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. 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.
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 March 31, 2020, and December 31, 2019,
was a liability balance of zero for each period. The change in fair
value for the three months ended March 31, 2020, and 2019, was zero
and a gain of $0.025 million, respectively.
Accounts Receivable
Accounts receivable are carried at the original invoiced amount
less an allowance for doubtful accounts based on the probability of
future collection. Management reviews accounts receivable on a
periodic basis to determine if any receivables will potentially be
uncollectible. The Company reserves for receivables that are
determined to be uncollectible, if any, in its allowance for
doubtful accounts. After the Company has exhausted all collection
efforts, the outstanding receivable is written off against the
allowance. In cases where our customers pay for services in
arrears, we accrue for revenue in advance of billings as long as
the criteria for revenue recognition are met, thus creating a
contract asset. A portion of our accounts receivable balance is
therefore unbilled at each balance sheet date and is reflected as
such on the consolidated balance sheet.
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
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.
Goodwill and Impairment
As of March 31, 2020, and December 31, 2019, we had recorded
goodwill of $10.92 million and $10.92 million, respectively.
Goodwill consists of the excess of the purchase price over the fair
value of tangible and identifiable intangible net assets acquired
in the SharpSpring, GraphicMail, and Perfect Audience acquisitions.
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.
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 March 31, 2020, the Company’s Swiss
subsidiary, InterInbox SA is under examination by the Switzerland
Federal Tax Administration for the years 2015 through 2018. The
Company does not expect any material adjustments as a result of the
audit.
Property and Equipment
Property
and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of the assets.
Upon retirement or sale, the cost of assets disposed of and the
related accumulated depreciation are eliminated from the accounts,
and any resulting gain or loss is credited or charged to
operations. Repairs and maintenance costs are expensed as incurred.
Depreciation expense related to property and equipment was $0.20
million and $.13 million for
the three months ended March 31, 2020, and 2019,
respectively.
Property
and equipment as of March 31, 2020 and December 31, 2019, is as
follows:
|
|
|
|
|
|
Property
and equipment, gross:
|
|
|
Leasehold
improvements
|
$293,120
|
$290,977
|
Furniture
and fixtures
|
708,899
|
678,774
|
Computer
equipment and software
|
2,731,702
|
2,350,758
|
Total
|
3,733,721
|
3,320,509
|
Less:
Accumulated depreciation and amortization
|
(1,527,565)
|
(1,323,787)
|
|
$2,206,156
|
$1,996,722
|
Useful
lives are as follows:
Leasehold
improvements
|
3-5
years
|
Furniture
and fixtures
|
3-5
years
|
Computer
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.
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.
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. Deferred
revenue balances were $0.86 million and $0.25 million as of
December 31, 2019, and 2018, respectively. Deferred revenue
decreased by $0.09 million and increased by $0.04 million during
the three months ended March 31, 2020, and 2019, respectively. The
Company had deferred revenue contract liability balances of $0.77
million and $0.29 million as of March 31, 2020, and March 31, 2019,
respectively.
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). The unbilled receivable balances as of
December 31, 2019, and 2018 were $1.0 million and $0.74 million,
respectively. Substantially all of these balances were billed
during the three months ended March 31, 2020 and 2019,
respectively. As of March 31, 2020, and 2019, the Company had
unbilled receivables $1.09 million and $0.83 million, respectively.
These unbilled balances were the result of services provided in
period, but not yet billed to the customer.
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
March 31, 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. For the three months ending March 31, 2020, one customer
had an open account receivable balance which was above 10% of net
accounts receivable, accounting for approximately 18.6% of net
accounts receivable. As of March 31, 2020, no customer with
accounts receivable in excess of 10% of the Company’s net
receivables had a balance older than 30 days.
Cost of Services
Cost of
services consists primarily of direct labor costs associated with
support, customer onboarding, account management, and technology
hosting and license costs associated with the cloud-based
platform.
Credit Card Processing Fees
Credit
card processing fees are included as a component of general and
administrative expenses and are expensed as incurred.
