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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2017
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from ______________ to
______________
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Commission file number 001-36280
SharpSpring, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
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05-0502529
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(State or other jurisdiction of
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(I.R.S. employer
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incorporation or organization)
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identification number)
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550 SW 2nd
Avenue
Gainesville, FL
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32601
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(Address of principal executive offices)
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(Zip Code)
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888-428-9605
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the
Act:
Title
of each class
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Name of
each exchange on which registered
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Common
Stock, $0.001 par value per share
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The
NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ No
☑
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☑
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 Data
File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment of this
Form 10-K. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a 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 ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☐
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Smaller
reporting company ☑
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(Do not check if a smaller reporting company)
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Emerging
growth company ☐
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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 Act). Yes ☐ No ☑
The
aggregate market value of the voting common equity held by
non-affiliates of the registrant was $24,191,718 as of June 30,
2017.
As of
March 9, 2018, there were 8,445,016 outstanding shares of the
registrant’s common stock, $.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement to be filed in
conjunction with the registrant’s 2018 annual meeting of
stockholders are incorporated by reference in Part III of this
Annual Report on Form 10-K. The proxy statement will be filed by
the registrant with the Securities and Exchange Commission not
later than 120 days after the end of the registrant’s fiscal
year ended December 31, 2017.
TABLE OF CONTENTS
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Page
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PART I
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Item 1.
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Business
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4
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Item 1A.
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Risk
Factors
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10
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Item 1B.
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Unresolved
Staff Comments
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23 |
Item 2.
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Properties
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23 |
Item 3.
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Legal
Proceedings
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23 |
Item 4
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Mine
Safety Disclosures
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PART II
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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24 |
Item 6.
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Selected
Financial Data
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26 |
Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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27 |
Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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32 |
Item 8.
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Financial
Statements and Supplementary Data
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32 |
Item 9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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32 |
Item 9A.
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Controls
and Procedures
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32 |
Item 9B.
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Other
Information
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32 |
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PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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33 |
Item 11.
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Executive
Compensation
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33 |
Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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33 |
Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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33 |
Item 14.
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Principal
Accounting Fees and Services
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33 |
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PART IV
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Item 15.
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Exhibits,
Financial Statement Schedules
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34 |
Item 16.
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Form
10-K Summary
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34 |
Signatures
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35 |
2
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report on Form 10-K 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;
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statements of
our plans and objectives;
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statements
regarding the capabilities of our business operations;
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statements of
expected future economic performance;
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statements
regarding competition in our market; and
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assumptions
underlying statements regarding us or our business.
Forward-looking
statements are neither historical facts nor assurances of future
performance. Instead, they are based only on our current beliefs,
expectations and assumptions regarding the future of our business,
future plans and strategies, projections, anticipated events and
trends, the economy and other future conditions. Because
forward-looking statements relate to the future, they are subject
to inherent uncertainties, risks and changes in circumstances that
are difficult to predict and many of which are outside of our
control. Our actual results and financial condition may differ
materially from those indicated in the forward-looking statements.
Therefore, you should not rely on any of these forward-looking
statements. Important factors that could cause our actual results
and financial condition to differ materially from those indicated
in the forward-looking statements include, among others, the
following:
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strategic
actions, including acquisitions and dispositions and our success in
integrating acquired businesses;
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the extent to
which we continue to experience attrition related to the migration
of customers from our legacy GraphicMail platform;
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the occurrence
of hostilities, political instability or catastrophic
events;
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changes in
customer demand;
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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;
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developments and
changes in laws and regulations, including increased regulation of
our industry through legislative action and revised rules and
standards;
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security
breaches, cybersecurity attacks and other significant disruptions
in our information technology systems; and
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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.”
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.
3
Overview
SharpSpring, Inc.
(the “Company”) is a cloud-based marketing technology
company. The Company’s products are designed to improve the
way that businesses communicate with their prospects and customers
to increase sales. The Company’s flagship SharpSpring
marketing automation platform uses advanced features such as web
tracking, lead scoring and automated workflow to help businesses
deliver the right message to the right customer at the right time.
All of our products are designed and built as Software as Service
(or SaaS) offerings. We provide our products primarily on a
subscription basis, with additional fees charged if specified
volume limits are exceeded by our customers.
We
operate globally through SharpSpring, Inc., a Delaware corporation,
and our wholly owned subsidiaries that consist of (i) SharpSpring
Technologies, Inc., a Delaware corporation; (ii) InterInbox SA, a
Swiss corporation; (iii) ERNEPH 2012A (Pty) Ltd. dba ISMS, a South
African limited company; (iv) ERNEPH 2012B (Pty) Ltd. dba
GraphicMail South Africa, a South African limited company; (v)
Quattro Hosting LLC, a Delaware limited liability company; (vi)
SMTP Holdings S.a.r.l., a Luxembourg S.a.r.l.; and (vii) InterCloud
Ltd, a Gibraltar Limited Company. Unless the context otherwise requires, all
references to the “Company,” “we,”
“our” or “us” and other similar terms means
SharpSpring, Inc., and its subsidiaries.
On June
27, 2016, we sold the assets related to our SMTP email relay
product to the Electric Mail Company, a Nova Scotia
company.
Products and Services
SharpSpring Marketing Automation and SharpSpring Mail+
We
provide SaaS based marketing technologies to customers around the
world. Our focus is on marketing automation tools that enable
customers to interact with a lead from an early stage and nurture
that potential customer using advanced features until it becomes a
qualified sales lead or customer. Our primary product is the
premium SharpSpring marketing automation solution. Additionally, a
small portion of customers utilizes our SharpSpring Mail+ product,
which is a subset of the full suite solution that is focused on
more traditional email marketing while also including some of the
advanced functionality available in our premium
offering.
Discontinued and Divested Products and Services:
GraphicMail Email Marketing
During
2015 and the first half of 2016, the Company offered the
GraphicMail email campaign management solution to customers
globally. In late 2015, the Company announced that it would
discontinue selling and offering the GraphicMail email solution and
migrate existing GraphicMail customers to the SharpSpring platform,
onto the SharpSpring Mail+ product. Prior to the migration, the
GraphicMail platform focused on email, social and mobile marketing
and was typically used by companies wishing to communicate with a
list of subscribers or customers.
SMTP Email Relay Services
On June
27, 2016, we sold the assets related to our SMTP email relay
product to the Electric Mail Company, a Nova Scotia company. Prior
to that, the Company offered a proprietary SMTP relay product,
which was designed to send high volumes of email messages in an
efficient manner and increase the delivery rate of email
messages.
Markets & Competition
We
operate in the marketing technology market, with a focus on
marketing automation products. Our products compete in two markets
that are interrelated and often overlap with each
other:
1)
Marketing
automation products (highly targeted one-to-one messaging with
sophisticated analytics); and
2)
Traditional email
marketing services (newsletters and one-to-many
communications).
4
Our
SharpSpring product competes primarily in the marketing automation
market. Based on industry reports, our growth rate and the growth
rate of our competitors, we believe the market for marketing
automation technology is currently growing at approximately 30% per
year. The market for marketing automation software and related
solutions is new and evolving, with high barriers to entry due to
the complex nature of the technology. SharpSpring entered the
market in 2014 with a highly competitive offering that achieved
meaningful customer adoption in its first few years after launch.
As of December 31, 2017, SharpSpring had 1,750 paying customers and
approximately 6,500 businesses using the platform, including
agencies, agency clients and direct end user customers. We face
competition from cloud-based software and SaaS companies including
HubSpot, Act-On, Pardot and Infusionsoft. We differentiate
ourselves from the competition with the integration of specific
tools designed for digital marketing agencies, and with
SharpSpring’s advanced features, ease of use, platform
flexibility, and value compared to other competitive offerings.
SharpSpring is designed as a solution for small or mid-sized
businesses, but focuses on selling to marketing agencies, who serve
as partners providing a distribution channel to their
clients.
Since
inception, the majority of our SharpSpring customers have been
digital marketing agencies. A digital marketing agency is a firm
that specializes in helping clients, usually small or mid-sized
businesses, with their digital marketing initiatives like websites,
email marketing, search engine optimization, social campaigns and
other lead generation activities. We have built special tools in
the SharpSpring application to allow agencies to manage their
clients and optimize their efforts across their portfolio. We also
have special pricing to agency customers to allow them the
flexibility to manage their client relationships. In general, when
we sell SharpSpring to an agency customer, we provide the agency
with a SharpSpring license for the agency to use plus a 3-pack of
client licenses for the agency to deploy to their client base. This
agency license and the pack of licenses are generally sold for a
monthly recurring fee, plus an up-front onboarding fee. The agency
has complete discretion over the pricing of the platform to their
clients for the use, implementation and services related to
SharpSpring. If an agency utilizes its pack of licenses and adds
additional clients on to the platform, there is a monthly
per-client fee charged to the agency. Additionally, we charge
customers for certain items if volume or transactional limits are
exceeded. In most cases, we provide support to the agency and the
agency provides support to their clients on the platform, but for
additional fees, we can support the agency’s client directly.
Our mentality is to partner with the agencies to grow and expand
our businesses together using the SharpSpring
platform.
SharpSpring Mail+
was launched in 2016 as a replacement to the GraphicMail product
that was acquired in 2014. SharpSpring Mail+ provides customers
with an advanced email marketing and marketing automation tool. It
includes traditional email campaign management solutions like
design capabilities, reporting tools and list management
functionality, but also includes additional features like dynamic
email content and SharpSpring’s visitor ID tool that are more
typically found in a marketing automation solution. SharpSpring
Mail+ competes with companies such as Constant Contact, iContact
Corporation, The Rocket Science Group LLC (MailChimp®), and
VerticalResponse, Inc., a subsidiary of Deluxe Corporation, as well
as other email and marketing automation companies. SharpSpring
Mail+, and most other vendors, typically charge a monthly fee or a
fee per number of emails sent and, in some cases, they have a free
offering for low-volume or non-profit customers. SharpSpring
Mail+’s rich feature set and comparative value plus
personalized messages that enable customers to grow their business
are key market differentiators.
We are
part of a constantly evolving and highly competitive marketplace.
Some of our competitors have more extensive customer bases and
broader customer relationships than we have, and have longer
operating histories and greater name recognition than we have.
Additionally, some of our current and potential competitors have
significantly more financial, technical, marketing and other
resources than we have, and are able to devote greater resources to
the development, promotion, sale and support of their products and
services. Barriers to entry are relatively high in the marketing
automation market due to complexity of systems.
Sales and Marketing
We sell
our products globally, through our internal sales teams, and to a
lesser extent, third party resellers. Before the discontinuation of
GraphicMail and the sale of our SMTP email relay product, our
products had separate and mostly distinct sales processes, which
are described below. We use and rely on our own SharpSpring
marketing automation platform to help our business generate leads,
convert more leads to sales and monitor the effectiveness of all
our marketing campaigns. Our website www.sharpspring.com serves as
a lead generation source and we use a variety of other digital
marketing tools to attract new customers.
5
Our
SharpSpring product sales process involves targeting customers,
completing product demos and advancing customers through our
marketing and sales pipeline to conversion using our SharpSpring
marketing automation product. Since SharpSpring was launched fairly
recently in 2014, brand recognition today is growing, but still
fairly limited. Therefore, we are more reliant on outbound
marketing and search engine traffic to attract potential leads. Our
marketing efforts to date have been nearly 100% focused on digital
marketing agencies, and we have had success signing up over 1,400
marketing agency partners as of December 31, 2017. These agencies
become customers of ours and are able to resell SharpSpring to
their clients, while paying increased fees to us as their client
count expands beyond the base license. This allows the agency to
provide services and first level support for their clients, which
increases their own revenues from the end client and creates a
longer-lasting relationship overall between the agency and client.
We also sell SharpSpring directly to end-users and have over 300
direct end user customers on the platform. The Company’s
sales are done primarily through internal resources, but a small
number of third-party resellers were also used during
2017.
Since
creating the SharpSpring Mail+ product to migrate the GraphicMail
customers onto during the middle of 2016, we have spent limited
resources marketing and selling SharpSpring Mail+ as a standalone
product. We intend to continue to devote limited resources to the
sales and marketing process for SharpSpring Mail+ as a standalone
product in the future, and may decide to discontinue the
SharpSpring Mail+ product altogether.
Prior
to its discontinuation in the middle of 2016, our GraphicMail sales
and marketing efforts were designed to attract potential customers
to our website, enroll them in a free trial, encourage them to
engage with our products, convert them to paying customers and
retain them as ongoing customers. We employed strategies to acquire
customers by using a variety of sources, including online
advertising, partner relationships and referrals. Additionally,
GraphicMail used a network of third party resellers who distributed
and sold GraphicMail in 14 countries. These resellers acted as
local sales resources, performed marketing for the product and
provided first level support, and received a large portion of the
revenue related to sales of GraphicMail through those
organizations. The Company discontinued the GraphicMail product and
ended any reselling arrangements for GraphicMail with third
parties.
Prior
to its sale in June 2016, SMTP relay services were sold and leads
were largely generated by the SMTP.com website. SMTP stands for
“Simple Mail Transfer Protocol”, which is the internet
protocol by which all email is sent globally. Despite the fact that
we did not own the protocol, the SMTP name provided us immediate
name recognition and domain context worldwide. In addition, the
services we provided may be searched for online as
“SMTP”, “SMTP relay services”, “SMTP
services”, “SMTP providers”, or using similar
terms. Our website may have appeared in search engine results for
these and other queries in common search engines. In addition, SMTP
purchased online search advertising and other forms of online
advertising to drive traffic to the website and referring partners
provided us with leads. Referring partners were typically other
service providers operating in the email ecosystem, who may provide
related products and services that were non-competitive with our
own. We paid those third parties between 15% and 30% of the revenue
generated from their referrals.
Customers
As of
December 31, 2017, we had over 1,750 customers for our SharpSpring
product, the majority of which were marketing agencies. Including
agency partners, agency clients and direct end user clients, we had
over 6,500 businesses using the SharpSpring platform as of December
31, 2017.
As of
December 31, 2017, we had approximately 1,000 customers using our
SharpSpring Mail+ product.
The
vast majority of our customers are on month-to-month agreements,
with a mixture of customers being charged in advance and in
arrears. We have a small amount of customers that prepay for longer
periods, such as quarterly or annually.
We are
not heavily dependent on any one customer or even a few major
customers. Our user base is diverse and the largest single customer
represents less than 3% of our aggregate revenues. The loss of any
one customer would not represent a material loss of sales. A large
majority of our SharpSpring customers are marketing agencies who
resell the SharpSpring product to their clients. From a client or
end user perspective, we do not have any significant industry
concentration in our customer base.
6
Technology & Technology Suppliers
Our
SharpSpring product technology was developed internally over the
past six years. SharpSpring’s key features include web
tracking, customer relationship management, lead scoring and
nurturing, landing pages, email technology, rule-based triggers and
notifications and deep analytics to measure marketing program
return on investment (ROI). We offer value to our customers by
providing integration with industry standard technologies like
Salesforce.com and others, and third-party data providers like
Zoominfo.
SharpSpring Mail+
is a subset of the SharpSpring technology. During late 2015 and the
first half of 2016, we modified SharpSpring to support the
SharpSpring Mail+ features and functionality using the existing
platform. This involved creating a subset of the SharpSpring
technology with more limited features for SharpSpring
Mail+.
