UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JuneSeptember 30, 2019
 
Or
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 001-36280
 
SharpSpring, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware05-0502529
(State or other jurisdiction of incorporationor organization)(I.R.S. Employer Identification No.)
  
5001 Celebration Pointe Avenue
Suite 410
Gainesville, FL
 
32608
(Address of principal executive offices)(Zip Code)
  
888-428-9605
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:Title of each classTradingclassnote6 Symbol(s)Name of exchange on which registeredCommon Stock, $0.001 par value per shareSHSPThe NASDAQ Stock Market LLC
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑  No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).Yes ☑  No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☑  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer   ☐Accelerated filer    ☐
Non-accelerated filer     ☑Smaller reporting company  ☑
 Emerging growth company  ☐
 
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)   
Yes ☐  No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,946,08610,952,954 shares of common stock as of August 12,November 13, 2019.
 

 
 
SharpSpring, Inc.
 
Table of Contents
 
 Page
  
PART I – FINANCIAL INFORMATION 
Item 1. Financial Statements:3
2
Consolidated Balance Sheets— JuneSeptember 30, 2019 (unaudited) and December 31, 2018
3
2
Consolidated Statements of Comprehensive Income (Loss) (unaudited)4
3
Consolidated Statements of Cash Flows (unaudited)5
4
Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
6
5
Notes to the Consolidated Financial Statements (unaudited)7
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations2218
Item 3. Quantitative and Qualitative Disclosures About Market Risk2722
Item 4. Controls and Procedures2722
PART II – OTHER INFORMATION2823
Item 1. Legal Proceedings. Proceedings2823
Item 1A. Risk Factors. Factors2823
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds2823
Item 3. Defaults Upon Senior Securities2823
Item 4. Mine Safety Disclosures2823
Item 5. Other Information. Information2823
Item 6. Exhibits2924
SIGNATURES3025
 
 
 
 
 
PARTPART I – FINANCIAL INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report on Form 10-Q contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
 
Examples of forward-looking statements include, but are not limited to:
 
●the timing of the development of future products;
●projections of costs, revenue, earnings, capital structure and other financial items;
●statements of our plans and objectives;
●statements regarding the capabilities of our business operations;
●statements of expected future economic performance;
●statements regarding competition in our market; and
●assumptions underlying statements regarding us or our business.
 
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
 
●strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses;
●the occurrence of hostilities, political instability or catastrophic events;
●changes in customer demand;
●the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors' services;
●developments and changes in laws and regulations, including increased regulation of our industry through legislative action and revised rules and standards;
●security breaches, cybersecurity attacks and other significant disruptions in our information technology systems; and
●natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment.
 
The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A “Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and under Part II, Item 1.A “Risk Factors” contained in this report on Form 10-Q. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
 
The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
 

Item
Item 1. 
Financial Statements.
 
SharpSpring, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
 
 
December 31,
 
 
September 30,
 
 
December 31,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Assets
 
 
 
 
 
 
Cash and cash equivalents
 $15,997,667 
 $9,320,866 
 $13,753,942 
 $9,320,866 
Accounts receivable, net of allowance for doubtful accounts of $211,053 and $127,516 at June 30, 2019 and December 31, 2018, respectively
  106,042 
  80,521 
Accounts receivable, net of allowance for doubtful accounts of $215,663 and $127,516 at September 30, 2019 and December 31, 2018, respectively
  95,498 
  80,521 
Unbilled receivables
  880,333 
  740,425 
  927,952 
  740,425 
Income taxes receivable
  43,813 
  22,913 
  43,813 
  22,913 
Other current assets
  1,255,109 
  1,184,217 
  1,414,396 
  1,184,217 
Total current assets
  18,282,964 
  11,348,942 
  16,235,601 
  11,348,942 
    
    
Property and equipment, net
  1,591,883 
  1,260,798 
  1,880,926 
  1,260,798 
Goodwill
  8,869,548 
  8,866,413 
  8,860,980 
  8,866,413 
Intangibles, net
  1,675,500 
  1,866,000 
  1,580,250 
  1,866,000 
Right-of-use assets
  5,501,577 
  - 
  5,392,330 
  - 
Other long-term assets
  588,715 
  665,123 
  559,186 
  665,123 
Total assets
 $36,510,187 
 $24,007,276 
 $34,509,273 
 $24,007,276 
    
    
Liabilities and Shareholders' Equity
    
    
Accounts payable
 $1,534,797 
 $1,613,477 
 $1,617,034 
 $1,613,477 
Accrued expenses and other current liabilities
  678,837 
  774,944 
  729,476 
  774,944 
Deferred revenue
  317,077 
  250,656 
  508,804 
  250,656 
Income taxes payable
  16,234 
  23,705 
  13,340 
  23,705 
Lease liability
  356,245 
  - 
  362,065 
  - 
Total current liabilities
  2,903,190 
  2,662,782 
  3,230,719 
  2,662,782 
    
    
Convertible notes, including accrued interest
  - 
  8,342,426 
  - 
  8,342,426 
Convertible notes embedded derivative
  - 
  214,350 
  - 
  214,350 
Lease liability, net of current portion
  5,182,511 
  - 
  5,081,623 
  - 
Total liabilities
  8,085,701 
  11,219,558 
  8,312,342 
  11,219,558 
Commitments and contingencies (Note 11)
    
    
    
    
Shareholders' equity:
    
    
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at June 30, 2019 and December 31, 2018
  - 
Common stock, $0.001 par value, Authorized shares-50,000,000; issued shares-10,965,794 at June 30, 2019 and 8,639,139 at December 31, 2018; outstanding shares-10,945,794 at June 30, 2019 and 8,619,139 at December 31, 2018
  10,966 
  8,639 
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at September 30, 2019 and December 31, 2018
  - 
Common stock, $0.001 par value, Authorized shares-50,000,000; issued shares-10,972,426 at September 30, 2019 and 8,639,139 at December 31, 2018; outstanding shares-10,952,426 at September 30, 2019 and 8,619,139 at December 31, 2018
  10,972 
  8,639 
Additional paid in capital
  53,211,881 
  30,446,838 
  53,515,915 
  30,446,838 
Accumulated other comprehensive loss
  (229,620)
  (231,053)
  (234,103)
  (231,053)
Accumulated deficit
  (24,484,741)
  (17,352,706)
  (27,011,853)
  (17,352,706)
Treasury stock
  (84,000)
  (84,000)
Total shareholders' equity
  28,424,486 
  12,787,718 
  26,196,931 
  12,787,718 
    
    
Total liabilities and shareholders' equity
 $36,510,187 
 $24,007,276 
 $34,509,273 
 $24,007,276 
 
See accompanying notes to the consolidated financial statements.
 

 
SharpSpring, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
Three Months Ended
 
 
Six Months Ended
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
June 30,
 
 
September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
Revenue
 $5,517,433 
 $4,442,289 
 $10,843,718 
 $8,626,952 
 $5,723,978 
 $4,873,329 
 $16,567,696 
 $13,500,281 
    
    
Cost of services
  1,625,818 
  1,507,362 
  3,174,200 
  2,907,659 
  1,840,764 
  1,472,410 
  5,014,964 
  4,380,069 
Gross profit
  3,891,615 
  2,934,927 
  7,669,518 
  5,719,293 
  3,883,214 
  3,400,919 
  11,552,732 
  9,120,212 
    
    
Operating expenses:
    
    
Sales and marketing
  2,865,610 
  2,356,400 
  5,873,813 
  4,727,431 
  3,102,653 
  2,640,697 
  8,976,466 
  7,368,128 
Research and development
  1,217,981 
  1,008,019 
  2,476,709 
  1,958,694 
  1,207,605 
  1,106,995 
  3,684,314 
  3,065,689 
General and administrative
  1,935,291 
  1,424,404 
  4,162,966 
  2,850,638 
  1,991,329 
  1,518,106 
  6,154,295 
  4,368,744 
Non-employee stock issuance expense
  - 
  508,561 
  - 
  508,561 
Intangible asset amortization
  95,250 
  115,000 
  190,500 
  230,000 
  95,250 
  115,000 
  285,750 
  345,000 
    
    
Total operating expenses
  6,114,132 
  4,903,823 
  12,703,988 
  9,766,763 
  6,396,837 
  5,889,359 
  19,100,825 
  15,656,122 
    
    
Operating loss
  (2,222,517)
  (1,968,896)
  (5,034,470)
  (4,047,470)
  (2,513,623)
  (2,488,440)
  (7,548,093)
  (6,535,910)
Other expense, net
  (41,966)
  (338,431)
  (146,093)
  (269,803)
  (15,781)
  (243,956)
  (161,873)
  (513,759)
Loss on induced conversion
  (2,162,696)
  - 
  (2,162,696)
  - 
  - 
  (2,162,696)
  - 
Gain (loss) on embedded derivative
  189,776 
  (453,449)
  214,350 
  (453,449)
  - 
  27,295 
  214,350 
  (426,154)
    
    
Loss before income taxes
  (4,237,403)
  (2,760,776)
  (7,128,909)
  (4,770,722)
  (2,529,404)
  (2,705,101)
  (9,658,312)
  (7,475,823)
Provision (benefit) for income taxes
  787 
  (294,543)
  3,126 
  (252,546)
  (2,291)
  5,130 
  835 
  (247,415)
Net loss
 $(4,238,190)
 $(2,466,233)
 $(7,132,035)
 $(4,518,176)
 $(2,527,113)
 $(2,710,231)
 $(9,659,147)
 $(7,228,408)
    
    
Basic net loss per share
 $(0.41)
 $(0.29)
 $(0.75)
 $(0.53)
 $(0.23)
 $(0.32)
 $(0.96)
 $(0.85)
Diluted net loss per share
 $(0.41)
 $(0.29)
 $(0.75)
 $(0.53)
 $(0.23)
 $(0.32)
 $(0.96)
 $(0.85)
    
    
Shares used in computing basic net loss per share
  10,296,041 
  8,474,616 
  9,568,161 
  8,459,036 
  10,948,416 
  8,530,858 
  10,028,246 
  8,482,976 
Shares used in computing diluted net loss per share
  10,296,041 
  8,474,616 
  9,568,161 
  8,459,036 
  10,948,416 
  8,530,858 
  10,028,246 
  8,482,976 
    
    
Other comprehensive income (loss):
    
    
Foreign currency translation adjustment, net
  2,806 
  (30,526)
  1,433 
  115,542 
  2,806 
  (30,526)
  (3,051)
  243,468 
Comprehensive loss
 $(4,235,384)
 $(2,496,759)
 $(7,130,602)
 $(4,402,634)
 $(2,524,307)
 $(2,740,757)
 $(9,662,198)
 $(6,984,940)
 
See accompanying notes to the consolidated financial statements.


