Overview
SharpSpring, Inc.
(the “Company”) is a cloud-based marketing technology
company. The Company’s products are designed to improve the
way that businesses communicate with their prospects and customers
to increase sales. The Company’s flagship SharpSpring
marketing automation platform uses advanced features such as web
tracking, lead scoring and automated workflow to help businesses
deliver the right message to the right customer at the right time.
All of our products are designed and built as Software as Service
(or SaaS) offerings. We provide our products primarily on a
subscription basis, with additional fees charged if specified
volume limits are exceeded by our customers.
We
operate globally through SharpSpring, Inc., a Delaware corporation,
and our wholly owned subsidiaries that consist of (i) SharpSpring
Technologies, Inc., a Delaware corporation; (ii) InterInbox SA, a
Swiss corporation; (iii) ERNEPH 2012A (Pty) Ltd. dba ISMS, a South
African limited company; (iv) ERNEPH 2012B (Pty) Ltd. dba
GraphicMail South Africa, a South African limited company; (v)
Quattro Hosting LLC, a Delaware limited liability company; (vi)
SMTP Holdings S.a.r.l., a Luxembourg S.a.r.l.; and (vii) InterCloud
Ltd, a Gibraltar Limited Company.
Unless the context otherwise requires, all
references to the “Company,” “we,”
“our” or “us” and other similar terms means
SharpSpring, Inc., and its subsidiaries.
On June
27, 2016, we sold the assets related to our SMTP email relay
product to the Electric Mail Company, a Nova Scotia
company.
Products and Services
SharpSpring Marketing Automation and SharpSpring Mail+
We
provide SaaS based marketing technologies to customers around the
world. Our focus is on marketing automation tools that enable
customers to interact with a lead from an early stage and nurture
that potential customer using advanced features until it becomes a
qualified sales lead or customer. Our primary product is the
premium SharpSpring marketing automation solution. Additionally, a
small portion of customers utilizes our SharpSpring Mail+ product,
which is a subset of the full suite solution that is focused on
more traditional email marketing while also including some of the
advanced functionality available in our premium
offering.
Discontinued and Divested Products and Services:
GraphicMail Email Marketing
During
2015 and the first half of 2016, the Company offered the
GraphicMail email campaign management solution to customers
globally. In late 2015, the Company announced that it would
discontinue selling and offering the GraphicMail email solution and
migrate existing GraphicMail customers to the SharpSpring platform,
onto the SharpSpring Mail+ product. Prior to the migration, the
GraphicMail platform focused on email, social and mobile marketing
and was typically used by companies wishing to communicate with a
list of subscribers or customers.
SMTP Email Relay Services
On June
27, 2016, we sold the assets related to our SMTP email relay
product to the Electric Mail Company, a Nova Scotia company. Prior
to that, the Company offered a proprietary SMTP relay product,
which was designed to send high volumes of email messages in an
efficient manner and increase the delivery rate of email
messages.
Markets & Competition
We
operate in the marketing technology market, with a focus on
marketing automation products. Our products compete in two markets
that are interrelated and often overlap with each
other:
1)
Marketing
automation products (highly targeted one-to-one messaging with
sophisticated analytics); and
2)
Traditional email
marketing services (newsletters and one-to-many
communications).
Our
SharpSpring product competes primarily in the marketing automation
market. Based on industry reports, our growth rate and the growth
rate of our competitors, we believe the market for marketing
automation technology is currently growing at approximately 30% per
year. The market for marketing automation software and related
solutions is new and evolving, with high barriers to entry due to
the complex nature of the technology. SharpSpring entered the
market in 2014 with a highly competitive offering that achieved
meaningful customer adoption in its first few years after launch.
As of December 31, 2017, SharpSpring had 1,750 paying customers and
approximately 6,500 businesses using the platform, including
agencies, agency clients and direct end user customers. We face
competition from cloud-based software and SaaS companies including
HubSpot, Act-On, Pardot and Infusionsoft. We differentiate
ourselves from the competition with the integration of specific
tools designed for digital marketing agencies, and with
SharpSpring’s advanced features, ease of use, platform
flexibility, and value compared to other competitive offerings.
SharpSpring is designed as a solution for small or mid-sized
businesses, but focuses on selling to marketing agencies, who serve
as partners providing a distribution channel to their
clients.
Since
inception, the majority of our SharpSpring customers have been
digital marketing agencies. A digital marketing agency is a firm
that specializes in helping clients, usually small or mid-sized
businesses, with their digital marketing initiatives like websites,
email marketing, search engine optimization, social campaigns and
other lead generation activities. We have built special tools in
the SharpSpring application to allow agencies to manage their
clients and optimize their efforts across their portfolio. We also
have special pricing to agency customers to allow them the
flexibility to manage their client relationships. In general, when
we sell SharpSpring to an agency customer, we provide the agency
with a SharpSpring license for the agency to use plus a 3-pack of
client licenses for the agency to deploy to their client base. This
agency license and the pack of licenses are generally sold for a
monthly recurring fee, plus an up-front onboarding fee. The agency
has complete discretion over the pricing of the platform to their
clients for the use, implementation and services related to
SharpSpring. If an agency utilizes its pack of licenses and adds
additional clients on to the platform, there is a monthly
per-client fee charged to the agency. Additionally, we charge
customers for certain items if volume or transactional limits are
exceeded. In most cases, we provide support to the agency and the
agency provides support to their clients on the platform, but for
additional fees, we can support the agency’s client directly.
Our mentality is to partner with the agencies to grow and expand
our businesses together using the SharpSpring
platform.
SharpSpring Mail+
was launched in 2016 as a replacement to the GraphicMail product
that was acquired in 2014. SharpSpring Mail+ provides customers
with an advanced email marketing and marketing automation tool. It
includes traditional email campaign management solutions like
design capabilities, reporting tools and list management
functionality, but also includes additional features like dynamic
email content and SharpSpring’s visitor ID tool that are more
typically found in a marketing automation solution. SharpSpring
Mail+ competes with companies such as Constant Contact, iContact
Corporation, The Rocket Science Group LLC (MailChimp®), and
VerticalResponse, Inc., a subsidiary of Deluxe Corporation, as well
as other email and marketing automation companies. SharpSpring
Mail+, and most other vendors, typically charge a monthly fee or a
fee per number of emails sent and, in some cases, they have a free
offering for low-volume or non-profit customers. SharpSpring
Mail+’s rich feature set and comparative value plus
personalized messages that enable customers to grow their business
are key market differentiators.
We are
part of a constantly evolving and highly competitive marketplace.
Some of our competitors have more extensive customer bases and
broader customer relationships than we have, and have longer
operating histories and greater name recognition than we have.
Additionally, some of our current and potential competitors have
significantly more financial, technical, marketing and other
resources than we have, and are able to devote greater resources to
the development, promotion, sale and support of their products and
services. Barriers to entry are relatively high in the marketing
automation market due to complexity of systems.
Sales and Marketing
We sell
our products globally, through our internal sales teams, and to a
lesser extent, third party resellers. Before the discontinuation of
GraphicMail and the sale of our SMTP email relay product, our
products had separate and mostly distinct sales processes, which
are described below. We use and rely on our own SharpSpring
marketing automation platform to help our business generate leads,
convert more leads to sales and monitor the effectiveness of all
our marketing campaigns. Our website www.sharpspring.com serves as
a lead generation source and we use a variety of other digital
marketing tools to attract new customers.
Our
SharpSpring product sales process involves targeting customers,
completing product demos and advancing customers through our
marketing and sales pipeline to conversion using our SharpSpring
marketing automation product. Since SharpSpring was launched fairly
recently in 2014, brand recognition today is growing, but still
fairly limited. Therefore, we are more reliant on outbound
marketing and search engine traffic to attract potential leads. Our
marketing efforts to date have been nearly 100% focused on digital
marketing agencies, and we have had success signing up over 1,400
marketing agency partners as of December 31, 2017. These agencies
become customers of ours and are able to resell SharpSpring to
their clients, while paying increased fees to us as their client
count expands beyond the base license. This allows the agency to
provide services and first level support for their clients, which
increases their own revenues from the end client and creates a
longer-lasting relationship overall between the agency and client.
We also sell SharpSpring directly to end-users and have over 300
direct end user customers on the platform. The Company’s
sales are done primarily through internal resources, but a small
number of third-party resellers were also used during
2017.
Since
creating the SharpSpring Mail+ product to migrate the GraphicMail
customers onto during the middle of 2016, we have spent limited
resources marketing and selling SharpSpring Mail+ as a standalone
product. We intend to continue to devote limited resources to the
sales and marketing process for SharpSpring Mail+ as a standalone
product in the future, and may decide to discontinue the
SharpSpring Mail+ product altogether.