We
decommissioned the GraphicMail product in the middle of 2016.
GraphicMail had been developed over the past nine years and
consisted of an email editor that customers used to create sharp,
professional email campaigns. It had an easy to use interface,
integrated with social media channels, offered mobile messaging and
included tools to effectively track campaign results. GraphicMail
historically utilized Postfix software to assist in spooling
emails, which is an open source technology, but began using the
SMTP relay service during 2015 as its primary email sending
platform.
The
Company sold the SMTP relay service in June 2016. The SMTP relay
service product used Message Transfer Agent (MTA) technology
provided by Message Systems, a third party. Typically, our SMTP
relay service customers would be too small and spend too little on
email to be able to afford this type of sophisticated system on
their own. The SMTP solution pooled a large number of customers
into our proprietary and scalable system that handled billions of
emails. The software was customized to optimize the speed at which
email is delivered, and to manage the process of maximizing inbox
delivery. The proprietary systems managed how emails are sent, and
which IP addresses or pools of IP addresses were used for sending.
Another key part of our technological assets were our 12,286
portable IPv4 addresses (which were sold along with the
product).
Email
sending technology is a key part of the application. Following the
sale of the SMTP product in June 2016, we rely on a third party to
deliver our platform’s email. During the period of time
before the sale of the SMTP product in June 2016, we employed
Message Systems as the backbone of our sending. During the first
half of 2016, we also employed Postfix software for certain
functions. PostFix software is open source and has been released
under the IBM Public License 1.0, giving us and others rights to
freely utilize and modify the software at our discretion and
without cost. We operated the software in a clean unmodified state.
We developed proprietary extensions that plugged into the PostFix
software in an effort to optimize the speed at which email is
delivered, and to manage the process of maximizing inbox delivery.
Customizations to open source software code generally require
developers to make their work available at no cost. Since we
developed the software by creating extensions which live outside of
the open source software layer, we were not required to offer our
products or make our source code available.
Our
platforms are hosted in third party data centers on virtual
cloud-based infrastructure. During 2017, these providers included
Google Compute and Amazon Web Services. These data centers use a
mixture of biometric access controls, redundant power,
environmental controls and secure internet connection points to
ensure uptime and data security. The Company continuously monitors
our services for availability, performance and security. When
necessary we send engineers to these third-party providers’
locations to maintain quality control and oversight. We rely
on our data center providers to maintain peak operating conditions
in their businesses and to quickly address issues related to their
service as they arise.
Key Performance Indicators
In
addition to financial performance, the Company measures the
performance of several key performance indicators,
including:
●
Number of acquired
customers
●
Customer
acquisition costs (CAC)
●
Customer attrition
rates
●
Net revenue
retention
●
Expected lifetime
value (LTV)
Intellectual Property
The
Company does not have any patents, and does not have any patents in
progress.
Our
trade secrets include our competencies in marketing automation, web
tracking, integrations, workflow and email editing.
7
We
registered “SharpSpring” and the related logo and
certain other marks as trademarks in the United States and several
other jurisdictions.
We are
the registered holder of a variety of domestic and international
domain names that include “sharpspring”,
“sharpspringmailplus”, “graphicmail” and
similar variations.
Regulation of our Business
We must
comply with U.S. federal legislation entitled Controlling the
Assault of Non-Solicited Pornography and Marketing Act of 2003, or
CAN-SPAM Act, which imposes certain obligations on the senders of
commercial emails and specifies penalties for the transmission of
commercial email messages that are intended to deceive the
recipient as to source or content.
The
CAN-SPAM Act’s main provisions include:
●
prohibiting
false or misleading email header information
●
prohibiting the
use of deceptive subject lines
●
ensuring that
recipients may, for at least 30 days after an email is sent, opt
out of receiving future commercial email messages from the sender,
with the opt-out effective within 10 days of the
request
●
requiring that
commercial email be identified as a solicitation or advertisement
unless the recipient affirmatively assented to receiving the
message
●
requiring that
the sender include a valid postal address in the email
message
In
addition, some states have passed laws regulating commercial email
practices that are significantly more punitive and difficult to
comply with than the CAN-SPAM Act, particularly Utah and Michigan,
which have enacted do-not-email registries listing minors who do
not wish to receive unsolicited commercial email that markets
certain covered content, such as adult or other harmful products.
Some portions of these state laws may not be preempted by the
CAN-SPAM Act. Additionally, some foreign jurisdictions, such as
Australia, Canada and the European Union, have also enacted laws
that regulate sending email, some of which are more restrictive
than the CAN-SPAM Act. For example, some foreign laws prohibit
sending unsolicited email unless the recipient has provided the
sender advance consent to receipt of such email, or in other words
has “opted-in” to receiving it.
The
ability of our customers’ constituents to opt out of
receiving commercial emails may minimize the effectiveness of our
email marketing product. Moreover, non-compliance with the CAN-SPAM
Act carries significant financial penalties. If we were found to be
in violation of the CAN-SPAM Act, applicable state laws not
preempted by the CAN-SPAM Act, or foreign laws regulating the
distribution of commercial email, whether as a result of violations
by our customers or if we were deemed to be directly subject to and
in violation of these requirements, we could be required to pay
penalties, which would adversely affect our financial performance
and significantly harm our business. We also may be required to
change one or more aspects of the way we operate our business,
which could impair our ability to attract and retain customers or
increase our operating costs.
As
internet commerce continues to evolve, increasing regulation by
federal, state or foreign governments becomes more likely. Our
business could be negatively impacted by the application of
existing laws and regulations or the enactment of new laws
applicable to email communications. The cost to comply with such
laws or regulations could be significant and would increase our
operating expenses, and we may be unable to pass along those costs
to our customers in the form of increased subscription fees. In
addition, federal, state and foreign governmental or regulatory
agencies may decide to impose taxes on services provided over the
Internet or via email. Such taxes could discourage the use of the
Internet and email as a means of commercial marketing and
communications, which would adversely affect the viability of our
services.
8
Additionally,
certain aspects of how our customers utilize our platform are
subject to regulations in the United States, European Union and
elsewhere. In recent years, U.S. and European lawmakers and
regulators have expressed concern over the use of third-party
cookies or web beacons for online behavioral advertising, and
legislation adopted recently in the European Union requires
informed consent for the placement of a cookie on a user’s
device. Regulation of cookies and web beacons may lead to
restrictions on our activities, such as efforts to understand
users’ Internet usage. New and expanding “Do Not
Track” regulations have recently been enacted or proposed
that protect users’ right to choose whether or not to be
tracked online. These regulations seek, among other things, to
allow end users to have greater control over the use of private
information collected online, to forbid the collection or use of
online information, to demand a business to comply with their
choice to opt out of such collection or use, and to place limits
upon the disclosure of information to third party websites. These
policies could have a significant impact on the operation of our
marketing automation platform and could impair our attractiveness
to customers, which would harm our business.
The
European Union’s General Data Protection Regulation (GDPR)
seeks to create a data protection law framework across the EU and
aims to give citizens back the control of their personal data,
whilst imposing strict rules on those hosting and 'processing' this
data, anywhere in the world. The Regulation also introduces rules
relating to the free movement of personal data within and outside
the EU. The GDPR will come into effect on May 25,
2018.
Customers and
potential customers in the healthcare, financial services and other
industries are subject to substantial regulation regarding their
collection, use and protection of data and may be the subject of
further regulation in the future. Accordingly, these laws or
significant new laws or regulations or changes in, or repeals of,
existing laws, regulations or governmental policy may change the
way these customers do business and may require us to implement
additional features or offer additional contractual terms to
satisfy customer and regulatory requirements, or could cause the
demand for and sales of our marketing automation platform to
decrease and adversely impact our financial results.
Employees
As of
February 28, 2018, we have approximately 149 employees supporting
our operations. Nearly all of our employees devote their full
effort to the company. Our resources include 40 sales and marketing
resources, 37 research and development resources, 15 general &
administrative resources and 57 customer services, network and
support resources. None of our employees are covered by collective
bargaining agreements.
We
believe that our future success will depend in part on our
continued ability to attract, hire or acquire and retain qualified
employees and contractors. There can be no assurance that we will
be able to attract and retain such resources. If we are
unsuccessful in managing the timely delivery of these services our
business could be adversely affected. We believe we have good
relations with our resources.
Properties
Our
corporate headquarters is a leased office facility located in
Gainesville, FL.
Financial Information About Segments
The
Company operates as one operating segment. Operating segments are
defined as components of an enterprise for which separate financial
information is regularly evaluated by the chief operating decision
maker (“CODM”), which is the Company’s chief
executive officer, in deciding how to allocate resources and assess
performance. The Company’s CODM evaluates the Company’s
financial information and resources and assess the performance of
these resources on a consolidated basis. Since the Company operates
in one operating segment, all required financial segment
information can be found in the consolidated financial
statements.
Corporate Information
SharpSpring, Inc.
is a Delaware corporation. Its wholly owned subsidiaries consist of
(i) SharpSpring Technologies, Inc., a Delaware corporation; (ii)
InterInbox SA, a Swiss corporation; (iii) ERNEPH 2012A (Pty) Ltd.
dba ISMS, a South African limited company; (iv) ERNEPH 2012B (Pty)
Ltd. dba GraphicMail South Africa, a South African limited company;
(v) Quattro Hosting LLC, a Delaware limited liability company; (vi)
SMTP Holdings S.a.r.l., a Luxembourg S.a.r.l.; and (vii) InterCloud
Ltd, a Gibraltar Limited Company.
9
Our
corporate headquarters is located at 550 SW 2nd Avenue,
Gainesville, FL 32601. Our telephone number is 888-428-9605. Our
corporate website is www.sharpspring.com. The
information on our website is not incorporated herein by reference
and is not part of this Form 10-K Annual Report. Also, this report
includes the trade names of other companies. Unless specifically
stated otherwise, the use or display
by us of such other parties' names and trade names in this report
is not intended to and does not imply a relationship with, or
endorsement or sponsorship of us by, any of these other
parties.
ITEM
1A.
RISK
FACTORS
Risks Related To Our Business
The majority of our products and services are sold pursuant to
short-term subscription agreements, and if our customers elect not
to renew these agreements, our revenues may decrease.
Typically, our
products and services are sold pursuant to short-term subscription
agreements, which are generally one month to one year in length,
with no obligation to renew these agreements. Our renewal rates may
decline due to a variety of factors, including the products and
services and prices offered by our competitors, new technologies
offered by others, consolidation in our customer base or if some of
our customers cease their operations. If our renewal rates are low
or decline for any reason, or if customers renew on less favorable
terms, our revenues may decrease, which could adversely affect our
stock price.
We may not be able to scale our business quickly enough to meet our
customers' growing needs, and if we are not able to grow
efficiently, our operating results could be harmed.
As
usage of our marketing software grows and as customers use our
solutions for more advanced relationship marketing programs, we
will need to devote additional resources to improving our
application architecture, integrating with third-party systems, and
maintaining infrastructure performance. In addition, we will need
to appropriately scale our internal business systems and our
services organization, including customer support and professional
services, to serve our growing customer base, particularly as our
customer demographics expand over time. Any failure of or delay in
these efforts could cause impaired system performance and reduced
customer satisfaction. These issues could reduce the attractiveness
of our marketing software to customers, resulting in decreased
sales to new customers, lower renewal rates by existing customers,
the issuance of service credits, or requested refunds, which could
adversely affect our revenue growth and harm our reputation. Even
if we are able to upgrade our systems and expand our staff, any
such expansion will be expensive and complex, requiring management
time and attention. We could also face inefficiencies or
operational failures as a result of our efforts to scale our
infrastructure. Moreover, there are inherent risks associated with
upgrading, improving and expanding our information technology
systems. We cannot be sure that the expansion and improvements to
our infrastructure and systems will be fully or effectively
implemented on a timely basis, if at all. These efforts may reduce
revenue and our margins and adversely affect our financial
results.
If we fail to enhance our existing products and services or develop
new products and services, our products and services may become
obsolete or less competitive and we could lose
customers.
If we
are unable to enhance our existing products and services or develop
new products and services that keep pace with rapid technological
developments and meet our customers’ needs, our business will
be harmed. Creating and designing such enhancements and new
products entail significant technical and business risks and
require substantial expenditures and lead-time, and there is no
guarantee that such enhancements and new products will be completed
in a timely fashion. Nor is there any guarantee that any new
service offerings will gain acceptance among our customers or by
the broader market. For example, our existing customers may not
view any new service as complementary to our service offerings and
therefore decide not to purchase such service. If we cannot enhance
our existing products and services or develop new products or if we
are not successful in selling such enhancements and new products to
our customers, we could lose customers or have difficulty
attracting new customers, which would adversely impact our
financial performance.
If we are unable to attract new customers and retain existing
customers on a cost-effective basis, our business and results of
operations will be adversely affected.
10
To
succeed, we must continue to attract and retain a large number of
customers on a cost-effective basis, many of whom have not
previously used the types of products and services that we offer.
Our sales process involves targeting customers, completing product
demos and advancing customers through our marketing and sales
pipeline to conversion using our SharpSpring marketing automation
product, in addition to relying on outbound marketing and search
engine traffic to attract potential leads. We rely on a variety of
methods to attract new customers, such as outbound emails, hosting
events, paying providers of online services, search engines,
directories and other websites to provide content, advertising
banners and other links that direct customers to our website. If we
are unable to use any of our current marketing initiatives or the
cost of such initiatives were to significantly increase or such
initiatives or our efforts to satisfy our existing customers are
not successful, we may not be able to attract new customers or
retain existing customers on a cost-effective basis and, as a
result, our revenue and results of operations would be adversely
affected.
If we fail to develop our brands cost-effectively, our business may
be adversely affected.
Successful
promotion of our brands will depend largely on the effectiveness of
our marketing efforts and on our ability to provide reliable and
useful services at competitive prices. Brand promotion activities
may not yield increased revenue, and even if they do, any increased
revenue may not offset the expenses we incur in building our
brands. If we fail to successfully promote and maintain our brands,
or incur substantial expenses in an unsuccessful attempt to promote
and maintain our brands, we may fail to attract enough new
customers or retain our existing customers to the extent necessary
to realize a sufficient return on our brand-building efforts, and
our business and results of operations could suffer.
Email communications is a key component of our product. Delivery of
our emails can be impaired by third party monitoring agencies and
internet service providers. If the delivery of our customers’
emails is limited or blocked, our product’s capabilities
would be severely limited and customers may cancel their
accounts.
Many
SharpSpring users aim to communicate using email with a broad range
of customers and prospects. Our policies limit the use of email to
recipients who have agreed to receive email from that business.
However, it is often difficult to enforce the use of opt-in email
lists and in some cases, our customers disregard our policies and
send emails to purchased lists, which may include spam traps put in
place by monitoring agencies. Those same agencies can block emails
from reaching individuals that use their email protection services.
Additionally, internet service providers (ISPs) also filter email
based on email characteristics and spam complaint rates. Although
we work with one of the premier email delivery providers, recent
aggressive actions by monitoring agencies and ISPs make it more
difficult to protect our email sending reputation and deliver our
customers’ emails to the recipient. We continually monitor
and improve our own technology and work closely with ISPs to
maintain our deliverability rates. If third party agencies or ISPs
materially limit or halt the delivery of our customers’
emails, or if we fail to deliver our customers’ emails in an
acceptable manner, our customers may cancel their
accounts.
