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Securities registered pursuant to Section 12(b) of the
Act:
Title of each class registered
Trading Symbol(s)
Name of each exchange on which registered
Common
Stock, $0.001 par value per share
SHSP
The
NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ No
☑
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☑
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
☐
C:
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a 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 Act). Yes ☐ No ☑
The
aggregate market value of the voting common equity held by
non-affiliates of the registrant was $133,259,188 as of June 30,2019.
As of
March 13, 2020, there were 11,520,718 outstanding shares of the
registrant’s common stock, $.001 par value.
Portions
of the registrant’s definitive proxy statement to be filed in
conjunction with the registrant’s 2020 annual meeting of
stockholders are incorporated by reference in Part III of this
Annual Report on Form 10-K. The proxy statement will be filed by
the registrant with the Securities and Exchange Commission not
later than 120 days after the end of the registrant’s fiscal
year ended December 31, 2019.
This
report on Form 10-K 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.
4
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 accuracy 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.”
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.
SharpSpring, Inc.
(the “Company”) is a cloud-based marketing technology
company. The SharpSpring platform is designed to improve the way
that businesses communicate with their prospects and customers to
increase sales. The Company’s flagship marketing automation
platform uses advanced features such as web tracking, lead scoring
and automated workflow to help businesses deliver the right message
to the right customer at the right time. The SharpSpring platform
is designed and built as a Software as Service (or SaaS) offering.
We provide our products on a subscription basis, with additional
fees charged if specified volume limits are exceeded by our
customers.
During
the fourth quarter of 2019, we acquired the assets and certain liabilities that comprise
our Perfect Audience platform. The Perfect Audience expands
our product and service offering into advertisement retargeting for
small businesses.
We
operate globally through SharpSpring, Inc., a Delaware corporation,
and our wholly owned subsidiaries that consist of (i) SharpSpring
Technologies, Inc., a Delaware corporation; (ii) SharpSpring Reach,
Inc., a Delaware corporation; (iii) InterInbox SA, a Swiss
corporation; (iv) ERNEPH 2012A (Pty) Ltd., a South African limited
company; (v) ERNEPH 2012B (Pty) Ltd., a South African limited
company; and (vi) SMTP Holdings S.a.r.l., a Luxembourg S.a.r.l.
Unless the context otherwise requires,
all references to the “Company,”“we,”“our” or “us” and other similar terms means
SharpSpring, Inc., and its subsidiaries.
Products and Services
SharpSpring
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. Our platform also includes
customer relationship management (CRM) technology that enables a
business to store, manage, and optimize customer and prospect data
in a cloud-based environment.
SharpSpring Mail+
Our
SharpSpring Mail+ product is a subset of the full suite solution
that is focused on more traditional email marketing while also
including some of the advanced functionality available in our
premium offering. A small portion of our customers utilize our
SharpSpring Mail+ product.
Perfect Audience
Our
Perfect Audience platform is a product and service offering to
small businesses for display retargeting. Perfect Audience is
designed for rapid deployment and offers customers an easy-to-use
interface to implement and optimize campaigns across all major
networks and devices.
6
Markets & Competition
SharpSpring
Our
SharpSpring product competes primarily in the marketing automation
market. The market for marketing automation software and related
solutions is evolving, highly competitive with expected competition
to increase as barriers decrease as does complexity of the
technology decreases. SharpSpring entered the market in 2014 with a
highly competitive offering that achieved meaningful customer
adoption in its first few years after launch. As of December 31,2019, SharpSpring had approximately 2,500 paying customers and
approximately 9,000 businesses using the platform, including
agencies, agency clients, and direct end-user customers. We face
competition from cloud-based software and SaaS companies, including
HubSpot, Act-On, Pardot (part of Salesforce.com), ActiveCampaign
and Infusionsoft. We differentiate ourselves from the competition
with the integration of specific tools designed for digital
marketing agencies, and with SharpSpring’s advanced features,
ease of use, platform flexibility, and value compared to other
competitive offerings. SharpSpring is designed as a solution for
small or mid-sized businesses but focuses on selling to marketing
agencies, who serve as partners providing a distribution channel to
their clients.
Since
its inception, the majority of our SharpSpring customers have been
digital marketing agencies. A digital marketing agency is a firm
that specializes in helping clients, usually small or mid-sized
businesses, with their digital marketing initiatives like websites,
email marketing, search engine optimization, social campaigns,
pay-per-click advertising and other digital lead generation
activities. We have built special tools in the SharpSpring
application to allow agencies to manage their clients on the
platform and optimize their efforts across their portfolio. We also
have special pricing to agency customers to allow them the
flexibility to resell the platform at a profit and manage their
client relationships. In general, when we sell SharpSpring to an
agency customer, we provide the agency with a SharpSpring license
for the agency to use, plus a 3-pack of client licenses for the
agency to deploy to their client base. This agency license and the
pack of licenses are generally sold for a monthly recurring fee,
plus an up-front onboarding fee. The agency has complete discretion
over the pricing of the platform to their clients for the use,
implementation, and services related to SharpSpring. If an agency
utilizes its pack of licenses and adds additional clients on to the
platform, there is a monthly per-client fee charged to the agency
based on the number of additional licenses the agency has deployed
to their clients. Additionally, we charge customers for certain
items if the volume or transactional limits are exceeded, such as
emails sent or contacts stored in the platform. In most cases, we
provide support to the agency and the agency provides support to
their clients on the platform. However, for additional fees, we can
provide product support to the agency’s client directly. Our
objective is to partner with the agencies to grow and expand our
businesses together using the SharpSpring platform.
SharpSpring Mail+
Approximately
one-fifth of our marketing automation customers are individual
businesses that have licensed SharpSpring directly without working
through an agency. We refer to these customers as “Direct
Customers.” Similar to agency customers, Direct Customers pay
a monthly subscription fee for the use of the platform, plus an
up-front onboarding fee. Additionally, we charge Direct Customers
additional transactional charges based on usage over certain
limits.
7
SharpSpring Mail+
was launched in 2016, as a replacement to the GraphicMail product
that was acquired in 2014. SharpSpring Mail+ provides customers
with an advanced email marketing and marketing automation tool. It
includes traditional email campaign management solutions like
design capabilities, reporting tools and list management
functionality, but also includes additional features like dynamic
email content and SharpSpring’s visitor ID tool that are more
typically found in a marketing automation solution. SharpSpring
Mail+ competes with companies such as Constant Contact, iContact
Corporation, The Rocket Science Group, LLC (MailChimp®), and
VerticalResponse, Inc., a subsidiary of Deluxe Corporation, as well
as other email and marketing automation companies. SharpSpring
Mail+, and most other vendors, typically charge a monthly fee or a
fee per number of emails sent and, in some cases, they have a free
offering for low-volume or non-profit customers. SharpSpring
Mail+’s rich feature set is the primary key market
differentiator.
Perfect Audience
The
Perfect Audience platform was acquired in November of 2019 to
enhance the Company’s product and service offering. The
Perfect Audience cloud-based platform enables multi-channel
retargeting to known leads, plus targeted advertising to new
prospects via lookalike audience functionality. It empowers
marketers to create, manage, and optimize their ad campaigns across
thousands of sites all within one, simple-to-use interface. Perfect
Audience adds powerful lead functionality that fuels
top-of-the-funnel lead generation efforts, plus additional lead
nurturing capabilities to maximize middle-of-the-funnel conversion.
These features complement SharpSpring’s core feature set
designed to track, nurture, and convert those leads into
sales.
We are
part of a continually evolving and highly competitive marketplace.
Most of our competitors have more extensive customer bases, broader
customer relationships, longer operating histories, and greater
name recognition than we have. Additionally, some of our current
and potential competitors have significantly more financial,
technical, marketing and other resources than we have, and are able
to devote greater resources to the development, promotion, sale and
support of their products and services. Barriers to entry exist in
the marketing automation market due to complexity of systems, but
are decreasing as technology complexity decreases.
Sales and Marketing
We sell
our products globally, through our internal sales teams, and to a
lesser extent, third party resellers. We use and rely on our own
SharpSpring marketing automation platform to help our business
generate leads, convert more leads to sales and monitor the
effectiveness of all our marketing campaigns. Our websitewww.sharpspring.com
serves as a lead generation source and we use a variety of other
digital marketing tools and marketing campaigns to attract new
customers.
8
Our
SharpSpring product sales process involves targeting customers,
completing product demos, and advancing customers through our
marketing and sales pipeline to conversion using our SharpSpring
marketing automation product. Since SharpSpring was launched fairly
recently in 2014, brand recognition today is growing, but still
fairly limited. Therefore, we are more reliant on our marketing
campaigns and search engine traffic to attract potential leads. Our
marketing efforts to date have been nearly focused on digital
marketing agencies, and we have had success signing up over 1,800
marketing agency partners as of December 31, 2019. These agencies
become customers and are able to resell SharpSpring to their
clients, while paying increased fees to us as their client count
expands beyond the base license pack. This allows the agency to
provide services and first-level support for their clients, which
increases their own revenues from the end client and creates a
longer-lasting relationship overall between the agency and client.
We also sell SharpSpring directly to end-users and have over 500
direct end user customers on the platform. The Company’s
sales are done primarily through internal resources, but a small
number of third-party resellers were also used during
2019.
The
SharpSpring Mail+ product was created in 2016 to migrate
GraphicMail customers to the SharpSpring platform. Since that time,
we spent limited resources marketing and selling SharpSpring Mail+
as a standalone product and we discontinued its sale to new
customers during early 2018. We currently intend to continue
supporting SharpSpring Mail+, but may decide to discontinue the
SharpSpring Mail+ product altogether in the future. The SharpSpring
Mail+ product generated approximately $0.22 million of revenue
during 2019.
In
early 2018, we discontinued its sale to new customers. We currently
intend to continue supporting SharpSpring Mail+, but may decide to
discontinue the SharpSpring Mail+ product altogether in the
future.
Customers
As of
December 31, 2019, we had over 2,500 customers for our SharpSpring
product, the majority of which were marketing agencies who resell
SharpSpring to their clients. Including agency partners, agency
clients and direct end user customers, we had over 9,000 businesses
using the SharpSpring platform as of December 31,2019.
As of
December 31, 2019, we had approximately 400 customers using our
SharpSpring Mail+ product.
As of
December 31, 2019, we had approximately 1600 customers using our
Perfect Audience platform.
The
vast majority of our customers are on month-to-month agreements,
with a mixture of customers being charged in advance and in
arrears. We have a small number of customers that prepay for longer
periods, such as quarterly or annually. Perfect Audience customers
generally are not locked into a month-to-month contract and pay for
usage of the platform at the time of use.
9
Technology & Technology Suppliers
SharpSpring
operates as a multi-tenant Software-as-a-service (or
“SaaS”) application. SharpSpring’s key features
include web tracking, customer relationship management, lead
scoring and nurturing, landing pages, email technology, rule-based
triggers and notifications and deep analytics to measure marketing
program return on investment (ROI). In addition to our technology
platform, we offer value to our customers by providing integrations
with other technology platforms. SharpSpring Mail+ is a subset of
the SharpSpring technology.
In
early 2018, we discontinued its sale to new customers. We currently
intend to continue supporting SharpSpring Mail+, but may decide to
discontinue the SharpSpring Mail+ product altogether in the
future.
Perfect
Audience is separate standalone platform that provides multi-channel retargeting to known leads, plus
targeted advertising to new prospects via lookalike audience
functionality. It empowers marketers to create, manage, and
optimize their ad campaigns across thousands of sites using Google,
Facebook, Instagram, leading ad exchanges and partner networks. Ads
placed via the platform can be seamlessly dispersed and measured
across every major advertising network, including Google, Facebook,
Yahoo!, AppNexus, Rubicon, and Smaato, providing the tools
marketers need to drive incremental leads and sales, while tracking
the ROI of their ad spend. With multiple ad networks at their
disposal, users can select the best channels for their
business’ needs.
Our
platforms are hosted in third party data centers on virtual
cloud-based infrastructure. During 2019, these providers included
Google Compute and Amazon Web Services. These data centers use a
mixture of biometric access controls, redundant power,
environmental controls and secure internet connection points to
ensure uptime and data security. Email sending technology is
a key part of the application, and we rely on a third party to
deliver our platform’s email. We monitor our services for
availability, performance and security. We rely on our data
center and service providers to maintain peak operating conditions
in their businesses and to quickly address issues related to their
service as they arise.
Key Performance Indicators
In
addition to financial performance, our measures the performance of
several key performance indicators, including:
●
Customer
acquisition costs (CAC)
●
Net revenue dollar
retention
●
Average revenue per
user (ARPU)
●
Expected lifetime
value (LTV)
Intellectual Property
The
Company has one patent for developed technology related to the
Perfect Audience platform. This patent has a remaining life of
approximately 18 years as of December 31, 2019.
Our
trade secrets include our competencies in marketing automation, web
tracking, integrations, workflow, email editing and display
retargeting.
We
registered “SharpSpring” and the related logo and
certain other marks as trademarks in the United States and several
other jurisdictions.
10
We are
the registered holder of a variety of domestic and international
domain names that include “sharpspring”,
“sharpspringmailplus”, “graphicmail”,
“perfectaudience”, and similar variations.
Employees
As of
December 31, 2019, we have approximately 231 full-time employees
located in the United States supporting our operations. None of our
employees are covered by collective bargaining agreements. We have
not experienced any work stoppages, and we consider our relations
with our employees to be good.
Properties
Our
corporate headquarters is a leased office facility located in
Gainesville, FL. Presently, we lease approximately 25,000 square
feet of office space.
Financial Information About Segments
The
Company operates as one operating segment. Operating segments are
defined as components of an enterprise for which separate financial
information is regularly evaluated by the chief operating decision
maker (“CODM”), which is the Company’s chief
executive officer, in deciding how to allocate resources and assess
performance. The Company’s CODM evaluates the Company’s
financial information and resources and assess the performance of
these resources on a consolidated basis. Since the Company operates
in one operating segment, all required financial segment
information can be found in the consolidated financial
statements.
