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: March 31, 2020
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission
File Number: 001-36280
SharpSpring, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
05-0502529
|
(State
or other jurisdiction of incorporationor organization)
|
|
(I.R.S.
Employer Identification No.)
|
5001 Celebration Pointe Avenue
Suite 410
Gainesville, FL
|
|
32608
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
888-428-9605
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Securities registered pursuant to Section 12(b) of the
Act:
Title
of each class
|
Trading
Symbol(s)
|
Name of
exchange on which registered
|
Common Stock, $0.001 par value per share
|
SHSP
|
The NASDAQ Stock Market LLC
|
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☑ No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act:
Large
accelerated filer ☐
|
Accelerated
filer ☑
|
Non-accelerated
filer ☐
|
Smaller
reporting company ☑
|
|
Emerging
growth company ☐
|
If an
emerging growth company, indicate by 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: 11,526,741 shares
of common stock as of May 13, 2020.
SharpSpring, Inc.
Table of Contents
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Page
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PART I
– FINANCIAL INFORMATION
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4
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4
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5
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6
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7
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8
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31
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36
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36
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PART II
– OTHER INFORMATION
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39
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39
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39
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39
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39
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39
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39
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40
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41
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2
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 anticipated
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 ability of our
agency partners to resell the SharpSpring platform to their
clients;
●
security breaches,
cybersecurity attacks and other significant disruptions in our
information technology systems;
●
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;
●
the occurrence of
hostilities, political instability or catastrophic
events;
●
the novel
coronavirus (“COVID-19”) and its potential
impact on our business; 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, 2019, 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
PART
I – FINANCIAL INFORMATION
Item 1. Financial Statements.
SharpSpring, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
March 31,
|
December 31,
|
|
2020
|
2019
|
Assets
|
|
|
Cash
and cash equivalents
|
$11,625,049
|
$11,881,949
|
Accounts
receivable, net of allowance for doubtful accounts of $31,699 and
$12,455 at March 31, 2020 and December 31, 2019,
respectively
|
425,918
|
340,344
|
Unbilled
receivables
|
1,091,122
|
998,048
|
Income
taxes receivable
|
1,577,927
|
15,010
|
Other
current assets
|
1,500,627
|
1,363,366
|
Total
current assets
|
16,220,643
|
14,598,717
|
|
|
|
Property
and equipment, net
|
2,206,156
|
1,996,722
|
Goodwill
|
10,919,403
|
10,922,814
|
Intangibles,
net
|
4,505,199
|
4,658,000
|
Deferred
income taxes
|
-
|
-
|
Right-of-use
assets
|
5,687,249
|
5,281,530
|
Other
long-term assets
|
547,333
|
549,022
|
Convertible
notes embedded derivative
|
-
|
-
|
Total
assets
|
$40,085,983
|
$38,006,805
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
Accounts
payable
|
$2,942,268
|
$2,052,538
|
Accrued
expenses and other current liabilities
|
524,844
|
919,089
|
Line
of credit
|
1,900,000
|
-
|
Deferred
revenue
|
766,715
|
860,820
|
Income
taxes payable
|
12,284
|
13,944
|
Lease
liability, current portion
|
420,977
|
370,340
|
Total
current liabilities
|
6,567,088
|
4,216,731
|
|
|
|
Deferred
income taxes
|
-
|
-
|
Convertible
notes, including accrued interest
|
-
|
-
|
Convertible
notes embedded derivative
|
-
|
-
|
Lease
liability, net of current portion
|
5,347,179
|
4,976,727
|
Other
long-term liabilities
|
-
|
-
|
Total
liabilities
|
11,914,267
|
9,193,458
|
Commitments
and contingencies (Note 13)
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
Preferred
stock, $0.001 par value, 5,000,000 shares authorized, no shares
issued or outstanding at March 31, 2020 and December 31,
2019
|
-
|
-
|
Common
stock, $0.001 par value, Authorized shares-50,000,000; issued
shares- 11,545,957 at March 31, 2020 and 11,537,163 at December 31,
2019; outstanding shares- 11,525,957 at March 31, 2020 and
11,517,163 at December 31, 2019
|
11,546
|
11,537
|
Additional
paid in capital
|
59,206,549
|
58,851,285
|
Accumulated
other comprehensive loss
|
(233,620)
|
(224,793)
|
Accumulated
deficit
|
(30,728,759)
|
(29,740,682)
|
Treasury
stock
|
(84,000)
|
(84,000)
|
Total
shareholders' equity
|
28,171,716
|
28,813,347
|
|
|
|
Total
liabilities and shareholders' equity
|
$40,085,983
|
$38,006,805
|
See
accompanying notes to the consolidated financial
statements.
4
SharpSpring, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
|
Three Months Ended March 31,
|
|
|
2020
|
2019
|
|
|
|
Revenue
|
$7,052,729
|
$5,326,285
|
|
|
|
Cost
of services
|
2,367,642
|
1,548,381
|
Gross
profit
|
4,685,087
|
3,777,904
|
|
|
|
Operating
expenses:
|
|
|
Sales
and marketing
|
3,034,121
|
3,008,203
|
Research
and development
|
1,578,139
|
1,258,728
|
General
and administrative
|
2,413,842
|
2,227,675
|
Intangible
asset amortization
|
152,801
|
95,250
|
Impairment
of intangible assets
|
-
|
-
|
|
|
|
Total
operating expenses
|
7,178,903
|
6,589,856
|
|
|
|
Operating
loss
|
(2,493,816)
|
(2,811,952)
|
Other
expense, net
|
(56,778)
|
(104,126)
|
Gain
on embedded derivative
|
-
|
24,574
|
|
|
|
Loss
before income taxes
|
(2,550,594)
|
(2,891,504)
|
|
|
|
Provision
(benefit) for income taxes
|
(1,562,517)
|
2,339
|
Net
loss
|
$(988,077)
|
$(2,893,843)
|
|
|
|
Basic
net loss per share
|
$(0.09)
|
$(0.33)
|
Diluted
net loss per share
|
$(0.09)
|
$(0.33)
|
|
|
|
Shares
used in computing basic net loss per share
|
11,521,192
|
8,840,281
|
Shares
used in computing diluted net loss per share
|
11,521,192
|
8,840,281
|
|
|
|
Other
comprehensive income (loss):
|
|
|
Foreign
currency translation adjustment, net
|
(8,827)
|
(1,372)
|
Comprehensive
loss
|
$(996,904)
|
$(2,895,215)
|
See
accompanying notes to the consolidated financial
statements.
5
SharpSpring, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’
EQUITY
(Unaudited)
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Additional
|
Other
|
|
|
|
|
|
Common Stock
|
Paid in
|
Comprehensive
|
Treasury Stock
|
Accumulated
|
|
||
|
Shares
|
Amount
|
Capital
|
Loss
|
Shares
|
Amount
|
Deficit
|
Total
|
Balance,
December 31, 2018
|
8,639,139
|
$8,639
|
$30,446,838
|
$(231,053)
|
20,000
|
$(84,000)
|
$(17,352,706)
|
$12,787,718
|
Stock
based compensation - stock options
|
-
|
-
|
269,044
|
-
|
-
|
-
|
-
|
269,044
|
Issuance
of common stock for cash
|
1,005,244
|
1,005
|
11,275,304
|
-
|
-
|
-
|
-
|
11,276,309
|
Issuance
of common stock for director services
|
2,404
|
2
|
34,471
|
-
|
-
|
-
|
-
|
34,473
|
Foreign
currency translation adjustment, net
|
-
|
-
|
-
|
(1,372)
|
-
|
-
|
-
|
(1,372)
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,893,843)
|
(2,893,843)
|
Balance,
March 31, 2019
|
9,646,787
|
$9,647
|
$42,025,657
|
$(232,425)
|
20,000
|
$(84,000)
|
$(20,246,550)
|
$21,472,329
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2019
|
11,537,163
|
11,537
|
58,851,285
|
(224,793)
|
20,000
|
(84,000)
|
(29,740,682)
|
$28,813,347
|
Stock
based compensation - stock options
|
-
|
-
|
339,356
|
-
|
-
|
-
|
-
|
339,356
|
Issuance
of common stock for cash
|
1,505
|
2
|
11,172
|
-
|
-
|
-
|
-
|
11,174
|
Issuance
of common stock for services
|
2,680
|
3
|
31,273
|
-
|
-
|
-
|
-
|
31,276
|
Common
stock withheld related to net share settlement of equity
awards
|
4,609
|
5
|
(26,537)
|
-
|
-
|
-
|
-
|
(26,532)
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
(8,827)
|
-
|
-
|
-
|
(8,827)
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(988,077)
|
(988,077)
|
Balance,
March 31, 2020
|
11,545,957
|
$11,546
|
$59,206,549
|
$(233,620)
|
20,000
|
$(84,000)
|
$(30,728,759)
|
$28,171,716
|
See
accompanying notes to the consolidated financial
statements.
