shsp_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2021

Or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36280

SharpSpring, Inc.
(Exact name of registrant as specified in its charter)

Delaware		05-0502529
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5001 Celebration Pointe Avenue Suite 410 Gainesville, FL		32608
(Address of principal executive offices)		(Zip Code)

888-428-9605

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 12,886,660 shares of common stock as of August 13, 2021.

SHARPSPRING, INC

TABLE OF CONTENTS

		Page

PART I – FINANCIAL INFORMATION		5

	Item 1. Financial Statements:	5
	Consolidated Balance Sheets (Unaudited)	5
	Consolidated Statements of Operations and Comprehensive Loss (Unaudited)	6
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	7
	Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to the Consolidated Financial Statements (Unaudited)	9
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
	Item 4. Controls and Procedures	32

PART II – OTHER INFORMATION		34

	Item 1. Legal Proceedings	34
	Item 1A. Risk Factors	34
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
	Item 3. Defaults Upon Senior Securities	36
	Item 4. Mine Safety Disclosures	36
	Item 5. Other Information	36
	Item 6. Exhibits	37
SIGNATURES		38

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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:

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	·	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.

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SHARPSPRING, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
	2021			2020
Assets
Cash and cash equivalents	$	25,157,240		$	28,267,792
Accounts receivable, net of allowance for doubtful accounts of $74,126 and $56,134 at June 30, 2021 and December 31, 2020, respectively		300,149			323,130
Unbilled receivables		1,265,527			1,248,060
Income taxes receivable		143,498			54,449
Other current assets		1,293,952			1,433,543
Total current assets		28,160,366			31,326,974

Property and equipment, net		1,861,067			2,188,948
Goodwill		10,230,917			10,250,088
Intangibles, net		3,672,753			4,015,851
Right-of-use assets		7,934,913			8,352,028
Other long-term assets		584,435			611,857
Total assets	$	52,444,451		$	56,745,746

Liabilities and Shareholders' Equity
Accounts payable	$	964,933		$	1,074,594
Accrued expenses and other current liabilities		2,242,981			1,259,836
Line of credit		1,900,000			1,900,000
Deferred revenue		862,767			845,265
Income taxes payable		23,755			81,221
Lease liability, current portion		748,499			724,627
Notes payable, current portion		-			2,630,962
Total current liabilities		6,742,935			8,516,505
Lease liability, net of current portion
		7,358,118			7,771,898
Notes payable, net of current portion		-			768,538
Total liabilities		14,101,053			17,056,941
Commitments and contingencies (Note 9)

Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at June 30, 2021 and December 31, 2020		-			-
Common stock, $0.001 par value, 50,000,000 shares authorized, 12,902,030 issued and 12,882,030 outstanding as of June 30, 2021; 12,818,797 issued and 12,798,797 outstanding as of December 31, 2020		12,902			12,819
Additional paid in capital		77,141,573			75,544,966
Accumulated other comprehensive loss		(219,736	)		(215,269	)
Accumulated deficit		(38,507,341	)		(35,569,711	)
Treasury stock		(84,000	)		(84,000	)
Total shareholders' equity		38,343,398			39,688,805

Total liabilities and shareholders' equity	$	52,444,451		$	56,745,746

See accompanying notes to the consolidated financial statements.

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SHARPSPRING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020

Revenue	$	8,106,243		$	7,270,905		$	16,095,473		$	14,323,634

Cost of services		1,984,662			1,873,029			3,874,675			4,240,671
Gross profit		6,121,581			5,397,876			12,220,798			10,082,963

Operating expenses:
Sales and marketing		3,915,096			2,395,100			7,706,478			5,429,222
Research and development		2,111,540			1,484,890			4,227,280			3,063,029
General and administrative		3,522,971			2,244,560			6,294,610			4,658,401
Intangible asset amortization		171,549			183,746			343,098			336,547

Total operating expenses		9,721,156			6,308,296			18,571,466			13,487,199

Operating loss		(3,599,575	)		(910,420	)		(6,350,668	)		(3,404,236	)
Other income (expense), net		(21,354	)		(2,777	)		(14,519	)		(59,556	)
Gain on extinguishment of debt		3,271,101			-			3,438,077			-