Available Information
Our
website address is www.sharpspring.com. Our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13 or 15(d) of the Exchange Act are
available free of charge through our website as soon as reasonably
practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission (the “SEC”).
Our website and the information contained or incorporated therein
are not intended to be incorporated into this Annual Report on Form
10-K.
Also,
this report includes the trade names of other companies. Unless
specifically stated otherwise, the use or display by us of such other parties' names and
trade names in this report is not intended to and does not imply a
relationship with, or endorsement or sponsorship of us by, any of
these other parties.
An
investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and the other
information in this Annual Report on Form 10-K and in our other
public filings before making an investment decision. Our business,
prospects, financial condition, or operating results could be
harmed by any of these risks, as well as other risks not currently
known to us or that we currently consider immaterial. If any such
risks and uncertainties actually occurs, our business, financial
condition or operating results could differ materially from the
plans, projections and other forward-looking statements included in
the section titled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
and elsewhere in this report and in our other public filings. The
trading price of our common stock could decline due to any of these
risks, and, as a result, you may lose all or part of your
investment.
11
Risks Related To Our Business
The majority of our products and services are sold pursuant to
short-term subscription agreements, and if our customers elect not
to renew these agreements, our revenues may decrease.
Typically, our
products and services are sold pursuant to short-term subscription
agreements, which are generally one month to one year in length,
with no obligation to renew these agreements. Our renewal rates may
decline due to a variety of factors, including the products and
services and prices offered by our competitors, new technologies
offered by others, consolidation in our customer base or if some of
our customers cease their operations. If our renewal rates are low
or decline for any reason, or if customers renew on less favorable
terms, our revenues may decrease, which could adversely affect our
results of operations.
We may not be able to scale our business quickly enough to meet our
customers' growing needs, and if we are not able to grow
efficiently, our operating results could be harmed.
As
usage of our marketing software grows and as customers use our
solutions for more advanced relationship marketing programs, we
will need to devote additional resources to improving our
application architecture, integrating with third-party systems, and
maintaining infrastructure performance. In addition, we will need
to appropriately scale our internal business systems and our
services organization, including customer support and professional
services, to serve our growing customer base, particularly as our
customer demographics expand over time. Any failure of or delay in
these efforts could cause impaired system performance and reduced
customer satisfaction. These issues could reduce the attractiveness
of our marketing software to customers, resulting in decreased
sales to new customers, lower renewal rates by existing customers,
the issuance of service credits, or requested refunds, which could
adversely affect our revenue growth and harm our reputation. Even
if we are able to upgrade our systems and expand our staff, any
such expansion will be expensive and complex, requiring management
time and attention. We could also face inefficiencies or
operational failures as a result of our efforts to scale our
infrastructure. Moreover, there are inherent risks associated with
upgrading, improving and expanding our information technology
systems. We cannot be sure that the expansion and improvements to
our infrastructure and systems will be fully or effectively
implemented on a timely basis, if at all. These efforts may reduce
revenue and our margins and adversely affect our financial
results.
We rely, in large part, on our agency partners’ ability to
resell the SharpSpring solution to their clients and service and
support their clients that are using the SharpSpring
platform.
We sell
primarily to digital marketing agencies, who purchase a pack of
SharpSpring licenses and resell SharpSpring to their end clients.
Our agency partners typically perform various services for their
clients, including website services, lead generation activities,
social media services and other digital marketing services. If our
agency partners are not successful in reselling SharpSpring to
their clients or are not successful in supporting or servicing
their active clients on the SharpSpring platform, the value of our
agency partner relationships will not grow, and those agency
partners will have a higher risk of attrition. If we cannot retain
these agency partners as SharpSpring customers, our revenue and
operating performance will be adversely impacted.
12
The novel strain of coronavirus (“COVID-19”) could have
an adverse effect on our business operations.
In December 2019, a novel strain of coronavirus
(“COVID-19”) was reported in Wuhan, China. The World
Health Organization has declared COVID-19 to constitute a
“Public Health Emergency of International
Concern.” Disruptions to
our business operations could occur as a result from quarantines of
employees, customers and suppliers in areas affected by the
outbreak, and closures of digital marketing agencies,
third-party vendor’s manufacturing facilities, and logistics supply
chains.
If we fail to enhance our existing products and services or develop
new products and services, our products and services may become
obsolete or less competitive and we could lose
customers.
If we
are unable to enhance our existing products and services or develop
new products and services that keep pace with rapid technological
developments and meet our customers’ needs, our business will
be harmed. Creating and designing such enhancements and new
products entail significant technical and business risks and
require substantial expenditures and lead-time, and there is no
guarantee that such enhancements and new products will be completed
in a timely fashion. Nor is there any guarantee that any new
service offerings will gain acceptance among our customers or by
the broader market. For example, our existing customers may not
view any new service as complementary to our service offerings and
therefore decide not to purchase such service. If we cannot enhance
our existing products and services or develop new products or if we
are not successful in selling such enhancements and new products to
our customers, we could lose customers, which would adversely
impact our financial performance.
If we are unable to attract new customers and retain existing
customers on a cost-effective basis, our business and results of
operations will be adversely affected.
To
succeed, we must continue to attract and retain a large number of
customers on a cost-effective basis, many of whom have not
previously used the types of products and services that we offer.
Our sales process involves targeting customers, completing product
demos and advancing customers through our marketing and sales
pipeline to conversion using our SharpSpring marketing automation
product, in addition to relying on outbound marketing and search
engine traffic to attract potential leads. We rely on a variety of
methods to attract new customers, such as outbound emails, hosting
events, paying providers of online services, search engines,
directories and other websites to provide content, advertising
banners and other links that direct customers to our website. If we
are unable to use any of our current marketing initiatives or the
cost of such initiatives were to significantly increase or such
initiatives or our efforts to satisfy our existing customers are
not successful, we may not be able to attract new customers or
retain existing customers on a cost-effective basis and, as a
result, our revenue and results of operations would be adversely
affected.
If we fail to develop our brands cost-effectively, our business may
be adversely affected.
Successful
promotion of our brands will depend largely on the effectiveness of
our marketing efforts and on our ability to provide reliable and
useful services at competitive prices. Brand promotion activities
may not yield increased revenue, and even if they do, any increased
revenue may not offset the expenses we incur in building our
brands. If we fail to successfully promote and maintain our brands,
or incur substantial expenses in an unsuccessful attempt to promote
and maintain our brands, we may fail to attract enough new
customers or retain our existing customers to the extent necessary
to realize a sufficient return on our brand-building efforts, and
our business and results of operations could suffer.
13
Email communications is a key component of our product. At times,
delivery of our emails has been impaired by third party monitoring
agencies and internet service providers. If the delivery of our
customers’ emails is limited or blocked, our product’s
capabilities would be severely limited, and customers may cancel
their accounts.
Many
SharpSpring users aim to communicate using email with a broad range
of customers and prospects. Our policies limit the use of email to
recipients who have agreed to receive email from that business.
However, it is often difficult to enforce the use of opt-in email
lists and in some cases, our customers disregard our policies and
send emails to purchased lists, which may include spam traps put in
place by monitoring agencies. Those same monitoring agencies can
block emails from reaching individuals that use their spam email
protection services. Additionally, internet service providers
(ISPs) also filter email based on email characteristics and spam
complaint rates. Although we work with one of the premier email
delivery providers, recent aggressive actions by monitoring
agencies and ISPs make it more difficult to protect our email
sending reputation and deliver our customers’ emails to the
recipient. We continually monitor and improve our own technology
and work closely with ISPs to maintain our high deliverability
rates. If third party agencies or ISPs materially limit or halt the
delivery of our customers’ emails, or if we fail to deliver
our customers’ emails in an acceptable manner, our customers
may cancel their accounts.
We rely on third-party vendors to provide services to crucial parts
of our business. If the relationship with these vendors
deteriorates or is terminated it may harm our ability to provide
our software or services to our customers.
SharpSpring depends
on the services of third-party vendors to deliver data and provide
our software and services. In the future if any of these
third-party services are interrupted or terminated our ability to
continue provide service to our customers will deteriorate. Any
such deterioration could adversely affect our business and our
ability to generate revenue. Presently, the novel strain of coronavirus known as
COVID-19 has the potential to interrupt many, if not all, of
the third-party vendors upon which we rely.
Our inability to successfully acquire and integrate our Perfect
Audience business or other businesses, assets, products or
technologies could harm our operating results.
We recently acquired from Marin Software
Incorporated the assets and certain liabilities that comprise our
Perfect Audience platform. As part of this acquisition we
negotiated certain services to facilitate the smooth transition of
the Perfect Audience business. We have limited experience in
successfully acquiring and integrating businesses, products and
technologies, and we may not achieve the synergies or other
benefits we expected to achieve, and we may incur write-downs,
impairment charges or unforeseen liabilities that could negatively
affect our operating results or financial position or could
otherwise harm our business.
14
We may
in the future evaluate and pursue other acquisitions and strategic
investments in businesses, products or technologies that we believe
could complement or expand our existing solutions, expand our
customer base and operations worldwide, enhance our technical
capabilities or otherwise offer growth or cost-saving
opportunities. From time to time, we may enter into letters of
intent with companies with which we are negotiating potential
acquisitions or investments or as to which we are conducting due
diligence. Although we are currently not a party to any binding
definitive agreement with respect to potential investments in, or
acquisitions of, complementary businesses, products or
technologies, we may enter into these types of arrangements in the
future, which could materially decrease the amount of our available
cash or require us to seek additional equity or debt financing. We
have limited experience in successfully acquiring and integrating
businesses, products and technologies. We may not be successful in
negotiating the terms of any potential acquisition, conducting
thorough due diligence, financing the acquisition or effectively
integrating the acquired business, product or technology into our
existing business and operations. Our due diligence may fail to
identify all of the problems, liabilities or other shortcomings or
challenges of an acquired business, product or technology,
including issues related to intellectual property, product quality
or product architecture, regulatory compliance practices, revenue
recognition or other accounting practices, or employee or customer
issues.
If we
finance acquisitions using existing cash, the reduction of our
available cash could cause us to face liquidity issues or cause
other unanticipated problems in the future. If we finance
acquisitions by issuing convertible debt or equity securities, the
ownership interest of our existing stockholders may be diluted,
which could adversely affect the market price of our stock.
Further, contemplating or completing an acquisition and integrating
an acquired business, product or technology could divert management
and employee time and resources from other matters.
Our international operations subject us to additional risks and
uncertainties.
We have
customers in various international jurisdictions. Our international
operations present unique challenges and risks to our Company.
Compliance with complex foreign and U.S. laws and regulations that
apply to our international operations increases our cost of doing
business in international jurisdictions and could interfere with
our ability to offer our products and services to one or more
countries or expose us or our employees to fines and penalties.
These laws and regulations include, but are not limited to, tax
laws, data privacy and filtering requirements, U.S. laws such as
the Foreign Corrupt Practices Act, and local laws prohibiting
corrupt payments to governmental officials. Violations of these
laws and regulations could result in monetary damages, criminal
sanctions against us, our officers, or our employees, and
prohibitions on the conduct of our business. Our international
operations also subject us to additional foreign currency exchange
rate risks and will require additional management attention and
resources. Our international operations subject us to other
inherent risks, including, but not limited to:
●
the
impact of recessions in economies outside of the United
States
●
changes
in and differences between regulatory requirements between
countries
●
The extent of the impact of the novel strain of coronavirus known
as COVID-19 on global commerce
●
U.S.
and foreign export restrictions, including export controls relating
to encryption technologies
●
anti-SPAM
laws and other laws that may differ materially from U.S.
laws
●
reduced
protection for and enforcement of intellectual property rights in
some countries
●
potentially
adverse tax consequences
●
difficulties
and costs of staffing and managing foreign operations
●
political
and economic instability
●
international
conflicts, wars or terrorism
●
tariffs
and other trade barriers
●
seasonal
reductions in business activity
15
Our
failure to address these risks adequately could materially and
adversely affect our business, revenue, results of operations, cash
flows and financial condition.
We could be materially affected by the fluctuations of the U.S.
Dollar against the Euro, Swiss Franc, South African Rand or British
Pound.
In
2019, approximately 86% of our revenues are currently generated in
U.S. Dollars, while approximately 14% of our revenues are
denominated in other currencies including the Euro, Swiss Franc,
South African Rand and British Pound. Our costs are generally
incurred in similar currencies. Currency exchange rates can
fluctuate dramatically, which will impact the amount of revenue we
will record when translated to U.S. Dollars and will impact the
amount of costs that we incur when translated to U.S. Dollars.
Although our cost currencies are generally aligned to our revenue
currencies, variances exist between the rate we incur costs in each
currency compared to the revenue. Therefore, changes to currency
rates may dramatically impact profitability.
The United Kingdom's withdrawal from the European Union could have
an adverse impact on our business, financial condition, operating
results and cash flows.
On
January 31, 2020, the United Kingdom ("U.K.") withdrew from the
European Union ("E.U."), commonly referred to as Brexit. The U.K.
and E.U. agreed to participate in a transition period (the
"Transition Period"), due to expire on December 31, 2020, to
negotiate a trade agreement and other aspects of their future
relationship. Following the Transition Period, the U.K. will no
longer be a part of the single market and customs union of the E.U.
Currently the relationship between the U.K. and E.U. following the
Transition Period is unknown.
Brexit
may cause fluctuations in the value of the U.K. pound sterling and
E.U. euro. Fluctuations in exchange rates between the U.S. dollar
and foreign currencies may adversely affect our expenses, earnings,
cash flows, results of operations, and revenues. We do not engage
in foreign currency hedging arrangements.
If we do not or cannot maintain the compatibility of our marketing
software with third-party applications that our customers use in
their businesses, our revenue will decline.