6
SharpSpring, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Three Months Ended March 31,
|
|
|
2020
|
2019
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$(988,077)
|
$(2,893,843)
|
Adjustments
to reconcile loss from operations:
|
|
|
Depreciation
and amortization
|
356,579
|
227,253
|
Amortization
of costs to acquire contracts
|
202,439
|
202,945
|
Non-cash
stock compensation
|
370,632
|
303,517
|
Non-cash
interest
|
-
|
100,000
|
Amortization
of debt issuance costs and embedded derivative
|
-
|
(2,000)
|
Gain
on embedded derivative
|
-
|
(24,574)
|
Unrealized
foreign currency loss
|
80,727
|
10,739
|
Changes
in assets and liabilities:
|
|
|
Accounts
receivable
|
(85,272)
|
14,448
|
Unbilled
receivables
|
(92,496)
|
(93,772)
|
Right-of-use
assets
|
(405,719)
|
106,215
|
Other
assets
|
(342,872)
|
(42,855)
|
Income
taxes, net
|
(1,562,944)
|
2,339
|
Accounts
payable
|
890,013
|
(274,640)
|
Lease
liabilities
|
421,089
|
(92,035)
|
Other
liabilities
|
(394,239)
|
(69,280)
|
Deferred
revenue
|
(94,289)
|
39,585
|
Net
cash used in operating activities
|
(1,644,429)
|
(2,485,958)
|
|
|
|
Cash
flows from investing activities
|
|
|
Purchases
of property and equipment
|
(140,930)
|
(169,976)
|
Capitalization
of software development costs
|
(272,282)
|
(177,198)
|
Net
cash used in investing activities
|
(413,212)
|
(347,174)
|
|
|
|
Cash
flows used in financing activities:
|
|
|
Proceeds
from line of credit
|
1,900,000
|
-
|
Proceeds
from exercise of stock options, net
|
11,174
|
603,865
|
Proceeds
from issuance of common stock, net
|
-
|
10,672,444
|
Payments
for taxes related to net share settlement of equity
awards
|
(26,533)
|
-
|
Net
cash provided by financing activities
|
1,884,641
|
11,276,309
|
|
|
|
Effect
of exchange rate on cash
|
(83,900)
|
(11,285)
|
|
|
|
Change
in cash and cash equivalents
|
(256,900)
|
8,431,892
|
|
|
|
Cash
and cash equivalents, beginning of period
|
11,881,949
|
9,320,866
|
|
|
|
Cash
and cash equivalents, end of period
|
$11,625,049
|
$17,752,758
|
|
|
|
Supplemental
information on consolidated statements of cash flows:
|
|
|
Cash
paid during the period for
|
|
|
Interest
|
|
|
Income
taxes, net
|
$426
|
$-
|
Non-cash
activities
|
|
|
Right-of-use
asset obtained for lease liability
|
$521,898
|
$5,715,510
|
See
accompanying notes to the consolidated financial
statements.
7
SharpSpring, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Organization
SharpSpring,
Inc. (the “Company”) provides a cloud-based marketing
automation solution and a display retargeting platform through our
SharpSpring and Perfect Audience products. 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 unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America (U.S. GAAP) applicable to interim periods,
under the rules and regulations of the United States Securities and
Exchange Commission (“SEC”). In the opinion of our
management, the Company has prepared the accompanying unaudited
consolidated financial statements on a basis substantially
consistent with the audited consolidated financial statements of
the Company as of and for the year ended December 31, 2019, and
these consolidated financial statements include all adjustments
consisting of only normal recurring adjustments, necessary for a
fair statement of the results of the interim periods presented.
The Company’s consolidated
financial statements include the accounts of SharpSpring, Inc. and
our subsidiaries (the “Company”). The Company’s
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,
2020.
The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and related
notes included in the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2019, filed with the
Securities and Exchange Commission (the “SEC”) on March
16, 2020, as amended on April 30, 2020.
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.
8
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 assesses
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 functional currency of the Company’s foreign subsidiaries
is the local currency. Assets and liabilities denominated in a
foreign currency are translated into U.S. dollars at the exchange
rates in effect at the balance sheet dates, with the resulting
translation adjustments directly recorded to a separate component
of accumulated other comprehensive loss. Income and expense
accounts are translated at the average exchange rates during the
period. Foreign currency translation gains and losses are recorded
in other comprehensive income (loss).
Cash and Cash Equivalents
Cash equivalents are short-term, liquid investments with remaining
maturities of three months or less when acquired. Cash and cash
equivalents are deposited or managed by major financial
institutions and at most times are in excess of Federal Deposit
Insurance Corporation (FDIC) insurance limits.
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 approximate fair value because of the
short-term nature of these items. The fair value of the embedded
derivatives associated with our convertible notes are 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 March 31, 2020, and December 31, 2019,
was a liability balance of zero for each period. The change in fair
value for the three months ended March 31, 2020, and 2019, was zero
and a gain of $0.025 million, respectively.
9
Accounts Receivable
Accounts receivable are carried at the original invoiced amount
less an allowance for doubtful accounts based on the probability of
future collection. Management reviews accounts receivable on a
periodic basis to determine if any receivables will potentially be
uncollectible. The Company reserves for receivables that are
determined to be uncollectible, if any, in its allowance for
doubtful accounts. After the Company has exhausted all collection
efforts, the outstanding receivable is written off against the
allowance. 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 are met, thus creating a
contract asset. A portion of our accounts receivable balance is
therefore unbilled at each balance sheet date and is reflected as
such on the consolidated balance sheet.
Business Combinations
Accounting for business combinations requires us to make
significant estimates and assumptions, especially at the
acquisition date with respect to tangible and intangible assets
acquired and liabilities assumed and pre-acquisition contingencies.
We use our best estimates and assumptions to accurately assign fair
value to the tangible and intangible assets acquired and
liabilities assumed at the acquisition date as well as the useful
lives of those acquired intangible assets.
Examples of critical estimates in valuing certain of the intangible
assets and goodwill we have acquired include but are not limited
to:
●
future expected
cash flows from customer contracts and acquired developed
technologies and patents;
●
the acquired
company’s trade name, vendor relationships, and customer
relationships, as well as assumptions about the period of time the
acquired trade name will continue to be used in our offerings;
and
●
discount
rates.
Unanticipated events and circumstances may occur that may affect
the accuracy or validity of such assumptions, estimates or actual
results.
Intangibles
Finite-lived intangible assets include trade names, developed
technologies, customer relationships, and vendor 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 regularly 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.
10
Goodwill and Impairment
As of March 31, 2020, and December 31, 2019, we had recorded
goodwill of $10.92 million and $10.92 million, 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, GraphicMail, and Perfect Audience 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
Third-party costs associated with the issuance of debt are included
as a direct reduction to the carrying value of the debt and are
amortized to interest expense ratably over the life of the
debt.
Income Taxes
Provisions
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, Simplifying the 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 2017 remain open to
examination by U.S. federal and state tax
jurisdictions.
In
determining the provision for income taxes, the Company uses
statutory tax rates and tax planning opportunities available to the
Company in the jurisdictions in which it operates. This includes
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
consolidated financial statements or tax returns to the extent
pervasive evidence exists that they will be realized in future
periods. The deferred tax balances are adjusted to reflect tax
rates by tax jurisdiction, based on currently enacted tax laws,
which are expected to be in effect in the years in which the
temporary differences are expected to reverse. In accordance with
the Company’s income tax policy, significant or unusual items
are separately recognized in the period in which they occur. The
Company is subject to routine examination by domestic and foreign
tax authorities and frequently faces challenges regarding the
amount of taxes due. These challenges include positions taken
by the Company related to the timing, nature, and amount of
deductions and the allocation of income among various tax
jurisdictions. As of March 31, 2020, the Company’s Swiss
subsidiary, InterInbox SA is under examination by the Switzerland
Federal Tax Administration for the years 2015 through 2018. The
Company does not expect any material adjustments as a result of the
audit.
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 $0.20
million and $.13 million for
the three months ended March 31, 2020, and 2019,
respectively.
11
Property
and equipment as of March 31, 2020 and December 31, 2019, is as
follows:
|
March 31,
|
December 31,
|
|
2020
|
2019
|
Property
and equipment, gross:
|
|
|
Leasehold
improvements
|
$293,120
|
$290,977
|
Furniture
and fixtures
|
708,899
|
678,774
|
Computer
equipment and software
|
2,731,702
|
2,350,758
|
Total
|
3,733,721
|
3,320,509
|
Less:
Accumulated depreciation and amortization
|
(1,527,565)
|
(1,323,787)
|
|
$2,206,156
|
$1,996,722
|
Useful
lives are as follows:
Leasehold
improvements
|
3-5
years
|
Furniture
and fixtures
|
3-5
years
|
Computer
equipment
|
3
years
|
Software
|
3-5
years
|
Revenue Recognition
The Company generates revenue from contracts with multiple
performance obligations, which typically include subscriptions to
its cloud-based marketing automation software and professional
services which include on-boarding and training services. The
Company’s customers do not have the right to take possession
of the software. Substantially all of
SharpSpring’s revenue is from contracts with
customers. The Company recognizes revenue from contracts with
customers using a five-step model as prescribed under ASC 606,
which is described below:
●
Identify the
customer contract;
●
Identify
performance obligations that are distinct;
●
Determine the
transaction price;
●
Allocate the
transaction price to the distinct performance obligations;
and
●
Recognize revenue
as the performance obligations are satisfied.
