UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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For the quarterly period ended: | |
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Or | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number:
(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
| (Zip Code) |
(Registrant’s telephone number, including area code)
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(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 |
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| The |
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.
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).
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 | ☐ |
☒ | Smaller reporting company | ||
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| 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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
SHARPSPRING, INC
TABLE OF CONTENTS
| 2 |
| Table of Contents |
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 proposed Merger (as defined below); |
| · | 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:
| 3 |
| Table of Contents |
| · | the proposed acquisition of the Company pursuant to the Agreement and Plan of Merger, dated as of June 21, 2021, as it may be amended from time to time in accordance with its terms (the “Merger Agreement”), by and among Constant Contact, Inc., a Delaware corporation (“Constant Contact”) and Groove Merger Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of Constant Contact (“MergerSub”), providing for the merger of MergerSub with and into the Company (the “Merger”) and for the Company to become a wholly-owned subsidiary of Constant Contact, including the risk that the transaction may not be completed in a timely manner or at all, which may adversely affect the Company’s business and the price of its common stock, the failure to satisfy the conditions to the consummation of the transaction, including the adoption of the Merger Agreement by the shareholders of the Company, and the receipt of certain governmental and regulatory approvals, the effect of the announcement or pendency of the transaction on the Company’s business relationships, operating results, and business generally, risks that the proposed transaction disrupts the Company’s current plans and operations and potential difficulties in the Company’s employee retention as a result of the transaction, risks related to diverting management’s attention from the Company’s ongoing business operations, and the outcome of any legal proceedings that instituted against the Company or the purchaser related to the Merger Agreement or the transaction; |
| · | 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 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 1A “Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and in Item 1A of Part II of this Quarterly 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.
| 4 |
| Table of Contents |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
SHARPSPRING, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| June 30, |
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| December 31, |
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| 2021 |
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| 2020 |
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Assets |
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Cash and cash equivalents |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Unbilled receivables |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Intangibles, net |
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Right-of-use assets |
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Other long-term assets |
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Total assets |
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Liabilities and Shareholders' Equity |
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Accounts payable |
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Accrued expenses and other current liabilities |
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Line of credit |
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Deferred revenue |
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Income taxes payable |
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Lease liability, current portion |
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Notes payable, current portion |
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Total current liabilities |
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Lease liability, net of current portion |
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Notes payable, net of current portion |
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Total liabilities |
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Commitments and contingencies (Note 9) |
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Shareholders' equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Treasury stock |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
| $ |
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| $ |
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See accompanying notes to the consolidated financial statements.
| 5 |
| Table of Contents |
SHARPSPRING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
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| Three Months Ended |
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| Six Months Ended |
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| June 30, |
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Revenue |
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Cost of services |
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Gross profit |
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Operating expenses: |
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Sales and marketing |
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Research and development |
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General and administrative |
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Intangible asset amortization |
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Total operating expenses |
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Operating loss |
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| ( | ) |
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Other income (expense), net |
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| ( | ) |
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Gain on extinguishment of debt |
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Loss before income taxes |
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Provision (benefit) for income taxes |
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Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
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Net loss per share, basic and diluted |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
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Shares used in computing net loss per share, basic and diluted |
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Other comprehensive loss: |
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Foreign currency translation adjustment, net |
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| ( | ) |
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| ( | ) | ||
Comprehensive loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
See accompanying notes to the consolidated financial statements.
| 6 |
| Table of Contents |
SHARPSPRING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
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| Accumulated |
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| Additional |
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| Other |
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| Common Stock |
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| Paid in |
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| Comprehensive |
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| Treasury Stock |
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| Accumulated |
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| Shares |
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| Amount |
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| Capital |
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| Loss |
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| Shares |
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| Amount |
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| Deficit |
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| Total |
| ||||||||
Balance, March 31, 2020 |
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| $ |
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| $ |
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| $ | ( | ) |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Stock based compensation |
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| - |
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| - |
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Issuance of common stock for cash |
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| - |
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Issuance of common stock for services |
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| - |
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Issuance of common stock under stock plans, net of shares withheld for employee taxes |
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| ( | ) |
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| - |
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Foreign currency translation adjustment, net |
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| - |
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| - |
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Net loss |
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| - |
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| - |
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| ( | ) |
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Balance, June 30, 2020 |
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| $ |
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| $ |
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| $ | ( | ) |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Balance, March 31, 2021 |
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Stock based compensation |
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| - |
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| - |
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Issuance of common stock for cash |
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| - |
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Issuance of common stock for services |
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| - |
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Issuance of common stock under stock plans, net of shares withheld for employee taxes |
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| ( | ) |
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| - |
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| ( | ) | |||||
Foreign currency translation adjustment |
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| - |
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| - |
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Net loss |
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| - |
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| - |
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Balance, June 30, 2021 |
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| $ |
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| $ |
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| $ | ( | ) |
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| $ | ( | ) |
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Balance, December 31, 2019 |
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| $ |
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| $ |
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| $ | ( | ) |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Stock based compensation |
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| - |
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| - |
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Issuance of common stock for cash |
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| - |
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Issuance of common stock for services |
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| - |
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Issuance of common stock under stock plans, net of shares withheld for employee taxes |
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| ( | ) |
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| - |
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| ( | ) | |||||
Foreign currency translation adjustment |
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| - |
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| ( | ) |
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| - |
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Net loss |
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| - |
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| - |
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Balance, June 30, 2020 |
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| $ |
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| $ |
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| $ | ( | ) |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
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Balance, December 31, 2020 |
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Stock based compensation |
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| - |
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| - |
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Issuance of common stock for cash |
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| - |
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Issuance of common stock for services |
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| - |
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Issuance of common stock under stock plans, net of shares withheld for employee taxes |
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| ( | ) |
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| - |
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| ( | ) | |||||
Foreign currency translation adjustment |
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| - |
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| ( | ) |
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| - |
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Net loss |
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| - |
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| - |
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| ( | ) |
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Balance, June 30, 2021 |
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| $ |
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| $ |
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| $ | ( | ) |
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| $ | ( | ) |
| $ | ( | ) |
| $ |
| |||||
See accompanying notes to the consolidated financial statements.
