NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1: Organization
We
were incorporated in Massachusetts in October 1998 as EMUmail, Inc. During 2010, we changed our name to SMTP.com, then later reincorporated
in the State of Delaware and changed our name to SMTP, Inc. In December 2015, we changed our name to SharpSpring, Inc. and changed
the name of our SharpSpring product U.S. operating subsidiary from SharpSpring, Inc. to SharpSpring Technologies, Inc.
In
June 2016, we sold the assets related to our SMTP email relay product to the Electric Mail Company, a Nova Scotia company. See
Note 5 for details of this disposition.
Our
Company focuses on providing cloud-based marketing automation solutions. Our SharpSpring marketing automation solution is designed
to increase the rates at which businesses generate leads and convert leads to sales opportunities by improving the way businesses
communicate with customers and prospects. Our products are marketed directly by us and through a small group of reseller partners
to customers around the world. Prior to June 27, 2016, our Company also provided cloud-based email relay delivery services to
its customers.
Note
2: Summary of Significant Accounting Policies
Basis
of Presentation and Consolidation
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (U.S. GAAP). Our Consolidated Financial Statements include the accounts of SharpSpring, Inc. and our subsidiaries
(“the Company”). Our Consolidated Financial Statements reflect the elimination of all significant inter-company accounts
and transactions. The results of operations for the interim periods presented are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire year ending December 31, 2017.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Operating
Segments
The
Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial
information is regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s chief
executive officer, in deciding how to allocate resources and assess performance. The Company’s CODM evaluates the Company’s
financial information and resources and assess the performance of these resources on a consolidated basis. The Company does not
present geographical information about revenues because it is impractical to do so.
Foreign
Currencies
The
Company’s subsidiaries utilize the U.S. Dollar, Swiss Franc, South African Rand and British Pound as their functional currencies.
The assets and liabilities of these subsidiaries are translated at ending exchange rates for the respective periods, while revenues
and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included
in other comprehensive income or loss within the Consolidated Statements of Comprehensive Loss.
Cash
and Cash Equivalents
Cash
equivalents are short-term, liquid investments with remaining maturities of three months or less when acquired. Cash and cash
equivalents are deposited or managed by major financial institutions and at most times are in excess of Federal Deposit Insurance
Corporation (FDIC) insurance limits.
Fair
Value of Financial Instruments
U.S.
GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs to determine the fair value.
These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level
3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own
assumptions.
The
Company’s financial instruments consist of cash and cash equivalents, accounts receivable, deposits and accounts payable.
The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of
the short-term nature of these items.
Accounts
Receivable
Accounts
receivable are carried at the original invoiced amount less an allowance for doubtful accounts based on the probability of future
collection. Management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible.
The Company reserves for receivables that are determined to be uncollectible, if any, in its allowance for doubtful accounts.
The Company had an allowance for doubtful accounts of $634,880 and $508,288 as of June 30, 2017 and December 31, 2016, respectively.
After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance.
Intangibles
Finite-lived
intangible assets include trade names, developed technologies and customer relationships and are amortized based on the estimated
economic benefit over their estimated useful lives, with original periods ranging from 5 to 11 years. We continually evaluate
the reasonableness of the useful lives of these assets. Finite-lived intangibles are tested for recoverability whenever events
or changes in circumstances indicate the carrying amounts may not be recoverable. Impairment losses are measured as the amount
by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used
when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess
impairments and the fair value of an asset group. The dynamic economic environment in which the Company operates and the resulting
assumptions used to estimate future cash flows impact the outcome of these impairment tests.
Goodwill
and Impairment
As
of June 30, 2017 and December 31, 2016, we had recorded goodwill of $8,867,539 and $8,845,394, respectively. Goodwill consists
of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in the SharpSpring
and GraphicMail acquisitions (See Note 3). Under FASB ASC 350,
“Intangibles - Goodwill and Other”
deemed to
have indefinite lives are no longer amortized but are subject to annual impairment tests, and tests between annual tests in certain
circumstances, based on estimated fair value in accordance with FASB ASC 350-10, and written down when impaired.