 
SharpSpring, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended
 
 
Nine Month Ended
 
 
June 30,
 
 
September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(7,132,035)
 $(4,518,176)
 $(9,659,147)
 $(7,228,408)
Adjustments to reconcile loss from operations:
    
    
Depreciation and amortization
  471,518 
  391,716 
  727,873 
  632,132 
Amortization of costs to acquire contracts
  431,757 
  363,239 
  630,815 
  557,718 
Non-cash stock compensation
  565,592 
  476,221 
  849,900 
  710,879 
Non-employee stock issuance expense
  - 
  508,561 
Deferred income taxes
  - 
  (108,265)
  - 
  (153,890)
(Gain)/Loss on disposal of property and equipment
  (617)
  - 
  (617)
  - 
Non-cash interest
  139,372 
  104,301 
  139,372 
  204,301 
Amortization of debt issuance costs and embedded derivative
  2,903 
  6,632 
  2,903 
  12,991 
(Gain)/loss on embedded derivative
  (214,350)
  453,449 
  (214,350)
  426,154 
Loss on induced conversion
  2,162,696 
  - 
  2,162,696 
  - 
Unrealized foreign currency gain/loss
  17,126 
  167,912 
  43,470 
  290,386 
Changes in assets and liabilities:
    
    
Accounts receivable
  (25,294)
  41,504 
  (15,014)
  40,253 
Unbilled receivables
  (138,819)
  (94,297)
  (189,008)
  (143,716)
Right-of-use assets
  213,933 
  - 
  323,180 
  - 
Other assets
  (416,276)
  (452,582)
  (746,774)
  (773,608)
Income taxes, net
  (28,562)
  1,838,379 
  (30,853)
  2,050,292 
Accounts payable
  (78,830)
  564,696 
  3,891 
  669,474 
Lease liabilities
  (185,575)
  (31,587)
  (280,643)
  27,784 
Other liabilities
  (87,300)
  - 
  (36,639)
  - 
Deferred revenue
  65,612 
  40,910 
  258,991 
  59,972 
Net cash used in operating activities
  (4,237,149)
  (755,948)
  (6,029,954)
  (2,108,725)
    
    
Cash flows from investing activities
    
    
Purchases of property and equipment
  (612,104)
  (188,118)
  (1,062,252)
  (396,153)
Proceeds from the sale of property and equipment
  617 
  - 
  617 
  - 
Net cash used in investing activities
  (611,487)
  (188,118)
  (1,061,635)
  (396,153)
    
    
Cash flows used in financing activities:
    
    
Proceeds from issuance of convertible note
  - 
  8,000,000 
  - 
  8,000,000 
Debt issuance costs
  - 
  (141,657)
  - 
  (141,657)
Proceeds from exercise of stock options
  906,617 
  241,805 
  926,350 
  449,259 
Proceeds (cost) from issuance of common stock, net
  10,649,005 
  - 
  10,649,005 
  - 
Net cash provided by financing activities
  11,555,622 
  8,100,148 
  11,575,355 
  8,307,602 
    
    
Effect of exchange rate on cash
  (30,186)
  (19,322)
  (50,690)
  (18,687)
    
    
Change in cash and cash equivalents
  6,676,800 
  7,136,760 
  4,433,076 
  5,784,037 
    
    
Cash and cash equivalents, beginning of period
  9,320,866 
  5,399,747 
  9,320,866 
  5,399,747 
    
    
Cash and cash equivalents, end of period
 $15,997,666 
 $12,536,507 
 $13,753,942 
 $11,183,784 
    
    
Supplemental information on consolidated statements of cash flows:
    
    
Cash paid during the period for
    
    
Income taxes, net
 $- 
 $(1,982,957)
 $11,013 
 $(2,105,913)
Non-cash activities
    
    
Right-of-use asset obtained for lease liability
 $5,715,510 
 $- 
 $5,715,510 
 $- 
Convertible notes liability relieved upon conversion
 $8,484,701 
 $- 
 $8,484,701 
 $- 
Embedded derivative liability relieved upon conversion
 $189,776 
 $- 
 $189,776 
 $- 
 

See accompanying notes to the consolidated financial statements.
 

 
SHARPSPRING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
 
 
 
Additional
 
 
Other
 
 
 
 
 
Common Stock
 
 
Paid in
 
 
Comprehensive
 
 
Treasury Stock
 
 
Accumulated
 
 
 
 
 
Common Stock   
 
 
Paid in
 
 
Comprehensive
 
 
Treasury Stock   
 
 
Accumulated
 
 
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Loss
 
 
Shares
 
 
Amount
 
 
Deficit
 
 
Total
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Loss
 
 
Shares
 
 
Amount
 
 
Deficit
 
 
Total
 
Balance, March 31, 2018
  8,466,740 
 $8,467 
 $28,608,357 
 $(511,289)
  20,000 
 $(84,000)
 $(9,925,826)
 $18,095,709 
Stock based compensation - stock options
  - 
  189,344 
  - 
  189,344 
Issuance of common stock for cash
  48,885 
  49 
  233,200 
  - 
  233,249 
Issuance of common stock for director services
  6,915 
  7 
  49,455 
  - 
  49,462 
Issuance of common stock for warrant conversions
  5,283 
  5 
  (5)
  - 
Foreign currency translation adjustment, net
  - 
  146,069 
  - 
  146,069 
Net loss
  - 
  (2,466,234)
Balance, June 30, 2018
  8,527,823 
 $8,528 
 $29,080,350 
 $(365,220)
  20,000 
 $(84,000)
 $(12,392,060)
 $16,247,599 
  8,527,823 
 $8,528 
 $29,080,351 
 $(365,220)
  20,000 
 $(84,000)
 $(12,392,060)
 $16,247,599 
    
Balance, March 31, 2019
  9,646,787 
 $9,647 
 $42,025,657 
 $(232,425)
  20,000 
 $(84,000)
 $(20,246,550)
 $21,472,329 
Stock based compensation - stock options
  - 
  224,654 
  - 
  224,654 
  - 
  192,202 
  - 
  192,202 
Issuance of common stock for cash
  60,648 
  61 
  302,692 
  - 
  302,753 
  35,064 
  35 
  207,419 
  - 
  207,454 
Issuance of common stock for director services
  1,952 
  2 
  37,418 
  - 
  37,420 
  5,184 
  5 
  57,452 
  - 
  57,457 
Issuance of common stock for other non-employee services
  14,772 
  15 
  (15)
  - 
  36,274 
  36 
  508,525 
  - 
  508,561 
Issuance of common stock for warrant conversions
  1,241,635 
  1,242 
  10,621,474 
  - 
  10,622,716 
  5,129 
  5 
  (5)
 ��- 
  - 
Foreign currency translation adjustment, net
  - 
  2,806 
  - 
  2,806 
  - 
  127,925 
  - 
  127,925 
Net loss
  - 
  (4,238,191)
  - 
  (2,710,232)
Balance, September 30, 2018
  8,609,474 
 $8,609 
 $30,045,943 
 $(237,295)
  20,000 
 $(84,000)
 $(15,102,292)
 $14,630,965 
    
Balance, June 30, 2019
  10,965,794 
 $10,966 
 $53,211,881 
 $(229,619)
  20,000 
 $(84,000)
 $(24,484,741)
 $28,424,486 
  10,965,794 
 $10,966 
 $53,211,881 
 $(229,620)
  20,000 
 $(84,000)
 $(24,484,741)
 $28,424,486 
Stock based compensation - stock options
  - 
  252,799 
  - 
  252,799 
Issuance of common stock for cash
  4,292 
  4 
  27,228 
  - 
  27,232 
Issuance of common stock for director services
  2,340 
  2 
  24,006 
  - 
  24,008 
Foreign currency translation adjustment, net
  - 
  (4,484)
  - 
  (4,484)
Net loss
  - 
  (2,527,113)
Balance, September 30, 2019
  10,972,426 
 $10,972 
 $53,515,915 
 $(234,103)
  20,000 
 $(84,000)
 $(27,011,853)
 $26,196,931 
    
    
Balance, December 31, 2017
  8,456,061 
 $8,456 
 $28,362,397 
 $(480,762)
  20,000 
 $(84,000)
 $(7,873,883)
 $19,932,208 
  8,456,061 
 $8,456 
 $28,362,397 
 $(480,762)
  20,000 
 $(84,000)
 $(7,873,883)
 $19,932,208 
Stock based compensation - stock options
  - 
  382,879 
  - 
  382,879 
  - 
  575,081 
  - 
  575,081 
Issuance of common stock for cash
  50,609 
  51 
  241,754 
  - 
  241,805 
  85,673 
  86 
  449,173 
  - 
  449,259 
Issuance of common stock for director services
  15,870 
  16 
  93,325 
  - 
  93,341 
  21,054 
  21 
  150,777 
  - 
  150,798 
Issuance of common stock for other non-employee services
  - 
  36,274 
  36 
  508,525 
  - 
  508,561 
Issuance of common stock for warrant conversions
  5,283 
  5 
  (5)
  - 
  10,412 
  10 
  (10)
  - 
Foreign currency translation adjustment, net
  - 
  115,543 
  - 
  115,543 
  - 
  243,468 
  - 
  243,468 
Net loss
  - 
  (4,518,176)
  - 
  (7,228,408)
Balance, June 30, 2018
  8,527,823 
 $8,528 
 $29,080,350 
 $(365,219)
  20,000 
 $(84,000)
 $(12,392,060)
 $16,247,599 
Balance, September 30, 2018
  8,609,474 
 $8,609 
 $30,045,943 
 $(237,295)
  20,000 
 $(84,000)
 $(15,102,292)
 $14,630,965 
    
    
Balance, December 31, 2018
  8,639,139 
 $8,639 
 $30,446,838 
 $(231,053)
  20,000 
 $(84,000)
 $(17,352,706)
 $12,787,718 
  8,639,139 
 $8,639 
 $30,446,838 
 $(231,053)
  20,000 
 $(84,000)
 $(17,352,706)
 $12,787,718 
Stock based compensation - stock options
  - 
  493,699 
  - 
  493,699 
  - 
  746,498 
  - 
  746,498 
Issuance of common stock for cash
  1,065,892 
  1,066 
  11,577,996 
  - 
  11,579,062 
  1,070,184 
  1,070 
  11,605,224 
  - 
  11,606,294 
Issuance of common stock for director services
  4,356 
  4 
  71,889 
  - 
  71,893 
  6,696 
  7 
  95,895 
  - 
  95,902 
Issuance of common stock for warrant conversions
  14,772 
  15 
  (15)
  - 
  14,772 
  15 
  (15)
  - 
Issance of commons stock for settlement of notes
  1,241,635 
  1,242 
  10,621,474 
  - 
  10,622,716 
  1,241,635 
  1,242 
  10,621,474 
  - 
  10,622,716 
Foreign currency translation adjustment
  - 
  1,433 
  - 
  1,433 
  - 
  (3,051)
  - 
  (3,051)
Net Loss
  - 
  (7,132,035)
  - 
  (9,659,147)
Balance, June 30, 2019
  10,965,794 
 $10,966 
 $53,211,881 
 $(229,620)
  20,000 
 $(84,000)
 $(24,484,741)
 $28,424,486 
Balance, September 30, 2019
  10,972,426 
 $10,972 
 $53,515,915 
 $(234,103)
  20,000 
 $(84,000)
 $(27,011,853)
 $26,196,931 
 
See accompanying notes to the consolidated financial statements.
 