If we pursue future acquisitions, our inability to successfully
acquire and integrate other businesses, assets, products or
technologies could harm our operating results.
We may
in the future evaluate and pursue acquisitions and strategic
investments in businesses, products or technologies that we believe
could complement or expand our existing solutions, expand our
client base and operations worldwide, enhance our technical
capabilities or otherwise offer growth or cost-saving
opportunities. From time to time, we may enter into letters of
intent with companies with which we are negotiating potential
acquisitions or investments or as to which we are conducting due
diligence. Although we are currently not a party to any binding
definitive agreement with respect to potential investments in, or
acquisitions of, complementary businesses, products or
technologies, we may enter into these types of arrangements in the
future, which could materially decrease the amount of our available
cash or require us to seek additional equity or debt financing. We
have limited experience in successfully acquiring and integrating
businesses, products and technologies. We may not be successful in
negotiating the terms of any potential acquisition, conducting
thorough due diligence, financing the acquisition or effectively
integrating the acquired business, product or technology into our
existing business and operations. Our due diligence may fail to
identify all of the problems, liabilities or other shortcomings or
challenges of an acquired business, product or technology,
including issues related to intellectual property, product quality
or product architecture, regulatory compliance practices, revenue
recognition or other accounting practices, or employee or customer
issues.
11
Additionally, in
connection with any acquisitions we complete, we may not achieve
the synergies or other benefits we expected to achieve, and we may
incur write-downs, impairment charges or unforeseen liabilities
that could negatively affect our operating results or financial
position or could otherwise harm our business. If we finance
acquisitions using existing cash, the reduction of our available
cash could cause us to face liquidity issues or cause other
unanticipated problems in the future. If we finance acquisitions by
issuing convertible debt or equity securities, the ownership
interest of our existing stockholders may be diluted, which could
adversely affect the market price of our stock. Further,
contemplating or completing an acquisition and integrating an
acquired business, product or technology could divert management
and employee time and resources from other matters.
Our international operations subject us to additional risks and
uncertainties.
We have
customers in various international jurisdictions. Our international
operations present unique challenges and risks to our Company.
Compliance with complex foreign and U.S. laws and regulations that
apply to our international operations increases our cost of doing
business in international jurisdictions and could interfere with
our ability to offer our products and services to one or more
countries or expose us or our employees to fines and penalties.
These laws and regulations include, but are not limited to, tax
laws, data privacy and filtering requirements, U.S. laws such as
the Foreign Corrupt Practices Act, and local laws prohibiting
corrupt payments to governmental officials. Violations of these
laws and regulations could result in monetary damages, criminal
sanctions against us, our officers, or our employees, and
prohibitions on the conduct of our business. Our international
operations also subject us to additional foreign currency exchange
rate risks and will require additional management attention and
resources. Our international operations subject us to other
inherent risks, including, but not limited to:
●
the impact of
recessions in economies outside of the United States
●
changes in and
differences between regulatory requirements between
countries
●
U.S. and foreign
export restrictions, including export controls relating to
encryption technologies
●
anti-SPAM laws
and other laws that may differ materially from U.S.
laws
●
reduced
protection for and enforcement of intellectual property rights in
some countries
●
potentially
adverse tax consequences
●
difficulties and
costs of staffing and managing foreign operations
●
political and
economic instability
●
international
conflicts, wars or terrorism
●
tariffs and
other trade barriers
●
seasonal
reductions in business activity
Our
failure to address these risks adequately could materially and
adversely affect our business, revenue, results of operations, cash
flows and financial condition.
We could be materially affected by the fluctuations of the U.S.
Dollar against the Euro, Swiss Franc, South African Rand or British
Pound.
In our
fourth quarter of 2017, approximately 82% of our revenues are
currently generated in U.S. Dollars, while approximately 18% of our
revenues are denominated in other currencies including the Euro,
Swiss Franc, South African Rand and British Pound. Our costs are
generally incurred in similar currencies. Currency exchange rates
can fluctuate dramatically, which will impact the amount of revenue
we will record when translated to U.S. Dollars and will impact the
amount of costs that we incur when translated to U.S. Dollars.
Although our cost currencies are generally aligned to our revenue
currencies, variances exist between the rate we incur costs in each
currency compared to the revenue. Therefore, changes to currency
rates may dramatically impact profitability.
If we do not or cannot maintain the compatibility of our marketing
software with third-party applications that our customers use in
their businesses, our revenue will decline.
The
functionality and popularity of our marketing software depends, in
part, on our ability to integrate our solutions with third-party
applications and platforms, including CRM, event management,
e-commerce, call center, and social media sites that our customers
use and from which they obtain data. Third-party providers of
applications and APIs may change the features of their applications
and platforms, restrict our access to their applications and
platforms or alter the terms governing use of their applications
and APIs and access to those applications and platforms in an
adverse manner. Such changes could functionally limit or terminate
our ability to use these third-party applications and platforms in
conjunction with our solution, which could negatively impact our
offerings and harm our business. If we fail to integrate our
software with new third-party applications and platforms that our
customers use for marketing purposes, we may not be able to offer
the functionality that our customers need, which would negatively
impact our ability to generate revenue and adversely impact our
business.
12
The market in which we participate is competitive and, if we do not
compete effectively, our operating results could be
harmed.
Our
principal competitors include marketing automation companies like
HubSpot, Pardot and Act-On. Companies can also utilize various
point solutions to provide individual marketing capabilities for
things like email campaigns, landing pages, forms and analytics,
which are all features in a marketing automation solution.
Competition could result in reduced sales, reduced margins or the
failure of our products to achieve or maintain more widespread
market acceptance, any of which could harm our
business.
Our
current and potential competitors may have significantly more
financial, technical, marketing and other resources than we do and
may be able to devote greater resources to the development,
promotion, sale and support of their products. Our current and
potential competitors may have more extensive customer bases and
broader customer relationships than we have. In addition, these
companies may have longer operating histories and greater name
recognition than we have and may be able to bundle products with
other products that have gained widespread market acceptance. These
competitors may be better able to respond quickly to new
technologies and to undertake more extensive marketing campaigns.
If we are unable to compete with such companies, the demand for our
products could substantially decline.
Our business is substantially dependent on continued demand for
marketing and email technology and any decrease in demand could
cause us to suffer a decline in revenues and
profitability.
We
derive, and expect to continue to derive, substantially all of our
revenue from organizations, including marketing agencies and small
and medium size businesses, associations and non-profits. As a
result, widespread acceptance of marketing technology among small
and medium size organizations is critical to our future growth and
success. The overall market for marketing automation technology is
relatively new and still evolving, and small organizations have
generally been slower than larger organizations to adopt email
marketing as part of their marketing mix. There is no certainty
regarding how or whether this market will develop, or whether it
will experience any significant contractions. Our ability to
attract and retain customers will depend in part on our ability to
make marketing communications convenient, effective and affordable.
If small and medium size organizations determine that marketing
technology and communication does not sufficiently benefit them,
existing customers may cancel their accounts and potential
customers may decide not to utilize our services.
We are a small public company and the requirements of being a
public company are a strain on our systems and resources, are a
diversion to management’s attention and are
costly.
As a
public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934 (Exchange Act) the Sarbanes-Oxley
Act of 2002 (Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act), and the rules and
regulations of The NASDAQ Stock Market. The requirements of these
rules and regulations increase our legal, accounting and financial
compliance costs, make some activities more difficult,
time-consuming and costly and may also place undue strain on our
personnel, systems and resources.
The
Exchange Act requires, among other things, that we file annual,
quarterly and current reports with respect to our business and
operating results. The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and
procedures and internal control over financial reporting. We are
continuing the costly process of implementing and testing our
systems to report our results as a public company, to continue to
manage our growth and to implement internal controls. We are and
will continue to be required to implement and maintain various
other control and business systems related to our equity, finance,
treasury, information technology, other recordkeeping systems and
other operations. As a result of this implementation and
maintenance, management's attention may be diverted from other
business concerns, which could adversely affect our
business.
In
addition, changing laws, regulations and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a
diversion of management's time and attention from
revenue-generating activities to compliance activities. If our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to their application and practice,
regulatory authorities may initiate legal proceedings against us
and our business may be adversely affected.
13
In
addition, we expect these laws, rules and regulations to make it
more difficult and more expensive for us to obtain director and
officer liability insurance, and we may be required to incur
substantial costs to maintain appropriate levels of coverage. These
factors could also make it more difficult for us to attract and
retain qualified members of our board of directors, particularly to
serve on our audit committee, and qualified executive
officers.
As a
result of being a public company, our business and financial
condition has become more visible, which we believe may result in
threatened or actual litigation, including by competitors and other
third parties. If such claims are successful, our business and
operating results could be adversely affected, and even if the
claims do not result in litigation or are resolved in our favor,
these claims, and the time and resources necessary to resolve them,
could divert the time and resources of our management and adversely
affect our business and operating results.
Risks Related To Our Management
If we fail to retain our key personnel, we may not be able to
achieve our anticipated level of growth and our business could
suffer.
Our
future depends, in part, on our ability to attract and retain key
personnel. Our future also depends on the continued efforts and
abilities of our executive officers, including our Chief Executive
Officer and other key personnel, each of whom would be difficult to
replace. In particular, Richard Carlson, our Chief Executive
Officer and President and Travis Whitton, our Chief Technology
Officer, are critical to the Company’s strategic direction
and product development process. The loss of the services of
Messrs. Carlson, Whitton or other key personnel, and the process to
replace any of our key personnel, would involve significant time
and expense and may significantly delay or prevent the achievement
of our business objectives. We currently do not maintain key person
life insurance on any of our executives. Accordingly, the loss of
the services of any of these persons would adversely affect our
business.
Our anticipated growth in our operations could place a significant
strain on our management team and our administrative, operational
and financial reporting infrastructure.
Our
success will depend in part on the ability of our management team
to effectively manage our growth in our operations. To do so, we
believe we will need to continue to hire, train and manage new
employees as needed. If our new hires perform poorly, or if we are
unsuccessful in hiring, training, managing and integrating these
new employees, or if we are not successful in retaining our
existing employees, our business may be harmed. To manage the
expected growth of our operations and personnel, we will need to
continue to improve our operational and financial controls and
update our reporting procedures and systems. The expected addition
of new employees and the capital investments that we anticipate
will be necessary to manage our anticipated growth will increase
our cost base, which will make it more difficult for us to offset
any future revenue shortfalls by reducing expenses in the short
term. If we fail to successfully manage our anticipated growth, our
business operations could be adversely affected.
A material weakness in internal controls may remain undetected for
a longer period because of our Company's exemption from the auditor
attestation requirements under Section 404(b) of
Sarbanes-Oxley.
Our
annual report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial reporting.
Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to rules
of the Securities and Exchange Commission that permit the Company
to provide only management’s attestation in its annual
report. As a result, a material weakness in our internal controls
may remain undetected for a longer period.
14
Risks Related To Our Systems
Our customers’ use of our products to transmit negative
messages or website links to harmful applications could damage our
reputation, and we may face liability for unauthorized, inaccurate
or fraudulent information distributed via our
services.
Although it is
against our terms and conditions, our customers could use our email
servers to transmit negative messages or website links to harmful
applications, reproduce and distribute copyrighted material without
permission, or report inaccurate or fraudulent data or information.
Any such use of our products could damage our reputation and we
could face claims for damages, copyright or trademark infringement,
defamation, negligence or fraud. Moreover, our customers’
promotion of their products and services through our email
marketing product may not comply with federal, state and foreign
laws. We cannot predict whether our role in facilitating these
activities would expose us to liability under these
laws.
Even if
claims asserted against us do not result in liability, we may incur
substantial costs in investigating and defending such claims. If we
are found liable for our customers’ activities, we could be
required to pay fines or penalties, redesign business methods or
otherwise expend resources to remedy any damages caused by such
actions and to avoid future liability.
Various private spam blacklists have in the past interfered with,
and may in the future interfere with, the effectiveness of our
products and our ability to conduct business.
Our
customers rely on email to communicate with their constituents and
we depend on email to market to and communicate with our customers.
Various private entities attempt to regulate the use of email for
commercial solicitation. These entities often advocate standards of
conduct or practice that significantly exceed current legal
requirements and classify certain email solicitations that comply
with current legal requirements as spam. Some of these entities
maintain “blacklists” of companies and individuals, and
the websites, ISPs and internet protocol addresses associated with
those entities or individuals that do not adhere to those standards
of conduct or practices for commercial email solicitations that the
blacklisting entity believes are appropriate. If a company’s
internet protocol addresses are listed by a blacklisting entity,
emails sent from those addresses may be blocked if they are sent to
any Internet domain or Internet address that subscribes to the
blacklisting entity’s service or purchases its blacklist.
Although we have not owned the internet protocol addresses we
utilize since the sale of the SMTP product, blacklisting of the
internet protocol addresses that the company uses could materially
impact our sending ability.
Our facilities and systems are vulnerable to natural disasters and
other unexpected events and any of these events could result in an
interruption of our ability to execute clients’ email
campaigns.
While
we have established contingency plans for certain potential
disasters, it is possible that an unexpected disaster may occur,
which could interrupt our ability to provide services. We also
depend on the efficient and uninterrupted operations of our
third-party data centers and hardware systems. The data centers and
hardware systems are vulnerable to damage from earthquakes,
tornados, hurricanes, fire, floods, power loss, telecommunications
failures and similar events. If any of these events results in
damage to our facilities or third-party data centers or systems, we
may be unable to operate our services until the damage is repaired,
and may accordingly lose clients and revenues. In addition, subject
to applicable insurance coverage, we may incur substantial costs in
repairing any damage.
System failures could reduce the attractiveness of our service
offerings, which could cause us to suffer a decline in revenues and
profitability.
The
satisfactory performance, reliability and availability of the
technology and the underlying network infrastructure are critical
to our operations, level of client service, reputation and ability
to attract and retain clients. We have experienced periodic
interruptions, affecting all or a portion of our systems, which we
believe will continue to occur from time to time. We are not aware
of any loss of customers due to material service interruptions.
However, any systems damage or interruption that impairs our
ability to accept and fill client orders could result in an
immediate loss of revenue to us, and could cause some clients to
purchase services offered by our competitors. In addition, frequent
systems failures could harm our reputation. Some factors that could
lead to interruptions in customer service include: operator
negligence; improper operation by, or supervision of, employees;
physical and electronic break-ins; misappropriation; computer
viruses and similar events; power loss; computer systems failures;
and Internet and telecommunications failures. We do not carry
sufficient business interruption insurance to fully compensate us
for losses that may occur.
15
Any significant disruption in service on our websites or in our
computer systems, or in our customer support services, could reduce
the attractiveness of our products and result in a loss of
customers.