Income
Taxes
Provision
for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between
the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported
amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized
or settled as prescribed in FASB ASC 740,
Accounting for Income
Taxes. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
The
Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the consolidated financial
statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax
position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position
is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit
to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater
than 50% likelihood of being realized upon ultimate settlement. There are no material uncertain tax positions taken by the Company
on its tax returns. Tax years subsequent to 2012 remain open to examination by U.S. federal and state tax jurisdictions.
In
determining the provision for income taxes, the Company uses statutory tax rates and tax planning opportunities available to the
Company in the jurisdictions in which it operates. This includes recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the consolidated financial statements or tax returns to the extent
pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax
rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary
differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items are
separately recognized in the period in which they occur. The Company is subject to routine examination by domestic and foreign
tax authorities and frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by
the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions.
As of June 30, 2017, the Company is not being examined by domestic or foreign tax authorities.
Property
and Equipment
Property
and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of the assets.
Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts
and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation
expense from continuing operations related to property and equipment was $70,107 and $11,807 for the three months ended June 30,
2017 and 2016, respectively. Depreciation expense from continuing operations related to property and equipment was $135,190 and
$41,604 for the six months ended June 30, 2017 and 2016, respectively.
Property
and equipment as of June 30, 2017 and December 31, 2016 is as follows:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Property
and equipment, net:
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
$
|
128,122
|
|
|
$
|
128,122
|
|
Furniture
and fixtures
|
|
|
355,078
|
|
|
|
316,819
|
|
Computer
equipment and software
|
|
|
707,139
|
|
|
|
641,722
|
|
Construction
in progress
|
|
|
30,000
|
|
|
|
-
|
|
Total
|
|
|
1,220,339
|
|
|
|
1,086,663
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(316,577
|
)
|
|
|
(181,318
|
)
|
|
|
$
|
903,762
|
|
|
$
|
905,345
|
|
Useful
lives are as follows:
Leasehold
improvements
|
|
|
3-5
years
|
|
Furniture
and fixtures
|
|
|
3-5
years
|
|
Computing
equipment
|
|
|
3
years
|
|
Software
|
|
|
3-5
years
|
|
Revenue
Recognition
The
Company recognizes revenue from its services when it is probable that the economic benefits associated with the transactions will
flow to the Company and the amount of revenue can be measured reliably. This is normally demonstrated when: (i) persuasive evidence
of an arrangement exists; (ii) the fee is fixed or determinable; (iii) performance of service has been delivered; and (iv) collection
is reasonably assured.
For
the Company’s internet-based SharpSpring marketing automation solution, the services are typically offered on a month-to-month
basis with a fixed fee charged each month depending on the size of the engagement with the customer. Monthly fees are recorded
as revenue during the month they are earned. Some customers are charged annually, for which revenues are deferred and recorded
ratably over the subscription period. The Company also charges transactional-based fees if monthly volume limitations are reached
or other chargeable activity occurs. Additionally, customers are typically charged an upfront implementation and training fee.
The upfront implementation and training fees represent short-term “use it or lose it” services offered for a flat
fee. Such flat fees are recognized over the service period, which is 60 days.
For
the Company’s SMTP email delivery product (prior to its sale in June 2016), the Company’s GraphicMail email product
(which was discontinued in 2016) and the SharpSpring Mail+ product, services are provided over various contractual periods for
a fixed fee that varies based on a maximum volume of transactions. Revenue is recognized on a straight-line basis over the contractual
period. If the customer’s transactions exceed contractual volume limitations, overages are charged and recorded as revenue
in the periods in which the transaction overages occur.
Prior
to June 2016, certain of the Company’s GraphicMail customers were sold through third party resellers. In some cases, we
allowed the third party resellers to collect the funds directly from the customer, withhold their own reseller fee, and remit
the net amount owed back to the Company. In those situations, because the Company was the primary obligor in the arrangement,
the Company recorded the gross revenue and expenses such that 100% of the end customer revenue was reported by the Company and
a corresponding expense was recorded for the reseller fee. The Company discontinued selling through third party resellers for
the GraphicMail and SharpSpring Mail+ products during 2016.
From
time to time, the Company offers refunds to customers and experiences credit card chargebacks relating to cardholder disputes
that are commonly experienced by businesses that accept credit cards. The Company makes estimates for refunds and credit card
chargebacks based on historical experience.
