UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: March 31, 2018
 
Or
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
Commission File Number: 001-36280
 
SharpSpring, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
05-0502529
(State or other jurisdiction of incorporationor organization)
(I.R.S. Employer Identification No.)
 
 
550 Southwest 2 nd Avenue
Gainesville, FL
 
32601
(Address of principal executive offices)
(Zip Code)
 
 
888-428-9605
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer   ☐
Accelerated filer    ☐
Non-accelerated filer     ☐
Smaller reporting company  ☑
(Do not check if a smaller reporting company)
Emerging growth company  ☐
 
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes    No 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,446,740 shares of common stock as of May 10, 2018.
 
 
 
SharpSpring, Inc.
 
Table of Contents
 
 
Page
 
 
 
 
2
3
4
5
19
23
23
24
24
24
25
25
25
25
26
27
 
 
 
i
 
 
P ART I – FINANCIAL INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This report on Form 10-Q contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.
 
Examples of forward-looking statements include, but are not limited to:
 
the timing of the development of future products;
projections of costs, revenue, earnings, capital structure and other financial items;
statements of our plans and objectives;
statements regarding the capabilities of our business operations;
statements of expected future economic performance;
statements regarding competition in our market; and
assumptions underlying statements regarding us or our business.
 
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
 
strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses;
the occurrence of hostilities, political instability or catastrophic events;
changes in customer demand;
the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors' services;
developments and changes in laws and regulations, including increased regulation of our industry through legislative action and revised rules and standards;
security breaches, cybersecurity attacks and other significant disruptions in our information technology systems; and
natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment.
 
The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A “Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as amended pursuant to Form 10-K/A. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
 
The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 
1
 
I tem 1. 
Financial Statements.
 
 
SharpSpring, Inc.
 
 
C ONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
 
 
 
 
 
March 31,
 
 
December 31,
 
 
 
2018
 
 
2017
 
 
 
(unaudited)
 
 
(audited)
 
Assets
 
 
 
 
 
 
Cash and cash equivalents
  $ 12,259,169  
  $ 5,399,747  
Accounts receivable, net of allowance for doubtful accounts of $555,242 and $526,127 at March 31, 2018 and December 31, 2017, respectively
    729,036  
    639,959  
Income taxes receivable
    2,034,668  
    2,132,616  
Other current assets
    957,354  
    899,127  
Total current assets
    15,980,227  
    9,071,449  
 
       
       
Property and equipment, net
    795,982  
    799,145  
Goodwill
    8,882,393  
    8,872,898  
Other intangible assets, net
    2,211,000  
    2,326,000  
Other long-term assets
  744,049
    612,631  
Total assets
  $ 28,643,651  
  $ 21,682,123  
 
       
       
Liabilities and Shareholders' Equity
       
       
Accounts payable
  $ 1,263,329  
  $ 504,901  
Accrued expenses and other current liabilities
    563,870  
    625,680  
Deferred revenue
    303,004  
    279,818  
Income taxes payable
    180,024  
    171,384  
Total current liabilities
    2,310,227  
    1,581,783  
 
       
       
Deferred income taxes
    188,928  
    168,132  
Convertible notes
  7,862,917
    -  
Total liabilities
    10,547,942  
    1,749,915  
Commitments and contingencies (Note 12)
       
       
 
       
       
Shareholders' equity:
       
       
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at March 31, 2018 and December 31, 2017
    -  
    -  
Common stock, $0.001 par value,  Authorized shares-50,000,000; issued shares-8,466,740 at March 31, 2018 and 8,456,061 at December 31, 2017; outstanding shares-8,446,740 at March 31, 2018 and 8,436,061 at December 31, 2017
    8,466
    8,456  
Additional paid in capital
    28,608,357  
    28,362,397  
Accumulated other comprehensive loss
    (511,289 )
    (480,762 )
Accumulated deficit
    (9,925,825 )
    (7,873,883 )
Treasury stock
    (84,000 )
    (84,000 )
Total shareholders' equity
    18,095,709  
    19,932,208  
 
       
       
Total liabilities and shareholders' equity
  $ 28,643,651  
  $ 21,682,123  
See accompanying notes to the consolidated financial statements.
 
 
2
 
 
 
SharpSpring, Inc.
 
 
C ONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
March 31,    
 
 
 
2018
 
 
2017
 
Revenue
  $ 4,184,663  
  $ 3,023,433  
 
       
       
Cost of services
    1,400,297  
    1,271,321  
Gross profit
    2,784,366  
    1,752,112  
 
       
       
Operating expenses:
       
       
Sales and marketing
    2,371,030  
    1,549,522  
Research and development
    950,675  
    659,731  
General and administrative
    1,426,234  
    1,356,198  
Intangible asset amortization
    115,000  
    131,523  
 
       
       
Total operating expenses
    4,862,939  
    3,696,974  
 
       
       
Operating loss
    (2,078,573 )
    (1,944,862 )
Other income (expense), net
    68,628  
    66,844  
 
       
       
Loss before income taxes
    (2,009,945 )
    (1,878,018 )
Provision (benefit) for income tax
    41,997  
    (498,746 )
Net loss
  $ (2,051,942 )
  $ (1,379,272 )
 
       
       
Basic net loss per share
  $ (0.24 )
  $ (0.16 )
Diluted net loss per share
  $ (0.24 )
  $ (0.16 )
 
       
       
Shares used in computing basic net (loss) income per share
    8,443,455  
    8,369,249  
Shares used in computing diluted net (loss) income per share
    8,443,455  
    8,369,249  
 
       
       
Other comprehensive income (loss):
       
       
Foreign currency translation adjustment
    (30,527 )
    (9,393 )
Comprehensive loss
  $ (2,082,469 )
  $ (1,388,665 )
 
See accompanying notes to the consolidated financial statements.
 
 
3
 
 
SharpSpring, Inc.
C ONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Three Months Ended
 
 
 
March 31,    
 
 
 
2018
 
 
2017
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
  $ (2,051,942 )
  $ (1,379,272 )
Adjustments to reconcile net loss to net cash used in operating activities:
       
       
Depreciation and amortization
    190,983  
    196,606  
Non-cash stock compensation
    237,415  
    184,346  
Deferred income taxes
    20,796  
    (29,558 )
Non-cash interest expense
  4,301
    -  
Amortization of debt issuance costs
  274
    -  
Unearned foreign currency gain/loss
    (49,397 )
    (33,865 )
Changes in operating assets and liabilities:
       
       
Accounts receivable
    (84,896 )
    214,873  
Other assets
    (32,991 )
    (40,440 )
Income taxes, net
    104,070  
    (75,294 )
Accounts payable
    751,502
    155,471  
Accrued expenses and other current liabilities
    (61,837 )
    (41,091 )
Deferred revenue
    20,623  
    (339 )
Net cash used in operating activities
    (951,099 )
    (848,563 )
 
       
       
Cash flows from investing activities:
       
       
Purchases of property and equipment
    (72,820 )
    (83,787 )
Acquisitions of customer assets from resellers
    -  
    (3,116 )
Net cash used in investing activities
    (72,820 )
    (86,903 )
 
       
       
Cash flows from financing activities:
       
       
Proceeds from issuance of convertible note
    8,000,000  
    -  
Debt issuance costs
    (141,657 )
    -  
Proceeds from exercise of stock options
    8,555  
    -  
Net cash provided by financing activities
    7,866,898  
    -  
 
       
       
Effect of exchange rate on cash
    16,443  
    13,011  
 
       
       
Change in cash and cash equivalents
    6,859,422  
    (922,455 )
 
       
       
Cash and cash equivalents, beginning of period
    5,399,747  
    8,651,374  
 
       
       
Cash and cash equivalents, end of period
  $ 12,259,169  
  $ 7,728,919  
 
       
       
Supplemental information on consolidated statements of cash flows:
       
       
Cash paid (received) for income taxes
  $ (82,869 )
  $ 54,582  
 
See accompanying notes to the consolidated financial statements.
 