 
SharpSpring, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1: Organization
 
SharpSpring, Inc. (the “Company”) provides a cloud-based marketing automation solution. SharpSpring is designed to increase the rates at which businesses generate leads and convert leads to sales opportunities by improving the way businesses communicate with customers and prospects. Our products are marketed directly by us and through a small group of reseller partners to customers around the world.
 
Note 2: Summary of Significant Accounting Policies
 
Basis of Presentation and Consolidation
 
The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of our management, Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2018, and these consolidated financial statements include all adjustments consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. Our Consolidated Financial Statements include the accounts of SharpSpring, Inc. and our subsidiaries (the “Company”). Our Consolidated Financial Statements reflect the elimination of all significant inter-company accounts and transactions. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2019.
 
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 assessassesses 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;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 transactiontranslation gains and losses are recorded in other comprehensive income (loss).
 
Cash and Cash Equivalents
 
Cash equivalents are short-term, liquid investments with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed by major financial institutions and at most times are in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits.


 
Fair Value of Financial Instruments
 
U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, deposits, embedded derivatives (associated with our convertible notes) and accounts payable. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximatesapproximate fair value because of the short-term nature of these items. The fair value of the embedded derivatives associated with our convertible notes is calculated using Level 3 unobservable inputs, utilizing a probability-weighted expected value model to determine the liability. The fair value of the embedded derivatives at JuneSeptember 30, 2019, and December 31, 2018, was a liability balance of zero and $214,350, respectively. The change in fair value for the three months ended JuneSeptember 30, 2019, and 2018 was zero and a gain of $189,776 and a loss of $453,449,$27,295, respectively. The change in fair value for the sixnine months ended JuneSeptember 30, 2019, and 2018, was a gain of $214,350 and a loss of $453,449,$426,154, respectively.

 
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 isare 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.
 
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 Impairment
 
As of JuneSeptember 30, 2019, and December 31, 2018, we had recorded goodwill of $8,869,548$8,860,980 and $8,866,413, respectively. Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in the SharpSpring and GraphicMail acquisitions. Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, “Intangibles - Goodwill and Other” deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests, and tests between annual tests in certain circumstances, based on estimated fair value in accordance with FASB ASC 350-10, and written down when impaired.
 
Debt Issuance Costs
 
Third-party costs associated with the issuance of debt are included as a direct reduction to the carrying value of the debt and are amortized to interest expense ratably over the life of the debt.
 

 
Income Taxes
 
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, Simplifying the Accounting for Income Taxes 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 2015 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 JuneSeptember 30, 2019, the Company is 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 audits.

 
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 $149,015$161,105 and $85,733125,416 for the three months ended JuneSeptember 30, 2019, and 2018, respectively. Depreciation expense related to property and equipment was $281,018$442,123 and $161,716287,132 for the sixnine months ended JuneSeptember 30, 2019, and 2018, respectively. Repairs and maintenance costs are expensed as incurred.
 
Property and equipment as of JuneSeptember 30, 2019 and December 31, 2018, is as follows:
 
 
June 30,
 
 
December 31,
 
 
September 30,
 
 
December 31,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Property and equipment, gross:
 
 
 
 
 
 
Leasehold improvements
 $263,518 
 $197,268 
 $289,565 
 $197,268 
Furniture and fixtures
  671,324 
  611,171 
  675,104 
  611,171 
Computer equipment and software
  1,632,723 
  1,135,012 
  2,053,045 
  1,135,012 
Total
  2,567,565 
  1,943,451 
  3,017,714 
  1,943,451 
Less: Accumulated depreciation and amortization
  (975,682)
  (682,653)
  (1,136,788)
  (682,653)
 $1,591,883 
 $1,260,798 
 $1,880,926 
 $1,260,798 
 
Useful lives are as follows:
 
Leasehold improvements3-5 years
Furniture and fixtures3-5 years
Computing equipment3 years
Software3-5 years
Revenue Recognition
 
The Company recognizes revenue from its services when it is probable that the economic benefits associated with the transactions will flow to the Company and the amount of revenue can be reliably measured. All significant sources of revenue are the result of a contract with a customer, and as such meet all of the requirements of recognizing revenue in accordance with FASB ASC 606. For the three months ended JuneSeptember 30, 2019, and 2018, revenue from contracts with customers was $5.5$5.7 million and $4.4$4.9 million, respectively. For the sixnine months ended JuneSeptember 30, 2019, and 2018, revenue from contracts with customers was $10.8$16.6 million and $8.6$13.5 million, respectively.
 
For the Company’s internet-based SharpSpring marketing automation solution, the services are typically offered on a month-to-month basis with a fee charged each month depending on the size of the engagement with the customer. Monthly fees are recorded as revenue during the month they are earned. Some customers are charged annually in advance, for which revenues are deferred and recorded ratably over the subscription period. The Company also charges transactional-based fees if monthly volume limitations are reached or other chargeable activity occurs. Additionally, customers are typically charged an upfront onboarding and training fee. The upfront onboarding and training fees represent short-term “use it or lose it” services offered for a flat fee. Such flat fees are recognized over the service period, which is typically 60 days.
 
For the SharpSpring Mail+ product, the services are typically offered on a month-to-month basis. Customers are either charged in arrears based on the number of contacts in the system during the billing period or in advance if the customer selects a plan based on e-mail volume. The Company also charges transactional-based fees if monthly volume limitations are reached or other chargeable activity occurs.
 
Our products are billed in arrears or upfront, depending on the product, which creates contract assets (unbilled receivables) and contract liabilities (deferred revenue). Contract assets occur due to unbilled charges for which the Company has satisfied performance obligations. Contract liabilities occur due to billing up frontupfront billed charges for charges thatwhich the Company has not yet fully satisfied all performance obligations. Both contract assets and liabilities are recognized and deferred ratably over their service periods.
 
The Company makes judgements when determining revenue recognition. Because many of our contracts are billed in arrears, estimates are made for the transaction price and amounts allocated to each accounting period related to the performance obligations of each contract. There have been no changes to the methodology used in these judgements and estimates for determining revenues. Some of the estimates used when determining revenue recognition relate to variable customer consideration that changes from month to month. The Company uses the most likely amount method to determine the estimated variable consideration, relying on historical consideration received, customer status and projected usage to determine the most likely consideration amount. The amount of variable consideration recognized is constrained and is only included in the transaction price to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur.
 

  
The performance obligations are measured using the output method to recognize revenue based on direct measurements of the value to the customer of the services transferred to date. Most of the Company’s contracts have a predefined service period and are therefore satisfied over that period. This allows for a reliable way to measure performance obligations remaining and completed. The Company does have some contracts that are satisfied at a point in time upon delivery of services. The criteria for the completion of these contracts isare defined in each contract with a customer so that there is no judgment required to evaluate when the service is delivered to the customer. Any discount given is allocated to the performance obligation and is treated as a reduction to the transaction price. Due to the month to month nature of the Company’s contracts with customers, no financing or time value of money component exists related to the contracts with customers. Due to the month to month nature of the Company’s contracts with customers, we have elected to utilize the optional practical expedient from ASC 606-10-50-14 through 50-14A for disclosing the remaining performance obligations. The remaining performance obligations as of the balance sheet date consist of initial implementation and availability and use of the SharpSpring platform. Remaining implementation obligations typically are provided over a period of 30 days or less as of the balance sheet date. Remaining obligations of availability of the platform are provided over a period ranging from less than 30 days to 12 months as of the balance sheet date.
 
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’s providing the services. Deferred revenue is earned over the service period identified in each contract. The majority of our deferred revenue balances (contract liabilities) arise from upfront implementation fees for its SharpSpring marketing automation solution that are paidpayments from customers in advance. These services are typically performed over a 60-day period, and the revenue is recognized over that period. Additionally, someadvance of the Company’s customers pay for services in advanceservice on a periodic basis (such as monthly, quarterly, annually or bi-annually). In situations where a customer pays in advance, the deferred revenue is recognized over the service period defined in the contract. Additionally, the Company has deferred revenue related to implementation fees for its SharpSpring marketing automation solution that serviceare paid in advance. These implementation services are typically performed over a 60-day period, and the revenue is recognized over that period. Deferred revenue balances were $250,656 and $279,818 as of December 31, 2018, and 2017, respectively. Deferred revenue during the three months ended JuneSeptember 30, 2019, and 2018, increased by $27,791$191,727 and $15,582,$19,833, respectively. Deferred revenue during the sixnine months ended JuneSeptember 30, 2019, and 2018, increased by $66,420$258,147 and $38,768,$58,601, respectively. The Company had deferred revenue contract liability balances of $317,077$508,804 and $250,656 as of JuneSeptember 30, 2019, and December 31, 2018, respectively. The Company expects to recognize a majority of the revenue on of these remaining performance obligations within 12 months. Approximately 12%7% 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 prepaid credits within 12 months.
 