| 7 |
| Table of Contents |
SHARPSPRING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Six Months Ended |
| |||||
|
| June 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | ( | ) |
| $ | ( | ) |
Adjustments to reconcile loss from operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
| ||
Gain on extinguishment of debt |
|
| ( | ) |
|
|
| |
Amortization of costs to acquire contracts |
|
|
|
|
|
| ||
Non-cash stock compensation |
|
|
|
|
|
| ||
Deferred income taxes |
|
|
|
|
| ( | ) | |
Loss on disposal of property and equipment |
|
|
|
|
|
| ||
Unrealized foreign currency (gain) loss |
|
| ( | ) |
|
|
| |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
| ( | ) | |
Unbilled receivables |
|
| ( | ) |
|
| ( | ) |
Right-of-use assets |
|
|
|
|
| ( | ) | |
Other assets |
|
| ( | ) |
|
| ( | ) |
Income taxes, net |
|
| ( | ) |
|
|
| |
Accounts payable |
|
| ( | ) |
|
| ( | ) |
Lease liabilities |
|
| ( | ) |
|
|
| |
Accrued expenses and other current liabilities |
|
|
|
|
| ( | ) | |
Deferred revenue |
|
|
|
|
| ( | ) | |
Net cash used in operating activities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| ( | ) |
|
| ( | ) |
Capitalization of software development costs |
|
| ( | ) |
|
| ( | ) |
Net cash used in investing activities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities: |
|
|
|
|
|
|
|
|
Proceeds from line of credit |
|
|
|
|
|
| ||
Proceeds from note payable |
|
|
|
|
|
| ||
Proceeds from exercise of stock options, net |
|
|
|
|
|
| ||
Payments for taxes related to net share settlement of equity awards |
|
| ( | ) |
|
| ( | ) |
Net cash provided by financing activities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash |
|
|
|
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Supplemental information on consolidated statements of cash flows: |
|
|
|
|
|
|
|
|
Cash paid (received) during the period for |
|
|
|
|
|
|
|
|
Interest, net |
| $ |
|
| $ | ( | ) | |
Income taxes, net |
| $ |
|
|
| ( | ) | |
Non-cash activities |
|
|
|
|
|
|
|
|
Right-of-use asset obtained for lease liability |
| $ |
|
| $ |
| ||
See accompanying notes to the consolidated financial statements.
| 8 |
| Table of Contents |
SHARPSPRING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Organization, Basis of Presentation, and Summary of Significant Accounting Policies
Organization and Proposed Merger
SharpSpring, Inc. (the “Company”, “we”, “our”, or “us”) provides a cloud-based marketing automation solution and a display retargeting platform through its SharpSpring Marketing Automation and SharpSpring Ads (formerly known as Perfect Audience) products. Our flagship Marketing Automation platform 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 SharpSpring Ads platform empowers marketers to create, manage, and optimize their ad campaigns across thousands of websites. The Company’s products are marketed directly by us and through a small group of reseller partners to customers around the world.
On June 21, 2021, the Company entered into an Agreement and Plan of Merger, as it may be amended from time to time in accordance with its terms (the “Merger Agreement”) with Constant Contact, Inc., a Delaware corporation (“Constant Contact”) and Groove Merger Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of Constant Contact (“MergerSub”), providing for the merger of MergerSub with and into the Company (the “Merger”) and for the Company to become a wholly-owned subsidiary of Constant Contact.
COVID – 19
On January 30, 2020, the World Health Organization declared the coronavirus “COVID-19” outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 included restrictions on travel, quarantines, or “stay‑at‑home” restrictions in certain areas and forced closures for certain types of public places and businesses. COVID‑19, and the recently identified variants of COVID-19, and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets globally, including the geographical areas in which the Company operates.
While it is unknown how long these conditions will last and what the complete financial impact will be, the Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of the business/operations and are unable at this time to predict the continued impact that COVID-19 will have on its business, financial position, and operating results in future periods due to numerous uncertainties.
| 9 |
| Table of Contents |
Basis of Presentation and Consolidation
The accompanying unaudited consolidated 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 Company 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, 2020, 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 its 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, 2021.
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, 2020, filed with the SEC on March 30, 2021.
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 and accounts receivable. At June 30, 2021, and December 31, 2020, 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 it is subject to unusual credit risk beyond normal credit risk associated with commercial banking relationships.
Our accounts receivable exposes the Company to credit risk in the event of nonpayment by customers. As of June 30, 2021, two customers had an open accounts receivable balance above 10% of our net accounts receivable balance, which represented
There were no customers that accounted for more than 10% of Company’s total revenue for any financial period presented.
Significant Accounting Policies
There were no material changes to the Company’s significant accounting policies disclosed in “Note 2 – Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 30, 2021.
| 10 |
| Table of Contents |
Operating Segments
The Company operates as one reportable segment with two operating segments. Our operating segments consist of our SharpSpring Marketing Automation segment and SharpSpring Ads Retargeting segment in accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting. 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 assess the performance of these resources between its two operating segments. The Company does not separately allocate operating expenses, nor does it fully allocate assets to these operating segments. In accordance with ASC 280, the Company aggregated its two operating segments as one operating segment for financial reporting purposes. The Company does not present geographical information about revenues because it is impractical to do so.
Recently Issued Accounting Standards
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017- 04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard was effective beginning in January 2021, with early adoption permitted. The Company early adopted this ASU on January 1, 2020.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplified 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.
| 11 |
| Table of Contents |
This standard is effective for fiscal and interim periods beginning after December 15, 2020. We believe the adoption of this standard has not and will not have a material impact on our consolidated financial statements.
There are no other new accounting pronouncements that are expected to have a material impact on the Company and all subsidiaries thereof. All intercompany balances and transactions have been eliminated upon consolidation.
Note 2: Revenue Recognition
Unbilled Receivables
In cases where customers pay for services in arrears, the Company accrues 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, 2021, and 2020, the Company had unbilled receivables of $
Unbilled receivable balances as of December 31, 2020, and 2019 were $
Capitalized Cost of Obtaining a Contract
The Company capitalizes 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 a three-year estimated weighted average life of the customer. As of June 30, 2021, the net carrying value of the capitalized cost of obtaining a contract was $
Deferred Revenue
Deferred revenue consists of payments received in advance of the Company providing the services. Most of our deferred revenue balances (contract liabilities) arise from payments from customers in advance of service on a periodic basis (such as monthly, quarterly, annually, or bi-annually), while the portion of our deferred revenue balances associated with SharpSpring Ads arises from prepaid deposits for future usage of the platform. Deferred revenue from our SharpSpring Marketing Automation customers is earned over the service period identified in each contract. Deferred revenue from our SharpSpring Ads retargeting customers is earned as the service is used. Additionally, the Company has deferred revenue related to implementation fees for its SharpSpring Marketing Automation solution that are paid in advance, which is recognized over the service period. These implementation services are typically performed over a 60-day period. As of March 31, 2021, and 2020, the Company had deferred revenue balances of $
| 12 |
| Table of Contents |
Disaggregation of Revenue
Disaggregated revenue for the three and six months ended June 30, 2021, and 2020, are as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Revenue by Product: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Marketing Automation Revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Retargeting Revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Mail + Product Revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Retargeting Revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Upfront Fees |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total Revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Note 3: Property & Equipment
Property and equipment as of June 30, 2021, and December 31, 2020, is as follows:
|
| June 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Property and equipment, gross: |
|
|
|
|
|
| ||
Leasehold improvements |
| $ |
|
| $ |
| ||
Furniture and fixtures |
|
|
|
|
|
| ||
Capitalized software development costs |
|
|
|
|
|
| ||
Computer equipment and other software |
|
|
|
|
|
| ||
Total |
|
|
|
|
|
| ||
Less: Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
Property and equipment, net: |
| $ |
|
| $ |
| ||
Depreciation expense related to property and equipment was $
| 13 |
| Table of Contents |
Note 4: Goodwill and Other Intangible Assets
Goodwill and acquired intangible assets are initially recorded at fair value and are reviewed at least annually for indicators of impairment or more frequently if there are indicators of impairment.