1)
Identify the customer contract
A customer contract is generally identified when the Company and a
customer have executed arrangement that calls for the Company to
provide access to its software or provide professional services in
exchange for consideration from the customer.
2)
Identify performance obligations that are distinct
A performance obligation is a promise to provide a distinct good or
service or a series of distinct goods or services. A good or
service that is promised to a customer is distinct if the customer
can benefit from the good or service either on its own or together
with other resources that are readily available to the customer,
and a company’s promise to transfer the good or service to
the customer is separately identifiable from other promises in the
contract. The Company has determined that subscriptions for
its software is distinct because, once a customer has access to the
software it purchased, the software is fully functional and does
not require any additional development, modification, or
customization. Professional services sold are distinct
because the customer benefits from the on-boarding and training to
make better use of the online software products it
purchased.
12
3)
Determine the transaction price
The transaction price is the amount of consideration to which the
Company expects to be entitled in exchange for transferring goods
or services to a customer, excluding sales taxes that are collected
on behalf of government agencies. The Company estimates any
variable consideration to which it will be entitled at contract
inception, when determining the transaction price. The
Company does not include variable consideration to the extent that
it is probable that a significant reversal in the amount of
cumulative revenue recognized will occur when any uncertainty
associated with the variable consideration is
resolved.
4)
Allocate the transaction price to the distinct performance
obligations
The transaction price is allocated to each performance obligation
based on the relative standalone selling prices of the goods or
services being provided to the customer.
5)
Recognize revenue as the performance obligations are
satisfied
Revenues are recognized when or as control of the promised goods or
services is transferred to customers. Revenue
from the SharpSpring Marketing Automation and
Mail+ software is recognized ratably over the subscription period,
which is typically one month. Revenue related to our
professional services is recognized
as the services are provided. SharpSpring’s subscription
contracts range from one to twelve months. The Company recognizes
revenue from on-boarding and training services as the services are
provided, which is generally over 60 days. The Perfect
Audience software is utilized on an as needed basis, and the
related revenue recognized as the service is provided. Cash
payments received in advance of providing subscription or services
are recorded to deferred revenue until the performance obligation
is satisfied.
Our products are billed in arrears or upfront, depending on the
product, which creates contract assets (unbilled receivables) and
contract liabilities (deferred revenue), respectively. Unbilled
receivables occur due to unbilled charges for which the Company has
satisfied performance obligations. Deferred revenues occur due to
billing up front for charges that the Company has not yet fully
satisfied all performance obligations. Both contract assets and
liabilities are recognized as it is used.
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.
13
Gross Versus Net Revenue
ASC 606
provides guidance on proper recognition of principal versus agent
considerations which is used to determine gross versus net revenue
recognition. Under ASC 606, the core objective of the guidance on
gross versus net revenue recognition is to help determine whether
an entity is a principal or an agent in a transaction. In general,
the primary difference between these two is the performance
obligation being satisfied. The principal has a performance
obligation to provide the desired goods or services to the end
customer, whereas the agent arranges for the principal to provide
the desired goods or services. Additionally, a fundamental
characteristic of a principal in a transaction is control. A
principal substantively controls the goods and services before they
are transferred to the customer as well as controls the price of
the good or service being provided. An agent normally receives a
commission or fee for these activities. In addition to control, the
level at which an entity controls the price of the good or service
being transferred determines principal versus agent status. The
more discretion over setting price a company has in providing the
good or service, the more likely they are considered a principal
rather than an agent.
Under
the guidance when another party is involved in providing a good or
service to a customer, an entity is a principal if the entity
obtains control of the asset or right to a service performed by the
other party. For Perfect Audience, SharpSpring never takes
possession or control of the advertising space and acts an agent
facilitating the customer with the desired advertisement inventory
from the principal provider. In addition to the lack of control of
the advertising inventory, SharpSpring does not have control over
the cost of the advertising inventory, but rather only receives a
fee for services for providing the advertising inventory to the
customer, further demonstrating SharpSpring’s role as the
agent in the transaction. Therefore, as an agent in the retargeting
transaction SharpSpring records revenue net of the cost of
advertising inventory cost incurred for placing advertisements on
websites.
Deferred Revenue
Deferred revenue consists of payments received in advance of the
Company providing the services. Deferred revenue is earned over the
service period identified in each contract. Most our deferred
revenue balances (contract liabilities) arise from payments from
customers in advance of service on a periodic basis (such as
monthly, quarterly, annually, or bi-annually). In situations where
a customer pays in advance, the deferred revenue is recognized over
the service period defined in the contract. Additionally, the
Company has deferred revenue related to implementation fees for its
SharpSpring Marketing Automation solution that are paid in advance.
These implementation services are typically performed over a 60-day
period, and the revenue is recognized over that period. Deferred
revenue balances were $0.86 million and $0.25 million as of
December 31, 2019, and 2018, respectively. Deferred revenue
decreased by $0.09 million and increased by $0.04 million during
the three months ended March 31, 2020, and 2019, respectively. The
Company had deferred revenue contract liability balances of $0.77
million and $0.29 million as of March 31, 2020, and March 31, 2019,
respectively.
14
Unbilled Receivables
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 are met, thus creating a contract asset
(unbilled receivable). The unbilled receivable balances as of
December 31, 2019, and 2018 were $1.0 million and $0.74 million,
respectively. Substantially all of these balances were billed
during the three months ended March 31, 2020 and 2019,
respectively. As of March 31, 2020, and 2019, the Company had
unbilled receivables $1.09 million and $0.83 million, respectively.
These unbilled balances were the result of services provided in
period, but not yet billed to the customer.
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
March 31, 2020, and December 31, 2019, 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. For the three months ending March 31, 2020, one customer
had an open account receivable balance which was above 10% of net
accounts receivable, accounting for approximately 18.6% of net
accounts receivable. As of March 31, 2020, no customer with
accounts receivable in excess of 10% of the Company’s net
receivables had a balance older than 30 days.
Cost of Services
Cost of
services consists primarily of direct labor costs associated with
support, customer onboarding, account management, 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, excluding marketing team costs, were
$1.19 million and $1.54 million for the three months ended
March 31, 2020, and 2019, respectively.
15
Capitalized Cost of Obtaining a Contract
The
Company capitalizes certain sales commission costs which are
incremental to obtaining a contract. The Company expenses 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 straight-line amortization over the
estimated weighted average life of the customer, which for the 3
months ended March 31, 2020 and 2019 was approximately 3 years. At
March 31, 2020, the net carrying value of the capitalized cost of
obtaining a contract was $1.2
million, of which $0.68
million is included in other current assets and $0.52 million is included in other
long-term assets. At December 31, 2019, the net carrying value of
the capitalized cost of obtaining a contract was $1.2 million, of which $.68 million is included in other current
assets and $0.52 million is
included in other long-term assets. The Company amortized expenses
for the costs of obtaining contracts of $0.20 million and $0.20 million for the three months ended
March 31, 2020, and 2019, respectively.
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. The
Company also provides stock-based compensation to non-employee
directors which are treated as employees for the purpose of
stock-based compensation in accordance with ASC 718. 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 potentially dilutive common stock equivalents for the period.
For purposes of this calculation, options to purchase common stock,
unvested restricted stock units, warrants, and the conversion
option of the Convertible Notes (Note 6) are 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.
16
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. The guidance became effective for the Company on
January 1, 2019. The Company is using the modified retrospective
transition method which allows the Company to recognize and measure
leases as of the adoption date, January 1, 2019, with the
cumulative impact being reflected in the opening balance of
retained earnings. The application of the modified retrospective
transition was applied to all active leases at the date of initial
application. There was no impact to the Company’s retained
earnings for the implementation of this accounting standard. The
following tables present the cumulative impact on our financial
statements upon adoption.
|
Impact upon adoption of new ASU
|
As
of January 1, 2019
|
|
Right-of-use
assets
|
5,715,510
|
Total
Assets
|
$5,715,510
|
|
|
Accrued expenses
and other current liabilities
|
$(8,821)
|
Lease liability
(current)
|
344,883
|
Lease liability
(non-current)
|
5,379,448
|
Total
Liabilities
|
$5,715,510
|
In
January 2017, the Financial Accounting Standards Board
(“FASB”) issued guidance simplifying the accounting for
goodwill impairment by removing Step 2 of the goodwill impairment
test. Under previous guidance, Step 2 of the goodwill impairment
test required 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 was
recognized as goodwill impairment. Under the new guidance, 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 guidance was adopted effective January
1, 2020 and did not have a material impact on the consolidated
financial statements.
In
December 2019, the FASB issued guidance simplifying the
accounting for income taxes. The new accounting guidance removes
(i) the exception to the incremental approach for intra-period tax
allocations when there is a loss from continuing operations and
income or gain from other items such as discontinued operation or
other comprehensive income, (ii) the exception to the requirement
to recognize a deferred tax liability for equity method investments
when a foreign subsidiary becomes an equity method investment,
(iii) the exception to the ability not to recognize a deferred tax
liability for a foreign subsidiary when a foreign equity method
investment becomes a subsidiary, and (iv) the exception to the
general methodology for calculating income taxes in an interim
period when a year-to-date loss exceeds the anticipated loss for
the year.