Accrued Revenue
 
In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition isare met, thus creating an unbilled receivable. A portion of our revenue is therefore unbilled at each period. The accrued revenue balances were $740,425 and $554,603 as of December 31, 2018, and 2017, respectively. Revenue billed that was included in accrued revenue at the beginning of the period for the three months ending JuneSeptember 30, 2019, and 2018, was $832,593$880,333 and $628,497,$646,452, respectively. Revenue billed that was included in accrued revenue at the beginning of the period for the sixnine months ending JuneSeptember 30, 2019, and 2018, was $740,425 and $554,603, respectively. Accrued revenue not billed in the three and sixnine months ending JuneSeptember 30, 2019, and 2018, was $880,333$927,952 and $646,452,$697,101, respectively. The Company had accrued revenue balances of $880,333 and$927,952and $740,425 as of JuneSeptember 30, 2019, and December 31, 2018, respectively.
 
Concentration of Credit Risk and Significant Customers
 
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. At JuneSeptember 30, 2019, and December 31, 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 that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

 
There were no customers that accounted for more than 10% of total revenue or 10% of total accounts receivable for any financial period presented.
 
Cost of Services
 
Cost of services consists primarily of direct labor costs associated with support, customer onboarding, account management, and technology hosting and license costs associated with the cloud-based platform.
 
Credit Card Processing Fees
 
Credit card processing fees are included as a component of general and administrative expenses and are expensed as incurred.
 
Advertising Costs
 
The Company expenses advertising costs as incurred. Advertising and marketing expenses, excluding marketing team costs, were $1,487,6421,525,322 and $1,294,2741,443,534 for the three months ended JuneSeptember 30, 2019, and 2018, respectively. Advertising and marketing expenses, excluding marketing team costs, were $3,031,2184,556,539 and $2,743,7014,187,234 for the sixnine months ended JuneSeptember 30, 2019, and 2018, respectively.


  
Capitalized Cost of Obtaining a Contract
 
The Company capitalizes sales commission costs which are incremental to obtaining a contract. We expense costs that are related to obtaining a contract but that are not incremental, such as other sales and marketing costs and costs that would be incurred regardless of a contract being obtained. Capitalized costs are amortized using the straight-line amortization over the estimated weighted average life of the customer, which we have estimated to be 3 years. At JuneSeptember 30, 2019, the net carrying value of the capitalized cost of obtaining a contract was $1,241,3721,209,280, of which $691,996686,255 is included in other current assets and $549,376523,025 is included in other long-term assets. At December 31, 2018, the net carrying value of the capitalized cost of obtaining a contract was $1,309,329, of which $699,159 is included in other current assets and $610,170 is included in other long-term assets. The Company amortized expenses for the costs of obtaining contracts of $228,812199,058 and $185,701194,479 for the three months ended JuneSeptember 30, 2019, and 2018, respectively. The Company amortized expenses for the costs of obtaining contracts of $431,757630,815 and $363,239557,718 for for the sixnine months ended JuneSeptember 30, 2019, and 2018, respectively.
 
Stock Compensation
 
We account for stock-based compensation in accordance with FASB ASC 718 “CompensationCompensation — Stock Compensation”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 purposespurpose of stock-based compensation in accordance with ASC 718. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period.
 
Net Loss Per Share
 
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potentialpotentially dilutive common stock equivalents for the period. For purposes of this calculation, options to purchase common stock, warrants, and the conversion option of the convertible Notes (Note 5) are considered to be potential common shares outstanding. Since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s potential common shares outstanding were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive.
 
Comprehensive Income (Loss)
 
Comprehensive income or loss includes all changes in equity during a period from non-owner sources, such as net income or loss and foreign currency translation adjustments.
 

Recently Issued Accounting Standards
 
Recent accounting standards not included below are not expected to have a material impact on our consolidated financial position and results of operations.
 
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 presentspresent the cumulative impact toon our financial statements upon adoption.
 
 
 
Impact upon adoption of new ASU
 
As of January 1, 2019
 
 
 
Right-of-use assets
  5,715,510 
Total Assets
 $5,715,510 
 
    
Accrued expenses and other current liabilities
 $(8,821)
Lease liability (current)
  344,883 
Lease liability (non-current)
  5,379,448 
Total Liabilities
 $5,715,510 
 

Note 3: Goodwill and Other Intangible Assets
 
Intangible assets are as follows:
 
 
As of June 30, 2019
 
 
As of September 30, 2019
 
 
Gross
 
 
 
 
 
Net
 
 
Gross
 
 
 
 
 
Net
 
 
Carrying
 
 
Accumulated
 
 
Carrying
 
 
Carrying
 
 
Accumulated
 
 
Carrying
 
 
Amount
 
 
Amortization
 
 
Value
 
 
Amount
 
 
Amortization
 
 
Value
 
Amortized intangible assets:
 
 
 
 
 
 
Trade names
 $120,000 
  (120,000)
 $- 
 $120,000 
  (120,000)
 $- 
Technology
  2,130,000 
  (1,073,000)
  1,057,000 
  2,130,000 
  (1,132,500)
  997,500 
Customer relationships
  4,113,939 
  (3,495,439)
  618,500 
  1,320,000 
  (737,250)
  582,750 
Unamortized intangible assets:
  6,363,939 
  (4,688,439)
  1,675,500 
  3,570,000 
  (1,989,750)
  1,580,250 
Goodwill
    
  8,869,548 
    
  8,860,980 
Total goodwill and intangible assets
    
 $10,545,048 
    
 $10,441,230 
    
    
 


 
 
As of December 31, 2018
 
 
 
Gross
 
 
 
 
 
Net
 
 
 
Carrying
 
 
Accumulated
 
 
Carrying
 
 
 
Amount
 
 
Amortization
 
 
Value
 
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
Trade names
 $120,000 
  (120,000)
 $- 
Technology
  2,130,000 
  (954,000)
  1,176,000 
Customer relationships
  4,100,014 
  (3,410,014)
  690,000 
Unamortized intangible assets:
  6,350,014 
  (4,484,014)
  1,866,000 
Goodwill
    
    
  8,866,413 
Total goodwill and intangible assets
    
    
 $10,732,413 
 
Estimated amortization expense for the remainder of 2019 and subsequent years is as follows:
 
Remainder of 2019
  190,500 
  95,250 
2020
  332,000 
  332,000 
2021
  280,000 
  280,000 
2022
  228,000 
  228,000 
2023
  180,000 
  180,000 
2024
  141,000 
  141,000 
Thereafter
  324,000 
  324,000 
Total
 $1,675,500 
 $1,580,250 
 
Amortization expense for the three months ended JuneSeptember 30, 2019 and 2018, was $95,250 and $115,000, respectively.
Amortization expense for the sixnine months ended JuneSeptember 30, 2019 and 2018, was $190,500$285,750 and $230,000,$345,000, respectively.
 
Note 4: Credit Facility
 
In March 2016, the Company entered into a $2.5 million revolving loan agreement (the “Credit Facility”) with Western Alliance Bank. The facility originally matured on March 21, 2018 and was amended to mature on March 31, 2020. There are no mandatory amortization provisions and the Credit Facility is payable in full at maturity. As of JuneSeptember 30, 2019, the credit facility carried an interest rate of 7.25%6.75%. The Credit Facility is collateralized by a lien on substantially all of the existing and future assets of the Company and secured by a pledge of 100% of the capital stock of SharpSpring Technologies, Inc. and 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 5: Convertible Notes
 
On March 28, 2018, we issued $8.0 million in aggregate principal amount of convertible notes (the “Note”). Interest accruesaccrued at a rate of 5.0% per year and iswas “payable in kind” annually in the form of the issuance of additional Notes (“PIK Notes”, and, together with Note, the “Notes”). The principal amount of the Notes and the PIK Notes arewere due and payable in full on the fifth anniversary of the date of the Notes. The Company shall havehad 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 arewere 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 arewere 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 anand 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 arewere unsecured obligations and arewere subordinate in right of payment to the Credit Facility (Note 4). So long as any Notes arewere outstanding, except as the investor may otherwise agree in writing, the Company shall at no time (i) was to have outstanding senior indebtedness in an aggregate amount exceeding 18.6% of the Company’s trailing twelve-monthtwelve month revenue, (ii) incur any indebtedness that is both junior in right of payment to the obligations of the Company to its senior secured lender and senior to the Company’s obligations under the Notes or (iii) enter into any agreement with any lender or other third party that would (A) prohibit the Company from issuing PIK Notes at any time or under any circumstances or (B) prohibit the conversion of the Notes in accordance with their terms at any time or under any circumstances. Prior to the issuance of the Notes, the Company had no outstanding indebtedness for borrowed money. The holder of the Notes must notify the Company at least 120 days prior to the maturity of the Notes of its election to convert the Notes.
 
The convertible Notes agreement containscontained customary events of default with respect to the Notes and providesprovided that upon certain events of default occurring and continuing, the investor, by written notice to the Company may declare the entire outstanding principal amount of thisthe Notes and all accrued but unpaid interest to be immediately due and payable. During the continuance of an event of default, the investor shall havehad recourse to any and all remedies available to under applicable law. The Notes were recorded upon issuance at amortized cost in accordance with applicable accounting guidance. As there iswas no difference in the amount recorded at inception and the face value of the Notes, interest expense will bewas accreted at the stated interest rate under the terms of the Notes. Total interest expense related to the Notes will bewas impacted by the amortization of the debt issuance cost using the effective interest method.
 
The Company would bewas required to accelerate and issue the PIK Notes through the maturity of the Notes if the Company electselected to convert the Notes prior to maturity (which it can do upon certain conditions) or if there iswas 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 was zero as of JuneSeptember 30, 2019. The derivative iswas accounted for at fair value, with subsequent changes in the fair value to be reported as part of Other income (expense), net in the Consolidated Statement of Operations.
 
Additionally, the investor’s conversion option was analyzed for embedded derivative treatment, but the conversion option qualifiesqualified for a scope exception as it iswas considered to be clearly and closely related to the Company’s stock.
 
On May 9, 2019, the Company entered into and made effective a Note Conversion Agreement (the “Conversion Agreement”) with SHSP Holdings, LLC (“SHSP Holdings”) and Evercel Holdings, LLC (“Evercel,” and together with SHSP Holdings, the “Investor”), pursuant to which the parties agreed to the conversion (the “Conversion”) of the Notes. The Company’s entry into the Conversion Agreement was unanimously approved by the disinterested members of the Company’s Board of Directors.