Prior
to its discontinuation in the middle of 2016, our GraphicMail sales
and marketing efforts were designed to attract potential customers
to our website, enroll them in a free trial, encourage them to
engage with our products, convert them to paying customers and
retain them as ongoing customers. We employed strategies to acquire
customers by using a variety of sources, including online
advertising, partner relationships and referrals. Additionally,
GraphicMail used a network of third party resellers who distributed
and sold GraphicMail in 14 countries. These resellers acted as
local sales resources, performed marketing for the product and
provided first level support, and received a large portion of the
revenue related to sales of GraphicMail through those
organizations. The Company discontinued the GraphicMail product and
ended any reselling arrangements for GraphicMail with third
parties.
Prior
to its sale in June 2016, SMTP relay services were sold and leads
were largely generated by the SMTP.com website. SMTP stands for
“Simple Mail Transfer Protocol”, which is the internet
protocol by which all email is sent globally. Despite the fact that
we did not own the protocol, the SMTP name provided us immediate
name recognition and domain context worldwide. In addition, the
services we provided may be searched for online as
“SMTP”, “SMTP relay services”, “SMTP
services”, “SMTP providers”, or using similar
terms. Our website may have appeared in search engine results for
these and other queries in common search engines. In addition, SMTP
purchased online search advertising and other forms of online
advertising to drive traffic to the website and referring partners
provided us with leads. Referring partners were typically other
service providers operating in the email ecosystem, who may provide
related products and services that were non-competitive with our
own. We paid those third parties between 15% and 30% of the revenue
generated from their referrals.
Customers
As of
December 31, 2017, we had over 1,750 customers for our SharpSpring
product, the majority of which were marketing agencies. Including
agency partners, agency clients and direct end user clients, we had
over 6,500 businesses using the SharpSpring platform as of December
31, 2017.
As of
December 31, 2017, we had approximately 1,000 customers using our
SharpSpring Mail+ product.
The
vast majority of our customers are on month-to-month agreements,
with a mixture of customers being charged in advance and in
arrears. We have a small amount of customers that prepay for longer
periods, such as quarterly or annually.
We are
not heavily dependent on any one customer or even a few major
customers. Our user base is diverse and the largest single customer
represents less than 3% of our aggregate revenues. The loss of any
one customer would not represent a material loss of sales. A large
majority of our SharpSpring customers are marketing agencies who
resell the SharpSpring product to their clients. From a client or
end user perspective, we do not have any significant industry
concentration in our customer base.
Technology & Technology Suppliers
Our
SharpSpring product technology was developed internally over the
past six years. SharpSpring’s key features include web
tracking, customer relationship management, lead scoring and
nurturing, landing pages, email technology, rule-based triggers and
notifications and deep analytics to measure marketing program
return on investment (ROI). We offer value to our customers by
providing integration with industry standard technologies like
Salesforce.com and others, and third-party data providers like
Zoominfo.
SharpSpring Mail+
is a subset of the SharpSpring technology. During late 2015 and the
first half of 2016, we modified SharpSpring to support the
SharpSpring Mail+ features and functionality using the existing
platform. This involved creating a subset of the SharpSpring
technology with more limited features for SharpSpring
Mail+.
We
decommissioned the GraphicMail product in the middle of 2016.
GraphicMail had been developed over the past nine years and
consisted of an email editor that customers used to create sharp,
professional email campaigns. It had an easy to use interface,
integrated with social media channels, offered mobile messaging and
included tools to effectively track campaign results. GraphicMail
historically utilized Postfix software to assist in spooling
emails, which is an open source technology, but began using the
SMTP relay service during 2015 as its primary email sending
platform.
The
Company sold the SMTP relay service in June 2016. The SMTP relay
service product used Message Transfer Agent (MTA) technology
provided by Message Systems, a third party. Typically, our SMTP
relay service customers would be too small and spend too little on
email to be able to afford this type of sophisticated system on
their own. The SMTP solution pooled a large number of customers
into our proprietary and scalable system that handled billions of
emails. The software was customized to optimize the speed at which
email is delivered, and to manage the process of maximizing inbox
delivery. The proprietary systems managed how emails are sent, and
which IP addresses or pools of IP addresses were used for sending.
Another key part of our technological assets were our 12,286
portable IPv4 addresses (which were sold along with the
product).
Email
sending technology is a key part of the application. Following the
sale of the SMTP product in June 2016, we rely on a third party to
deliver our platform’s email. During the period of time
before the sale of the SMTP product in June 2016, we employed
Message Systems as the backbone of our sending. During the first
half of 2016, we also employed Postfix software for certain
functions. PostFix software is open source and has been released
under the IBM Public License 1.0, giving us and others rights to
freely utilize and modify the software at our discretion and
without cost. We operated the software in a clean unmodified state.
We developed proprietary extensions that plugged into the PostFix
software in an effort to optimize the speed at which email is
delivered, and to manage the process of maximizing inbox delivery.
Customizations to open source software code generally require
developers to make their work available at no cost. Since we
developed the software by creating extensions which live outside of
the open source software layer, we were not required to offer our
products or make our source code available.
Our
platforms are hosted in third party data centers on virtual
cloud-based infrastructure. During 2017, these providers included
Google Compute and Amazon Web Services. These data centers use a
mixture of biometric
access controls, redundant power,
environmental controls and secure internet connection points to
ensure uptime and data security. The Company continuously monitors
our services for availability, performance and security. When
necessary we send engineers to these third-party providers’
locations to maintain quality control and oversight.
We rely
on our data center providers to maintain peak operating conditions
in their businesses and to quickly address issues related to their
service as they arise.
Key Performance Indicators
In
addition to financial performance, the Company measures the
performance of several key performance indicators,
including:
●
Number of acquired
customers
●
Customer
acquisition costs (CAC)
●
Customer attrition
rates
●
Expected lifetime
value (LTV)
Intellectual Property
The
Company does not have any patents, and does not have any patents in
progress.
Our
trade secrets include our competencies in marketing automation, web
tracking, integrations, workflow and email editing.
We
registered “SharpSpring” and the related logo and
certain other marks as trademarks in the United States and several
other jurisdictions.
We are
the registered holder of a variety of domestic and international
domain names that include “sharpspring”,
“sharpspringmailplus”, “graphicmail” and
similar variations.
Regulation of our Business
We must
comply with U.S. federal legislation entitled Controlling the
Assault of Non-Solicited Pornography and Marketing Act of 2003, or
CAN-SPAM Act, which imposes certain obligations on the senders of
commercial emails and specifies penalties for the transmission of
commercial email messages that are intended to deceive the
recipient as to source or content.
The
CAN-SPAM Act’s main provisions include:
●
prohibiting
false or misleading email header information
●
prohibiting the
use of deceptive subject lines
●
ensuring that
recipients may, for at least 30 days after an email is sent, opt
out of receiving future commercial email messages from the sender,
with the opt-out effective within 10 days of the
request
●
requiring that
commercial email be identified as a solicitation or advertisement
unless the recipient affirmatively assented to receiving the
message
●
requiring that
the sender include a valid postal address in the email
message
In
addition, some states have passed laws regulating commercial email
practices that are significantly more punitive and difficult to
comply with than the CAN-SPAM Act, particularly Utah and Michigan,
which have enacted do-not-email registries listing minors who do
not wish to receive unsolicited commercial email that markets
certain covered content, such as adult or other harmful products.
Some portions of these state laws may not be preempted by the
CAN-SPAM Act. Additionally,
some foreign jurisdictions, such as
Australia, Canada and the European Union, have also enacted laws
that regulate sending email, some of which are more restrictive
than the CAN-SPAM Act. For example, some foreign laws prohibit
sending unsolicited email unless the recipient has provided the
sender advance consent to receipt of such email, or in other words
has “opted-in” to receiving it.
The
ability of our customers’ constituents to opt out of
receiving commercial emails may minimize the effectiveness of our
email marketing product. Moreover, non-compliance with the CAN-SPAM
Act carries significant financial penalties. If we were found to be
in violation of the CAN-SPAM Act, applicable state laws not
preempted by the CAN-SPAM Act, or foreign laws regulating the
distribution of commercial email, whether as a result of violations
by our customers or if we were deemed to be directly subject to and
in violation of these requirements, we could be required to pay
penalties, which would adversely affect our financial performance
and significantly harm our business. We also may be required to
change one or more aspects of the way we operate our business,
which could impair our ability to attract and retain customers or
increase our operating costs.