The
functionality and popularity of our marketing software depends, in
part, on our ability to integrate our solutions with third-party
applications and platforms, including CRM, event management,
e-commerce, call center, and social media sites that our customers
use and from which they obtain data. Third-party providers of
applications and APIs may change the features of their applications
and platforms, restrict our access to their applications and
platforms or alter the terms governing use of their applications
and APIs and access to those applications and platforms in an
adverse manner. Such changes could functionally limit or terminate
our ability to use these third-party applications and platforms in
conjunction with our solution, which could negatively impact our
offerings and harm our business. If we fail to integrate our
software with new third-party applications and platforms that our
customers use for marketing purposes, we may not be able to offer
the functionality that our customers need, which would negatively
impact our ability to generate revenue and adversely impact our
business.
16
If we are unable to maintain our relationships with, and access to,
publishers, advertising exchange platforms and other platforms that
aggregate the supply of advertising inventory, our business will
suffer.
We
currently depend on relationships with various publishers,
including Facebook, Google, OpenX, AppNexus, Yahoo, and Rubicon
(among others) Our display retargeting platform interfaces with
these publishers’ platforms through APIs. We are subject to
the respective platforms’ standard API terms and conditions,
which govern the use and distribution of data from these platforms.
Our business significantly depends on having access to these APIs
on commercially reasonable terms and our business would be harmed
if any of these publishers, advertising exchanges or aggregators of
advertising inventory discontinues or limits access to their
platforms, modifies their terms of use or other policies or place
additional restrictions on us as API users, or charges API license
fees for API access. Moreover, some of these publishers, such as
Google, market competitive solutions for their platforms. Because
the advertising inventory suppliers control their APIs, they may
develop competitive offerings that are not subject to the limits
imposed on us through the API terms and conditions. Publishers,
advertising exchanges and advertising inventory aggregators update
their API terms of use from time to time and new versions of these
terms could impose additional restrictions on us. In addition,
publishers, advertising exchanges and advertising inventory
aggregators continually update their APIs and may update or modify
functionality, which requires us to modify our software to
accommodate these changes and to devote technical resources and
personnel to these efforts which could otherwise be used to focus
on other priorities. Any of these outcomes could cause demand for
our products to decrease, our research and development costs to
increase, and our results of operations and financial condition to
be harmed.
If the market for digital advertising slows or declines, our
business, growth prospects, and financial condition would be
adversely affected.
The
Perfect Audience platform is dependent on the market for digital
advertising. The future growth of our business could be constrained
by the level of acceptance and expansion of emerging cloud-based
advertising channels, as well as the continued use and growth of
existing channels, such as search and display
advertising. Even if these channels become widely adopted,
advertisers and agencies may not make significant investments in
solutions such as ours that help them manage their digital
advertising spend across publisher platforms and advertising
channels. It is difficult to predict customer adoption rates,
customer demand for our platform, the future growth rate and size
of the advertising cloud solutions market or the entry of
competitive solutions. The continued expansion of the market for
advertising cloud solutions depends on a number of factors,
including the continued growth of the cloud-based advertising
market, the growth of social and mobile as advertising channels and
the cost, performance and perceived value associated with
advertising cloud solutions, as well as the ability of cloud
computing companies to address security and privacy concerns.
Further, the cloud computing market is less developed in many
jurisdictions outside the United States. If we or other cloud
computing providers experience security incidents, loss of customer
data, disruptions in delivery or other problems, the market for
cloud computing as a whole, including our applications, may be
negatively affected.
The market in which we participate is competitive and, if we do not
compete effectively, our operating results could be
harmed.
17
Our
principal competitors include marketing automation companies like
HubSpot, Pardot (part of Salesforce.com) and Act-On. Companies can
also utilize various point solutions to provide individual
marketing capabilities for things like email campaigns, landing
pages, forms and analytics, which are all features in a marketing
automation solution. Competition could result in reduced sales,
reduced margins or the failure of our products to achieve or
maintain more widespread market acceptance, any of which could harm
our business.
Our
current and potential competitors may have significantly more
financial, technical, marketing and other resources than we do and
may be able to devote greater resources to the development,
promotion, sale and support of their products. Our current and
potential competitors may have more extensive customer bases and
broader customer relationships than we have. In addition, these
companies may have longer operating histories and greater name
recognition than we have and may be able to bundle products with
other products that have gained widespread market acceptance. These
competitors may be better able to respond quickly to new
technologies and to undertake more extensive marketing campaigns.
If we are unable to compete with such companies, the demand for our
products could substantially decline.
Our business is substantially dependent on continued demand for
marketing and email technology and any decrease in demand could
cause us to suffer a decline in revenues and
profitability.
We
derive, and expect to continue to derive, substantially all of our
revenue from organizations, including marketing agencies and small
and medium size businesses, associations and non-profits. As a
result, widespread acceptance of marketing technology among small
and medium size organizations is critical to our future growth and
success. The overall market for marketing automation technology is
relatively new and still evolving, and small organizations have
generally been slower than larger organizations to adopt email
marketing as part of their marketing mix. There is no certainty
regarding how or whether this market will develop, or whether it
will experience any significant contractions. Our ability to
attract and retain customers will depend in part on our ability to
make marketing communications convenient, effective, and
affordable. If small and medium size organizations determine that
marketing technology and communication does not sufficiently
benefit them, existing customers may cancel their accounts and
potential customers may decide not to utilize our
services.
We are a small public company and the requirements of being a
public company are a strain on our systems and resources, are a
diversion to management’s attention, and are
costly.
As a
public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934 (Exchange Act) the Sarbanes-Oxley
Act of 2002 (Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act), and the rules and
regulations of The NASDAQ Stock Market. The requirements of these
rules and regulations increase our legal, accounting and financial
compliance costs, make some activities more difficult,
time-consuming and costly and may also place strain on our
personnel, systems and resources.
The
Exchange Act requires, among other things, that we file annual,
quarterly and current reports with respect to our business and
operating results. The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and
procedures and internal control over financial reporting. We are
continuing the costly process of implementing and testing our
systems to report our results as a public company, to continue to
manage our growth and to implement internal controls. We are and
will continue to be required to implement and maintain various
other control and business systems related to our equity, finance,
treasury, information technology, other recordkeeping systems and
other operations. As a result of this implementation and
maintenance, management's attention may be diverted from other
business concerns, which could adversely affect our
business.
18
In
addition, changing laws, regulations and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a
diversion of management's time and attention from
revenue-generating activities to compliance activities. If our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to their application and practice,
regulatory authorities may initiate legal proceedings against us
and our business may be adversely affected.
We
expect these laws, rules and regulations to make it more difficult
and more expensive for us to continue to obtain director and
officer liability insurance, and we may be required to incur
substantial costs to maintain appropriate levels of coverage. These
factors could also make it more difficult for us to attract and
retain qualified members of our board of directors, particularly to
serve on our audit committee, and qualified executive
officers.
As a
result of being a public company, our business and financial
condition is more visible, which we believe may result in
threatened or actual litigation, including by competitors and other
third parties. If such claims are successful, our business and
operating results could be adversely affected, and even if the
claims do not result in litigation or are resolved in our favor,
these claims, and the time and resources necessary to resolve them,
could divert the time and resources of our management and adversely
affect our business and operating results.
We may be subject to additional obligations to collect and remit
sales tax and other taxes, and we may be subject to tax liability
for past sales, which could harm our business.
State,
local and foreign jurisdictions have differing rules and
regulations governing sales, 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 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.
19
Risks Related To Our Management
If we fail to attract and retain key and other personnel, we may
not be able to achieve our anticipated level of growth and our
business could suffer.
Our
future depends, in part, on our ability to attract and retain key
personnel. Our future also depends on the continued efforts and
abilities of our executive officers, including our Chief Executive
Officer and other key personnel, each of whom would be difficult to
replace. In particular, Richard Carlson, our Chief Executive
Officer and President and Travis Whitton, our Chief Technology
Officer, are critical to the Company’s strategic direction
and product development process. The loss of the services of
Carlson, Whitton, or other key personnel, and the process to
replace any of our key personnel, would involve significant time
and expense and may significantly delay or prevent the achievement
of our business objectives. We currently do not maintain key person
life insurance on any of our executives. Accordingly, the loss of
the services of any of these persons would adversely affect our
business.
We
believe that our future success will also depend in part on our
continued ability to attract, hire or acquire and retain qualified
employees and contractors. There can be no assurance that we will
be able to attract and retain such resources. If we are
unsuccessful in managing the timely delivery of these services, our
business could be adversely affected.
Our anticipated growth in our operations could place a significant
strain on our management team and our administrative, operational
and financial reporting infrastructure.
Our
success will depend in part on the ability of our management team
to effectively manage our growth in our operations. To do so, we
believe we will need to continue to hire, train and manage new
employees as needed. If our new hires perform poorly, or if we are
unsuccessful in hiring, training, managing and integrating these
new employees, or if we are not successful in retaining our
existing employees, our business may be harmed. To manage the
expected growth of our operations and personnel, we will need to
continue to improve our operational and financial controls and
update our reporting procedures and systems. The expected addition
of new employees and the capital investments that we anticipate
will be necessary to manage our anticipated growth will increase
our cost base, which will make it more difficult for us to offset
any future revenue shortfalls by reducing expenses in the short
term. If we fail to successfully manage our anticipated growth, our
business operations could be adversely affected.
20
Risks Related To Our Systems
Our customers’ use of our products to transmit negative
messages or website links to harmful applications could damage our
reputation, and we may face liability for unauthorized, inaccurate
or fraudulent information distributed via our
services.
Although it is
against our terms and conditions, our customers could use our email
servers to transmit negative messages or website links to harmful
applications, reproduce and distribute copyrighted material without
permission, or report inaccurate or fraudulent data or information.
Any such use of our products could damage our reputation and we
could face claims for damages, copyright or trademark infringement,
defamation, negligence or fraud. Moreover, our customers’
promotion of their products and services through our email
marketing product may not comply with federal, state and foreign
laws. We cannot predict whether our role in facilitating these
activities would expose us to liability under these
laws.
Even if
claims asserted against us do not result in liability, we may incur
substantial costs in investigating and defending such claims. If we
are found liable for our customers’ activities, we could be
required to pay fines or penalties, redesign business methods or
otherwise expend resources to remedy any damages caused by such
actions and to avoid future liability.
Various private spam blacklists have in the past interfered with,
and may in the future interfere with, the effectiveness of our
products and our ability to conduct business.
Our
customers rely on email to communicate with their constituents and
we depend on email to market to and communicate with our customers.
Various private entities attempt to regulate the use of email for
commercial solicitation. These entities often advocate standards of
conduct or practice that significantly exceed current legal
requirements and classify certain email solicitations that comply
with current legal requirements as spam. Some of these entities
maintain “blacklists” of companies and individuals, and
the websites, ISPs and internet protocol addresses associated with
those entities or individuals that do not adhere to those standards
of conduct or practices for commercial email solicitations that the
blacklisting entity believes are appropriate. If a company’s
internet protocol addresses are listed by a blacklisting entity,
emails sent from those addresses may be blocked if they are sent to
any Internet domain or Internet address that subscribes to the
blacklisting entity’s service or purchases its blacklist.
Although we do not own the internet protocol addresses that we use,
blacklisting of the internet protocol addresses that the company
uses could materially impact our sending ability.
Our facilities and systems are vulnerable to natural disasters and
other unexpected events and any of these events could result in an
interruption of our ability to execute customers’ email
campaigns.
While
we have established contingency plans for certain potential
disasters, it is possible that an unexpected disaster may occur,
which could interrupt our ability to provide services. We also
depend on the efficient and uninterrupted operations of our
third-party data centers and hardware systems. The data centers and
hardware systems are vulnerable to damage from earthquakes,
tornados, hurricanes, fire, floods, power loss, telecommunications
failures, public health emergencies, and similar events. If any of
these events results in damage to our facilities or third-party
data centers or systems, we may be unable to operate our services
until the damage is repaired or the disruption is remied, and may
accordingly lose customers and revenues. In addition, subject to
applicable insurance coverage, we may incur substantial costs in
repairing any damage.
21
System failures could reduce the attractiveness of our service
offerings, which could cause us to suffer a decline in revenues and
profitability.
The
satisfactory performance, reliability and availability of the
technology and the underlying network infrastructure are critical
to our operations, level of customer service, reputation and
ability to attract and retain customer. We have experienced
periodic interruptions, affecting all or a portion of our systems,
which we believe will continue to occur from time to time. We are
not aware of any loss of customers due to material service
interruptions. However, any systems damage or interruption that
impairs our ability to accept and fill customer orders could result
in an immediate loss of revenue to us, and could cause some
customers to purchase services offered by our competitors. In
addition, frequent systems failures could harm our reputation. Some
factors that could lead to interruptions in customer service
include: operator negligence; improper operation by, or supervision
of, employees; physical and electronic break-ins; misappropriation;
computer viruses and similar events; power loss; computer systems
failures; Internet and telecommunications failures; and public
health emergencies. Our business interruption insurance may not be
sufficient to fully compensate us for losses that may
occur.
Any significant disruption in service on our websites or in our
computer systems, or in our customer support services, could reduce
the attractiveness of our products and result in a loss of
customers.
The
satisfactory performance, reliability and availability of our
technology and our underlying network infrastructure are critical
to our operations, level of customer service, reputation and
ability to attract new customers and retain existing customers. Our
production system hardware and the disaster recovery operations for
our production system hardware are co-located in third-party
hosting facilities. None of the companies who host our systems
guarantee that our customers’ access to our products will be
uninterrupted, error-free or secure. Our operations depend on their
ability to protect their and our systems in their facilities
against damage or interruption from natural disasters, power or
telecommunications failures, air quality, temperature, humidity and
other environmental concerns, computer viruses or other attempts to
harm our systems, criminal acts and similar events. In the event
that our arrangements with third-party data centers are terminated,
or there is a lapse of service or damage to their facilities, we
could experience interruptions in our service as well as delays and
additional expense in arranging new facilities. Any interruptions
or delays in access to our services, whether as a result of a
third-party error, our own error, natural disasters or security
breaches, whether accidental or willful, could harm our
relationships with customers and our reputation. Also, in the event
of damage or interruption, our insurance policies may not
adequately compensate us for any losses that we may incur. These
factors could damage our brand and reputation, divert our
employees’ attention, reduce our revenue, subject us to
liability and cause customers to cancel their accounts, any of
which could adversely affect our business, financial condition and
results of operations.