Advertising Costs
The
Company expenses advertising costs as incurred. Advertising and
marketing expenses, excluding marketing team costs, were
$1.19 million and $1.54 million for the three months ended
March 31, 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 March 31, 2020 and 2019 was approximately 3 years. At
March 31, 2020, the net carrying value of the capitalized cost of
obtaining a contract was $1.2
million, of which $0.68
million is included in other current assets and $0.52 million is included in other
long-term assets. At December 31, 2019, the net carrying value of
the capitalized cost of obtaining a contract was $1.2 million, of which $.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 $0.20 million for the three months ended
March 31, 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.
Comprehensive Income (Loss)
Comprehensive
income or loss includes all changes in equity during a period from
non-owner sources, such as net income or loss and foreign currency
translation adjustments.
Recently Issued Accounting Standards
Recent
accounting standards not included below are not expected to have a
material impact on our consolidated financial position and results
of operations.
In
February 2016, the FASB issued guidance that requires lessees to
recognize most leases on their balance sheets but record expenses
on their income statements in a manner similar to current
accounting. The guidance became effective for the Company on
January 1, 2019. The Company is using the modified retrospective
transition method which allows the Company to recognize and measure
leases as of the adoption date, January 1, 2019, with the
cumulative impact being reflected in the opening balance of
retained earnings. The application of the modified retrospective
transition was applied to all active leases at the date of initial
application. There was no impact to the Company’s retained
earnings for the implementation of this accounting standard. The
following tables present the cumulative impact on our financial
statements upon adoption.
|
Impact upon adoption of new ASU
|
As
of January 1, 2019
|
|
Right-of-use
assets
|
5,715,510
|
Total
Assets
|
$5,715,510
|
|
|
Accrued expenses
and other current liabilities
|
$(8,821)
|
Lease liability
(current)
|
344,883
|
Lease liability
(non-current)
|
5,379,448
|
Total
Liabilities
|
$5,715,510
|
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.
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
intangible assets:
|
|
|
|
Trade
names
|
$501,000
|
(120,000)
|
$381,000
|
Technology
|
3,109,000
|
(1,269,725)
|
1,839,275
|
Customer
relationships
|
1,320,000
|
(802,751)
|
517,249
|
Vendor
relationships
|
1,813,000
|
(45,325)
|
1,767,675
|
Unamortized
intangible assets:
|
6,743,000
|
(2,237,801)
|
4,505,199
|
Goodwill
|
|
|
10,919,403
|
Total
goodwill and intangible assets
|
|
|
$15,424,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Estimated amortization expense for the remainder of 2020 and
subsequent years is as follows:
Remainder
of 2020
|
$458,400
|
2021
|
559,200
|
2022
|
507,200
|
2023
|
459,200
|
2024
|
420,200
|
Thereafter
|
1,719,999
|
Indefinite
Lived
|
381,000
|
Total
|
$4,505,199
|
Amortization expense for the three months ended March 31, 2020 and
2019, was $0.15 million and $0.95 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 facility originally matured on March 21, 2018 and was
amended to mature on June 21, 2020. There are no mandatory
amortization provisions and the Credit Facility is payable in full
at maturity. As of March 31, 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 March 31, 2020, the credit facility carried an
interest rate of 6.25%. and there was $1.9 million outstanding
under the Credit Facility. As December 31, 2019 there was no
amounts outstanding. 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). selection to convert the
Notes.
The
Notes were recorded upon issuance at amortized cost in accordance
with applicable accounting guidance. As there was no difference in
the amount recorded at inception and the face value of the Notes,
interest expense was accreted at the stated interest rate under the
terms of the Notes. Total interest expense related to the Notes was
impacted by the amortization of the debt issuance cost using the
effective interest method.
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 of March 31, 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 Operations.
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 months
ended March 31, 2020, and 2019:
|
|
|
|
|
|
|
Contractual
interest paid-in-kind expense (non-cash)
|
$-
|
$100,000
|
Amortization
of debt issuance costs (non-cash)
|
-
|
6,410
|
Amortization
of embedded derivative (non-cash)
|
-
|
(8,410)
|
Total
interest expense
|
$-
|
$98,000
|
Effective
interest rate
|
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.