As
internet commerce continues to evolve, increasing regulation by
federal, state or foreign governments becomes more likely. Our
business could be negatively impacted by the application of
existing laws and regulations or the enactment of new laws
applicable to email communications. The cost to comply with such
laws or regulations could be significant and would increase our
operating expenses, and we may be unable to pass along those costs
to our customers in the form of increased subscription fees. In
addition, federal, state and foreign governmental or regulatory
agencies may decide to impose taxes on services provided over the
Internet or via email. Such taxes could discourage the use of the
Internet and email as a means of commercial marketing and
communications, which would adversely affect the viability of our
services.
Additionally,
certain aspects of how our customers utilize our platform are
subject to regulations in the United States, European Union and
elsewhere. In recent years, U.S. and European lawmakers and
regulators have expressed concern over the use of third-party
cookies or web beacons for online behavioral advertising, and
legislation adopted recently in the European Union requires
informed consent for the placement of a cookie on a user’s
device. Regulation of cookies and web beacons may lead to
restrictions on our activities, such as efforts to understand
users’ Internet usage. New and expanding “Do Not
Track” regulations have recently been enacted or proposed
that protect users’ right to choose whether or not to be
tracked online. These regulations seek, among other things, to
allow end users to have greater control over the use of private
information collected online, to forbid the collection or use of
online information, to demand a business to comply with their
choice to opt out of such collection or use, and to place limits
upon the disclosure of information to third party websites. These
policies could have a significant impact on the operation of our
marketing automation platform and could impair our attractiveness
to customers, which would harm our business.
The
European Union’s General Data Protection Regulation (GDPR)
seeks to create a data protection law framework across the EU and
aims to give citizens back the control of their personal data,
whilst imposing strict rules on those hosting and 'processing' this
data, anywhere in the world. The Regulation also introduces rules
relating to the free movement of personal data within and outside
the EU. The GDPR will come into effect on May 25,
2018.
Customers and
potential customers in the healthcare, financial services and other
industries are subject to substantial regulation regarding their
collection, use and protection of data and may be the subject of
further regulation in the future. Accordingly, these laws or
significant new laws or regulations or changes in, or repeals of,
existing laws, regulations or governmental policy may change the
way these customers do business and may require us to implement
additional features or offer additional contractual terms to
satisfy customer and regulatory requirements, or could cause the
demand for and sales of our marketing automation platform to
decrease and adversely impact our financial results.
Employees
As of
February 28, 2018, we have approximately 149 employees supporting
our operations. Nearly all of our employees devote their full
effort to the company. Our resources include 40 sales and marketing
resources, 37 research and development resources, 15 general &
administrative resources and 57 customer services, network and
support resources. None of our employees are covered by collective
bargaining agreements.
We
believe that our future success will depend in part on our
continued ability to attract, hire or acquire and retain qualified
employees and contractors. There can be no assurance that we will
be able to attract and retain such resources. If we are
unsuccessful in managing the timely delivery of these services our
business could be adversely affected. We believe we have good
relations with our resources.
Properties
Our
corporate headquarters is a leased office facility located in
Gainesville, FL.
Financial Information About 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. Since the Company operates
in one operating segment, all required financial segment
information can be found in the consolidated financial
statements.
Corporate Information
SharpSpring, Inc.
is a Delaware corporation. Its wholly owned subsidiaries consist of
(i) SharpSpring Technologies, Inc., a Delaware corporation; (ii)
InterInbox SA, a Swiss corporation; (iii) ERNEPH 2012A (Pty) Ltd.
dba ISMS, a South African limited company; (iv) ERNEPH 2012B (Pty)
Ltd. dba GraphicMail South Africa, a South African limited company;
(v) Quattro Hosting LLC, a Delaware limited liability company; (vi)
SMTP Holdings S.a.r.l., a Luxembourg S.a.r.l.; and (vii) InterCloud
Ltd, a Gibraltar Limited Company.
Our
corporate headquarters is located at 550 SW 2
nd
Avenue,
Gainesville, FL 32601. Our telephone number is 888-428-9605. Our
corporate website is
www.sharpspring.com
. The
information on our website is not incorporated herein by reference
and is not part of this Form 10-K Annual Report. Also, this report
includes the trade names of other companies. Unless specifically
stated otherwise, the use
or display
by us of such other parties' names and trade names in this report
is not intended to and does not imply a relationship with, or
endorsement or sponsorship of us by, any of these other
parties.
Risks Related To Our Business
The majority of our products and services are sold pursuant to
short-term subscription agreements, and if our customers elect not
to renew these agreements, our revenues may decrease.
Typically, our
products and services are sold pursuant to short-term subscription
agreements, which are generally one month to one year in length,
with no obligation to renew these agreements. Our renewal rates may
decline due to a variety of factors, including the products and
services and prices offered by our competitors, new technologies
offered by others, consolidation in our customer base or if some of
our customers cease their operations. If our renewal rates are low
or decline for any reason, or if customers renew on less favorable
terms, our revenues may decrease, which could adversely affect our
stock price.
We may not be able to scale our business quickly enough to meet our
customers' growing needs, and if we are not able to grow
efficiently, our operating results could be harmed.
As
usage of our marketing software grows and as customers use our
solutions for more advanced relationship marketing programs, we
will need to devote additional resources to improving our
application architecture, integrating with third-party systems, and
maintaining infrastructure performance. In addition, we will need
to appropriately scale our internal business systems and our
services organization, including customer support and professional
services, to serve our growing customer base, particularly as our
customer demographics expand over time. Any failure of or delay in
these efforts could cause impaired system performance and reduced
customer satisfaction. These issues could reduce the attractiveness
of our marketing software to customers, resulting in decreased
sales to new customers, lower renewal rates by existing customers,
the issuance of service credits, or requested refunds, which could
adversely affect our revenue growth and harm our reputation. Even
if we are able to upgrade our systems and expand our staff, any
such expansion will be expensive and complex, requiring management
time and attention. We could also face inefficiencies or
operational failures as a result of our efforts to scale our
infrastructure. Moreover, there are inherent risks associated with
upgrading, improving and expanding our information technology
systems. We cannot be sure that the expansion and improvements to
our infrastructure and systems will be fully or effectively
implemented on a timely basis, if at all. These efforts may reduce
revenue and our margins and adversely affect our financial
results.
If we fail to enhance our existing products and services or develop
new products and services, our products and services may become
obsolete or less competitive and we could lose
customers.
If we
are unable to enhance our existing products and services or develop
new products and services that keep pace with rapid technological
developments and meet our customers’ needs, our business will
be harmed. Creating and designing such enhancements and new
products entail significant technical and business risks and
require substantial expenditures and lead-time, and there is no
guarantee that such enhancements and new products will be completed
in a timely fashion. Nor is there any guarantee that any new
service offerings will gain acceptance among our customers or by
the broader market. For example, our existing customers may not
view any new service as complementary to our service offerings and
therefore decide not to purchase such service. If we cannot enhance
our existing products and services or develop new products or if we
are not successful in selling such enhancements and new products to
our customers, we could lose customers or have difficulty
attracting new customers, which would adversely impact our
financial performance.
If we are unable to attract new customers and retain existing
customers on a cost-effective basis, our business and results of
operations will be adversely affected.
To
succeed, we must continue to attract and retain a large number of
customers on a cost-effective basis, many of whom have not
previously used the types of products and services that we offer.
Our sales process involves targeting customers, completing product
demos and advancing customers through our marketing and sales
pipeline to conversion using our SharpSpring marketing automation
product, in addition to relying on outbound marketing and search
engine traffic to attract potential leads. We rely on a variety of
methods to attract new customers, such as outbound emails, hosting
events, paying providers of online services, search engines,
directories and other websites to provide content, advertising
banners and other links that direct customers to our website. If we
are unable to use any of our current marketing initiatives or the
cost of such initiatives were to significantly increase or such
initiatives or our efforts to satisfy our existing customers are
not successful, we may not be able to attract new customers or
retain existing customers on a cost-effective basis and, as a
result, our revenue and results of operations would be adversely
affected.
If we fail to develop our brands cost-effectively, our business may
be adversely affected.
Successful
promotion of our brands will depend largely on the effectiveness of
our marketing efforts and on our ability to provide reliable and
useful services at competitive prices. Brand promotion activities
may not yield increased revenue, and even if they do, any increased
revenue may not offset the expenses we incur in building our
brands. If we fail to successfully promote and maintain our brands,
or incur substantial expenses in an unsuccessful attempt to promote
and maintain our brands, we may fail to attract enough new
customers or retain our existing customers to the extent necessary
to realize a sufficient return on our brand-building efforts, and
our business and results of operations could suffer.