Deferred
Revenue
Some
of the Company’s customers pay for services in advance on a periodic basis (such as monthly, quarterly, annually or bi-annually).
Also, the Company charges an upfront implementation and training fee for its SharpSpring marketing automation solution that is
paid in advance, for which services are performed over a 60-day period. Deferred revenue consists of payments received in advance
of the Company’s providing the services. Deferred revenues are amortized on a straight-line basis in connection with the
contractual period or recorded as revenue when the services are used.
Accrued
Revenue
In
cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for
revenue recognition is met. A portion of our accounts receivable balance is therefore unbilled at each balance sheet date.
Concentration
of Credit Risk and Significant Customers
Financial
instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents.
At June 30, 2017 and December 31, 2016, the Company had cash balances at financial institutions that exceed federally insured
limits. The Company maintains its cash balances with accredited financial institutions. The Company does not believe that it is
subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
For
the three and six months ended June 30, 2017 and 2016, there were no customers that accounted
for more than 10% of total revenue or 10% of total accounts receivable.
Cost
of Services
Cost
of services consists primarily of the direct labor costs, technology hosting costs, software license costs, and fees paid to resellers
of the Company’s product.
Credit
Card Processing Fees
Credit
card processing fees are included as a component of general and administrative expenses and are expensed as incurred.
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising and marketing expenses from continuing operations was $797,173 and
$421,821 for the three months ended June 30, 2017 and 2016, respectively. Advertising and marketing expenses from continuing operations
was $1,342,948 and $677,573 for the six months ended June 30, 2017 and 2016, respectively.
Research
and Development Costs and Capitalized Software Costs
We
capitalize certain costs associated with internal use software during the application development stage, mostly related to software
that we use in providing our hosted solutions. We expense costs associated with preliminary project phase activities, training,
maintenance and any post-implementation period costs as incurred. For the three months ended June 30, 2017 and 2016, we capitalized
$17,392 and zero, respectively, in software development costs. For the six months ended June 30, 2017 and 2016, we capitalized
$33,938 and $6,642, respectively, in software development costs. We amortize capitalized software costs over the estimated useful
life of the software, which is typically estimated to be 3 years, once the related project has been completed and deployed for
customer use. At June 30, 2017 and December 31, 2016, the net carrying value of capitalized software was $86,857 and $78,005,
respectively.
All
other software development costs are charged to expenses when incurred, and generally consist of salaries, software development
tools and personnel-related costs for those engaged in research and development activities.
Stock
Compensation
We
account for stock based compensation in accordance with FASB ASC 718 “Compensation — Stock Compensation” which
requires companies to measure the cost of employee services received in exchange for an award of an equity instrument based on
the grant-date fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite
service period.
Net
Income (Loss) Per Share
Basic
net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted
net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares
outstanding during the period.
Comprehensive
Income or Loss
Comprehensive
income or loss includes all changes in equity during a period from non-owner sources, such as net income or loss and foreign currency
translation adjustments.
Recently
Issued Accounting Standards
Recent
accounting standards not included below are not expected to have a material impact on our consolidated financial position and
results of operations.
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that changes the accounting for certain
aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the
income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The guidance also allows
for the employer to repurchase or sell more shares than required under local statutory regulation without triggering liability
accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an
estimated basis. The guidance was effective January 2017. The impact of adopting ASU 2016-09 was not material to the consolidated
financial statements.
In
February 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets but record expenses
on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria
and the accounting for sales-type and direct financing leases. The guidance is effective in 2019 with early adoption permitted.
The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
In
May 2014, the FASB issued updated guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard
provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved the deferral
of the new standard’s effective date by one year. The new standard now is effective for annual reporting periods beginning
January 1, 2018. The FASB will permit companies to adopt the new standard early, but not before the original effective date of
January 1, 2017. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
In
January 2017, the FASB issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment
test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of
goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting
unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized
as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which
calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January
2020, with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated
financial statements.
Note
3: Acquisitions
During
2014, the Company pursued strategic acquisitions to further extend its product offerings. Such acquisitions have been accounted
for as business combinations pursuant to ASC 805 “
Business Combinations.