 
4
 
 
SharpSpring, Inc.
N OTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1: Organization
 
We were incorporated in Massachusetts in October 1998 as EMUmail, Inc. During 2010, we changed our name to SMTP.com, then later reincorporated in the State of Delaware and changed our name to SMTP, Inc. In December 2015, we changed our name to SharpSpring, Inc. and changed the name of our SharpSpring product U.S. operating subsidiary from SharpSpring, Inc. to SharpSpring Technologies, Inc.
 
Our Company focuses on providing the SharpSpring cloud-based marketing automation solution. SharpSpring is designed to increase the rates at which businesses generate leads and convert leads to sales opportunities by improving the way businesses communicate with customers and prospects. Our products are marketed directly by us and through a small group of reseller partners to customers around the world.
 
Note 2: Summary of Significant Accounting Policies
 
Basis of Presentation and Consolidation
 
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Our Consolidated Financial Statements include the accounts of SharpSpring, Inc. and our subsidiaries (“the Company”). Our Consolidated Financial Statements reflect the elimination of all significant inter-company accounts and transactions. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2018.
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Operating Segments
 
The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s chief executive officer, in deciding how to allocate resources and assess performance. The Company’s CODM evaluates the Company’s financial information and resources and assess the performance of these resources on a consolidated basis. The Company does not present geographical information about revenues because it is impractical to do so.
 
Foreign Currencies
 
The Company’s subsidiaries utilize the U.S. Dollar, Swiss Franc, South African Rand and British Pound as their functional currencies. The assets and liabilities of these subsidiaries are translated at ending exchange rates for the respective periods, while revenues and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included in other comprehensive income or loss within the Consolidated Statements of Comprehensive Loss.
 
Cash and Cash Equivalents
 
Cash equivalents are short-term, liquid investments with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed by major financial institutions and at most times are in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits.
 
Fair Value of Financial Instruments
 
U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, deposits, embedded derivatives (associated with our convertible notes) and accounts payable. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the short-term nature of these items. The fair value of the embedded derivatives is calculated using Level 3 unobservable inputs. The value of the embedded derivatives is calculated using a binomial lattice model.
 
 
5
 
 
The following table presents the key inputs in the determination of the fair value of the embedded derivatives at March 31, 2018:
 
 
 
Valuation Date
 
 
 
March 31,
 
 
 
2018
 
Total value of embedded derivative asset
  $ 185,870
Starting Stock Price
  $ 5.52  
Expected Annual Volatility
    50.00 %
Risk Free Rate
    2.59 %
Expected annual dividend yield
    0.00 %
Recovery rate
    30.00 %
Bond Yield
    15.99 %
 
Accounts Receivable
 
In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition is met, thus creating a contract asset. A portion of our accounts receivable balance is therefore unbilled at each balance sheet date. The net billed accounts receivable balance as of March 31, 2018 and December 31, 2017 was $102,403 and $89,210, respectively. Accounts receivable are carried at the original invoiced amount less an allowance for doubtful accounts based on the probability of future collection.  Management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. The Company reserves for receivables that are determined to be uncollectible, if any, in its allowance for doubtful accounts. The Company had an allowance for doubtful accounts of $555,242 and $526,127 as of March 31, 2018 and December 31, 2017, respectively. After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance.
 
Intangibles
 
Finite-lived intangible assets include trade names, developed technologies and customer relationships and are amortized based on the estimated economic benefit over their estimated useful lives, with original periods ranging from 5 to 11 years. We continually evaluate the reasonableness of the useful lives of these assets. Finite-lived intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. Impairment losses are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an asset group. The dynamic economic environment in which the Company operates, and the resulting assumptions used to estimate future cash flows impact the outcome of these impairment tests.
 
Goodwill and Impairment
 
As of March 31, 2018, and December 31, 2017, we had recorded goodwill of $8,882,393 and $8,872,898, respectively. Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in the SharpSpring and GraphicMail acquisitions. Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, “Intangibles - Goodwill and Other” deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests, and tests between annual tests in certain circumstances, based on estimated fair value in accordance with FASB ASC 350-10, and written down when impaired.
 
 
6
 
 
Debt Issuance Costs
 
We incurred certain third-party costs in connection with our credit facility and the issuance of the 5% Convertible Notes maturing March 27, 2023 (the “Notes”), as more fully described in Note 5: Convertible Notes, principally related to legal and financial advisory fees. These costs are included as a direct reduction to the carrying value of the debt as part of the Notes on our consolidated balance sheets and are being amortized to interest expense ratably over the five-year term of the Notes.
 
Estimated amortization expense of debt issuance costs for the remainder of 2018 and subsequent years is as follows:
 
Remainder of 2018
  $ 19,077  
2019
    26,455  
2020
    27,855  
2021
    29,322  
2022
    30,862  
2023
    7,813  
Total
  $ 141,384  
 
Income Taxes
 
Provision for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
 
The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the consolidated financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. There are no material uncertain tax positions taken by the Company on its tax returns. Tax years subsequent to 2013 remain open to examination by U.S. federal and state tax jurisdictions.
 
In determining the provision for income taxes, the Company uses statutory tax rates and tax planning opportunities available to the Company in the jurisdictions in which it operates. This includes recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns to the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items are separately recognized in the period in which they occur. The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due.  These challenges include positions taken by the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions. As of March 31, 2018, the Company is not being examined by domestic or foreign tax authorities.
 
 
7
 
 
Property and Equipment
 
Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of the assets. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation expense from continuing operations related to property and equipment was $75,983 and $65,083 for the three months ended March 31, 2018 and 2017, respectively.
 
Property and equipment as of March 31, 2018 and December 31, 2017 is as follows:
 
 
 
March 31,
 
 
December 31,
 
 
 
2018
 
 
2017
 
Property and equipment, net:
 
 
 
 
 
 
Leasehold improvements
  $ 128,122  
  $ 128,122  
Furniture and fixtures
    374,014  
    355,033  
Computer equipment and software
    830,164  
    776,201  
Construction in progress
    -  
    -  
Total
    1,332,300  
    1,259,356  
Less: Accumulated depreciation and amortization
    (536,318 )
    (460,211 )
 
  $ 795,982  
  $ 799,145  
 
Useful lives are as follows:
 
Leasehold improvements
3-5 years
Furniture and fixtures
3-5 years
Computing equipment
3 years
Software
3-5 years

Revenue Recognition
 
The Company recognizes revenue from its services when it is probable that the economic benefits associated with the transactions will flow to the Company and the amount of revenue can be measured reliably. All significant sources of revenue are the result of a contract with a customer, and as such meet all of the requirements of recognizing revenue in accordance with FASB ASC 606. For the periods ended March 31, 2018 and March 31, 2017 revenue from contracts with customers was $4.2 million and $3.0 million respectively.
 
For the Company’s internet-based SharpSpring marketing automation solution, the services are typically offered on a month-to-month basis with a fixed fee charged in arrears each month depending on the size of the engagement with the customer. Monthly fees are recorded as revenue during the month they are earned. Some customers are charged annually, for which revenues are deferred and recorded ratably over the subscription period. The Company also charges transactional-based fees if monthly volume limitations are reached or other chargeable activity occurs. Additionally, customers are typically charged an upfront implementation and training fee. The upfront implementation and training fees represent short-term “use it or lose it” services offered for a flat fee. Such flat fees are recognized over the service period, which is 60 days.
 
For the SharpSpring Mail+ product, the services are typically offered on a month-to-month basis. Customers are either charged in arrears based on the number of contacts in the system during the billing period or in advance if the customer selects a plan based on e-mail volume. The Company also charges transactional-based fees if monthly volume limitations are reached or other chargeable activity occurs.
 
Our products are billed in arrears or upfront, depending on the product, which creates contract assets (accrued revenue) and contract liabilities (deferred revenue). Contract assets occur due to unbilled charges that the Company has satisfied performance obligations for. Contract liabilities occur due to billing up front for charges that the Company has not yet fully satisfied performance obligations on. Both contract assets and liabilities are recognized and deferred ratably over their service periods .
 