17
The new
accounting guidance also simplifies the accounting for income taxes
by (i) requiring an entity to recognize franchise tax that is
partially based on income as an income-based tax and account for
any incremental amount incurred as a non-income-based tax, (ii)
requiring that an entity evaluate when a step up in the tax basis
of goodwill should be considered part of the business combination
in which the book goodwill was originally recognized and when it
should be considered a separate transaction, (iii) specifying that
an entity is not required to allocate the consolidated amount of
current and deferred tax expense to a legal entity that is not
subject to tax in its separate financial statements, (iv) requiring
that an entity reflect the effect of an enacted change in tax laws
or rates in the annual effective tax rate computation in the
interim period that includes the enactment date, and (v) making
minor Codification improvements for income taxes related to
employee stock ownership plans and investments in qualified
affordable housing projects accounted for using the equity
method.
This
standard is effective for fiscal and interim periods beginning
after December 15, 2020. The Company anticipates that the adoption
of this standard will not have a material impact on its financial
statements.
Note 3: Acquisitions
On
November 21, 2019, the Company acquired substantially all the
assets and assumed certain liabilities of the Perfect Audience
business unit from Marin Software Incorporated, a Delaware
corporation for cash consideration of $4.6 million. The acquired
assets and liabilities were assigned to SharpSpring’s wholly
owned subsidiary SharpSpring Reach, Inc. Perfect Audience is a
cloud-based platform that provides display retargeting software
products and services. The transaction was structured as an asset
purchase, whereby SharpSpring acquired all of Perfect
Audience’s assets used in connection with the business
(excluding certain pre-acquisition receivables, cash, and cash
equivalents) and only liabilities pertaining to the business such
as deferred revenue, accrued publisher costs, accrued bonuses for
to the acquired workforce, and any liabilities accruing on or after
November 21, 2019.
The
allocation of the purchase price is based on management estimates
and assumptions, and other information compiled by management,
which utilized established valuation techniques appropriate for the
industry. The valuation included a combination of the income
approach and cost approach, depending upon which was the most
appropriate based on the nature and reliability of the data
available. The income approach is predicated upon the value of the
future cash flows that an asset is expected to generate over its
economic life. The cost approach considers the cost to replace (or
reproduce) the asset and the effects on the assets value of
physical, functional, and/or economic obsolescence that has
occurred with respect to the asset.
18
The
following represents the final allocation of the purchase price to
the acquired net tangible and intangible assets acquired and
liabilities assumed by SharpSpring:
Cash
Consideration
|
$4,566,402
|
Add:
|
|
Net
tangible liabilities acquired
|
|
Deferred
Revenue
|
$186,500
|
Accrued
expenses and other current liabilities
|
$545,473
|
Total
liabilities
|
$731,973
|
Less:
|
|
Net
tangible assets acquired
|
|
Accounts
receivable
|
$(55,236)
|
Other
current assets
|
$(20,719)
|
Total
tangible assets
|
$(75,955)
|
Intangible
assets acquired:
|
|
Trade
names
|
$(381,000)
|
Technology
|
$(979,000)
|
Vendor
relationships
|
$(1,813,000)
|
Total
intangible assets
|
$(3,173,000)
|
Goodwill
|
$2,049,420
|
Acquired
intangible assets include developed technology and vendor
relationships which are amortized over ten years. The acquired
trade name assets have an indefinite life and will be tested for
impairment at least annually.
The
excess of purchase consideration over the fair value of net
tangible and identifiable intangible assets acquired was recorded
as goodwill of $2.05 million. Goodwill will not be amortized but
instead tested for impairment at least annually (more frequently if
certain indicators are present). Goodwill arose primarily as a
result of the expected future growth of the Perfect Audience
product and the assembled workforce. The transaction costs
associated with the acquisition were approximately $0.18 million
and were recorded in general and administrative
expense.
The
Company uses its best estimates and assumptions to assign fair
value to the tangible and intangible assets acquired and
liabilities assumed at the acquisition date. The Company’s
estimates are inherently uncertain and subject to
refinement.
19
Note 4: Goodwill and Other Intangible Assets
Intangible assets are as follows:
|
As of March 31, 2020
|
||
|
Gross
|
|
Net
|
|
Carrying
|
Accumulated
|
Carrying
|
|
Amount
|
Amortization
|
Value
|
Amortized
intangible assets:
|
|
|
|
Trade
names
|
$501,000
|
(120,000)
|
$381,000
|
Technology
|
3,109,000
|
(1,269,725)
|
1,839,275
|
Customer
relationships
|
1,320,000
|
(802,751)
|
517,249
|
Vendor
relationships
|
1,813,000
|
(45,325)
|
1,767,675
|
Unamortized
intangible assets:
|
6,743,000
|
(2,237,801)
|
4,505,199
|
Goodwill
|
|
|
10,919,403
|
Total
goodwill and intangible assets
|
|
|
$15,424,602
|
|
As of December 31, 2019
|
||
|
Gross
|
|
Net
|
|
Carrying
|
Accumulated
|
Carrying
|
|
Amount
|
Amortization
|
Value
|
Amortized
intangible assets:
|
|
|
|
Trade
names
|
$501,000
|
(120,000)
|
$381,000
|
Technology
|
3,109,000
|
(1,192,000)
|
1,917,000
|
Customer
relationships
|
1,320,000
|
(773,000)
|
547,000
|
Vendor
relationships
|
1,813,000
|
-
|
1,813,000
|
Unamortized
intangible assets:
|
6,743,000
|
(2,085,000)
|
4,658,000
|
Goodwill
|
|
|
10,922,814
|
Total
goodwill and intangible assets
|
|
|
$15,580,814
|
20
Estimated amortization expense for the remainder of 2020 and
subsequent years is as follows:
Remainder
of 2020
|
$458,400
|
2021
|
559,200
|
2022
|
507,200
|
2023
|
459,200
|
2024
|
420,200
|
Thereafter
|
1,719,999
|
Indefinite
Lived
|
381,000
|
Total
|
$4,505,199
|
Amortization expense for the three months ended March 31, 2020 and
2019, was $0.15 million and $0.95 million,
respectively.
Note 5: 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 June 21, 2020. There are no mandatory
amortization provisions and the Credit Facility is payable in full
at maturity. As of March 31, 2020, 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 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. As of March 31, 2020, the credit facility carried an
interest rate of 6.25%. and there was $1.9 million outstanding
under the Credit Facility. As December 31, 2019 there was no
amounts outstanding. No events of default have
occurred.
Note 6: Convertible Notes
In
March 2018, the Company issued $8.0 million five-year convertible
notes (the “Notes”) with an interest rate of 5%
“payable in kind”. SharpSpring received net proceeds
from the offering of approximately $7.9 million after adjusting for
debt issue costs, including financial advisory and legal fees. The
Notes were unsecured obligations and were subordinate in right of
payment to the Credit Facility (Note 5). selection to convert the
Notes.
The
Notes were recorded upon issuance at amortized cost in accordance
with applicable accounting guidance. As there was no difference in
the amount recorded at inception and the face value of the Notes,
interest expense was accreted at the stated interest rate under the
terms of the Notes. Total interest expense related to the Notes was
impacted by the amortization of the debt issuance cost using the
effective interest method.
In
accordance with generally accepted accounting principles for
convertible debt certain 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 was
zero as of March 31, 2020. The derivative was 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.
21
We
incurred certain third-party costs in connection with our issuance
of the Notes, principally related to financial advisory and legal
fees, which were 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 three months
ended March 31, 2020, and 2019:
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
2019
|
Contractual
interest paid-in-kind expense (non-cash)
|
$-
|
$100,000
|
Amortization
of debt issuance costs (non-cash)
|
-
|
6,410
|
Amortization
of embedded derivative (non-cash)
|
-
|
(8,410)
|
Total
interest expense
|
$-
|
$98,000
|
Effective
interest rate
|
0.0%
|
4.9%
|
On May
9, 2019, the Company entered into and made effective a Note
Conversion Agreement (the “Conversion Agreement”) with
SHSP Holdings, LLC (“SHSP Holdings”) and Evercel
Holdings, LLC (“Evercel,” and together with SHSP
Holdings, the “Investor”), pursuant to which the
parties agreed to the conversion (the “Conversion”) of
the Notes. The Company’s entry into the Conversion Agreement
was unanimously approved by the disinterested members of the
Company’s Board of Directors.
Under
the Conversion Agreement, the Notes were deemed to have been
converted into the Conversion Shares, and any interest in any
amount ceased to accrue or be payable with respect to the Notes,
and SHSP Holdings ceases to be a holder of any Notes, and the Notes
cease to be outstanding, for purposes of the Investors’
Rights Agreement dated as of March 28, 2018. Effective as of the
issuance and delivery of the Conversion Shares to SHSP Holdings,
the Notes were canceled and terminated in their entirety and of no
further force and effect, and any and all indebtedness and other
obligations of the Company under the Notes was fully performed and
discharged, and any and all claims or rights of SHSP Holdings or
its affiliates thereunder were fully and finally extinguished and
released. Additionally, under the terms of the Conversion
Agreement, the Company agreed to pay in shares 49% of the remaining
future interest totaling 115,037 shares. As a result of
accelerating the 49% of future interest along with the
extinguishment of the convertible notes, the Company incurred a
loss on conversion of debt of $2.2 million. The loss was measured
as the excess fair value of the shares issued under the modified
conversion, compared to the fair value of the shares that would
have been issued under an unmodified conversion as of the
measurement date. Level 1 inputs were used to determine the fair
value of the shares paid to the Investor. The loss on conversion
was partially offset by a gain of approximately $0.19 million from
the write-off of the embedded derivative liability.