Under
the Conversion Agreement, the Notes were deemed to have been
converted into the Conversion Shares, and any interest in any
amount ceased to accrue or be payable with respect to the Notes,
and SHSP Holdings ceases to be a holder of any Notes, and the Notes
cease to be outstanding, for purposes of the Investors’
Rights Agreement dated as of March 28, 2018. Effective as of the
issuance and delivery of the Conversion Shares to SHSP Holdings,
the Notes were canceled and terminated in their entirety and of no
further force and effect, and any and all indebtedness and other
obligations of the Company under the Notes was fully performed and
discharged, and any and all claims or rights of SHSP Holdings or
its affiliates thereunder were fully and finally extinguished and
released. Additionally, under the terms of the Conversion
Agreement, the Company agreed to pay in shares 49% of the remaining
future interest totaling 115,037 shares. As a result of
accelerating the 49% of future interest along with the
extinguishment of the convertible notes, the Company incurred a
loss on conversion of debt of $2.2 million. The loss was measured
as the excess fair value of the shares issued under the modified
conversion, compared to the fair value of the shares that would
have been issued under an unmodified conversion as of the
measurement date. Level 1 inputs were used to determine the fair
value of the shares paid to the Investor. The loss on conversion
was partially offset by a gain of approximately $0.19 million from
the write-off of the embedded derivative liability.
The
Convertible Notes had a net carrying value of zero for March 31,
2020 and December 31, 2019, respectively.
Note 7: 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.
|
|
|
|
|
|
|
Net
loss
|
$(988,077)
|
$(2,893,843)
|
|
|
|
Basic
weighted average common shares outstanding
|
11,521,192
|
8,840,281
|
Add
incremental shares for:
|
|
|
Warrants
|
-
|
-
|
Stock
options
|
-
|
-
|
Restricted
stock units (RSUs)
|
-
|
-
|
Convertible
notes
|
-
|
-
|
Diluted
weighted average common shares outstanding
|
11,521,192
|
8,840,281
|
|
|
|
Net
loss per share:
|
|
|
Basic
|
$(0.09)
|
$(0.33)
|
Diluted
|
$(0.09)
|
$(0.33)
|
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:
|
|
|
|
|
|
|
Warrants
|
-
|
30,000
|
Stock
options
|
1,416,501
|
1,391,487
|
Restricted
stock units (RSUs)
|
79,818
|
-
|
Convertible
notes
|
-
|
1,120,573
|
Total
|
1,496,319
|
2,542,060
|
Note 8: 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 March 31, 2020, and 2019, the Company
recorded income tax benefit of $1,562,517 and income tax expense of
$2,339, respectively, from operations. The blended effective tax
rate for the three months ending March 31, 2020, and 2019, was
61.3% 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 carryforwards, 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.
At
March 31, 2020 and December 31, 2019, we have established a
valuation allowance of $6.7 million and $7.0 million, respectively,
against certain deferred tax assets given the uncertainty of
recoverability of these amounts.
Note 9: 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. For the period ended March 31, 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 $0.09 million and
$0.07 million
to expense in the three months ended
March 31, 2020, and 2019, respectively, associated with our
matching contribution in those periods.
Note 10: 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, now a 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 11: 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.
In
April 2019, the Company adopted the 2019 Equity Incentive Plan (the
“2019 Plan”). No more than 697,039 shares of common
stock, plus the number of shares of common stock underlying any
award granted under the 2010 Plan that expires, terminates, is
canceled, or is forfeited shall be available for grant under the
2019 Plan. The Plan provides for the issuance of stock options and
other stock-based awards. During the terms of the Awards, the
Company shall keep available at all times the number of shares of
Common Stock required to satisfy such Awards.