Email communications is a key component of our product. Delivery of
our emails can be impaired by third party monitoring agencies and
internet service providers. If the delivery of our customers’
emails is limited or blocked, our product’s capabilities
would be severely limited and customers may cancel their
accounts.
Many
SharpSpring users aim to communicate using email with a broad range
of customers and prospects. Our policies limit the use of email to
recipients who have agreed to receive email from that business.
However, it is often difficult to enforce the use of opt-in email
lists and in some cases, our customers disregard our policies and
send emails to purchased lists, which may include spam traps put in
place by monitoring agencies. Those same agencies can block emails
from reaching individuals that use their email protection services.
Additionally, internet service providers (ISPs) also filter email
based on email characteristics and spam complaint rates. Although
we work with one of the premier email delivery providers, recent
aggressive actions by monitoring agencies and ISPs make it more
difficult to protect our email sending reputation and deliver our
customers’ emails to the recipient. We continually monitor
and improve our own technology and work closely with ISPs to
maintain our deliverability rates. If third party agencies or ISPs
materially limit or halt the delivery of our customers’
emails, or if we fail to deliver our customers’ emails in an
acceptable manner, our customers may cancel their
accounts.
If we pursue future acquisitions, our inability to successfully
acquire and integrate other businesses, assets, products or
technologies could harm our operating results.
We may
in the future evaluate and pursue acquisitions and strategic
investments in businesses, products or technologies that we believe
could complement or expand our existing solutions, expand our
client base and operations worldwide, enhance our technical
capabilities or otherwise offer growth or cost-saving
opportunities. From time to time, we may enter into letters of
intent with companies with which we are negotiating potential
acquisitions or investments or as to which we are conducting due
diligence. Although we are currently not a party to any binding
definitive agreement with respect to potential investments in, or
acquisitions of, complementary businesses, products or
technologies, we may enter into these types of arrangements in the
future, which could materially decrease the amount of our available
cash or require us to seek additional equity or debt financing. We
have limited experience in successfully acquiring and integrating
businesses, products and technologies. We may not be successful in
negotiating the terms of any potential acquisition, conducting
thorough due diligence, financing the acquisition or effectively
integrating the acquired business, product or technology into our
existing business and operations. Our due diligence may fail to
identify all of the problems, liabilities or other shortcomings or
challenges of an acquired business, product or technology,
including issues related to intellectual property, product quality
or product architecture, regulatory compliance practices, revenue
recognition or other accounting practices, or employee or customer
issues.
Additionally, in
connection with any acquisitions we complete, we may not achieve
the synergies or other benefits we expected to achieve, and we may
incur write-downs, impairment charges or unforeseen liabilities
that could negatively affect our operating results or financial
position or could otherwise harm our business. If we finance
acquisitions using existing cash, the reduction of our available
cash could cause us to face liquidity issues or cause other
unanticipated problems in the future. If we finance acquisitions by
issuing convertible debt or equity securities, the ownership
interest of our existing stockholders may be diluted, which could
adversely affect the market price of our stock. Further,
contemplating or completing an acquisition and integrating an
acquired business, product or technology could divert management
and employee time and resources from other matters.
Our international operations subject us to additional risks and
uncertainties.
We have
customers in various international jurisdictions. Our international
operations present unique challenges and risks to our Company.
Compliance with complex foreign and U.S. laws and regulations that
apply to our international operations increases our cost of doing
business in international jurisdictions and could interfere with
our ability to offer our products and services to one or more
countries or expose us or our employees to fines and penalties.
These laws and regulations include, but are not limited to, tax
laws, data privacy and filtering requirements, U.S. laws such as
the Foreign Corrupt Practices Act, and local laws prohibiting
corrupt payments to governmental officials. Violations of these
laws and regulations could result in monetary damages, criminal
sanctions against us, our officers, or our employees, and
prohibitions on the conduct of our business. Our international
operations also subject us to additional foreign currency exchange
rate risks and will require additional management attention and
resources. Our international operations subject us to other
inherent risks, including, but not limited to:
●
the impact of
recessions in economies outside of the United States
●
changes in and
differences between regulatory requirements between
countries
●
U.S. and foreign
export restrictions, including export controls relating to
encryption technologies
●
anti-SPAM laws
and other laws that may differ materially from U.S.
laws
●
reduced
protection for and enforcement of intellectual property rights in
some countries
●
potentially
adverse tax consequences
●
difficulties and
costs of staffing and managing foreign operations
●
political and
economic instability
●
international
conflicts, wars or terrorism
●
tariffs and
other trade barriers
●
seasonal
reductions in business activity
Our
failure to address these risks adequately could materially and
adversely affect our business, revenue, results of operations, cash
flows and financial condition.
We could be materially affected by the fluctuations of the U.S.
Dollar against the Euro, Swiss Franc, South African Rand or British
Pound.
In our
fourth quarter of 2017, approximately 82% of our revenues are
currently generated in U.S. Dollars, while approximately 18% of our
revenues are denominated in other currencies including the Euro,
Swiss Franc, South African Rand and British Pound. Our costs are
generally incurred in similar currencies. Currency exchange rates
can fluctuate dramatically, which will impact the amount of revenue
we will record when translated to U.S. Dollars and will impact the
amount of costs that we incur when translated to U.S. Dollars.
Although our cost currencies are generally aligned to our revenue
currencies, variances exist between the rate we incur costs in each
currency compared to the revenue. Therefore, changes to currency
rates may dramatically impact profitability.
If we do not or cannot maintain the compatibility of our marketing
software with third-party applications that our customers use in
their businesses, our revenue will decline.
The
functionality and popularity of our marketing software depends, in
part, on our ability to integrate our solutions with third-party
applications and platforms, including CRM, event management,
e-commerce, call center, and social media sites that our customers
use and from which they obtain data. Third-party providers of
applications and APIs may change the features of their applications
and platforms, restrict our access to their applications and
platforms or alter the terms governing use of their applications
and APIs and access to those applications and platforms in an
adverse manner. Such changes could functionally limit or terminate
our ability to use these third-party applications and platforms in
conjunction with our solution, which could negatively impact our
offerings and harm our business. If we fail to integrate our
software with new third-party applications and platforms that our
customers use for marketing purposes, we may not be able to offer
the functionality that our customers need, which would negatively
impact our ability to generate revenue and adversely impact our
business.
The market in which we participate is competitive and, if we do not
compete effectively, our operating results could be
harmed.
Our
principal competitors include marketing automation companies like
HubSpot, Pardot and Act-On. Companies can also utilize various
point solutions to provide individual marketing capabilities for
things like email campaigns, landing pages, forms and analytics,
which are all features in a marketing automation solution.
Competition could result in reduced sales, reduced margins or the
failure of our products to achieve or maintain more widespread
market acceptance, any of which could harm our
business.
Our
current and potential competitors may have significantly more
financial, technical, marketing and other resources than we do and
may be able to devote greater resources to the development,
promotion, sale and support of their products. Our current and
potential competitors may have more extensive customer bases and
broader customer relationships than we have. In addition, these
companies may have longer operating histories and greater name
recognition than we have and may be able to bundle products with
other products that have gained widespread market acceptance. These
competitors may be better able to respond quickly to new
technologies and to undertake more extensive marketing campaigns.
If we are unable to compete with such companies, the demand for our
products could substantially decline.
Our business is substantially dependent on continued demand for
marketing and email technology and any decrease in demand could
cause us to suffer a decline in revenues and
profitability.
We
derive, and expect to continue to derive, substantially all of our
revenue from organizations, including marketing agencies and small
and medium size businesses, associations and non-profits. As a
result, widespread acceptance of marketing technology among small
and medium size organizations is critical to our future growth and
success. The overall market for marketing automation technology is
relatively new and still evolving, and small organizations have
generally been slower than larger organizations to adopt email
marketing as part of their marketing mix. There is no certainty
regarding how or whether this market will develop, or whether it
will experience any significant contractions. Our ability to
attract and retain customers will depend in part on our ability to
make marketing communications convenient, effective and affordable.
If small and medium size organizations determine that marketing
technology and communication does not sufficiently benefit them,
existing customers may cancel their accounts and potential
customers may decide not to utilize our services.
We are a small public company and the requirements of being a
public company are a strain on our systems and resources, are a
diversion to management’s attention and are
costly.
As a
public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934 (Exchange Act) the Sarbanes-Oxley
Act of 2002 (Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act), and the rules and
regulations of The NASDAQ Stock Market. The requirements of these
rules and regulations increase our legal, accounting and financial
compliance costs, make some activities more difficult,
time-consuming and costly and may also place undue strain on our
personnel, systems and resources.