The company makes judgements when determining revenue recognition. Because many of our contracts are billed in arrears, estimates are made for the transaction price and amounts allocated to each accounting period related to the performance obligations of each contract. There have been no changes to the methodology used in these judgements and estimates for determining revenues. Some of the estimates used when determining revenue recognition relate to variable customer consideration that changes from month to month. The Company uses the most likely amount method to determine the estimated variable consideration, relying on historical consideration received, customer status and projected usage to determine the most likely consideration amount. The amount of variable consideration recognized is constrained and is only included in the transaction price to the extent that it is probable that a significant reversal of cumulative revenue recognized will not occur.
 
 
8
 
 
The performance obligations are measured using the output method to recognize revenue based on direct measurements of the value to the customer of the services transferred to date. Most of the Company’s contracts are satisfied over time, and as each contract has a predefined service period, this allows for a reliable way to measure performance obligations remaining and completed. The Company does have some contracts that are satisfied at a point in time upon delivery of services. The criteria for the completion of these contracts is defined in each contract with a customer so that there is no judgment required in evaluating when the service is delivered to the customer. Any discount given is allocated to the performance obligation and is treated as reduction to the transaction price. Due to the month to month nature of the Company’s contracts with customers, no financing or time value of money component exists related to the contracts. Due to the month to month nature of the Company’s contracts with customers, we have elected to utilize the optional exemption from ASC 606-10-50-14 through 50-14A for disclosing the remaining performance obligations. The remaining performance obligations as of the balance sheet date consist of trainings and availability and use of the SharpSpring platform over the remainder of the contract, which is typically less than 30 days.
 
From time to time, the Company offers refunds to customers and experiences credit card chargebacks relating to cardholder disputes that are commonly experienced by businesses that accept credit cards. The Company makes estimates for refunds and credit card chargebacks based on historical experience.
 
Deferred Revenue
 
Deferred revenue consists of payments received in advance of the Company’s providing the services. Deferred revenue is earned over the service period identified in each contract. The majority of our deferred revenue balances (contract liabilities) arise from upfront implementation and training fees for its SharpSpring marketing automation solution that are paid in advance. These services are typically performed over a 60-day period, and the revenue is recognized over that period. Additionally, some of the Company’s customers pay for services in advance on a periodic basis (such as monthly, quarterly, annually or bi-annually). In situations where a customer pays in advance for a one-year service period, the deferred revenue is recognized over that service period. Of the deferred revenue balances of $279,818 and $280,159 as of December 31, 2017 and 2016, respectively, $193,721 and $200,489 was recognized during the three months ending March 31, 2018 and 2017, respectively. The Company had deferred revenue contract liability balances of $303,004 and $279,818 as of March 31, 2018 and December 31, 2017, respectively.
 
Accrued Revenue
 
In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition is met, thus creating a contract asset. A portion of our accounts receivable balance is therefore unbilled at each balance sheet date. Of the accrued revenue contract asset balances of $550,749 and $456,129 as of December 31, 2017 and 2016, respectively, $550,749 and $456,129 was billed during the three months ending March 31, 2018 and 2017, respectively. The Company had accrued revenue contract asset balances of $626,633 and $550,749 as of March 31, 2018 and December 31, 2017, respectively.
 
Concentration of Credit Risk and Significant Customers
 
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents. At March 31, 2018 and December 31, 2017, the Company had cash balances at financial institutions that exceed federally insured limits. The Company maintains its cash balances with accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
 
For the three months ended March 31, 2018 and 2017, there were no customers that accounted for more than 10% of total revenue or 10% of total accounts receivable.
 
Cost of Services
 
Cost of services consists primarily of direct labor costs associated with support and customer onboarding and technology hosting and license costs associated with the cloud-based platform.
 
 
9
 
 
Credit Card Processing Fees
 
Credit card processing fees are included as a component of general and administrative expenses and are expensed as incurred.
 
Advertising Costs
 
The Company expenses advertising costs as incurred. Advertising and marketing expenses from continuing operations was $1,434,525 and $ 545,775 for the three months ended March 31, 2018 and 2017, respectively.
 
Research and Development Costs and Capitalized Software Costs
 
We capitalize certain costs associated with internal use software during the application development stage, mostly related to software that we use in providing our hosted solutions. We expense costs associated with preliminary project phase activities, training, maintenance and any post-implementation period costs as incurred. For the three months ended March 31, 2018 and 2017, we capitalized $27,236 and $ 16,546 , respectively, in software development costs. We amortize capitalized software costs over the estimated useful life of the software, which is typically estimated to be 3 years, once the related project has been completed and deployed for customer use. At March 31, 2018 and December 31, 2017, the net carrying value of capitalized software was $100,293 and $ 90,437 , respectively.
 
All other software development costs are charged to expenses when incurred, and generally consist of salaries, software development tools and personnel-related costs for those engaged in research and development activities.
 
Capitalized Cost of Obtaining a Contract
 
The Company capitalizes sales commission costs which are incremental to obtaining a contract. We expense costs that are related to obtaining a contract, but are not incremental such as other sales and marketing costs and other costs that would be incurred regardless of if the contract was obtained. Capitalized costs are amortized using the straight line amortization over the estimated weighted average life of the customer, which we have estimated to be 3 years. At March 31, 2018 the net carrying value of the capitalized cost of obtaining a contract was $1,209,000, of which $646,000 is included in other current assets and $563,000 is included in other long-term assets. At December 31, 2017, the net carrying value of the capitalized cost of obtaining a contract was $1, 219 ,000, of which  $631,000 is included in other current assets and $588,000 is included in other long-term assets. The Company amortized expenses for the costs of obtaining contracts of $178,000 and $112,000 for the three months ended March 31, 2018 and 2017, respectively. Such capitalized cost adjustments have been retroactively applied to prior periods.
 
Stock Compensation
 
We account for stock-based compensation in accordance with FASB ASC 718 “Compensation — Stock Compensation” which requires companies to measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period.
 
Net Income (Loss) Per Share
 
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period.
 
Comprehensive Income or Loss
 
Comprehensive income or loss includes all changes in equity during a period from non-owner sources, such as net income or loss and foreign currency translation adjustments.
 
Recently Issued Accounting Standards
 
Recent accounting standards not included below are not expected to have a material impact on our consolidated financial position and results of operations.
 
In February 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective in 2019 with early adoption permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
 
In January 2017, the FASB issued guidance simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2020, with early adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
 
 
10
 
 
In May 2014, the FASB issued updated guidance and disclosure requirements for recognizing revenue from contracts with customers. This new revenue recognition standard became effective for the Company on January 1, 2018. In addition to providing guidance on when and how revenue is recognized, the new standard also provides guidance on accounting for costs of obtaining contracts primarily related to aligning the expense with the period in which the value is recognized. As a result of this new standard, the Company was required to capitalize certain costs related to obtaining contracts associated with commissions expense paid to salespeople. The Company is using the retrospective transition method to adjust each prior reporting period presented for this new method of accounting for costs associated with obtaining contracts. The following tables present our results under our historical method and as adjusted to reflect these accounting changes.
 
 
 
Historical Accounting Method
 
 
Effect of Adoption of New ASU
 
 
As Adjusted
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Sales and Marketing Expense
    2,360,953  
    10,077  
    2,371,030  
Total operating expense
    4,852,862  
    10,077  
    4,862,939  
Operating loss
    (2,068,496 )
    (10,077 )
    (2,078,573 )
Loss before income taxes
    (1,999,868 )
    (10,077 )
    (2,009,945 )
Provision (benefit) for income tax
    41,781  
    216  
    41,997  
Net loss
    (2,041,649 )
    (10,293 )
    (2,051,942 )
Basic net loss per share
    (0.24 )
    -  
    (0.24 )
Diluted net loss per share
    (0.24 )
    -  
    (0.24 )
 
       
       
       
Balance, March 31, 2018
       
       
       
Other current assets
    311,777  
    645,577  
    957,354  
Other long-term assets
  210,869
    563,180  
  744,049
Total assets
    27,434,894
    1,208,757  
  28,643,651
Accumulated deficit
    (11,134,582 )
    1,208,757  
    (9,925,825 )
 
 
 