Stock Options
Stock
option awards under the 2010 Plan and 2019 Plan (the
“Plans”) have a 10-year maximum contractual term and,
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:
|
Three Months
Ended March 31,
|
|
2020
|
|
2019
|
Volatility
|
52%
|
|
49% - 50%
|
Risk-free interest rate
|
1.46% - 1.66%
|
|
2.55% - 2.59%
|
Expected term
|
6.25 years
|
|
6.25 years
|
The
weighted average grant date fair value of stock options granted
during the three months ended March
31, 2020, and 2019, was $5.68 and $7.02, 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
March 31, 2020, and 2019, the
Company recognized an expense of $0.22 million and $0.27 million, respectively, associated
with stock option awards. At March 31,
2020, future stock compensation expense associated with
stock options (net of estimated forfeitures) not yet recognized was
$1.92 million and will be recognized over a weighted average
remaining vesting period of 2.8 years. The following summarizes
stock option activity for the three months ended March 31,
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2019
|
1,470,406
|
$7.30
|
7.5
|
$6,604,461
|
|
|
|
|
|
Granted
|
131,725
|
$11.20
|
|
|
Exercised
|
(630)
|
$5.57
|
|
|
Forfeited
|
(185,000)
|
$11.70
|
|
|
Outstanding
at March 31, 2020
|
1,416,501
|
$7.09
|
7.1
|
$1,222,646
|
|
|
|
|
|
Exercisable
at March 31, 2020
|
874,937
|
$5.77
|
6.3
|
$929,649
|
The
total intrinsic value of stock options exercised during the three
months ended March 31, 2020, and 2019, were $1,468 and $1,189,991,
respectively.
Restricted Stock Units
During
the three months ended March 31, 2020,
and 2019, the Company granted 35,855 and zero Restricted
Stock Units (RSUs), respectively. RSUs having a value equal to the
fair market value of an identical number of shares of Common Stock,
which may, but need not, provide that such restricted award may not
be sold, assigned, transferred or otherwise disposed of, pledged or
hypothecated as collateral for a loan or as security for the
performance of any obligation or for any other purpose for a period
determined by the Board of Directors. The Plans are administered by
the Board of Directors, which has the authority to determine to
whom RSUs may be granted, the period of exercise, and what other
restrictions, if any, should apply. Vesting for awards granted to
date under the Plans is generally over four years from the date of
the grant, with 25% of the award vesting after one year and monthly
vesting thereafter.
RSUs
are expensed on a straight-line basis over the requisite vesting
period. During the three months ended March 31, 2020, and 2019, the Company
recognized expense of approximately $0.12 million and zero,
respectively, associated with RSUs. At March 31, 2020, future stock compensation
expense associated with stock options (net of estimated
forfeitures) not yet recognized was approximately $0.71 million and
will be recognized over a weighted average remaining vesting period
of 3.21 years. The following summarizes RSU activity for the period
ended March 31,
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
at December 31, 2019
|
50,494
|
$11.82
|
|
|
|
Granted
|
35,875
|
12.39
|
Vested
|
(6,551)
|
12.39
|
Cancelled
|
-
|
-
|
Unvested
at March 31, 2020
|
79,818
|
$12.03
|
Stock Awards
During
the three months ended March 31, 2020,
and 2019, the Company issued 2,680 and 2,404 shares,
respectively, to non-employee directors as compensation for their
service on the board. Such stock awards are immediately
vested.
Stock
awards are valued based on the closing price of our common stock on
the date of grant, and compensation cost is recorded immediately if
there is no vesting period or on a straight-line basis over the
vesting period. The total fair value of stock awards granted,
vested and expensed during the three months ended March 31, 2020, and 2019, was $0.03 million
and $0.03 million,
respectively. As of March 31,
2020, there was no unrecognized compensation cost related to
stock awards.
Note 12: Warrants
On
January 30, 2014, in connection with an $11.5 million financing
transaction, the Company issued 80,000 warrants to purchase common
stock at an exercise price of $7.81 per share with a term of 5
years. The fair value of the warrants was determined using the
Black-Scholes option valuation model. These warrants became
exercisable on January 30, 2015. The remaining 30,000 of the
outstanding warrants were exercised in May and August 2019. No
other warrants have been issued since January 30, 2014. As of March
31, 2020, and December 31, 2019 there were zero outstanding
warrants.
Note 13: 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 14.