The
Convertible Notes had a net carrying value of zero for March 31,
2020 and December 31, 2019, respectively.
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,
restricted stock units (“RSUs”) and the conversion
option of the Convertible Notes (Note 6) are considered to be
potential common shares outstanding.
22
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
2019
|
Net
loss
|
$(988,077)
|
$(2,893,843)
|
|
|
|
Basic
weighted average common shares outstanding
|
11,521,192
|
8,840,281
|
Add
incremental shares for:
|
|
|
Warrants
|
-
|
-
|
Stock
options
|
-
|
-
|
Restricted
stock units (RSUs)
|
-
|
-
|
Convertible
notes
|
-
|
-
|
Diluted
weighted average common shares outstanding
|
11,521,192
|
8,840,281
|
|
|
|
Net
loss per share:
|
|
|
Basic
|
$(0.09)
|
$(0.33)
|
Diluted
|
$(0.09)
|
$(0.33)
|
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, unvested
restricted stock units, 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 Months Ended
|
|
|
March 31,
|
|
|
2020
|
2019
|
Warrants
|
-
|
30,000
|
Stock
options
|
1,416,501
|
1,391,487
|
Restricted
stock units (RSUs)
|
79,818
|
-
|
Convertible
notes
|
-
|
1,120,573
|
Total
|
1,496,319
|
2,542,060
|
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 (benefit) 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 (benefit), pre-tax income (loss), or
pre-tax income (loss), by jurisdiction.
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security
Act (the “CARES Act”) was enacted into the law. The
CARES Act contained many income tax relief provisions including
allowing for a 5-year carryback of Federal net operating losses
generated in tax years beginning in 2018, 2019, or 2020. As
required under U.S. GAAP, the effects of tax law changes are
recognized in the period of enactment. Accordingly, we have
recorded incremental income tax benefit in the amount of $1.6
million associated with the CARES Act related to the carryback of
the Company’s 2018 federal net operating loss.
During
the three months ended March 31, 2020, and 2019, the Company
recorded income tax benefit of $1,562,517 and income tax expense of
$2,339, respectively, from operations. The blended effective tax
rate for the three months ending March 31, 2020, and 2019, was
61.3% and -0.1%, respectively. The effective blended tax rate
varies from our statutory U.S. tax rate due to valuation allowances
on losses, utilization of net operating loss carryforwards, and
income generated in certain other jurisdictions at various tax
rates.
23
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 to reduce
cash tax payments in the future to the extent that we generate
taxable income prior to expiration.
At
March 31, 2020 and December 31, 2019, we have established a
valuation allowance of $6.7 million and $7.0 million, respectively,
against certain deferred tax assets given the uncertainty of
recoverability of these amounts.
Note 9: Defined Contribution Retirement Plan
We offer our U.S. employees the ability to participate in a 401(k)
plan. Eligible U.S. employees could contribute up to 100% of their
eligible compensation, subject to limitations established by the
Internal Revenue Code. For the period ended March 31, 2020, the
Company contributed a matching contribution equal to 100% of each
such participant’s contribution up to the first 3% of their
annual eligible compensation. We charged $0.09 million and
$0.07 million
to expense in the three months ended
March 31, 2020, and 2019, respectively, associated with our
matching contribution in those periods.
24
Note 10: Related Party Transactions
Intercompany
transactions have been eliminated in our consolidated financial
statements. The convertible notes issued in March 2018 were held
directly by SHSP Holdings, LLC (“SHSP Holdings”).
Daniel C. Allen, now a former director of SharpSpring Inc., is the
founder and manager of Corona Park Investment Partners, LLC
(“CPIP”). CPIP is a member of Evercel Holdings, LLC and
is a member and sole manager of SHSP Holdings. Evercel, Inc. is a
member and the manager of Evercel Holdings, LLC and is a member of
SHSP Holdings. In May 2019, the Company and SHSP Holdings entered
into and made effective a Note Conversion Agreement as outlined in
Note 6 above. There were no other material related party
transactions for the periods presented.
Note 11: Stock-Based Compensation
From
time to time, the Company grants stock option and restricted stock
units 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 “2010 Plan”) which 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.
In
April 2019, the Company adopted the 2019 Equity Incentive Plan (the
“2019 Plan”). No more than 697,039 shares of common
stock, plus the number of shares of common stock underlying any
award granted under the 2010 Plan that expires, terminates, is
canceled, or is forfeited shall be available for grant under the
2019 Plan. The Plan provides for the issuance of stock options and
other stock-based awards. During the terms of the Awards, the
Company shall keep available at all times the number of shares of
Common Stock required to satisfy such Awards.
Stock Options
Stock
option awards under the 2010 Plan and 2019 Plan (the
“Plans”) have a 10-year maximum contractual term and,
subject to the provisions regarding Ten Percent Shareholders, 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 Plans
are 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 Plans 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:
|
Three Months
Ended March 31,
|
||
|
2020
|
|
2019
|
Volatility
|
52%
|
|
49% - 50%
|
Risk-free interest rate
|
1.46% - 1.66%
|
|
2.55% - 2.59%
|
Expected term
|
6.25 years
|
|
6.25 years
|
25
The
weighted average grant date fair value of stock options granted
during the three months ended March
31, 2020, and 2019, was $5.68 and $7.02, 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 began 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
March 31, 2020, and 2019, the
Company recognized an expense of $0.22 million and $0.27 million, respectively, associated
with stock option awards. At March 31,
2020, future stock compensation expense associated with
stock options (net of estimated forfeitures) not yet recognized was
$1.92 million and will be recognized over a weighted average
remaining vesting period of 2.8 years. The following summarizes
stock option activity for the three months ended March 31,
2020:
|
|
Weighted
|
Weighted
|
Aggregate
|
|
Number of
|
Average
|
Average Remaining
|
Intrinsic
|
|
Options
|
Exercise Price
|
Contractual Life
|
Value
|
Outstanding
at December 31, 2019
|
1,470,406
|
$7.30
|
7.5
|
$6,604,461
|
|
|
|
|
|
Granted
|
131,725
|
$11.20
|
|
|
Exercised
|
(630)
|
$5.57
|
|
|
Forfeited
|
(185,000)
|
$11.70
|
|
|
Outstanding
at March 31, 2020
|
1,416,501
|
$7.09
|
7.1
|
$1,222,646
|
|
|
|
|
|
Exercisable
at March 31, 2020
|
874,937
|
$5.77
|
6.3
|
$929,649
|
The
total intrinsic value of stock options exercised during the three
months ended March 31, 2020, and 2019, were $1,468 and $1,189,991,
respectively.
Restricted Stock Units
During
the three months ended March 31, 2020,
and 2019, the Company granted 35,855 and zero Restricted
Stock Units (RSUs), respectively. RSUs having a value equal to the
fair market value of an identical number of shares of Common Stock,
which may, but need not, provide that such restricted award may not
be sold, assigned, transferred or otherwise disposed of, pledged or
hypothecated as collateral for a loan or as security for the
performance of any obligation or for any other purpose for a period
determined by the Board of Directors. The Plans are administered by
the Board of Directors, which has the authority to determine to
whom RSUs may be granted, the period of exercise, and what other
restrictions, if any, should apply. Vesting for awards granted to
date under the Plans is generally over four years from the date of
the grant, with 25% of the award vesting after one year and monthly
vesting thereafter.
26
RSUs
are expensed on a straight-line basis over the requisite vesting
period. During the three months ended March 31, 2020, and 2019, the Company
recognized expense of approximately $0.12 million and zero,
respectively, associated with RSUs. At March 31, 2020, future stock compensation
expense associated with stock options (net of estimated
forfeitures) not yet recognized was approximately $0.71 million and
will be recognized over a weighted average remaining vesting period
of 3.21 years. The following summarizes RSU activity for the period
ended March 31,
2020:
|
|
Weighted
|
|
|
Average
|
|
|
Grant Date
|
|
Number of
|
Fair Value
|
|
Units
|
Per Share
|
Unvested
at December 31, 2019
|
50,494
|
$11.82
|
|
|
|
Granted
|
35,875
|
12.39
|
Vested
|
(6,551)
|
12.39
|
Cancelled
|
-
|
-
|
Unvested
at March 31, 2020
|
79,818
|
$12.03
|
Stock Awards
During
the three months ended March 31, 2020,
and 2019, the Company issued 2,680 and 2,404 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 immediately if
there is no vesting period or on a straight-line basis over the
vesting period. The total fair value of stock awards granted,
vested and expensed during the three months ended March 31, 2020, and 2019, was $0.03 million
and $0.03 million,
respectively. As of March 31,
2020, there was no unrecognized compensation cost related to
stock awards.