The
Exchange Act requires, among other things, that we file annual,
quarterly and current reports with respect to our business and
operating results. The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and
procedures and internal control over financial reporting. We are
continuing the costly process of implementing and testing our
systems to report our results as a public company, to continue to
manage our growth and to implement internal controls. We are and
will continue to be required to implement and maintain various
other control and business systems related to our equity, finance,
treasury, information technology, other recordkeeping systems and
other operations. As a result of this implementation and
maintenance, management's attention may be diverted from other
business concerns, which could adversely affect our
business.
In
addition, changing laws, regulations and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a
diversion of management's time and attention from
revenue-generating activities to compliance activities. If our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to their application and practice,
regulatory authorities may initiate legal proceedings against us
and our business may be adversely affected.
In
addition, we expect these laws, rules and regulations to make it
more difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to incur
substantial costs to maintain appropriate levels of coverage. These
factors could also make it more difficult for us to attract and
retain qualified members of our board of directors, particularly to
serve on our audit committee, and qualified executive
officers.
As a
result of being a public company, our business and financial
condition has become more visible, which we believe may result in
threatened or actual litigation, including by competitors and other
third parties. If such claims are successful, our business and
operating results could be adversely affected, and even if the
claims do not result in litigation or are resolved in our favor,
these claims, and the time and resources necessary to resolve them,
could divert the time and resources of our management and adversely
affect our business and operating results.
Risks Related To Our Management
If we fail to retain our key personnel, we may not be able to
achieve our anticipated level of growth and our business could
suffer.
Our
future depends, in part, on our ability to attract and retain key
personnel. Our future also depends on the continued efforts and
abilities of our executive officers, including our Chief Executive
Officer and other key personnel, each of whom would be difficult to
replace. In particular, Richard Carlson, our Chief Executive
Officer and President and Travis Whitton, our Chief Technology
Officer, are critical to the Company’s strategic direction
and product development process. The loss of the services of
Messrs. Carlson, Whitton or other key personnel, and the process to
replace any of our key personnel, would involve significant time
and expense and may significantly delay or prevent the achievement
of our business objectives. We currently do not maintain key person
life insurance on any of our executives. Accordingly, the loss of
the services of any of these persons would adversely affect our
business.
Our anticipated growth in our operations could place a significant
strain on our management team and our administrative, operational
and financial reporting infrastructure.
Our
success will depend in part on the ability of our management team
to effectively manage our growth in our operations. To do so, we
believe we will need to continue to hire, train and manage new
employees as needed. If our new hires perform poorly, or if we are
unsuccessful in hiring, training, managing and integrating these
new employees, or if we are not successful in retaining our
existing employees, our business may be harmed. To manage the
expected growth of our operations and personnel, we will need to
continue to improve our operational and financial controls and
update our reporting procedures and systems. The expected addition
of new employees and the capital investments that we anticipate
will be necessary to manage our anticipated growth will increase
our cost base, which will make it more difficult for us to offset
any future revenue shortfalls by reducing expenses in the short
term. If we fail to successfully manage our anticipated growth, our
business operations could be adversely affected.
A material weakness in internal controls may remain undetected for
a longer period because of our Company's exemption from the auditor
attestation requirements under Section 404(b) of
Sarbanes-Oxley.
Our
annual report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial reporting.
Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to rules
of the Securities and Exchange Commission that permit the Company
to provide only management’s attestation in its annual
report. As a result, a material weakness in our internal controls
may remain undetected for a longer period.
Risks Related To Our Systems
Our customers’ use of our products to transmit negative
messages or website links to harmful applications could damage our
reputation, and we may face liability for unauthorized, inaccurate
or fraudulent information distributed via our
services.
Although it is
against our terms and conditions, our customers could use our email
servers to transmit negative messages or website links to harmful
applications, reproduce and distribute copyrighted material without
permission, or report inaccurate or fraudulent data or information.
Any such use of our products could damage our reputation and we
could face claims for damages, copyright or trademark infringement,
defamation, negligence or fraud. Moreover, our customers’
promotion of their products and services through our email
marketing product may not comply with federal, state and foreign
laws. We cannot predict whether our role in facilitating these
activities would expose us to liability under these
laws.
Even if
claims asserted against us do not result in liability, we may incur
substantial costs in investigating and defending such claims. If we
are found liable for our customers’ activities, we could be
required to pay fines or penalties, redesign business methods or
otherwise expend resources to remedy any damages caused by such
actions and to avoid future liability.
Various private spam blacklists have in the past interfered with,
and may in the future interfere with, the effectiveness of our
products and our ability to conduct business.
Our
customers rely on email to communicate with their constituents and
we depend on email to market to and communicate with our customers.
Various private entities attempt to regulate the use of email for
commercial solicitation. These entities often advocate standards of
conduct or practice that significantly exceed current legal
requirements and classify certain email solicitations that comply
with current legal requirements as spam. Some of these entities
maintain “blacklists” of companies and individuals, and
the websites, ISPs and internet protocol addresses associated with
those entities or individuals that do not adhere to those standards
of conduct or practices for commercial email solicitations that the
blacklisting entity believes are appropriate. If a company’s
internet protocol addresses are listed by a blacklisting entity,
emails sent from those addresses may be blocked if they are sent to
any Internet domain or Internet address that subscribes to the
blacklisting entity’s service or purchases its blacklist.
Although we have not owned the internet protocol addresses we
utilize since the sale of the SMTP product, blacklisting of the
internet protocol addresses that the company uses could materially
impact our sending ability.
Our facilities and systems are vulnerable to natural disasters and
other unexpected events and any of these events could result in an
interruption of our ability to execute clients’ email
campaigns.
While
we have established contingency plans for certain potential
disasters, it is possible that an unexpected disaster may occur,
which could interrupt our ability to provide services. We also
depend on the efficient and uninterrupted operations of our
third-party data centers and hardware systems. The data centers and
hardware systems are vulnerable to damage from earthquakes,
tornados, hurricanes, fire, floods, power loss, telecommunications
failures and similar events. If any of these events results in
damage to our facilities or third-party data centers or systems, we
may be unable to operate our services until the damage is repaired,
and may accordingly lose clients and revenues. In addition, subject
to applicable insurance coverage, we may incur substantial costs in
repairing any damage.
System failures could reduce the attractiveness of our service
offerings, which could cause us to suffer a decline in revenues and
profitability.
The
satisfactory performance, reliability and availability of the
technology and the underlying network infrastructure are critical
to our operations, level of client service, reputation and ability
to attract and retain clients. We have experienced periodic
interruptions, affecting all or a portion of our systems, which we
believe will continue to occur from time to time. We are not aware
of any loss of customers due to material service interruptions.
However, any systems damage or interruption that impairs our
ability to accept and fill client orders could result in an
immediate loss of revenue to us, and could cause some clients to
purchase services offered by our competitors. In addition, frequent
systems failures could harm our reputation. Some factors that could
lead to interruptions in customer service include: operator
negligence; improper operation by, or supervision of, employees;
physical and electronic break-ins; misappropriation; computer
viruses and similar events; power loss; computer systems failures;
and Internet and telecommunications failures. We do not carry
sufficient business interruption insurance to fully compensate us
for losses that may occur.
Any significant disruption in service on our websites or in our
computer systems, or in our customer support services, could reduce
the attractiveness of our products and result in a loss of
customers.
The
satisfactory performance, reliability and availability of our
technology and our underlying network infrastructure are critical
to our operations, level of customer service, reputation and
ability to attract new customers and retain existing customers. Our
production system hardware and the disaster recovery operations for
our production system hardware are co-located in third-party
hosting facilities. None of the companies who host our systems
guarantee that our customers’ access to our products will be
uninterrupted, error-free or secure. Our operations depend on their
ability to protect their and our systems in their facilities
against damage or interruption from natural disasters, power or
telecommunications failures, air quality, temperature, humidity and
other environmental concerns, computer viruses or other attempts to
harm our systems, criminal acts and similar events. In the event
that our arrangements with third-party data centers are terminated,
or there is a lapse of service or damage to their facilities, we
could experience interruptions in our service as well as delays and
additional expense in arranging new facilities. Any interruptions
or delays in access to our services, whether as a result of a
third-party error, our own error, natural disasters or security
breaches, whether accidental or willful, could harm our
relationships with customers and our reputation. Also, in the event
of damage or interruption, our insurance policies may not
adequately compensate us for any losses that we may incur. These
factors could damage our brand and reputation, divert our
employees’ attention, reduce our revenue, subject us to
liability and cause customers to cancel their accounts, any of
which could adversely affect our business, financial condition and
results of operations.