The
satisfactory performance, reliability and availability of our
technology and our underlying network infrastructure are critical
to our operations, level of customer service, reputation and
ability to attract new customers and retain existing customers. Our
production system hardware and the disaster recovery operations for
our production system hardware are co-located in third-party
hosting facilities. None of the companies who host our systems
guarantee that our customers’ access to our products will be
uninterrupted, error-free or secure. Our operations depend on their
ability to protect their and our systems in their facilities
against damage or interruption from natural disasters, power or
telecommunications failures, air quality, temperature, humidity and
other environmental concerns, computer viruses or other attempts to
harm our systems, criminal acts and similar events. In the event
that our arrangements with third-party data centers are terminated,
or there is a lapse of service or damage to their facilities, we
could experience interruptions in our service as well as delays and
additional expense in arranging new facilities. Any interruptions
or delays in access to our services, whether as a result of a
third-party error, our own error, natural disasters or security
breaches, whether accidental or willful, could harm our
relationships with customers and our reputation. Also, in the event
of damage or interruption, our insurance policies may not
adequately compensate us for any losses that we may incur. These
factors could damage our brand and reputation, divert our
employees’ attention, reduce our revenue, subject us to
liability and cause customers to cancel their accounts, any of
which could adversely affect our business, financial condition and
results of operations.
We rely on third-party cloud computing services that we do not
control could cause errors or failures of our service, which could
cause us to suffer a decline in revenues and
profitability.
We rely
on cloud computing services from third parties that we do not
control in order to offer our products, including Google Compute,
Amazon Web Services, and others. If we lose the right to use these
services or the service malfunctions, our customers could
experience delays or be unable to access our services until we can
obtain and integrate equivalent technology or a repair is made. Any
delays or failures associated with our services could upset our
customers and harm our business.
If we are unable to protect the confidentiality of our unpatented
proprietary information, processes and know-how and our trade
secrets, the value of our technology and services could be
adversely affected.
We rely
upon unpatented proprietary technology, processes and know-how and
trade secrets. Although we try to protect this information in part
by executing confidentiality agreements with our employees,
consultants and third parties, such agreements may offer only
limited protection and may be breached. Any unauthorized disclosure
or dissemination of our proprietary technology, processes and
know-how or our trade secrets, whether by breach of a
confidentiality agreement or otherwise, may cause irreparable harm
to our business, and we may not have adequate remedies for any such
breach. In addition, our trade secrets may otherwise be
independently developed by our competitors or other third parties.
If we are unable to protect the confidentiality of our proprietary
information, processes and know-how or our trade secrets are
disclosed, the value of our technology and services could be
adversely affected, which could negatively impact our business,
financial condition and results of operations.
Our use of open source software could impose limitations on our
ability to commercialize our products, which could cause us to
suffer a decline in revenues and profitability.
Customizations to
open source software code generally require developers to make
their work available at no cost. Since we have created our software
by developing extensions which plug into open source software
without modifying the open source code, we do not believe there is
a risk we could be required to offer our products or make our
source code available. Although we monitor our use of open source
software closely, the terms of many open source licenses to which
we are subject have not been interpreted by United States or
foreign courts, and there is a risk that such licenses could be
construed in a manner that imposes unanticipated conditions or
restrictions on our ability to commercialize our products. In such
event, we could be required to seek licenses from third parties in
order to continue offering our products, to re-engineer our
products or to discontinue sales of our products, or to release our
software code under the terms of an open source license, any of
which could materially adversely affect our business.
Given
the nature of open source software, there is also a risk that third
parties may assert copyright and other intellectual property
infringement claims against us based on our use of certain open
source software programs. The risks associated with intellectual
property infringement claims are discussed immediately
below.
Because we have not filed for patent protection of our
technologies, we face the risk of our technologies not being
adequately protected.
16
We do
not currently have any patents for our proprietary technology and
do not have plans to file for patent protection currently. If we
fail to obtain patents on our technologies and processes, we may be
unable to adequately protect our intellectual property, especially
if the designs and materials used in our products are replicated by
our competitors. Further, even if we file for patent protection,
there is no assurance that it will be approved by the US Patent and
Trademark Office.
If a third party asserts that we are infringing its intellectual
property, whether successful or not, it could subject us to costly
and time-consuming litigation or require us to obtain expensive
licenses, and our business may be adversely affected.
The
software and Internet industries are characterized by the existence
of a large number of patents, trademarks and copyrights and by
frequent litigation based on allegations of infringement or other
violations of intellectual property rights. Third parties may
assert patent and other intellectual property infringement claims
against us in the form of lawsuits, letters or other forms of
communication. These claims, whether or not successful,
could:
●
|
divert
management’s attention;
|
●
|
result
in costly and time-consuming litigation;
|
●
|
require
us to enter into royalty or licensing agreements, which may not be
available on acceptable terms, or at all;
|
●
|
in the
case of open source software-related claims, require us to release
our software code under the terms of an open source license;
or
|
●
|
require
us to redesign our software and services to avoid
infringement.
|
As a
result, any third-party intellectual property claims against us
could increase our expenses and adversely affect our business. In
addition, many of our agreements with our agency partners require
us to indemnify them for third-party intellectual property
infringement claims, which would increase the cost to us resulting
from an adverse ruling on any such claim. Even if we have not
infringed any third parties’ intellectual property rights, we
cannot be sure our legal defenses will be successful, and even if
we are successful in defending against such claims, our legal
defense could require significant financial resources and
management time. Finally, if a third party successfully asserts a
claim that our products infringe its proprietary rights, royalty or
licensing agreements might not be available on terms we find
acceptable or at all and we may be required to pay significant
monetary damages to such third party.
If the security of our customers’ confidential information
stored in our systems is breached or otherwise subjected to
unauthorized access, our reputation may be severely harmed, we may
be exposed to liability and we may lose the ability to offer our
customers a credit card payment option.
Our
system stores our customers’ proprietary email distribution
lists, credit card information and other critical data. Any
accidental or willful security breaches or other unauthorized
access could expose us to liability for the loss of such
information, adverse regulatory action by federal and state
governments, time-consuming and expensive litigation and other
possible liabilities as well as negative publicity, which could
severely damage our reputation. If security measures are breached
because of third-party action, employee error, malfeasance or
otherwise, or if design flaws in our software are exposed and
exploited, and, as a result, a third party obtains unauthorized
access to any of our customers’ data, our relationships with
our customers will be severely damaged, and we could incur
significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and
generally are not recognized until they are launched against a
target, we and our third-party hosting facilities may be unable to
anticipate these techniques or to implement adequate preventative
measures. In addition, many states have enacted laws requiring
companies to notify individuals of data security breaches involving
their personal data. These mandatory disclosures regarding a
security breach often lead to widespread negative publicity, which
may cause our customers to lose confidence in the effectiveness of
our data security measures. Any security breach, whether actual or
perceived, would harm our reputation, and we could lose customers
and fail to acquire new customers.
If we
fail to maintain our compliance with the data protection policy
documentation standards adopted by the major credit card issuers,
we could lose our ability to offer our customers a credit card
payment option. Any loss of our ability to offer our customers a
credit card payment option would make our products less attractive
to many small organizations by negatively impacting our customer
experience and significantly increasing our administrative costs
related to customer payment processing.
We may be the subjected of intentional cyber disruptions and
attacks.
We
expect to be an ongoing target of attacks specifically designed to
impede the performance of our products. Experienced computer
programmers, or hackers, may attempt to penetrate our network
security or the security of our data centers and IT environments.
These hackers, or others, which may include our employees or
vendors, may cause interruptions of our services. Although we
continually seek to improve our countermeasures to prevent and
detect such incidents, if these efforts are not successful, our
business operations, and those of our customers, could be adversely
affected, losses or theft of data could occur, our reputation and
future sales could be harmed, governmental regulatory action or
litigation could be commenced against us and our business,
financial condition, operating results and cash flow could be
materially adversely affected.
17
Risks Related To Our Industry
Existing federal, state and foreign laws regulate Internet tracking
software, the senders of commercial emails and text messages,
website owners and other activities, and could impact the use of
our marketing tools and potentially subject us to regulatory
enforcement or private litigation.
Certain
aspects of how our customers utilize our marketing tools are
subject to regulations in the United States, European Union and
elsewhere. New and expanding “Do Not Track” regulations
have recently been enacted or proposed that protect users' right to
choose whether or not to be tracked online. These regulations seek,
among other things, to allow consumers to have greater control over
the use of private information collected online, to forbid the
collection or use of online information, to demand a business to
comply with their choice to opt out of such collection or use, and
to place limits upon the disclosure of information to third party
websites. These policies could have a significant impact on the
operation of our marketing software and could impair our
attractiveness to customers, which would harm our
business.
Customers and
potential customers in the healthcare, financial services and other
industries are subject to substantial regulation regarding their
collection, use and protection of data and may be the subject of
further regulation in the future. Accordingly, these laws or
significant new laws or regulations or changes in, or repeals of,
existing laws, regulations or governmental policy may change the
way these customers do business and may require us to implement
additional features or offer additional contractual terms to
satisfy customer and regulatory requirements, or could cause the
demand for and sales of our marketing software to decrease and
adversely impact our financial results.
In
addition, U.S., state and foreign jurisdictions are considering and
may in the future enact legislation or laws restricting the ability
to conduct marketing activities in mobile, social and web channels.
Any of the foregoing existing or future restrictions could require
us to change one or more aspects of the way we operate our
business, which could impair our ability to attract and retain
customers, or increase our operating costs or otherwise harm our
business. We may be unable to pass along those costs to our
customers in the form of increased subscription fees.
While
these laws and regulations generally govern our customers’
use of our marketing tools, we may be subject to certain laws as a
data processor on behalf of, or as a business associate of, our
customers. For example, these laws and regulations governing the
collection, use and disclosure of personal information include, in
the United States, rules and regulations promulgated under the
authority of the Federal Trade Commission, the Health Insurance
Portability and Accountability Act of 1996, the Gramm-Leach-Bliley
Act of 1999 and state breach notification laws, and
internationally, the Data Protection Directive in the European
Union and the Federal Data Protection Act in Germany. If we were
found to be in violation of any of these laws or regulations as a
result of government enforcement or private litigation, we could be
subjected to civil and criminal sanctions, including both monetary
fines and injunctive action that could force us to change our
business practices, all of which could adversely affect our
financial performance and significantly harm our reputation and our
business.
Privacy concerns and consumers' acceptance of Internet behavior
tracking may limit the applicability, use and adoption of our
marketing software.
Privacy
concerns may cause consumers to resist providing the personal data
necessary to allow our customers to use our services effectively.
We have implemented various features intended to enable our
customers to better protect consumer privacy, but these measures
may not alleviate all potential privacy concerns and threats. Even
the perception of privacy concerns, whether or not valid, may
inhibit market adoption of our services in certain industries. In
addition to government activity, privacy advocacy groups and the
technology and other industries are considering various new,
additional or different self-regulatory standards that may place
additional burdens on us. There are numerous lawsuits in process
against various technology companies that collect and use personal
information. If those lawsuits are successful, it could impact the
way we conduct our business and adversely affect our financial
results. The costs of compliance with, and other burdens imposed
by, the foregoing laws, regulations, policies and actions may limit
the use and adoption of our cloud-based marketing software and
reduce overall demand for it, or lead to significant fines,
penalties or liabilities for any noncompliance or loss of any such
action.
18
Evolving regulations concerning data privacy may restrict our
customers’ ability to solicit, collect, process and use data
necessary to conduct email campaigns or to analyze the results or
may increase their costs, which could harm our
business.
Federal, state and
foreign governments have enacted, and may in the future enact, laws
and regulations concerning the solicitation, collection, processing
or use of consumers’ personal information. Such laws and
regulations may require companies to implement privacy and security
policies, permit users to access, correct and delete personal
information stored or maintained by such companies, inform
individuals of security breaches that affect their personal
information, and, in some cases, obtain individuals’ consent
to use personal information for certain purposes. Other proposed
legislation could, if enacted, prohibit the use of certain
technologies that track individuals’ activities on web pages
or that record when individuals click through to an Internet
address contained in an email message. Such laws and regulations
could restrict our customers’ ability to collect and use
email addresses, page viewing data, and personal information, which
may reduce demand for our products. They may also negatively impact
our ability to effectively market our products.
The growth of the marketing automation market depends partially on
the continued growth and effectiveness of anti-spam products, which
may be insufficient to enable us to offer our services at a
profit.
Adoption and
retention of email as a communications medium depends on the
ability to prevent junk mail, or “spam,” from
overwhelming a subscriber’s electronic mailbox. In recent
years, many companies have evolved to address this issue and filter
unwanted messages before they reach customers’ mailboxes. In
response, spammers have become more sophisticated and have also
begun using junk messages as a means for fraud. Email protection
companies in turn have evolved to address this new threat. However,
if their products fail to be effective against spam, adoption of
email as a communications tool will decline, which would adversely
affect the market for our services.
Another economic downturn could negatively affect the business
sector, which may cause our customers to terminate existing
accounts with us or cause potential customers to fail to purchase
our products, resulting in a decrease in our revenue and impairing
our ability to operate profitably.
Our
email services are designed specifically for small and medium size
organizations, including small and medium size businesses,
associations and non-profits that frequently have limited budgets
and may be more likely to be significantly affected by economic
downturns than their larger, more established counterparts. Small
organizations may choose to spend the limited funds that they have
on items other than our products and may experience higher failure
rates. Moreover, if small organizations experience economic
hardship, they may be unwilling or unable to expend resources on
marketing, including email marketing, which would negatively affect
the overall demand for our products, increase customer attrition
and could cause our revenue to decline. In addition, we have
limited experience operating our business during an economic
downturn. Accordingly, we do not know if our current business model
will continue to operate effectively during an economic downturn.
Furthermore, we are unable to predict the likely duration and
severity of potential adverse economic conditions in the U.S. and
other countries, but the longer the duration the greater risks we
face in operating our business. There can be no assurance,
therefore, that worsening economic conditions, or a prolonged or
recurring recession, will not have a significant adverse impact on
our operating and financial results.
19
U.S. federal legislation entitled Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003 imposes certain
obligations on the senders of commercial emails, which could
minimize the effectiveness of our email marketing product, and
establishes financial penalties for non-compliance, which could
increase the costs of our business.
The
Controlling the Assault of Non-Solicited Pornography and Marketing
Act of 2003, or CAN-SPAM Act, establishes certain requirements for
commercial email messages and specifies penalties for the
transmission of commercial email messages that are intended to
deceive the recipient as to source or content. The CAN-SPAM Act,
among other things, obligates the sender of commercial emails to
provide recipients with the ability to opt out of receiving future
emails from the sender. In addition, some states have passed laws
regulating commercial email practices that are significantly more
punitive and difficult to comply with than the CAN-SPAM Act,
particularly Utah and Michigan, which have enacted do-not-email
registries listing minors who do not wish to receive unsolicited
commercial email that markets certain covered content, such as
adult or other harmful products. Some portions of these state laws
may not be preempted by the CAN-SPAM Act. The ability of our
customers’ constituents to opt out of receiving commercial
emails may minimize the effectiveness of our email marketing
product. Moreover, non-compliance with the CAN-SPAM Act carries
significant financial penalties. If we were found to be in
violation of the CAN-SPAM Act, applicable state laws not preempted
by the CAN-SPAM Act, or foreign laws regulating the distribution of
commercial email, whether as a result of violations by our
customers or if we were deemed to be directly subject to and in
violation of these requirements, we could be required to pay
penalties, which would adversely affect our financial performance
and significantly harm our business. We also may be required to
change one or more aspects of the way we operate our business,
which could impair our ability to attract and retain customers or
increase our operating costs.
As Internet commerce develops, federal, state and foreign
governments may adopt new laws to regulate Internet commerce, which
may negatively affect our business.