 
Under the Conversion Agreement, the Notes were deemed to have been converted into the Conversion Shares, and any interest in any amount ceased to accrue or be payable with respect to the Notes, and SHSP Holdings ceases to be a holder of any Notes, and the Notes cease to be outstanding, for purposes of the Investors’ Rights Agreement dated as of March 28, 2018. Effective as of the issuance and delivery of the Conversion Shares to SHSP Holdings, the Notes were canceled and terminated in their entirety and of no further force and effect, and any and all indebtedness and other obligations of the Company under the Notes was fully performed and discharged, and any and all claims or rights of SHSP Holdings or its affiliates thereunder were fully and finally extinguished and released. Additionally, under the terms of the Conversion Agreement, the Company agreed to pay in shares 49% of the remaining future interest totaling 115,037 shares. As a result of accelerating the 49% of future interest along with the extinguishment of the convertible notes, the Company incurred a loss on conversion of debt of $2.2 million. The loss was measured as the excess fair value of the shares issued under the modified conversion, compared to the fair value of the shares that would have been issued under an unmodified conversion as of the measurement date. Level 1 inputs were used to determine the fair value of the shares paid to the Investor. The loss on conversion was partially offset by a gain of $189,776 from the write-off of the embedded derivative liability.
The net carrying amount of the Notes at JuneSeptember 30, 2019 was as follows:
 
June 30,
 
 
December 31,
 
 
September 30,
 
 
December 31,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Principal amount
 $- 
 $8,000,000 
 $- 
 $8,000,000 
Accrued interest paid-in-kind
  - 
  304,301 
  - 
  304,301 
Unamortized debt issuance costs
  - 
  (122,153)
  - 
  (122,153)
Unamortized embedded derivative
  - 
  160,278 
  - 
  160,278 
Net carrying value
 $- 
 $8,342,426 
 $- 
 $8,342,426 

 
We incurred certain third-party costs in connection with our issuance of the Notes, principally related to financial advisory and legal fees, which are beingwere amortized to interest expense ratably over the five-year term of the Notes. Upon conversion on May 9, 2019, all remaining issuance costs were fully expensed.
The following table sets forth total interest expense related to the Notes for the three and sixnine month ended JuneSeptember 30, 2019, and 2018:
 
 
Three Months Ended
 
 
Six Months Ended
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
June 30,
 
 
September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Contractual interest paid-in-kind expense (non-cash)
 $43,373 
 $100,000 
 $139,372 
 $104,301 
 $- 
 $100,000 
 $139,372 
 $204,301 
Amortization of debt issuance costs (non-cash)
  4,698 
  6,359 
  15,108 
  6,632 
  - 
  6,359 
  15,108 
  12,991 
Amortization of embedded derivative (non-cash)
  (3,795)
  - 
  (12,205)
  - 
  - 
  (12,205)
  - 
Total interest expense
 $44,276 
 $106,359 
 $142,275 
 $110,933 
 $- 
 $106,359 
 $142,275 
 $217,292 
Effective interest rate
  4.9%
  5.3%
  4.9%
  5.3%
  0.0%
  5.3%
  4.9%
  5.3%
 

Note 6: 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 potentialpotentially dilutive common stock equivalents for the period. For purposes of this calculation, options to purchase common stock, warrants and the conversion option of the Convertible Notes (Note 5) are considered to be potential common shares outstanding.
 
 
Three Months Ended
 
 
Six Months Ended
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
June 30,
 
 
September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Net loss
 $(4,238,190)
 $(2,466,233)
 $(7,132,035)
 $(4,518,176)
 $(2,527,113)
 $(2,710,231)
 $(9,659,147)
 $(7,228,408)
    
    
Basic weighted average common shares outstanding
  10,296,041 
  8,474,616 
  9,568,161 
  8,459,036 
  10,948,416 
  8,530,858 
  10,028,246 
  8,482,976 
Add incremental shares for:
    
    
Warrants
  - 
  - 
Stock options
  - 
  - 
Convertible notes
  - 
  - 
Diluted weighted average common shares outstanding
  10,296,041 
  8,474,616 
  9,568,161 
  8,459,036 
  10,948,416 
  8,530,858 
  10,028,246 
  8,482,976 
    
    
Net loss per share:
    
    
Basic
 $(0.41)
 $(0.29)
 $(0.75)
 $(0.53)
 $(0.23)
 $(0.32)
 $(0.96)
 $(0.85)
Diluted
 $(0.41)
 $(0.29)
 $(0.75)
 $(0.53)
 $(0.23)
 $(0.32)
 $(0.96)
 $(0.85)
 
Additionally, since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s outstanding warrants, stock options, and convertible notes were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table contains all potentially dilutive common stock equivalents:
 
 
Three and Six Months Ended
 
 
Three and Nine Months Ended
 
 
June 30,
 
 
September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Warrants
  - 
  44,000 
  - 
  30,000 
Stock options
  1,337,486 
  1,483,566 
  1,419,844 
  1,475,689 
Convertible notes
  - 
  1,080,573 
  - 
  1,093,907 
 

Note 7: Income Taxes
 
The income tax expense we record in any interim period is based on our estimated effective tax rate for the year for each jurisdiction that we operate in. The calculation of our estimated effective tax rate requires an estimate of pre-tax income by tax jurisdiction, as well as total tax expense for the fiscal year. Accordingly, this tax rate is subject to adjustment if, in subsequent interim periods, there are changes to our initial estimates of total tax expense, pre-tax income, or pre-tax income by jurisdiction.
 
During the three months ended JuneSeptember 30, 2019, and 2018, the Company recorded income tax benefit of $2,291 and income tax expense of $5,130, respectively, from operations. During the nine months ended September 30, 2019, and 2018, the Company recorded income tax expense of $787$835 and income tax benefit of $294,543,$247,415, respectively, from continuing operations. During the six months ended June 30, 2019 and 2018, the Company recorded income tax expense of $3,126 and income tax benefit of $252,546, respectively, from continuing operations. The blended effective tax rate for the sixnine months ending JuneSeptember 30, 2019, and 2018, was -0.1%0.0% and 5.3%3.0%, respectively. The effective blended tax rate varies from our statutory U.S. tax rate due to valuation allowances on losses and income generated in certain other jurisdictions at various tax rates.

 
Valuation Allowance
We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers many different factors including historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies, and the availability of future tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. This is inherently judgmental since we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.
 
In making our assessment of deferred tax asset recoverability, we considered our historical financial results, our projected future financial results, the planned reversal of existing deferred tax liabilities and the impact of any tax planning actions. Based on our analysis we noted both positive and negative factors relative to our ability to support realization of certain deferred tax assets. However, based on the weighting of all the evidence, including the near term effect on our income projections of investments we are making in our team, product and systems infrastructure, we concluded that it was more likely than not that the majority of our deferred tax assets related to temporary differences and net operating losses may not be recovered. The establishment of a valuation allowance has no effect on our ability to use the underlying deferred tax assets prior to expiration to reduce cash tax payments in the future to the extent that we generate taxable income.
 
At JuneSeptember 30, 2019, and December 31, 2018, we have established a valuation allowance of $5.9$6.5 million and $4.3 million, respectively, against certain deferred tax assets given the uncertainty of recoverability of these amounts.
 
Note 8: 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 99% 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 $82,047$78,040 and $61,58664,679 to expense in the three months ended JuneSeptember 30, 2019, and 2018, respectively, associated with our matching contribution in those periods. We charged $151,209229,248 and $121,924186,614 to expense in the threenine months ended JuneSeptember 30, 2019, and 2018, respectively, associated with our matching contribution in those periods.
 
Note 9:  Stock-Based Compensation
 
The Company grants stock option awards to officers and employees and grants stock awards to directors as compensation for their service to the Company.
 
In November 2010, the Company adopted the 2010 Stock Incentive Plan (the “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.


 
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:
 
Six Months Ended June 30,
 
Nine months ended September 30,
 
2019 2018
 
2019
 
 
2018
 
   
 
 
 
Volatility49% - 50% 48% - 49%
  49%-50%
 
  48%-49%
 
Risk-free interest rate2.27% - 2.59% 2.34% - 2.84%
  1.45%-2.59%
 
  2.34%-2.99%
 
Expected term6.25 years 6.25 years
  6.25 years
 
   6.25 years 
 
The weighted average grant date fair value of stock options granted during the sixnine months ended JuneSeptember 30, 2019, and 2018, was $7.266.43 and $2.342.88, respectively.
For grants prior to January 1, 2015, the volatility assumption was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. For all grants subsequent to January 1, 2015, the volatility assumption reflects the Company’s historic stock volatility for the period of February 1, 2014 forward, which is the date the Company’s stock started actively trading. The risk-free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.
 
Stock option awards are expensed on a straight-line basis over the requisite service period. During the three months ended JuneSeptember 30, 2019, and 2018, the Company recognized an expense of $224,654$252,799 and $189,344$192,202, respectively, associated with stock option awards. During the sixnine months ended JuneSeptember 30, 2019, and 2018, the Company recognized an expense of $493,699$746,498 and $382,879$575,081, respectively, associated with stock option awards. At JuneSeptember 30, 2019, future stock compensation expense associated with stock options (net of estimated forfeitures) not yet recognized was $2,665,958$2,959,018 and will be recognized over a weighted average remaining vesting period of 3.1 years. The following summarizes stock option activity for the sixnine months ended JuneSeptember 30, 2019:
 
 
 
 
 
Weighted
 
 
Aggregate
 
 
 
 
 
Weighted
 
 
Aggregate
 
 
Number of
 
 
Average
 
 
Average Remaining
 
 
Intrinsic
 
 
Number of
 
 
Average
 
 
Average Remaining
 
 
Intrinsic
 
 
Options
 
 
Exercise Price
 
 
Contractual Life
 
 
Value
 
 
Options
 
 
Exercise Price
 
 
Contractual Life
 
 
Value
 
Outstanding at December 31, 2018
  1,654,522 
 $6.07 
  8.2 
 $10,866,658 
  1,654,522 
 $6.07 
  8.2 
 $10,866,658 
    
    
Granted
  65,794 
  14.36 
    
  166,294 
  12.77 
    
Exercised
  (180,392)
  5.03 
    
  (185,212)
  5.06 
    
Expired
  (1,198)
  5.18 
    
  (1,198)
  5.18 
    
Forfeited
  (201,240)
  4.97 
    
  (214,562)
  5.08 
    
Outstanding at June 30, 2019
  1,337,486 
 $6.79 
  7.7 
 $8,392,981 
Outstanding at September 30, 2019
  1,419,844 
 $7.14 
  7.6 
 $4,773,655 
    
    
Exercisable at June 30, 2019
  647,803 
 $5.02 
  6.8 
 $5,162,212 
Exercisable at September 30, 2019
  718,990 
 $5.14 
  6.6 
 $3,310,784 
 
The total intrinsic value of stock options exercised during the three months ended JuneSeptember 30, 2019, and 2018, were $698,813zero and $157,036,$246,672, respectively. The total intrinsic value of stock options exercised during the sixnine months ended JuneSeptember 30, 2019, and 2018, were $1,888,805$1,432,655 and $157,601,$404,273, respectively.
 