Loss before income taxes		(349,828	)		(913,197	)		(2,927,110	)		(3,463,792	)

Provision (benefit) for income taxes		3,947			57,187			10,520			(1,505,331	)
Net loss	$	(353,775	)	$	(970,384	)	$	(2,937,630	)	$	(1,958,461	)

Net loss per share, basic and diluted	$	(0.03	)	$	(0.08	)	$	(0.23	)	$	(0.17	)

Shares used in computing net loss per share, basic and diluted		12,852,131			11,529,324			12,833,148			11,525,258

Other comprehensive loss:
Foreign currency translation adjustment, net		5,493			3,258			(4,467	)		(5,569	)
Comprehensive loss	$	(348,282	)	$	(967,126	)	$	(2,942,097	)	$	(1,964,030	)

See accompanying notes to the consolidated financial statements.

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SHARPSPRING, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

								Accumulated
					Additional			Other
	Common Stock				Paid in			Comprehensive			Treasury Stock					Accumulated
	Shares		Amount		Capital			Loss			Shares		Amount			Deficit			Total
Balance, March 31, 2020		11,545,957	$	11,546	$	59,206,549		$	(233,620	)		20,000	$	(84,000	)	$	(30,728,759	)	$	28,171,715
Stock based compensation		-		-		323,722			-			-		-			-			323,722
Issuance of common stock for cash		3,155		3		12,285			-			-		-			-			12,289
Issuance of common stock for services		4,824		5		46,692			-			-		-			-			46,696
Issuance of common stock under stock plans, net of shares withheld for employee taxes		784		1		(1,870	)		-			-		-			-			(1,869	)
Foreign currency translation adjustment, net		-		-		-			3,258			-		-			-			3,258
Net loss		-		-		-			-			-		-			(970,384	)		(970,384	)
Balance, June 30, 2020		11,554,720	$	11,555	$	59,587,378		$	(230,362	)		20,000	$	(84,000	)	$	(31,699,143	)	$	27,585,428

Balance, March 31, 2021		12,854,252		12,854		76,255,585			(225,229	)		20,000		(84,000	)		(38,153,566	)		37,805,644
Stock based compensation		-		-		544,365			-			-		-			-			544,365
Issuance of common stock for cash		43,967		44		321,906			-			-		-			-			321,950
Issuance of common stock for services		1,836		2		30,953			-			-		-			-			30,955
Issuance of common stock under stock plans, net of shares withheld for employee taxes		1,975		2		(11,236	)		-			-		-			-			(11,234	)
Foreign currency translation adjustment		-		-		-			5,493			-		-			-			5,493
Net loss		-		-		-			-			-		-			(353,775	)		(353,775	)
Balance, June 30, 2021		12,902,030	$	12,902	$	77,141,573		$	(219,736	)		20,000	$	(84,000	)	$	(38,507,341	)	$	38,343,398

Balance, December 31, 2019		11,537,163	$	11,537	$	58,851,285		$	(224,793	)		20,000	$	(84,000	)	$	(29,740,682	)	$	28,813,347
Stock based compensation		-		-		663,078			-			-		-			-			663,078
Issuance of common stock for cash		4,660		5		23,457			-			-		-			-			23,462
Issuance of common stock for services		7,504		8		77,965			-			-		-			-			77,972
Issuance of common stock under stock plans, net of shares withheld for employee taxes		5,393		5		(28,407	)		-			-		-			-			(28,402	)
Foreign currency translation adjustment		-		-		-			(5,569	)		-		-			-			(5,569	)
Net loss		-		-		-			-			-		-			(1,958,461	)		(1,958,461	)
Balance, June 30, 2020		11,554,720	$	11,555	$	59,587,378		$	(230,362	)		20,000	$	(84,000	)	$	(31,699,143	)	$	27,585,428

Balance, December 31, 2020		12,818,797		12,819		75,544,966			(215,269	)		20,000		(84,000	)		(35,569,711	)		39,688,805
Stock based compensation		-		-		895,088			-			-		-			-			895,088
Issuance of common stock for cash		66,023		66		501,971			-			-		-			-			502,037
Issuance of common stock for services		12,099		12		235,805			-			-		-			-			235,817
Issuance of common stock under stock plans, net of shares withheld for employee taxes		5,111		5		(36,257	)		-			-		-			-			(36,252	)
Foreign currency translation adjustment		-		-		-			(4,467	)		-		-			-			(4,467	)
Net loss		-		-		-			-			-		-			(2,937,630	)		(2,937,630	)
Balance, June 30, 2021		12,902,030	$	12,902	$	77,141,573		$	(219,736	)		20,000	$	(84,000	)	$	(38,507,341	)	$	38,343,398

See accompanying notes to the consolidated financial statements.