Historical Accounting Method
 
 
Effect of Adoption of New ASU
 
 
As Adjusted
 
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
Sales and Marketing Expense
    1,645,870  
    (96,348 )
    1,549,522  
Total operating expense
    3,793,322  
    (96,348 )
    3,696,974  
Operating loss
    (2,041,210 )
    96,348  
    (1,944,862 )
Loss before income taxes
    (1,974,366 )
    96,348  
    (1,878,018 )
Provision (benefit) for income tax
    (499,693 )
    947  
    (498,746 )
Net loss
    (1,474,673 )
    95,401  
    (1,379,272 )
Basic net loss per share
    (0.18 )
    0.02  
    (0.16 )
Diluted net loss per share
    (0.18 )
    0.02  
    (0.16 )
 
       
       
       
Balance, December 31, 2017
       
       
       
Other current assets
    267,924  
    631,203  
    899,127  
Other long-term assets
    25,000  
    587,631  
    612,631  
Total assets
    20,463,289  
    1,218,834  
    21,682,123  
Accumulated deficit
    (9,092,717 )
    1,218,834  
    (7,873,883 )
 
 
11
 
 
Note 3: Goodwill and Other Intangible Assets
 
Intangible assets are as follows:
 
 
As of March 31, 2018
 
 
 
Gross
 
 
 
 
 
Net
 
 
 
Carrying
 
 
Accumulated
 
 
Carrying
 
 
 
Amount
 
 
Amortization
 
 
Value
 
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
Trade names
  $ 355,179  
  $ (327,425 )
  $ 27,754  
Technology
    3,898,193  
    (2,531,693 )
    1,366,500  
Customer relationships
    4,235,583  
    (3,418,837 )
    816,746  
Unamortized intangible assets:
    8,488,955  
    (6,277,955 )
    2,211,000  
Goodwill
       
       
    8,882,393  
Total intangible assets
       
       
  $ 11,093,393  
 
 
Estimated amortization expense for the remainder of 2018 and subsequent years is as follows:
 
Remainder of 2018
  $ 345,000  
2019
    381,000  
2020
    332,000  
2021
    280,000  
2022
    228,000  
2023
    180,000  
Thereafter
    465,000  
Total
  $ 2,211,000  
 
Amortization expense for the three months ended March 31, 2018 and 2017 was $115,000 and $131,523, respectively.
 
Note 4: Credit Facility
 
In March 2016, the Company entered into a $2.5 million revolving loan agreement (the “Credit Facility”) with Western Alliance Bank. The facility originally matured on March 21, 2018 and was amended to mature on March 31, 2020. There are no mandatory amortization provisions and the Credit Facility is payable in full at maturity. Loan proceeds accrue interest at the higher of Western Alliance Bank’s Prime interest rate (4.75% as of March 31, 2018) or 4.75%, plus 1.75%. The Credit Facility is collateralized by a lien on substantially all of the existing and future assets of the Company and secured by a pledge of 100% of the capital stock of SharpSpring Technologies, Inc. and Quattro Hosting, LLC and a 65% pledge of the Company’s foreign subsidiaries’ stock. The Credit Facility subjects the Company to a number of restrictive covenants, including financial and non-financial covenants customarily found in loan agreements for similar transactions. The Credit Facility also restricts our ability to pay cash dividends on our common stock. There are no amounts outstanding under the Credit Facility and no events of default occurred.
 
 
12
 
 
Note 5: Convertible Notes
 
On March 28, 2018, we issued $8.0 million aggregate principal amount of convertible notes (the “Notes”). Interest accrues at a rate of 5.0% per year and is “payable in kind” annually in the form of the issuance of additional notes (“PIK Notes”). The principal amount of the Note and the PIK Notes are due and payable in full on the fifth anniversary of the date of the Notes. The Company shall have the right to extend the maturity date for up to six months on up to three separate occasions, with interest accruing at a rate of 10% during any such extension periods. The Notes are convertible into shares of the Company’s common stock at any time by the holder at a fixed conversion price of $7.50 per share, subject to customary adjustments for specified corporate events. Additionally, if the Notes and PIK Notes are not converted into common stock by the holder, at the maturity date, the Company may elect to convert all outstanding Notes and PIK Notes into shares of the Company’s common stock at a conversion price equal to 80% of the volume weighted average closing price of the Company’s common stock for the 30 trading days prior to an including the maturity date. We received net proceeds from the offering of approximately $7.9 million after adjusting for debt issue costs, including financial advisory and legal fees.
 
The Notes are unsecured obligations and are subordinate in right of payment to the credit facility discussed above. So long as any Notes are outstanding, except as the investor may otherwise agree in writing, the Company shall at no time (i) have outstanding senior indebtedness in an aggregate amount exceeding 18.6% of the Company’s trailing twelve-month revenue, (ii) incur any indebtedness that is both junior in right of payment to the obligations of the Company to its senior secured lender and senior to the Company’s obligations under the Notes or (iii) enter into any agreement with any lender or other third party that would (A) prohibit the Company from issuing PIK Notes at any time or under any circumstances or (B) prohibit the conversion of the Notes in accordance with their terms at any time or under any circumstances. Prior to this offering, the Company had no outstanding indebtedness for borrowed money. Conversion by the holder may be subject to stockholder vote pursuant to NASDAQ stock market rules, which the Company has agreed to solicit at the upcoming annual shareholder meeting. If shareholder approval is not obtained at the upcoming shareholder meeting, the Company is required to continue to solicit shareholder approval on a quarterly basis until shareholder approval is obtained or assist the holder of the Notes in selling shares of Company stock so that conversion of the Notes will not violate NASDAQ regulations. The holder of the Notes must notify the Company at least 120 days prior to the maturity of the Notes of its election to convert the Notes.
 
The convertible note agreement contains customary events of default with respect to the Notes and provides that upon certain events of default occurring and continuing, the investor, by written notice to the Company may declare the entire outstanding principal amount of this Note and all accrued but unpaid interest to be immediately due and payable. During the continuance of an event of default, the investor shall have recourse to any and all remedies available to under applicable law. The Notes were recorded upon issuance at amortized cost in accordance with applicable accounting guidance. As there is no difference in the amount recorded at inception and the face value of the Notes, interest expense will be accreted at the stated interest rate under the terms of the Notes. Total interest expense related to the Notes will be impacted by the amortization of the debt issuance cost using the effective interest method.
 
The Company would be required to accelerate and issue the PIK Notes through the maturity of the Notes if the Company elects to convert the Notes prior to maturity (which it can do upon certain conditions) or if there is a change in control. For each of these situations, the Company determined that the economic characteristics of these “make whole” features were not considered clearly and closely related to the Company’s stock. Accordingly, these embedded conversion features were bifurcated from the Notes and separately accounted for on a combined basis at fair value as a single derivative. The fair value of the derivative as of March 31, 2018 was an asset of $185,870 and is included within “Deposits and other” in the accompanying balance sheet. The derivative is being accounted for at fair value, with subsequent changes in the fair value to be reported as part of Other income (expense), net in the Consolidated Statement of Operations. The investor’s conversion option also qualifies as an embedded derivative but qualifies for a scope exception as it is considered to be clearly and closely related to the Company’s stock. Through March 31, 2018, the Company has sufficient authorized and unissued shares and could issue all shares potentially issuable related to the investor’s conversion option without further approval from shareholders. However, the Company is required to continue to evaluate the share limits each reporting period.
 
