SharpSpring (SHSP) 10-Q 2020 Q2 Quarterly report

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: June 30, 2020
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36280

SharpSpring, Inc.

(Exact name of registrant as specified in its charter)

Delaware	05-0502529
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5001 Celebration Pointe Avenue Suite 410 Gainesville, FL	32608
(Address of principal executive offices)	(Zip Code)

888-428-9605

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of exchange on which registered
Common Stock, $0.001 par value per share	SHSP	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐    No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 11,552,951 shares of common stock as of August 13, 2020.

SharpSpring, Inc.

Table of Contents

		Page
PART I – FINANCIAL INFORMATION			4
Item 1.	Financial Statements:		4
	Consolidated Balance Sheets (unaudited)		4
	Consolidated Statements of Comprehensive Loss (unaudited)		5
	Consolidated Statements of Changes in Shareholders’ Equity (unaudited)		6
	Consolidated Statements of Cash Flows (unaudited)		7
	Notes to the Consolidated Financial Statements (unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		41
Item 4.	Controls and Procedures		41
PART II – OTHER INFORMATION			44
Item 1.	Legal Proceedings		44
Item 1A.	Risk Factors		44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3.	Defaults Upon Senior Securities		45
Item 4.	Mine Safety Disclosures		45
Item 5.	Other Information		45
Item 6.	Exhibits		46
	SIGNATURES		47

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

Examples of forward-looking statements include, but are not limited to:

· the anticipated timing of the development of future products;

· projections of costs, revenue, earnings, capital structure and other financial items;

· statements of our plans and objectives;

· statements regarding the capabilities of our business operations;

· statements of expected future economic performance;

· statements regarding competition in our market; and

· assumptions underlying statements regarding us or our business.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

· strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses;

· the ability of our agency partners to resell the SharpSpring platform to their clients;

· security breaches, cybersecurity attacks and other significant disruptions in our information technology systems;

· changes in customer demand;

· the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors’ services;

· developments and changes in laws and regulations, including increased regulation of our industry through legislative action and revised rules and standards;

· the occurrence of hostilities, political instability or catastrophic events;

· the novel coronavirus (“COVID-19”) and its potential impact on our business; and

· natural events such as severe weather, fires, floods and earthquakes, or man-made or other disruptions of our operating systems, structures or equipment.

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A “Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and under Part II, Item 1.A “Risk Factors” contained in this report on Form 10-Q. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

3

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SharpSpring, Inc.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
	2020			2019
Assets
Cash and cash equivalents	$	15,286,895		$	11,881,949
Accounts receivable, net of allowance for doubtful accounts of $56,833 and $12,455 at June 30, 2020 and December 31, 2019, respectively		448,016			340,344
Unbilled receivables		1,134,432			998,048
Income taxes receivable		42,179			15,010
Other current assets		1,203,445			1,363,366
Total current assets		18,114,967			14,598,717
Property and equipment, net		2,336,154			1,996,722
Goodwill		10,925,003			10,922,814
Intangibles, net		4,321,453			4,658,000
Deferred income taxes		5,520			-
Right-of-use assets		8,756,920			5,281,530
Other long-term assets		579,015			549,022
Total assets	$	45,039,032		$	38,006,805
Liabilities and Shareholders’ Equity
Accounts payable	$	1,931,572		$	2,052,538
Accrued expenses and other current liabilities		631,042			919,089
Line of credit		1,900,000			-
Deferred revenue		659,650			860,820
Income taxes payable		73,483			13,944
Lease liability, current portion		685,876			370,340
Notes payable, current portion		1,493,024			-
Total current liabilities		7,374,647			4,216,731
Lease liability, net of current portion		8,172,482			4,976,727
Notes payable, net of current portion		1,906,475			-
Total liabilities		17,453,604			9,193,458
Commitments and contingencies (Note 15)		-			-
Shareholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at June 30, 2020 and December 31, 2019		-			-
Common stock, $0.001 par value, Authorized shares-50,000,000; issued shares- 11,554,720 at June 30, 2020 and 11,537,163 at December 31, 2019; outstanding shares- 11,534,720 at June 30, 2020 and 11,517,163 at December 31, 2019		11,555			11,537
Additional paid in capital		59,587,378			58,851,285
Accumulated other comprehensive loss		(230,362	)		(224,793	)
Accumulated deficit		(31,699,143	)		(29,740,682	)
Treasury stock		(84,000	)		(84,000	)
Total shareholders’ equity		27,585,428			28,813,347
Total liabilities and shareholders’ equity	$	45,039,032		$	38,006,805

See accompanying notes to the consolidated financial statements.

4

SharpSpring, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
Revenue	$	7,270,905		$	5,517,433		$	14,323,634		$	10,843,718
Cost of services		1,873,029			1,625,818			4,240,671			3,174,200
Gross profit		5,397,876			3,891,615			10,082,963			7,669,518
Operating expenses:
Sales and marketing		2,395,100			2,865,610			5,429,222			5,873,813
Research and development		1,484,890			1,217,981			3,063,029			2,476,709
General and administrative		2,244,560			1,935,291			4,658,401			4,162,966
Intangible asset amortization		183,746			95,250			336,547			190,500
Total operating expenses		6,308,296			6,114,132			13,487,199			12,703,988
Operating loss		(910,420	)		(2,222,517	)		(3,404,236	)		(5,034,470	)
Other expense, net		(2,777	)		(41,966	)		(59,556	)		(146,093	)
Loss on induced conversion		-			(2,162,696	)		-			(2,162,696	)
Gain on embedded derivative		-			189,776			-			214,350
Loss before income taxes		(913,197	)		(4,237,403	)		(3,463,792	)		(7,128,909	)
Provision (benefit) for income taxes		57,187			787			(1,505,331	)		3,126
Net loss	$	(970,384	)	$	(4,238,190	)	$	(1,958,461	)	$	(7,132,035	)
Basic net loss per share	$	(0.08	)	$	(0.41	)	$	(0.17	)	$	(0.75	)
Diluted net loss per share	$	(0.08	)	$	(0.41	)	$	(0.17	)	$	(0.75	)
Shares used in computing basic net loss per share		11,529,324			10,296,041			11,525,258			9,568,161
Shares used in computing diluted net loss per share		11,529,324			10,296,041			11,525,258			9,568,161
Other comprehensive income (loss):
Foreign currency translation adjustment, net		3,258			2,806			(5,569	)		1,433
Comprehensive loss	$	(967,126	)	$	(4,235,384	)	$	(1,964,030	)	$	(7,130,602	)

See accompanying notes to the consolidated financial statements.

5

SharpSpring, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

								Accumulated
					Additional			Other
	Common Stock				Paid in			Comprehensive			Treasury Stock					Accumulated
	Shares		Amount		Capital			Loss			Shares		Amount			Deficit			Total
Balance, 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
Issuance of common stock for cash		60,648		61		302,692			-			-		-			-			302,753
Issuance of common stock for director services		1,952		2		37,418			-			-		-			-			37,420
Issuance of common stock for other non-employee services		14,772		15		(15	)		-			-		-			-			-
Issuance of common stock for warrant conversions		1,241,635		1,242		10,621,474			-			-		-			-			10,622,716
Foreign currency translation adjustment, net		-		-		-			2,806			-		-			-			2,806
Net loss		-		-		-			-			-		-			(4,238,191	)		(4,238,191	)
Balance, June 30, 2019		10,965,794	$	10,966	$	53,211,881		$	(229,619	)		20,000	$	(84,000	)	$	(24,484,741	)	$	28,424,486
Balance, March 31, 2020		11,545,957		11,546		59,206,549			(233,620	)		20,000		(84,000	)		(30,728,759	)		28,171,715
Stock based compensation - stock options		-		-		323,722			-			-		-			-			323,722
Issuance of common stock for cash		3,155		3		12,285			-			-		-			-			12,289
Issuance of common stock for services		4,824		5		46,692			-			-		-			-			46,696
Issuance of common stock under stock plans, net of shares withheld for employee taxes		784		1		(1,870	)		-			-		-			-			(1,869	)
Foreign currency translation adjustment		-		-		-			3,258			-		-			-			3,258
Net Loss		-		-		-			-			-		-			(970,384	)		(970,384	)
Balance, June 30, 2020		11,554,720	$	11,555	$	59,587,378		$	(230,362	)		20,000	$	(84,000	)	$	(31,699,143	)	$	27,585,428
Balance, December 31, 2018		8,639,139	$	8,639	$	30,446,838		$	(231,053	)		20,000	$	(84,000	)	$	(17,352,706	)	$	12,787,718
Stock based compensation - stock options		-		-		493,699			-			-		-			-			493,699
Issuance of common stock for cash		1,065,892		1,066		11,577,996			-			-		-			-			11,579,062
Issuance of common stock for director services		4,356		4		71,889			-			-		-			-			71,893
Issuance of common stock for warrant conversions		14,772		15		(15	)		-			-		-			-			-
Issance of commons stock for settlement of notes		1,241,635		1,242		10,621,474			-			-		-			-			10,622,716
Foreign currency translation adjustment		-		-		-			1,433			-		-			-			1,433
Net Loss		-		-		-			-			-		-			(7,132,035	)		(7,132,035	)
Balance, June 30, 2019		10,965,794	$	10,966	$	53,211,881		$	(229,619	)		20,000	$	(84,000	)	$	(24,484,741	)	$	28,424,486
Balance, December 31, 2019		11,537,163		11,537		58,851,285			(224,793	)		20,000		(84,000	)		(29,740,682	)		28,813,347
Stock based compensation - stock options		-		-		663,078			-			-		-			-			663,078
Issuance of common stock for cash		4,660		5		23,457			-			-		-			-			23,462
Issuance of common stock for services		7,504		8		77,965			-			-		-			-			77,972
Issuance of common stock under stock plans, net of shares withheld for employee taxes		5,393		5		(28,407	)		-			-		-			-			(28,402	)
Foreign currency translation adjustment		-		-		-			(5,569	)		-		-			-			(5,569	)
Net Loss		-		-		-			-			-		-			(1,958,461	)		(1,958,461	)
Balance, June 30, 2020		11,554,720	$	11,555	$	59,587,378		$	(230,362	)		20,000	$	(84,000	)	$	(31,699,143	)	$	27,585,428

See accompanying notes to the consolidated financial statements.