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SHARPSPRING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	June 30,
	2021			2020
Cash flows from operating activities:
Net loss	$	(2,937,630	)	$	(1,958,461	)
Adjustments to reconcile loss from operations:
Depreciation and amortization		1,041,311			774,140
Gain on extinguishment of debt		(3,438,077	)		-
Amortization of costs to acquire contracts		407,282			404,767
Non-cash stock compensation		1,138,405			741,051
Deferred income taxes		-			(5,504	)
Loss on disposal of property and equipment		3,299			-
Unrealized foreign currency (gain) loss		(45,204	)		109,928
Changes in assets and liabilities:
Accounts receivable		20,362			(106,260	)
Unbilled receivables		(27,704	)		(133,315	)
Right-of-use assets		417,115			(3,475,390	)
Other assets		(239,733	)		(279,099	)
Income taxes, net		(144,864	)		33,639
Accounts payable		(108,933	)		(120,934	)
Lease liabilities		(389,909	)		3,511,291
Accrued expenses and other current liabilities		975,631			(288,041	)
Deferred revenue		20,294			(201,893	)
Net cash used in operating activities		(3,308,355	)		(994,081	)

Cash flows from investing activities
Purchases of property and equipment		(169,328	)		(352,900	)
Capitalization of software development costs		(204,302	)		(424,124	)
Net cash used in investing activities		(373,630	)		(777,024	)

Cash flows used in financing activities:
Proceeds from line of credit		-			1,900,000
Proceeds from note payable		-			3,399,500
Proceeds from exercise of stock options, net		502,037			23,462
Payments for taxes related to net share settlement of equity awards		(36,252	)		(28,402	)
Net cash provided by financing activities		465,785			5,294,560

Effect of exchange rate on cash		105,648			(118,509	)

Change in cash and cash equivalents		(3,110,552	)		3,404,946

Cash and cash equivalents, beginning of period		28,267,792			11,881,949

Cash and cash equivalents, end of period	$	25,157,240		$	15,286,895

Supplemental information on consolidated statements of cash flows:
Cash paid (received) during the period for
Interest, net	$	48,028		$	(19,255	)
Income taxes, net	$	155,294			(1,533,467	)
Non-cash activities
Right-of-use asset obtained for lease liability	$	-		$	3,758,014

See accompanying notes to the consolidated financial statements.

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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.

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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 24.1% of the Company’s net accounts receivable balance. As of December 31, 2020, the Company had one customer representing 12.4% of net accounts receivable balance.

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.

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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.

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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 $1.26 million and $1.09 million, respectively. Substantially all of these services were billed during the three months ended June 30, 2021, and 2020, respectively. Unbilled receivable balances net remained unchanged during the three months ended June 30, 2021. During the three months ended June 30, 2020, unbilled receivables increased by $0.04 million.

Unbilled receivable balances as of December 31, 2020, and 2019 were $1.25 million and $1.00 million, respectively. Unbilled receivable balances increased by $0.02 million and increased by $0.13 million during the six months ended June 30, 2021, and 2020, respectively. As of June 30, 2021, and 2020, the Company had unbilled receivables of $1.27 million and $1.13 million, respectively. These unbilled balances were the result of services provided in period, but not yet billed to the customer.

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 $1.18 million, of which $0.63 million is included in other current assets and $0.55 million is included in other long-term assets. As of December 31, 2020, the net carrying value of the capitalized cost of obtaining a contract was $1.27 million, of which $0.69 million is included in other current assets and $0.58 million is included in other long-term assets. For the three months ended June 30, 2021, and 2020, the Company amortized approximately $0.20 million for each period, in costs directly attributable to obtaining contracts. For the six months ended June 30, 2021, and 2020, the Company amortized approximately $0.41 million and $0.40 million, respectively, in costs directly attributable to obtaining contracts.