 
Stock Awards
During the three months ended JuneSeptember 30, 2019, and 2018, the Company issued 1,9522,340 and 6,9155,184 shares, respectively, to non-employee directors as compensation for their service on the board. During the sixnine months ended JuneSeptember 30, 2019, and 2018, the Company issued 4,3566,696 and 15,87021,054 shares, respectively, to non-employee directors as compensation for their service on the board Such stock awards are immediately vested.
 
Stock awards are valued based on the closing price of our common stock on the date of grant, and compensation cost is recorded on a straight-line basis over the share vesting period. The total fair value of stock awards granted, vested, and expensed during the three months ended JuneSeptember 30, 2019, and 2018, was $37,420$31,508 and $49,46257,457, respectively. The total fair value of stock awards granted, vested, and expensed during the sixnine months ended JuneSeptember 30, 2019, and 2018, was $71,893$103,402 and $93,341143,268, respectively. As of JuneSeptember 30, 2019, there was no unrecognized compensation cost related to stock awards.
Additionally, during the three months ended September 30, 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 $509,000 associated with this issuance in the third quarter of 2018. These shares were not issued from the 2010 Stock Incentive Plan.
 
Note 10: Warrants
 
During 2014, the Company issued warrants to certain service providers. The following table summarizes information about the Company’s warrants at JuneSeptember 30, 2019:
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
Number of
 
 
Average
 
 
Average Remaining
 
 
Intrinsic
 
 
Number of
 
 
Average
 
 
Average Remaining
 
 
Intrinsic
 
 
Units
 
 
Exercise Price
 
 
Contractual Term
 
 
Value
 
 
Units
 
 
Exercise Price
 
 
Contractual Term
 
 
Value
 
Outstanding at December 31, 2018
  30,000 
 $7.81 
  1.1 
 $144,525 
  30,000 
 $7.81 
  1.1 
 $144,525 
    
    
Granted
  - 
    
  - 
    
Exercised
  (30,000)
  7.81 
    
  (30,000)
  7.81 
    
Cancelled
  - 
  - 
    
  - 
  - 
    
Outstanding at June 30, 2019
  - 
 $- 
  - 
 $- 
Outstanding at September 30, 2019
  - 
 $- 
  - 
 $- 
    
    
Exercisable at June 30, 2019
  - 
 $- 
  - 
 $- 
Exercisable at September 30, 2019
  - 
 $- 
  - 
 $- 
 
Note 11: Commitments and Contingencies
 
The Company may from time to time be involved in legal proceedings arising from the normal course of business. The Company is not currently a party to any litigation of a material nature. The Company has employment agreements with several members of its leadership team and executive officers. The Company is not party to any non-cancellable contracts that create a material future commitment other than its lease as described in Note 12.
 

 
Note 12: 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. The term of the addendum extends through the same period as the 2018 Lease. The base rent for the first full year of the 2019 addendum is approximately $395,000. 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. We have also elected to utilize practical expedients to combine lease and non-lease components and to not include on the balance sheet leases with an initial term of 12 months or less (“short-term leases”). Short-term lease payments are recognized in the consolidated statements of income on a straight-line basis over the lease term. These practical expedients apply to all of SharpSpring’s operating leases. The Company is not party to any financing lease.
 
The weighted average remaining lease term as of JuneSeptember 30, 2019, is 9.39.2 years. The weighted average discount rate for our operating leases as of JuneSeptember 30, 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 three months ended JuneSeptember 30, 2019, and 2018, were zero and $19,290$19,210 respectively. The lease cost associated with short-term leases for the sixnine months ended JuneSeptember 30, 2019, and 2018, were zero and $37,941$57,072 respectively.
 
Future minimum lease payments are as follows as of JuneSeptember 30, 2019:
 
Operating Leases
 
 
Operating Leases
 
Remainder of 2019
 $369,119 
  184,560 
2020
  742,956 
  742,956 
2021
  766,546 
  766,546 
2022
  771,278 
  771,278 
2023
  794,937 
  794,937 
Thereafter
  4,020,754 
  4,020,754 
Total undiscounted cash flows
 $7,465,591 
 $7,281,032 
Less imputed interest
  (1,926,835)
  (1,837,344)
Present value of lease liability
 $5,538,756 
 $5,443,688 
 
Note 13: Disaggregation of Revenue
 
The Company operates as one reporting segment. Operating segments are defined as components of an enterprise for which separate financial information inis regularly evaluated by the chief operating decision makers (“CODM”), which is the Company’s chief executive office, in deciding how to allocate resources and assess performance. The Company does not present geographical information about revenues because it is impractical to do so. Disaggregated revenue for the three and sixnine months ended JuneSeptember 30, 2019, and 2018, are as follows:
 
 
Three Months Ended
 
 
Six Months Ended
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
June 30,
 
 
September 30,
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Revenue by Product:
 
 
 
 
 
 
Marketing Automation Revenue
  5,450,837 
  4,319,158 
  10,712,920 
  8,382,657 
  5,676,555 
  4,793,467 
  16,389,475 
  13,176,124 
Mail + Product Revenue
 $66,596 
 $123,131 
 $130,798 
 $244,295 
 $47,423 
 $79,862 
 $178,221 
 $324,157 
Total Revenue
 $5,517,433 
 $4,442,289 
 $10,843,718 
 $8,626,952 
 $5,723,978 
 $4,873,329 
 $16,567,696 
 $13,500,281 
    
    
Revenue by Type:
    
    
Recurring Revenue
  5,124,370 
  4,072,001 
  9,992,519 
  7,925,832 
  5,391,989 
  4,420,872 
  15,384,507 
  12,331,999 
Upfront Fees
 $393,063 
 $370,288 
 $851,199 
 $701,120 
 $331,989 
 $452,457 
 $1,183,189 
 $1,168,282 
Total Revenue
 $5,517,433 
 $4,442,289 
 $10,843,718 
 $8,626,952 
 $5,723,978 
 $4,873,329 
 $16,567,696 
 $13,500,281 
 

 
ItemItem 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. This information should also be read in conjunction with our audited historical consolidated financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission on March 5, 2019.
 
Overview
 
We provide SaaS basedSaaS-based marketing technologies to customers around the world. Our focus is on marketing automation tools that enable customers to interact with a lead from an early stage and nurture that potential customer using advanced features until it becomes a qualified sales lead or customer. We primarily offer our premium SharpSpring marketing automation solution, but also have customers on the SharpSpring Mail+ product, which is a subset of the full suite solution.
 
We believe our recent growth has been driven by the strong demand for marketing automation technology solutions, particularly in the small and mid-size business market. Our products are offered at competitive prices with unlimited multi-lingual customer support. We employ a subscription-based revenue model. We also earn revenues from additional usage charges that may come into effect when a customer exceeds a transactional quota, as well as fees earned for additional products and services.
 
Unless the context otherwise requires, in this section titled Management’s Discussion and Analysis of Financial Condition and Results of Operations all references to “SharpSpring” relate to the SharpSpring product, while all references to “our Company,” “we,” “our” or “us” and other similar terms means SharpSpring, Inc., a Delaware corporation, and all subsidiaries.
Results of Operations
 
Three Months Ended JuneSeptember 30, 2019, Compared to the Three Months Ended JuneSeptember 30, 2018
 
 
 
 
 
Percent
 
 
 
 
 
Percent
 
 
Three Months Ended
 
 
Change
 
 
Three Months Ended
 
 
Change
 
 
June 30,
 
 
from
 
 
September 30,
 
 
from
 
 
2019
 
 
2018
 
 
Prior Year
 
 
2019
 
 
2018
 
 
Prior Year
 
Revenues and Cost of Sales:
 
 
 
 
 
 
Revenues
 $5,517,433 
 $4,442,289 
 $1,075,144 
  24%
 $5,723,978 
 $4,873,329 
 $850,649 
  17%
Cost of Sales
  1,625,818 
  1,507,362 
  118,456 
  8%
  1,840,764 
  1,472,410 
  368,354 
  25%
Gross Profit
 $3,891,615 
 $2,934,927 
 $956,688 
  33%
 $3,883,214 
 $3,400,919 
 $482,295 
  14%
 
Revenues increased for the three months ended JuneSeptember 30, 2019, as compared to the three months ended JuneSeptember 30, 2018, primarily due to growth in our SharpSpring marketing automation customer base. Revenues for our core marketing automation platform increased to $5.5$5.7 million in the three months ended JuneSeptember 30, 2019, from $4.3$4.8 million in the three months ended JuneSeptember 30, 2018. This growth in revenues was slightly offset by reduced revenue from our SharpSpring Mail+ product, which declined from approximately $123,000$80,000 for the three months ended JuneSeptember 30, 2018, to approximately $67,000$47,000 for the three months ended JuneSeptember 30, 2019.
 

Cost of services increased for the three months ended JuneSeptember 30, 2019, as compared to the three months ended JuneSeptember 30, 2018, primarily due to increased employee related costs associated with providing and supporting our technology platform to more customers and increased hosting cost with the growth of the Company. As a percentage of revenues, cost of services was 29%32% and 34%30% of revenues for the three months ended JuneSeptember 30, 2019, and 2018, respectively. This represents a year-over-year improvement in gross margin due to increasedThe Company saw improved revenue scale and operating leverage.leverage for its support and hosting costs but was offset by investment in our account management and customer success initiatives. The investment in account management began in the first quarter of 2019 and continued to ramp up throughout the year. We believe the account management program will have a long-term positive impact on the Company’s revenue and attrition.
 