6

SharpSpring, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	June 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(1,958,461	)	$	(7,132,035	)
Adjustments to reconcile loss from operations:
Depreciation and amortization		774,140			471,518
Amortization of costs to acquire contracts		404,767			431,757
Non-cash stock compensation		741,051			565,592
Deferred income taxes		(5,504	)		-
Gain on disposal of property and equipment		-			(617	)
Non-cash interest		-			139,372
Amortization of debt issuance costs and embedded derivative		-			2,903
Gain on embedded derivative		-			(214,350	)
Loss on induced conversion		-			2,162,696
Unrealized foreign currency loss		109,928			17,126
Changes in assets and liabilities:
Accounts receivable		(106,260	)		(25,294	)
Unbilled receivables		(133,315	)		(138,819	)
Right-of-use assets		(3,475,390	)		213,933
Other assets		(279,099	)		(416,276	)
Income taxes, net		33,639			(28,562	)
Accounts payable		(120,934	)		(78,830	)
Lease liabilities		3,511,291			(185,575	)
Other liabilities		(288,041	)		(87,300	)
Deferred revenue		(201,893	)		65,612
Net cash used in operating activities		(994,081	)		(4,237,149	)
Cash flows from investing activities
Purchases of property and equipment		(352,900	)		(239,530	)
Proceeds from the sale of property and equipment		-			617
Capitalization of software development costs		(424,124	)		(372,574	)
Net cash used in investing activities		(777,024	)		(611,487	)
Cash flows used in financing activities:
Proceeds from line of credit		1,900,000			-
Proceeds from note payable		3,399,500			-
Proceeds from exercise of stock options, net		23,462			906,617
Proceeds from issuance of common stock, net		-			10,649,005
Payments for taxes related to net share settlement of equity awards		(28,402	)		-
Net cash provided by financing activities		5,294,560			11,555,622
Effect of exchange rate on cash		(118,509	)		(30,186	)
Change in cash and cash equivalents		3,404,946			6,676,800
Cash and cash equivalents, beginning of period		11,881,949			9,320,866
Cash and cash equivalents, end of period	$	15,286,895		$	15,997,666
Supplemental information on consolidated statements of cash flows:
Cash received during the period for
Interest, net	$	(19,255	)	$	-
Income taxes, net		(1,533,467	)		-
Non-cash activities
Right-of-use asset obtained for lease liability	$	3,758,014		$	5,715,510
Convertible notes liability relieved upon conversion	$	-			8,484,701
Embedded derivative liability relieved upon conversion	$	-			189,776

See accompanying notes to the consolidated financial statements.

7

SharpSpring, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Organization

SharpSpring, Inc. (the “Company”) provides a cloud-based marketing automation solution and a display retargeting platform through our SharpSpring and Perfect Audience products. SharpSpring is designed to increase the rates at which businesses generate leads and convert leads to sales opportunities by improving the way businesses communicate with customers and prospects. Perfect Audience empowers marketers to create, manage, and optimize their ad campaigns across thousands of websites. Our products are marketed directly by us and through a small group of reseller partners to customers around the world.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of our management, the Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2019, and these consolidated financial statements include all adjustments consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. The Company’s consolidated financial statements include the accounts of SharpSpring, Inc. and our subsidiaries (the “Company”). The Company’s consolidated financial statements reflect the elimination of all significant inter-company accounts and transactions. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2020.

The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2020, as amended on April 30, 2020.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

8

Operating Segments

The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s chief executive officer, in deciding how to allocate resources and assess performance. The Company’s CODM evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. The Company does not present geographical information about revenues because it is impractical to do so.

Foreign Currencies

The functional currency of the Company’s foreign subsidiaries is the local currency. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at the average exchange rates during the period. Foreign currency translation gains and losses are recorded in other comprehensive income (loss).

Cash and Cash Equivalents

Cash equivalents are short-term, liquid investments with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed by major financial institutions and at most times are in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits.

Fair Value of Financial Instruments

U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, deposits, embedded derivatives (associated with our convertible notes) and accounts payable. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these items. The fair value of the embedded derivatives associated with our convertible notes are calculated using Level 3 unobservable inputs, utilizing a probability-weighted expected value model to determine the liability. The fair value of the embedded derivatives at June 30, 2020, and December 31, 2019, was a liability balance of zero for each period. The change in fair value for the three months ended June 30, 2020, and 2019, was zero and a gain of $0.19 million, respectively. The change in fair value for the six months ended June 30, 2020, and 2019, was zero and a gain of $0.21 million, respectively.

9

Accounts Receivable

Accounts receivable are carried at the original invoiced amount less an allowance for doubtful accounts based on the probability of future collection. Management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. The Company reserves for receivables that are determined to be uncollectible, if any, in its allowance for doubtful accounts. After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance. In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition are met, thus creating a contract asset. A portion of our accounts receivable balance is therefore unbilled at each balance sheet date and is reflected as such on the consolidated balance sheet.

Business Combinations

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.

Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:

· future expected cash flows from customer contracts and acquired developed technologies and patents;

· the acquired company’s trade name, vendor relationships, and customer relationships, as well as assumptions about the period of time the acquired trade name will continue to be used in our offerings; and

· discount rates.

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Intangibles

Finite-lived intangible assets include trade names, developed technologies, customer relationships, and vendor relationships, and are amortized based on the estimated economic benefit over their estimated useful lives, with original periods ranging from 5 to 11 years. We regularly evaluate the reasonableness of the useful lives of these assets. Finite-lived intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. Impairment losses are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments, and the fair value of an asset group. The dynamic economic environment in which the Company operates, and the resulting assumptions used to estimate future cash flows impact the outcome of these impairment tests.

10

Goodwill and Impairment

As of June 30, 2020, and December 31, 2019, we had recorded goodwill of $10.92 million. Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in the SharpSpring, GraphicMail, and Perfect Audience acquisitions. Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, “Intangibles - Goodwill and Other” deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests, and tests between annual tests in certain circumstances, based on estimated fair value in accordance with FASB ASC 350-10, and written down when impaired.

Debt Issuance Costs

Third-party costs associated with the issuance of debt are included as a direct reduction to the carrying value of the debt and are amortized to interest expense ratably over the life of the debt.

Income Taxes

Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, Simplifying the Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the consolidated financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. There are no material uncertain tax positions taken by the Company on its tax returns. Tax years subsequent to 2017 remain open to examination by U.S. federal and state tax jurisdictions

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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 June 30, 2020, the Company’s Swiss subsidiary, InterInbox SA is under examination by the Switzerland Federal Tax Administration for withholding taxes for the years 2015 through 2018. The Company does not expect any material adjustments as a result of the audit.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of the assets. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation expense related to property and equipment was $ million and $ million for the three months ended June 30, 2020, and 2019, respectively. Depreciation expense related to property and equipment was $ million and $ million for the six months ended June 30, 2020, and 2019, respectively.

Property and equipment as of June 30, 2020 and December 31, 2019, is as follows:

	June 30,			December 31,
	2020			2019
Property and equipment, gross:
Leasehold improvements	$	300,619		$	290,977
Furniture and fixtures		913,370			678,774
Computer equipment and software		2,883,544			2,350,758
Total		4,097,533			3,320,509
Less: Accumulated depreciation		(1,761,379	)		(1,323,787	)
	$	2,336,154		$	1,996,722

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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 generates revenue from contracts with multiple performance obligations, which typically include subscriptions to its cloud-based marketing automation software and professional services which include on-boarding and training services. The Company’s customers do not have the right to take possession of the software. Substantially all of SharpSpring’s revenue is from contracts with customers. The Company recognizes revenue from contracts with customers using a five-step model as prescribed under ASC 606, which is described below:

• Identify the customer contract;

• Identify performance obligations that are distinct;

• Determine the transaction price;

• Allocate the transaction price to the distinct performance obligations; and

• Recognize revenue as the performance obligations are satisfied.

1) Identify the customer contract

A customer contract is generally identified when the Company and a customer have executed arrangement that calls for the Company to provide access to its software or provide professional services in exchange for consideration from the customer.

2) Identify performance obligations that are distinct

A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. The Company has determined that subscriptions for its software is distinct because, once a customer has access to the software it purchased, the software is fully functional and does not require any additional development, modification, or customization. Professional services sold are distinct because the customer benefits from the on-boarding and training to make better use of the online software products it purchased.

3) Determine the transaction price

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies. The Company estimates any variable consideration to which it will be entitled at contract inception, when determining the transaction price. The Company does not include variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will occur when any uncertainty associated with the variable consideration is resolved.