The Company’s 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. During the six months ended June 30, 2021, the Company reclassified our trade name asset for Perfect Audience from an indefinite lived asset to a definite lived asset with a useful life of 3 years as part of our phase out of the Perfect Audience name. 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.
Goodwill and other Intangible Assets as of June 30, 2021, and December 31, 2020, are as follows:
|
| As of June 30, 2021 |
| |||||||||
|
| Gross |
|
|
|
| Net |
| ||||
|
| Carrying |
|
| Accumulated |
|
| Carrying |
| |||
|
| Amount |
|
| Amortization |
|
| Value |
| |||
Amortized intangible assets: |
|
|
|
|
|
|
|
|
| |||
Trade names |
| $ |
|
| $ | ( | ) |
| $ |
| ||
Technology |
|
|
|
|
| ( | ) |
|
|
| ||
Customer relationships |
|
|
|
|
| ( | ) |
|
|
| ||
Vendor relationships |
|
|
|
|
| ( | ) |
|
|
| ||
Unamortized intangible assets: |
|
|
|
|
| ( | ) |
|
|
| ||
Goodwill |
|
|
|
|
|
|
|
|
|
|
| |
Total goodwill and intangible assets |
|
|
|
|
|
|
|
|
| $ |
| |
|
| As of December 31, 2020 |
| |||||||||
|
| Gross |
|
|
|
| Net |
| ||||
|
| Carrying |
|
| Accumulated |
|
| Carrying |
| |||
|
| Amount |
|
| Amortization |
|
| Value |
| |||
Amortized intangible assets: |
|
|
|
|
|
|
|
|
| |||
Trade names |
| $ |
|
| $ | ( | ) |
| $ |
| ||
Technology |
|
|
|
|
| ( | ) |
|
|
| ||
Customer relationships |
|
|
|
|
| ( | ) |
|
|
| ||
Vendor relationships |
|
|
|
|
| ( | ) |
|
|
| ||
Unamortized intangible assets: |
|
|
|
|
| ( | ) |
|
|
| ||
Goodwill |
|
|
|
|
|
|
|
|
|
|
| |
Total goodwill and intangible assets |
|
|
|
|
|
|
|
|
| $ |
| |
Estimated amortization expense for the remainder of 2021 and subsequent years is as follows:
Remainder of 2021 |
| $ |
| |
2022 |
|
|
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
Thereafter |
|
|
| |
Total |
| $ |
|
| 14 |
| Table of Contents |
Amortization expense for three months ended June 30, 2021, and 2020, was $
Note 5: Debt
Credit Facility
In March 2016, the Company entered into a $
SBA Paycheck Protection Program Loan
In April 2020, SharpSpring entered into two loan agreements with United States Small Business Administration (“SBA”) under the Paycheck Protection Program for a total loan amount of $
The SBA Loans were eligible for forgiveness as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) approved by the U.S. Congress on March 27, 2020, if certain requirements were met. The Company applied for forgiveness with the SBA in December 2020, in which on March 11, 2021, the SBA forgave the principal balance and associated accumulated interest of one of the two SBA Loans in full. As a result, the Company recognized $
Presently, the SBA and other government communications have indicated that all loans in excess of $2.0 million will be subject to audit and that those audits could take up to seven years to complete. If the SBA determines that the SBA Loan was not properly obtained and/or expenditures supporting forgiveness were not appropriate, the Company would be required to repay some or all of the SBA Loan and record additional expense which could have a material adverse effect on our business, financial condition and results of operations in a future period.
| 15 |
| Table of Contents |
Note 6: Income Taxes
SharpSpring income taxes are computed in accordance with ASC Topic 740, 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)or pre-tax income (loss), by jurisdiction.
On March 27, 2020, the CARES Act was enacted into the law. The CARES Act contained many income tax relief provisions including allowing for a
During the three months ended June 30, 2021, and 2020, the Company recorded income tax expense of approximately $
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.
| 16 |
| Table of Contents |
At June 30, 2021 and December 31, 2020, we have established a valuation allowance of $
Note 7: Stock-Based Compensation
From time to time, the Company grants stock options and restricted stock unit awards to officers and employees of the Company. Additionally, the Company grants stock options and 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
In April 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”), which was amended in July 2020 and June 2021. As amended no more than
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
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, | |||||
|
| 2021 |
|
| 2020 | ||
|
|
|
|
|
| ||
Volatility |
|
|
| ||||
Risk Free Interest Rate |
|
|
| ||||
Expected term |
|
|
| ||||
| 17 |
| Table of Contents |
The weighted average grant date fair value of stock options granted during the six months ended June 30, 2021, and 2020, was $
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, 2021, and 2020, the Company recognized an expense of $
|
|
|
| Weighted |
|
| Weighted |
|
| Aggregate |
| |||||
|
| Number of |
|
| Average |
|
| Average Remaining |
|
| Intrinsic |
| ||||
|
| Options |
|
| Exercise Price |
|
| Contractual Life |
|
| Value |
| ||||
Outstanding at December 31, 2020 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Exercised |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |
Expired |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |
Forfeited |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
| |
Outstanding at June 30, 2021 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2021 |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
The total intrinsic value of stock options exercised during the three months ended June 30, 2021, and 2020, were $
| 18 |
| Table of Contents |
Restricted Stock Units
Restricted Stock Units (“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 three years from the date of the grant, with
RSUs are expensed using a graded vested schedule which are recorded on a straight-line basis over the requisite vesting period as if the award were, in substance, a single award. During the three months ended June 30, 2021, and 2020, the Company recognized expense of approximately $
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Restricted Stock Awards
Restricted stock awards (“RSAs”) 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. For awards granted that contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized on a straight-line basis over the requisite vesting period as if the award were, in substance, a single award. During the three months ended June 30, 2021, and 2020, the Company recognized expense of approximately $
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During the six months ended June 30, 2021, and 2020, the Company issued
The following table summarizes RSA activity for the six month period ended June 30, 2021:
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Additionally, during the first quarter 2021, the Company entered into an agreement with Marietta Davis to issue
Note 8: Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of common stock outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents for the period, including stock options and RSUs. Basic and diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.