The net carrying amount of the Notes at March 31, 2018 was as follows:
 
Principal amount
  $ 8,000,000  
Accrued interest paid-in-kind
    4,301  
Unamortized debt issuance costs
    (141,384 )
Embedded conversion feature derivative
    185,870  
Net carrying value
  $ 8,048,787  
 
We incurred certain third-party costs in connection with our issuance of the Notes, principally related to financial advisory and legal fees, which are being amortized to interest expense ratably over the five-year term of the Notes. The following table sets forth total interest expense related to the Notes for the period ended March 31, 2018:
 
Contractual interest paid-in-kind expense (non-cash)
    4,301  
Amortization of debt issuance costs (non-cash)
    274  
Total interest expense
    4,575  
Effective interest rate
    5.4 %
 
 
13
 
 
Note 6:   Changes in Accumulated Other Comprehensive Income (Loss)
 
 
 
Foreign Currency
 
 
 
Translation
 
 
 
Adjustment
 
Balance as of December 31, 2017
  $ (480,762 )
Other comprehensive income (loss) prior to reclassifications
    -  
Amounts reclassified from accumulated other comprehensive income
    -  
Tax effect
    -  
Net current period other comprehensive loss
    (30,527 )
Balance as of March 31, 2018
  $ (511,289 )
 
Note 7:   Net Loss Per Share
 
Computation of net loss per share is as follows:
 
 
 
Three Months Ended
 
 
 
December 31,
 
 
 
2018
 
 
2017
 
Net loss
  $ (2,051,942 )
  $ (1,379,272 )
 
       
       
Basic weighted average common shares outstanding
    8,443,455  
    8,369,249  
Add incremental shares for:
       
       
Warrants
    -  
    -  
Stock options
    -  
    -  
Diluted weighted average common shares outstanding
    8,443,455  
    8,369,249  
 
       
       
Net loss per share:
       
       
Basic
  $ (0.24 )
  $ (0.16 )
Diluted
  $ (0.24 )
  $ (0.16 )
 
For the three months ended March 31, 2018, 1,525,450 stock options and 80,000 warrants were excluded from diluted net loss per share, because the effect of including these potential shares was anti-dilutive. For the three months ended March 31, 2017 , 1,396,788 stock options and 170,973 warrants were excluded from diluted net loss per share, because the effect of including these potential shares was anti-dilutive.
 
Note 8:   Income Taxes
 
The income tax expense we record in any interim period is based on our estimated effective tax rate for the year for each jurisdiction that we operate in. The calculation of our estimated effective tax rate requires an estimate of pre-tax income by tax jurisdiction, as well as total tax expense for the fiscal year. Accordingly, this tax rate is subject to adjustment if, in subsequent interim periods, there are changes to our initial estimates of total tax expense, pre-tax income, or pre-tax income by jurisdiction.
 
 
14
 
 
During the three months ended March 31, 2018 and 2017 , the Company recorded income tax expense of $41,997 and income tax benefit of $ 498,746 , respectively. The blended effective tax rate for the three months ending March 31, 2018 and 2017 was -2% and 26%, respectively. The effective blended tax rate varies from our statutory U.S. tax rate due to income generated in certain other jurisdictions at various tax rates.
 
In December 2017, the Company reasonably estimated that it will not have a transition tax related to the repatriation of foreign earnings for the impact of the U.S. Tax Cuts and Jobs Act (“Tax Act”). The Company has not yet finalized these calculations and no adjustments to the provisional amount have been made in the current period. We will finalize the provisional amounts within one year from the date of enactment.
 
Valuation Allowance
We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers many different factors including historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies and the availability of future tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. This is inherently judgmental since we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.
 
In making our assessment of deferred tax asset recoverability, we considered our historical financial results, our projected future financial results, the planned reversal of existing deferred tax liabilities and the impact of any tax planning actions. Based on our analysis we noted both positive and negative factors relative to our ability to support realization of certain deferred tax assets. However, based on the weighting of all the evidence, including the near term effect on our income projections of investments we are making in our team, product and systems infrastructure, we concluded that it was more likely than not that the majority of our deferred tax assets related to temporary differences and net operating losses may not be recovered. The establishment of a valuation allowance has no effect on our ability to use the underlying deferred tax assets prior to expiration to reduce cash tax payments in the future to the extent that we generate taxable income.
 
At March 31, 2018 and December 31, 2017 , we have established a valuation allowance of $3.8 million and $1.9 million, respectively, against certain deferred tax assets given the uncertainty of recoverability of these amounts.
 
Note 9: Defined Contribution Retirement Plan
 
Starting in 2016, we offered our U.S. employees the ability to participate in a 401(k) plan. Eligible U.S. employees may contribute up to 100% of their eligible compensation, subject to limitations established by the Internal Revenue Code. The Company contributes a matching contribution equal to 100% of each such participant’s contribution up to the first 3% of their annual eligible compensation. We charged $60,339 and $ 36,495 to expense in the three months ended March 31, 2018 and 2017, respectively, associated with our matching contribution in those periods.
 
Note 10:  Stock-Based Compensation
 
The Company grants stock option awards to officers and employees and grants stock awards to directors as compensation for their service to the Company.
 
In November 2010, the Company adopted the 2010 Stock Incentive Plan (“the Plan”) which was amended in April 2011, August 2013, April 2014, February 2016 and March 2017. As amended, up to 1,950,000 shares of common stock are available for issuance under the Plan. The Plan provides for the issuance of stock options and other stock-based awards.
 
 
15
 
 
Stock Options
 
Stock option awards under the Plan have a 10-year maximum contractual term and must be issued at an exercise price of not less than 100% of the fair market value of the common stock at the date of grant. The Plan is administered by the Board of Directors, which has the authority to determine to whom options may be granted, the period of exercise and what other restrictions, if any, should apply. Vesting for awards granted to date under the Plan is principally over four years from the date of the grant, with 25% of the award vesting after one year and monthly vesting thereafter.
 
Option awards are valued based on the grant date fair value of the instruments, net of estimated forfeitures, using a Black-Scholes option pricing model with the following assumptions:
 
 
Three Months Ended March 31 ,
 
2018
 
2017
 
 
 
 
Volatility
48 – 49%
 
49%
Risk-free interest rate
2.34% - 2.7%
 
2.04% - 2.26%
Expected term
6.25 years
 
6.25 years
 
The weighted average grant date fair value of stock options granted during the three months ended March 31, 2018 and 2017 was $2.28 and $ 2.42 , respectively.
 
For grants prior to January 1, 2015, the volatility assumption was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. For all grants subsequent to January 1, 2015, the volatility assumption reflects the Company’s historic stock volatility for the period of February 1, 2014 forward, which is the date the Company’s stock started actively trading. The risk-free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.
 
Stock option awards are expensed on a straight-line basis over the requisite service period. During the three months ended March 31, 2018 and 2017 , the Company recognized expense of $193,535and $ 127,967 , respectively, associated with stock option awards. At March 31, 2018 , future stock compensation expense associated with stock options (net of estimated forfeitures) not yet recognized was $1,614,800 and will be recognized over a weighted average remaining vesting period of 3.0 years. The following summarizes stock option activity for the three months ended March 31, 2018 :
 
 
 
 
 
 
Weighted
 
 
Weighted
 
 
Aggregate
 
 
 
Number of
 
 
Average
 
 
Average Remaining
 
 
Intrinsic
 
 
 
Options
 
 
Exercise Price
 
 
Contractual Life
 
 
Value
 
Outstanding at December 31, 2017
    1,069,330  
  $ 5.11  
    7.0  
  $ 36,693  
 
       
       
       
       
Granted
    465,850  
    4.56  
       
       
Exercised
    (1,724 )
    4.96  
       
       
Forfeited
    (8,006 )
    4.11  
       
       
Outstanding at March 31, 2018
    1,525,450  
  $ 4.95  
    8.2  
  $ 2,241,770  
 
       
       
       
       
Exercisable at March 31, 2018
    569,155  
  $ 5.39  
    7.0  
  $ 627,707  
 
The total intrinsic value of stock options exercised during the three months ended March 31, 2018 was $565. There were no stock options exercised during the three months ended March 31, 2017.
 
Stock Awards
During the three months ended March 31, 2018 and 2017 , the Company issued 8,955 and 10,884 shares, respectively, to non-employee directors as compensation for their service on the board. Such stock awards are immediately vested.
 
Stock awards are valued based on the closing price of our common stock on the date of grant, and compensation cost is recorded on a straight line basis over the share vesting period. The total fair value of stock awards granted, vested and expensed during the three months ended March 31, 2018 and 2017 was $43,880 and $ 56,379 , respectively. As of March 31, 2018 , there was no unrecognized compensation cost related to stock awards.
 