As
Internet commerce continues to evolve, increasing regulation by
federal, state or foreign governments becomes more likely. Our
business could be negatively impacted by the application of
existing laws and regulations or the enactment of new laws
applicable to email communications. The cost to comply with such
laws or regulations could be significant and would increase our
operating expenses, and we may be unable to pass along those costs
to our customers in the form of increased subscription fees. In
addition, federal, state and foreign governmental or regulatory
agencies may decide to impose taxes on services provided over the
Internet or via email. Such taxes could discourage the use of the
Internet and email as a means of commercial marketing and
communications, which would adversely affect the viability of our
services.
Risks Related To Owning Our Securities
We have a history of losses and may not achieve profitability in
the future.
We
generated a net loss from continuing operations of approximately
$5.0 million in 2017. We will need to generate and sustain
increased revenue levels in future periods to become profitable,
and, even if we do, we may not be able to maintain or increase our
level of profitability. We intend to continue to expend significant
funds to expand and grow our marketing automation platform and
obtain new customers. Our efforts to grow our business may be more
costly than we expect, and we may not be able to increase our
revenue enough to offset higher operating expenses. We may incur
significant losses in the future for a number of reasons, including
the other risks described in this Annual Report on Form 10-K, and
unforeseen expenses, difficulties, complications and delays and
other unknown events. If we are unable to achieve and sustain
profitability, the market price of our common stock may
significantly decrease.
We may need additional capital in the future, which may not be
available to us on favorable terms, or at all, and may dilute your
ownership of our common stock.
We have
historically relied on outside financing and cash from operations
to fund our operations, capital expenditures and expansion.
Although the sale of the SMTP email relay business in 2016 provided
the Company with a one-time source of funds, cash from operations
following the divestiture is significantly lower than historic
levels. We may require additional capital from equity or debt
financing in the future to:
●
fund our
operations;
●
respond to
competitive pressures;
●
take advantage
of strategic opportunities, including more rapid expansion of our
business or the acquisition of complementary products, technologies
or businesses; and
●
develop new
products or enhancements to existing products.
20
We may
not be able to secure timely additional financing on favorable
terms, or at all. The terms of any additional financing may place
limits on our financial and operating flexibility. If we raise
additional funds through issuances of equity, convertible debt
securities or other securities convertible into equity, our
existing stockholders could suffer significant dilution in their
percentage ownership of our Company, and any new securities we
issue could have rights, preferences and privileges senior to those
of our common stock. If we are unable to obtain adequate financing
or financing on terms satisfactory to us, if and when we require
it, our ability to grow or support our business and to respond to
business challenges could be significantly limited.
We may expand through acquisitions of, or investments in, other
companies or through business relationships, all of which may
result in additional dilution to our stockholders and consumption
of resources that are necessary to sustain our
business.
One of
the strategies available to us to grow our business would be to
acquire competing or complementary services, technologies or
businesses. We also may enter into relationships with other
businesses in order to expand our service offerings, which could
involve preferred or exclusive licenses, additional channels of
distribution or discount pricing or investments in other
companies.
In
connection with one or more of those transactions, we
may:
●
issue additional
equity securities that would dilute our stockholders;
●
use cash that we
may need in the future to operate our business;
●
incur debt on
terms unfavorable to us or that we are unable to
repay;
●
incur large
charges or substantial liabilities;
●
encounter
difficulties retaining key employees of the acquired company or
integrating diverse business cultures;
●
become subject
to adverse tax consequences, substantial depreciation or deferred
compensation charges; and
●
encounter
unfavorable reactions from investment banking market analysts who
disapprove of our completed acquisitions.
Our board of directors has the authority, without stockholder
approval, to issue preferred stock with terms that may not be
beneficial to existing common stockholders and with the ability to
affect adversely stockholder voting power and perpetuate their
control over us.
Our
certificate of incorporation allows us to issue shares of preferred
stock without any vote or further action by our stockholders. Our
board of directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our board of
directors also has the authority to issue preferred stock without
further stockholder approval, including large blocks of preferred
stock. As a result, our board of directors could authorize the
issuance of a series of preferred stock that would grant to holders
thereof the preferred right to our assets upon liquidation, the
right to receive dividend payments before dividends are distributed
to the holders of common stock or other preferred stockholders and
the right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock or existing preferred
stock, if any.
Preferred stock
could be used to dilute a potential hostile acquirer. Accordingly,
any future issuance of preferred stock or any rights to purchase
preferred stock may have the effect of making it more difficult for
a third party to acquire control of us. This may delay, defer or
prevent a change of control or an unsolicited acquisition proposal.
The issuance of preferred stock also could decrease the amount of
earnings attributable to, and assets available for distribution to,
the holders of our common stock and could adversely affect the
rights and powers, including voting rights, of the holders of our
common stock and preferred stock.
A sale of a substantial number of shares of our common stock may
cause the price of our common stock to decline and may impair our
ability to raise capital in the future.
Our
common stock is traded on The NASDAQ Capital Market and, despite
certain increases of trading volume from time to time, our common
stock is considered “thinly-traded,” meaning that the
number of persons interested in trading our common stock at any
given time may be relatively small or non-existent. Finance
transactions resulting in a large amount of newly issued shares
that become readily tradable, or other events that cause current
stockholders to sell shares, could place downward pressure on the
trading price of our stock. The lack of a robust resale market may
require a stockholder who desires to sell a large number of shares
of common stock to sell the shares in increments over time to
mitigate any adverse impact of the sales on the market price of our
stock.
21
If our
stockholders sell, or the market perceives that our stockholders
intend to sell for various reasons, including the ending of
restriction on resale, substantial amounts of our common stock in
the public market, including shares issued upon the exercise of
outstanding options or warrants, the market price of our common
stock could fall. Sales of a substantial number of shares of our
common stock may make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we
deem reasonable or appropriate. We may become involved in
securities class action litigation that could divert
management’s attention and harm our business.
Our amended certificate of incorporation and bylaws, and certain
provisions of Delaware corporate law, as well as certain of our
contracts, contain provisions that could delay or prevent a change
in control even if the change in control would be beneficial to our
stockholders.
Delaware law, as
well as our amended certificate of incorporation and bylaws,
contains anti-takeover provisions that could delay or prevent a
change in control of our Company, even if the change in control
would be beneficial to our stockholders.
These
provisions could lower the price that future investors might be
willing to pay for shares of our common stock. These anti-takeover
provisions:
●
|
authorize
our board of directors to create and issue, without stockholder
approval, preferred stock, thereby increasing the number of
outstanding shares, which can deter or prevent a takeover
attempt;
|
●
|
prohibit
cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect
director candidates;
|
●
|
empower
our board of directors to fill any vacancy on our board of
directors, whether such vacancy occurs as a result of an increase
in the number of directors or otherwise;
|
●
|
provide
that our board of directors is expressly authorized to adopt, amend
or repeal our bylaws; and
|
●
|
provide
that our directors will be elected by a plurality of the votes cast
in the election of directors.
|
Section
203 of the Delaware General Corporation Law, the terms of our
employee stock option agreements and other contractual provisions
may also discourage, delay or prevent a change in control of our
Company. Section 203 generally prohibits a Delaware corporation
from engaging in a business combination with an interested
stockholder for three years after the date the stockholder became
an interested stockholder. Our employee stock option agreements
include change-in-control provisions that allow us to grant options
or stock purchase rights that may become vested immediately upon a
change in control. The terms of change of control provisions
contained in certain of our senior executive employee agreements
may also discourage a change in control of our Company. Our board
of directors also has the power to adopt a stockholder rights plan
that could delay or prevent a change in control of our Company even
if the change in control is generally beneficial to our
stockholders. These plans, sometimes called “poison
pills,” are oftentimes criticized by institutional investors
or their advisors and could affect our rating by such investors or
advisors. If our board of directors adopts such a plan, it might
have the effect of reducing the price that new investors are
willing to pay for shares of our common stock.
Together, these
charter, statutory and contractual provisions could make the
removal of our management and directors more difficult and may
discourage transactions that otherwise could involve payment of a
premium over prevailing market prices for our common stock.
Furthermore, the existence of the foregoing provisions, as well as
the significant common stock beneficially owned by our founder,
executive officers, and members of our board of directors, could
limit the price that investors might be willing to pay in the
future for shares of our common stock. They could also deter
potential acquirers of our Company, thereby reducing the likelihood
that you could receive a premium for your common stock in an
acquisition.
Our quarterly results may fluctuate and if we fail to meet the
expectations of analysts or investors, our stock price could
decline substantially.
Our
quarterly operating results may fluctuate, and if we fail to meet
or exceed the expectations of securities analysts or investors, the
trading price of our common stock could decline. Some of the
important factors that could cause our revenue and operating
results to fluctuate from quarter to quarter include:
●
our ability to
retain existing customers, attract new customers and satisfy our
customers’ requirements;
●
general economic
conditions;
●
changes in our
pricing policies;
●
our ability to
expand our business;
●
our ability to
successfully integrate our acquired businesses;
22
●
new product and
service introductions;
●
technical
difficulties or interruptions in our services;
●
the timing of
additional investments in our hardware and software
systems;
●
regulatory
compliance costs;
●
costs associated
with future acquisitions of technologies and businesses;
and
●
extraordinary
expenses such as litigation or other dispute-related settlement
payments.
Some of
these factors are not within our control, and the occurrence of one
or more of them may cause our operating results to vary widely. As
such, we believe that quarter-to-quarter comparisons of our revenue
and operating results may not be meaningful and should not be
relied upon as an indication of future performance.
Our common stock is subject to volatility.
We
cannot assure you that the market price for our common stock will
remain at its current level and a decrease in the market price
could result in substantial losses for investors. The market price
of our common stock may be significantly affected by one or more of
the following factors:
●
announcements or
press releases relating to our industry or to our own business or
prospects;
●
regulatory,
legislative, or other developments affecting us or our industry
generally;
●
sales by holders
of restricted securities pursuant to effective registration
statements or exemptions from registration; and
●
market
conditions specific to our company, our industry and the stock
market generally.
If securities or industry analysts do not publish research or
reports about our business, or if they change their recommendations
regarding our stock adversely, our stock price and trading volume
could decline.
The
trading market for our common stock will depend in part on the
research and reports that securities or industry analysts publish
about us or our business. We currently have two independent
research analyst covering our stock and may not obtain additional
research coverage by securities and industry analysts. If no
additional securities or industry analysts commence coverage of us,
the trading price for our common stock could be negatively
affected. In the event any analyst who covers us downgrades our
securities, the price of our securities would likely decline. If
one or more of these analysts ceases to cover us or fails to
publish regular reports on us, interest in the purchase of our
securities could decrease, which could cause the price of our
common stock and its trading volume to decline.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
None
ITEM 2.
PROPERTIES
Our
corporate headquarters is a leased office facility located in
Gainesville, FL.
ITEM
3.
LEGAL
PROCEEDINGS
We
are not a party to any litigation of a material
nature.
ITEM
4.
MINE
SAFETY DISCLOSURES
Not
applicable.
23
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our
common stock trades on The NASDAQ Capital Market under the symbol
“SHSP”. The following table set forth below lists the
range of high and low sales prices for our common stock for our two
most recent fiscal years.
|
|
High
|
Low
|
|
|
|
|
2016 |
1st
Quarter
|
$4.31
|
$2.90
|
|
2nd
Quarter
|
$5.68
|
$3.06
|
|
3rd
Quarter
|
$6.30
|
$4.48
|
|
4th Quarter
|
$5.75
|
$5.01
|
2017 |
1st
Quarter
|
$5.80
|
$4.07
|
|
2nd
Quarter
|
$4.99
|
$3.52
|
|
3rd
Quarter
|
$4.75
|
$3.07
|
|
4th Quarter
|
$4.86
|
$3.27
|
*The
prices in the table reflect inter-dealer prices, without retail
markup, markdown or commission and may not represent actual
transactions or a liquid trading market.
Stockholders
As of
March 9, 2018 we have a total of 8,445,016 shares of common stock
outstanding, held of record by approximately 57 stockholders. We do
not have any shares of preferred stock outstanding.
Dividends
Our
Company did not distribute any cash dividends in 2016 or 2017.
Presently, we do not have any intentions to pay a dividend and our
Loan and Security Agreement with Western Alliance Bank restricts
our ability to pay cash dividends on our common stock and it will
continue to do so for the foreseeable future.
24
Securities Authorized for Issuance under Equity Compensation
Plans
Equity
Compensation Plans as of December 31, 2017.
Equity Compensation Plan Information
Plan
category
|
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants and
rights
(a)
|
Weighted-average
exercise price
of
outstanding
options,
warrants and
rights
(b)
|
Number of
securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities reflected
in column
(a))
(c)
|
Equity compensation
plans approved by security holders (1)
|
1,069,330
|
$5.11
|
548,736
|
Equity compensation
plans not approved by security holders (2)
|
80,000
|
$7.81
|
-0-
|
Total
|
1,149,330
|
$5.30
|
548,736
|
(1)
|
Reflects
our 2010 Employee Stock Plan, as amended for the benefit of our
directors, officers, employees and consultants. We have reserved
1,950,000 shares of common stock for such persons pursuant to that
plan.
|
(2)
|
Comprised
of common stock purchase warrants we issued for
services.
|
Recent Sales of Unregistered Securities
None.
25
ITEM
6.
SELECTED
FINANCIAL DATA
Not
Applicable.
26
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this report contains forward-looking statements.
All statements other than statements of historical fact made in
this report are forward looking. In particular, the statements
herein regarding industry prospects and future results of
operations or financial position are forward-looking statements.
These forward-looking statements can be identified by the use of
words such as “believes,” “estimates,”
“could,” “possibly,”
“probably,” anticipates,” “projects,”
“expects,” “may,” “will,” or
“should” or other variations or similar words. No
assurances can be given that the future results anticipated by the
forward-looking statements will be achieved. Forward-looking
statements reflect management’s current expectations and are
inherently uncertain. Our actual results may differ significantly
from management’s expectations.
The following discussion and analysis should be read in conjunction
with our 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.
Background Overview
We
provide SaaS based marketing technologies to customers around the
world. Our focus is on marketing automation tools that enable
businesses to generate more leads, convert more leads to sales and
measure the effectiveness of the marketing campaigns being used.
The platform has tools that enable more efficient and effective
communication with a lead to nurture potential customers using
advanced features until that lead becomes a qualified sales lead or
customer. We offer our premium SharpSpring marketing automation
solution as well as SharpSpring Mail+, which is a subset of the
full suite solution that is focused on more traditional email
marketing while also including some of the advanced functionality
available in our premium offering. During 2016, we discontinued the
GraphicMail email marketing product and migrated those customers to
our SharpSpring Mail+ product. On June 27, 2016, we sold our SMTP
email relay service which provided customers with the ability to
increase the deliverability of email with less time, cost and
complexity than handling it themselves.
In
addition to our growth through strategic acquisitions in 2014, 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 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.
On
August 15, 2014, we acquired the SharpSpring product when we
acquired substantially all the assets and assumed certain
liabilities of RCTW LLC (formerly called SharpSpring LLC), a
Delaware limited liability company. Those assets were assigned to
our wholly owned subsidiary SharpSpring Technologies, Inc.
(formerly called SharpSpring, Inc.).