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Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
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Basic and diluted weighted average common shares outstanding |
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Basic and diluted net loss per share |
| $ | (0.03 | ) |
| $ | (0.08 | ) |
| $ | (0.23 | ) |
| $ | (0.17 | ) |
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 stock options and unvested RSUs 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:
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Note 9: Commitments and Contingencies
Legal Proceedings
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 our 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 currently party to various litigation, however we are unable to estimate the likelihood or potential loss at this time, as such we have not recorded any estimated losses in our Consolidated Statements of Operations and Comprehensive loss. Descriptions of any material litigations are provided below.
Subsequent to the announcement of the Merger Agreement between the Company, Constant Contact, and MergerSub, various lawsuits were filed in connection with the Merger.
On July 21, 2021, a complaint was filed against the Company and certain of its directors and a former director in the United States Southern District Court of New York, captioned Kaczmar v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06227. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder (“Rule 14a-9”), as well as an alleged breach of fiduciary duty. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants breached their fiduciary duty, and attorneys’ and experts’ fees. On August 3, 2021, the Company was served with a summons requiring an answer or reply motion within 21 days. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.
On July 30, 2021, a complaint was filed against the Company and its directors in the United States Southern District Court of New York, captioned Ahmed v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06494. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.
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On August 2, 2021, a complaint was filed against the Company and certain of its directors and a former director in the United States Eastern District Court of New York, captioned Lavery v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-04312. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.
On August 4, 2021, a complaint was filed against the Company and certain of its directors and a former director in the United States Southern District Court of New York, captioned Lessard v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06602. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.
On August 12, 2021, a complaint was filed against the Company and certain of its directors in the United States District Court of Delaware, captioned Reinhardt v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-01171-UNA. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.
On August 12, 2021, a complaint was filed against the Company and certain of its directors in the United States Southern District Court of New York, captioned Wilhelm v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06804-UA. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.
On August 12, 2021, a complaint was filed against the Company and certain of its directors in the United States Eastern District Court of Pennsylvania, captioned Page v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-03606-GAM. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.
On August 13, 2021, a complaint was filed against the Company and certain of its directors in the United States Southern District Court of New York, captioned Handiazv. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06816. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.
Commitments
The Company rents our facilities with leases ranging from month-to-month to several years in duration. Most of our service contracts are on a month-to-month basis, however, some contracts and agreements extend out to longer periods. Future minimum lease payments, and payments due under non-cancelable service contracts are as follows as of June 30, 2021:
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Remainder of 2021 |
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2024 |
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2025 |
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Thereafter |
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Total undiscounted cash flows |
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Less imputed interest remaining |
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Present value of lease liability |
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| Table of Contents |
Sales and Franchise Taxes
State, local and foreign jurisdictions have differing rules and regulations governing sales, franchise, use, value added and other taxes. 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. The Company evaluated the potential contingent liability with respect to sales tax nexus in accordance with ASC 450 “Contingencies” and determined the liability is both reasonably estimate and probable. Accordingly, the Company recorded a contingent liability for sales tax of $
Defined Contribution Retirement Plan
Employment Agreements
The Company has employment agreements with several members of its leadership team and executive officers.
Merger Related Expenses
On June 21, 2021, the Company entered into an Agreement and Plan of Merger, (“Merger Agreement”), with Constant Contact, Inc., a Delaware corporation, (“Constant Contact”), and Groove Merger Sub, Inc (“MergerSub”), a Delaware corporation and a direct wholly-owned subsidiary of Constant Contact (“the Merger”). Pursuant to the terms of the Merger Agreement, MergerSub will merge with and into SharpSpring and SharpSpring will continue as the surviving corporation and become a wholly-owned subsidiary of Constant Contact. The Merger, subject to final shareholder approval and other closing conditions, will be proposed at a Special Stockholders Meeting to be held on August 25, 2021. Additional details regarding the proposed merger can be found within the Definitive Proxy Statement filed with the SEC on July 30, 2021. SharpSpring does not have any additional contracts with Constant Contact, except those related to Merger Agreement..
In connection with the Merger Agreement, SharpSpring expects to incur certain transaction-related expenses. These costs related to the transaction are expected to total between $
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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, 2020, filed with the Securities and Exchange Commission on March 30, 2021.
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 SharpSpring Ads 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 SharpSpring Ads 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” relate to the SharpSpring Marketing Automation product and references to “SharpSpring Ads” relate to the SharpSpring Ads product, while all references to “our Company,” “we,” “our” or “us” and other similar terms means SharpSpring, Inc., a Delaware corporation, and wholly owned subsidiaries.
Agreement and Plan of Merger
On June 21, 2021, the Company entered into an Agreement and Plan of Merger, (“Merger Agreement”), with Constant Contact, Inc., a Delaware corporation, (“Constant Contact”), and Groove Merger Sub, Inc (“MergerSub”), a Delaware corporation and a direct wholly-owned subsidiary of Constant Contact (“the Merger”). Pursuant to the terms of the Merger Agreement, MergerSub will merge with and into SharpSpring and SharpSpring will continue as the surviving corporation and become a wholly-owned subsidiary of Constant Contact. The Merger, subject to final shareholder approval and other closing conditions, will be proposed at a Special Stockholders Meeting to be held on August 25, 2021. Additional details regarding the proposed Merger can be found within the Definitive Proxy Statement filed with the SEC on July 30, 2021. We cannot assure you that the Merger will be completed on the terms or timeline anticipated or at all. SharpSpring does not have any additional contracts with Constant Contact, except those related to Merger Agreement.
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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 voluntary 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. At the onset of the pandemic, we made certain temporary strategic business decisions to help navigate these uncertain times such as salary reduction, reduction and reallocation of marketing budget, and pausing our employee 401(k) matching program. SharpSpring has successfully reverted these temporary measures after establishing a more stable view of the impact of the COVID-19 pandemic.
Also described in Note 5, SBA Paycheck Protection Loans, the Company received $3.40 million from the Small Business Association (“SBA”) loan program in April 2020, which as of June 30, 2021, the entire $3.40 million has been forgiven. We also received an approximately $1.60 million tax refund in June 2020 as a result of historical net operating losses as described in Note 6, Income Taxes. The SBA loan program and tax refund are both results of the CARES Act enacted by Congress in March 2020. This cash infusion continues to allow for increased flexibility in these uncertain times. In addition, the Company received approximately $13.94 million from a stock offering, net of issuance costs, in December 2020.