 
 
 
 
Percent
 
 
 
 
 
Percent
 
 
Three Months Ended
 
 
Change
 
 
Three Months Ended
 
 
Change
 
 
June 30,
 
 
from
 
 
September 30,
 
 
from
 
 
2019
 
 
2018
 
 
Prior Year
 
 
2019
 
 
2018
 
 
Prior Year
 
Operating expenses:
 
 
 
 
 
 
Sales and marketing
 $2,865,610 
 $2,356,400 
 $509,210 
  22%
 $3,102,653 
 $2,640,697 
 $461,956 
  17%
Research and development
  1,217,981 
  1,008,019 
  209,962 
  21%
  1,207,605 
  1,106,995 
  100,610 
  9%
General and administrative
  1,935,291 
  1,424,404 
  510,887 
  36%
  1,991,329 
  1,518,106 
  473,223 
  31%
Non-employee stock issuance expense
  - 
  508,561 
  (508,561)
  -100%
Intangible asset amortization
  95,250 
  115,000 
  (19,750)
  -17%
  95,250 
  115,000 
  (19,750)
  -17%
 $6,114,132 
 $4,903,823 
 $1,210,309 
  25%
 $6,396,837 
 $5,889,359 
 $507,478 
  9%
 
Sales and marketing expenses increased for the three months ended JuneSeptember 30, 2019, as compared to the same period in 2018. The increase was primarily due to an increase in employee-related costs and marketing program spending for various lead generation activities. Program spend increased by approximately $193,00076,000 compared to same period last year. Employee-related costs increased by approximately $279,000.$270,000. Partner commissions and referral fees increased by approximately $41,000$38,000 compared to the same period in 2018. Costs associated with third-party services increased by approximately $40,000$88,000 compared to the same period in 2018.
 
Research and development expenses increased for the three months ended JuneSeptember 30, 2019, as compared to the three months ended JuneSeptember 30, 2018, primarily due to additional hiring of development and quality assurance staff since last year. Employee-related costs for this group increased by approximately $212,000157,000 in the three months ended JuneSeptember 30, 2019, compared to the same period in 2018. Non-employee-related costs for this group increased by approximately $127,000$197,000 in the three months ended JuneSeptember 30, 2019, compared to the same period in 2018. These amounts were partially offset by increased capitalized software development work of approximately $130,000$254,000 for the three months ended JuneSeptember 30, 2019, compared to the same period in the prior year.
 
General and administrative expenses increased for the three months ended JuneSeptember 30, 2019, as compared to the three months ended JuneSeptember 30, 2018, primarily due to higher employee related costs associated with business growth of approximately $205,000,$192,000, and increased facilities costs associated with the Company’s new office space of approximately $75,000.$70,000. Additionally, depreciation expense increased by approximately $63,000$36,000 primarily due to new furniture, equipment, and leasehold improvements related to the move to the Company’s new office locationheadquarters in November of 2018. Professional fees related to legal, accounting, and corporate governance grew approximately $66,000 during the three months ended September 30, 2019. Cost associated with license fees, internet and data communication, and equipment grew approximately $110,000 during the three months ended September 30, 2019 to continue to support the growth of the Company.
During the three months ended September 30, 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 $509,000 associated with this issuance in the third quarter of 2018.
 
Amortization of intangible assets decreased for the three months ended JuneSeptember 30, 2019, as compared to the three months ended JuneSeptember 30, 2018, due primarily to the Trade Name asset fully amortizing in the fourth quarter of 2018.
 
 
 
 
 
Percent
 
 
 
 
 
Percent
 
 
Three Months Ended
 
 
Change
 
 
Three Months Ended
 
 
Change
 
 
June 30,
 
 
from
 
 
September 30,
 
 
from
 
 
2019
 
 
2018
 
 
Prior Year
 
 
2019
 
 
2018
 
 
Prior Year
 
Other
 
 
 
 
 
 
Other expense, net
 $(41,966)
 $(338,431)
 $296,465 
  -88%
 $(15,781)
 $(243,956)
 $228,176 
  -94%
Loss on conversion of convertible notes
  (2,162,696)
  - 
  (2,162,696)
  n/a 
Gain (loss) on embedded derivative
  189,776 
  (453,449)
  643,225 
  -142%
  - 
  27,295 
  (27,295)
  -100%
Provision (benefit) for income taxes
  787 
  (294,543)
  295,330 
  -100%
  (2,291)
  5,130 
  (7,421)
  -145%
 

Other expense is generally related to foreign exchange gains and losses derived from owing amounts or having amounts owed in currencies other than the entity’s functional currency, as well as interest expense related to our convertible notes. Non-cash interest expense for the three months ended JuneSeptember 30, 2019, and 2018, was approximately $44,000zero and $106,000,$100,000, respectively.
 
We recorded a change in the valuation of convertible notes embedded derivatives of zero and $27,295 during the three months ended September 30, 2019, and 2018, respectively.
During the three months ended September 30, 2019, our income tax benefit was related to income derived in foreign jurisdictions at the applicable statutory tax rates. We have recorded a full valuation allowance against all of our U.S. net operating loss deferred tax assets, so there is no tax benefit recorded on the income statement for those losses. For the three months ended September 30, 2018, our income tax provision related to income derived in foreign jurisdictions at the applicable statutory tax rates.
Nine months ended September 30, 2019, Compared to the Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Nine Months Ended
 
 
Change
 
 
Change
 
 
 
September 30,
 
 
from
 
 
from
 
 
 
2019
 
 
2018
 
 
Prior Year
 
 
Prior Year
 
Revenues and Cost of Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 $16,567,696 
 $13,500,281 
 $3,067,415 
  23%
Cost of Sales
  5,014,964 
  4,380,069 
  634,895 
  14%
Gross Profit
 $11,552,732 
 $9,120,212 
 $2,432,520 
  27%
Revenues increased for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, primarily due to growth in our SharpSpring marketing automation customer base. Revenues for our core marketing automation platform increased to $16.4 million in the nine months ended September 30, 2019, from $13.2 million in the nine months ended September 30, 2018. This growth in revenues was slightly offset by reduced revenue from our SharpSpring Mail+ product, which declined from approximately $324,000 for the nine months ended September 30, 2018, to approximately $178,000 for the nine months ended September 30, 2019.
Cost of services increased for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, primarily due to increased employee related costs associated with providing and supporting our technology platform to more customers and increased hosting cost with the growth of the Company. As a percentage of revenues, cost of services was 30% and 32% of revenues for the nine months ended September 30, 2019, and 2018, respectively. This represents a year-over-year improvement in gross margin due to increased revenue scale and operating leverage. The increased revenue scale and operating leverage was partially offset by an increase in our account management and customer success initiatives throughout the year.
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Nine Months Ended
 
 
Change
 
 
Change
 
 
 
September 30,
 
 
from
 
 
from
 
 
 
2019
 
 
2018
 
 
Prior Year
 
 
Prior Year
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
 $8,976,466 
 $7,368,128 
 $1,608,338 
  22%
Research and development
  3,684,314 
  3,065,689 
  618,625 
  20%
General and administrative
  6,154,295 
  4,368,744 
  1,785,551 
  41%
Non-employee stock issuance expense
  - 
  508,561 
  (508,561)
  -100%
Intangible asset amortization
  285,750 
  345,000 
  (59,250)
  -17%
Impairment of intangible assets
  - 
  - 
  - 
  n/a 
 
 $19,100,825 
 $15,656,122 
 $3,444,703 
  22%
Sales and marketing expenses increased for the nine months ended September 30, 2019, as compared to the same period in 2018. The increase was primarily due to an increase in employee-related costs and marketing program spending for various lead generation activities. Program spend increased by approximately $364,000 compared to the same period last year. Employee-related costs increased by approximately $1,022,000 of which $133,000 is related to severance for the Chief Revenue Officer. Partner commissions and referral fees increased by approximately $121,000 compared to the same period in 2018. Costs associated with third-party services increased by approximately $125,000 compared to the same period in 2018.


Research and development expenses increased for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, primarily due to additional hiring of development and quality assurance staff since last year. Employee-related costs for this group increased by approximately $707,000 in the nine months ended September 30, 2019, compared to the same period in 2018. Non-employee-related costs for this group increased by approximately $383,000 in the nine months ended September 30, 2019, compared to the same period in 2018. These amounts were partially offset by increased capitalized software development work of approximately $471,000 for the nine months ended September 30, 2019, compared to the same period in the prior year.
General and administrative expenses increased for the three months ended September 30, 2019, as compared to the nine months ended September 30, 2018, primarily due to higher employee related costs associated with business growth of approximately $565,000, and increased facilities costs associated with the Company’s new office space of approximately $239,000. Additionally, depreciation expense increased by approximately $155,000 primarily due to new furniture, equipment, and leasehold improvements related to the move to the Company’s new headquarters in November of 2018. The Company also incurred a one-time franchise tax fee settlement of approximately $317,000 during the nine months ended September 30, 2019.
During the nine months ended September 30, 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 $509,000 associated with this issuance in the third quarter of 2018.
Amortization of intangible assets decreased for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, due primarily to the Trade Name asset fully amortizing in 2018.
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Nine Months Ended
 
 
Change
 
 
Change
 
 
 
September 30,
 
 
from
 
 
from
 
 
 
2019
 
 
2018
 
 
Prior Year
 
 
Prior Year
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
Other expense, net
 $(161,873)
 $(513,759)
 $351,886 
  -68%
Loss on induced conversion
  (2,162,696)
  - 
  (2,162,696)
  n/a 
Gain (loss) on embedded derivative
  214,350 
  (426,154)
  640,504 
  -150%
Provision (benefit) for income taxes
  835 
  (247,415)
  248,250 
  -100%
Other expense is generally related to foreign exchange gains and losses derived from owing amounts or having amounts owed in currencies other than the entity’s functional currency, as well as interest expense related to our convertible notes. Non-cash interest expense for the nine months ended September 30, 2019, and 2018, was approximately $142,275 and $204,000, respectively.
 
On May 9, 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 $189,776$214,350, and a loss on conversion of debt of $2,162,696 during the threenine months ended JuneSeptember 30, 2019. The company incurred a loss on the embedded derivative of $453,449$426,154 during the threenine months ended JuneSeptember 30, 2018.
 