” Under this ASC, acquisition and integration
costs are not included as components of consideration transferred, but are accounted for as expenses in the period in which the
costs are incurred.
SharpSpring
On
August 15, 2014, the Company acquired substantially all the assets and assumed the liabilities of SharpSpring LLC, a Delaware
limited liability company for a cash payment of $5,000,000 plus potential earn out consideration of $10,000,000 that was contingent
on the SharpSpring product achieving certain levels of revenue in 2015. SharpSpring is a cloud-based marketing automation platform
that enables users to improve the effectiveness of their marketing communications and drive increased revenues through the use
of automation.
The
SharpSpring earn out was initially $10,000,000, payable 60% in cash and 40% in stock, depending on SharpSpring achieving certain
revenue levels in 2015. At the time of the acquisition, the Company utilized the income approach to estimate the fair value of
the earn out. The Company analyzed scenarios and determined a probability weighting for each scenario. The Company calculated
the earn out payments based on the respective revenues for each scenario and then weighted the resulting payment by the probabilities
of achieving each scenario. In order to calculate an appropriate risk-adjusted discount rate for the earn out, the Company calculated
the weighted average cash-flows of the business based on the three scenarios and their respective weightings. The Company then
calculated an implied internal rate of return (“IRR”) of 18.9%, which is the discount rate necessary in order to reconcile
the weighed cash-flows of the three scenarios to the total purchase price including the earn out payment. The earn out payment
was then discounted by the 18.9% IRR. Based on these methods and the Company’s original assessment of meeting those revenue
levels in 2015, an earn out liability of $6,963,000 was originally recorded as a liability during purchase accounting. This was
re-measured in each subsequent quarter since the transaction, resulting in additional charges of $99,000 and $222,000 during the
three and six months ended June 30, 2016, respectively, having been recorded on the Consolidated Statement of Comprehensive Income
(Loss). The final payments against the earn out of $1.0 million in cash and $4.0 million in common stock occurred in the quarter
ended June 30, 2016.
GraphicMail
On
October 17, 2014, we acquired 100% of the equity interest owned, directly or indirectly, in GraphicMail group companies (“GraphicMail”)
consisting of InterInbox SA, a Swiss corporation, InterCloud Limited, a Gibraltar limited company, ERNEPH 2012A (Pty) Ltd. dba
ISMS, a South African limited company, ERNEPH 2012B (Pty) Ltd. dba GraphicMail South Africa, a South African limited company,
and Quattro Hosting LLC, a Delaware limited liability company. The acquisition consideration consisted of $5.3 million, $2.6 million
of which was paid in cash and $2.7 million of which was paid in stock, plus potential earn out consideration of up to $0.8 million
based on achieving certain revenue levels in 2015 (paid 50% in cash and 50% in stock). GraphicMail operated as a campaign management
solution, enabling customers to create content and manage emails being sent to customers and distribution lists.
Pursuant
to the equity interest purchase agreement, the Company was liable for an earn out of up to $0.8 million, related to GraphicMail
achieving certain revenue levels in 2015. The Company utilized the income approach to estimate the fair value of the earn out.
The Company analyzed scenarios and determined a probability weighting for each scenario. The Company calculated the earn out payments
based on the respective revenues for each scenario and then weighted the resulting payment by the probabilities of achieving each
scenario. In order to calculate an appropriate risk-adjusted discount rate for the earn out, the Company calculated the weighted
average cash-flows of the business based on the three scenarios and their respective weightings. The Company then calculated an
implied internal rate of return (“IRR”) of 29.8%, which is the discount rate necessary in order to reconcile the weighed
cash-flows of the three scenarios to the total purchase price including the earn out payment. The earn out payment was then discounted
by the 29.8% IRR. Based on these methods and the Company’s initial assessment of meeting those revenue levels in 2015, an
earn out liability of $36,000 was recorded as a liability during purchase accounting. This was re-measured in the subsequent quarters,
resulting in a benefit of $2,527 during the six months ended June 30, 2016. During March 2016, the Company paid $415,858 in the
form of $207,929 in cash and 53,924 shares of common stock in full settlement of the earn out liability to the former GraphicMail
shareholders.