On
October 17, 2014, we acquired the GraphicMail group companies
(“GraphicMail”) consisting of InterInbox SA, a Swiss
corporation, InterCloud Ltd, a Gibraltar limited company, ERNEPH
2012A (Pty) Ltd. dba ISMS, a South African limited company, ERNEPH
2012B (Pty) Ltd. dba GraphicMail South Africa, a South African
limited company, and Quattro Hosting LLC, a Delaware limited
liability company. Prior to its discontinuation in the middle of
2016, GraphicMail operated as an email campaign management
solution, enabling customers to create content and manage emails
being sent to customers and distribution lists.
On
December 1, 2015, we changed our name from SMTP, Inc. to
SharpSpring, Inc., and we changed the name of our SharpSpring
operating subsidiary from SharpSpring, Inc. to SharpSpring
Technologies, Inc.
On
June 27, 2016, we sold the assets related to our SMTP email relay
service.
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 as of the dates of their
respective acquisitions.
27
Results of Operations
Year Ended December 31, 2017 Compared to the Year Ended December
31, 2016
|
|
|
|
Percent
|
|
|
|
Change
|
Change
|
|
Year Ended December 31,
|
from
|
from
|
|
|
2017
|
2016
|
Prior Year
|
Prior Year
|
Revenues and Cost of Sales:
|
|
|
|
|
Revenues
|
$13,448,752
|
$11,541,702
|
$1,907,050
|
17%
|
Cost
of Sales
|
4,996,745
|
4,462,440
|
534,305
|
12%
|
Gross
Profit
|
$8,452,007
|
$7,079,262
|
$1,372,745
|
19%
|
Revenues from continuing operations increased for
the year ended December 31, 2017 as compared to the year ended
December 31, 2016, primarily due to growth in our SharpSpring
marketing automation customer base. Revenues for our flagship marketing automation
platform increased to $12.8 million in 2017 from $9.1 million in
2016. This growth in revenues was offset by reduced revenue from
our traditional email marketing products (SharpSpring Mail+ and
GraphicMail) which declined from $2.4 million in 2016 to $0.7
million in 2017. We experienced high attrition levels during
the final nine months of 2016 following the migration of customers
from the GraphicMail platform to the SharpSpring Mail+ platform. We
expect revenue to increase in 2018 from net new SharpSpring
customers acquired during 2018 and the realization of the full-year
value of the customers acquired throughout 2017.
Cost of
services increased for the year ended
December 31, 2017 as compared to the year ended December 31, 2016 primarily due
to costs to support increased revenues and incremental business
from new customer additions to SharpSpring. As a percentage of
revenues, cost of services was 37% of revenues for the year ended December
31, 2017 and 39% of revenues during the year ended December 31,
2016. Although costs increased for support resources related to
business growth, the Company achieved some operating leverage with
increased revenues compared to the prior year. We expect costs of
services to increase in 2018 in dollar terms, but decrease slightly
as a percent of revenue, as we add more costs to support customer
growth but also create operating leverage in our support and
hosting infrastructure.
|
|
|
|
Percent
|
|
|
|
Change
|
Change
|
|
Year Ended December 31,
|
from
|
from
|
|
|
2017
|
2016
|
Prior Year
|
Prior Year
|
Operating expenses:
|
|
|
|
|
Sales
and marketing
|
$6,983,208
|
$5,340,351
|
$1,642,857
|
31%
|
Research
and development
|
2,883,714
|
2,308,650
|
575,064
|
25%
|
General
and administrative
|
5,346,136
|
4,418,500
|
927,636
|
21%
|
Change
in earn out liability
|
-
|
219,473
|
(219,473)
|
-100%
|
Intangible
asset amortization
|
527,468
|
1,360,105
|
(832,637)
|
-61%
|
Impairment
of intangible assets
|
-
|
1,459,541
|
(1,459,541)
|
-100%
|
|
$15,740,526
|
$15,106,620
|
$633,906
|
4%
|
Sales
and marketing expenses increased for the year ended December 31,
2017 as compared to the year ended December 31, 2016. The increase
was primarily due to an increase in marketing program spending for
various lead generation activities, which increased by $1.5 million
from last year. Additionally, we experienced an increase in
marketing employee-related costs due to recent hires, offset by
reductions in sales team employee costs associated with the
consolidation and closure of international offices. We expect sales
and marketing expenses to increase in 2018 as we devote more
resources to acquiring new customers.
Research and
development expenses increased for the year ended December 31, 2017
as compared to the year ended December 31, 2016 primarily due to
additional hiring of development and quality assurance staff since
last year. Employee-related costs for this group increased by
approximately $522,000 in the year ended December 31, 2017 compared
to the same period in 2016. We expect research and development
spend to increase in 2018 as we increase our team to support future
product development commensurate with the growth of our
business.
28
General
and administrative expenses increased for the year ended December
31, 2017 as compared to the year ended December 31, 2016, with
higher employee related costs associated with business growth,
higher facilities costs, and higher depreciation. We expect general
and administrative expenses to increase slightly in dollar terms
and decrease as a percent of revenue in 2018, as we add costs to
support general business growth.
The acquisitions of SharpSpring and GraphicMail
included liability-based contingent consideration which was
re-measured during each reporting period until the ultimate
settlement in the first half of 2016. These re-measurements
resulted in additional charges that are recorded on the
Consolidated Statements of Comprehensive Income (Loss). During
the year ended December 31, 2016, we incurred a charge of $222,000 related to
the adjustment to the earn out liability for SharpSpring and $2,527
benefit related to the earn out liability for GraphicMail. There
were no such charges recorded in 2017.
Amortization of
intangible assets decreased for the year ended December 31, 2017 as
compared to the year ended December 31, 2016 due primarily to the
reduction of amortization related to the GraphicMail customer
relationship intangibles. During the fourth quarter of 2016, the
Company accelerated the amortization expense for the majority of
the GraphicMail customer relationship intangible values, which
reduced future amortization expense compared to prior levels. We
expect amortization expense to decrease slightly in
2018.
In
2016, a decline in revenues related to the former GraphicMail
customer base (migrated to SharpSpring Mail+) created an impairment
in our customer relationship intangible assets and we recorded an
impairment of intangible assets of approximately $1.5
million.
|
|
|
|
Percent
|
|
|
|
Change
|
Change
|
|
Year Ended December 31,
|
from
|
from
|
|
|
2017
|
2016
|
Prior Year
|
Prior Year
|
Other
|
|
|
|
|
Other
income (expense), net
|
$209,173
|
$442,195
|
$(233,022)
|
-53%
|
Provision
(benefit) for income tax
|
$(2,104,108)
|
$(1,869,188)
|
$(234,920)
|
13%
|
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.
However, during the year ended December 31, 2016, the Company
recorded a gain related to a favorable claim from the GraphicMail
escrow hold-back account of $259,760. Additionally, during the year
ended December 31, 2017, the Company recorded other income in the
amount of $57,825 related to the performance of services pursuant
to the transition services agreement associated with the SMTP email
relay product sale.
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 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 year ended December 31, 2017 and 2016, our income tax benefit
from continuing operations 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.
29
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Change
|
|
Change
|
|
Year Ended December 31,
|
|
from
|
|
from
|
||
|
2017
|
|
2016
|
|
Prior Year
|
|
Prior Year
|
Discontinued operations
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
$ -
|
|
$10,666,985
|
|
($10,666,985)
|
|
-100%
|
Discontinued
operations, net of tax, represents revenue, offset by expenses and
taxes, related to our SMTP email relay business that was sold on
June 27, 2016 to an unrelated third party.
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
sometimes received in advance of providing the services, yielding a
deferred revenue liability on our consolidated balance sheet. On
June 27, 2016, we sold our SMTP email relay business for
approximately $15.0 million, approximately $14.0 million of which
was received during the second quarter of 2016 and $1.0 million of
which was received in the second quarter of 2017. From time to
time, we also raise funds from offering our common stock for sale
to new and existing investors. Additionally, in March 2016, the Company obtained a $2.5 million
revolving credit facility to provide additional financing
flexibility in the future. No amounts have been borrowed under the
facility to date and based on the borrowing base calculations,
approximately $2.0 million was available under the facility as of
December 31, 2017.
Our
primary sources of cash outflows from operations include payroll
and payments to vendors and third party service providers. During
2016, we also acquired customer relationship assets for cash from
several former GraphicMail third party resellers. Additionally, we
disbursed $207,929 of cash in March 2016 for an earn out payment to
the former GraphicMail shareholders and $1.0 million in June 2016
for an earn out payment to the former SharpSpring
shareholders.
Analysis of Cash Flows
Net
cash used in operating activities from our continuing operations
improved by $4.3 million to $4.1 million used in operations for the
year ended December 31, 2017, compared to $8.3 million used in
operations for the year ended December 31, 2016. The improvement in
cash used in operating activities was attributable primarily to
lower tax payments and stronger cash collections from customers
during 2017 compared to 2016.
Net cash used in investing activities from our
continuing operations was $0.2 million during the year ended December 31, 2017 compared
to $1.2 million during the year
ended December 31, 2016. The reduction in cash used for
investing activities relates to less cash paid to several former
GraphicMail third-party resells to acquire customer relationship
assets in 2017 compared to 2016. Additionally, the Company had
higher purchases of fixed assets in the third quarter of 2016
associated with furniture and fixtures related to its new
headquarters building.
Net
cash provided by financing activities was $22,133 during the year
ended December 31, 2017 compared to net cash used in financing
activities of $1.2 million during the year ended December
31, 2016. During the year
ended December 31, 2016, the Company paid $1 million to the former
SharpSpring shareholders and $207,929 to the former GraphicMail
shareholders related to earn out payments from those 2014
acquisitions.
We had
net working capital of approximately $6.9 million and $10.4 million
as of December 31, 2017 and December
31, 2016, respectively. Our cash balance was $5.4 million at
December 31, 2017 compared to $8.7 million at December 31, 2016,
reflecting cash used for operations and investing activities during
the period, offset by $1.0 million received in June 2017 related to
the escrow hold back from the SMTP business disposition in
2016.
30
Contractual Obligations
We
typically rent our office facilities with leases involving
multi-year commitments. Although some of our service contracts are
on a month-to-month basis, we sometimes enter into non-cancelable
service contracts for longer periods of time, some of which may
last several years. Future minimum lease payments and payments due
under non-cancelable service contracts are as follows as of
December 31, 2017:
2018
|
$483,204
|
2019
|
373,015
|
2020
|
382,884
|
2021
|
292,843
|
2022
|
-
|
Thereafter
|
-
|
|
$1,531,946
|
Significant Accounting Policies
Our
significant accounting policies, including the assumptions and
judgments underlying them, are disclosed in the Notes to the
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, and it is
unlikely that material different amounts would be reported under
different assumptions.
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.
New Accounting Pronouncements
For
information on recent accounting pronouncements, see Recently Issued Accounting
Pronouncements in the notes to the consolidated financial
statements appearing elsewhere in this Annual Report on Form
10-K.
31
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
Applicable.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements included in this annual report under this item
are set forth beginning on Page F-1 of this Annual Report,
immediately following the signature pages.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not
Applicable.
ITEM
9A.
CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of
the end of the period covered by this report, our Company evaluated
the effectiveness and design and operation of its disclosure
controls and procedures. Our Company’s disclosure controls
and procedures are the controls and other procedures that we
designed to ensure that our Company records, processes, summarizes,
and reports in a timely manner the information that it must
disclose in reports that our Company files with or submits to the
Securities and Exchange Commission. Our principal executive officer
and principal financial officer reviewed and participated in this
evaluation. Based on this evaluation, our Company made the
determination that its disclosure controls and procedures were
effective.
Management's Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined
in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the
supervision and with the participation of management, including our
principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal
controls over financial reporting based on the framework in
Internal Control -Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). Based on this evaluation, management has concluded that
our internal control over financial reporting was effective as of
December 31, 2017.
The
Company’s internal control over financial reporting includes
policies and procedures that (1) pertain to maintenance of records
that, in reasonable detail, accurately and fairly reflect
transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the Company's assets that could have a material
effect on the financial statements.
Our
management, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls or
our internal control over financial reporting will prevent or
detect all errors and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not
absolute, assurance that the control system's objectives will be
met. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. In addition,
the design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and controls may
become inadequate if conditions change. There can be no assurance
that any design will succeed in achieving its stated goals under
all potential future conditions.
This annual report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial reporting.
Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to rules
of the Securities and Exchange Commission that permit the Company
to provide only management’s attestation in this annual
report.
Changes in Company Internal Controls
Throughout 2017 and
during the fourth quarter of 2017, the Company made several
improvements to its internal control over financial reporting
practices. The Company strengthened its accounting team, improved
review controls, improved its segregation of duties and implemented
new policies related to expense management that improved internal
controls over financial reporting.
ITEM
9B.
OTHER
INFORMATION
Not
Applicable.
32
PART III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information required by this Item is incorporated by reference from
the information contained within our Company’s definitive
proxy statement for the 2018 Annual Meeting of
Stockholders.
ITEM
11.
EXECUTIVE
COMPENSATION
The
information required by this Item is incorporated by reference from
our Proxy Statement to be filed prior to the 2018 Annual Meeting of
Stockholders.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information required by this Item is incorporated by reference from
our Proxy Statement to be filed prior to the 2018 Annual Meeting of
Stockholders.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by this Item is incorporated by reference from
our Proxy Statement to be filed prior to the 2018 Annual Meeting of
Stockholders.
ITEM
14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information required by this Item is incorporated by reference from
our Proxy Statement to be filed prior to the 2018 Annual Meeting of
Stockholders.
33
PART IV
ITEM
15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a)
Documents filed as part of this report:
1.
Financial Statements and
Reports
The
financial statements included in Part II, Item 8 of this Annual
Report on Form 10-K are filed as part of this Report.
2.
Financial Statements Schedule
Other
financial statement schedules have been omitted because either the
required information (i) is not present, (ii) is not present in
amounts sufficient to require submission of the schedule or (iii)
is included in the Financial Statements and Notes thereto under
Part II, Item 8 of this Annual Report on Form 10-K.
3.
Exhibits
The
exhibit list in the Index to Exhibits is incorporated herein by
reference as the list of exhibits required as part of this
Report.
ITEM
16.
FORM
10–K SUMMARY
None.
34
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) 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 on March
15, 2018.
|
SharpSpring, Inc.
|
|
|
|
|
|
By:
|
/s/
Richard A. Carlson
|
|
|
Richard
A. Carlson
|
|
|
Chief
Executive Officer and President
(Principal
Executive Officer)
|
|
|
|
Pursuant to the
requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Richard A. Carlson
|
|
Chief
Executive Officer and President (Principal Executive Officer),
Director
|
|
March
15, 2018
|
Richard
A. Carlson
|
|
|||
|
|
|
|
|
/s/
Edward S. Lawton
|
|
Chief
Financial Officer (Principal Financial Officer)
|
|
March
15, 2018
|
Edward
S. Lawton
|
|
|
|
|
|
|
|
|
|
/s/
Steven A. Huey
|
|
Chair
of the Board of Directors
|
|
March
15, 2018
|
Steven
A. Huey
|
|
|
|
|
|
|
|
|
|
/s/
Marietta Davis
|
|
Director
|
|
March
15, 2018
|
Marietta
Davis
|
|
|
|
|
|
|
|
|
|
/s/
John L. Troost
|
|
Director
|
|
March
15, 2018
|
John L.