 
16
 
 
Note 11:   Warrants
 
During 2014, the Company issued warrants to certain service providers. The following table summarizes information about the Company’s warrants at March 31, 2018 :
 
 
 
 
 
 
Weighted
 
 
Weighted
 
 
 
 
 
 
Number of
 
 
Average
 
 
Average Remaining
 
 
Intrinsic
 
 
 
Units
 
 
Exercise Price
 
 
Contractual Term
 
 
Value
 
Outstanding at December 31, 2017
    80,000  
  $ 7.81  
    2.1  
  $ 33,660  
 
       
       
       
       
Granted
    -  
    -  
       
       
Cancelled
    -  
    -  
       
       
Outstanding at March 31, 2018
    80,000  
  $ 7.81  
    1.8  
  $ -  
 
       
       
       
       
Exercisable at March 31, 2018
    80,000  
  $ 7.81  
    1.8  
  $ -  
 
Note 12: Commitments and Contingencies
 
Litigation
 
The Company may from time to time be involved in legal proceedings arising from the normal course of business. T he Company is not currently a party to any litigation of a material nature.
 
Operating Leases and Service Contracts
 
The Company currently rents its primary office facility under a five year lease which started in September 2016. Most of its service contracts are on a month-to-month basis, however, some contracts and agreements extend out to longer periods. Future minimum lease payments and payments due under non-cancelable service contracts are as follows as of March 31, 2018:
 
Remainder of 2018
  $ 375,546  
2019
    374,071  
2020
    383,967  
2021
    293,672  
2022
    -  
2023
    -  
Thereafter
    -  
Total
  $ 1,427,256  
 
On April 18, 2018, the Company entered into a lease for the Company’s new principal office (the “2018 Lease”) to lease approximately 25,000 square feet of office space. The term of the 2018 Lease is ten years, beginning on the date on which the Company takes possession of and occupies all or any part of the premises for normal business activities. The term may be extended for an additional 5 years in incremental one-year periods, subject to certain conditions described in the 2018 Lease. Base rent for the first year of the 2018 Lease is approximately $619,000, with increases in base rent occurring every two years. In conjunction with the signing of the 2018 Lease, the Company has agreed to assign its existing lease for its current primary office space (the “Assignment”) to the landlord from the 2018 Lease. Such assignment of the current lease shall become effective one month following the commencement of the 2018 Lease. Because both the 2018 Lease and Assignment were entered into following the end of the quarter, neither are reflected in the above future minimum lease payments schedule.
 
Employment Agreements
 
The Company has employment agreements with several members of its leadership team and executive officers.
 
 
17
 
 
Note 13: Disaggregation of Revenue
 
The company operates as one reporting segment. Operating segments are defined as components of an enterprise for which separate financial information in regularly evaluated by the chief operating decision makers (“CODM”), which is the Company’s chief executive office, in deciding how to allocate resources and assess performance. The Company does not present geographical information about revenues because it is impractical to do so. Disaggregated revenue for the three months ended March 31, 2018 and 2017 are as follows:
 
Revenue by product:
 
March 31,
 
 
March 31,
 
 
 
2018
 
 
2017
 
Marketing Automation revenue
  $ 4,063,500  
  $ 2,845,173  
Mail + revenue
    121,163  
    178,260  
Total revenue
  $ 4,184,663  
  $ 3,023,433  
 
       
       
 
Revenue by type:
 
March 31,
 
 
March 31,
 
 
 
2018
 
 
2017
 
Recurring revenue
  $ 3,846,953  
  $ 2,795,384  
Upfront and other fees
    337,710  
    228,049  
Total revenue
  $ 4,184,663  
  $ 3,023,433  
 
       
       
 
 
18
 
 
I tem 2. 
Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. This information should also be read in conjunction with our audited historical consolidated financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission on March 15, 2018, as amended pursuant to Form 10-K/A filed with the Securities and Exchange Commission on April 30, 2018.
 
Overview
 
We provide SaaS based marketing technologies to customers around the world. Our focus is on marketing automation tools that enable customers to interact with a lead from an early stage and nurture that potential customer using advanced features until it becomes a qualified sales lead or customer. We primarily offer our premium SharpSpring marketing automation solution, but also have customers on the SharpSpring Mail+ product, which is a subset of the full suite solution.
 
We believe our recent growth has been driven by the strong demand for marketing automation technology solutions, particularly in the small and mid-size business market. Our products are offered at competitive prices with unlimited multi-lingual customer support. We employ a subscription-based revenue model. We also earn revenues from additional usage charges that may come into effect when a customer exceeds a transactional quota, as well as fees earned for additional products and services.
 
Unless the context otherwise requires, in this section titled Management’s Discussion and Analysis of Financial Condition and Results of Operations all references to “SharpSpring” relate to the SharpSpring product, while all references to “our Company,” “we,” “our” or “us” and other similar terms means SharpSpring, Inc., a Delaware corporation, and all subsidiaries.
 
Results of Operations
 
Three Months Ended March 31, 2018 Compared to the Three Months Ended March 31, 2017
 
Unless otherwise noted, all figures and comparisons relate to our continuing operations.
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Three Months Ended
 
 
Change
 
 
Change
 
 
 
March 31,
 
 
from
 
 
from
 
 
 
2018
 
 
2017
 
 
Prior Year
 
 
Prior Year
 
Revenues and Cost of Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
  $ 4,184,663  
  $ 3,023,433  
  $ 1,161,230  
    38 %
Cost of Sales
    1,400,297  
    1,271,321  
    128,976  
    10 %
Gross Profit
  $ 2,784,366  
  $ 1,752,112  
  $ 1,032,254  
    59 %
 
Revenues increased for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017, primarily due to growth in our SharpSpring marketing automation customer base. Revenues also increased due to pricing changes implemented over the past year . Revenues for our flagship marketing automation platform increased to $4.1 million in the three months ended March 31, 2018 from $2.8 million in the three months ended March 31, 2017. This growth in revenues was slightly offset by reduced revenue from our SharpSpring Mail+ product which declined from $178,000 in the three months ended March 31, 2017 to $121,000 in the three months ended March 31, 2018 .
 
 
19
 
 
SharpSpring revenues are broken into two categories: recurring revenues and up-front fees and other revenues. Recurring revenues account for the majority of our revenues totaling $3.9 million and $2.8 million for the three months ended March 31, 2018 and 2017, respectively. Recurring revenues are made up of the subscriptions we charge for our products as well as any transactional or volume-based charges that are incurred by customers. Recurring revenues are typically billed in arrears. Up-front fees and other revenues were approximately $338,000 and $228,000 for the three months ended March 31, 2018 and 2017, respectively. Up-front fees and other revenues consist primarily of the initial fees we charge to customers for training services performed at the onset of the relationship with SharpSpring, which are typically billed in advance. Because the majority of our revenues are recurring revenues, which fluctuate only slightly depending on the volume-based charges incurred in a given period, our revenues are generally very stable and have increased over time as we have acquired more customers.
 
Cost of services increased for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 primarily due to increased employee related costs associated with providing our technology platform to more customers compared to the prior period. As a percentage of revenues, cost of services was 33% and 42 % of revenues for the three months ended March 31, 2018 and 2017, respectively. This represents a year-over-year improvement in gross margin due to increased revenue scale and operating leverage.
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Three Months Ended
 
 
Change
 
 
Change
 
 
 
March 31,
 
 
from
 
 
from
 
 
 
2018
 
 
2017
 
 
Prior Year
 
 
Prior Year
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
  $ 2,371,030  
  $ 1,549,522  
  $ 821,508  
    53 %
Research and development
    950,675  
    659,731  
    290,944  
    44 %
General and administrative
    1,426,234  
    1,356,198  
    70,036  
    5 %
Intangible asset amortization
    115,000  
    131,523  
    (16,523 )
    -13 %
 
  $ 4,862,939  
  $ 3,696,974  
  $ 1,165,965  
    32 %
 
Sales and marketing expenses increased for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. The increase was primarily due to an increase in marketing program spending for various lead generation activities, which increased by approximately $834,000 compared to last year.
 
Research and development expenses increased for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 primarily due to additional hiring of development and quality assurance staff since last year. Employee-related costs for this group increased by approximately $257,000 in the three months ended March 31, 2018 compared to the same period in 2017.
 
General and administrative expenses increased for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017, with higher employee related costs associated with business growth. These increases were somewhat offset with lower professional fees and lower bad debt expense.
 