Relied upon third-party cloud computing services, could cause
errors or failures of our service, which could cause us to suffer a
decline in revenues and profitability.
We rely
on cloud computing services from third parties that we do not
control in order to offer our products, including Google Compute,
Amazon Web Services, and others. If we lose the right to use these
services or the service malfunctions, our customers could
experience delays or be unable to access our services until we can
obtain and integrate equivalent technology, or a repair is made.
Any delays or failures associated with our services could upset our
customers and harm our business.
22
If we are unable to protect the confidentiality of our unpatented
proprietary information, processes and know-how and our trade
secrets, the value of our technology and services could be
adversely affected.
With
one limited exception related to our retargeting platform. we rely
upon unpatented proprietary technology, processes and know-how and
trade secrets for our marketing automation solution and retargeting
platform and we do not have plans to file for additional patent
protection. Further, even if we file for additional patent
protection, there is no assurance that it will be approved by the
US Patent and Trademark Office. Although we try to protect this
information in part by executing confidentiality agreements with
our employees, consultants and third parties, such agreements may
offer only limited protection and may be breached. Any unauthorized
disclosure or dissemination of our proprietary technology,
processes and know-how or our trade secrets, whether by breach of a
confidentiality agreement or otherwise, may cause irreparable harm
to our business, and we may not have adequate remedies for any such
breach. In addition, our trade secrets may otherwise be
independently developed by our competitors or other third parties.
If we are unable to protect the confidentiality of our proprietary
information, processes and know-how or our trade secrets are
disclosed, the value of our technology and services could be
adversely affected, which could negatively impact our business,
financial condition and results of operations.
Our use of open source software could impose limitations on our
ability to commercialize our products, which could cause us to
suffer a decline in revenues and profitability.
Customizations to
open source software code generally require developers to make
their work available at no cost. Since we have created our software
by developing extensions which plug into open source software
without modifying the open source code, we do not believe there is
a risk we could be required to offer our products or make our
source code available. Although we monitor our use of open source
software closely, the terms of many open source licenses to which
we are subject have not been interpreted by United States or
foreign courts, and there is a risk that such licenses could be
construed in a manner that imposes unanticipated conditions or
restrictions on our ability to commercialize our products. In such
event, we could be required to seek licenses from third parties in
order to continue offering our products, to re-engineer our
products or to discontinue sales of our products, or to release our
software code under the terms of an open source license, any of
which could materially adversely affect our business.
Given
the nature of open source software, there is also a risk that third
parties may assert copyright and other intellectual property
infringement claims against us based on our use of certain open
source software programs. The risks associated with intellectual
property infringement claims are discussed immediately
below.
If a third party asserts that we are infringing its intellectual
property, whether successful or not, it could subject us to costly
and time-consuming litigation or require us to obtain expensive
licenses, and our business may be adversely affected.
The
software and Internet industries are characterized by the existence
of a large number of patents, trademarks and copyrights and by
frequent litigation based on allegations of infringement or other
violations of intellectual property rights. Third parties may
assert patent and other intellectual property infringement claims
against us in the form of lawsuits, letters or other forms of
communication. These claims, whether or not successful,
could:
●
divert
management’s attention;
●
result
in costly and time-consuming litigation;
●
require
us to enter into royalty or licensing agreements, which may not be
available on acceptable terms, or at all;
●
in the
case of open source software-related claims, require us to release
our software code under the terms of an open source license;
or
●
require
us to redesign our software and services to avoid
infringement.
23
As a
result, any third-party intellectual property claims against us
could increase our expenses and adversely affect our business. In
addition, many of our agreements with our agency partners require
us to indemnify them for third-party intellectual property
infringement claims, which would increase the cost to us resulting
from an adverse ruling on any such claim. Even if we have not
infringed any third parties’ intellectual property rights, we
cannot be sure our legal defenses will be successful, and even if
we are successful in defending against such claims, our legal
defense could require significant financial resources and
management time. Finally, if a third party successfully asserts a
claim that our products infringe its proprietary rights, royalty or
licensing agreements might not be available on terms we find
acceptable or at all and we may be required to pay significant
monetary damages to such third party.
If the security of our customers’ confidential information
stored in our systems is breached or otherwise subjected to
unauthorized access, our reputation may be severely harmed, we may
be exposed to liability and we may lose the ability to offer our
customers a credit card payment option.
Our
system stores our customers’ proprietary email distribution
lists, credit card information and other critical data. Any
accidental or willful security breaches or other unauthorized
access could expose us to liability for the loss of such
information, adverse regulatory action by federal and state
governments, time-consuming and expensive litigation and other
possible liabilities as well as negative publicity, which could
severely damage our reputation. If security measures are breached
because of third-party action, employee error, malfeasance or
otherwise, or if design flaws in our software are exposed and
exploited, and, as a result, a third party obtains unauthorized
access to any of our customers’ data, our relationships with
our customers will be severely damaged, and we could incur
significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and
generally are not recognized until they are launched against a
target, we and our third-party hosting facilities may be unable to
anticipate these techniques or to implement adequate preventative
measures. In addition, many states have enacted laws requiring
companies to notify individuals of data security breaches involving
their personal data. These mandatory disclosures regarding a
security breach often lead to widespread negative publicity, which
may cause our customers to lose confidence in the effectiveness of
our data security measures. Any security breach, whether actual or
perceived, would harm our reputation, and we could lose customers
and fail to acquire new customers.
If we
fail to maintain our compliance with the data protection policy
documentation standards adopted by the major credit card issuers,
we could lose our ability to offer our customers a credit card
payment option. Any loss of our ability to offer our customers a
credit card payment option would make our products less attractive
to many small organizations by negatively impacting our customer
experience and significantly increasing our administrative costs
related to customer payment processing.
We may be the subject of intentional cyber disruptions and
attacks.
We
expect to be an ongoing target of attacks specifically designed to
impede the performance of our products. Experienced computer
programmers, or hackers, may attempt to penetrate our network
security or the security of our data centers and IT environments.
These hackers, or others, which may include our employees or
vendors, may cause interruptions of our services. Although we
continually seek to improve our countermeasures to prevent and
detect such incidents, if these efforts are not successful, our
business operations, and those of our customers, could be adversely
affected, losses or theft of data could occur, our reputation and
future sales could be harmed, governmental regulatory action or
litigation could be commenced against us and our business,
financial condition, operating results and cash flow could be
materially adversely affected.
24
Risks Related To Our Industry
Existing federal, state and foreign laws regulate Internet tracking
software, the senders of commercial emails and text messages,
website owners and other activities, and could impact the use of
our marketing tools and potentially subject us to regulatory
enforcement or private litigation.
Certain
aspects of how our customers utilize our platform are subject to
regulations in the United States, European Union and elsewhere.
U.S. and European lawmakers and regulators have expressed concern
over the use of third-party cookies or web beacons for online
behavioral advertising. Legislation adopted in the European Union
requires informed consent for the placement of a cookie on a
user’s device. Regulation of cookies and web beacons may lead
to restrictions on our activities, such as efforts to understand
users’ Internet usage. New and expanding “Do Not
Track” regulations have recently been enacted or proposed
that protect users’ right to choose whether or not to be
tracked online. These regulations seek, among other things, to
allow end users to have greater control over the use of private
information collected online, to forbid the collection or use of
online information, to demand a business to comply with their
choice to opt out of such collection or use, and to place limits
upon the disclosure of information to third party websites. These
policies could have a significant impact on the operation of our
marketing automation platform and could impair our attractiveness
to customers, which would harm our business.
Customers and
potential customers in the healthcare, financial services and other
industries are subject to substantial regulation regarding their
collection, use and protection of data and may be the subject of
further regulation in the future. Accordingly, these laws or
significant new laws or regulations or changes in, or repeals of,
existing laws, regulations or governmental policy may change the
way these customers do business and may require us to implement
additional features or offer additional contractual terms to
satisfy customer and regulatory requirements, or could cause the
demand for and sales of our marketing software to decrease and
adversely impact our financial results.
In
addition, U.S., state and foreign jurisdictions are considering and
may in the future enact legislation or laws restricting the ability
to conduct marketing activities in mobile, social and web channels.
Any of the foregoing existing or future restrictions could require
us to change one or more aspects of the way we operate our
business, which could impair our ability to attract and retain
customers, or increase our operating costs or otherwise harm our
business. We may be unable to pass along those costs to our
customers in the form of increased subscription fees.
25
While
these laws and regulations generally govern our customers’
use of our marketing tools, we may be subject to certain laws as a
data processor on behalf of, or as a business associate of, our
customers. For example, these laws and regulations governing the
collection, use and disclosure of personal information include, in
the United States, rules and regulations promulgated under the
authority of the Federal Trade Commission, the Health Insurance
Portability and Accountability Act of 1996, the Gramm-Leach-Bliley
Act of 1999 and state breach notification laws, and
internationally, the General Data Protection Regulation in the
European Union and the Federal Data Protection Act in Germany. If
we were found to be in violation of any of these laws or
regulations as a result of government enforcement or private
litigation, we could be subjected to civil and criminal sanctions,
including both monetary fines and injunctive action that could
force us to change our business practices, all of which could
adversely affect our financial performance and significantly harm
our reputation and our business.
Privacy concerns and consumers' acceptance of Internet behavior
tracking may limit the applicability, use and adoption of our
marketing software.
Privacy
concerns may cause consumers to resist providing the personal data
necessary to allow our customers to use our services effectively.
We have implemented various features intended to enable our
customers to better protect consumer privacy, but these measures
may not alleviate all potential privacy concerns and threats. Even
the perception of privacy concerns, whether or not valid, may
inhibit market adoption of our services in certain industries. In
addition to government activity, privacy advocacy groups and the
technology and other industries are considering various new,
additional or different self-regulatory standards that may place
additional burdens on us. There are numerous lawsuits in process
against various technology companies that collect and use personal
information. If those lawsuits are successful, it could impact the
way we conduct our business and adversely affect our financial
results. The costs of compliance with, and other burdens imposed
by, the foregoing laws, regulations, policies and actions may limit
the use and adoption of our cloud-based marketing software and
reduce overall demand for it, or lead to significant fines,
penalties or liabilities for any noncompliance or loss of any such
action.
Evolving regulations concerning data privacy may restrict our
customers’ ability to solicit, collect, process and use data
necessary to conduct email campaigns or to analyze the results or
may increase their costs, which could harm our
business.
Federal, state and
foreign governments have enacted, and may in the future enact, laws
and regulations concerning the solicitation, collection, processing
or use of consumers’ personal information. Such laws and
regulations may require companies to implement privacy and security
policies, permit users to access, correct and delete personal
information stored or maintained by such companies, inform
individuals of security breaches that affect their personal
information, and, in some cases, obtain individuals’ consent
to use personal information for certain purposes. Other proposed
legislation could, if enacted, prohibit the use of certain
technologies that track individuals’ activities on web pages
or that record when individuals click through to an Internet
address contained in an email message. Such laws and regulations
could restrict our customers’ ability to collect and use
email addresses, page viewing data, and personal information, which
may reduce demand for our products. They may also negatively impact
our ability to effectively market our products.
26
The
European Union’s General Data Protection Regulation (GDPR)
went into effect in May 2018 and created a data protection law
framework across the EU, aiming to give citizens back the control
of their personal data, while imposing strict rules on those
hosting and 'processing' this data, anywhere in the world. The
Regulation also introduces rules relating to the free movement of
personal data within and outside the EU. SharpSpring, as a data
processor, must clearly disclose any data collection, declare the
lawful basis and purpose for data processing, and state how long
data is being retained and if it is being shared with any third
parties or outside of the European Economic Area. Data subjects
have the right to request a portable copy of the data collected by
a processor in a common format, and the right to have their data
erased under certain circumstances. Public authorities, and
businesses whose core activities center around regular or
systematic processing of personal data, are required to employ a
data protection officer (DPO), who is responsible for managing
compliance with the GDPR. Businesses must report any data breaches
within 72 hours if they have an adverse effect on user privacy. In
some cases, violators of the GDPR may be fined up to €20
million or up to 4% of the annual worldwide turnover of the
preceding financial year in case of an enterprise, whichever is
greater.
In
addition to GDPR, California enacted a similar law to GDPR, the
California Consumer Privacy Act (CCPA), which took effect in
January 2020. The CCPA similarly imposes new obligations with
regards to customer data collection and protection. We continue to
monitor GDPR, CCPA, and any new or upcoming regulations to ensure
compliance and their impact on our ability to provide our marketing
automation services display retargeting to our
customers.
The growth of the marketing automation market depends partially on
the continued growth and effectiveness of anti-spam products, which
may be insufficient to enable us to offer our services at a
profit.
Adoption and
retention of email as a communications medium depends on the
ability to prevent junk mail, or “spam,” from
overwhelming a subscriber’s electronic mailbox. In recent
years, many companies have evolved to address this issue and filter
unwanted messages before they reach customers’ mailboxes. In
response, spammers have become more sophisticated and have also
begun using junk messages as a means for fraud. Email protection
companies in turn have evolved to address this new threat. However,
if their products fail to be effective against spam, adoption of
email as a communications tool will decline, which would adversely
affect the market for our services.
Another economic downturn could negatively affect the business
sector, which may cause our customers to terminate existing
accounts with us or cause potential customers to fail to purchase
our products, resulting in a decrease in our revenue and impairing
our ability to operate profitably.
27
Our
email services are designed specifically for small and medium size
organizations, including small and medium size businesses,
associations and non-profits that frequently have limited budgets
and may be more likely to be significantly affected by economic
downturns than their larger, more established counterparts. Small
organizations may choose to spend their limited funds on items
other than our products. Moreover, if small organizations
experience economic hardship, they may be unwilling or unable to
expend resources on marketing, including email marketing, which
would negatively affect the overall demand for our products,
increase customer attrition and could cause our revenue to decline.