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4) Allocate the transaction price to the distinct performance obligations

The transaction price is allocated to each performance obligation based on the relative standalone selling prices of the goods or services being provided to the customer.

5) Recognize revenue as the performance obligations are satisfied

Revenues are recognized when or as control of the promised goods or services is transferred to customers. Revenue from the SharpSpring Marketing Automation and Mail+ software is recognized ratably over the subscription period, which is typically one month. Revenue related to our professional services is recognized as the services are provided. SharpSpring’s subscription contracts range from one to twelve months. The Company recognizes revenue from on-boarding and training services as the services are provided, which is generally over 60 days. The Perfect Audience software is utilized on an as needed basis, and the related revenue recognized as the service is provided. Cash payments received in advance of providing subscription or services are recorded to deferred revenue until the performance obligation is satisfied.

Our products are billed in arrears or upfront, depending on the product, which creates contract assets (unbilled receivables) and contract liabilities (deferred revenue), respectively. Unbilled receivables occur due to unbilled charges for which the Company has satisfied performance obligations. Deferred revenues occur due to billing up front for charges that the Company has not yet fully satisfied all performance obligations. Both contract assets and liabilities are recognized as it is used.

From time to time, the Company offers refunds to customers and experiences credit card chargebacks relating to cardholder disputes that are commonly experienced by businesses that accept credit cards. The Company makes estimates for refunds and credit card chargebacks based on historical experience.

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Gross Versus Net Revenue

ASC 606 provides guidance on proper recognition of principal versus agent considerations which is used to determine gross versus net revenue recognition. Under ASC 606, the core objective of the guidance on gross versus net revenue recognition is to help determine whether an entity is a principal or an agent in a transaction. In general, the primary difference between these two is the performance obligation being satisfied. The principal has a performance obligation to provide the desired goods or services to the end customer, whereas the agent arranges for the principal to provide the desired goods or services. Additionally, a fundamental characteristic of a principal in a transaction is control. A principal substantively controls the goods and services before they are transferred to the customer as well as controls the price of the good or service being provided. An agent normally receives a commission or fee for these activities. In addition to control, the level at which an entity controls the price of the good or service being transferred determines principal versus agent status. The more discretion over setting price a company has in providing the good or service, the more likely they are considered a principal rather than an agent.

Under the guidance when another party is involved in providing a good or service to a customer, an entity is a principal if the entity obtains control of the asset or right to a service performed by the other party. For Perfect Audience, SharpSpring never takes possession or control of the advertising space and acts an agent facilitating the customer with the desired advertisement inventory from the principal provider. In addition to the lack of control of the advertising inventory, SharpSpring does not have control over the cost of the advertising inventory, but rather only receives a fee for services for providing the advertising inventory to the customer, further demonstrating SharpSpring’s role as the agent in the transaction. Therefore, as an agent in the retargeting transaction SharpSpring records revenue net of the cost of advertising inventory cost incurred for placing advertisements on websites.

Deferred Revenue

Deferred revenue consists of payments received in advance of the Company providing the services. Deferred revenue is earned over the service period identified in each contract. Most our deferred revenue balances (contract liabilities) arise from payments from customers in advance of service on a periodic basis (such as monthly, quarterly, annually, or bi-annually). In situations where a customer pays in advance, the deferred revenue is recognized over the service period defined in the contract. Additionally, the Company has deferred revenue related to implementation fees for its SharpSpring Marketing Automation solution that are paid in advance. These implementation services are typically performed over a 60-day period, and the revenue is recognized over that period. As of March 31, 2020, and 2019, the Company had deferred revenue balances of $0.77 million and $0.29 million, respectively. Deferred revenue decreased by $0.11 million and increased by $0.03 million during the three months ended June 30, 2020, and 2019, respectively. Deferred revenue balances were $0.86 million and $0.25 million as of December 31, 2019, and 2018, respectively. Deferred revenue decreased by $0.2 million and increased by $0.07 million during the six months ended June 30, 2020, and 2019, respectively. The Company had deferred revenue contract liability balances of $0.66 million and $0.32 million as of June 30, 2020, and June 30, 2019, respectively.

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Unbilled Receivables

In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition are met, thus creating a contract asset (unbilled receivable). As of March 31, 2020, and 2019, the Company had unbilled receivables of $1.09 million and $0.83 million, respectively. Substantially all of these services were billed during the three months ended June 30, 2020 and 2019, respectively. Unbilled receivable balances increased by $0.04 million and increased by $0.05 million during the three months ended June 30, 2020, and 2019, respectively. The unbilled receivable balances as of December 31, 2019, and 2018 were $1.0 million and $0.74 million, respectively. Unbilled receivable balances increased by $0.13 million and increased by $0.14 million during the six months ended June 30, 2020, and 2019, respectively. As of June 30, 2020, and 2019, the Company had unbilled receivables of $1.13 million and $0.88 million, respectively. These unbilled balances were the result of services provided in period, but not yet billed to the customer.

Notes Payable - SBA Paycheck Protection Program Loan

We account for loans obtained under the Paycheck Protection Program in Section 1102 of the CARES Act (Note 7) as debt pursuant to FASB ASC 470 - Debt, which requires the loan to be recognized as a liability. The loan accrues interest in accordance with FASB ASC 835-30 - Interest – Imputation of Interest, which states that since the loan is prescribed by a government agency, it does not impute interest at the market rate even though it is higher than the stated rate.

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 June 30, 2020, and December 31, 2019, the Company had cash balances at financial institutions that exceed federally insured limits. The Company maintains its cash balances with accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

There were no customers that accounted for more than 10% of total revenue 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.

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Advertising Costs

The Company expenses advertising costs as incurred. Advertising and marketing expenses, excluding marketing team costs, were $0.49 million and $1.49 million for the three months ended June 30, 2020, and 2019, respectively. Advertising and marketing expenses, excluding marketing team costs, were $1.68 million and $3.03 million for the six months ended June 30, 2020, and 2019, respectively.

Capitalized Cost of Obtaining a Contract

The Company capitalizes certain sales commission costs which are incremental to obtaining a contract. The Company expenses costs that are related to obtaining a contract but are not incremental such as other sales and marketing costs and other costs that would be incurred regardless of if the contract was obtained. Capitalized costs are amortized using straight-line amortization over the estimated weighted average life of the customer, which for the 3 months ended June 30, 2020 and 2019 was approximately 3 years. At June 30, 2020, the net carrying value of the capitalized cost of obtaining a contract was $1.24 million, of which $0.69 million is included in other current assets and $0.55 million is included in other long-term assets. At December 31, 2019, the net carrying value of the capitalized cost of obtaining a contract was $1.20 million, of which $0.68 million is included in other current assets and $0.52 million is included in other long-term assets. The Company amortized expenses for the costs of obtaining contracts of $0.20 million and $0.23 million for the three months ended June 30, 2020, and 2019, respectively. The Company amortized expenses for the costs of obtaining contracts of $0.40 million and $0.43 million for the six months ended June 30, 2020, and 2019, respectively.

Stock Compensation

We account for stock-based compensation in accordance with FASB ASC 718 Compensation — Stock Compensation, which requires companies to measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. The Company also provides stock-based compensation to non-employee directors which are treated as employees for the purpose of stock-based compensation in accordance with ASC 718. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potentially dilutive common stock equivalents for the period. For purposes of this calculation, options to purchase common stock, unvested restricted stock units, warrants, and the conversion option of the Convertible Notes (Note 6) are potential common shares outstanding. Since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s potential common shares outstanding were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive.

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Comprehensive Loss

Comprehensive 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 Financial Accounting Standards Board (“FASB”) issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under previous guidance, Step 2 of the goodwill impairment test required entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value was recognized as goodwill impairment. Under the new guidance, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The guidance was adopted effective January 1, 2020 and did not have a material impact on the consolidated financial statements.

In December 2019, the FASB issued guidance simplifying the accounting for income taxes. The new accounting guidance removes (i) the exception to the incremental approach for intra-period tax allocations when there is a loss from continuing operations and income or gain from other items such as discontinued operation or other comprehensive income, (ii) the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, (iii) the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and (iv) the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

The new accounting guidance also simplifies the accounting for income taxes by (i) requiring an entity to recognize franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (ii) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, (iii) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, (iv) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, and (v) making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

This standard is effective for fiscal and interim periods beginning after December 15, 2020. The Company anticipates that the adoption of this standard will not have a material impact on its financial statements.

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Note 3: Acquisitions

On November 21, 2019, the Company acquired substantially all the assets and assumed certain liabilities of the Perfect Audience business unit from Marin Software Incorporated, a Delaware corporation for cash consideration of $4.6 million. The acquired assets and liabilities were assigned to SharpSpring’s wholly owned subsidiary SharpSpring Reach, Inc. Perfect Audience is a cloud-based platform that provides display retargeting software products and services. The transaction was structured as an asset purchase, whereby SharpSpring acquired all of Perfect Audience’s assets used in connection with the business (excluding certain pre-acquisition receivables, cash, and cash equivalents) and only liabilities pertaining to the business such as deferred revenue, accrued publisher costs, accrued bonuses for to the acquired workforce, and any liabilities accruing on or after November 21, 2019.

The allocation of the purchase price is based on management estimates and assumptions, and other information compiled by management, which utilized established valuation techniques appropriate for the industry. The valuation included a combination of the income approach and cost approach, depending upon which was the most appropriate based on the nature and reliability of the data available. The income approach is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. The cost approach considers the cost to replace (or reproduce) the asset and the effects on the assets value of physical, functional, and/or economic obsolescence that has occurred with respect to the asset.

