| 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 assesses the performance of these resources on a consolidated basis. The Company does not present geographical information
about revenues because it is impractical to do so. Foreign Currencies The functional
currency of the Company’s foreign subsidiaries is the local currency. Assets and liabilities denominated in a foreign currency
are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates, with the resulting translation adjustments
directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at
the average exchange rates during the period. Foreign currency translation gains and losses are recorded in other comprehensive
income (loss). Cash and Cash Equivalents Cash equivalents are short-term, liquid investments
with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed by major financial
institutions and at most times are in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. Fair Value of Financial Instruments U.S. GAAP establishes a fair value hierarchy
which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined
as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other
than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs
for use when little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company’s financial instruments consist
of cash and cash equivalents, accounts receivable, deposits, embedded derivatives (associated with our convertible notes) and accounts
payable. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because
of the short-term nature of these items. The fair value of the embedded derivatives associated with our convertible notes 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 September 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 September 30, 2019, and 2018 was zero and a gain of $27,295, respectively.
The change in fair value for the nine months ended September 30, 2019, and 2018, was a gain of $214,350 and a loss of $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 are met, thus creating a contract
asset. A portion of our accounts receivable balance is therefore unbilled at each balance sheet date and is reflected as such on
the consolidated balance sheet. 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 September 30, 2019, and December 31, 2018,
we had recorded goodwill of $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” 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 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 September 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 $161,105 and $125,416 for the three months ended September 30, 2019, and 2018, respectively. Depreciation expense
related to property and equipment was $442,123 and $287,132 for the nine months ended September 30, 2019, and 2018, respectively.
Repairs and maintenance costs are expensed as incurred. Property and equipment as of September 30, 2019
and December 31, 2018, is as follows:
September 30, December 31,
2019 2018
Property and equipment, gross:
Leasehold improvements $ 289,565 $ 197,268
Furniture and fixtures 675,104 611,171
Computer equipment and software 2,053,045 1,135,012
Total 3,017,714 1,943,451
Less: Accumulated depreciation and amortization (1,136,788 ) (682,653 )
$ 1,880,926 $ 1,260,798 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 reliably measured. All significant sources of revenue are the result of a contract with a customer, and as such meet the
requirements of recognizing revenue in accordance with FASB ASC 606. For the three months ended September 30, 2019, and 2018, revenue
from contracts with customers was $5.7 million and $4.9 million, respectively. For the nine months ended September 30, 2019, and
2018, revenue from contracts with customers was $16.6 million and $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 upfront billed charges for which 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 are 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 payments from customers in advance of
service on a periodic basis (such as monthly, quarterly, annually or bi-annually). In situations where a customer pays in advance,
the deferred revenue is recognized over the service period defined in the contract. Additionally, the Company has deferred revenue
related to implementation fees for its SharpSpring marketing automation solution that are paid in advance. These implementation
services are typically performed over a 60-day period, and the revenue is recognized over that period. Deferred revenue balances
were $250,656 and $279,818 as of December 31, 2018, and 2017, respectively. Deferred revenue during the three months ended September
30, 2019, and 2018, increased by $191,727 and $19,833, respectively. Deferred revenue during the nine months ended September 30,
2019, and 2018, increased by $258,147 and $58,601, respectively. The Company had deferred revenue contract liability balances of
$508,804 and $250,656 as of September 30, 2019, and December 31, 2018, respectively. The Company expects to recognize a majority
of the revenue of these remaining performance obligations within 12 months. Approximately 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 are 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 September 30, 2019, and 2018, was $880,333 and $646,452, respectively. Revenue billed
that was included in accrued revenue at the beginning of the period for the nine months ending September 30, 2019, and 2018, was
$740,425 and $554,603, respectively. Accrued revenue not billed in the three and nine months ending September 30, 2019, and 2018,
was $927,952 and $697,101, respectively. The Company had accrued revenue balances of $927,952and $740,425 as of September 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 September 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 $1,525,322 and $1,443,534 for the three months ended September
30, 2019, and 2018, respectively. Advertising and marketing expenses, excluding marketing team costs, were $4,556,539 and $4,187,234
for the nine months ended September 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 September 30, 2019, the net carrying value of the capitalized cost of obtaining a contract was $1,209,280, of
which $686,255 is included in other current assets and $523,025 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 $199,058 and $194,479 for the three months ended September 30, 2019, and 2018, respectively. The Company amortized expenses
for the costs of obtaining contracts of $630,815 and $557,718 for the nine months ended September 30, 2019, and 2018, respectively. Stock Compensation We account for stock-based compensation in accordance
with FASB ASC 718 Compensation — Stock Compensation, Net Loss Per Share Basic net loss per share is computed by dividing
net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by
giving effect to all potentially dilutive common stock equivalents for the period. For purposes of this calculation, options to
purchase common stock, warrants, and the conversion option of the convertible Notes (Note 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 present the cumulative impact on our financial statements
upon adoption.
Impact upon adoption of new ASU
As of January 1, 2019
Right-of-use assets 5,715,510
Total Assets $ 5,715,510
Accrued expenses and other current liabilities $ (8,821 )
Lease liability (current) 344,883
Lease liability (non-current) 5,379,448
Total Liabilities $ 5,715,510 |