In addition, we have limited experience operating our business
during an economic downturn. Accordingly, we do not know if our
current business model will continue to operate effectively during
an economic downturn. Furthermore, we are unable to predict the
likely duration and severity of potential adverse economic
conditions in the U.S. and other countries, but the longer the
duration the greater risks we face in operating our business. There
can be no assurance, therefore, that worsening economic conditions,
or a prolonged or recurring recession, will not have a significant
adverse impact on our operating and financial results.
U.S. federal legislation entitled Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003 imposes certain
obligations on the senders of commercial emails, which could
minimize the effectiveness of our email marketing product, and
establishes financial penalties for non-compliance, which could
increase the costs of our business.
The
Controlling the Assault of Non-Solicited Pornography and Marketing
Act of 2003, or CAN-SPAM Act, establishes certain requirements for
commercial email messages and specifies penalties for the
transmission of commercial email messages that are intended to
deceive the recipient as to source or content. The CAN-SPAM Act,
among other things, obligates the sender of commercial emails to
provide recipients with the ability to opt out of receiving future
emails from the sender. In addition, some states have passed laws
regulating commercial email practices that are significantly more
punitive and difficult to comply with than the CAN-SPAM Act,
particularly Utah and Michigan, which have enacted do-not-email
registries listing minors who do not wish to receive unsolicited
commercial email that markets certain covered content, such as
adult or other harmful products. Some portions of these state laws
may not be preempted by the CAN-SPAM Act. The ability of our
customers’ constituents to opt out of receiving commercial
emails may minimize the effectiveness of our email marketing
product. Moreover, non-compliance with the CAN-SPAM Act carries
significant financial penalties. If we were found to be in
violation of the CAN-SPAM Act, applicable state laws not preempted
by the CAN-SPAM Act, or foreign laws regulating the distribution of
commercial email, whether as a result of violations by our
customers or if we were deemed to be directly subject to and in
violation of these requirements, we could be required to pay
penalties, which would adversely affect our financial performance
and significantly harm our business. We also may be required to
change one or more aspects of the way we operate our business,
which could impair our ability to attract and retain customers or
increase our operating costs.
As Internet commerce develops, federal, state and foreign
governments may adopt new laws to regulate Internet commerce, which
may negatively affect our business.
28
As
Internet commerce continues to evolve, increasing regulation by
federal, state or foreign governments becomes more likely. Our
business could be negatively impacted by the application of
existing laws and regulations or the enactment of new laws
applicable to email communications. The cost to comply with such
laws or regulations could be significant and would increase our
operating expenses, and we may be unable to pass along those costs
to our customers in the form of increased subscription fees. In
addition, federal, state and foreign governmental or regulatory
agencies may decide to impose taxes on services provided over the
Internet or via email. Such taxes could discourage the use of the
Internet and email as a means of commercial marketing and
communications, which would adversely affect the viability of our
services.
Risks Related To Owning Our Securities
We have a history of losses and may not achieve profitability in
the future.
We
generated a net loss from operations of approximately $10.3 million
in 2019. We will need to generate and sustain increased revenue
levels in future periods to become profitable, and, even if we do,
we may not be able to maintain or increase our level of
profitability. We intend to continue to expend significant funds to
expand and grow our marketing automation and display retargeting
platforms and obtain new customers. Our efforts to grow our
business may be more costly than we expect, and we may not be able
to increase our revenue enough to offset higher operating expenses.
We may incur significant losses in the future for a number of
reasons, including the other risks described in this Annual Report
on Form 10-K, unforeseen expenses, difficulties, complications and
delays and other unknown events. If we are unable to achieve and
sustain profitability, the market price of our common stock may
significantly decrease.
We may need additional capital in the future, which may not be
available to us on favorable terms, or at all, and may dilute your
ownership of our common stock.
We have
historically relied on outside financing and cash from operations
to fund our operations, capital expenditures and expansion. We may
require additional capital from equity or debt financing in the
future to:
●
fund
our operations;
●
respond
to competitive pressures;
●
take
advantage of strategic opportunities, including more rapid
expansion of our business or the acquisition of complementary
products, technologies or businesses; and
●
develop
new products or enhancements to existing products.
We may
not be able to secure timely additional financing on favorable
terms, or at all. The terms of any additional financing may place
limits on our financial and operating flexibility. If we raise
additional funds through issuances of equity, convertible debt
securities or other securities convertible into equity, our
existing stockholders could suffer significant dilution in their
percentage ownership of our Company, and any new securities we
issue could have rights, preferences and privileges senior to those
of our common stock. If we are unable to obtain adequate financing
or financing on terms satisfactory to us, if and when we require
it, our ability to grow or support our business and to respond to
business challenges could be significantly limited.
29
We may expand through acquisitions of, or investments in, other
companies or through business relationships, all of which may
result in additional dilution to our stockholders and consumption
of resources that are necessary to sustain our
business.
One of
the strategies available to us to grow our business would be to
acquire competing or complementary services, technologies or
businesses. We also may enter into relationships with other
businesses in order to expand our service offerings, which could
involve preferred or exclusive licenses, additional channels of
distribution or discount pricing or investments in other
companies.
In
connection with one or more of those transactions, we
may:
●
issue
additional equity securities that would dilute our
stockholders;
●
use
cash that we may need in the future to operate our
business;
●
incur
debt on terms unfavorable to us or that we are unable to
repay;
●
incur
large charges or substantial liabilities;
●
encounter
difficulties retaining key employees of the acquired company or
integrating diverse business cultures;
●
become
subject to adverse tax consequences, substantial depreciation, or
deferred compensation charges; and
●
encounter
unfavorable reactions from investment banking market analysts who
disapprove of our completed acquisitions.
Our board of directors has the authority, without stockholder
approval, to issue preferred stock with terms that may not be
beneficial to existing common stockholders and with the ability to
affect adversely stockholder voting power and perpetuate their
control over us.
Our
certificate of incorporation allows the Board of Directors to issue
shares of preferred stock without any vote or further action by our
stockholders. Our board of directors has the authority to fix and
determine the relative rights and preferences of preferred stock.
Our board of directors also has the authority to issue preferred
stock without further stockholder approval, including large blocks
of preferred stock. As a result, our board of directors could
authorize the issuance of a series of preferred stock that would
grant to holders thereof the preferred right to our assets upon
liquidation, the right to receive dividend payments before
dividends are distributed to the holders of common stock or other
preferred stockholders and the right to the redemption of the
shares, together with a premium, prior to the redemption of our
common stock or existing preferred stock, if any.
Preferred stock
could be used to dilute a potential hostile acquirer. Accordingly,
any future issuance of preferred stock or any rights to purchase
preferred stock may have the effect of making it more difficult for
a third party to acquire control of us. This may delay, defer or
prevent a change of control or an unsolicited acquisition proposal.
The issuance of preferred stock also could decrease the amount of
earnings attributable to, and assets available for distribution to,
the holders of our common stock and could adversely affect the
rights and powers, including voting rights, of the holders of our
common stock and preferred stock.
A sale of a substantial number of shares of our common stock may
cause the price of our common stock to decline and may impair our
ability to raise capital in the future.
30
Our
common stock is traded on The NASDAQ Capital Market and, despite
certain increases of trading volume from time to time, our common
stock is considered “thinly-traded,” meaning that the
number of persons interested in trading our common stock at any
given time may be relatively small or non-existent. Finance
transactions resulting in a large amount of newly issued shares
that become readily tradable, or other events that cause current
stockholders to sell shares, could place downward pressure on the
trading price of our stock. The lack of a robust resale market may
require a stockholder who desires to sell a large number of shares
of common stock to sell the shares in increments over time to
mitigate any adverse impact of the sales on the market price of our
stock.
If our
stockholders sell, or the market perceives that our stockholders
intend to sell for various reasons, including the ending of
restriction on resale, substantial amounts of our common stock in
the public market, including shares issued upon the exercise of
outstanding options or warrants, the market price of our common
stock could fall. Sales of a substantial number of shares of our
common stock may make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we
deem reasonable or appropriate. We may become involved in
securities class action litigation that could divert
management’s attention and harm our business.
Our amended certificate of incorporation and bylaws, and certain
provisions of Delaware corporate law, as well as certain of our
contracts, contain provisions that could delay or prevent a change
in control even if the change in control would be beneficial to our
stockholders.
Delaware law, as
well as our amended certificate of incorporation and bylaws,
contains anti-takeover provisions that could delay or prevent a
change in control of our Company, even if the change in control
would be beneficial to our stockholders.
These
provisions could lower the price that future investors might be
willing to pay for shares of our common stock. These anti-takeover
provisions:
●
authorize
our board of directors to create and issue, without stockholder
approval, preferred stock, thereby increasing the number of
outstanding shares, which can deter or prevent a takeover
attempt;
●
prohibit
cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect
director candidates;
●
empower
our board of directors to fill any vacancy on our board of
directors, whether such vacancy occurs as a result of an increase
in the number of directors or otherwise;
●
provide
that our board of directors is expressly authorized to adopt, amend
or repeal our bylaws; and
●
provide
that our directors will be elected by a plurality of the votes cast
in the election of directors.
31
Section
203 of the Delaware General Corporation Law, the terms of our
employee stock option agreements and other contractual provisions
may also discourage, delay or prevent a change in control of our
Company. Section 203 generally prohibits a Delaware corporation
from engaging in a business combination with an interested
stockholder for three years after the date the stockholder became
an interested stockholder. Our employee stock option agreements
include change-in-control provisions that allow us to grant options
or stock purchase rights that may become vested immediately upon a
change in control. The terms of change of control provisions
contained in certain of our senior executive employee agreements
may also discourage a change in control of our Company. Our board
of directors also has the power to adopt a stockholder rights plan
that could delay or prevent a change in control of our Company even
if the change in control is generally beneficial to our
stockholders. These plans, sometimes called “poison
pills,” are oftentimes criticized by institutional investors
or their advisors and could affect our rating by such investors or
advisors. If our board of directors adopts such a plan, it might
have the effect of reducing the price that new investors are
willing to pay for shares of our common stock.
Together, these
charter, statutory and contractual provisions could make the
removal of our management and directors more difficult and may
discourage transactions that otherwise could involve payment of a
premium over prevailing market prices for our common stock.
Furthermore, the existence of the foregoing provisions, as well as
the significant common stock beneficially owned by our founder,
executive officers, and members of our board of directors, could
limit the price that investors might be willing to pay in the
future for shares of our common stock. They could also deter
potential acquirers of our Company, thereby reducing the likelihood
that you could receive a premium for your common stock in an
acquisition.
Our quarterly results may fluctuate and if we fail to meet the
expectations of analysts or investors, our stock price could
decline substantially.
Our
quarterly operating results may fluctuate, and if we fail to meet
or exceed the expectations of securities analysts or investors, the
trading price of our common stock could decline. Some of the
important factors that could cause our revenue and operating
results to fluctuate from quarter to quarter include:
●
our
ability to retain existing customers, attract new customers and
satisfy our customers’ requirements;
●
general
economic conditions;
●
changes
in our pricing policies;
●
our
ability to expand our business;
●
our
ability to successfully integrate our acquired
businesses;
●
new
product and service introductions;
●
technical
difficulties or interruptions in our services;
●
the
timing of additional investments in our hardware and software
systems;
●
regulatory
compliance costs;
●
costs
associated with future acquisitions of technologies and businesses;
and
●
extraordinary
expenses such as litigation or other dispute-related settlement
payments.
Some of
these factors are not within our control, and the occurrence of one
or more of them may cause our operating results to vary widely. As
such, we believe that quarter-to-quarter comparisons of our revenue
and operating results may not be meaningful and should not be
relied upon as an indication of future performance.
32
Our common stock is subject to volatility.
We
cannot assure you that the market price for our common stock will
remain at its current level, and a decrease in the market price
could result in substantial losses for investors. The market price
of our common stock may be significantly affected by one or more of
the following factors:
●
announcements
or press releases relating to our industry or to our own business
or prospects;
●
regulatory,
legislative, or other developments affecting us or our industry
generally;
●
sales
by holders of restricted securities pursuant to effective
registration statements or exemptions from registration;
and
●
market
conditions specific to our company, our industry and the stock
market generally.
If securities or industry analysts do not publish research or
reports about our business, or if they change their recommendations
regarding our stock adversely, our stock price and trading volume
could decline.
The
trading market for our common stock will depend in part on the
research and reports that securities or industry analysts publish
about us or our business. We currently have five independent
research analysts covering our stock and may not obtain additional
research coverage by securities and industry analysts. If no
additional securities or industry analysts commence coverage of us,
the trading price for our common stock could be negatively
affected. In the event any analyst who covers us downgrades our
securities, the price of our securities would likely decline. If
one or more of these analysts ceases to cover us or fails to
publish regular reports on us, interest in the purchase of our
securities could decrease, which could cause the price of our
common stock and its trading volume to decline.
If we fail to maintain an effective system of disclosure controls
and internal control over financial reporting, our ability to
produce timely and accurate financial statements or comply with
applicable regulations could be impaired.
As a
public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934 (Exchange Act) the Sarbanes-Oxley
Act of 2002 (Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act), and the rules and
regulations of The NASDAQ Stock Market. We expect that compliance
with these rules and regulations will continue to increase our
legal, accounting and financial compliance costs, make some
activities more difficult, time consuming and costly, and place
significant strain on our personnel, systems and
resources.
The
Sarbanes-Oxley Act requires, among other things, that we assess the
effectiveness of our internal control over financial reporting
annually and the effectiveness of our disclosure controls and
procedures quarterly. In particular, Section 404 of the
Sarbanes-Oxley Act, (Section 404), requires us to perform
system and process evaluation and testing of our internal control
over financial reporting to allow management to report on, and our
independent registered public accounting firm to attest to, the
effectiveness of our internal control over financial reporting. Our
compliance with applicable provisions of Section 404 requires
that we incur substantial accounting expense and expend significant
management time on compliance-related issues as we implement
additional corporate governance practices and comply with reporting
requirements. Moreover, if we are not able to comply with the
requirements of Section 404 applicable to us in a timely
manner, or if we or our independent registered public accounting
firm identifies deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses, the market
price of our stock could decline and we could be subject to
sanctions or investigations by the SEC or other regulatory
authorities, which would require additional financial and
management resources.