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 $0.95 million and $0.77 million, respectively. Deferred revenue decreased by $0.09 million and decreased by $0.11 million during the three months ended June 30, 2021, and 2020, respectively. Deferred revenue balances were $0.85 million and $0.86 million as of December 31, 2020, and 2019, respectively. Deferred revenue increased by $0.01 million and decreased by $0.2 million during the six months ended June 30, 2021, and 2020, respectively. The Company had deferred revenue contract liability balances of $0.86 million and $0.66 million as of June 30, 2021, and June 30, 2020, respectively.

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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	$	7,495,296	$	6,566,976	$	14,878,176	$	12,926,333
Retargeting Revenue		581,490		667,910		1,155,064		1,286,717
Mail + Product Revenue		29,457		36,019		62,233		110,584
Total Revenue	$	8,106,243	$	7,270,905	$	16,095,473	$	14,323,634

Revenue by Type:
Recurring Revenue	$	7,283,298	$	6,319,119	$	14,434,024	$	12,449,561
Retargeting Revenue		581,490		667,911		1,155,064		1,286,717
Upfront Fees		241,455		283,875		506,385		587,356
Total Revenue	$	8,106,243	$	7,270,905	$	16,095,473	$	14,323,634

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	$	366,735		$	313,119
Furniture and fixtures		913,370			913,370
Capitalized software development costs		2,352,235			2,147,934
Computer equipment and other software		1,191,049			1,083,432
Total		4,823,389			4,457,855
Less: Accumulated depreciation		(2,962,322	)		(2,268,907	)
Property and equipment, net:	$	1,861,067		$	2,188,948

Depreciation expense related to property and equipment was $0.43 million and $0.23 million for the three months ended June 30, 2021, and 2020, respectively. Depreciation expense related to property and equipment was $0.70 million and $0.44 million for the six months ended June 30, 2021, and 2020, respectively.

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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	$	501,000	$	(183,500	)	$	317,500
Technology		3,109,000		(1,653,703	)		1,455,297
Customer relationships		1,320,000		(941,000	)		379,000
Vendor relationships		1,813,000		(292,044	)		1,520,956
Unamortized intangible assets:		6,743,000		(3,070,247	)		3,672,753
Goodwill							10,230,917
Total goodwill and intangible assets						$	13,903,670

	As of December 31, 2020
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Value
Amortized intangible assets:
Trade names	$	501,000	$	(120,000	)	$	381,000
Technology		3,109,000		(1,513,751	)		1,595,249
Customer relationships		1,320,000		(892,004	)		427,996
Vendor relationships		1,813,000		(201,394	)		1,611,606
Unamortized intangible assets:		6,743,000		(2,727,149	)		4,015,851
Goodwill							10,250,088
Total goodwill and intangible assets						$	14,265,939

Estimated amortization expense for the remainder of 2021 and subsequent years is as follows:

Remainder of 2021	$	343,100
2022		634,200
2023		586,200
2024		420,200
2025		390,200
Thereafter		1,298,853
Total	$	3,672,753

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Amortization expense for three months ended June 30, 2021, and 2020, was $0.17 million and $0.18 million, respectively. Amortization expense for the six months ended June 30, 2021, and 2020, was $0.34 million and $0.34 million, respectively.

Note 5: Debt

Credit Facility

In March 2016, the Company entered into a $2.5 million revolving loan agreement (the “Credit Facility”) with Western Alliance Bank. The facility originally matured on March 21, 2018 and was amended to mature on June 19, 2022. There are no mandatory amortization provisions, and the Credit Facility is payable in full at maturity. As of June 30, 2021, the Credit Facility is collateralized by a lien on substantially all of the existing and future assets of the Company and secured by a pledge of 100% of the capital stock of SharpSpring Technologies, Inc. and a 65% pledge of the Company’s foreign subsidiaries’ stock. The Credit Facility subjects the Company to a number of restrictive covenants, including financial and non-financial covenants customarily found in loan agreements for similar transactions. The Credit Facility also restricts our ability to pay cash dividends on our common stock. As of June 30, 2021, the credit facility carried an interest rate of 5.0%, there was $1.9 million outstanding under the Credit Facility, and no events of default have occurred. The interest expense relating to the Credit Facility for three months ended June 30, 2021, and 2020 was approximately $0.02 million and $0.03 million, respectively. The interest expense relating to the Credit Facility for six ended June 30, 2021, and 2020 was approximately $0.05 million and $0.03 million respectively