Note 12: Warrants
On
January 30, 2014, in connection with an $11.5 million financing
transaction, the Company issued 80,000 warrants to purchase common
stock at an exercise price of $7.81 per share with a term of 5
years. The fair value of the warrants was determined using the
Black-Scholes option valuation model. These warrants became
exercisable on January 30, 2015. The remaining 30,000 of the
outstanding warrants were exercised in May and August 2019. No
other warrants have been issued since January 30, 2014. As of March
31, 2020, and December 31, 2019 there were zero outstanding
warrants.
27
Note 13: Commitments and Contingencies
Litigation
From
time to time the Company may become involved in legal proceedings
or be subject to claims arising in the ordinary course of its
business. Although the results of litigation and claims cannot be
predicted with certainty, the Company currently believes that the
final outcome of these ordinary course matters will not have a
material adverse effect on its business, operating results,
financial condition or cash flows. Regardless of the outcome,
litigation can have an adverse impact on the Company because of
defense and settlement costs, diversion of management resources and
other factors. The Company is not
currently a party to any litigation of a material
nature.
Commitments
The Company is not party to any non-cancellable contracts that
create a material future commitment other than its leases as
described in Note 14.
Sales and Franchise Taxes
State, local and foreign jurisdictions have differing rules and
regulations governing sales, franchise, use, value added and other
taxes, and these rules and regulations are subject to varying
interpretations that may change over time. In particular, the
applicability of such taxes to SaaS products in various
jurisdictions is unclear. Further, these jurisdictions’ rules
regarding tax nexus vary significantly and are complex. As such, we
could face possible tax assessments and audits. A successful
assertion, by any of these taxing authorities, that we should be
collecting additional sales, use, value added or other taxes in
jurisdictions where we have not historically done so and do not
accrue for such taxes could result in tax liabilities and related
penalties for past sales, discourage customers from purchasing our
products or otherwise harm our business and operating results. We
continue to evaluate the impact of various tax types which may
require future sales, franchise, or other tax
payments.
Employment Agreements
The Company has employment agreements with several members of its
leadership team and executive officers.
28
Note 14: Leases
The Company currently rents its primary office facility under a
ten-year lease which started in November 2018 (the “2018
Lease”). The term of the lease may be extended for an
additional 5 years in incremental one-year periods, subject to
certain conditions described in the 2018 Lease. In June 2019, the
Company entered into an addendum agreement to the 2018 Lease (the
“2019 Addendum”) to lease an additional approximately
16,500 square feet of office space located on the same premises as
the 2018 Lease. In February 2020, the Company took possession of
approximately 2,600 out of the approximately 16,500 total square
feet included in the 2019 addendum. The rent expense and future
payments associated with the additional square feet the Company
took possession of is included in the future minimum lease payments
table below. The term of the addendum extends through the same
period as the 2018 Lease. We do not assume renewals in our
determination of lease term unless the renewals are deemed to be
reasonably assured at lease commencement. At the commencement of
the 2018 lease, renewal was not reasonably assured. Determination
of whether a contract contains a lease is determined at execution
of the contract based on the facts of each contract. The Company
elected the package of practical expedients permitted under ASC 842
which allows us to carryforward historical lease classification,
assessment on whether a contract was or contains a lease, and
initial direct costs for any leases that existed prior to adoption
of the standard. The Company has lease agreements with lease and
non-lease components, which it has elected to combine for all
leases. In addition, the Company does not recognize right-of-use
assets or lease liabilities for leases with a term of 12 months or
less (“Short-term” leases). Short-term lease payments
are recognized in the consolidated statements of comprehensive loss
on a straight-line basis over the lease term. The Company is not
party to any financing lease.
The weighted average remaining lease term as of March 31, 2020, is
8.7 years. The weighted average discount rate for our operating
leases as of March 31, 2020 is 6.5%. The discount rate of each
lease is determined by the company’s incremental borrowing
rate at the time of a lease contract. The lease cost associated
with short-term leases for the three months ended March 31, 2020,
and 2019, were zero for both periods.
Future minimum lease payments are as follows as of March 31,
2020:
|
Operating Leases
|
Remainder
of 2020
|
613,233
|
2021
|
842,093
|
2022
|
847,346
|
2023
|
873,611
|
2024
|
878,864
|
Thereafter
|
3,540,910
|
Total
undiscounted cash flows
|
$7,596,057
|
Less
imputed interest
|
(1,827,901)
|
Present
value of lease liability
|
$5,768,156
|
Note 15: 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 maker (“CODM”), which is the Company’s
chief executive officer, 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 months ended March 31, 2020,
and 2019, are as follows:
29
|
Three Months Ended
|
|
|
March 31,
|
|
|
2020
|
2019
|
Revenue
by Product:
|
|
|
Marketing
Automation Revenue
|
$6,359,357
|
$5,261,939
|
Retargeting
Revenue
|
618,807
|
-
|
Mail
+ Product Revenue
|
74,565
|
64,346
|
Total
Revenue
|
$7,052,729
|
$5,326,285
|
|
|
|
Revenue
by Type:
|
|
|
Recurring
Revenue
|
$6,130,442
|
$4,868,149
|
Retargeting
Revenue
|
618,807
|
-
|
Upfront
Fees
|
303,480
|
458,136
|
Total
Revenue
|
$7,052,729
|
$5,326,285
|
Note 16: Subsequent Events
The following events and transactions occurred subsequent to March
31, 2020:
On April 21, 2020 SharpSpring entered into two loan agreements with
United States Small Business Administration for a total loan amount
of $3.4 million, (“SBA Loan”). The SBA Loan has a
maturity date of 2 years from the initial disbursement and carries
an interest rate of 1% per year. Principal and interest payments
begin 7 months from the initial date of disbursement. The SBA Loan
is eligible for forgiveness as part of the CARES Act approved by US
Congress on March 19, 2020 if certain requirements currently in
effect are met. The Company continues to evaluate the requirements
of the CARES Act that allow for forgiveness.
On
March 11, 2020, the World Health Organization, or WHO, classified
COVID-19, as a global pandemic. The Company has assessed the impact
of the COVID-19 pandemic. While the broader implications of
COVID-19 on its results of operations and overall financial
performance remain uncertain for future periods, the Company
assessed the potential impact on its March 31, 2020 consolidated
financial statements and determined there were no material
adjustments necessary with respect to these consolidated financial
statements.
30
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, 2019,
filed with the Securities and Exchange Commission on March 16,
2020, as amended on April 30, 2020.
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. In 2019, the Company acquired the Perfect Audience
platform, which allowed us to expand into the display retargeting
space.
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.
Our SharpSpring Marketing Automation platform employs 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. The Perfect Audience platform
employs a usage-based revenue model. Revenue from this platform is
dependent on the number of ads placed through the platform and the
effectiveness of that ad space.
Unless
the context otherwise requires, in this section titled
Management’s Discussion and Analysis of Financial Condition
and Results of Operations references to “SharpSpring”
relate to the SharpSpring Marketing Automation product and
references to “Perfect Audience” relate to the Perfect
Audience 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
Effects of COVID-19
The
COVID-19 pandemic has affected our businesses, as well as those of
our customers, suppliers, and third-party sellers. We have not
experienced any drop off in the services provided by our various
vendors. To serve our customers while also providing for the safety
of our employees and service providers, we have adapted various
steps to protect our employees and customers. We have enacted a
work-from-home policy to allow our employees to maintain social
distancing while still maintaining our level of productivity and
effectiveness prior to the work-from-home policy. In addition to
our work-from-home policy, we have made several strategic business
decisions to help navigate these uncertain times.
31
We have
implemented a 10% reduction to salaries across most of the Company.
In addition to salary reduction, the company has suspended company
bonuses and is cutting various other non-employee related costs
across the board to ensure future flexibility. The Company has also
increased its cash position by $1.9 million by drawing down on our
line of credit. As stated in Note 16, Subsequent Events, the
Company received $3.4 million from the Small Business Association
(SBA) loan program on April 21, 2020. We have also filed for a $1.6
million tax refund as a result of historical net operating losses,
which is expected to be received in the next 90 days. The SBA loan
program and tax refund are both results of the CARES Act enacted by
Congress in March. This cash infusion will allow for increased
flexibility in these uncertain times. In addition to the immediate
cash infusions, the Company has an effective Form S-3 shelf
registration statement that would allow for the issuance of
additional shares for future capital flexibility.
We
expect demand for our product to continue to be at or above our
numbers from the same periods in 2019 and as a SaaS product we can
continue to provide our product to our customers while still
practicing social distancing which is more difficult in other
industries. We continue to bring in new leads, host demos, and
drive sales at promising levels despite the downturns in the
overall economy. We believe our tools offer our customers a chance
to thrive in these uncertain times where others are diminishing.
For customers that use the various features our platform provides,
we are deeply embedded in their sales and marketing processes.
Additionally, our Perfect Audience business has continued to run
according to plan, and we remain very optimistic about the
long-term cross-selling opportunities and expanded market available
to us through retargeting.
The
impact of COVID-19 on SharpSpring had little impact on the
financial results during the first quarter of 2020 as the majority
of the operational adjustments were made late in the period. We
expect the subsequent quarter to see further impact from COVID-19
and the various operational adjustments we made. The full extent of
the impact to the Company due to the impact of the COVID-19
pandemic for our second quarter and beyond cannot be currently
determined. The extent to which the COVID-19 pandemic will impact
the Company will depend on future developments, which are highly
uncertain and cannot be reasonably predicted, including the
duration of the outbreak, the increase or reduction in governmental
restrictions to businesses and individuals, the potential for a
resurgence of the virus and other factors. The longer the COVID-19
pandemic continues, the greater the potential negative financial
effect on the Company. We continue to evaluate the impact of global
economic and health conditions to ensure our responses to these
uncertain times are both timely and appropriate.