The following represents the final allocation of the purchase price to the acquired net tangible and intangible assets acquired and liabilities assumed by SharpSpring:

Cash Consideration	$	4,566,402
Add:
Net tangible liabilities acquired
Deferred Revenue	$	186,500
Accrued expenses and other current liabilities	$	545,473
Total liabilities	$	731,973
Less:
Net tangible assets acquired
Accounts receivable	$	(55,236	)
Other current assets	$	(20,719	)
Total tangible assets	$	(75,955	)
Intangible assets acquired:
Trade names	$	(381,000	)
Technology	$	(979,000	)
Vendor relationships	$	(1,813,000	)
Total intangible assets	$	(3,173,000	)
Goodwill	$	2,049,420

Acquired intangible assets include developed technology and vendor relationships which are amortized over ten years. The acquired trade name assets have an indefinite life and will be tested for impairment at least annually.

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The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill of $2.05 million. Goodwill will not be amortized but instead tested for impairment at least annually (more frequently if certain indicators are present). Goodwill arose primarily as a result of the expected future growth of the Perfect Audience product and the assembled workforce. The transaction costs associated with the acquisition were approximately $0.18 million and were recorded in general and administrative expense.

The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement.

Note 4: Goodwill and Other Intangible Assets

Intangible assets are as follows:

	As of June 30, 2020
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Value
Amortized intangible assets:
Trade names	$	501,000		(120,000	)	$	381,000
Technology		3,109,000		(1,358,301	)		1,750,699
Customer relationships		1,320,000		(832,502	)		487,498
Vendor relationships		1,813,000		(110,744	)		1,702,256
Unamortized intangible assets:		6,743,000		(2,421,547	)		4,321,453
Goodwill							10,925,003
Total goodwill and intangible assets						$	15,246,456
	As of December 31, 2019
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Value
Amortized intangible assets:
Trade names	$	501,000		(120,000	)	$	381,000
Technology		3,109,000		(1,192,000	)		1,917,000
Customer relationships		1,320,000		(773,000	)		547,000
Vendor relationships		1,813,000		-			1,813,000
Unamortized intangible assets:		6,743,000		(2,085,000	)		4,658,000
Goodwill							10,922,814
Total goodwill and intangible assets						$	15,580,814

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Estimated amortization expense for the remainder of 2020 and subsequent years is as follows:

Remainder of 2020	$	305,600
2021		559,200
2022		507,200
2023		459,200
2024		420,200
Thereafter		1,689,053
Indefinite Lived		381,000
Total	$	4,321,453

Amortization expense for the three months ended June 30, 2020 and 2019 was $0.18 million and $0.10 million, respectively. Amortization expense for the six months ended June 30, 2020 and 2019 was $0.34 million and $0.19 million, respectively.

Note 5: Credit Facility

In March 2016, the Company entered into a $2.5 million revolving loan agreement (the “Credit Facility”) with Western Alliance Bank. The agreement originally matured on March 21, 2018 and was amended to mature on June 19, 2022. There are no mandatory amortization provisions and the Credit Facility is payable in full at maturity. As of June 30, 2020, the Credit Facility is collateralized by a lien on substantially all of the existing and future assets of the Company and secured by a pledge of 100% of the capital stock of SharpSpring Technologies, Inc. and a 65% pledge of the Company’s foreign subsidiaries’ stock. The Credit Facility subjects the Company to a number of restrictive covenants, including financial and non-financial covenants customarily found in loan agreements for similar transactions. The Credit Facility also restricts our ability to pay cash dividends on our common stock. As of June 30, 2020, the Credit Facility carried an interest rate of 5.0%. and there was $1.9 million Line of Credit outstanding under the Credit Facility. As December 31, 2019 there were no amounts outstanding. The interest expense relating to the Credit of Facility for three and six months ended June 30, 2020 and 2019 was $0.03 million and zero, respectively. No events of default have occurred.

Note 6: Convertible Notes

In March 2018, the Company issued $8.0 million five-year convertible notes (the “Notes”) with an interest rate of 5% “payable in kind”. SharpSpring received net proceeds from the offering of approximately $7.9 million after adjusting for debt issue costs, including financial advisory and legal fees. The Notes were unsecured obligations and were subordinate in right of payment to the Credit Facility (Note 5).

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The Notes were recorded upon issuance at amortized cost in accordance with applicable accounting guidance. As there was no difference in the amount recorded at inception and the face value of the Notes, interest expense was accreted at the stated interest rate under the terms of the Notes. Total interest expense related to the Notes was impacted by the amortization of the debt issuance cost using the effective interest method.

In accordance with generally accepted accounting principles for convertible debt certain features were determined to be “embedded derivatives” and were bifurcated from the Notes and separately accounted for on a combined basis at fair value as a single derivative. The fair value of the derivatives was zero as June 30, 2020. The derivative was accounted for at fair value, with subsequent changes in the fair value to be reported as part of other income (expense), net in the Consolidated Statement of Comprehensive Loss.

We incurred certain third-party costs in connection with our issuance of the Notes, principally related to financial advisory and legal fees, which were being amortized to interest expense ratably over the five-year term of the Notes. The following table sets forth total interest expense related to the Notes for the three and six months ended June 30, 2020, and 2019:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
Contractual interest paid-in-kind expense (non-cash)	$	-		$	43,373		$	-		$	139,372
Amortization of debt issuance costs (non-cash)		-			4,698			-			15,108
Amortization of embedded derivative (non-cash)		-			(3,795	)		-			(12,205	)
Total interest expense	$	-		$	44,276		$	-		$	142,275
Effective interest rate		0.0	%		4.9	%		0.0	%		4.9	%

On May 9, 2019, the Company entered into and made effective a Note Conversion Agreement (the “Conversion Agreement”) with SHSP Holdings, LLC (“SHSP Holdings”) and Evercel Holdings, LLC (“Evercel,” and together with SHSP Holdings, the “Investor”), pursuant to which the parties agreed to the conversion (the “Conversion”) of the Notes. The Company’s entry into the Conversion Agreement was unanimously approved by the disinterested members of the Company’s Board of Directors.

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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 induced conversion of debt of $2.2 million. The loss was measured as the excess fair value of the shares issued under the modified conversion, compared to the fair value of the shares that would have been issued under an unmodified conversion as of the measurement date. Level 1 inputs were used to determine the fair value of the shares paid to the Investor. The loss on conversion was partially offset by a gain of approximately $0.19 million from the write-off of the embedded derivative liability.

The Convertible Notes had a net carrying value of zero for June 30, 2020 and December 31, 2019, respectively.

Note 7: SBA Paycheck Protection Program Loan

In April, 2020 SharpSpring entered into two loan agreements with United States Small Business Administration under the Paycheck Protection Program for a total loan amount of $3.4 million, (“SBA Loan”). The SBA Loan has a maturity date of 2 years from the initial disbursement and carries an interest rate of 1% per year. Principal and interest payments begin 7 months from the initial date of disbursement. The SBA Loan is eligible for forgiveness as part of the CARES Act approved by US Congress on March 19, 2020 if certain requirements are met. The Company continues to evaluate and monitor the requirements of the CARES Act that allow for forgiveness. The accrued interest expense relating these loans for three and six months ended June 30, 2020 and 2019 was approximately $7,000 and zero, respectively. As of June 30, 2020, the SBA loan had an outstanding principle balance of $3.4 million included in notes payable.

	Debt Obligation
2020	$	360,703
2021		2,270,259
2022		768,537
Total Commitments	$	3,399,499

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Note 8: 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 square feet of office space located on the same premises as the 2018 Lease. In May 2020, the Company took possession of the full space included in the 2019 addendum, accounting for approximately an additional 18,000 square feet. The rent expense and future payments associated with the additional square feet are included in the future minimum lease payments table below. The additional space resulted in an increased lease liability and right-of-use asset of approximately $3.8 million. The term of the addendum extends through the same period as the 2018 Lease. We do not assume renewals in our determination of lease term unless the renewals are deemed to be reasonably assured at lease commencement. The Company continues to evaluate the likelihood of renewal of the 2018 Lease and 2019 Addendum. At the commencement of the 2018 Lease nor subsequently thereafter, renewal has not been reasonably assured.

Determination of whether a contract contains a lease is determined at execution of the contract based on the facts of each contract. The Company elected the package of practical expedients permitted under ASC 842 which allows us to carryforward historical lease classification, assessment on whether a contract was or contains a lease, and initial direct costs for any leases that existed prior to adoption of the standard. The Company has lease agreements with lease and non-lease components, which it has elected to combine for all leases. In addition, the Company does not recognize right-of-use assets or lease liabilities for leases with a term of 12 months or less (“Short-term” leases). Short-term lease payments are recognized in the consolidated statements of comprehensive loss on a straight-line basis over the lease term. The Company is not party to any financing lease.

The weighted average remaining lease term as of June 30, is 8.3 years. The weighted average discount rate for our operating leases as of June 30, 2020 is 6.5%. The discount rate of each lease is determined by the company’s incremental borrowing rate at the time of a lease contract. The lease cost associated with short-term leases for the three months and six month ended June 30, 2020, and 2019, were zero for both periods.