33
Furthermore,
investor perceptions of our company may suffer if deficiencies are
found, and this could cause a decline in the market price of our
stock. Irrespective of compliance with Section 404, any
failure of our internal control over financial reporting could have
a material adverse effect on our stated operating results and harm
our reputation. If we are unable to implement these requirements
effectively or efficiently, it could harm our operations, financial
reporting, or financial results and could result in an adverse
opinion on our internal controls from our independent registered
public accounting firm.
MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our
common stock trades on The NASDAQ Capital Market under the symbol
“SHSP”.
Stockholders
As of
March 13, 2020, there were approximately 51 holders of our common
stock including The Depository Trust Company, which holds shares of
our common stock on behalf of an indeterminate number of beneficial
owners.
Dividends
Our
Company does not pay any cash dividends on its commons stock. Our
Loan and Security Agreement with Western Alliance Bank restricts
our ability to pay cash dividends on our common stock and it will
continue to do so for the foreseeable future.
35
Securities Authorized for Issuance under Equity Compensation
Plans
See
Item 12, “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters,” for information
regarding securities authorized for issuance
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this report contains forward-looking statements.
All statements other than statements of historical fact made in
this report are forward looking. In particular, the statements
herein regarding industry prospects and future results of
operations or financial position are forward-looking statements.
These forward-looking statements can be identified by the use of
words such as “believes,”“estimates,”“could,”“possibly,”“probably,” anticipates,” “projects,”“expects,”“may,”“will,” or
“should” or other variations or similar words. No
assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. Forward-looking
statements reflect management’s current expectations and are
inherently uncertain. Our actual results may differ significantly
from management’s expectations.
The following discussion and analysis should be read in conjunction
with our 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.
Background 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.
36
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 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.
Revenues from continuing operations increased for
the year ended December 31, 2019 as compared to the year ended
December 31, 2018, primarily due to growth in our SharpSpring
marketing automation customer base. Revenues for our flagship marketing automation
platform increased to $22.2 million in 2019 from $18.3 million in
2018. During 2019, we continued to attract and acquire new
customers on the SharpSpring platform, which contributed to our
revenue growth. This growth in revenues was partially offset by
reduced revenue from our SharpSpring Mail+ product, which declined
from $0.4 million in 2018 to $0.2 million in 2019. We expect
revenue to continue to increase in 2020 from the realization of the
full year value of the net new SharpSpring customers acquired
throughout 2019. The acquisition of Perfect Audience in November of
2019 generated an additional $0.3 million of new revenue in the
short period offered.
Cost of
services increased for the year ended
December 31, 2019, as compared to the year ended December 31, 2018, primarily due
to increased employee and technology-related costs associated with
providing our technology platform to more customers and increased
hosting cost with the growth of the Company. As a percentage of
revenues, cost of services was 31% of revenues for both years ended
December 31, 2019, and December 31, 2018. Although costs increased
for support resources related to business growth and initial costs
from Perfect Audience, the Company achieved some operating leverage
with increased revenues compared to the prior year. We expect costs
of services to increase in 2020 in dollar terms, but remain
relatively consistent as a percent of revenue, as we add more costs
to support customers and promote growth in agency partner
relationships, but also continue to create operating leverage in
our support and hosting infrastructure.
Percent
Year ended
Change
Change
December 31,
from
from
2019
2018
Prior Year
Prior Year
Operating expenses:
Sales
and marketing
$11,785,227
$10,092,691
$1,692,536
17%
Research
and development
5,036,613
4,298,031
738,582
17%
General
and administrative
8,617,073
6,358,087
2,258,986
36%
Non-employee
stock issuance expense
-
508,561
(508,561)
-100%
Intangible
asset amortization
381,000
460,000
(79,000)
-17%
Total
operating expenses
$25,819,913
$21,717,370
$4,102,543
19%
37
Sales
and marketing expenses increased for the year ended December 31,2019, as compared to the year ended December 31, 2018. The increase
was primarily due to an increase in marketing program spending for
various lead generation activities, which increased by
approximately $0.36 million from the prior year. Additionally, we
experienced an increase in marketing and sales employee-related
costs of approximately $1.3 million in part due to hires made
during 2019 to align with the Company’s growth. Also included
in the $1.3 million is severance related to the Company’s
former CRO in the amount of approximately $0.13 million We expect
sales and marketing expenses to increase in 2020 as we devote more
resources to acquiring new customers.
Research and
development expenses increased for the year ended December 31,2019, as compared to the year ended December 31, 2018, primarily
due to additional hiring of development and quality assurance staff
since last year. Employee-related costs for this group increased by
approximately $0.89 million in the year ended December 31, 2019,
compared to the same period in 2018. Non-employee related costs for
this group increased by approximately $0.5 million compared to 2018
primarily driven by the outsourcing of certain development
projects. The increase in these costs were partially offset by
increased capitalized software development costs of approximately
$0.69 million compared to the year ended 2018. We expect research
and development spend to increase in 2020 as we increase our team
to support future product development commensurate with the growth
of our business.
General
and administrative expenses increased for the year ended December31, 2019 as compared to the year ended December 31, 2018, with
higher employee related costs associated with business growth,
higher facilities costs, and higher depreciation. Employee related
costs increased approximately $0.80 million compared to 2018.
Facilities and depreciation costs to be able to support the growth
of the company increased approximately $0.43 million in 2019
compared to 2018. Professional fees related audit, tax, the
acquisition of Perfect Audience, and equity transactions increased
by approximately by $0.24 million compared to 2018. During 2018 we
incurred expenses of approximately $0.25 million related to the
closure of our Northeast operations, which included transition of
our CFO to the Gainesville office. We expect general and
administrative expenses to increase in dollar terms and decrease as
a percent of revenue in 2020, as we add costs to support general
business growth.
During
the year ended 2018, the Company issued 36,274 shares to a service
provider to satisfy a performance-based contractual arrangement.
The Company recorded an expense of approximately $0.51 million
associated with this issuance in 2018.
Amortization of
intangible assets decreased for the year ended December 31, 2019,
as compared to the year ended December 31, 2018, primarily due to
the reduction of amortization related to the SharpSpring trade name
which became fully amortized in 2018.
Percent
Year ended
Change
Change
December 31,
from
from
2019
2018
Prior Year
Prior Year
Other
Other
expenses, net
$(147,338)
$(545,482)
$398,144
-73%
Loss
on induced conversion
(2,162,696)
-
(2,162,696)
n/a
Gain
(loss) on embedded derivative
214,350
(400,220)
614,570
-154%
Provision
(benefit) for income taxes
29,349
(330,994)
360,343
-109%
38
Other
income (expense) is generally related to foreign exchange gains and
losses derived from owing amounts or having amounts owed in
currencies other than the entity’s functional currency, as
well as interest expense related to our convertible notes. Foreign
exchange loss for the year ended December 31, 2019, was $0.04
million. Non-cash interest expense for the year ended December 31,2019, and 2018 was $0.14 million and $0.3 million,
respectively.
On May9, 2019, the Company entered into an agreement to convert the
Convertible Notes. As a result of the conversion, the company
realized a gain on the embedded derivative of $0.21 million, and a
loss on conversion of debt of $2.16 million during the year ended
December 31, 2019. The company incurred a loss on the embedded
derivative of $0.40 million during the year ended December 31,2018.
During
the year ended December 31, 2019, our income tax provision from
operations related to U.S. States’ income taxes of
approximately $25,000 as well as approximately $4,000 of income tax
related to foreign jurisdictions. For the year ended December 31,2018, our income tax benefit from operations related to U.S.
consolidated deferred tax liabilities that were reduced by
indefinite-lived operating losses created during 2018, increased
income tax benefit related to the U.S. 2017 loss carryback, and
additional tax benefit derived in foreign
jurisdictions.
Liquidity and Capital Resources
Sources and Uses of Cash
Our
primary source of operating cash inflows are payments from
customers for use of our marketing automation technology platform.
Such payments are primarily received monthly from customers but can
sometimes be received annually in advance of providing the
services, yielding a deferred revenue liability on our consolidated
balance sheet. In addition to operating cash flows, the Company
issued approximately $15.6 million of common stock in 2019 with two
separate issuances in March and November 2019, respectively. In
March 2018, the Company issued $8.0 million of convertible notes
and received $7.9 million in cash net of debt issuance costs. The
Company received $1.0 million and approximately $0.6 million from
the exercise of stock options in 2019 and 2018 respectively. The
Company also received $2.1 million in cash tax refunds in 2018,
associated with 2017, U.S. net operating losses that were carried
back and applied to income taxes paid for the 2016 year. To provide
additional financing flexibility, the Company also has a credit
facility in place. No amounts have been borrowed under the facility
to date and based on the borrowing base calculations, approximately
$2.1 million was available under the facility as of December 31,2019.
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 increased by $4.4 million to $8.0
million used in operations for the year ended December 31, 2019,
compared to $3.6 million used in operations for the year ended
December 31, 2018. The increase in cash used in operating
activities was attributable primarily to the net loss increase from
$9.5 million to $12.4 million. This partially offset by the
non-cash loss of $2.2 million related to the induced conversion of
the convertible notes in May 2019. In June 2018 the Company
received an approximately $2.1 million tax refund.
39
Net cash used in investing activities was $5.9
million during the year ended December 31, 2019, compared to net
cash used in investing activities of $0.89 million during the year
ended December 31, 2018. The change in cash used for
investing activities is primarily related to the purchase of the
Perfect Audience assets for $4.6 million in November
2019.
Net
cash provided by financing activities was $16.6 million during
the year ended December 31,2019, compared to $8.5 million net cash received in
financing activities during the year
ended December 31, 2018. The majority of the net cash
provided by financing activities in 2019 was related to two
separate stock raises totaling $15.6 million. During the year ended
December 31, 2018, the majority of the cash received related to
financing activities is related the Company’s issuance $8.0
million of convertible notes during the first quarter of 2018, for
which the Company received $7.9 million after debt issuance costs.
The Company also received $0.97 million and $0.6 million in
proceeds from the exercise of stock options during the years ended
December 31, 2019 and 2018, respectively.
Contractual Obligations
We
typically rent our office facilities with leases involving
multi-year commitments. Although some of our service contracts are
on a month-to-month basis, we sometimes enter into non-cancelable
service contracts for longer periods of time, some of which may
last several years. Future minimum lease payments and payments due
under non-cancelable service contracts are as follows as of
December 31, 2019:
Operating
Leases
2020
$742,956
2021
766,546
2022
771,278
2023
794,937
2024
799,669
Thereafter
3,221,086
Total
Commitments
$7,096,472
Significant Accounting Policies
Our
significant accounting policies, including the assumptions and
judgments underlying them, are disclosed in the Notes to the
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, and it is
unlikely that material different amounts would be reported under
different assumptions.
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.
New Accounting Pronouncements
For
information on recent accounting pronouncements, see Recently Issued Accounting
Pronouncements in the notes to the consolidated financial
statements appearing elsewhere in this Annual Report on Form 10-K
(see Note 2).
40
ITEM
7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
financial statements included in this annual report under this item
are set forth beginning on Page F-1 of this Annual Report,
immediately following the signature pages.
ITEM 9.
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
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 covered by 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.
Notwithstanding the
identified material weaknesses, management believes the
consolidated financial statements included in this Form 10-K 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).
41
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.
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.
42
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.
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 Item
8 of this Form 10-K.
Following
identification of the material weaknesses and prior to filing this
Annual Report on Form 10-K, we completed substantive procedures for
the year ended December 31, 2019. Based on these procedures,
management believes that our consolidated financial statements
included in this Form 10-K have been prepared in accordance with
U.S. GAAP. Our CEO and CFO have certified that, based on their
knowledge, the consolidated financial statements, and other
financial information included in this Form 10-K, fairly present in
all material respects the financial condition, results of
operations and cash flows of the Company as of, and for, the
periods presented in this Form 10-K. Cherry Bekaert LLP has issued
an unqualified opinion on our consolidated financial statements,
which is included in Item 8 of this Form 10-K.
43
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 Internal Control Over Financial Reporting
Other
than the material weakness identified during the year, as of
December 31, 2019, there have been no other changes in our internal
control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) of the Exchange Act) that occurred during fiscal year
2019 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
information required by this Item is incorporated by reference from
the information contained within our Company’s definitive
proxy statement for the 2020 Annual Meeting of
Stockholders.
The
information required by this Item is incorporated by reference from
the information contained within our Company’s definitive
proxy statement for the 2020 Annual Meeting of
Stockholders.
ITEM 12.
SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by this Item is incorporated by reference from
the information contained within our Company’s definitive
proxy statement for the 2020 Annual Meeting of
Stockholders.
ITEM
13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The
information required by this Item is incorporated by reference from
the information contained within our Company’s definitive
proxy statement for the 2020 Annual Meeting of
Stockholders.
The
information required by this Item is incorporated by reference from
the information contained within our Company’s definitive
proxy statement for the 2020 Annual Meeting of
Stockholders.
The
financial statements included in Part II, Item 8 of this Annual
Report on Form 10-K are filed as part of this Report.
2.
Financial Statements Schedule
Other
financial statement schedules have been omitted because either the
required information (i) is not present, (ii) is not present in
amounts sufficient to require submission of the schedule or (iii)
is included in the Financial Statements and Notes thereto under
Part II, Item 8 of this Annual Report on Form 10-K.
3.
Exhibits
The
exhibit list in the Index to Exhibits is incorporated herein by
reference as the list of exhibits required as part of this
Report.
Pursuant to the
requirements of Section 13 or 15(d) 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 on March16, 2020.
SharpSpring, Inc.