Three Months Ended March 31,
2020, Compared to the Three Months Ended March 31, 2019:
|
|
|
|
Percent
|
|
Three Months Ended
|
Change
|
Change
|
|
|
March 31,
|
from
|
from
|
|
|
2020
|
2019
|
Prior Year
|
Prior Year
|
Revenues and Cost of Sales:
|
|
|
|
|
Revenues
|
$7,052,729
|
$5,326,285
|
$1,726,444
|
32%
|
Cost
of Sales
|
2,367,642
|
1,548,381
|
819,261
|
53%
|
Gross
Profit
|
$4,685,087
|
$3,777,904
|
$907,183
|
24%
|
32
Revenues increased for the three months ended
March 31, 2020, as compared to the three months ended March 31,
2019, due to continued growth of our marketing automation customer
base, a price increase put in place during the first quarter of
2020, and addition of the Perfect Audience platform. SharpSpring
continues to grow its customer base driving more recurring revenue.
Revenues for our flagship marketing automation platform increased
to $6.36 million in the three months ended March 31, 2020, up from
$5.26 million in the three months ended March 31, 2019. The
Perfect Audience platform acquired in November of 2019 generated an
additional $0.62 million of new revenue for the three months ended
March 31, 2020.
Cost of
services increased for the three
months ended March 31, 2020, as compared to the three months ended March 31, 2019,
primarily due to increased employee related costs associated with
providing and supporting our technology platform to more customers
and increased hosting cost with the growth of the Company of
approximately $0.29 million. In addition, costs increased $0.20
million during the three months ended March 31, 2020 for hosting
costs to support new revenues from both the SharpSpring Marketing
Automation product as well as the newly acquired Perfect Audience.
Total cost of sales related to the SharpSpring product went up
approximately $0.32 million in the first quarter of 2020 compared
to the first quarter of 2019. Total costs of sales added by the new
Perfect Audience product was approximately $0.50 million. Gross
margin percentage decreased from 71% in the first quarter of 2019
to 66% in the first quarter of 2020. This drop in gross margin
percentage is attributable to the addition of the Perfect Audience
platform which has a lower gross margin.
|
|
|
|
Percent
|
|
Three Months Ended
|
Change
|
Change
|
|
|
March 31,
|
from
|
from
|
|
|
2020
|
2019
|
Prior Year
|
Prior Year
|
Operating expenses:
|
|
|
|
|
Sales
and marketing
|
$3,034,121
|
$3,008,203
|
$25,918
|
1%
|
Research
and development
|
1,578,139
|
1,258,728
|
319,411
|
25%
|
General
and administrative
|
2,413,842
|
2,227,675
|
186,167
|
8%
|
Intangible
asset amortization
|
152,801
|
95,250
|
57,551
|
60%
|
|
$7,178,903
|
$6,589,856
|
$589,047
|
9%
|
Sales
and marketing expenses increased for the three months ended March
31, 2020, as compared to the same period in 2019. The increase was
primarily due to an increase in employee-related costs of
approximately $0.21 million. Employee related costs in 2019 include
the severance for Chief Revenue Officer from February 2019. The
increase in employee-related costs was partially offset by reduced
marketing program and marketing outsourcing spend of approximately
$0.24 million. The Company incurred approximately $0.07 million
related to the recruitment of our Head of Sales and Chief Marketing
Officer during the first quarter of 2020.
Research and
development expenses increased for the three months ended March 31,
2020, as compared to the three months ended March 31, 2019. Employee-related costs
increased by approximately $0.24
million in the three months ended March 31, 2020, compared
to the same period in 2019 mainly due to additional hiring of staff
since last year. Outsourced development costs increased by $0.17
million for three months ended March 31, 2020 compared to the same
period in 2019. Other non-employee related costs increased by
approximately $0.07 million in the three months ended March 31,
2020, compared to the same period in 2019. These amounts were
partially offset by increased capitalized software development of
approximately $0.16 million for the three months ended March 31,
2020, compared to the same period in the prior year.
33
General
and administrative expenses increased for the three months ended
March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to higher
employee related costs associated with business growth of
approximately $0.20 million. Additionally, depreciation expense
increased by approximately $0.07 million related to increased
property and equipment expenditures throughout 2019 and 2020.
Professional fees related to legal and accounting increased by
$0.13 million during the three months ended March 31, 2020. Cost
associated with other non-employee related costs grew approximately
$0.09 million during the three months ended March 31, 2020 to
continue to support the growth of the Company. These increases in
costs are offset in part by reduced corporate governance expense of
approximately $0.32 million. This reduction is mostly attributable
to a one time franchise tax payment of approximately $0.32 million
in the first quarter of 2019.
Amortization of
intangible assets increased for the three months ended March 31,
2020, as compared to the three months ended March 31, 2019, due primarily to the
intangible assets acquired as part of the Perfect Audience
acquisition on November 21, 2019 (Note 3).
|
|
|
|
Percent
|
|
Three Months Ended
|
Change
|
Change
|
|
|
March 31,
|
from
|
from
|
|
|
2020
|
2019
|
Prior Year
|
Prior Year
|
Other
|
|
|
|
|
Other
expense, net
|
$(56,778)
|
$(104,126)
|
$47,348
|
-45%
|
Gain
on embedded derivative
|
-
|
24,574
|
(24,574)
|
-100%
|
Provision
(benefit) for income taxes
|
(1,562,517)
|
2,339
|
(1,564,856)
|
-66903%
|
Other
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 as
interest expense related to our line of credit in 2020 and
convertible notes in 2019. Interest expense relating to our line of
credit (Note 5) for the three months ended March 31, 2020, and
2019, was $2,602 and zero, respectively. Non-cash interest expense
relating to convertible notes for the three months ended March 31,
2020, and 2019, was approximately zero and $0.10 million
respectively.
We
recorded a gain on the embedded derivative of zero and $.02 million
during the three months ended March 31, 2020 and 2019
respectively.
During
the three months ended March 31, 2020, our income tax benefit was
related to carryback of net operating loss for our consolidated
U.S. entities for the years prior to 2019 as result of changes to
the tax law from the CARES Act. For years 2019 and 2020, 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 Consolidated Statement of Comprehensive
Loss for those losses. For the three months ended March 31, 2019, our income tax provision
related to income derived in foreign jurisdictions at the
applicable statutory tax rates.
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 and
Perfect Audience platforms. 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 to
operating cash flows, the Company drew down on its line of credit
in the amount of $1.9 million in March 2020. In March of 2019, the
Company issued 885,500 shares of common stock and received $10.7
million in cash net of stock issuance costs. The company also has
an effective Form S-3 shelf registration statement that would allow
for the issuance of additional shares for future
flexibility.
34
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 $0.85 million to
$1.64 million used in operations for the three months ended March
31, 2020, compared to approximately $2.49 million used in
operations for the three months ended March 31, 2019. The decrease in cash used
in operating activities was attributable primarily to timing of
payments related to our Accounts payable.
Net cash used in investing activities was
approximately $0.41 million during the three months ended
March 31, 2020, compared to
approximately $0.35 million used during the three months ended
March 31, 2019. The increase in cash used for investing
activities during the three months ended March 31, 2020, is
primarily related to the increased investment in property and
equipment as SharpSpring increased its investment in capitalized
software development.
Net
cash provided by financing activities was $1.88 million during the
three months ended March 31, 2020, compared to $11.28 million net
cash received from financing activities during the three months
ended March 31, 2019. The
majority of the net cash provided by financing activities for the
three months ended March 31,
2020, is related to the Company’s $1.9 million
proceeds received from our line of credit (Note 5). The company
received $10.7 million related to the net proceeds from the stock
offering completed in March 2019. The Company also received
approximately $0.60 million from the exercise of employee stock
options during the three months ended March 31, 2019.
We had
net working capital of approximately $9.65 million and $10.38
million as of March 31, 2020, and December 31, 2019, respectively.
Our cash balance was $11.63 million at March 31, 2020, reflecting
the $1.9 million received from the draw on our line of credit in
March 2020. Our cash balance was $11.88 million on December 31,
2019, reflecting net $10.7 million received from the stock offering
in March 2019.
Contractual Obligations
As
of March 31, 2020, there were no material changes in our
contractual obligations from those disclosed in our Annual Report
on Form 10-K filed with the SEC on March 16, 2020, as amended on
April, 30 2020, other than those appearing in the notes to the
consolidated financial statements appearing elsewhere in this
Quarterly Report on Form 10-Q.
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.
35
Item 3. Quantitative and Qualitative Disclosure About
Market Risk.
Not
applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have
established disclosure controls and procedures to ensure that
material information relating to us, including our consolidated
subsidiaries, is made known to the officers who certify our
financial reports and to other members of senior management and the
Board of Directors.