Additionally,
in March 2016, the Company received $175,970 in cash and 20,000 shares of Company stock (valued at $84,000) from the GraphicMail
escrow fund related to an indemnified claim for unrecorded liabilities at the time of the acquisition. The total value of the
claim of $259,970 was recorded as a gain in other income (expense), net during the six months ended June 30, 2016. The Company
accounted for the receipt of 20,000 shares as treasury stock with a carrying value of $84,000.
Note
4: Asset Purchase Agreements
During
2015 and 2016, the Company entered into separation agreements with several third-party GraphicMail resellers to terminate the
reseller arrangements and for the Company to purchase the customer relationships that each had accumulated as a GraphicMail reseller.
Pursuant to the terms of the separation agreements, the Company made payments to the resellers in exchange for the rights to the
customer relationships. The Company accounted for these purchases as intangible asset acquisitions. The aggregate estimated purchase
price for the intangible assets acquired was approximately $731,000. Due to heavy customer attrition from the GraphicMail customer
base during the second half of 2016, the majority of the acquired intangible assets value was impaired during the fourth quarter
of 2016.
Note
5: Disposition
On
June 27, 2016, the Company completed the sale of the assets and deferred revenue liabilities of its SMTP email relay business
(“SMTP”) to the Electric Mail Company for approximately $15.0 million. Of the total proceeds from the sale of SMTP,
approximately $1.0 million in cash was held in escrow until the one year anniversary and recorded in Other current assets at December
31, 2016. The Company received the $1.0 million escrow payment in June 2017. In conjunction with the sale, the Company also entered
into a transition services agreement (the “TSA”) with the buyer to assist in the transition of operations over a six-month
period, which was subsequently extended for an additional three months. Pursuant to the terms of the transition services agreement,
in exchange for assisting in the transfer of operations, the Company may continue utilizing the SMTP email relay platform for
its email sending needs at no cost. Although no cash was exchanged for the services performed by the parties to the TSA, the Company
recorded the estimated cost to utilize the SMTP sending platform as a cost of sale and recorded a benefit to Other income (expense),
net for the value of services provided to the Electric Mail Company. Also, in conjunction with the sale, the Company abandoned
a software asset that was not acquired, but will not be utilized by the Company in the future. The Company recorded a gain on
the sale of SMTP of approximately $9.8 million, net of tax of $5.2 million in the second quarter of 2016.
Pursuant
to the reporting requirements of ASC 205-20,
Presentation of Financial Statements – Discontinued Operations
, the
Company has determined that the SMTP business qualifies for presentation as a discontinued operation because it represents a component
of our entity and the sale of SMTP represents a strategic shift in our business plans. Therefore, the Company has reclassified
the assets and liabilities of the SMTP business as held for sale in the accompanying Consolidated Balance Sheets and presented
the operating results of SMTP (for periods prior to the sale) as discontinued operations, net of tax, in the accompanying Consolidated
Statements of Comprehensive Income (Loss) and Consolidated Statements of Cash Flows.
Financial
information for the SMTP email relay business for the three and six months ended June 30, 2017 and 2016, are presented in the
following table:
`
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
1,339,102
|
|
|
$
|
-
|
|
|
$
|
2,746,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services
|
|
|
-
|
|
|
|
335,166
|
|
|
|
-
|
|
|
|
642,013
|
|
Gross
profit
|
|
|
-
|
|
|
|
1,003,936
|
|
|
|
-
|
|
|
|
2,104,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
-
|
|
|
|
103,516
|
|
|
|
-
|
|
|
|
177,265
|
|
Research
and development
|
|
|
-
|
|
|
|
79,845
|
|
|
|
-
|
|
|
|
152,898
|
|
General
and administrative
|
|
|
-
|
|
|
|
231,137
|
|
|
|
-
|
|
|
|
474,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
-
|
|
|
|
414,498
|
|
|
|
-
|
|
|
|
804,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
-
|
|
|
|
589,438
|
|
|
|
-
|
|
|
|
1,300,154
|
|
Other
income (expense), net, before gain on sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes, before gain on sale
|
|
|
-
|
|
|
|
589,438
|
|
|
|
-
|
|
|
|
1,300,154
|
|
Income
tax expense
|
|
|
-
|
|
|
|
220,332
|
|
|
|
-
|
|
|
|
485,998
|
|
Net
income, before gain on sale
|
|
$
|
-
|
|
|
$
|
369,106
|
|
|
$
|
-
|
|
|
$
|
814,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of discontinued operations
|
|
|
-
|
|
|
|
9,373,295
|
|
|
|
-
|
|
|
|
9,373,295
|
|
Income
from discontinued operations, net of income taxes
|
|
$
|
-
|
|
|
$
|
9,742,401
|
|
|
$
|
-
|
|
|
$
|
10,187,451
|
|
The
financial information above includes the financial results for the SMTP email relay business through June 27, 2016, plus any residual
costs incurred after June 27, 2016 related to the transition of the business to the buyer. The results are comprised of revenue
and costs directly attributable to the SMTP email relay business as well as allocated costs for resources that have historically
had shared roles in our consolidated operations. For resources performing shared roles, cost allocations have been created based
on estimated work performed and job activities. Although our SharpSpring and GraphicMail products had utilized the SMTP email
relay sending platform prior to the disposition, no intercompany revenues have been reflected in the SMTP email relay business
operating results related to the use of the email sending platform by our other product lines.