Troost
|
|
|
|
|
|
|
|
|
|
/s/
David A. Buckel
|
|
Director
|
|
March
15, 2018
|
David
A. Buckel
|
|
|
|
|
|
|
|
|
|
/s/ Roy
W. Olivier
|
|
Director
|
|
March
15, 2018
|
Roy W.
Olivier
|
|
|
|
|
|
|
|
|
|
35
INDEX TO FINANCIAL STATEMENTS
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Comprehensive Loss
|
F-4
|
Consolidated
Statement of Changes in Shareholders’ Equity
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to the Consolidated Financial Statements
|
F-7
|
F-1
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and Stockholders of SharpSpring,
Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of
SharpSpring, Inc. (the Company) (f/k/a SMTP, Inc.) as of December
31, 2017 and 2016, and the related consolidated statements of
comprehensive loss, changes in stockholders’ equity, and cash
flows for each of the years in the two-year period ended December
31, 2017, and the related notes (collectively referred to as the
financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of
its operations and its cash flows for each of the years in the
two-year period ended December 31, 2017, in conformity with
accounting principles generally accepted in the United States of
America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe our audits provide a reasonable basis for
our opinion.
/s/ Cherry Bekaert LLP
We have
served as the Company’s auditor since 2016.
Atlanta,
Georgia
March
15, 2018
F-2
SHARPSPRING, INC.
CONSOLIDATED BALANCE SHEETS
|
December 31,
|
December 31,
|
|
2017
|
2016
|
Assets
|
|
|
Cash
and cash equivalents
|
$5,399,747
|
$8,651,374
|
Accounts
receivable, net of allowance for doubtful accounts of $526,127 and
$508,288 at December 31, 2017 and December 31, 2016,
respectively
|
639,959
|
1,261,923
|
Income
taxes receivable
|
2,132,616
|
1,355,180
|
Other
current assets
|
267,924
|
1,396,642
|
Total
current assets
|
8,440,246
|
12,665,119
|
|
|
|
Property
and equipment, net
|
799,145
|
905,345
|
Goodwill
|
8,872,898
|
8,845,394
|
Other
intangible assets, net
|
2,326,000
|
2,850,635
|
Deferred
income taxes
|
-
|
32,996
|
Deposits
and other
|
25,000
|
30,464
|
Total
assets
|
$20,463,289
|
$25,329,953
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
Accounts
payable
|
$504,901
|
$498,534
|
Accrued
expenses and other current liabilities
|
625,680
|
953,171
|
Deferred
revenue
|
279,818
|
280,159
|
Income
taxes payable
|
171,384
|
484,349
|
Total
current liabilities
|
1,581,783
|
2,216,213
|
|
|
|
Deferred
income taxes
|
168,132
|
195,495
|
Total
liabilities
|
1,749,915
|
2,411,708
|
Commitments and contingencies (Note 17)
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
Preferred
stock, $0.001 par value, 5,000,000 shares authorized, no shares
issued or outstanding at December 31, 2017 and December 31,
2016
|
-
|
-
|
Common
stock, $0.001 par value, Authorized shares-50,000,000; issued
shares-8,456,061 at December 31, 2017 and 8,380,663 at December 31,
2016; outstanding shares-8,436,061 at December 31, 2017 and
8,360,663 at December 31, 2016
|
8,456
|
8,381
|
Additional
paid in capital
|
28,362,397
|
27,556,398
|
Accumulated
other comprehensive loss
|
(480,762)
|
(445,055)
|
Accumulated
deficit
|
(9,092,717)
|
(4,117,479)
|
Treasury
stock
|
(84,000)
|
(84,000)
|
Total
shareholders' equity
|
18,713,374
|
22,918,245
|
|
|
|
Total
liabilities and shareholders' equity
|
$20,463,289
|
$25,329,953
|
|
|
|
See
accompanying notes to the consolidated financial
statements.
F-3
SHARPSPRING, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|
Year
Ended
|
|
|
December
31,
|
|
|
2017
|
2016
|
Revenue
|
$13,448,752
|
$11,541,702
|
|
|
|
Cost
of services
|
4,996,745
|
4,462,440
|
Gross
profit
|
8,452,007
|
7,079,262
|
|
|
|
Operating
expenses:
|
|
|
Sales
and marketing
|
6,983,208
|
5,340,351
|
Research
and development
|
2,883,714
|
2,308,650
|
General
and administrative
|
5,346,136
|
4,418,500
|
Change
in earn out liability
|
-
|
219,473
|
Intangible
asset amortization
|
527,468
|
1,360,105
|
Impairment
of intangible assets
|
-
|
1,459,541
|
|
|
|
Total
operating expenses
|
15,740,526
|
15,106,620
|
|
|
|
Operating
loss
|
(7,288,519)
|
(8,027,358)
|
Other
income, net
|
209,173
|
442,195
|
|
|
|
Loss
before income taxes
|
(7,079,346)
|
(7,585,163)
|
Benefit
for income tax
|
(2,104,108)
|
(1,869,188)
|
Net
loss from continuing operations
|
(4,975,238)
|
(5,715,975)
|
Net
income from discontinued operations, net of tax
|
-
|
10,666,985
|
Net
(loss) income
|
$(4,975,238)
|
$4,951,010
|
|
|
|
Net loss per share from continuing operations
|
|
|
Basic
net loss per share
|
$(0.59)
|
$(0.72)
|
Diluted
net loss per share
|
$(0.59)
|
$(0.72)
|
|
|
|
Net income per share from discontinued operations
|
|
|
Basic
net income per share
|
$-
|
$1.35
|
Diluted
net income per share
|
$-
|
$1.35
|
|
|
|
Net
(loss) income per share
|
|
|
Basic
net (loss) income per share
|
$(0.59)
|
$0.63
|
Diluted
net (loss) income per share
|
$(0.59)
|
$0.63
|
|
|
|
Shares
used in computing basic net (loss) income per share
|
8,395,319
|
7,895,197
|
Shares
used in computing diluted net (loss) income per share
|
8,395,319
|
7,895,197
|
|
|
|
Other
comprehensive income (loss):
|
|
|
Foreign
currency translation adjustment
|
(35,707)
|
(302,442)
|
Comprehensive
(loss) income
|
$(5,010,945)
|
$4,648,568
|
See
accompanying notes to the consolidated financial
statements.
F-4
SHARPSPRING, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’
EQUITY
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Additional
|
Other
|
|
|
|
|
|
Common
Stock
|
Paid in
|
Comprehensive
|
Treasury
Stock
|
Accumulated
|
|
||
|
Shares
|
Amount
|
Capital
|
Loss
|
Shares
|
Amount
|
Deficit
|
Total
|
Balance,
December 31, 2015
|
7,233,035
|
$7,233
|
$22,607,290
|
$(142,613)
|
-
|
$-
|
$(9,068,488)
|
$13,403,422
|
Stock
based compensation - stock options
|
-
|
-
|
510,002
|
-
|
-
|
-
|
-
|
510,002
|
Issuance
of common stock for cash
|
3,088
|
3
|
12,214
|
-
|
-
|
-
|
-
|
12,217
|
Issuance
of common stock for services
|
50,976
|
51
|
220,479
|
-
|
-
|
-
|
-
|
220,530
|
Issuance
of common stock for earn out payment
|
1,093,564
|
1,094
|
4,206,835
|
-
|
-
|
-
|
-
|
4,207,929
|
Receipt
of treasury shares of shares
|
-
|
-
|
-
|
-
|
20,000
|
(84,000)
|
-
|
(84,000)
|
Tax
benefit from stock-based award activity, net
|
-
|
-
|
(422)
|
-
|
-
|
-
|
-
|
(422)
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
(302,442)
|
-
|
-
|
-
|
(302,442)
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
4,951,010
|
4,951,010
|
Balance,
December 31, 2016
|
8,380,663
|
8,381
|
27,556,398
|
(445,055)
|
20,000
|
(84,000)
|
(4,117,479)
|
22,918,245
|
Stock
based compensation - stock options
|
-
|
-
|
510,978
|
-
|
-
|
-
|
-
|
510,978
|
Issuance
of common stock for cash
|
15,387
|
15
|
22,105
|
-
|
-
|
-
|
-
|
22,120
|
Issuance
of common stock for services
|
60,011
|
60
|
272,916
|
-
|
-
|
-
|
-
|
272,976
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
(35,707)
|
-
|
-
|
-
|
(35,707)
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,975,238)
|
(4,975,238)
|
Balance,
December 31, 2017
|
8,456,061
|
$8,456
|
$28,362,397
|
$(480,762)
|
20,000
|
$(84,000)
|
$(9,092,717)
|
$18,713,374
|
See
accompanying notes to the consolidated financial
statements.
F-5
SHARPSPRING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year
Ended
|
|
|
December
31,
|
|
|
2017
|
2016
|
Cash
flows from operating activities:
|
|
|
Net
(loss) income
|
$(4,975,238)
|
$4,951,010
|
Deduct:
Income from discontinued operations, net of income
taxes
|
-
|
10,666,985
|
Net
loss from continuing operations
|
(4,975,238)
|
(5,715,975)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation
and amortization
|
807,574
|
2,978,798
|
Non-cash
stock compensation
|
783,942
|
705,649
|
Deferred
income taxes
|
5,618
|
167,757
|
Loss
on disposal of property and equipment
|
3,481
|
128,978
|
Non-cash
change in value of earn out liability
|
-
|
219,473
|
Non-cash
gain from escrow claim
|
-
|
(84,000)
|
Unearned
foreign currency gain/loss
|
(70,769)
|
(185,414)
|
Changes in operating assets and
liabilities:
|
|
|
Accounts
receivable
|
665,296
|
(499,516)
|
Other
assets
|
136,771
|
(210,715)
|
Income
taxes, net
|
(1,105,771)
|
(5,706,659)
|
Accounts
payable
|
(22,860)
|
(156,081)
|
Accrued
expenses and other current liabilities
|
(272,133)
|
271,058
|
Deferred
revenue
|
(8,795)
|
(246,721)
|
Net
cash used in operating activities - Continuing
operations
|
(4,052,884)
|
(8,333,368)
|
Net
cash provided by operating activities - Discontinued
operations
|
-
|
1,265,364
|
Net
cash used in operating activities
|
(4,052,884)
|
(7,068,004)
|
|
|
|
Cash
flows from investing activities:
|
|
|
Purchases
of property and equipment
|
(177,110)
|
(455,506)
|
Acquisitions
of customer assets from resellers
|
(64,268)
|
(724,678)
|
Net
cash used in investing activities - Continuing
operations
|
(241,378)
|
(1,180,184)
|
Net
cash provided by investing activities - Discontinued
operations
|
1,000,000
|
13,945,548
|
Net
cash provided by investing activities
|
758,622
|
12,765,364
|
|
|
|
Cash
flows from financing activities:
|
|
|
Payment
to reduce earn out
|
-
|
(1,207,929)
|
Proceeds
from exercise of stock options
|
22,133
|
12,217
|
Excess
tax benefits from share-based payments
|
-
|
(422)
|
Net
cash provided by (used in) financing activities - Continuing
operations
|
22,133
|
(1,196,134)
|
Net
cash provided by financing activities - Discontinued
operations
|
-
|
-
|
Net
cash provided by (used in) financing activities
|
22,133
|
(1,196,134)
|
|
|
|
Effect
of exchange rate on cash
|
20,502
|
(8,498)
|
|
|
|
Change
in cash and cash equivalents
|
(3,251,627)
|
4,492,728
|
|
|
|
Cash
and cash equivalents, beginning of period
|
8,651,374
|
4,158,646
|
|
|
|
Cash
and cash equivalents, end of period
|
$5,399,747
|
$8,651,374
|
Supplemental
information on consolidated statements of cash
flows:
|
|
|
|
||
Cash
paid for income taxes, net
|
$(556,291)
|
$3,643,858
|
|
|
|
|
||
Supplemental
information on non-cash investing and financing
activities:
|
||
Receipt
of common stock for escrow claim
|
$-
|
$84,000
|
Settlement
of earn out liabilities with common stock
|
$-
|
$(4,207,929)
|
Other
receivable created for sale of SMTP email relay
business
|
$-
|
$(1,000,000)
|
|
|
|
See
accompanying notes to the consolidated financial
statements.
F-6
SHARPSPRING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
We were
incorporated in Massachusetts in October 1998 as EMUmail, Inc.
During 2010, we changed our name to SMTP.com, then later
reincorporated in the State of Delaware and changed our name to
SMTP, Inc. In December 2015, we changed our name to SharpSpring,
Inc. and changed the name of our SharpSpring product U.S. operating
subsidiary from SharpSpring, Inc. to SharpSpring Technologies,
Inc.
In June
2016, we sold the assets related to our SMTP email relay product to
the Electric Mail Company, a Nova Scotia company. See Note 5 for
details of this disposition.
Our
Company focuses on providing 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. Prior to June 27, 2016, our Company also provided
cloud-based email relay delivery services to its
customers.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The
accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America (U.S. GAAP). Our
Consolidated Financial Statements include the accounts of
SharpSpring, Inc. and our subsidiaries (“the Company”).
Our Consolidated Financial Statements reflect the elimination of
all significant inter-company accounts and
transactions.
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
F-7
U.S.
GAAP establishes a fair value hierarchy which has three levels
based on the reliability of the inputs to determine the fair value.
These levels include: Level 1, defined as inputs such as unadjusted
quoted prices in active markets for identical assets or
liabilities; Level 2, defined as inputs other than quoted prices in
active markets that are either directly or indirectly observable;
and Level 3, defined as unobservable inputs for use when little or
no market data exists, therefore requiring an entity to develop its
own assumptions.
The
Company’s financial instruments consist of cash and cash
equivalents, accounts receivable, deposits and accounts payable.
The carrying amount of cash and cash equivalents, accounts
receivable and accounts payable approximates fair value because of
the short-term nature of these items.
Accounts Receivable
Accounts receivable are carried at the original invoiced amount
less an allowance for doubtful accounts based on the probability of
future collection. Management reviews accounts receivable on
a periodic basis to determine if any receivables will potentially
be uncollectible. The Company reserves for receivables that are
determined to be uncollectible, if any, in its allowance for
doubtful accounts. The Company had an allowance for doubtful
accounts of $526,127 and $508,288 as of December 31, 2017 and 2016,
respectively. After the Company has exhausted all collection
efforts, the outstanding receivable is written off against the
allowance.
Intangibles
Finite-lived intangible assets include trade names, developed
technologies and customer relationships and are amortized based on
the estimated economic benefit over their estimated useful lives,
with original periods ranging from 5 to 11 years. We continually
evaluate the reasonableness of the useful lives of these assets.
Finite-lived intangibles are tested for recoverability whenever
events or changes in circumstances indicate the carrying amounts
may not be recoverable. Impairment losses are measured as
the amount by which the carrying value of an asset group exceeds
its fair value and are recognized in operating results. Judgment is
used when applying these impairment rules to determine the timing
of the impairment test, the undiscounted cash flows used to assess
impairments and the fair value of an asset group. The dynamic
economic environment in which the Company operates and the
resulting assumptions used to estimate future cash flows impact the
outcome of these impairment tests.