While, the COVID-19 pandemic has made significant impact on the entire global economy, the SharpSpring sales and marketing platforms continue to generate demand in these uncertain times 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 three months ended June 30, 2021, we activated 159 new customers compared to 260 in the same period in 2020. The second quarter of 2021 was challenging on our sales and marketing funnel as the direct and indirect impacts of COVID-19 and the recently identified variants of COVID-19 remained along with challenges in new customer acquisition within the business not related to the pandemic. The resulting sales levels will have a continuing impact on the Company’s growth rate throughout 2021 and beyond due to the Company’s recurring revenue model. Additionally, customer acquisition costs had increased significantly since the onset of the pandemic and that the remote work environment had added upward pressure on salaries as the Company sought to continue to hire qualified candidates to fill open positions in a highly competitive market for a limited number of candidates. Despite a lower-than-average new logo sales quarter, 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. Our SharpSpring Ads business has faced downward pressures beyond that of our Marketing Automation platform as the retargeting industry continues to experience difficulties as customers spend less on advertisements during this unprecedented time. We continue to invest in our product as we still expect long term growth from this business and believe the current economic climate for advertisement retargeting is temporary only due to COVID-19 and the recently identified variants of COVID-19. During the first quarter of 2021, we have returned our marketing spend levels to a pre-pandemic level in an effort to spur growth of new customers back to levels we were able to achieve prior to the pandemic.
COVID-19 and the recently identified variants of COVID-19 have created a more global and therefore more competitive employment pool for companies across the United States as well as the rest of the world. As such, we are no longer exclusively competing for talented employees with other local companies, but rather competing with companies across the globe as remote work has become more widely adopted. We have taken steps to review our total compensation package including flexibility of working remotely, to ensure we can remain competitive in the current environment. We believe the steps we have taken will allow us to remain competitive for top talent needed to grow our company.
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Despite COVID-19 and the recently identified variants of COVID-19, the Company was able to continue to grow revenue in the three months ended June 30, 2021, compared to both the three months ended March 31, 2021, and June 30, 2020. We believe we have limited the impact of the pandemic on our existing customer base as evidenced by our lower than our average attrition rate, however, we are still experiencing difficulties attracting new customers with the economic uncertainties of the pandemic still looming. It is possible that we could be further impacted from COVID-19 and the recently identified variants of COVID-19 in subsequent quarters in ways that we presently do not anticipate; however, at this time, our business continues to grow. In addition, we have been able to maintain the size of our workforce throughout the entirety of the pandemic. The full extent of the impact to the Company due to the impact of the COVID-19 pandemic for the next year and beyond cannot currently be completely determined, but the Company has taken measures to best position our self 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.
Results of Operations
Three Months Ended June 30, 2021, Compared to the Three Months Ended June 30, 2020:
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Revenues and Cost of Sales: |
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Revenues |
| $ | 8,106,243 |
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| $ | 7,270,905 |
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| $ | 835,338 |
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| 11% | |
Cost of Sales |
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| 1,984,662 |
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| 1,873,029 |
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| 111,633 |
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| 6% | |
Gross Profit |
| $ | 6,121,581 |
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| $ | 5,397,876 |
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| $ | 723,705 |
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| 13% | |
Revenues increased $0.84 million to $8.11 million in the three months ended June 30, 2021, as compared to $7.27 million for the three months ended June 30, 2020, primarily from the combined impact of our two most recent rolling annual price increases throughout the year put in place during the first quarter of 2021 and 2020 and continued improvement of our attrition from our existing customer base. Revenues for our flagship marketing automation platform increased to approximately $7.50 million in the three months ended June 30, 2021, up from $6.57 million in the three months ended June 30, 2020. Revenue from the SharpSpring Ads platform decreased $0.09 million to $0.58 million for the three months ended June 30, 2021, compared to $0.67 million for the three months ended June 30, 2020.
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Cost of sales increased $0.11 million to $1.98 million for the three months ended June 30, 2021, compared to $1.87 million for the three months ended June 30, 2020. The increase in cost of sales was driven primarily by an increase in employee related costs of approximately $0.09 million associated with supporting our technology platform to more customers. Costs associated with our SharpSpring Ads platform for the three months ended June 30, 2021, increased approximately $0.01 million compared to the same period last year. In addition, the total cost of sales related to the SharpSpring Marketing Automation product increased approximately $0.10 million in the second quarter of 2021 compared to the second quarter of 2020. The total costs increased approximately $0.03 million during the three months ended June 30, 2021, for hosting costs to support new revenues from both our various products. Gross margin as a percentage of revenue increased from 74.2% in the second quarter of 2020 to 75.5% in the second quarter of 2021. This improvement in gross margin is the result of overall efficiencies within our cost of sales.
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Operating expenses: |
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Sales and marketing |
| $ | 3,915,096 |
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| $ | 2,395,100 |
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| $ | 1,519,996 |
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| 63% | |
Research and development |
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| 2,111,540 |
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| 1,484,890 |
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| 626,650 |
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| 42% | |
General and administrative |
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| 3,522,971 |
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| 2,244,560 |
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| 1,278,411 |
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| 57% | |
Intangible asset amortization |
|
| 171,549 |
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| 183,746 |
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| (12,197 | ) |
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| -7% | |
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| $ | 9,721,156 |
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| $ | 6,308,296 |
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| $ | 3,412,860 |
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| 54% | |
Sales and marketing expenses increased $1.52 million to $3.92 million for the three months ended June 30, 2021, as compared to $2.40 million for the three months ended June 30, 2020. The increase was primarily due to an increase of $1.40 million in marketing program spend to drive growth of new sales. Additionally, employee-related costs, including equity compensation, increased $0.11 million to support increased marketing program spend during the second quarter of 2021 compared to the same period of 2020 as well as the return to full salaries in the fourth quarter of 2020 that were reduced in response to COVID-19 starting in April 2020. These increases were partially offset by a decrease of $0.05 million in recruiting expense related to additional sales and marketing hires made in the second quarter of 2020.
Research and development expenses increased $0.63 million to $2.11 million for the three months ended June 30, 2021, as compared to $1.48 million for the three months ended June 30, 2020. The increase in research and development expense is primarily due to an increase of $0.68 million in employee-related costs, including equity compensation, tied to increased headcount and a more competitive salary environment for remote workers as more companies transitioned to remote workers as a result of COVID-19. Outsourced development costs for the three months ended June 30, 2021, decreased approximately $0.13 million as compared to the three months ended June 30, 2020, as we concentrated on internal development work as opposed to outsourced development. Capitalized development costs for the three months ended June 30, 2021, and June 30, 2020, were $0.14 million and $0.15 million, respectively. The decreased capitalization resulted in a net increase research and development expense of approximately $0.01 million for the three months ended June 30, 2021, compared to the same period last year.