Note
6: Intangible Assets
Intangible
assets are as follows:
|
|
As
of June 30, 2017
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
$
|
338,111
|
|
|
$
|
(284,608
|
)
|
|
$
|
53,503
|
|
Technology
|
|
|
3,769,873
|
|
|
|
(2,212,373
|
)
|
|
|
1,557,500
|
|
Customer
relationships
|
|
|
4,191,825
|
|
|
|
(3,212,058
|
)
|
|
|
979,767
|
|
Total
finite-lived intangible assets:
|
|
|
8,299,809
|
|
|
|
(5,709,039
|
)
|
|
|
2,590,770
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
8,867,539
|
|
Total
intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
11,458,309
|
|
Estimated
amortization expense for the remainder of 2017 and subsequent years is as follows:
|
Remainder
of 2017
|
|
|
$
|
264,770
|
|
|
2018
|
|
|
|
459,996
|
|
|
2019
|
|
|
|
381,000
|
|
|
2020
|
|
|
|
332,004
|
|
|
2021
|
|
|
|
279,996
|
|
|
2022
|
|
|
|
228,000
|
|
|
Thereafter
|
|
|
|
645,004
|
|
|
Total
|
|
|
$
|
2,590,770
|
|
Amortization
expense for the three months ended June 30, 2017 and 2016 was $131,869 and $286,719, respectively. Amortization expense for the
six months ended June 30, 2017 and 2016 was $263,392 and $770,016, respectively.
Note
7: Credit Facility
In
March 2016, the Company entered into a $2.5 million revolving loan agreement (the “Loan Agreement”) with Western Alliance
Bank. The facility matures on March 21, 2018 and has no mandatory amortization provisions and is payable in full at maturity.
Loan proceeds accrue interest at the higher of Western Alliance Bank’s Prime interest rate (4.25% as of June 30, 2017) or
3.5%, plus 1.75%. The Loan Agreement 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 Quattro Hosting, LLC and a
65% pledge of the Company’s foreign subsidiaries’ stock. The Loan Agreement subjects the Company to a number of restrictive
covenants, including financial and non-financial covenants customarily found in loan agreements for similar transactions. The
Loan Agreement also restricts our ability to pay cash dividends on our common stock. During June 2016, the Company amended the
Loan Agreement to modify its financial covenants and allow for the sale of the SMTP business assets. There are no amounts outstanding
under the Loan Agreement as of June 30, 2017 and no events of default have occurred to date. As of June 30, 2017, based on the
borrowing base calculations $1,790,616 was available for withdrawal under the Loan Agreement.
Note
8: Shareholders’ Equity
In
March 2016, the Company issued 53,924 shares of common stock to the former owners of GraphicMail in satisfaction of the stock-based
earn out. Additionally, in March 2016, the Company received 20,000 shares of stock from the GraphicMail escrow fund related to
an indemnified claim.
In
June 2016, the Company issued 1,039,636 shares of common stock to the RCTW, LLC shareholders to satisfy the remaining stock-based
portion of the SharpSpring earn out.