Amortization of intangible assets decreased for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 due primarily to the reduction of amortization related to the GraphicMail customer relationship intangibles that were fully depreciated at the end of 2017.
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Three Months Ended
 
 
Change
 
 
Change
 
 
 
March 31,
 
 
from
 
 
from
 
 
 
2018
 
 
2017
 
 
Prior Year
 
 
Prior Year
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense), net
  $ 68,628  
  $ 66,844  
  $ 1,784  
    3 %
Provision (benefit) for income tax
  $ 41,997  
  $ (498,746 )
  $ 540,743  
    -108 %
 
Other income (expense) is generally related to foreign exchange gains and losses derived from owing amounts or having amounts owed in currencies other than the entity’s functional currency, as well interest expense related to our convertible notes.
 
 
20
 
 
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted into the law. The Tax Act contains broad and complex provisions including, but not limited to: (i) the reduction of corporate income tax rate from 35% to 21%, (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries, (iv) modifying limitation on excessive employee remuneration, (v) requiring current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations, (vi) repeal of corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized, (vii) creating a new minimum tax, (viii) creating a new limitation on deductible interest expense, (ix) changing rules related to uses and limitations of net operating loss carrybacks, carryforwards and foreign tax credits created in tax years beginning after December 31, 2017, and (x) eliminating the deduction for income attributable to domestic production activities.
 
As required under U.S. GAAP, the effects of tax law changes are recognized in the period of enactment. Accordingly, we have recorded incremental income tax benefit in the amount of $0.1 million associated with the Tax Act during the year ended December 31, 2017.
 
During the three months ended March 31, 2018 our income tax provision related to state income taxes by our consolidated U.S. entities as well as taxes related to income derived in foreign jurisdictions at the applicable statutory tax rates. For the three months ended March 31, 2017, our income tax benefit related to losses incurred by our consolidated U.S. entities offset by a small amount of tax expense related to income derived in foreign jurisdictions at the applicable statutory tax rates.
 
Liquidity and Capital Resources
 
Sources and Uses of Cash
 
Our primary source of operating cash inflows from continuing operations are payments from customers for use of our marketing automation technology platform. Such payments are primarily received monthly from customers, but can sometimes be received annually in advance of providing the services, yielding a deferred revenue liability on our consolidated balance sheet. In addition, during the first quarter of 2018, the Company issued $8.0 million of convertible notes and received $7,858,343 in cash after deducting debt issuance costs. To provide additional financing flexibility, the Company also has a credit facility in place. No amounts have been borrowed under the facility to date and based on the borrowing base calculations, approximately $2.1 million was available under the facility as of March 31, 2018.
 
Our primary sources of cash outflows from operations include payroll and payments to vendors and third party service providers.
 
Analysis of Cash Flows
 
Net cash used in operating activities from our continuing operations increased by $102,536 to $951,099 used in operations for the three months ended March 31, 2018, compared to $848,563 used in operations for the three months ended March 31, 2017. The increase in cash used in operating activities was attributable primarily to increased operating expenses during the first three months of 2018 compared to the same period in 2017.
 
Net cash used in investing activities from our continuing operations was $72,820 and $86,903 during the three months ended March 31, 2018 , and March 31, 2017, respectively . The reduction in cash used for investing activities is primarily related to less cash spent on the acquisition of new equipment when compared with the same period in 2017.
 
Net cash provided by financing activities was $7.9 million during the three months ended March 31, 2018, compared to zero net cash used in financing activities of during the three months ended March 31, 2017. The majority of the net cash provided by financing activities is related the Company’s issuance $8 million of convertible notes during the first quarter of 2018. In addition to the $8 million dollars received, the Company also incurred approximately $142,000 in debt issuance costs.
 
 
 
21
 
 
We had net working capital of approximately $13.7 million and $7.5 million as of March 31, 2018 and December 31, 2017, respectively. Our cash balance was $12.3 million at March 31, 2018 compared to $5.4 million at December 31, 2017, reflecting the net $7.9 million received from the issuance of convertible notes in March 2018, offset by cash used from operations.
 
Contractual Obligations
 
The Company currently rents its primary office facility under a five year lease which started in September 2016. Most of our service contracts are also on a month-to-month basis. However, from time to time, we enter into non-cancelable service contracts including longer-term contracts and payments for the acquisition of customer relationships from resellers. Future minimum lease payments and payments due under non-cancelable service contracts are as follows as of March 31, 2018:
 
Remainder of 2018
  $ 375,546  
2019
    374,071  
2020
    383,967  
2021
    293,672  
2022
    -  
2023
    -  
Thereafter
    -  
Total
  $ 1,427,256  
 
On April 18, 2018, the Company entered into a lease for the Company’s new principal office (the “2018 Lease”) to lease approximately 25,000 square feet of office space. The term of the 2018 Lease is ten years, beginning on the date on which the Company takes possession of and occupies all or any part of the premises for normal business activities. The term may be extended for an additional 5 years in incremental one-year periods, subject to certain conditions described in the 2018 Lease. Base rent for the first year of the 2018 Lease is approximately $619,000, with increases in base rent occurring every two years. In conjunction with the signing of the 2018 Lease, the Company has agreed to assign its existing lease for its current primary office space (the “Assignment”) to the landlord from the 2018 Lease. Such assignment of the current lease shall become effective one month following the commencement of the 2018 Lease. Because both the 2018 Lease and Assignment were entered into following the end of the quarter, neither are reflected in the above future minimum lease payments schedule.
 
Significant Accounting Policies
 
Our significant accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Consolidated Financial Statements. We have consistently applied these policies in all material respects. We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree.
 
Off-balance sheet arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
 
 
22
 
 
I tem 3. 
Quantitative and Qualitative Disclosure About Market Risk
 
Not applicable.
 
I tem 4.  
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31 , 2018. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of March 31, 2018 the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Company Internal Controls
 
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
23
 
P ART II – OTHER INFORMATION
 
I tem 1.  
Legal Proceedings.
 
Not applicable.
 
I tem 1A. 
Risk Factors.
 
The following risk factors supplement the Risk Factors described in the Company’s annual report on Form 10-K for the year ended December 31, 2017 and should be read in conjunction therewith.
 
Risks Related to our Convertible Notes
 
As described in Note 5 – Convertible Notes Part I, Item 1 of this report, on March 28, 2018, the Company issued $8.0 million aggregate principal amount of convertible notes (the “ Notes ”). Interest accrues at a rate of 5.0% per year and is “payable in kind” annually in the form of the issuance of additional notes (“ PIK Notes ”). The aggregate principal amount of the Note and the PIK Notes will be due and payable in full on the fifth anniversary of the date of the Notes .
 
If the Notes are converted, the Company will issue a significant number of shares of common stock, and the ownership interests of existing will be significantly diluted.
 
The holder of the Notes may convert the Notes into shares of the Company’s common stock at any time prior to maturity at a fixed conversion price of $7.50 per share. If the Notes are converted by the holder, a minimum of 1,066,667 new shares of the Company’s common stock will be issued and the ownership interest of existing stockholders will be significantly diluted. The number of shares to be issued upon conversion of the Notes will increase over time with the issuance of additional PIK Notes , which will increase the potential dilution of the ownership interests of existing stockholders.
 
Under certain circumstances, the Company will be required to register with the SEC the resale of shares of common stock held by the holder of the Notes or issued upon conversion of the Notes , which may not be aligned with Company priorities or the interests of other stockholders.
 
If the Notes are converted into shares of the Company’s common stock , if the Company elects to repay the Notes with shares of common stock , or under other specified circumstances, the holder of the Notes (or the underlying shares) will be entitled to demand and piggyback registration rights with respect to retails of the shares. These rights may adversely affect the market for and the market price of the Company’s common stock , the Company’s ability to raise capital in the future to fund working capital, capital expenditures, acquisitions, general corporate or other purposes, or the timing or terms of any such capital raise.
 
If the Notes are not converted by the holder prior to maturity, we will be required to repay the aggregate principal amount of the outstanding Notes , including the accrued PIK Notes , and it is likely that shareholders will experience significant dilution if that occurs.
 