We rely on third-party cloud computing services that we do not
control could cause errors or failures of our service, which could
cause us to suffer a decline in revenues and
profitability.
We rely
on cloud computing services from third parties that we do not
control in order to offer our products, including Google Compute,
Amazon Web Services, and others. If we lose the right to use these
services or the service malfunctions, our customers could
experience delays or be unable to access our services until we can
obtain and integrate equivalent technology or a repair is made. Any
delays or failures associated with our services could upset our
customers and harm our business.
If we are unable to protect the confidentiality of our unpatented
proprietary information, processes and know-how and our trade
secrets, the value of our technology and services could be
adversely affected.
We rely
upon unpatented proprietary technology, processes and know-how and
trade secrets. Although we try to protect this information in part
by executing confidentiality agreements with our employees,
consultants and third parties, such agreements may offer only
limited protection and may be breached. Any unauthorized disclosure
or dissemination of our proprietary technology, processes and
know-how or our trade secrets, whether by breach of a
confidentiality agreement or otherwise, may cause irreparable harm
to our business, and we may not have adequate remedies for any such
breach. In addition, our trade secrets may otherwise be
independently developed by our competitors or other third parties.
If we are unable to protect the confidentiality of our proprietary
information, processes and know-how or our trade secrets are
disclosed, the value of our technology and services could be
adversely affected, which could negatively impact our business,
financial condition and results of operations.
Our use of open source software could impose limitations on our
ability to commercialize our products, which could cause us to
suffer a decline in revenues and profitability.
Customizations to
open source software code generally require developers to make
their work available at no cost. Since we have created our software
by developing extensions which plug into open source software
without modifying the open source code, we do not believe there is
a risk we could be required to offer our products or make our
source code available. Although we monitor our use of open source
software closely, the terms of many open source licenses to which
we are subject have not been interpreted by United States or
foreign courts, and there is a risk that such licenses could be
construed in a manner that imposes unanticipated conditions or
restrictions on our ability to commercialize our products. In such
event, we could be required to seek licenses from third parties in
order to continue offering our products, to re-engineer our
products or to discontinue sales of our products, or to release our
software code under the terms of an open source license, any of
which could materially adversely affect our business.
Given
the nature of open source software, there is also a risk that third
parties may assert copyright and other intellectual property
infringement claims against us based on our use of certain open
source software programs. The risks associated with intellectual
property infringement claims are discussed immediately
below.
Because we have not filed for patent protection of our
technologies, we face the risk of our technologies not being
adequately protected.
We do
not currently have any patents for our proprietary technology and
do not have plans to file for patent protection currently. If we
fail to obtain patents on our technologies and processes, we may be
unable to adequately protect our intellectual property, especially
if the designs and materials used in our products are replicated by
our competitors. Further, even if we file for patent protection,
there is no assurance that it will be approved by the US Patent and
Trademark Office.
If a third party asserts that we are infringing its intellectual
property, whether successful or not, it could subject us to costly
and time-consuming litigation or require us to obtain expensive
licenses, and our business may be adversely affected.
The
software and Internet industries are characterized by the existence
of a large number of patents, trademarks and copyrights and by
frequent litigation based on allegations of infringement or other
violations of intellectual property rights. Third parties may
assert patent and other intellectual property infringement claims
against us in the form of lawsuits, letters or other forms of
communication. These claims, whether or not successful,
could:
●
|
divert
management’s attention;
|
●
|
result
in costly and time-consuming litigation;
|
●
|
require
us to enter into royalty or licensing agreements, which may not be
available on acceptable terms, or at all;
|
●
|
in the
case of open source software-related claims, require us to release
our software code under the terms of an open source license;
or
|
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|
require
us to redesign our software and services to avoid
infringement.
|
As a
result, any third-party intellectual property claims against us
could increase our expenses and adversely affect our business. In
addition, many of our agreements with our agency partners require
us to indemnify them for third-party intellectual property
infringement claims, which would increase the cost to us resulting
from an adverse ruling on any such claim. Even if we have not
infringed any third parties’ intellectual property rights, we
cannot be sure our legal defenses will be successful, and even if
we are successful in defending against such claims, our legal
defense could require significant financial resources and
management time. Finally, if a third party successfully asserts a
claim that our products infringe its proprietary rights, royalty or
licensing agreements might not be available on terms we find
acceptable or at all and we may be required to pay significant
monetary damages to such third party.
If the security of our customers’ confidential information
stored in our systems is breached or otherwise subjected to
unauthorized access, our reputation may be severely harmed, we may
be exposed to liability and we may lose the ability to offer our
customers a credit card payment option.
Our
system stores our customers’ proprietary email distribution
lists, credit card information and other critical data. Any
accidental or willful security breaches or other unauthorized
access could expose us to liability for the loss of such
information, adverse regulatory action by federal and state
governments, time-consuming and expensive litigation and other
possible liabilities as well as negative publicity, which could
severely damage our reputation. If security measures are breached
because of third-party action, employee error, malfeasance or
otherwise, or if design flaws in our software are exposed and
exploited, and, as a result, a third party obtains unauthorized
access to any of our customers’ data, our relationships with
our customers will be severely damaged, and we could incur
significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and
generally are not recognized until they are launched against a
target, we and our third-party hosting facilities may be unable to
anticipate these techniques or to implement adequate preventative
measures. In addition, many states have enacted laws requiring
companies to notify individuals of data security breaches involving
their personal data. These mandatory disclosures regarding a
security breach often lead to widespread negative publicity, which
may cause our customers to lose confidence in the effectiveness of
our data security measures. Any security breach, whether actual or
perceived, would harm our reputation, and we could lose customers
and fail to acquire new customers.
If we
fail to maintain our compliance with the data protection policy
documentation standards adopted by the major credit card issuers,
we could lose our ability to offer our customers a credit card
payment option. Any loss of our ability to offer our customers a
credit card payment option would make our products less attractive
to many small organizations by negatively impacting our customer
experience and significantly increasing our administrative costs
related to customer payment processing.
We may be the subjected of intentional cyber disruptions and
attacks.
We
expect to be an ongoing target of attacks specifically designed to
impede the performance of our products. Experienced computer
programmers, or hackers, may attempt to penetrate our network
security or the security of our data centers and IT environments.
These hackers, or others, which may include our employees or
vendors, may cause interruptions of our services. Although we
continually seek to improve our countermeasures to prevent and
detect such incidents, if these efforts are not successful, our
business operations, and those of our customers, could be adversely
affected, losses or theft of data could occur, our reputation and
future sales could be harmed, governmental regulatory action or
litigation could be commenced against us and our business,
financial condition, operating results and cash flow could be
materially adversely affected.
Risks Related To Our Industry
Existing federal, state and foreign laws regulate Internet tracking
software, the senders of commercial emails and text messages,
website owners and other activities, and could impact the use of
our marketing tools and potentially subject us to regulatory
enforcement or private litigation.
Certain
aspects of how our customers utilize our marketing tools are
subject to regulations in the United States, European Union and
elsewhere. New and expanding “Do Not Track” regulations
have recently been enacted or proposed that protect users' right to
choose whether or not to be tracked online. These regulations seek,
among other things, to allow consumers to have greater control over
the use of private information collected online, to forbid the
collection or use of online information, to demand a business to
comply with their choice to opt out of such collection or use, and
to place limits upon the disclosure of information to third party
websites. These policies could have a significant impact on the
operation of our marketing software and could impair our
attractiveness to customers, which would harm our
business.
Customers and
potential customers in the healthcare, financial services and other
industries are subject to substantial regulation regarding their
collection, use and protection of data and may be the subject of
further regulation in the future. Accordingly, these laws or
significant new laws or regulations or changes in, or repeals of,
existing laws, regulations or governmental policy may change the
way these customers do business and may require us to implement
additional features or offer additional contractual terms to
satisfy customer and regulatory requirements, or could cause the
demand for and sales of our marketing software to decrease and
adversely impact our financial results.
In
addition, U.S., state and foreign jurisdictions are considering and
may in the future enact legislation or laws restricting the ability
to conduct marketing activities in mobile, social and web channels.
Any of the foregoing existing or future restrictions could require
us to change one or more aspects of the way we operate our
business, which could impair our ability to attract and retain
customers, or increase our operating costs or otherwise harm our
business. We may be unable to pass along those costs to our
customers in the form of increased subscription fees.