Note
9: Changes in Accumulated Other Comprehensive Income (Loss)
|
|
Foreign
Currency
|
|
|
|
Translation
|
|
|
|
Adjustment
|
|
Balance
as of December 31, 2016
|
|
$
|
(445,055
|
)
|
Other
comprehensive income (loss) prior to reclassifications
|
|
|
-
|
|
Amounts
reclassified from accumulated other comprehensive income
|
|
|
-
|
|
Tax
effect
|
|
|
-
|
|
Net
current period other comprehensive loss
|
|
|
19,477
|
|
Balance as
of June 30, 2017
|
|
$
|
(425,578
|
)
|
Note
10: Net Loss Per Share
Computation
of net loss per share is as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net
loss from continuing operations
|
|
$
|
(1,315,348
|
)
|
|
$
|
(669,104
|
)
|
|
$
|
(2,790,022
|
)
|
|
$
|
(1,824,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted
average common shares outstanding
|
|
|
8,381,748
|
|
|
|
7,625,833
|
|
|
|
8,375,499
|
|
|
|
7,439,152
|
|
Add
incremental shares for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
weighted average common shares outstanding
|
|
|
8,381,748
|
|
|
|
7,625,833
|
|
|
|
8,375,499
|
|
|
|
7,439,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.16
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.25
|
)
|
Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.25
|
)
|
For
the three and six months ended June 30, 2017, 1,323,726 stock options and 170,973 warrants were excluded from diluted net loss
per share, because the effect of including these potential shares was anti-dilutive. For the three and six months ended June 30,
2016, 1,134,744 stock options and 170,973 warrants were excluded from diluted net loss per share, because the effect of including
these potential shares was anti-dilutive.
Pursuant
to ASC 260,
Earnings Per Share
, since a loss is reported from continuing operations, diluted net loss per share has been
computed with the same average common shares outstanding as basic net loss per share, even during periods when the discontinued
operations provide for an overall consolidated net income.
Note
11: 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 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, pre-tax income, or pre-tax income by jurisdiction.
During
the three months ended June 30, 2017 and 2016, the Company recorded income tax benefits of $394,147 and $603,501, respectively,
from continuing operations. During the six months ended June 30, 2017 and 2016, the Company recorded income tax benefits of $893,840
and $815,507, respectively, from continuing operations. The blended effective tax rate for the six months ending June 30, 2017
and 2016 was 24% and 31%, respectively. The effective blended tax rate varies from our statutory U.S. tax rate due to 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 prior to expiration to reduce cash
tax payments in the future to the extent that we generate taxable income.
At
June 30, 2017 and December 31, 2016, we have established a valuation allowance of $2.6 million against certain deferred tax assets
given the uncertainty of recoverability of these amounts.
Note
12: Defined Contribution Retirement Plan
Starting
in 2016, we offered our U.S. employees the ability to participate in a 401(k) plan. Eligible U.S. employees may contribute up
to 60% of their eligible compensation, subject to limitations established by the Internal Revenue Code. The Company contributes
a matching contribution equal to 100% of each such participant’s contribution up to the first 3% of their annual eligible
compensation. We charged $54,579 and $23,815 to expense in the three months ended June 30, 2017 and 2016, respectively, associated
with our matching contribution in those periods. We charged $91,074 and $53,486 to expense in the six months ended June 30, 2017
and 2016, respectively, associated with our matching contribution in those periods.
Note
13: Stock-Based Compensation
The
Company grants stock option awards to officers and employees and grants stock awards to directors as compensation for their service
to the Company.
In
November 2010, the Company adopted the 2010 Stock Incentive Plan (“the Plan”) which was amended in April 2011, August
2013, April 2014, February 2016 and March 2017. As amended, up to 1,950,000 shares of common stock are available for issuance
under the Plan. The Plan provides for the issuance of stock options and other stock-based awards.
Stock
Options
Stock
option awards under the Plan have a 10-year maximum contractual term and 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 Plan is 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 Plan is principally over four years from the date of the grant, with 25% of
the award vesting after one year and monthly vesting thereafter.