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General and administrative expenses increased $1.28 million to $3.52 million for the three months ended June 30, 2021, as compared to $2.24 million for the three months ended June 30, 2020. During the three months ended June 30, 2021, the Company incurred costs of approximately $0.27 million relating to the proposed Merger. Employee related costs increased approximately $0.41 million during the three months ended June 30, 2021, compared to the three months ended June 30, 2020, of which $0.13 million is related to increase equity costs. Additionally, employee related costs increased during the three months ended June 30, 2020, due to the return to full salaries in the fourth quarter of 2020 that were reduced in response to COVID-19 starting in April 2020. Facilities and rent expense for the three months ended June 30, 2021, increased approximately $0.10 million compared to the three months ended June 30, 2020, which was mostly attributable to the additional office space added during the mid-second quarter of 2020 at our Gainesville headquarters. Other non-headcount and non-facilities costs, including insurance premiums and public company registration fees increased $0.16 million. Expenses from outside professional services not related to the proposed Merger increased by approximately $0.02 million. Depreciation expense increased by approximately $0.19 million related to increased property and equipment expenditures throughout 2020 to furnish the additional office space as well as increased capitalized software costs.
Amortization of intangible decreased $0.01 million for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020.
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| Three Months Ended |
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|
| Change |
| |||||||
|
| June 30, |
|
| from |
|
| from |
| |||||||
|
| 2021 |
|
| 2020 |
|
| Prior Year |
|
| Prior Year |
| ||||
Other |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other income (expense), net |
| $ | (21,354 | ) |
| $ | (2,777 | ) |
| $ | (18,577 | ) |
|
| 669% | |
Gain on extinguishment of debt |
| $ | 3,271,101 |
|
| $ | - |
|
| $ | 3,271,101 |
|
|
| n/a |
|
Provision (benefit) for income taxes |
| $ | 3,947 |
|
| $ | 57,187 |
|
| $ | (53,240 | ) |
|
| -93% | |
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 Credit Facility. For the three months ended June 30, 2021, we also recorded a gain on extinguishment of debt of approximately $3.27 million related to forgiveness of one of our SBA loans in June of 2021. Interest expense relating to our Credit Facility and SBA Loans (Note 5) for the three months ended June 30, 2021, and 2020 were approximately $0.03 million and $0.04 million, respectively. For the three months ended June 30, 2020, the Company received and recognized interest income in the amount of approximately $0.05 million related to the tax refund received in June 2020.
During the three months ended June 30, 2021, and June 30, 2020, our income tax expense was related to income derived in foreign jurisdictions at the applicable statutory tax rates. For years 2021 and 2020, 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 Consolidated Statement of Operations and Comprehensive Loss for those losses.
| 28 |
| Table of Contents |
Six Months Ended June 30, 2021, compared to the Six Months Ended June 30, 2020:
|
|
|
|
|
|
|
| Percent |
| |||||||
|
| Six Months Ended |
|
| Change |
|
| Change |
| |||||||
|
| June 30, |
|
| from |
|
| from |
| |||||||
|
| 2021 |
|
| 2020 |
|
| Prior Year |
|
| Prior Year |
| ||||
Revenues and Cost of Sales: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 16,095,473 |
|
| $ | 14,323,634 |
|
| $ | 1,771,839 |
|
|
| 12% | |
Cost of Sales |
|
| 3,874,675 |
|
|
| 4,240,671 |
|
|
| (365,996 | ) |
|
| -9% | |
Gross Profit |
| $ | 12,220,798 |
|
| $ | 10,082,963 |
|
| $ | 2,137,835 |
|
|
| 21% | |
Revenues increased $1.77 million to $16.10 million in the six months ended June 30, 2021, as compared to $14.32 million in the six months ended June 30, 2020, primarily from the combined impact of our two most recent rolling annual price increases throughout the year put in place during the first quarter of 2021 and 2020 and continued improvement of our attrition from our existing customer base. Revenues for our flagship marketing automation platform increased approximately $1.95 million to a record $14.88 million in the six months ended June 30, 2021, up from $12.93 million in the six months ended June 30, 2020. Revenue from the SharpSpring Ads platform decreased $0.13 million to $1.16 million for the six months ended June 30, 2021, compared to $1.29 million for the six months ended June 30, 2020.
Cost of sales decreased $0.37 million to $3.87 million for the six months ended June 30, 2021 compared to $4.24 million for the six months ended June 30, 2020. The decrease in cost of sales was driven primarily by an approximate $0.08 million decrease in employee related costs associated with more efficiently providing and supporting our technology platform. Costs associated with our SharpSpring Ads platform for the six months ended June 30, 2021, decreased approximately $0.21 million compared to the same period last year due to significant initial cost of supporting SharpSpring Ads in the first full six month of operations after the acquisition of the platform in November 2019. In addition, total cost of sales related to the SharpSpring Marketing Automation product decreased approximately $0.16 million for the six months ended June 30, 2021, compared to the same period in 2020. Hosting costs increased $0.05 million during the six months ended June 30, 2021, to support new revenues. Gross margin as a percentage of revenue increased from 70.4% in the first six months of 2020 to 75.9% in the first six of 2021. This improvement in gross margin is the result of overall efficiencies within our cost of sales.
|
|
|
|
|
|
|
| Percent |
| |||||||
|
| Six Months Ended |
|
| Change |
|
| Change |
| |||||||
|
| June 30, |
|
| from |
|
| from |
| |||||||
|
| 2021 |
|
| 2020 |
|
| Prior Year |
|
| Prior Year |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sales and marketing |
| $ | 7,706,478 |
|
| $ | 5,429,222 |
|
| $ | 2,277,256 |
|
|
| 42% | |
Research and development |
|
| 4,227,280 |
|
|
| 3,063,029 |
|
|
| 1,164,251 |
|
|
| 38% | |
General and administrative |
|
| 6,294,610 |
|
|
| 4,658,401 |
|
|
| 1,636,209 |
|
|
| 35% | |
Intangible asset amortization |
|
| 343,098 |
|
|
| 336,547 |
|
|
| 6,551 |
|
|
| 2% | |
|
| $ | 18,571,466 |
|
| $ | 13,487,199 |
|
| $ | 5,084,267 |
|
|
| 38% | |
Sales and marketing expenses increased $2.28 million to $7.71 million for the six months ended June 30, 2021, as compared to $5.43 million for the six months ended June 30, 2020. The increase was primarily due to an increase of $2.04 million in marketing program spend to drive growth of new sales, in the six months ended June 30, 2021, as the Company returned marketing program spend to pre-COVID levels. Additionally, employee-related costs, including equity compensation, increased $0.28 million to support increased marketing program spend in the second six months of 2021 compared to the same period of 2020. These increases were partially offset by a decrease of $0.12 million in recruiting expense related to additional sales and marketing hires made in the second six months of 2020.