While
these laws and regulations generally govern our customers’
use of our marketing tools, we may be subject to certain laws as a
data processor on behalf of, or as a business associate of, our
customers. For example, these laws and regulations governing the
collection, use and disclosure of personal information include, in
the United States, rules and regulations promulgated under the
authority of the Federal Trade Commission, the Health Insurance
Portability and Accountability Act of 1996, the Gramm-Leach-Bliley
Act of 1999 and state breach notification laws, and
internationally, the Data Protection Directive in the European
Union and the Federal Data Protection Act in Germany. If we were
found to be in violation of any of these laws or regulations as a
result of government enforcement or private litigation, we could be
subjected to civil and criminal sanctions, including both monetary
fines and injunctive action that could force us to change our
business practices, all of which could adversely affect our
financial performance and significantly harm our reputation and our
business.
Privacy concerns and consumers' acceptance of Internet behavior
tracking may limit the applicability, use and adoption of our
marketing software.
Privacy
concerns may cause consumers to resist providing the personal data
necessary to allow our customers to use our services effectively.
We have implemented various features intended to enable our
customers to better protect consumer privacy, but these measures
may not alleviate all potential privacy concerns and threats. Even
the perception of privacy concerns, whether or not valid, may
inhibit market adoption of our services in certain industries. In
addition to government activity, privacy advocacy groups and the
technology and other industries are considering various new,
additional or different self-regulatory standards that may place
additional burdens on us. There are numerous lawsuits in process
against various technology companies that collect and use personal
information. If those lawsuits are successful, it could impact the
way we conduct our business and adversely affect our financial
results. The costs of compliance with, and other burdens imposed
by, the foregoing laws, regulations, policies and actions may limit
the use and adoption of our cloud-based marketing software and
reduce overall demand for it, or lead to significant fines,
penalties or liabilities for any noncompliance or loss of any such
action.
Evolving regulations concerning data privacy may restrict our
customers’ ability to solicit, collect, process and use data
necessary to conduct email campaigns or to analyze the results or
may increase their costs, which could harm our
business.
Federal, state and
foreign governments have enacted, and may in the future enact, laws
and regulations concerning the solicitation, collection, processing
or use of consumers’ personal information. Such laws and
regulations may require companies to implement privacy and security
policies, permit users to access, correct and delete personal
information stored or maintained by such companies, inform
individuals of security breaches that affect their personal
information, and, in some cases, obtain individuals’ consent
to use personal information for certain purposes. Other proposed
legislation could, if enacted, prohibit the use of certain
technologies that track individuals’ activities on web pages
or that record when individuals click through to an Internet
address contained in an email message. Such laws and regulations
could restrict our customers’ ability to collect and use
email addresses, page viewing data, and personal information, which
may reduce demand for our products. They may also negatively impact
our ability to effectively market our products.
The growth of the marketing automation market depends partially on
the continued growth and effectiveness of anti-spam products, which
may be insufficient to enable us to offer our services at a
profit.
Adoption and
retention of email as a communications medium depends on the
ability to prevent junk mail, or “spam,” from
overwhelming a subscriber’s electronic mailbox. In recent
years, many companies have evolved to address this issue and filter
unwanted messages before they reach customers’ mailboxes. In
response, spammers have become more sophisticated and have also
begun using junk messages as a means for fraud. Email protection
companies in turn have evolved to address this new threat. However,
if their products fail to be effective against spam, adoption of
email as a communications tool will decline, which would adversely
affect the market for our services.
Another economic downturn could negatively affect the business
sector, which may cause our customers to terminate existing
accounts with us or cause potential customers to fail to purchase
our products, resulting in a decrease in our revenue and impairing
our ability to operate profitably.
Our
email services are designed specifically for small and medium size
organizations, including small and medium size businesses,
associations and non-profits that frequently have limited budgets
and may be more likely to be significantly affected by economic
downturns than their larger, more established counterparts. Small
organizations may choose to spend the limited funds that they have
on items other than our products and may experience higher failure
rates. Moreover, if small organizations experience economic
hardship, they may be unwilling or unable to expend resources on
marketing, including email marketing, which would negatively affect
the overall demand for our products, increase customer attrition
and could cause our revenue to decline. In addition, we have
limited experience operating our business during an economic
downturn. Accordingly, we do not know if our current business model
will continue to operate effectively during an economic downturn.
Furthermore, we are unable to predict the likely duration and
severity of potential adverse economic conditions in the U.S. and
other countries, but the longer the duration the greater risks we
face in operating our business. There can be no assurance,
therefore, that worsening economic conditions, or a prolonged or
recurring recession, will not have a significant adverse impact on
our operating and financial results.
U.S. federal legislation entitled Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003 imposes certain
obligations on the senders of commercial emails, which could
minimize the effectiveness of our email marketing product, and
establishes financial penalties for non-compliance, which could
increase the costs of our business.
The
Controlling the Assault of Non-Solicited Pornography and Marketing
Act of 2003, or CAN-SPAM Act, establishes certain requirements for
commercial email messages and specifies penalties for the
transmission of commercial email messages that are intended to
deceive the recipient as to source or content. The CAN-SPAM Act,
among other things, obligates the sender of commercial emails to
provide recipients with the ability to opt out of receiving future
emails from the sender. In addition, some states have passed laws
regulating commercial email practices that are significantly more
punitive and difficult to comply with than the CAN-SPAM Act,
particularly Utah and Michigan, which have enacted do-not-email
registries listing minors who do not wish to receive unsolicited
commercial email that markets certain covered content, such as
adult or other harmful products. Some portions of these state laws
may not be preempted by the CAN-SPAM Act. The ability of our
customers’ constituents to opt out of receiving commercial
emails may minimize the effectiveness of our email marketing
product. Moreover, non-compliance with the CAN-SPAM Act carries
significant financial penalties. If we were found to be in
violation of the CAN-SPAM Act, applicable state laws not preempted
by the CAN-SPAM Act, or foreign laws regulating the distribution of
commercial email, whether as a result of violations by our
customers or if we were deemed to be directly subject to and in
violation of these requirements, we could be required to pay
penalties, which would adversely affect our financial performance
and significantly harm our business. We also may be required to
change one or more aspects of the way we operate our business,
which could impair our ability to attract and retain customers or
increase our operating costs.
As Internet commerce develops, federal, state and foreign
governments may adopt new laws to regulate Internet commerce, which
may negatively affect our business.
As
Internet commerce continues to evolve, increasing regulation by
federal, state or foreign governments becomes more likely. Our
business could be negatively impacted by the application of
existing laws and regulations or the enactment of new laws
applicable to email communications. The cost to comply with such
laws or regulations could be significant and would increase our
operating expenses, and we may be unable to pass along those costs
to our customers in the form of increased subscription fees. In
addition, federal, state and foreign governmental or regulatory
agencies may decide to impose taxes on services provided over the
Internet or via email. Such taxes could discourage the use of the
Internet and email as a means of commercial marketing and
communications, which would adversely affect the viability of our
services.
Risks Related To Owning Our Securities
We have a history of losses and may not achieve profitability in
the future.
We
generated a net loss from continuing operations of approximately
$5.0 million in 2017. We will need to generate and sustain
increased revenue levels in future periods to become profitable,
and, even if we do, we may not be able to maintain or increase our
level of profitability. We intend to continue to expend significant
funds to expand and grow our marketing automation platform and
obtain new customers. Our efforts to grow our business may be more
costly than we expect, and we may not be able to increase our
revenue enough to offset higher operating expenses. We may incur
significant losses in the future for a number of reasons, including
the other risks described in this Annual Report on Form 10-K, and
unforeseen expenses, difficulties, complications and delays and
other unknown events. If we are unable to achieve and sustain
profitability, the market price of our common stock may
significantly decrease.
We may need additional capital in the future, which may not be
available to us on favorable terms, or at all, and may dilute your
ownership of our common stock.
We have
historically relied on outside financing and cash from operations
to fund our operations, capital expenditures and expansion.
Although the sale of the SMTP email relay business in 2016 provided
the Company with a one-time source of funds, cash from operations
following the divestiture is significantly lower than historic
levels. We may require additional capital from equity or debt
financing in the future to:
●
respond to
competitive pressures;
●
take advantage
of strategic opportunities, including more rapid expansion of our
business or the acquisition of complementary products, technologies
or businesses; and
●
develop new
products or enhancements to existing products.
We may
not be able to secure timely additional financing on favorable
terms, or at all. The terms of any additional financing may place
limits on our financial and operating flexibility. If we raise
additional funds through issuances of equity, convertible debt
securities or other securities convertible into equity, our
existing stockholders could suffer significant dilution in their
percentage ownership of our Company, and any new securities we
issue could have rights, preferences and privileges senior to those
of our common stock. If we are unable to obtain adequate financing
or financing on terms satisfactory to us, if and when we require
it, our ability to grow or support our business and to respond to
business challenges could be significantly limited.