Option
awards are valued based on the grant date fair value of the instruments, net of estimated forfeitures, using a Black-Scholes option
pricing model with the following assumptions:
|
|
|
Three
Months Ended June 30,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
48
- 49%
|
|
|
|
38%
- 50%
|
|
Risk-free
interest rate
|
|
|
1.90%
- 2.26%
|
|
|
|
1.12%
- 1.65%
|
|
Expected
term
|
|
|
6.25
years
|
|
|
|
6.25
years
|
|
The
weighted average grant date fair value of stock options granted during the six months ended June 30, 2017 and 2016 was $2.40 and
$1.51, respectively.
For
grants prior to January 1, 2015, the volatility assumption was based on historical volatility of similar sized companies due to
lack of historical data of the Company’s stock price. For all grants subsequent to January 1, 2015, the volatility assumption
reflects the Company’s historic stock volatility for the period of February 1, 2014 forward, which is the date the Company’s
stock started 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,
2017 and 2016, the Company recognized expense of $175,405 and $159,842, respectively, associated with stock option awards. During
the six months ended June 30, 2017 and 2016, the Company recognized expense of $359,752 and $335,828, respectively, associated
with stock option awards. At June 30, 2017, future stock compensation expense associated with stock options (net of estimated
forfeitures) not yet recognized was $1,326,012 and will be recognized over a weighted average remaining vesting period of 2.85
years. The following summarizes stock option activity for the three months ended June 30, 2017:
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2016
|
|
|
1,128,368
|
|
|
$
|
5.12
|
|
|
|
7.0
|
|
|
$
|
514,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
319,000
|
|
|
|
4.85
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(407
|
)
|
|
|
3.34
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(123,235
|
)
|
|
|
5.16
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2017
|
|
|
1,323,726
|
|
|
$
|
5.06
|
|
|
|
6.7
|
|
|
$
|
171,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2017
|
|
|
625,374
|
|
|
$
|
5.21
|
|
|
|
4.5
|
|
|
$
|
103,011
|
|
The
total intrinsic value of stock options exercised during the six months ended June 30, 2017 and June 30, 2016 was $411 and $1,854,
respectively.
Stock
Awards
During
the three months ended June 30, 2017 and 2016, the Company issued 12,786 and 13,566 shares, respectively, to non-employee directors
as compensation for their service on the board. During the six months ended June 30, 2017 and 2016, such awards totaled 23,670
and 29,479 shares, respectively. Such stock awards are immediately vested.
Stock
awards are valued based on the closing price of our common stock on the date of grant, and compensation cost is recorded on a
straight line basis over the share vesting period. The total fair value of stock awards granted, vested and expensed during the
three months ended June 30, 2017 and 2016 was $56,271 and $51,619, respectively. The total fair value of stock awards granted,
vested and expensed during the six months ended June 30, 2017 and 2016 was $112,650 and $104,282, respectively. As of June 30,
2017, there was no unrecognized compensation cost related to stock awards.
Note
14: Warrants
Prior
to 2015, the Company issued warrants to certain service providers. The following table summarizes information about the Company’s
warrants at June 30, 2017:
|
|
Number
of
Units
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Remaining
Contractual Term
|
|
|
Intrinsic
Value
|
|
Outstanding
at December 31, 2016
|
|
|
170,973
|
|
|
$
|
6.26
|
|
|
|
4.6
|
|
|
$
|
33,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2017
|
|
|
170,973
|
|
|
$
|
6.26
|
|
|
|
4.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2017
|
|
|
170,973
|
|
|
$
|
6.26
|
|
|
|
4.1
|
|
|
$
|
-
|
|
Note
15: Commitments and Contingencies
Litigation
The
Company may from time to time be involved in legal proceedings arising from the normal course of business. The Company is not
currently a party to any litigation of a material nature.
Operating
Leases and Service Contracts
The
Company rents its facilities with leases ranging from month-to-month to several years in duration. Most of its 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, 2017:
|
Remainder
of 2017
|
|
|
$
|
269,107
|
|
|
2018
|
|
|
|
448,918
|
|
|
2019
|
|
|
|
373,015
|
|
|
2020
|
|
|
|
382,884
|
|
|
2021
|
|
|
|
292,843
|
|
|
2022
|
|
|
|
-
|
|
|
Thereafter
|
|
|
|
-
|
|
|
Total
|
|
|
$
|
1,766,767
|
|
Employment
Agreements
The
Company has employment agreements with several members of its leadership team and executive officers.