| Summary of Significant Accounting Policies | Note 2: Summary of Significant Accounting Policies Basis of Presentation and Consolidation The accompanying financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Our
consolidated financial statements include the accounts of SharpSpring, Inc. and our subsidiaries (all collectively, the Company).
Our consolidated financial statements reflect the elimination of all significant inter-company accounts and transactions. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year
ending December 31, 2016. The year-end balance sheet data was derived from audited financial statements, but this Form 10-Q does
not include all disclosures required under U.S. GAAP. Certain information and note disclosures normally included in annual financial
statements prepared in accordance with U.S. GAAP have been omitted under the rules and regulations of the SEC. These interim financial statements should
be read in conjunction with the audited consolidated financial statements and related notes contained in the Companys Annual
Report on Form 10-K filed with the SEC on March 30, 2016. There have been no changes in the Companys significant accounting
policies from those that were disclosed in the Companys Annual Report on Form 10-K that have had a material impact on our
consolidated financial statements and related notes. Use of Estimates The preparation of the consolidated
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Foreign Currencies The
Companys subsidiaries utilize the U.S. Dollar, Swiss Franc, South African Rand and British Pound as their functional currencies.
The assets and liabilities of these subsidiaries are translated at ending exchange rates for the respective periods, while revenues
and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included
in other comprehensive income or loss within the Consolidated Statements of Comprehensive Income (Loss). Cash and Cash Equivalents Cash equivalents are short-term, liquid
investments with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed
by major financial institutions and at most times are in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. Restricted Cash The Company separates restricted cash
when arrangements with third parties legally restrict the use of funds. As of March 31, 2016, the Company had $250,000 deposited
with a major financial institution that was legally restricted and pledged as collateral against its credit card program. Fair Value of Financial Instruments U.S. GAAP establishes a fair value hierarchy
which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined
as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other
than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs
for use when little or no market data exists, therefore requiring an entity to develop its own assumptions. The Companys financial instruments
consist of cash and cash equivalents, restricted cash, accounts receivable, deposits and accounts payable. The carrying amount
of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the short-term nature
of these items. Accounts Receivable Accounts receivable are carried at the
original invoiced amount less an allowance for doubtful accounts based on the probability of future collection. Management reviews
accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. The Company reserves
for receivables that are determined to be uncollectible, if any, in its allowance for doubtful accounts. After the Company has
exhausted all collection efforts, the outstanding receivable is written off against the allowance. Intangibles Finite-lived intangible assets include
trade names, developed technologies and customer relationships and are amortized based on the estimated economic benefit over their
estimated useful lives, with periods ranging from 5 to 11 years. We continually evaluate the reasonableness of the useful lives
of these assets. Finite-lived intangibles are tested for recoverability whenever events or changes in circumstances indicate the
carrying amounts may not be recoverable. Impairment losses are measured as the amount by which the carrying value of an asset group
exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine
the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an asset group.
The dynamic economic environment in which the Company operates and the resulting assumptions used to estimate future cash flows
impact the outcome of these impairment tests. During the fourth quarter and year ended December 31, 2015, the Company recorded
an impairment loss of $1,310,386 related to the impaired recovery of its GraphicMail technology and trade name assets. Goodwill and Impairment As of March 31, 2016 and December 31,
2015, we had recorded goodwill of $8,885,425 and $8,881,933, respectively. Goodwill consists of the excess of the purchase price
over the fair value of tangible and identifiable intangible net assets acquired in the SharpSpring and GraphicMail acquisitions
(See Note 4). Under FASB ASC 350, Intangibles - Goodwill and Other Income Taxes Provision for income taxes are based
on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income
and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740,
Accounting for Income 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 2011 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 Companys income tax policy, significant or unusual items are separately recognized in the period in
which they occur. The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges
regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature and amount
of deductions and the allocation of income among various tax jurisdictions. Currently, the IRS is examining our 2014 U.S. income
tax return. Property and Equipment Property and equipment are recorded
at cost and depreciated using the straight-line method over the estimated useful life of the assets. Upon retirement or sale, the
cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or
loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation expense related
to property and equipment was $67,093 and $47,100 for the three months ended March 31, 2016 and 2015, respectively. Property and equipment as of March 31,
2016 and December 31, 2015 is as follows:
March 31, 2016 December 31, 2015
Property and equipment, net:
Leasehold improvements $ 1,909 $ 18,154
Furniture and fixtures 201,374 142,233
Computer equipment and software 794,673 874,698
Construction in progress 366,520 280,000
Total 1,364,476 1,315,085
Less: Accumulated depreciation and amortization (505,130 ) (498,039 )
$ 859,346 $ 817,046 Useful lives are as follows:
Leasehold improvements 3-5 years
Furniture and fixtures 3-5 years
Computing equipment 3 years
Software 3-5 years Revenue Recognition The Company recognizes revenue from
its services when it is probable that the economic benefits associated with the transactions will flow to the Company and the amount
of revenue can be measured reliably. This is normally demonstrated when: (i) persuasive evidence of an arrangement exists; (ii)
the fee is fixed or determinable; (iii) performance of service has been delivered; and (iv) collection is reasonably assured. For the Companys internet-based
SMTP email delivery product and GraphicMail email product, the services are offered over various contractual periods for a fixed
fee that varies based on a maximum volume of transactions. Revenues are typically paid by clients via credit card, check or wire
payments at the inception of the contractual period. Revenue is recognized on a straight-line basis over the contractual period.