| 29 |
| Table of Contents |
Research and development expenses increased $1.16 million to approximately $4.23 million for the six months ended June 30, 2021, as compared to $3.06 million for the six months ended June 30, 2020. The increase in research and development expense is primarily due to an increase of $1.22 million in employee-related costs, including equity compensation, tied to increased headcount and a more competitive salary environment for remote workers as more companies transitioned to remote workers as a result of COVID-19. Outsourced development costs for the six months ended June 30, 2021, decreased approximately $0.31 million as compared to the six months ended June 30, 2020, as we concentrated on internal development work as opposed to outsourced development. Capitalized development costs for the six months ended June 30, 2021, and June 30, 2020, were $0.20 million and $0.42 million, respectively. The decrease capitalization resulted in a net increase research and development expense of approximately $0.22 million for the six months ended June 30, 2021, compared to the same period last year.
General and administrative expenses increased $1.63 million to $6.29 million for the six months ended June 30, 2021, as compared to $4.66 million for the six months ended June 30, 2020. During the six months ended June 30, 2021, the Company incurred costs of approximately $0.27 million relating to the proposed Merger. Employee related costs increased approximately $0.54 million during the six months ended June 30, 2021, compared to the six months ended June 30, 2020, primarily due to the return to full salaries in the fourth quarter of 2020 that were reduced in response to COVID-19 starting in April 2020. Facilities and rent expense for the six months ended June 30, 2021, increased approximately $0.19 million compared to the six months ended June 30, 2020, and was mostly related to the addition of office space at our Gainesville headquarters during the mid-second quarter of 2020. Other non-headcount and non-facilities costs, including insurance premiums and public company registration fees increased $0.24 million. Expenses from outside professional services not related to the proposed Merger decreased by approximately $0.08 million. Depreciation expense increased by approximately $0.26 million related to increased property and equipment expenditures throughout 2020 for furniture and leasehold improvements related to the additional office space acquired in the second quarter of 2020, as well as increased capitalized software costs.
Amortization of intangible increased $0.01 million for the six months ended June 30, 2021, as compared to the three months ended June 30, 2020.
|
|
|
|
|
|
|
| Percent |
| |||||||
|
| Six Months Ended |
|
| Change |
|
| Change |
| |||||||
|
| June 30, |
|
| from |
|
| from |
| |||||||
|
| 2021 |
|
| 2020 |
|
| Prior Year |
|
| Prior Year |
| ||||
Other |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other income (expense), net |
| $ | (14,519 | ) |
| $ | (59,556 | ) |
| $ | 45,037 |
|
|
| -76% | |
Gain on extinguishment of debt |
| $ | 3,438,077 |
|
| $ | - |
|
| $ | 3,438,077 |
|
|
| n/a |
|
Provision (benefit) for income taxes |
| $ | 10,520 |
|
| $ | (1,505,331 | ) |
| $ | 1,515,851 |
|
|
| -101% | |
Other expense is generally related to foreign exchange gains and losses derived from owing amounts or having amounts owed in currencies other than the entity’s functional currency, as well as interest expense related to our Credit Facility. For the six months ended June 30, 2021, we also recorded a gain on extinguishment of debt of approximately $3.44 million related to forgiveness of one of our SBA loans in June of 2021. Interest expense relating to our Credit Facility and SBA Loans (Note 5) for the six months ended June 30, 2021, and 2020 was approximately $0.06 million and $0.04 million, respectively. For the six months ended June 30, 2020, the Company received and recognized interest income in the amount of approximately $0.05 million related to the tax refund received in June 2020.
| 30 |
| Table of Contents |
During the six months ended June 30, 2021, our income tax expense was related to income derived in foreign jurisdictions at the applicable statutory tax rates. During the six months ended June 30, 2020, our income tax benefit was related to 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. For years 2021 and 2020, we have recorded a full valuation allowance against all of our U.S. net operating loss deferred tax assets, so there is no tax benefit recorded on the Consolidated Statement of Operations and Comprehensive Loss for those losses.
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 SharpSpring Ads platforms. Such payments are primarily received monthly and weekly respectively from customers but can sometimes be received in advance of providing the services, yielding a deferred revenue liability on our consolidated balance sheet. In December of 2020, the Company issued 1,000,000 shares of common stock and raised approximately $13.94 million, net of issuance costs. In June 2020, we received a tax refund of approximately $1.60 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 $3.40 million from the SBA Loans in April 2020. In March 2020, the Company drew down on our available $1.90 million Credit Facility.
Our primary sources of cash outflows from operations include payroll and payments to vendors and third-party service providers.
Analysis of Cash Flow
Net cash used in operating activities increased by $2.31 million to $3.31 million used in operations for the six months ended June 30, 2021, compared to approximately $0.99 million for the six months ended June 30, 2020. The increase in cash used in operating activities was attributable primarily to the increase in operating loss of $2.95 million to $6.35 million for the six months ended June 30, 2021 up from $3.40 million net loss for the six months ended June 30, 2020.
Net cash used in investing activities improved by approximately $0.40 million to $0.37 million for the six months ended June 30, 2021, compared to $0.78 million for the six months ended June 30, 2020. The decrease in cash used for investing activities was primarily related to the reduced investment in property and equipment and decreased in investment in capitalized software development during the six months ended June 30, 2021, compared to the six months ended June 30, 2020.
Net cash provided by financing activities decreased by $4.83 million to $0.47 million for the six months ended June 30, 2021, compared to $5.29 million for the six months ended June 30, 2020. The decrease in cash provided by financing activities was primarily related the proceeds received from the Company’s $3.40 million SBA Loan and $1.90 million from our Credit Facility during the six months ended June 30, 2020 (Note 5). This decrease in cash flow was slightly offset by the increase of $0.48 million from proceeds from the exercise of employee stock options received during the six months ended June 30, 2021, compared to $0.02 million received during the six months ended June 30, 2020.
| 31 |
| Table of Contents |
SharpSpring had net working capital of approximately $21.42 million and $22.81 million as of June 30, 2021, and December 31, 2020, respectively. Our cash balance was on June 30, 2021, and December 31, 2020, was $25.16 million and $28.27 million respectively. The cash balances reflect $1.9 million received from our Credit Facility in March 2020, $3.4 million received from the SBA Loans in April 2020, and approximately $13.9 million received from secondary offering, net of issuance costs, in December 2020.