If the Notes are not converted prior to maturity by the holder, the Company will have the option to:
Repay the aggregate principal amount of the outstanding Notes , including accrued PIK Notes , in cash;
Repay the aggregate principal amount of the outstanding Notes , including accrued PIK Notes , by issuing shares of the Company’s common stock at value equal to 80% of the volume weighted average share price over the preceding 30-trading day period; or
Extend the maturity of the Notes for up to eighteen months at an increased interest rate of 10.0%.
 
Assuming all of the Notes , including accrued PIK Notes , remain outstanding at maturity , the aggregate principal amount would equal approximately $10.2 million. Based on the current cash balance and projected net uses of cash in the future, it is highly unlikely that the Company would be able to repay the aggregate principal amount at maturity in cash without securing additional capital or other financing. Such additional financing may not be available on favorable terms, or at all. Any additional equity financing, or the repayment of the Notes by issuing shares of common stock , may be dilutive to the ownership interests of existing stockholders and may adversely affect the market for and the market price of the Company’s common stock , and other forms of financing could increase the Company’s debt balance and result in significant expense to the Company.
 
 
24
 
 
The ability of the Company to repay the outstanding Notes and any PIK Notes by issuing shares of Company stock at value equal to 80% of the volume weighted average share price over the preceding 30-trading day period will be subject to stockholder approval pursuant to NASDAQ regulations .
 
If the Notes are not converted prior to maturity by the holder, the Company’s ability to issue shares to repay the Notes will be subject to stockholder approval pursuant to NASDAQ regulations . The Company intends to solicit stockholder approval at its 2018 annual stockholder meeting. If stockholder approval is not obtained at this meeting or at another stockholder meeting prior to the maturity of the Notes, and if the Notes are not converted by the holder prior to maturity, the Company’s ability to repay the Notes by issuing shares of common stock at value equal to 80% of the volume weighted average share price over the preceding 30-trading day period will be limited, and may require the Company to solicit other forms of capital and incur additional debt, which may not be available on favorable terms, or at all.
 
The ability of the Company to fully satisfy the conversion of the Notes is subject to stockholder approval pursuant to NASDAQ regulations , and failure to obtain such approval could adversely affect the Company.
 
The conversion of the Notes by the holder may require stockholder approval pursuant to NASDAQ regulations . The Company intends to solicit this stockholder approval at its2018 annual stockholder meeting. If stockholder approval is not obtained at the upcoming stockholder meeting, the Company is required to continue to solicit stockholder approval on a quarterly basis until such approval is obtained, or to assist the holder of the Notes with the sale of its (or its affiliates’) shares of the Company’s common stock in order to maintain compliance with NASDAQ regulations. These actions would result in incremental expense to the Company and/or adversely affect the market for and the market price of the common stock .
 
Our level of indebtedness may limit our financial flexibility.
 
The Company’s indebtedness may affect its operations in several ways, including:
 
The Company may be at a competitive disadvantage compared to similar companies that have less debt;
The Notes limit the Company’s ability to incur senior secured debt in excess of 18.6% of the Company’s trailing 12-month revenues; and
Additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may have higher costs and contain restrictive covenants, or may not be available to us.
 
These factors and other factors that could affect the Company’s ability to obtain additional financing, some of which may be beyond the Company’s control, could adversely affect the Company’s ability to take advantage of strategic opportunities that might otherwise benefit the Company, and could make the Company less attractive to potential acquirers .
 
The Notes contain a “make whole” provision that provides for the PIK Notes to accelerate and be paid through maturity upon a change in control of the Company, which would increase the cost of acquiring the Company and which could, in turn, make the Company less attractive to potential acquirers .
 
The Notes provide for an acceleration of interest through maturity upon a change in control, which will have the effect of increasing the cost to a third party of acquiring the Company. This could make the Company less attractive to potential acquirers or decrease the amount that a potential acquirer would be willing to pay for shares of the Company’s common stock , potentially preventing, or decreasing the consideration payable to the Company’s stockholders in, a change of control transaction.
 
I tem 2. 
Unregistered Sales of Equity Securities and Use of Proceeds.
 
On March 28, 2018, the Company entered into a Convertible Note Purchase Agreement (the “Note Purchase Agreement”) with an investor, pursuant to which the Company issued to the investor a convertible promissory note in the aggregate principal amount of $8,000,000 (the “Note”). The principal amount of the Note and any accrued interest thereon may be converted, in whole or in part, into shares of company common stock at any time prior to the fifth anniversary of the issuance date (“Maturity Date”) at a conversion price of $7.50 per share, subject to customary adjustments. Assuming full conversion of the principal amount of the Notes and accrued interest on the Maturity Date, the Company anticipates that it would issue 1,361,367 shares of common stock. The Company offered and sold the Notes to the investor in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. The Company relied on these exemptions from registration based in part on representations made by the investor in the Note Purchase Agreement.
 
I tem 3.     
Defaults Upon Senior Securities.
 
Not Applicable.
 
I tem 4. 
Mine Safety Disclosures.
 
Not Applicable.
 
I tem 5.  
Other Information.
 
Not Applicable.
 
 
25
 
 
I tem 6. 
Exhibits.
INDEX TO EXHIBITS
SEC Reference Number
 
Title of Document
 
Location
 
Form of Convertible Promissory Note, attached as Exhibit A to Convertible Note Purchase Agreement among SharpSpring, Inc. and SHSP Holdings, LLC dated March 28, 2018
 
Incorporated by reference to our Form 8-K filed March 28, 2018
 
Form of Investors Rights Agreement by and among SharpSpring, Inc., SHSP Holdings, LLC et al. dated March 28, 2018
 
Incorporated by reference to our Form 8-K filed March 28, 2018
 
Form of Subordination Agreement by and between SHSP Holdings, LLC and Western Alliance Bank dated March 28, 2018
 
Incorporated by reference to our Form 8-K filed March 28, 2018
 
Employee Agreement Amendment – Richard Carlson
 
Incorporated by reference to the Company’s Form 8-K filed on 2/12/18
 
Employee Agreement Amendment – Richard Carlson
 
Incorporated by reference to the Company’s Form 8-K filed on 4/15/17
 
Employee Agreement – Richard Carlson
 
Incorporated by reference to the Company’s Form 8-K filed on 9/14/15
 
Employee Agreement Amendment – Edward S. Lawton
 
Incorporated by reference to the Company’s Form 8-K filed on 2/12/18
 
Employee Agreement Amendment – Edward S. Lawton
 
Incorporated by reference to the Company’s Form 8-K filed on 8/1/17
 
Employee Agreement Amendment – Edward S. Lawton
 
Incorporated by reference to the Company’s Form 8-K filed on 6/24/15
 
Employee Agreement – Edward Lawton
 
Incorporated by reference to the Company’s Form 8-K filed on 8/18/14
 
Employee Agreement Amendment – Travis Whitton
 
Incorporated by reference to the Company’s Form 8-K filed on 2/12/18
 
Employee Agreement Amendment – Travis Whitton
 
Incorporated by reference to the Company’s Form 8-K filed on 8/1/17
 
Employee Agreement Amendment – Travis Whitton
 
Incorporated by reference to the Company’s Form 8-K filed on 7/8/16
 
Employee Agreement – Travis Whitton
 
Incorporated by reference to the Company’s Form 8-K filed on 7/8/16
 
Convertible Note Purchase Agreement among SharpSpring, Inc. and SHSP Holdings, LLC dated March 28, 2018
 
Incorporated by reference to our Form 8-K filed March 28, 2018
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
101
 
XBRL
 
 
 
 
 
 
 
 
26
 
 
S IGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
SharpSpring, Inc.
 
 
 
 
 
 
 
 
 
 
 

By:
/s/Richard A. Carlson
 
 
 
 
 
 
Richard A. Carlson
 
 
 
 
 
 
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 15, 2018
 
 
 
 
 
 
 
 
SharpSpring, Inc.
 
 
 
 
 
 
 

 
 
 
 
By:
/s/ Edward Lawton
 
 
 
 
 
 
Edward Lawton
Chief Financial Officer
 
 
 
 
 
 
(Principal Financial Officer)
Date: May 15, 2018
 
 
 
 
27
SharpSpring (NASDAQ:SHSP)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more SharpSpring Charts.
SharpSpring (NASDAQ:SHSP)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more SharpSpring Charts.