	Operating Leases
Remainder of 2020		644,946
2021		1,321,598
2022		1,329,525
2023		1,369,159
2024		1,377,086
Thereafter		5,525,881
Total undiscounted cash flows	$	11,568,195
Less imputed interest remaining		(2,709,837	)
Present value of lease liability	$	8,858,358

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Note 9: Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents for the period. For purposes of this calculation, options to purchase common stock, warrants, restricted stock units (“RSUs”) and the conversion option of the Convertible Notes (Note 6) are considered to be potential common shares outstanding.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
Net loss	$	(970,384	)	$	(4,238,190	)	$	(1,958,461	)	$	(7,132,035	)
Basic weighted average common shares outstanding		11,529,324			10,296,041			11,525,258			9,568,161
Add incremental shares for:
Warrants		-			-			-			-
Stock options		-			-			-			-
Restricted stock units (RSUs)		-			-			-			-
Convertible notes		-			-			-			-
Diluted weighted average common shares outstanding		11,529,324			10,296,041			11,525,258			9,568,161
Net loss per share:
Basic	$	(0.08	)	$	(0.41	)	$	(0.17	)	$	(0.75	)
Diluted	$	(0.08	)	$	(0.41	)	$	(0.17	)	$	(0.75	)

Additionally, since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s outstanding warrants, stock options, unvested restricted stock units, and convertible notes were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table contains all potentially dilutive common stock equivalents:

	Three and Six Months Ended
	June 30,
	2020		2019
Warrants		-		-
Convertible notes		-		-
Stock options		1,690,728		1,337,486
Restricted stock units (RSUs)		78,706		-
Total		1,769,434		1,337,486

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Note 10: Income Taxes

The income tax expense we record in any interim period is based on our estimated effective tax rate for the year for each jurisdiction that we operate in. The calculation of our estimated effective tax rate requires an estimate of pre-tax income by tax jurisdiction, as well as total tax expense (benefit) for the fiscal year. Accordingly, this tax rate is subject to adjustment if, in subsequent interim periods, there are changes to our initial estimates of total tax expense (benefit), pre-tax income (loss), or pre-tax income (loss), by jurisdiction.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into the law. The CARES Act contained many income tax relief provisions including allowing for a 5-year carryback of Federal net operating losses generated in tax years beginning in 2018, 2019, or 2020. As required under U.S. GAAP, the effects of tax law changes are recognized in the period of enactment. Accordingly, we have recorded incremental income tax benefit in the amount of $1.6 million associated with the CARES Act related to the carryback of the Company’s 2018 federal net operating loss.

During the three months ended June 30, 2020, and 2019, the Company recorded income tax expense of $57,187 and income tax expense of $787, respectively, from operations. During the six months ended June 30, 2020, and 2019, the Company recorded income tax benefit of $1,505,331 and income tax expense of $3,126, respectively, from operations. The blended effective tax rate for the six months ending June 30, 2020, and 2019, was 43.5% and -0.1%, respectively. The effective blended tax rate varies from our statutory U.S. tax rate due to valuation allowances on losses, utilization of net operating loss carryforward in the quarter ended March 31, 2020, 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 to reduce cash tax payments in the future to the extent that we generate taxable income prior to expiration.

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At June 30, 2020 and December 31, 2019, we have established a valuation allowance of $6.5 million and $7.0 million, respectively, against certain deferred tax assets given the uncertainty of recoverability of these amounts.

Note 11: Defined Contribution Retirement Plan

We offer our U.S. employees the ability to participate in a 401(k) plan. Eligible U.S. employees could contribute up to 100% of their eligible compensation, subject to limitations established by the Internal Revenue Code. Through April 30, 2020, the Company contributed a matching contribution equal to 100% of each such participant’s contribution up to the first 3% of their annual eligible compensation. We charged $0.03 million and $0.08 million to expense in the three months ended June 30, 2020, and 2019, respectively, associated with our matching contribution in those periods. We charged $0.12 million and $0.15 million to expense in the six months ended June 30, 2020, and 2019, respectively, associated with our matching contribution in those periods.

Note 12: Stock-Based Compensation

From time to time, the Company grants stock option and restricted stock units awards to officers and employees and grants stock awards to directors as compensation for their service to the Company.

In November 2010, the Company adopted the 2010 Stock Incentive Plan (the “2010 Plan”) which was restated in its entirety in August 2018. As amended, up to 2,600,000 shares of common stock are available for issuance under the Plan. The Plan provides for the issuance of stock options and other stock-based awards. The 2010 Plan expired on June 14, 2020 (except as to options outstanding as of this date).

In April 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). Upon adoption of the 2019 Plan no additional awards were granted under the 2010 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.

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Stock Options

Stock option awards under the 2010 Plan and 2019 Plan (the “Plans”) have a 10 -year maximum contractual term and, subject to the provisions regarding Ten Percent Shareholders, must be issued at an exercise price of not less than 100% of the fair market value of the common stock at the date of grant. The Plans are administered by the Board of Directors, which has the authority to determine to whom options may be granted, the period of exercise, and what other restrictions, if any, should apply. Vesting for awards granted to date under the Plans is principally over four years from the date of the grant, with 25% of the award vesting after one year and monthly vesting thereafter.

Option awards are valued based on the grant date fair value of the instruments, net of estimated forfeitures, using a Black-Scholes option pricing model with the following assumptions:

	Six Months Ended
	June 30,
	2020	2019
Volatility	52%-56%	49% - 50%
Risk Free Interest Rate	0.37% - 1.66%	2.27% - 2.59%
Expected term	6.25 years	6.25 years

The weighted average grant date fair value of stock options granted during the six months ended June 30, 2020, and 2019, was $5.12 and $7.26, respectively.

For grants prior to January 1, 2015, the volatility assumption was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. For all grants subsequent to January 1, 2015, the volatility assumption reflects the Company’s historic stock volatility for the period of February 1, 2014 forward, which is the date the Company’s stock began actively trading. The risk-free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.

Stock option awards are expensed on a straight-line basis over the requisite service period. During the three months ended June 30, 2020, and 2019, the Company recognized an expense of $0.26 million and $0.22 million, respectively, associated with stock option awards. During the six months ended June 30, 2020, and 2019, the Company recognized an expense of $0.47 million and $0.49 million, respectively, associated with stock option awards. At June 30, 2020, future stock compensation expense associated with stock options (net of estimated forfeitures) not yet recognized was $2.88 million and will be recognized over a weighted average remaining vesting period of 2.74 years. The following summarizes stock option activity for the three months ended June 30, 2020:

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				Weighted		Weighted		Aggregate
	Number of			Average		Average Remaining		Intrinsic
	Options			Exercise Price		Contractual Life		Value
Outstanding at December 31, 2019		1,470,406		$	7.30		7.5	$	6,604,461
Granted		449,605			9.93
Exercised		(3,785	)		4.17
Expired		(25,000	)		12.40
Forfeited		(200,498	)		11.75
Outstanding at June 30, 2020		1,690,728		$	7.40		7.5	$	3,816,073
Exercisable at June 30, 2020		895,974		$	5.65		6.2	$	3,102,335

The total intrinsic value of stock options exercised during the three months ended June 30, 2020, and 2019, were $0.02 million and $0.7 million, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2020, and 2019, were $0.02 million and $1.89 million, respectively.

Restricted Stock Units

During the three months ended June 30, 2020, and 2019, the Company granted zero Restricted Stock Units (RSUs) under the 2019 Plan. During the six months ended June 30, 2020, and 2019, the Company granted 35,875 and zero RSUs, respectively. RSUs having a value equal to the fair market value of an identical number of shares of Common Stock, which may, but need not, provide that such restricted award may not be sold, assigned, transferred or otherwise disposed of, pledged or hypothecated as collateral for a loan or as security for the performance of any obligation or for any other purpose for a period determined by the Board of Directors. The 2019 Plan is administered by the Board of Directors, which has the authority to determine to whom RSUs may be granted, the period of exercise, and what other restrictions, if any, should apply. Vesting for awards granted to date under the 2019 Plan is generally over four years from the date of the grant, with 25% of the award vesting after one year and monthly vesting thereafter.

RSUs are expensed on a straight-line basis over the requisite vesting period. During the three months ended June 30, 2020, and 2019, the Company recognized expense of approximately $0.07 million and zero, respectively, associated with RSUs. During the six months ended June 30, 2020, and 2019, the Company recognized expense of approximately $0.19 million and zero, respectively, associated with RSUs. At June 30, 2020, future stock compensation expense associated with RSUs (net of estimated forfeitures) not yet recognized was approximately $0.68 million and will be recognized over a weighted average remaining vesting period of 2.99 years. The following summarizes RSU activity for the period ended June 30, 2020:

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				Weighted
				Average
				Grant Date
	Number of			Fair Value
	Units			Per Share
Unvested at December 31, 2019		50,494		$	11.82
Granted		35,875			12.39
Vested		(7,663	)		12.39
Cancelled		-			-
Unvested at June 30, 2020		78,706		$	12.02

Stock Awards

During the three months ended June 30, 2020, and 2019, the Company issued 21,159 and 1,952 shares, respectively. The total shares were composed of 4,824 and 1,952 shares issued to non-employee directors as compensation for their service on the board, 16,335 and zero shares issued to employees for service during the three months ended June 30, 2020, and 2019, respectively. During the six months ended June 30, 2020, and 2019, the Company issued 23,839 and 4,356 shares, respectively The total shares were composed of 7,504 and 4,356 shares issued to non-employee directors as compensation for their service on the board, 16,335 and zero shares issued to employees for service during the six months ended June 30, 2020, and 2019, respectively. Non-employee Stock awards shares are immediately vested. Employee Stock award shares are vested principally over two years from the date of the grant, with 50% of the award vesting after one year and monthly vesting thereafter.