As of
the end of the period presented in this report, we carried out an
evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operations of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon
that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that due to material weaknesses in our internal
control over financial reporting described below in
Management’s Annual Report on Internal Control Over Financial
Reporting, our disclosure controls and procedures were not
effective as of December 31, 2019. There were no changes to our
disclosure controls or procedures during the quarter ended March
31, 2020 that materially affected or are reasonably likely to
materially affect our financial reporting.
Notwithstanding the
identified material weaknesses, management believes the
consolidated financial statements included in this Form 10-Q fairly
present, in all material respects, our financial condition, results
of operations and cash flows as of and for the periods presented in
accordance with U.S. generally accepted accounting
principles.
Management’s Annual Report on Internal Control Over Financial
Reporting
Management
is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act). Management, including our Chief
Executive Officer and Chief Financial Officer, assessed the
effectiveness of our internal control over financial reporting as
of December 31, 2019. In making this assessment, our management
used the criteria for effective internal control over financial
reporting described in “Internal Control-Integrated Framework
(2013),” issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting for external purposes in
accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes
those policies and procedures that:
●
Pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; `
●
Provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company;
and
●
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
36
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Accordingly, even effective
internal control over financial reporting can only provide
reasonable assurance of achieving its control
objectives.
We
have confidence in our internal controls and procedures.
Nevertheless, our management, including our Chief Executive Officer
and Chief Financial Officer, does not expect that our disclosure
procedures and controls or our internal controls will prevent all
errors or intentional fraud. An internal control system, no matter
how well-conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of such internal controls
are met. Further, the design of an internal control system must
reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. As
a result of the inherent limitations in all internal control
systems, no evaluation of controls can provide absolute assurance
that all our control issues and instances of fraud, if any, have
been detected.
A
material weakness is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the
Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
We
acquired Perfect Audience on November 21, 2019 and management
excluded from its assessment of the effectiveness of internal
control over financial reporting as the December 31, 2019, Perfect
Audience total assets and total revenues representing approximately
16.2% and 1.2%, respectively, of our consolidated financial
statements as of and for the year ended December 31,
2019.
In
connection with our evaluation of the internal controls of the
Company, we noted the following deficiencies that we consider to be
material weaknesses:
●
Ineffective
internal control over financial reporting and dependent business
process control (automated and manual) related to information
technology general controls (ITGCs) around (i) the design and
implementation of program change-management over certain
information technology (IT) systems that support the
Company’s financial reporting processes and related to
ineffective ITGCs around design and (ii) implementation of
effective user access controls over SaaS and internally hosted
applications that support the Company’s financial reporting
processes to ensure appropriate segregation of duties and to
adequately restrict user and privileged access to appropriate
SharpSpring personnel.
●
Due
to the extensive effort required in the implementation of section
404b, and as in common many growth companies with limited staff, we
identified control deficiencies in financial reporting during our
implementation related to: (i) certain entity level controls; (ii)
inadequate segregation of duties; and (iii) compliance and review
related to certain policies and procedures. As a result, these
deficiencies aggregate into an additional material
weakness.
The
material weaknesses did not result in any identified misstatements
to the consolidated financial statements, and there were no changes
to previously released financial results. Based on these material
weaknesses, the Company’s management concluded that at
December 31, 2019, the Company’s internal control over
financial reporting was not effective.
37
The
Company’s independent registered public accounting firm,
Cherry Bekaert LLP has issued an adverse audit report on the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2019, which appears in Part
II, Item 8 of our most recent Form 10-K for the period ended
December 31, 2019.
Remediation
Management
has been implementing and continues to implement measures designed
to ensure that control deficiencies contributing to the material
weaknesses are remediated, such that these controls are designed,
implemented, and operating effectively. The remediation actions
include: (i) creating and filling an IT Compliance Oversight
function; (ii) developing a training program addressing ITGCs and
policies, including educating control owners concerning the
principles and requirements of each control, with a focus on those
related to change-management and role-based security over IT
systems impacting financial reporting and performing a full
review or all current policies and procedures to identify current
operational and financial reporting principle gaps and implement a
cohesive set of policies that define the company’s standards
across systems, departments, and processes, reflected in the
supporting documents such as Standard Operating Procedures (SOP)
and checklists; (iii) implementing controls to address and
maintain documentation of completeness and accuracy of system
generated information used to support the operation of the
controls; (iv) developing enhanced change-management intake
procedures and controls related to changes in IT systems; (v)
implementing an IT management review and testing plan to monitor
ITGCs with a specific focus on systems supporting our financial
reporting processes; and (vi) enhanced monthly reporting on the
remediation measures to the Audit Committee of the Board of
Directors; (vii) and hiring additional accounting staff, including
an assistant controller, to increase the Company’s
segregation of duties and allow adequate time for proper
documentation of observable evidence of review and
approvals.
We
believe that these actions will remediate the material weaknesses.
The weaknesses will not be considered remediated, however, until
the applicable controls operate for a sufficient period of time and
management has concluded, through testing, that these controls are
operating effectively. We expect that the remediation of this
material weakness will be completed prior to the end of fiscal year
2020.
Changes in Company Internal Controls
Except
as set forth above, The Company continues to evaluate and plan the
remediation of the material weaknesses identified. During the
period ending March 31, 2020 there were no changes in our internal
control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
38
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
Not
applicable.
Item 1A. Risk Factors.
The following
risk factor supplements the Risk Factors described in the
Company’s annual report on Form 10-K for the year
ended December 31, 2019, as amended on April 30, 2020, and should
be read in conjunction therewith.
The extent to which the COVID-19 pandemic will adversely impact our
business, financial condition and results of operations is highly
uncertain and cannot be predicted.
The COVID-19 pandemic has created significant
worldwide uncertainty, volatility and economic disruption. The
extent to which COVID-19 will adversely impact our business,
financial condition and results of operations is dependent upon
numerous factors, many of which are highly uncertain, rapidly
changing and uncontrollable. These factors include, but are not
limited to: (i) the duration and scope of the pandemic; (ii)
governmental, business and individual actions that have been and
continue to be taken in response to the pandemic, including travel
restrictions, quarantines, social distancing, work-from-home and
shelter-in-place orders and shut-downs; (iii) the impact on U.S.
and global economies and the timing and rate of economic recovery;
(iv) potential adverse effects on the financial markets and access
to capital; (v) potential goodwill or other impairment charges;
(vi) increased cybersecurity risks as a result of pervasive remote
working conditions; (vii) our ability to effectively carry out our
operations due to any adverse impacts on the health and safety of
our employees and their families; (viii) the ability of our
agency partners to resell the SharpSpring platform to their
clients. Furthermore, as a result of
the COVID-19 pandemic, our employees have been required to, and
continue to, work from home. The significant increase in remote
working, particularly for an extended period of time, could
exacerbate certain risks to our business, including an increased
risk of cybersecurity events and improper dissemination of personal
or confidential information. We do not believe these circumstances
have, or will, materially adversely impact our internal controls or
financial reporting systems.
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds.
Not
Applicable.
Item 3. Defaults Upon Senior Securities.
Not
Applicable.
Item 4. Mine Safety Disclosures.
Not
Applicable.
Item 5. Other Information.
Not
Applicable.
39
Item 6. Exhibits.
INDEX TO EXHIBITS
Exhibit
No.
|
|
Description
|
|
Employee Agreement Amendment – Richard Carlson (incorporated
by reference to the Company’s Form 8-K/A filed on April 16,
2020)
|
|
|
Employee Agreement Amendment – Richard Carlson (incorporated
by reference to the Company’s Form 8-K filed
2/27/19).
|
|
|
Employee Agreement Amendment – Richard Carlson (incorporated
by reference to the Company’s Form 8-K filed
2/12/18).
|
|
|
Employee Agreement Amendment – Richard Carlson (incorporated
by reference to the Company’s Form 8-K filed
4/15/17).
|
|
|
Employee Agreement – Richard Carlson (incorporated by
reference to the Company’s Form 8-K filed
9/14/15).
|
|
|
Employee Agreement Amendment – Travis Whitton
(incorporated by reference to the Company’s Form 8-K/A filed
on April 16, 2020)
|
|
|
Employee Agreement Amendment – Travis Whitton (incorporated
by reference to the Company’s Form 8-K filed
2/27/19).
|
|
|
Employee Agreement Amendment – Travis Whitton (incorporated
by reference to the Company’s Form 8-K filed
2/12/18).
|
|
|
Employee Agreement Amendment – Travis Whitton (incorporated
by reference to the Company’s Form 8-K filed
8/1/17).
|
|
|
Employee Agreement Amendment – Travis Whitton (incorporated
by reference to the Company’s Form 8-K filed
7/8/16).
|
|
|
Employee Agreement – Travis Whitton (incorporated by
reference to the Company’s Form 8-K filed
7/8/16).
|
|
|
Loan Modification Agreement dated February 14, 2020, by and
among SharpSpring, Inc., SharpSpring Technologies, Inc.,
SharpSpring Reach, Inc., and Western Alliance Bank*
|
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
|
|
|
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*
|
|
|
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*
|
|
101
|
|
XBRL
|
* Filed
herewith
40
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: May 15, 2020
|
|
SharpSpring,
Inc.
|
|
|
|
|
By:
|
/s/
Michael Power
|
|
|
|
Michael
Power
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
Date: May 15, 2020
|
41