By:
/s/
Richard A. Carlson
Richard
A. Carlson
Chief
Executive Officer and President
(Principal
Executive Officer)
Pursuant to the
requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature
Title
Date
/s/
Richard A. Carlson
Chief
Executive Officer and President (Principal Executive Officer),
Director
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and
Stockholders of
SharpSpring, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
SharpSpring, Inc. and subsidiaries (the Company) as of December 31,2019 and 2018, and the related consolidated statements of
comprehensive loss, changes in stockholders’ equity, and cash
flows for each of the years in the two-year period ended December31, 2019, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the
consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as
of December 31, 2019 and 2018, and the results of its operations
and its cash flows for each of the years in the two-year period
ended December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
We
also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 16, 2020, expressed an adverse
opinion.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our
opinion.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and
Stockholders
SharpSpring,
Inc.
Adverse Opinion on Internal Control
over Financial Reporting
We have audited SharpSpring, Inc. and subsidiaries’ (the
Company’s) internal control over financial reporting
as of December 31, 2019, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). In
our opinion, because of the effect of the material weaknesses
described in the following paragraph on the achievement of the
objectives of the control criteria, the Company has not maintained
effective internal control over financial reporting as of December31, 2019, based on criteria established in Internal
Control—Integrated Framework (2013) issued by
COSO.
A material weakness is a control deficiency, or a 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. The following
material weaknesses have been identified and included in
management’s assessment. There are material weaknesses (1)
related to the operating effectiveness of the Company’s
design and implementation of program change-management over certain
information technology systems that support the Company’s
financial reporting processes (2) the design and 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
Company personnel. We also 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 which were aggregated into an additional material
weakness. These material weaknesses were considered in determining
the nature, timing, and extent of audit tests applied in our audit
of the 2019 consolidated financial statements, and do not affect
our opinion on those consolidated financial
statements.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated balance sheets and the related consolidated
statements of comprehensive loss, changes in stockholders’
equity, and cash flows of the Company, and our report dated March16, 2020, expressed an unqualified opinion.
Basis for Opinion
The
Company’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal
Control over Financial Reporting (Item 9A). Our responsibility is
to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit of internal control over financial reporting included
obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
F-3
Definition and Limitations of Internal Control over Financial
Reporting
The Company’s management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting (Item 9A). Our
responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our
opinion.
Disclaimer on Additional Information in Management’s
Report
We do
not express an opinion or any other form of assurance on
management’s statements, included in the accompanying
Management’s Report on Internal Control over Financial
Reporting, (Item 9A), referring to corrective actions taken after
December 31, 2019, relative to the aforementioned material
weaknesses in internal control over financial
reporting.
SharpSpring,
Inc. (the “Company”) provides a cloud-based marketing
automation solution and a display retargeting platform through our
SharpSpring and Perfect Audience products respectively. SharpSpring
is designed to increase the rates at which businesses generate
leads and convert leads to sales opportunities by improving the way
businesses communicate with customers and prospects. Our products
are marketed directly by us and through a small group of reseller
partners to customers around the world.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The
accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America (U.S. GAAP). 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.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Operating Segments
The Company operates as one operating segment. Operating segments
are defined as components of an enterprise for which separate
financial information is regularly evaluated by the chief operating
decision maker (“CODM”), which is the Company’s
chief executive officer, in deciding how to allocate resources and
assess performance. The Company’s CODM evaluates the
Company’s financial information and resources and assess the
performance of these resources on a consolidated basis. The Company
does not present geographical information about revenues because it
is impractical to do so.
Foreign Currencies
The 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).
F-9
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 approximates 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 December 31, 2019 and December 31, 2018
was a liability balance of zero and $0.21 million, respectively.
The change in fair value for the year ended December 31, 2019 and
2018 was a gain of $0.21 million and loss of $0.4
million.
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.
F-10
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 and customer relationships and are amortized based on
the estimated economic benefit over their estimated useful lives,
with original periods ranging from 5 to 11 years. We continually
evaluate the reasonableness of the useful lives of these assets.
Finite-lived intangibles are tested for recoverability whenever
events or changes in circumstances indicate the carrying amounts
may not be recoverable. Impairment losses are measured as
the amount by which the carrying value of an asset group exceeds
its fair value and are recognized in operating results. Judgment is
used when applying these impairment rules to determine the timing
of the impairment test, the undiscounted cash flows used to assess
impairments and the fair value of an asset group. The dynamic
economic environment in which the Company operates, and the
resulting assumptions used to estimate future cash flows impact the
outcome of these impairment tests.
Goodwill and Indefinite-Lived Intangible Assets
As of December 31, 2019 and 2018, we had recorded goodwill of $10.9
million and $8.9 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. In 2019, Goodwill
increased due to the Perfect Audience acquisition (See Note 3).
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.
The Company also has indefinite-lived intangible assets. As of
December 31, 2019, and 2018, we had recorded indefinite-lived
intangible assets of $0.38 million and zero, respectively (see Note
4). These assets are not 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 350-30, and written down when impaired.
F-11
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 as effective interest expense ratably over the life of
the debt. There was no debt issuance costs during the year ended
December 31, 2019. For the year ended December 31, 2018 we incurred
debt issuance costs of approximately $141,000. These costs were
included as a direct reduction tot the carrying value of the debt
as part of the Notes on our consolidated balance sheets and are
amortized to interest expense ratably over the five-year term of
the Notes. Upon conversion of the Notes in 2019, the remaining
balance of the debt issuance costs was expensed along with the
remaining balance of the Notes.
Income Taxes
Provision
for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between
the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported
amounts in the consolidated financial statements. Deferred tax
assets and liabilities are included in the consolidated financial
statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are
expected to be realized or settled as prescribed in FASB ASC 740,
Accounting for Income
Taxes. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for
income taxes. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that a deferred
tax asset will not be realized.
The
Company applies the authoritative guidance in accounting for
uncertainty in income taxes recognized in the consolidated
financial statements. This guidance prescribes a two-step process
to determine the amount of tax benefit to be recognized. First, the
tax position must be evaluated to determine the likelihood that it
will be sustained upon external examination. If the tax position is
deemed “more-likely-than-not” to be sustained, the tax
position is then assessed to determine the amount of benefit to
recognize in the financial statements. The amount of the benefit
that may be recognized is the largest amount that has a greater
than 50% likelihood of being realized upon ultimate settlement.
There are no material uncertain tax positions taken by the Company
on its tax returns. Tax years subsequent to 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 December 31, 2019, the Company was being
examined by the U.S. tax authorities related to the 2016 and 2017
tax years. The Company does not expect any material adjustments as
a result of the audit. The Company received notification February14, 2020 that the examination had been closed with no changes. The
Company received notification January 14, 2020 that it’s
Swiss subsidiary, InterInbox SA is under examination from 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.
F-12
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 $0.63
million and $0.43 million for the years ended December 31, 2019 and
2018, respectively.
Property
and equipment as of December 31 is as follows:
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,
which is described below:
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 and provide professional services in
exchange for consideration from the customer.
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.
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.
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.
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. The Perfect Audience software is
utilized on an as needed basis, and the related revenue recognized
as the service is 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 60 days. Cash payments received
in advance of providing subscription or services are recorded to
deferred revenue until the performance obligation is
satisfied.
F-14
Our products are typically billed in arrears or upfront, depending
on the product, which creates contract assets (unbilled
receivables) and contract liabilities (deferred revenue). 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.
Deferred Revenue
Deferred revenue consists of payments received in advance of the
Company providing services. Deferred revenue is earned over the
service period identified in each contract. The majority of our
deferred revenue balances (contract liabilities) arise from upfront
implementation and training fees for its SharpSpring marketing
automation solution that are paid in advance. These services are
typically performed over a 60-day period, and the revenue is
recognized over that period. Additionally, some of the
Company’s customers pay for services in advance on a periodic
basis (such as monthly, quarterly, annually or bi-annually). In
situations where a customer pays in advance for a one-year service
period, the deferred revenue is recognized over that service
period. Deferred revenue balances were $0.25 million and $0.28
million as of December 31, 2018 and 2017, respectively. Deferred
revenue during the year ended December 31, 2019 increased by $0.61
million and decreased by $0.03 million during the year ended
December 31, 2018. The Company had deferred revenue contract
liability balances of $0.86 million and $0.25 million as of
December 31, 2019 and 2018, respectively. The Company expects to
recognize a majority of the revenue on these remaining performance
obligations within 12 months. Approximately 4% of the deferred
revenue balance is related to prepaid credits. These credits are
recognized as they are used. The Company expects to recognize
approximately half of the remaining credits within 12 months. As
part of the acquisition of Perfect Audience, the Company acquired
approximately $0.19 million of deferred revenue.
Unbilled Receivable
In cases where our customers pay for services in arrears, we accrue
for revenue in advance of billings as long as the criteria for
revenue recognition is met, thus creating a contract asset. The
accrued revenue contract asset balances were $0.74 million and
$0.55 million as of December 31, 2018 and 2017,
respectively. Revenue billed
that was included in accrued revenue at the beginning of the year
ended December 31, 2019 and 2018 was $0.74 million and $0.55
million, respectively. The accrued revenue not billed and ending
balance in years ended December 31, 2019 and 2018 was $1.0 million
and $0.74 million respectively.
Concentration of Credit Risk and Significant Customers
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash, cash equivalents. At
December 31, 2019 and 2018, 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 it is subject to unusual
credit risk beyond the normal credit risk associated with
commercial banking relationships.
F-15
For the
years ended December 31, 2019, and 2018, there were no customers
that accounted for more than 10% of total revenue. For the year
ended December 31, 2019 two customers had open accounts receivable
balances which were above 10% of net accounts receivable,
accounting for approximately 43% of net accounts receivable. As of
February 29, 2020, these customers had no accounts receivable
balance older than 30 days. For the year ended December 31, 2018
there were no customers that accounted for more than 10% of the net
accounts receivable.
Cost of Services
Cost of
services consists primarily of direct labor costs associated with
support and customer onboarding and technology hosting costs 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 $5.8
million and $5.7 million for the years ended December 31, 2019 and
2018, respectively, and are included as a component of sales and
marketing expense.
The
Company capitalizes sales commission costs which are incremental to
obtaining a contract. We expense costs that are related to
obtaining a contract but are not incremental such as other sales
and marketing costs and other costs that would be incurred
regardless of if the contract was obtained. Capitalized costs are
amortized using straight-line amortization over the estimated
weighted average life of the customer, which we have estimated to
be 3 years. At December 31, 2019, 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, 2018, the net
carrying value of the capitalized cost of obtaining a contract was
$1.31 million, of which
$0.7 million is included in
other current assets and $0.61
million is included in other long-term assets. The Company
amortized costs directly attributable to obtaining contracts of
$0.8 million and $0.76
million during the years ended
December 31, 2019 and 2018, 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.
F-16
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,
warrants, and the conversion option of the Convertible Notes (Note
6) are considered to be potential common shares outstanding. Since
the Company incurred net losses for each of the periods presented,
diluted net loss per share is the same as basic net loss per share.
The Company’s potential common shares outstanding were not
included in the calculation of diluted net loss per share as the
effect would be anti-dilutive.
Comprehensive Income or Loss
Comprehensive
income or loss includes all changes in equity during a period from
non-owner sources, such as net income or loss and foreign currency
translation adjustments.
Recently Issued Accounting Standards
Recent
accounting standards not included below are not expected to have a
material impact on our consolidated financial position and results
of operations.
In May
2014, the FASB issued updated guidance and disclosure requirements
for recognizing revenue from contracts with customers. This new
revenue recognition standard became effective for the Company on
January 1, 2018. In addition to providing guidance on when and how
revenue is recognized, the new standard also provides guidance on
accounting for costs of obtaining contracts primarily related to
aligning the expense with the period in which the value is
recognized. As a result of this new standard, the Company was
required to capitalize certain costs related to obtaining contracts
associated with commissions expense paid to salespeople. The
Company is using the retrospective transition method to adjust each
prior reporting period presented for this new method of accounting
for costs associated with obtaining contracts. The application of
the retrospective transition was applied to all contracts at the
date of initial application. The following tables present our
results under our historical method and as adjusted to reflect
these accounting changes.
In
January 2017, the FASB issued guidance simplifying the accounting
for goodwill impairment by removing Step 2 of the goodwill
impairment test. Under current guidance, Step 2 of the goodwill
impairment test requires entities to calculate the implied fair
value of goodwill in the same manner as the amount of goodwill
recognized in a business combination by assigning the fair value of
a reporting unit to all of the assets and liabilities of the
reporting unit. The carrying value in excess of the implied fair
value is recognized as goodwill impairment. Under the new standard,
goodwill impairment is recognized based on Step 1 of the current
guidance, which calculates the carrying value in excess of the
reporting unit’s fair value. The new standard is effective
beginning in January 2020, with early adoption permitted. We do not
believe the adoption of this guidance will have a material impact
on our consolidated financial statements.
In
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.
In
December 2019, the FASB issued ASU No. 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes. This new accounting guidance removes the
following:
●
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,
●
the exception to
the requirement to recognize a deferred tax liability for equity
method investments when a foreign subsidiary becomes an equity
method investment,
●
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
●
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.
The new
accounting guidance also simplifies the accounting for income taxes
by:
●
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,
●
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,
●
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,
●
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
●
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 the 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, 2020.
F-20
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 takes into account 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.
The
following represents the initial 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 assets 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.
F-21
Pro Forma Results of Operations (Unaudited)
The
following table summarizes selected unaudited pro forma
consolidated statements of operations data for the year ended
December 31, 2019 and 2018 as if the acquisition of Perfect
Audience had been completed at the beginning of the
year.
This
selected unaudited pro forma consolidated financial data is
included only for the purpose of illustration and does not
necessarily indicate what the operating results would have been if
the acquisitions had been completed on that date. Moreover, this
information does not indicate what the Company's future operating
results will be. The information for 2019 and 2018 prior to the
acquisitions is included based on prior accounting records
maintained by the acquired companies. For 2019, this information
includes actual data recorded in our consolidated financial
statements for the period subsequent to the date of the
acquisition. The Company’s consolidated statement of
operations for the year ended December 31, 2019 include net revenue
and net loss of $0.27 million and $0.1 million, respectively,
attributable to the acquisitions.