If the customers transactions exceed contractual volume limitations, overages are charged and recorded in the periods in
which the transaction overages occur. Certain of the Companys GraphicMail
customers are sold through third party resellers. In some cases, we allow the third party resellers to collect the funds directly
from the customer, withhold their own reseller fee, and remit the net amount owed back to the Company. In those situations, because
the Company is the primary obligor in the arrangement, the Company records the gross revenue and expenses such that 100% of the
end customer revenue is reported by the Company and a corresponding expense is recorded for the reseller fee. For the Companys internet-based
SharpSpring marketing automation solution, the services are typically offered on a month-to-month basis with a fixed fee charged
each month depending on the size of the engagement with the customer. Monthly fees are recorded as revenue during the month they
are earned. Some customers are charged annually, for which revenues are deferred and recorded ratably over the subscription period.
The Company also charges transactional-based fees if monthly email volume limitations are reached or other chargeable activity
occurs. Additionally, some of our customers are charged an upfront implementation and training fee. The upfront implementation
and training fees represent short-term use it or lose it services offered for a flat fee. Such flat fees are recognized
over the service period, which is 60 days. The Company offers refunds on a pro-rata
basis at any time during the contractual period. The Company also experiences credit card chargebacks relating to cardholder disputes
that are commonly experienced by businesses that accept credit cards. The Company makes estimates for refunds and credit card chargebacks
based on historical experience. Deferred Revenue Some of the Companys customers
pay for services in advance on a periodic basis (such as monthly, quarterly, annually or bi-annually). Also, the Company charges
an upfront implementation and training fee for its SharpSpring marketing automation solution that is paid in advance, for which
services are performed over a 60-day period. Deferred revenue consists of payments received in advance of the Companys providing
the services. Deferred revenues are amortized on a straight-line basis in connection with the contractual period or recorded when
the services are used. Accrued Revenue In cases where our customers pay for
services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition is met. A portion
of our accounts receivable balance is therefore unbilled at the balance sheet date. Concentration of Credit Risk and
Significant Customers Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents. At March 31, 2016 and December
31, 2015, the Company had cash balances at financial institutions that exceed federally insured limits. The Company maintains its
cash balances with accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond
the normal credit risk associated with commercial banking relationships. For the three months ended March 31,
2016, and 2015, there were no customers that accounted for more than 10% of total revenue. Cost of Services Cost of services consists primarily
of the direct labor costs, technology hosting costs, software license costs, and fees paid to resellers of the Companys
product. Credit Card Processing Fees Credit card processing fees are included as a component of
general and administrative expenses and are expensed as incurred. Advertising Costs The Company expenses advertising costs as incurred. Research and Development Costs and Capitalized Software
Costs We capitalize certain costs associated
with internal use software during the application development stage, mostly related to software that we use in providing our hosted
solutions. We expense costs associated with preliminary project phase activities, training, maintenance and any post-implementation
period costs as incurred. For the three months ended March 31, 2016 and 2015, we capitalized $6,642 and $20,881 in software development
costs, respectively. We amortize capitalized software costs over the estimated useful life of the software, which has been estimated
to be 3 years, once the related project has been completed and deployed for customer use. At March 31, 2016, the net carrying value
of capitalized software was $83,925. All other software development costs
are charged to expenses when incurred, and generally consist of salaries, software development tools and personnel-related costs
for those engaged in research and development activities. Stock Compensation We account for stock based compensation
in accordance with FASB ASC 718, which requires companies to measure the cost of employee services received in exchange for an
award of an equity instrument based on the grant-date fair value of the award. Stock-based compensation expense is recognized on
a straight-line basis over the requisite service period. Net Income (Loss) Per Share Basic net income (loss) per share is
computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed
using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Comprehensive Income or Loss Comprehensive income or loss includes
all changes in equity during a period from non-owner sources, such as net income or loss and foreign currency translation adjustments. Recently Issued Accounting Standards In March 2016, the Financial Accounting
Standards Board (FASB) issued guidance that changes the accounting for certain aspects of share-based payments to
employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest
or are settled, thus eliminating additional paid-in capital pools. The guidance also allows for the employer to repurchase or sell
more shares than required under local statutory regulation without triggering liability accounting. In addition, the guidance allows
for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective in
2017 with early adoption permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial
statements. In February 2016, the FASB issued guidance
that requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner
similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type
and direct financing leases. The guidance is effective in 2019 with early adoption permitted. The Company is currently evaluating
the impact of this guidance on the consolidated financial statements. In May 2014, the FASB issued updated
guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard provides a five-step analysis
of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved the deferral of the new standards
effective date by one year. The new standard now is effective for annual and interim reporting periods beginning December 15, 2017.
The FASB will permit companies to adopt the new standard early, but not before the original effective date of December 15, 2016.
The Company is evaluating the potential impact of adopting this new accounting guidance. |