Stock awards are valued based on the closing price of our common stock on the date of grant, and compensation cost is recorded immediately if there is no vesting period or on a straight-line basis over the vesting period. The total fair value of stock awards granted, vested and expensed during the three months ended June 30, 2020, and 2019, was $0.05 million and $0.04 million, respectively. The total fair value of stock awards granted, vested and expensed during the six months ended June 30, 2020, and 2019, was $0.08 million and $0.07 million, respectively. At June 30, 2020, future stock compensation expense associated with stock awards (net of estimated forfeitures) not yet recognized was approximately $0.12 million and will be recognized over a weighted average remaining vesting period of 1.75 years. The following summarizes Stock Award activity for the period ended June 30, 2020:

				Weighted
				Average
				Grant Date
	Number of			Fair Value
	Units			Per Share
Unvested at December 31, 2019		-		$	-
Granted		23,839			9.83
Vested		(7,504	)		10.39
Cancelled		-			-
Unvested at June 30, 2020		16,335		$	9.57

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Note 13: Warrants

On January 30, 2014, in connection with an $11.5 million financing transaction, the Company issued 80,000 warrants to purchase common stock at an exercise price of $7.81 per share with a term of 5 years. The fair value of the warrants was determined using the Black-Scholes option valuation model. These warrants became exercisable on January 30, 2015. The remaining 30,000 of the outstanding warrants were exercised in May and August 2019. No other warrants have been issued since January 30, 2014. As of June 30, 2020, and December 31, 2019 there were zero outstanding warrants.

Note 14: Related Party Transactions

Intercompany transactions have been eliminated in our consolidated financial statements. The convertible notes issued in March 2018 were held directly by SHSP Holdings, LLC (“SHSP Holdings”). Daniel C. Allen, a now former director of SharpSpring Inc., is the founder and manager of Corona Park Investment Partners, LLC (“CPIP”). CPIP is a member of Evercel Holdings, LLC and is a member and sole manager of SHSP Holdings. Evercel, Inc. is a member and the manager of Evercel Holdings, LLC and is a member of SHSP Holdings. In May 2019, the Company and SHSP Holdings entered into and made effective a Note Conversion Agreement as outlined in Note 6 above. There were no other material related party transactions for the periods presented.

Note 15: Commitments and Contingencies

Litigation

From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company is not currently a party to any litigation of a material nature.

Commitments

The Company is not party to any non-cancellable contracts that create a material future commitment other than its leases as described in Note 8.

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Sales and Franchise Taxes

State, local and foreign jurisdictions have differing rules and regulations governing sales, franchise, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to SaaS products in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus vary significantly and are complex. As such, we could face possible tax assessments and audits. A successful assertion, by any of these taxing authorities, that we should be collecting additional sales, use, value added or other taxes in jurisdictions where we have not historically done so and do not accrue for such taxes could result in tax liabilities and related penalties for past sales, discourage customers from purchasing our products or otherwise harm our business and operating results. We continue to evaluate the impact of various tax types which may require future sales, franchise, or other tax payments.

Employment Agreements

The Company has employment agreements with several members of its leadership team and executive officers.

Note 16: Disaggregation of Revenue

The Company operates as one reporting segment. Operating segments are defined as components of an enterprise for which separate financial information in regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s chief executive officer, in deciding how to allocate resources and assess performance. The Company does not present geographical information about revenues because it is impractical to do so. Disaggregated revenue for the three and six months ended June 30, 2020, and 2019, are as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Revenue by Product:
Marketing Automation Revenue	$	6,566,976		5,450,837	$	12,926,333	$	10,712,920
Retargeting Revenue		667,910		-		1,286,717		-
Mail + Product Revenue		36,019		66,596		110,584		130,798
Total Revenue	$	7,270,905	$	5,517,433	$	14,323,634	$	10,843,718
Revenue by Type:
Recurring Revenue	$	6,319,119	$	5,124,370	$	12,449,561	$	9,992,519
Retargeting Revenue		667,911		-		1,286,717		-
Upfront Fees		283,875		393,063		587,356		851,199
Total Revenue	$	7,270,905	$	5,517,433	$	14,323,634	$	10,843,718

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. This information should also be read in conjunction with our audited historical consolidated financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission on March 16, 2020, as amended on April 30, 2020.

Overview                                                        

We provide SaaS-based marketing technologies to customers around the world. Our focus is on marketing automation tools that enable customers to interact with a lead from an early stage and nurture that potential customer using advanced features until it becomes a qualified sales lead or customer. We primarily offer our premium SharpSpring Marketing Automation solution, but also have customers on the SharpSpring Mail+ product, which is a subset of the full suite solution. In 2019, the Company acquired the Perfect Audience platform, which allowed us to expand into the display retargeting space.

We believe our recent growth has been driven by the strong demand for marketing automation technology solutions, particularly in the small and mid-size business market. Our products are offered at competitive prices with unlimited multi-lingual customer support. Our SharpSpring Marketing Automation platform employs a subscription-based revenue model. We also earn revenues from additional usage charges that may come into effect when a customer exceeds a transactional quota, as well as fees earned for additional products and services. The Perfect Audience platform employs a usage-based revenue model. Revenue from this platform is dependent on the number of ads placed through the platform and the effectiveness of that ad space.

Unless the context otherwise requires, in this section titled Management’s Discussion and Analysis of Financial Condition and Results of Operations references to “SharpSpring Marketing Automation” relate to the SharpSpring Marketing Automation product and references to “Perfect Audience” relate to the Perfect Audience product, while all references to “Company,” “we,” “our” or “us” and other similar terms means SharpSpring, Inc., a Delaware corporation, and all subsidiaries.

Results of Operations

Effects of COVID-19

The COVID-19 pandemic has affected our businesses, as well as those of our customers, suppliers, and third-party sellers. We have not experienced any drop off in the services provided by our various vendors. To serve our customers while also providing for the safety of our employees and service providers, we have adapted various steps to protect our employees and customers. We have enacted a work-from-home policy to allow our employees to maintain social distancing while still maintaining our level of productivity and effectiveness prior to the work-from-home policy. In addition to our work-from-home policy, we have made several strategic business decisions to help navigate these uncertain times.

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We implemented a 10% reduction to salaries across most of the Company. The employee salary reduction is temporary but expected to continue at a minimum through the next quarter. In addition to salary reduction, the Company has suspended Company bonuses and has cut various other non-employee related costs across the board to ensure future flexibility. This includes approximately 40% reduction in marketing advertising outsourcing and putting a greater reliance on internal lead generation. The Company delayed any non-essential capital expenditures, which will allow us to continue to maintain flexibility during the COVID pandemic.

The Company has also increased its cash position by $1.9 million by drawing down on our line of credit as described in Note 5, Credit Facility. As stated in Note 7, SBA Paycheck Protection Loan, the Company received $3.4 million from the Small Business Association (SBA) loan program in April 2020. We have also received a $1.6 million tax refund in June 2020 as a result of historical net operating losses described in Note 10, Income Taxes. The SBA loan program and tax refund are both results of the CARES Act enacted by Congress in March. This cash infusion continues to allow for increased flexibility in these uncertain times.

We expect demand for our product to continue to be at or above our numbers from the same periods in 2019 and as a SaaS product we can continue to provide our product to our customers while still practicing social distancing which is more difficult in other industries. During the second quarter 2020 we signed 276 new customers compared to 290 in the same period in 2019. We continue to bring in new leads, host demos, and drive sales at promising levels despite the downturns in the overall economy. We believe our tools offer our customers a chance to thrive in these uncertain times where others are diminishing. For customers that use the various features our platform provides, we are deeply embedded in their sales and marketing processes. Additionally, our Perfect Audience business has continued to run as anticipated, and we remain optimistic about the long-term cross-selling opportunities and expanded market available to our Company through retargeting.

Despite COVID-19, the Company was able to continue to grow revenue in both the three and six months ending June 30, 2020 as compared to the same periods in 2019 and the periods immediately preceding. It is possible that we could be further impacted from COVID-19 in subsequent quarters in ways that we presently do not anticipate; however, at this time, our business continues to grow. Revenue has increased 3% for three months ended June 30, 2020 as compared to three months ended March 31, 2020 and 32% compared to the three months ended June 30, 2020. In addition, we have been able to maintain the size of our workforce while other companies are seeing layoffs in large numbers. The full extent of the impact to the Company due to the impact of the COVID-19 pandemic for our third quarter and beyond cannot be currently determined, but the Company has taken measures to best position ourselves to continue to be successful in these uncertain times. The extent to which the COVID-19 pandemic will impact the Company will depend on future developments, which are still uncertain and cannot be reasonably predicted, including the duration of the outbreak, the increase or reduction in governmental restrictions to businesses and individuals, the potential for a resurgence of the virus and other factors. The longer the COVID-19 pandemic continues, the greater the potential negative financial effect on the Company. We continue to evaluate the impact of global economic and health conditions to ensure our responses to these uncertain times are both timely and appropriate.