Note 4: Goodwill and Other Intangible Assets
Goodwill and acquired intangible assets are initially recorded at
fair value and measured periodically for impairment. In performing
the Company’s annual impairment analysis during the
fourth quarters of 2019 and 2018, the Company determined that the
carrying amount of the Company’s goodwill was recoverable and
no additional tests were required. Because portions of the goodwill
are denominated in foreign currencies, relatively minor changes to
the goodwill balance occur over time due to changes in foreign
exchange rates. Goodwill increased from $8.87 million as of
December 31, 2018 to $10.92 million as of December 31, 2019, $2.05
million of this increase is attributable to the acquisition of
Perfect Audience in 2019. During the year ended December 31, 2019
and 2018, changes in foreign exchange rates caused goodwill to be
increased by approximately $7,000 and decreased by approximately
$6,000, respectively.
In addition to our annual goodwill impairment review, the Company
also performs periodic reviews of the carrying value and
amortization periods of other acquired intangible assets. If
indicators of impairment are present, an estimate of the
undiscounted cash flows that the specific asset is expected to
generate must be made to ensure that the carrying value of the
asset can be recovered. These estimates involve significant
subjectivity.
During the years ended December 31, 2019 and 2018, the Company
determined that no indicators of impairment were present for
Goodwill and acquired intangible assets.
F-22
The following tables set forth the information for intangible
assets subject to amortization and for intangible assets not
subject to amortization.
Estimated amortization expense for 2019 and subsequent years is as
follows:
2020
611,200
2021
559,200
2022
507,200
2023
459,200
2024
420,200
Thereafter
1,720,000
Total
Amortizable Intangible Assets
$4,277,000
Indefinite
Lived
381,000
Total
intangible assets
4,658,000
Amortization expense for the years ended December 31, 2019 and
2018, was $0.38 million and $0.46 million,
respectively.
F-23
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 March 31, 2020. There are no mandatory
amortization provisions and the Credit Facility is payable in full
at maturity. As of December 31, 2019, the credit facility carried
an interest rate of 6.5%. 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. There are no amounts outstanding under the Credit Facility
and no events of default have occurred.
Note 6: Convertible Notes
In
March 2018, we issued $8.0 million five year convertible notes (the
“Notes”) with an interest rate of 5%. The interest was
“payable in kind” annually in the form of the issuance
of additional notes (“PIK Notes”). The Company had the
right to extend the maturity date for up to nine months on up to
three separate occasions, with interest accruing at a rate of 10%
during any such extension periods. The Notes were convertible into
shares of the Company’s common stock at any time by the
holder at a fixed conversion price of $7.50 per share, subject to
customary adjustments for specified corporate events. Additionally,
if the Notes and PIK Notes were not converted into common stock by
the holder, at the maturity date, the Company may elect to convert
all outstanding Notes and PIK Notes into shares of the
Company’s common stock at a conversion price equal to 80% of
the volume weighted average closing price of the Company’s
common stock for the 30 trading days prior to an including the
maturity date. We received net proceeds from the offering of
approximately $7.9 million after adjusting for debt issue costs,
including financial advisory and legal fees.
The
Notes were unsecured obligations and were subordinate in right of
payment to the Credit Facility (Note 5). So long as the Notes were
outstanding the Company’s flexibility was restricted in
regard to entering into other debt agreements. Prior to the
issuance of the Notes, the Company had no outstanding indebtedness
for borrowed money. The holder of the Notes was required to notify
the Company at least 120 days prior to the maturity of the Notes of
its election 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.
The
Company was required to accelerate and issue the PIK Notes through
the maturity of the Notes if the Company elected to convert the
Notes prior to maturity or if there was a change in control.
Pursuant to accounting guidance, for each of these situations, the
Company determined that the economic characteristics of these
“make whole” features were not considered clearly and
closely related to the Company’s stock. Accordingly, these
features were determined to be “embedded derivatives”
and were bifurcated from the Notes and separately accounted for on
a combined basis at fair value as a single derivative. The fair
value of the derivatives as of December 31, 2018 was a liability of
$0.21 million which was included within the non-current liabilities
on the consolidated balance sheet. The derivative was accounted for
at fair value, with subsequent changes in the fair value reported
as part of Other income (expense), net in the Consolidated
Statement of Operations.
F-24
Additionally,
the investor’s conversion option was analyzed for embedded
derivative treatment, but the conversion option qualifies for a
scope exception as it was considered to be clearly and closely
related to the Company’s stock.
On May9, 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 net
carrying amount of the Notes at the years ended December 31, 2019
and 2018 were as follows:
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 periods ended
December 31, 2019 and 2018:
Basic
net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted
net loss per share is computed by giving effect to all potential
dilutive common stock equivalents for the period. For purposes of
this calculation, options to purchase common stock, warrants and
the conversion option of the convertible Notes (Note 6) are
considered to be potential common shares outstanding.
Computation
of net income per share is as follows:
Diluted
weighted average common shares outstanding
10,323,889
8,512,297
Net
loss per share:
Basic
$(1.20)
$(1.11)
Diluted
$(1.20)
$(1.11)
Additionally, since
the Company incurred net losses for each of the periods presented,
diluted net loss per share is the same as basic net loss per share.
The Company’s outstanding warrants, stock options, and
convertible notes were not included in the calculation of diluted
net loss per share as the effect would be anti-dilutive. The
following table contains all potentially dilutive common stock
equivalents:
The
Company has federal operating loss carryforwards of $18.39 million
and $9.28 million as of December 31, 2019 and 2018, respectively.
The Company has foreign operating loss carryforwards of $3.44
million and $3.2 million as of December 31, 2019 and 2018,
respectively. The Company has state operating loss carryforwards of
$19.25 million and $15.0 million as of December 31, 2019 and 2018,
respectively. Depending on the jurisdiction, some of these
operating loss carryovers will begin to expire within 3 years,
while other net operating losses can be carried forward
indefinitely as long as the company is operating.
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.
We have
established valuation allowances of $7.0 million and $4.3 million
as of December 31, 2019 and
December 31, 2018, respectively, against certain deferred tax
assets given the uncertainty of recoverability of these
amounts.
F-28
In
making our assessment of deferred tax asset recoverability, we
considered our historical financial results, our projected future
financial results, the planned reversal of existing deferred tax
liabilities and the impact of any tax planning actions. Based on
our analysis we noted both positive and negative factors relative
to our ability to support realization of certain deferred tax
assets. However, based on the weighting of all the evidence,
including the near-term effect on our income projections of
investments we are making in our team, product and systems
infrastructure, we concluded that it was more likely than not that
the majority of our deferred tax assets related to temporary
differences and net operating losses may not be recovered. The
establishment of a valuation allowance has no effect on our ability
to use the underlying deferred tax assets prior to expiration to
reduce cash tax payments in the future to the extent that we
generate taxable income.
Note 9: Defined Contribution Retirement Plan
Starting
in 2016, we offered our U.S. employees the ability to participate
in a 401(k) plan. Eligible U.S. employees may contribute up to 100%
of their eligible compensation, subject to limitations established
by the Internal Revenue Code. The Company contributes a matching
contribution equal to 100% of each such participant’s
contribution up to the first 3% of their annual eligible
compensation. We charged approximately $0.3 million and $0.25
million, to expense in the years ended December 31, 2019 and 2018,
respectively, associated with our matching
contribution.
Note 10: Related Party Transactions
Intercompany
transactions have been eliminated in our consolidated financial
statements. The convertible notes issued in March 2018 are held
directly by SHSP Holdings, LLC (“SHSP Holdings”).
Daniel C. Allen, now a fomer 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 years ended December 31, 2019 or
2018.
Note 11: Stock-Based Compensation
From
time to time, the Company grants stock option awards to officers
and employees and grants stock awards to directors as compensation
for their service to the Company.
In
November 2010, the Company adopted the 2010 Stock Incentive Plan
(the “2010 Plan”) which was amended in April 2011,
August 2013, April 2014, February 2016, March 2017, and June 2018.
The plan was restated in its entirety in August 2018. As amended,
up to 2,600,000 shares of
common stock are available for issuance under the Plan. The Plan
provides for the issuance of stock options and other stock-based
awards.
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.
F-29
Stock Options
Stock
option awards under the 2010 Plan and 2019 Plan (the
“Plans”) have a 10-year maximum contractual term and
must be issued at an exercise price of not less than 100% of the
fair market value of the common stock at the date of grant. The
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:
Year Ended
December 31,
2019
2018
Volatility
49% - 52%
48% - 49%
Risk-free
interest rate
1.45%- 2.59%
2.34% - 3.11%
6.25
years
6.25
years
The
weighted average grant date fair value of stock options granted
during the year ended December 31,2019 was $6.24.
For
grants prior to January 1, 2015, the volatility assumption was
based on historical volatility of similar sized companies due to
lack of historical data of the Company’s stock price. For all
grants subsequent to January 1, 2015, the volatility assumption
reflects the Company’s historic stock volatility for the
period of February 1, 2014 forward, which is the date the
Company’s stock started actively trading. The risk free
interest rate was determined based on treasury securities with
maturities equal to the expected term of the underlying award. The
expected term was determined based on the simplified method
outlined in Staff Accounting Bulletin No. 110.
Stock
option awards are expensed on a straight-line basis over the
requisite service period. During the year ended December 31, 2019 and 2018, the Company
recognized expense of approximately $1.08 million and $0.8 million,
respectively, associated with stock option awards. At December 31, 2019, future stock
compensation expense associated with stock options (net of
estimated forfeitures) not yet recognized was approximately $2.35
million and will be recognized over a weighted average remaining
vesting period of 2.93 years. The following summarizes stock option
activity for the year ended December31, 2019:
The
total intrinsic value of stock options exercised during the year
ended December 31, 2019 and
2018 was $1.9 million and $0.6 million
respectively.
Restricted Stock Units
During
the year ended December 31,2019 and 2018, the Company issued 50,494 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.
RSUs
are expensed on a straight-line basis over the requisite vesting
period. During the years ended December 31, 2019 and 2018, the Company
recognized expense of approximately $9,000 and zero, respectively,
associated with RSUs. At December 31,2019, future stock compensation expense associated with
stock options (net of estimated forfeitures) not yet recognized was
approximately $2.35 million and will be recognized over a weighted
average remaining vesting period of 3.92 years. The following
summarizes RSU activity for the year ended December 31, 2019:
During
the year ended December 31,2019 and 2018, the Company issued 10,286 and 23,302 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 years ended December 31, 2019 and 2018 was $0.13
million and $0.18 million, respectively. As of December 31, 2019 and 2018, there were no
unrecognized compensation cost related to stock
awards.
Additionally,
during the year ended December 31, 2018, the Company issued 36,274
shares to a service provider to satisfy a performance-based
contractual arrangement. The Company recorded an expense of
approximately $0.51 million associated with this issuance in the
third quarter of 2018. These shares were not issued from the 2010
Stock Incentive Plan.
F-31
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.
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.
F-32
Commitments
The Company is not party to any non-cancellable contracts that
create a material future commitment other than its lease 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
are currently evaluating the impact of various tax types which may
require future sales, franchise, or other tax
payments.
F-33
Employment Agreements
The Company has employment agreements with several members of its
leadership team and executive officers.
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
18,000 square feet of office space located on the same premises as
the 2018 Lease. As of December 31, 2019, we have not taken
possession of the additional space from the 2019 Addendum. 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 December 31, 2019,
is 8.9 years. The weighted average discount rate for our operating
leases as of December 31, 2019 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 years ended December 31, 2019, and
2018, were zero and $0.76 million respectively. Total operating
lease costs for the years ended December 31, 2019 and 2018 was $0.8
million and $0.51 million, respectively.
Future minimum lease payments are as follows as of December 31,2019:
Operating Leases
2020
742,956
2021
766,546
2022
771,278
2023
794,937
2024
799,669
Thereafter
3,221,086
Total
undiscounted cash flows
$7,096,472
Less
imputed interest
(1,749,405)
Present
value of lease liability
$5,347,067
F-34
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 year ended December 31, 2019 and 2018
are as follows:
Form of
Convertible Promissory Note, Attached as Exhibit A to Convertible
Note Purchase Agreement among SharpSpring, Inc. and SHSP Holdings,
LLC dated March 28, 2018
Incorporated
by reference to our Form 8-K filed March 28, 2018
Share
Purchase Agreement among SharpSpring, Inc., Special Situations
Private Equity Fund, L.P., Special Situations Technology Fund,
L.P., Special Situations Technology Fund II, L.P., Greenhaven Road
Capital Fund 1, L.P., and Greenhaven Road Capital Fund 2,
L.P.
Registration
Rights Agreement among SharpSpring, Inc., Special Situations
Private Equity Fund, L.P., Special Situations Technology Fund,
L.P., Special Situations Technology Fund II, L.P., Greenhaven Road
Capital Fund 1, L.P., and Greenhaven Road Capital Fund 2,
L.P.
Intellectual Property Security Agreement dated March 21, 2016,
by and among SharpSpring, Inc., Quattro Hosting LLC,
SharpSpring Technologies, Inc. and Western Alliance
Bank
Loan and Security Modification Agreement dated June 24, 2016, by
and among SharpSpring, Inc., Quattro Hosting LLC, SharpSpring
Technologies, Inc. and Western Alliance Bank
Loan
and Security Modification Agreement dated October 25, 2017, by and
among SharpSpring, Inc., Quattro Hosting LLC, SharpSpring
Technologies, Inc. and Western Alliance Bank
Incorporated
by reference to our Form 8-K filed on October 30, 2017
Loan
and Security Modification Agreement dated April 30,2018, by and among SharpSpring, Inc., Quattro Hosting
LLC, SharpSpring Technologies, Inc. and Western Alliance
Bank