During the threenine months ended JuneSeptember 30, 2019, our income tax provision was related to income derived in foreign jurisdictions at the applicable statutory tax rates. We have recorded a full valuation allowance against all of our U.S. net operating loss deferred tax assets, so there is no tax benefit recorded on the income statement for those losses. For the threenine months ended JuneSeptember 30, 2018, our income tax benefit related to state income taxes bythe operating loss for our consolidated U.S. entities as well as taxesoffset by a small amount of tax expense related to income derived in foreign jurisdictions at the applicable statutory tax rates.
Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Six Months Ended
 
 
Change
 
 
Change
 
 
 
June 30,
 
 
from
 
 
from
��
 
 
2019
 
 
2018
 
 
Prior Year
 
 
Prior Year
 
Revenues and Cost of Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 $10,843,718 
 $8,626,952 
 $2,216,766 
  26%
Cost of Sales
  3,174,200 
  2,907,659 
  266,541 
  9%
Gross Profit
 $7,669,518 
 $5,719,293 
 $1,950,225 
  34%

Revenues increased for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018, primarily due to growth in our SharpSpring marketing automation customer base. Revenues for our core marketing automation platform increased to $10.7 million in the six months ended June 30, 2019, from $8.4 million in the six months ended June 30, 2018. This growth in revenues was slightly offset by reduced revenue from our SharpSpring Mail+ product, which declined from approximately $244,000 for the six months ended June 30, 2018, to approximately $131,000 for the six months ended June 30, 2019.
Cost of services increased for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018, primarily due to increased employee related costs associated with providing and supporting our technology platform to more customers and increased hosting cost with the growth of the Company. As a percentage of revenues, cost of services was 29% and 34% of revenues for the six months ended June 30, 2019 and 2018, respectively. This represents a year-over-year improvement in gross margin due to increased revenue scale and operating leverage.
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Six Months Ended
 
 
Change
 
 
Change
 
 
 
June 30,
 
 
from
 
 
from
 
 
 
2019
 
 
2018
 
 
Prior Year
 
 
Prior Year
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
 $5,873,813 
 $4,727,431 
 $1,146,382 
  24%
Research and development
  2,476,709 
  1,958,694 
  518,015 
  26%
General and administrative
  4,162,966 
  2,850,638 
  1,312,328 
  46%
Intangible asset amortization
  190,500 
  230,000 
  (39,500)
  -17%
 
 $12,703,988 
 $9,766,763 
 $2,937,225 
  30%


Sales and marketing expenses increased for the six months ended June 30, 2019, as compared to the same period in 2018. The increase was primarily due to an increase in employee-related costs and marketing program spending for various lead generation activities. Program spend increased by approximately $288,000 compared to same period last year. Employee-related costs increased by approximately $752,000, of which $133,000 is related to severance for the Chief Revenue Officer. Partner commissions and referral fees increased by approximately $83,000 compared to the same period in 2018. Costs associated with third-party services increased by approximately $40,000 compared to the same period in 2018.
Research and development expenses increased for the six months ended June 30, 2019, as compared to the six months ended June 30, 2018 primarily due to additional hiring of development and quality assurance staff since last year. Employee-related costs for this group increased by approximately $550,000 in the six months ended June 30, 2019, compared to the same period in 2018. Non-employee-related costs for this group increased by approximately $185,000 in the six months ended June 30, 2019 compared to the same period in 2018. These amounts were partially offset by increased capitalized software development work of approximately $217,000 for the six months ended June 30, 2019, compared to the same period in the prior year.
General and administrative expenses increased for the three months ended June 30, 2019 as compared to the six months ended June 30, 2018, primarily due to higher employee related costs associated with business growth of approximately $373,000, and increased facilities costs associated with the Company’s new office space of approximately $168,000. Additionally, depreciation expense increased by approximately $120,000 primarily due to new furniture, equipment, and leasehold improvements related to the move to the new office location in November of 2018. The Company also incurred a one-time franchise tax fee settlement of approximately $317,000 during the six months ended June 30, 2019.
Amortization of intangible assets decreased for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 due primarily to the Trade Name asset fully amortizing in 2018.
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Six Months Ended
 
 
Change
 
 
Change
 
 
 
June 30,
 
 
from
 
 
from
 
 
 
2019
 
 
2018
 
 
Prior Year
 
 
Prior Year
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
Other expense, net
 $(146,093)
 $(269,803)
 $123,710 
  -46%
Loss on conversion of convertible notes
  (2,162,696)
  - 
  (2,162,696)
  n/a 
Gain (loss) on embedded derivative
  214,350 
  (453,449)
  667,799 
  -147%
Provision (benefit) for income taxes
  3,126 
  (252,546)
  255,672 
  -101%

Other expense is generally related to foreign exchange gains and losses derived from owing amounts or having amounts owed in currencies other than the entity’s functional currency, as well as interest expense related to our convertible notes. Non-cash interest expense for the six months ended June 30, 2019 and 2018, was approximately $142,275 and $111,000, respectively.
On May 9, 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 $214,350, and a loss on conversion of debt of $2,162,696 during the six months ended June 30, 2019. The company incurred a loss on the embedded derivative of $453,449 during the six months ended June 30, 2018.
During the six months ended June 30, 2019, our income tax provision was related to income derived in foreign jurisdictions at the applicable statutory tax rates. We have recorded a full valuation allowance against all of our U.S. net operating loss deferred tax assets, so there is no tax benefit recorded on the income statement for those losses. For the six months ended June 30, 2018, our income tax provision related to state income taxes by our consolidated U.S. entities as well as taxes related to income derived in foreign jurisdictions at the applicable statutory tax rates.

 
Liquidity and Capital Resources
 
Sources and Uses of Cash
 
Our primary source of operating cash inflows are payments from customers for use of our marketing automation technology 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. Additionally, in March 2018, the Company issued $8.0 million of convertible notes and received $7.9 million in cash net of debt issuance costs; in March 2019, the Company issued 885,500 shares of common stock and received $10.7 million in cash net of stock issuance costs. 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 $1.9 million was available under the facility as of JuneSeptember 30, 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 $3.5$3.9 million to $4.2$6.0 million used in operations for the sixnine months ended JuneSeptember 30, 2019, compared to approximately $756,000$2.1 million used in operations for the sixnine months ended June 30,2018.September 30, 2018. The increase in cash used in operating activities was attributable primarily to increased operating expenses during the first sixnine months of 2019 compared to 2018, a one-time franchise tax settlement and a one-time tax refund of approximately $2$2.0 million that was received during the sixnine months ended JuneSeptember 30, 2018.
 
Net cash used in investing activities was approximately $611,000$1.1 million during the sixnine months ended JuneSeptember 30, 2019, compared to approximately $188,000$396,000 used during the sixnine months ended JuneSeptember 30, 2018. The change in cash used for investing activities is primarily related to the increased investment in property and equipment, largely related to our new office space, and capitalized software development in the sixnine months ended JuneSeptember 30, 2019.
 
Net cash provided by financing activities was $11.6 million during the sixnine months ended JuneSeptember 30, 2019, compared to $8.1$8.3 million net cash received from financing activities during the sixnine months ended JuneSeptember 30, 2018. The company received $10.7 million received is related to the net proceeds from the stock offering completed in March 2019. The Company also received approximately $1.0$1 million from the exercise of employee stock options during the sixnine months ended JuneSeptember 30, 2019. The majority of the net cash provided by financing activities for the sixnine months ended JuneSeptember 30, 2018, is related to the Company’s issuance of $8.0 million of convertible notes during the first quarter of 2018, for which the Company received $7.9 million after debt issuance costs. Additionally, the company received cash of approximately $450,000 for the exercise of employee stock options during the nine months ended September 30, 2018.
 
We had net working capital of approximately $15.4$13.0 million and $8.7 million as of JuneSeptember 30, 2019, and December 31, 2018, respectively. Our cash balance was $16.0$13.8 million at JuneSeptember 30, 2019, reflecting the net $10.7 million received from the stock offering in March 2019. Our cash balance was $9.3 million at December 31, 2018, reflecting the net $7.9 million received from the issuance of convertible notes in March 2018, offset by cash used from operations.
 
Contractual Obligations
 
As of JuneSeptember 30, 2019, there were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 5, 2019, other than those appearing in the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
 
Significant Accounting Policies
 
Our significant accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Consolidated Financial Statements. We have consistently applied these policies in all material respects. We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree.
 

Off-balance sheet arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
ItemItem 3.  Quantitative and Qualitative Disclosure About Market Risk
 
Not applicable.
 
ItemItem 4.   Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of JuneSeptember 30, 2019. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of JuneSeptember 30, 2019, the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Company Internal Controls
 
There were no changes in our internal control over financial reporting during the quarter ended JuneSeptember 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

PART
PART II – OTHER INFORMATION
 
ItemItem 1.                   Legal Proceedings.
 
Not applicable.
 
ItemItem 1A.               Risk Factors.
 
Not applicable.
 
Item 2.                   Unregistered Sales of Equity Securities and Use of Proceeds.
 
DateSecurity/Value
May 2019Common Stock – 14,772 shares of common stock issued pursuant to cashless warrant exercises with an exercise price of $7.81.
Not Applicable
 
No underwriters were utilized, and no commissions or fees were paid with respect to any of the above transactions. We relied on Section 4(a)(2) and/or Regulation D of the Securities Act of 1933, as amended, since the transactions did not involve any public offering.
ItemItem 3.                   Defaults Upon Senior Securities.
 
Not Applicable.
 
ItemItem 4.                   Mine Safety Disclosures.
 
Not Applicable.
 
ItemItem 5.                   Other Information.
 
Not Applicable.
 

Item
Item 6.                   Exhibits.
INDEX TO EXHIBITS
SEC ReferenceNumberTitle of DocumentLocation
10.1Note Conversion Agreement, dated May 9, 2019, by and among SharpSpring, Inc., SHSP Holdings, LLC, and Evercel Holdings, LLCIncorporated by reference to the Company’s Form 8-K filed 05/09/19.
10.2SharpSpring, Inc. 2019 Equity Incentive Plan
Incorporated by reference to the Company’s Definitive Schedule 14A filed 04/30/19
10.3Office Lease Agreement Addendum with Celebration Pointe Office Partners II, LLC dated June 20, 2019.Incorporated by reference to the Company’s Form 8-K filed 6/25/19.
10.4Office Lease Agreement with Celebration Pointe Office Partners II, LLC dated April 18, 2018Incorporated by reference to the Company’s Form 8-K filed 4/19/18.
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Filed herewith
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Filed herewith
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Filed herewith
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Filed herewith
101XBRL 
 

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

Date: November 13, 2019
By:  
/s/ Richard A. Carlson
 
  Richard A. Carlson 
  
Chief Executive Officer and President
(Principal Executive Officer)
Date: August 13, 2019
 
 
 SharpSpring, Inc. 
    

Date: November 13, 2019
By:  
/s/ Bradley Stanczak
 
  Bradley Stanczak   
  
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2019
 
 
 
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