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Results of Operations

Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019

							Percent
	Three Months Ended				Change		Change
	June 30,				from		from
	2020		2019		Prior Year		Prior Year
Revenues and Cost of Sales:
Revenues	$	7,270,905	$	5,517,433	$	1,753,472		32	%
Cost of Sales		1,873,029		1,625,818		247,211		15	%
Gross Profit	$	5,397,876	$	3,891,615	$	1,506,261		39	%

Revenues increased for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, primarily due to growth in our SharpSpring Marketing Automation customer base, a price increase put in place in 2020, and the addition of the Perfect Audience platform. Revenues for our SharpSpring Marketing Automation increased to $6.6 million in the three months ended June 30, 2020, from $5.5 million in the three months ended June 30, 2019. The Perfect Audience platform acquired in November of 2019 generated an additional $0.67 million of new revenue for the three months ended June 30, 2020. This growth in revenues was slightly offset by reduced revenue from our SharpSpring Mail+ product, which declined from approximately $0.07 million for the three months ended June 30, 2019 to approximately $0.04 million for the three months ended June 30, 2020.

Cost of services increased for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, primarily due to increased employee related costs associated with providing and supporting our technology platform to more customers and increased hosting cost with the growth of the Company. As a percentage of revenues, cost of services was 26% and 29% of revenues for the three months ended June 30, 2020 and 2019, respectively. This represents a year-over-year improvement in gross margin due to increased revenue scale and operating leverage.

								Percent
	Three Months Ended				Change			Change
	June 30,				from			from
	2020		2019		Prior Year			Prior Year
Operating expenses:
Sales and marketing	$	2,395,100	$	2,865,610	$	(470,510	)		-16	%
Research and development		1,484,890		1,217,981		266,909			22	%
General and administrative		2,244,560		1,935,291		309,269			16	%
Intangible asset amortization		183,746		95,250		88,496			93	%
	$	6,308,296	$	6,114,132	$	194,164			3	%

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Sales and marketing expenses decreased for the three months ended June 30, 2020, as compared to the same period in 2019. The decrease was primarily due to a change in the strategy for marketing and how the Company acquires new leads, increase in employee-related costs, and marketing program spend for various lead generation activities. Program spend decreased by approximately $0.96 million compared to same period last year. Employee-related costs increased by approximately $0.42 million. The decrease in program spend and increase in employee related spend is a result of an effort to source more leads internally rather than acquiring them from third parties. Other non-employee and non-program costs increased by approximately $0.70 million compared to the same period in 2019.

Research and development expenses increased for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, primarily due to additional hiring of development and quality assurance staff since the second quarter of 2019. Employee-related costs for this group increased by approximately $0.17 million in the three months ended June 30, 2020, compared to the same period in 2019. Non-employee-related costs, including outsourced development, for this group increased by approximately $0.87 million in the three months ended June 30, 2020, compared to the same period in 2019. These costs were partially offset by capitalized software development work of approximately $0.15 million for the three months ended June 30, 2020, compared to approximately $0.17 million in the same period in 2019.

General and administrative expenses increased for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, primarily due to higher employee related costs associated with business growth of approximately $0.10 million, and increased facilities costs of approximately $0.07 million primarily associated with the Company adding additional office space in the second quarter of 2020 to support the growth of the Company. Depreciation expense increased by approximately $0.08 million primarily due to the Company’s continued investment in software development. The Company made $0.10 million in donations to various charities in the second quarter of 2020 compared to approximately $8,000 in the same period in 2019.

Amortization of intangible assets increased for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The increase in intangible amortization is principally due to the additions of intangibles as part of the acquisition of the Perfect Audience business in November 2019.

										Percent
	Three Months Ended						Change			Change
	June 30,						from			from
	2020			2019			Prior Year			Prior Year
Other
Other expense, net	$	(2,777	)	$	(41,966	)	$	39,189			-93	%
Loss on induced conversion		-			(2,162,696	)		2,162,696			-100	%
Gain on embedded derivative		-			189,776			(189,776	)		-100	%
Provision (benefit) for income taxes		57,187			787			56,400		7166		%

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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, line of credit, and SBA loans. During the three months ended June 30, 2020 incurred foreign currency losses of approximately $0.03 million compared to approximately $0.01 million to the same period in 2019. The Company incurred $0.04 million of interest expense in the three months ended June 30, 2020 compared to approximately $0.04 million in the same period in 2019. The Company received interest related to a tax refund received in June 2020 of approximately $0.05 million.

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 $0.19 million and a loss on conversion of debt of $2.16 million during the three months ended June 30, 2019.

During the three months ended June 30, 2020, 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, as a result there is no tax benefit recorded on the income statement for those losses. For the three months ended June 30, 2019, 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.

Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019

							Percent
	Six Months Ended				Change		Change
	June 30,				from		from
	2020		2019		Prior Year		Prior Year
Revenues and Cost of Sales:
Revenues	$	14,323,634	$	10,843,718	$	3,479,916		32	%
Cost of Sales		4,240,671		3,174,200		1,066,471		34	%
Gross Profit	$	10,082,963	$	7,669,518	$	2,413,445		31	%

Revenues increased for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, primarily due to growth in our SharpSpring Marketing Automation customer base, the price increase put in place in 2020, and addition of the Perfect Audience platform. Revenues for our SharpSpring Marketing Automation increased to $12.9 million in the six months ended June 30, 2020, from $10.7 million in the six months ended June 30, 2019. The Perfect Audience platform acquired in November of 2019 generated an additional $1.29 million of new revenue for the six months ended June 30, 2020. This growth in revenues was slightly offset by reduced revenue from our SharpSpring Mail+ product, which declined from approximately $0.13 million for the six months ended June 30, 2019 to approximately $0.11 million for the six months ended June 30, 2020.

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Cost of services increased for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, primarily due to increased employee related costs associated with providing and supporting our technology platform to more customers and increased hosting cost with the growth of the Company. As a percentage of revenues, cost of services was 30% and 29% of revenues for the six months ended June 30, 2020 and 2019, respectively. This represents a slight year-over-year regression in gross margin due to increased revenue scale and operating leverage being offset by the addition of the Perfect Audience platform in the fourth quarter of 2019.

								Percent
	Six Months Ended				Change			Change
	June 30,				from			from
	2020		2019		Prior Year			Prior Year
Operating expenses:
Sales and marketing	$	5,429,222	$	5,873,813	$	(444,591	)		-8	%
Research and development		3,063,029		2,476,709		586,320			24	%
General and administrative		4,658,401		4,162,966		495,435			12	%
Intangible asset amortization		336,547		190,500		146,047			77	%
	$	13,487,199	$	12,703,988	$	783,211			6	%

Sales and marketing expenses decreased for the six months ended June 30, 2020, as compared to the same period in 2019. The decrease was primarily due to a change in the strategy for marketing and how the Company acquires new leads, increase in employee-related costs, and marketing program spend for various lead generation activities. Program spend decreased by approximately $1.2 million compared to same period last year. Employee-related costs increased by approximately $0.63 million. The decrease in program spend and increase in employee related spend is a result of an effort to source more leads internally as well as increased and marketing staff to support the demand for the product. Other non-employee and non-program costs increased by approximately $0.14 million compared to the same period in 2019.

Research and development expenses increased for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, primarily due to additional hiring of development and quality assurance staff since last year. Employee-related costs for this group increased by approximately $0.41 million in the six months ended June 30, 2020, compared to the same period in 2019. Non-employee-related costs, including outsourced development, for this group increased by approximately $0.32 million in the six months ended June 30, 2020, compared to the same period in 2019. These costs were partially offset by capitalized software development work of approximately $0.42 million for the six months ended June 30, 2020, compared to approximately $0.28 million in the same period in 2019.

General and administrative expenses increased for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, primarily due to higher employee related costs associated with business growth of approximately $0.29 million, and increased facilities costs of approximately $0.08 million primarily associated with the Company adding additional office space in the second quarter of 2020 to support the growth of the Company. Depreciation expense increased by approximately $0.16 million primarily due to the Company’s continued investment in software development. The Company made $0.10 million in donations to various charities in the six months ended June 30, 2020 compared to approximately $0.02 in the same period in 2019.

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Amortization of intangible assets increased for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The increase in intangible amortization is principally due to the additions of intangibles as part of the acquisition of the Perfect Audience business in November 2019.

										Percent
	Six Months Ended						Change			Change
	June 30,						from			from
	2020			2019			Prior Year			Prior Year
Other
Other expense, net	$	(59,556	)	$	(146,093	)	$	86,537			-59	%
Loss on induced conversion		-			(2,162,696	)		2,162,696			-100	%
Gain on embedded derivative		-			214,350			(214,350	)		-100	%
Provision (benefit) for income taxes		(1,505,331	)		3,126			(1,508,457	)		-48255	%

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, line of credit, and SBA loans. During the six months ended June 30, 2020 incurred foreign currency losses of approximately $0.11 million compared to approximately $0.02 million to the same period in 2019. The Company incurred $0.04 million of interest expense in the six months ended June 30, 2020 compared to approximately $0.14 million in the same period in 2019. The Company received interest related to a tax refund received in June 2020 of approximately $0.05 million

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 $0.19 million and a loss on conversion of debt of $2.16 million during the six months ended June 30, 2019.

During the six months ended June 30, 2020, our income tax benefit was primarily related to a carryback of net operating loss for our consolidated U.S. entities for the years prior to 2019 as result of changes to the tax law from the CARES Act. Prior to March 31, 2020, we had 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, 2019, our income tax provision primarily related to income derived in foreign jurisdictions as well as state income taxes by our consolidated U.S. entities related 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 SharpSpring Marketing Automation and Perfect Audience platforms. Such payments are primarily received monthly from customers but can sometimes be received annually in advance of providing the services, yielding a deferred revenue liability on our consolidated balance sheet.  In addition to the operating cash flows the Company utilized several other sources of cash flows in 2020. In June 2020 we received a tax refund of approximately $1.6 million as net operating losses in prior years that could be realized as part of the tax law changes in the CARES Act. In addition to the tax refund the Company received approximately $3.4 million from the SBA Loan in April 2020. In March 2020, the Company drew down on its available $1.9 million line of credit. In March of 2019, the Company issued 885,500 shares of common stock and received $10.7 million in cash.