Sales and Franchise Taxes
State, local and foreign jurisdictions have differing rules and
regulations governing sales, franchise, use, value added and other
taxes, and these rules and regulations are subject to varying
interpretations that may change over time. In particular, the
applicability of such taxes to SaaS products in various
jurisdictions is unclear. Further, these jurisdictions’ rules
regarding tax nexus vary significantly and are complex. As such, we
could face possible tax assessments and audits. A successful
assertion, by any of these taxing authorities, that we should be
collecting additional sales, use, value added or other taxes in
jurisdictions where we have not historically done so and do not
accrue for such taxes could result in tax liabilities and related
penalties for past sales, discourage customers from purchasing our
products or otherwise harm our business and operating results. We
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 14: Leases
The Company currently rents its primary office facility under a
ten-year lease which started in November 2018 (the “2018
Lease”). The term of the lease may be extended for an
additional 5 years in incremental one-year periods, subject to
certain conditions described in the 2018 Lease. In June 2019, the
Company entered into an addendum agreement to the 2018 Lease (the
“2019 Addendum”) to lease an additional approximately
16,500 square feet of office space located on the same premises as
the 2018 Lease. In February 2020, the Company took possession of
approximately 2,600 out of the approximately 16,500 total square
feet included in the 2019 addendum. The rent expense and future
payments associated with the additional square feet the Company
took possession of is included in the future minimum lease payments
table below. The term of the addendum extends through the same
period as the 2018 Lease. We do not assume renewals in our
determination of lease term unless the renewals are deemed to be
reasonably assured at lease commencement. At the commencement of
the 2018 lease, renewal was not reasonably assured. Determination
of whether a contract contains a lease is determined at execution
of the contract based on the facts of each contract. The Company
elected the package of practical expedients permitted under ASC 842
which allows us to carryforward historical lease classification,
assessment on whether a contract was or contains a lease, and
initial direct costs for any leases that existed prior to adoption
of the standard. The Company has lease agreements with lease and
non-lease components, which it has elected to combine for all
leases. In addition, the Company does not recognize right-of-use
assets or lease liabilities for leases with a term of 12 months or
less (“Short-term” leases). Short-term lease payments
are recognized in the consolidated statements of comprehensive loss
on a straight-line basis over the lease term. The Company is not
party to any financing lease.
The weighted average remaining lease term as of March 31, 2020, is
8.7 years. The weighted average discount rate for our operating
leases as of March 31, 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 ended March 31, 2020,
and 2019, were zero for both periods.
Future minimum lease payments are as follows as of March 31,
2020:
|
|
Remainder
of 2020
|
613,233
|
2021
|
842,093
|
2022
|
847,346
|
2023
|
873,611
|
2024
|
878,864
|
Thereafter
|
3,540,910
|
Total
undiscounted cash flows
|
$7,596,057
|
Less
imputed interest
|
(1,827,901)
|
Present
value of lease liability
|
$5,768,156
|
Note 15: Disaggregation of Revenue
The Company operates as one reporting segment. Operating segments
are defined as components of an enterprise for which separate
financial information in regularly evaluated by the chief operating
decision maker (“CODM”), which is the Company’s
chief executive officer, in deciding how to allocate resources and
assess performance. The Company does not present geographical
information about revenues because it is impractical to do so.
Disaggregated revenue for the three months ended March 31, 2020,
and 2019, are as follows:
|
|
|
|
|
|
|
Revenue
by Product:
|
|
|
Marketing
Automation Revenue
|
$6,359,357
|
$5,261,939
|
Retargeting
Revenue
|
618,807
|
-
|
Mail
+ Product Revenue
|
74,565
|
64,346
|
Total
Revenue
|
$7,052,729
|
$5,326,285
|
|
|
|
Revenue
by Type:
|
|
|
Recurring
Revenue
|
$6,130,442
|
$4,868,149
|
Retargeting
Revenue
|
618,807
|
-
|
Upfront
Fees
|
303,480
|
458,136
|
Total
Revenue
|
$7,052,729
|
$5,326,285
|
Note 16: Subsequent Events
The following events and transactions occurred subsequent to March
31, 2020:
On April 21, 2020 SharpSpring entered into two loan agreements with
United States Small Business Administration 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 currently in
effect are met. The Company continues to evaluate the requirements
of the CARES Act that allow for forgiveness.
On
March 11, 2020, the World Health Organization, or WHO, classified
COVID-19, as a global pandemic. The Company has assessed the impact
of the COVID-19 pandemic. While the broader implications of
COVID-19 on its results of operations and overall financial
performance remain uncertain for future periods, the Company
assessed the potential impact on its March 31, 2020 consolidated
financial statements and determined there were no material
adjustments necessary with respect to these consolidated financial
statements.