We may expand through acquisitions of, or investments in, other
companies or through business relationships, all of which may
result in additional dilution to our stockholders and consumption
of resources that are necessary to sustain our
business.
One of
the strategies available to us to grow our business would be to
acquire competing or complementary services, technologies or
businesses. We also may enter into relationships with other
businesses in order to expand our service offerings, which could
involve preferred or exclusive licenses, additional channels of
distribution or discount pricing or investments in other
companies.
In
connection with one or more of those transactions, we
may:
●
issue additional
equity securities that would dilute our stockholders;
●
use cash that we
may need in the future to operate our business;
●
incur debt on
terms unfavorable to us or that we are unable to
repay;
●
incur large
charges or substantial liabilities;
●
encounter
difficulties retaining key employees of the acquired company or
integrating diverse business cultures;
●
become subject
to adverse tax consequences, substantial depreciation or deferred
compensation charges; and
●
encounter
unfavorable reactions from investment banking market analysts who
disapprove of our completed acquisitions.
Our board of directors has the authority, without stockholder
approval, to issue preferred stock with terms that may not be
beneficial to existing common stockholders and with the ability to
affect adversely stockholder voting power and perpetuate their
control over us.
Our
certificate of incorporation allows us to issue shares of preferred
stock without any vote or further action by our stockholders. Our
board of directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our board of
directors also has the authority to issue preferred stock without
further stockholder approval, including large blocks of preferred
stock. As a result, our board of directors could authorize the
issuance of a series of preferred stock that would grant to holders
thereof the preferred right to our assets upon liquidation, the
right to receive dividend payments before dividends are distributed
to the holders of common stock or other preferred stockholders and
the right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock or existing preferred
stock, if any.
Preferred stock
could be used to dilute a potential hostile acquirer. Accordingly,
any future issuance of preferred stock or any rights to purchase
preferred stock may have the effect of making it more difficult for
a third party to acquire control of us. This may delay, defer or
prevent a change of control or an unsolicited acquisition proposal.
The issuance of preferred stock also could decrease the amount of
earnings attributable to, and assets available for distribution to,
the holders of our common stock and could adversely affect the
rights and powers, including voting rights, of the holders of our
common stock and preferred stock.
A sale of a substantial number of shares of our common stock may
cause the price of our common stock to decline and may impair our
ability to raise capital in the future.
Our
common stock is traded on The NASDAQ Capital Market and, despite
certain increases of trading volume from time to time, our common
stock is considered “thinly-traded,” meaning that the
number of persons interested in trading our common stock at any
given time may be relatively small or non-existent. Finance
transactions resulting in a large amount of newly issued shares
that become readily tradable, or other events that cause current
stockholders to sell shares, could place downward pressure on the
trading price of our stock. The lack of a robust resale market may
require a stockholder who desires to sell a large number of shares
of common stock to sell the shares in increments over time to
mitigate any adverse impact of the sales on the market price of our
stock.
If our
stockholders sell, or the market perceives that our stockholders
intend to sell for various reasons, including the ending of
restriction on resale, substantial amounts of our common stock in
the public market, including shares issued upon the exercise of
outstanding options or warrants, the market price of our common
stock could fall. Sales of a substantial number of shares of our
common stock may make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we
deem reasonable or appropriate. We may become involved in
securities class action litigation that could divert
management’s attention and harm our business.
Our amended certificate of incorporation and bylaws, and certain
provisions of Delaware corporate law, as well as certain of our
contracts, contain provisions that could delay or prevent a change
in control even if the change in control would be beneficial to our
stockholders.
Delaware law, as
well as our amended certificate of incorporation and bylaws,
contains anti-takeover provisions that could delay or prevent a
change in control of our Company, even if the change in control
would be beneficial to our stockholders.
These
provisions could lower the price that future investors might be
willing to pay for shares of our common stock. These anti-takeover
provisions:
●
|
authorize
our board of directors to create and issue, without stockholder
approval, preferred stock, thereby increasing the number of
outstanding shares, which can deter or prevent a takeover
attempt;
|
●
|
prohibit
cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect
director candidates;
|
●
|
empower
our board of directors to fill any vacancy on our board of
directors, whether such vacancy occurs as a result of an increase
in the number of directors or otherwise;
|
●
|
provide
that our board of directors is expressly authorized to adopt, amend
or repeal our bylaws; and
|
●
|
provide
that our directors will be elected by a plurality of the votes cast
in the election of directors.
|
Section
203 of the Delaware General Corporation Law, the terms of our
employee stock option agreements and other contractual provisions
may also discourage, delay or prevent a change in control of our
Company. Section 203 generally prohibits a Delaware corporation
from engaging in a business combination with an interested
stockholder for three years after the date the stockholder became
an interested stockholder. Our employee stock option agreements
include change-in-control provisions that allow us to grant options
or stock purchase rights that may become vested immediately upon a
change in control. The terms of change of control provisions
contained in certain of our senior executive employee agreements
may also discourage a change in control of our Company. Our board
of directors also has the power to adopt a stockholder rights plan
that could delay or prevent a change in control of our Company even
if the change in control is generally beneficial to our
stockholders. These plans, sometimes called “poison
pills,” are oftentimes criticized by institutional investors
or their advisors and could affect our rating by such investors or
advisors. If our board of directors adopts such a plan, it might
have the effect of reducing the price that new investors are
willing to pay for shares of our common stock.
Together, these
charter, statutory and contractual provisions could make the
removal of our management and directors more difficult and may
discourage transactions that otherwise could involve payment of a
premium over prevailing market prices for our common stock.
Furthermore, the existence of the foregoing provisions, as well as
the significant common stock beneficially owned by our founder,
executive officers, and members of our board of directors, could
limit the price that investors might be willing to pay in the
future for shares of our common stock. They could also deter
potential acquirers of our Company, thereby reducing the likelihood
that you could receive a premium for your common stock in an
acquisition.
Our quarterly results may fluctuate and if we fail to meet the
expectations of analysts or investors, our stock price could
decline substantially.
Our
quarterly operating results may fluctuate, and if we fail to meet
or exceed the expectations of securities analysts or investors, the
trading price of our common stock could decline. Some of the
important factors that could cause our revenue and operating
results to fluctuate from quarter to quarter include:
●
our ability to
retain existing customers, attract new customers and satisfy our
customers’ requirements;
●
general economic
conditions;
●
changes in our
pricing policies;
●
our ability to
expand our business;
●
our ability to
successfully integrate our acquired businesses;
●
new product and
service introductions;
●
technical
difficulties or interruptions in our services;
●
the timing of
additional investments in our hardware and software
systems;
●
regulatory
compliance costs;
●
costs associated
with future acquisitions of technologies and businesses;
and
●
extraordinary
expenses such as litigation or other dispute-related settlement
payments.
Some of
these factors are not within our control, and the occurrence of one
or more of them may cause our operating results to vary widely. As
such, we believe that quarter-to-quarter comparisons of our revenue
and operating results may not be meaningful and should not be
relied upon as an indication of future performance.
Our common stock is subject to volatility.
We
cannot assure you that the market price for our common stock will
remain at its current level and a decrease in the market price
could result in substantial losses for investors. The market price
of our common stock may be significantly affected by one or more of
the following factors:
●
announcements or
press releases relating to our industry or to our own business or
prospects;
●
regulatory,
legislative, or other developments affecting us or our industry
generally;
●
sales by holders
of restricted securities pursuant to effective registration
statements or exemptions from registration; and
●
market
conditions specific to our company, our industry and the stock
market generally.
If securities or industry analysts do not publish research or
reports about our business, or if they change their recommendations
regarding our stock adversely, our stock price and trading volume
could decline.
The
trading market for our common stock will depend in part on the
research and reports that securities or industry analysts publish
about us or our business. We currently have two independent
research analyst covering our stock and may not obtain additional
research coverage by securities and industry analysts. If no
additional securities or industry analysts commence coverage of us,
the trading price for our common stock could be negatively
affected. In the event any analyst who covers us downgrades our
securities, the price of our securities would likely decline. If
one or more of these analysts ceases to cover us or fails to
publish regular reports on us, interest in the purchase of our
securities could decrease, which could cause the price of our
common stock and its trading volume to decline.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
None
Our
corporate headquarters is a leased office facility located in
Gainesville, FL.
ITEM
3.
LEGAL
PROCEEDINGS
We
are not a party to any litigation of a material
nature.
ITEM
4.
MINE
SAFETY DISCLOSURES
Not
applicable.