Contractual Obligations
As of June 30, 2021, there were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K filed with the SEC on March 30, 2021, other than those appearing in the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Significant Accounting Policies
As of June 30, 2021, there were no significant changes in the application of our significant accounting policies or estimation procedures from those presented in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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 Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2021. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of June 30, 2021 the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
| 32 |
| Table of Contents |
Changes in Company Internal Controls
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
| 33 |
| Table of Contents |
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time our 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 our business, operating results, financial condition or cash flows. In addition, as described in “Note 9 – Commitments and Contingencies” to our consolidated financial statements, we are party to four lawsuits relating to the Merger. Given the inherent unpredictability of these types of proceedings, however, it is possible that an adverse outcome in one or more of these proceedings could have a material adverse effect on our financial results.
Item 1A. Risk Factors.
There were no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, except as set forth below.
Risks Related to the Merger
The proposed Merger may be delayed or not occur at all for a variety of reasons, including the possibility that the Merger Agreement is terminated prior to the completion of the Merger.
On June 21, 2021, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”), with Constant Contact, Inc., a Delaware corporation, (“Constant Contact”), and Groove Merger Sub, Inc (“MergerSub”), a Delaware corporation and a direct wholly-owned subsidiary of Constant Contact (the “Merger”). Completion of the Merger is subject to customary closing conditions, including (i) approval of the Merger Agreement by our stockholders, (ii) the absence of governmental injunctions or other legal restraints prohibiting the Merger and (iii) the absence of a “Material Adverse Effect,” as defined in the Merger Agreement. In addition, the obligation of each party to consummate the Merger is conditioned upon, among other things, the accuracy of the representations and warranties of the other party (subject to certain materiality exceptions), and material compliance by the other party with its covenants under the Merger Agreement. Therefore, the Merger may not be completed or may not be completed as quickly as expected.
Failure to complete the Merger could adversely affect our business and the market price of our common stock in a number of ways, including:
| · | the market price of our common stock may decline to the extent that the current market price reflects an assumption that the Merger will be consummated; |
| · | if the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, we would be required to pay Constant Contact a termination fee of $7,046,778; |
| · | we have incurred, and will continue to incur, significant expenses for professional services in connection with the Merger for which we will have received little or no benefit if the Merger is not consummated; and |
| · | a failed Merger may result in negative publicity and/or give a negative impression of us in the investment community or business community generally. |
The Merger could divert management’s attention, disrupt our relationships with third parties and employees and result in negative publicity or legal proceedings, any of which could negatively impact our operating results and ongoing business.
| 34 |
| Table of Contents |
We have expended, and continue to expend, significant management time and resources in an effort to complete the Merger, which may have a negative impact on our ongoing business. Uncertainty regarding the outcome of the Merger and our future could disrupt our business relationships with our existing and potential customers, suppliers, vendors and other business partners, who may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us. Uncertainty regarding the outcome of the Merger could also adversely affect our ability to recruit and retain key personnel and other employees. The pendency of the Merger may also result in negative publicity and a negative impression of us in the financial markets. The Merger has resulted in litigation against us and our directors and officers. Such litigation could be distracting to management and may require us to incur significant costs. In addition, litigation could result in the Merger being delayed and/or enjoined by a court of competent jurisdiction, which could prevent the Merger from becoming effective or becoming effective on the expected timeframe. The occurrence of any of these events individually or in combination could have a material and adverse effect on our business, financial condition and results of operations.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities.
While the Merger Agreement is in effect, we are subject to certain restrictions on our business activities and must generally operate our business in the ordinary course, subject to certain exceptions. These restrictions could prevent us from pursuing attractive business opportunities that may arise prior to the consummation of the Merger. Although we may be able to pursue such activities with the Constant Contact’s consent, Constant Contact may not be willing to provide its consent for us to do so.
If the Merger occurs, our shareholders will not be able to participate in any upside to our business.
If the Merger is consummated, each outstanding share of common stock of the Company (other than shares held in the treasury of the Company, owned by Constant Contact or the MergerSub, or any dissenting shares), will cease to be outstanding and will be converted into the right to receive an amount in cash equal to $17.10, without interest, subject to deduction for any required withholding tax or other amounts required to be withheld therefrom. As a result, if our business following the Merger performs well, our current shareholders will not receive any additional consideration and will therefore not receive any benefit from any such future performance of our business.
Litigation could delay and/or prevent the Merger from becoming effective or from becoming effective within the expected timeframe.
We are subject to litigation challenging the Merger. If plaintiffs move for and are successful in obtaining an injunction prohibiting the consummation of the Merger, then such injunction may prevent the Merger from becoming effective or from becoming effective within the expected timeframe, either of which could substantially harm our business.
The Merger Agreement contains provisions that could discourage a potential competing acquirer of us.
The Merger Agreement contains certain customary restrictions of the Company’s ability to solicit, initiate, or knowingly encourage or induce third-party proposals (or knowingly cooperate in connection with such third party proposals) for the acquisition of our stock or assets until the consummation of the Merger or the earlier termination of the Merger Agreement. In addition, subject to certain customary "fiduciary out" exceptions, our Board of Directors is required to recommend that our stockholders vote in favor of the approval of the Merger, the Merger Agreement, and the transactions contemplated thereby. In addition, in some circumstances, upon termination of the Merger Agreement, the Company will be required to pay a termination fee of $7,046,778.
| 35 |
| Table of Contents |
These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of the Company from considering or proposing that acquisition, even if the acquirer was prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the Merger, or might otherwise result in a potential third-party acquirer proposing to pay a lower price to our stockholders than they might otherwise have proposed to pay due to the added expense of the termination fee that may become payable in certain circumstances.
If the Merger Agreement is terminated and the Company decides to seek another business combination, we may not be able to negotiate or consummate a transaction with another party on terms comparable to, or better than, the terms of the Merger Agreement.
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.
| 36 |
| Table of Contents |
Item 6. Exhibits.
INDEX TO EXHIBITS
Exhibit No. |
| Description |
| ||
| ||
| ||
| Amendment No. 2 to SharpSpring, Inc. 2019 Equity Incentive Plan | |
| ||
| ||
| ||
| ||
| ||
| ||
101 |
| XBRL* |
* Filed herewith
| 37 |
| Table of Contents |
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 (Principal Executive Officer) Date: August 16, 2021 |
|
SharpSpring, Inc. |
| ||
|
|
|
|
| By: | /s/ Aaron Jackson |
|
|
| Aaron Jackson Chief Financial Officer |
|
|
| (Principal Financial Officer) Date: August 16, 2021 |
|
38 |