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Our primary sources of cash outflows from operations include payroll and payments to vendors and third-party service providers.

Analysis of Cash Flows

Net cash used in operating activities decreased by $3.24 to $0.99 million used in operations for the six months ended June 30, 2020, compared to approximately $4.24 million used in operations for the six months ended June 30, 2019. The decrease in cash used in operating activities was attributable primarily to the Company reducing the loss before income taxes from $7.13 million during the six months ended June 30, 2019 to a loss before taxes of $3.46 million in the six months ended June 30, 2020. The Company received a $1.6 million tax refund received in June 2020.

Net cash used in investing activities was approximately $0.78 million during the six months ended June 30, 2020, compared to approximately $0.61 million used during the six months ended June 30, 2019. The change in cash used for investing activities is primarily related to the increased investment in property and equipment, largely related to our additional office space, and capitalized software development in the six months ended June 30, 2020.

Net cash provided by financing activities was $5.29 million during the six months ended June 30, 2020, compared to $11.6 million net cash received from financing activities during the six months ended June 30, 2019. The primary sources of the cash provided by financing activities is related to the Company’s $1.9 million line of credit and $3.4 million loan from the SBA Loan. In March 2019, the Company received $10.7 million from the issuance of common stock. The Company also received approximately $1.0 million from the exercise of employee stock options during the six months ended June 30, 2019.

We had net working capital of approximately $10.7 million and $10.4 million as of June 30, 2020 and December 31, 2019, respectively. Our cash balance was $15.3 million at June 30, 2020, reflecting the $1.9 million received from the draw on our line of credit in March 2020, the proceeds of the SBA Loan of $3.4 million, and tax refund of $1.6 million received in June 2020. Our cash balance was $11.88 million on December 31, 2019, reflecting net $10.7 million received from the stock offering in March 2019.

Contractual Obligations

As of June 30, 2020, here were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 16, 2020, as amended on April, 30 2020, other than those appearing in the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

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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.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.

As of the end of the period presented in this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to material weaknesses in our internal control over financial reporting described below in Management’s Annual Report on Internal Control Over Financial Reporting, our disclosure controls and procedures were not effective as of December 31, 2019. There were no changes to our disclosure controls or procedures during the quarter ended June 30, 2020 that materially affected or are reasonably likely to materially affect our financial reporting.

Notwithstanding the identified material weaknesses, management believes the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. generally accepted accounting principles.

Management’s Annual Report on Internal Control Over Financial Reporting 

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:

· Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; `

· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.

We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We acquired Perfect Audience on November 21, 2019 and management excluded from its assessment of the effectiveness of internal control over financial reporting as the December 31, 2019, Perfect Audience total assets and total revenues representing approximately 16.2% and 1.2%, respectively, of our consolidated financial statements as of and for the year ended December 31, 2019.

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In connection with our evaluation of the internal controls of the Company, we noted the following deficiencies that we consider to be material weaknesses:

· Ineffective internal control over financial reporting and dependent business process control (automated and manual) related to information technology general controls (ITGCs) around (i) the design and implementation of program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes and related to ineffective ITGCs around design and (ii) implementation of effective user access controls over SaaS and internally hosted applications that support the Company’s financial reporting processes to ensure appropriate segregation of duties and to adequately restrict user and privileged access to appropriate Company personnel.

· Due to the extensive effort required in the implementation of Section 404(b) of Sarbanes-Oxley Act of 2002, and as in common many growth companies with limited staff, we identified control deficiencies in financial reporting during our implementation related to: (i) certain entity level controls; (ii) inadequate segregation of duties; and (iii) compliance and review related to certain policies and procedures. As a result, these deficiencies aggregate into an additional material weakness.

The material weaknesses did not result in any identified misstatements to the consolidated financial statements, and there were no changes to previously released financial results. Based on these material weaknesses, the Company’s management concluded that at December 31, 2019, the Company’s internal control over financial reporting was not effective.

The Company’s independent registered public accounting firm, Cherry Bekaert LLP has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, which appears in Part II, Item 8 of our most recent Form 10-K for the period ended December 31, 2019.

Remediation

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) creating and filling an IT Compliance Oversight function; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to change-management and role-based security over IT systems impacting financial reporting and performing a full review or all current policies and procedures to identify current operational and financial reporting principle gaps and implement a cohesive set of policies that define the Company’s standards across systems, departments, and processes, reflected in the supporting documents such as Standard Operating Procedures (SOP) and checklists; (iii) implementing controls to address and maintain documentation of completeness and accuracy of system generated information used to support the operation of the controls; (iv) developing enhanced change-management intake procedures and controls related to changes in IT systems; (v) implementing an IT management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes; and (vi) enhanced monthly reporting on the remediation measures to the Audit Committee of the Board of Directors; (vii) and hiring additional accounting staff, including an assistant controller, to increase the Company’s segregation of duties and allow adequate time for proper documentation of observable evidence of review and approvals.

We believe that these actions will remediate the material weaknesses. The weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal year 2020.

Changes in Company Internal Controls

The Company continues to evaluate, plan, and remediate the material weaknesses identified. During the period ending June 30, 2020 there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Not Applicable.

Item 1A. Risk Factors.

The following risk factor supplements the Risk Factors described in the Company’s annual report on Form 10-K for the year ended December 31, 2019, as amended on April 30, 2020, and should be read in conjunction therewith.

The extent to which the COVID-19 pandemic will adversely impact our business, financial condition and results of operations is highly uncertain and cannot be predicted.

The COVID-19 pandemic has created significant worldwide uncertainty, volatility and economic disruption. The extent to which COVID-19 will adversely impact our business, financial condition and results of operations is dependent upon numerous factors, many of which are highly uncertain, rapidly changing and uncontrollable. These factors include, but are not limited to: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; (vii) our ability to effectively carry out our operations due to any adverse impacts on the health and safety of our employees and their families; (viii) the ability of our agency partners to resell the SharpSpring Marketing Automation platform to their clients. Furthermore, as a result of the COVID-19 pandemic, our employees have been predominantly working from home. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to our business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information. We do not believe these circumstances have, or will, materially adversely impact our internal controls or financial reporting systems.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.

Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

Not Applicable.

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Item 6. Exhibits.

INDEX TO EXHIBITS

Exhibit No.	Description
10.1	Employee Agreement Amendment – Richard Carlson (incorporated by reference to the Company’s Form 8-K/A filed on 4/16/20)
10.2	Employee Agreement Amendment – Richard Carlson (incorporated by reference to the Company’s Form 8-K filed 2/27/19).
10.3	Employee Agreement Amendment – Richard Carlson (incorporated by reference to the Company’s Form 8-K filed 2/12/18).
10.4	Employee Agreement Amendment – Richard Carlson (incorporated by reference to the Company’s Form 8-K filed 4/15/17).
10.5	Employee Agreement – Richard Carlson (incorporated by reference to the Company’s Form 8-K filed 9/14/15).
10.6	Employee Agreement Amendment – Travis Whitton (incorporated by reference to the Company’s Form 8-K/A filed on 4/16/20)
10.7	Employee Agreement Amendment – Travis Whitton (incorporated by reference to the Company’s Form 8-K filed 2/27/19).
10.8	Employee Agreement Amendment – Travis Whitton (incorporated by reference to the Company’s Form 8-K filed 2/12/18).
10.9	Employee Agreement Amendment – Travis Whitton (incorporated by reference to the Company’s Form 8-K filed 8/1/17).
10.10	Employee Agreement Amendment – Travis Whitton (incorporated by reference to the Company’s Form 8-K filed 7/8/16).
10.11	Employee Agreement – Travis Whitton (incorporated by reference to the Company’s Form 8-K filed 7/8/16).
10.12	Employee Agreement – Aaron Jackson (incorporated by reference to the Company’s Form 8-K/A filed on 7/23/20)
10.13	SharpSpring, Inc. 2019 Equity Incentive Plan (Incorporated by reference to the Company’s Definitive Schedule 14A filed on 4/30/19)
10.14	Amendment to SharpSpring, Inc. 2019 Equity Incentive Plan (Incorporated by reference to the Company’s Definitive Schedule 14A filed on 6/17/20)
10.15	Promissory Note dated April 22, 2020 made by SharpSpring Reach, Inc. to Western Alliance Bank (incorporated by reference to the Company’s Form 8-K filed 4/28/20)
10.16	Promissory Note dated April 23, 2020 made by SharpSpring Technologies, Inc. to Western Alliance Bank (incorporated by reference to the Company’s Form 8-K filed 4/28/20)
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
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 2002*
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 2002*
101	XBRL

* Included herewith.

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SIGNATURES

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

SharpSpring, Inc.
By:	/s/Richard A. Carlson
	Richard A. Carlson
	Chief Executive Officer and President (Principal Executive Officer) Date: August 14, 2020

SharpSpring, Inc.
By:	/s/ Aaron Jackson
	Aaron Jackson Interim Chief Financial Officer
	(Principal Financial Officer) Date: August 14, 2020

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