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 $3.40 million (the “SBA Loans”). The SBA Loans have a maturity date of 2 years from the initial disbursement and carry an interest rate of 1% per year. The application for the SBA Loans requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operation of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support the ongoing operations in a manner that is not significantly detrimental to the business. The receipt of the funds from the SBA Loans and the forgiveness of the SBA Loans is dependent on the Company having initially qualified for the SBA Loans and qualifying for the forgiveness of such loans based on funds being used for certain expenditures such as payroll costs and rent, as required by the terms of the SBA Loans.

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 $0.17 million to other income in our consolidated statement of operations and comprehensive loss in the six months ending June 30, 2021. On June 11, 2021, the SBA forgave the principal balance and associated accumulated interest of the second SBA Loans in full. As a result, the Company recognized $3.27 million to other income in our consolidated statement of operations and comprehensive loss in the three and six months ending June 30, 2021. Interest expense related to the SBA Loans for the three months ended June 30, 2021, and 2020 was approximately $0.01 million and $0.01 million, respectively. Interest expense related to the SBA Loans for the six months ended June 30, 2021, and 2020 was approximately $0.02 million and $0.01 million , respectively.

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.

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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 5-year carryback of federal net operating losses generated in tax years beginning in 2018, 2019, or 2020. As required under U.S. GAAP, the effects of tax law changes are recognized in the period of enactment. Accordingly, we recorded an incremental income tax benefit in the amount of $1.6 million associated with the CARES Act related to the carryback of the Company’s 2018 federal net operating loss in the first quarter of 2020.

During the three months ended June 30, 2021, and 2020, the Company recorded income tax expense of approximately $4,000 and $57,000, respectively. During the six months ended June 30, 2021, and 2020, the Company recorded income tax expense of approximately $0.01 million and income tax benefit of $1.51 million, respectively. The blended effective tax rate for the six months ending June 30, 2021, and 2020 was -0.4% and 43.5%, respectively. The June 30, 2021, effective blended tax rate varies from our statutory U.S. tax rate due to the tax impact of the valuation allowances on losses and income generated in certain other jurisdictions at various tax rates. The June 30, 2020, effective blended tax rate varies from our statutory U.S. tax rate due to the tax impact of the CARES Act, valuation allowances on losses and income generated in certain other jurisdictions at various tax rates.

Valuation Allowance

We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers many different factors including historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies and the availability of future tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. This is inherently judgmental, since we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.

In making our assessment of deferred tax asset recoverability, we considered our historical financial results, our projected future financial results, the planned reversal of existing deferred tax liabilities, and the impact of any tax planning actions. Based on our analysis we noted both positive and negative factors relative to our ability to support realization of certain deferred tax assets. However, based on the weighting of all the evidence, including the near-term effect on our income projections of investments we are making in our team, product and systems infrastructure, we concluded that it was more likely than not that the majority of our deferred tax assets related to temporary differences and net operating losses may not be recovered. The establishment of a valuation allowance has no effect on our ability to use the underlying deferred tax assets to reduce cash tax payments in the future to the extent that we generate taxable income prior to expiration.

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At June 30, 2021 and December 31, 2020, we have established a valuation allowance of $10.1 million and $8.9 million, respectively, against certain deferred tax assets given the uncertainty of recoverability of these amounts.

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 2,600,000 shares of common stock were available for issuance under the Plan. The Plan provided for the issuance of stock options and other stock-based awards. As of June 30, 2021, no shares remain available for future issuance under the 2010 Plan.

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 1,275,000 shares of common stock, plus the number of shares of common stock underlying any award granted under the 2010 Plan that expires, terminates, is canceled, or is forfeited shall be available for grant under the 2019 Plan. The Plan provides for the issuance of stock options and other stock-based awards. During the terms of the Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Awards.

Stock Options

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

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

		Six Months Ended
		June 30,
		2021				2020

SEC Form 10-Q filed by SharpSpring, Inc.