Goodwill and Impairment
As of December 31, 2017 and 2016, we had recorded goodwill of
$8,872,898 and $8,845,394, respectively. Goodwill consists of the
excess of the purchase price over the fair value of tangible and
identifiable intangible net assets acquired in the SharpSpring and
GraphicMail acquisitions (See Note 3). Under FASB ASC 350,
“Intangibles
- Goodwill and Other” deemed to have indefinite lives are no longer
amortized but are subject to annual impairment tests, and tests
between annual tests in certain circumstances, based on estimated
fair value in accordance with FASB ASC 350-10, and written down
when impaired.
Income Taxes
Provision
for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between
the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported
amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or
settled as prescribed in FASB ASC 740, Accounting for Income Taxes. As changes
in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. A
valuation allowance is established to reduce deferred tax assets if
it is more likely than not that a deferred tax asset will not be
realized.
F-8
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
December 31, 2017, the Company is not being examined by domestic or
foreign tax authorities.
Property and Equipment
Property
and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of the assets.
Upon retirement or sale, the cost of assets disposed of and the
related accumulated depreciation are eliminated from the accounts
and any resulting gain or loss is credited or charged to
operations. Repairs and maintenance costs are expensed as incurred.
Depreciation expense from continuing operations related to property
and equipment was $280,106 and $159,152 for the years ended
December 31, 2017 and 2016, respectively.
Property
and equipment as of December 31 is as follows:
|
December 31,
|
December 31,
|
|
2017
|
2016
|
Property
and equipment, net:
|
|
|
Leasehold
improvements
|
$128,122
|
$128,122
|
Furniture
and fixtures
|
355,033
|
316,819
|
Computer
equipment and software
|
776,201
|
641,722
|
Total
|
1,259,356
|
1,086,663
|
Less:
Accumulated depreciation and amortization
|
(460,211)
|
(181,318)
|
|
$799,145
|
$905,345
|
Useful
lives are as follows:
Leasehold
improvements
|
3-5
years
|
Furniture
and fixtures
|
3-5
years
|
Computing
equipment
|
3
years
|
Software
|
3-5
years
|
Revenue Recognition
The Company recognizes revenue from its services when it is
probable that the economic benefits associated with the
transactions will flow to the Company and the amount of revenue can
be measured reliably. This is normally demonstrated when: (i)
persuasive evidence of an arrangement exists; (ii) the fee is fixed
or determinable; (iii) performance of service has been delivered;
and (iv) collection is reasonably assured.
F-9
For the Company’s internet-based SharpSpring marketing
automation solution, the services are typically offered on a
month-to-month basis with a fixed fee charged each month depending
on the size of the engagement with the customer. Monthly fees are
recorded as revenue during the month they are earned. Some
customers are charged annually, for which revenues are deferred and
recorded ratably over the subscription period. The Company also
charges transactional-based fees if monthly volume limitations are
reached or other chargeable activity occurs. Additionally,
customers are typically charged an upfront implementation and
training fee. The upfront implementation and training fees
represent short-term “use it or lose it” services
offered for a flat fee. Such flat fees are recognized over the
service period, which is 60 days.
For the Company’s SMTP email delivery product (prior to its
sale in June 2016), the Company’s GraphicMail email product
(which was discontinued in 2016) and the SharpSpring Mail+ product,
services are provided over various contractual periods for a fixed
fee that varies based on a maximum volume of transactions. Revenue
is recognized on a straight-line basis over the contractual period.
If the customer’s transactions exceed contractual volume
limitations, overages are charged and recorded as revenue in the
periods in which the transaction overages occur.
Prior to June 2016, certain of the Company’s GraphicMail
customers were sold through third party resellers. In some cases,
we allowed the third party resellers to collect the funds directly
from the customer, withhold their own reseller fee, and remit the
net amount owed back to the Company. In those situations, because
the Company was the primary obligor in the arrangement, the Company
recorded the gross revenue and expenses such that 100% of the end
customer revenue was reported by the Company and a corresponding
expense was recorded for the reseller fee. The Company discontinued
selling through third party resellers for the GraphicMail and
SharpSpring Mail+ products during 2016.
From time to time, the Company offers refunds to customers and
experiences credit card chargebacks relating to cardholder disputes
that are commonly experienced by businesses that accept credit
cards. The Company makes estimates for refunds and credit card
chargebacks based on historical experience.
Deferred Revenue
Some of the Company’s customers pay for services in advance
on a periodic basis (such as monthly, quarterly, annually or
bi-annually). Also, the Company charges an upfront implementation
and training fee for its SharpSpring marketing automation solution
that is paid in advance, for which services are performed over a
60-day period. Deferred revenue consists of payments received in
advance of the Company’s providing the services. Deferred
revenues are amortized on a straight-line basis in connection with
the contractual period or recorded as revenue when the services are
used.
Accrued Revenue
In cases where our customers pay for services in arrears, we accrue
for revenue in advance of billings as long as the criteria for
revenue recognition is met. A portion of our accounts receivable
balance is therefore unbilled at each balance sheet date. As of
December 31, 2017, and 2016, the Company had accrued revenue
balances of $639,959 and $1,261,923 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
December 31, 2017 and 2016, the Company had cash balances at
financial institutions that exceed federally insured limits. The
Company maintains its cash balances with accredited financial
institutions. The Company does not believe that it is subject to
unusual credit risk beyond the normal credit risk associated with
commercial banking relationships.
For the
years ended December 31, 2017, and 2016, there were no customers
that accounted for more than 10% of total revenue or 10% of total
accounts receivable.
Cost of Services
Cost of
services consists primarily of direct labor costs associated with
support and customer onboarding and technology hosting costs and
license costs associated with the cloud-based
platform.
F-10
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 $3.2 million and
$1.6 million for the years ended December 31, 2017 and 2016,
respectively.
Research and Development Costs and Capitalized Software
Costs
We
capitalize certain costs associated with internal use software
during the application development stage, mostly related to
software that we use in providing our hosted solutions. We expense
costs associated with preliminary project phase activities,
training, maintenance and any post-implementation period costs as
incurred. For the years ended December 31, 2017 and December 31,
2016, we capitalized $68,217 and $5,239, 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 December 31, 2017 and December 31,
2016, the net carrying value of capitalized software was $90,437
and $78,005, respectively.
All
other software development costs are charged to expenses when
incurred, and generally consist of salaries, software development
tools and personnel-related costs for those engaged in research and
development activities.
Stock Compensation
We
account for stock based compensation in accordance with FASB ASC
718 “Compensation - Stock Compensation”, which requires
companies to measure the cost of employee services received in
exchange for an award of an equity instrument based on the
grant-date fair value of the award. Stock-based compensation
expense is recognized on a straight-line basis over the requisite
service period.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the period.
Diluted net income per share is computed using the weighted average
number of common shares and, if dilutive, potential common shares
outstanding during the period.
Comprehensive Income or Loss
Comprehensive
income or loss includes all changes in equity during a period from
non-owner sources, such as net income or loss and foreign currency
translation adjustments.
Recently Issued Accounting Standards
Recent
accounting standards not included below are not expected to have a
material impact on our consolidated financial position and results
of operations.
In
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.
F-11
In May
2014, the FASB issued updated guidance and disclosure requirements
for recognizing revenue. The new revenue recognition standard
provides a five-step analysis of transactions to determine when and
how revenue is recognized. The core principle is that a
company should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in
exchange for those goods or services. In July 2015, the FASB
approved the deferral of the new standard's effective date by one
year. The new standard now is effective for annual reporting
periods beginning January 1, 2018. The FASB will permit
companies to adopt the new standard early, but not before the
original effective date of January 1, 2017. The Company has
evaluated the impact of this standard and does not expect any
material changes in revenue or cost recognized as a result of this
pronouncement due to the month-to-month nature of its revenue
arrangements.
In
January 2017, the FASB issued guidance simplifying the accounting
for goodwill impairment by removing Step 2 of the goodwill
impairment test. Under current guidance, Step 2 of the goodwill
impairment test requires entities to calculate the implied fair
value of goodwill in the same manner as the amount of goodwill
recognized in a business combination by assigning the fair value of
a reporting unit to all of the assets and liabilities of the
reporting unit. The carrying value in excess of the implied fair
value is recognized as goodwill impairment. Under the new standard,
goodwill impairment is recognized based on Step 1 of the current
guidance, which calculates the carrying value in excess of the
reporting unit’s fair value. The new standard is effective
beginning in January 2020, with early adoption permitted. We do not
believe the adoption of this guidance will have a material impact
on our consolidated financial statements.
Note 3: Acquisitions
During
2014, the Company pursued strategic acquisitions to further extend
its product offerings. Such acquisitions have been accounted for as
business combinations pursuant to ASC 805 “Business Combinations.”
Under this ASC, acquisition and
integration costs are not included as components of consideration
transferred, but are accounted for as expenses in the period in
which the costs are incurred.
SharpSpring
On August 15, 2014, the Company acquired substantially all the
assets and assumed the liabilities of SharpSpring LLC, a Delaware
limited liability company for a cash payment of $5,000,000 plus
potential earn out consideration of $10,000,000 that was contingent
on the SharpSpring product achieving certain levels of revenue in
2015. SharpSpring is a cloud-based marketing automation platform
that enables users to improve the effectiveness of their marketing
communications and drive increased revenues through the use of
automation.
The SharpSpring earn out was initially $10,000,000, payable 60% in
cash and 40% in stock, depending on SharpSpring achieving certain
revenue levels in 2015. At the time of the acquisition, the Company
utilized the income approach to estimate the fair value of the earn
out. The Company analyzed scenarios and determined a probability
weighting for each scenario. The Company calculated the earn out
payments based on the respective revenues for each scenario and
then weighted the resulting payment by the probabilities of
achieving each scenario. In order to calculate an appropriate
risk-adjusted discount rate for the earn out, the Company
calculated the weighted average cash-flows of the business based on
the three scenarios and their respective weightings. The Company
then calculated an implied internal rate of return
(“IRR”) of 18.9%, which is the discount rate necessary
in order to reconcile the weighed cash-flows of the three scenarios
to the total purchase price including the earn out payment. The
earn out payment was then discounted by the 18.9% IRR. Based on
these methods and the Company’s original assessment of
meeting those revenue levels in 2015, an earn out liability of
$6,963,000 was originally recorded as a liability during purchase
accounting. This was re-measured in each subsequent quarter since
the transaction, resulting in additional charges of $222,000 during
the year ended December 31, 2016 having been recorded on the
Consolidated Statement of Comprehensive Income (Loss). The final
payments against the earn out of $1.0 million in cash and $4.0
million in common stock occurred in the quarter ended June 30,
2016.
GraphicMail
On
October 17, 2014, we acquired 100% of the equity interest owned,
directly or indirectly, in GraphicMail group companies
(“GraphicMail”) consisting of InterInbox SA, a Swiss
corporation, InterCloud Limited, a Gibraltar limited company,
ERNEPH 2012A (Pty) Ltd. dba ISMS, a South African limited company,
ERNEPH 2012B (Pty) Ltd. dba GraphicMail South Africa, a South
African limited company, and Quattro Hosting LLC, a Delaware
limited liability company. The acquisition consideration consisted
of $5.3 million, $2.6 million of which was paid in cash and $2.7
million of which was paid in stock, plus potential earn out
consideration of up to $0.8 million based on achieving certain
revenue levels in 2015 (paid 50% in cash and 50% in stock).
GraphicMail operated as a campaign management solution, enabling
customers to create content and manage emails being sent to
customers and distribution lists.
F-12
Pursuant to the equity interest purchase agreement, the Company was
liable for an earn out of up to $0.8 million, related to
GraphicMail achieving certain revenue levels in 2015. The Company
utilized the income approach to estimate the fair value of the earn
out. The Company analyzed scenarios and determined a probability
weighting for each scenario. The Company calculated the earn out
payments based on the respective revenues for each scenario and
then weighted the resulting payment by the probabilities of
achieving each scenario. In order to calculate an appropriate
risk-adjusted discount rate for the earn out, the Company
calculated the weighted average cash-flows of the business based on
the three scenarios and their respective weightings. The Company
then calculated an implied internal rate of return
(“IRR”) of 29.8%, which is the discount rate necessary
in order to reconcile the weighed cash-flows of the three scenarios
to the total purchase price including the earn out payment. The
earn out payment was then discounted by the 29.8% IRR. Based on
these methods and the Company’s initial assessment of meeting
those revenue levels in 2015, an earn out liability of $36,000 was
recorded as a liability during purchase accounting. This was
re-measured in the subsequent quarters, resulting in a benefit of
$2,527 during the year ended December
31, 2016. During March 2016, the Company paid $415,858 in
the form of $207,929 in cash and 53,924 shares of common stock in
full settlement of the earn out liability to the former GraphicMail
shareholders.
Additionally,
in March 2016, the Company received $175,970 in cash and 20,000
shares of Company stock (valued at $84,000) from the GraphicMail
escrow fund related to an indemnified claim for unrecorded
liabilities at the time of the acquisition. The total value of the
claim of $259,970 was recorded as a gain in other income (expense),
net during the year ended December 31, 2016. The Company accounted
for the receipt of 20,000 shares as treasury stock with a carrying
value of $84,000.
Note 4: Asset Purchase Agreements
During
2015 and 2016, the Company entered into separation agreements with
several third-party GraphicMail resellers to terminate the reseller
arrangements and for the Company to purchase the customer
relationships that each had accumulated as a GraphicMail reseller.
Pursuant to the terms of the separation agreements, the Company
made payments to the resellers in exchange for the rights to the
customer relationships. The Company accounted for these purchases
as intangible asset acquisitions. The aggregate estimated purchase
price for the intangible assets acquired was approximately
$731,000. Due to heavy customer attrition from the GraphicMail
customer base during the second half of 2016, the majority of the
acquired intangible assets value was impaired during the fourth
quarter of 2016.
Note 5: Dispositions
On June
27, 2016, the Company completed the sale of the assets and deferred
revenue liabilities of its SMTP email relay business
(“SMTP”) to the Electric Mail Company for approximately
$15.0 million. Of the total proceeds from the sale of SMTP,
approximately $1.0 million in cash was held in escrow until the
one-year anniversary and recorded in Other current assets at
December 31, 2016. The Company received the $1.0 million escrow
payment in June 2017. In conjunction with the sale, the Company
also entered into a transition services agreement (the
“TSA”) with the buyer to assist in the transition of
operations over a six-month period, which was subsequently extended
for an additional three months. Pursuant to the terms of the
transition services agreement, in exchange for assisting in the
transfer of operations, the Company may continue utilizing the SMTP
email relay platform for its email sending needs at no cost.
Although no cash was exchanged for the services performed by the
parties to the TSA, the Company recorded the estimated cost to
utilize the SMTP sending platform as a cost of sale and recorded a
benefit to Other income (expense), net for the value of services
provided to the Electric Mail Company. Also, in conjunction with
the sale, the Company abandoned a software asset that was not
acquired, but will not be utilized by the Company in the future.
The Company recorded a gain on the sale of SMTP of approximately
$9.8 million, net of tax of $5.2 million in 2016.
Pursuant
to the reporting requirements of ASC 205-20, Presentation of Financial Statements –
Discontinued Operations, the Company has determined that the
SMTP business qualifies for presentation as a discontinued
operation because it represents a component of our entity and the
sale of SMTP represents a strategic shift in our business plans.
Therefore, the Company has presented the operating results of SMTP
(for periods prior to the sale) as discontinued operations, net of
tax, in the accompanying Consolidated Statements of Comprehensive
Income (Loss) and Consolidated Statements of Cash
Flows.
F-13
Financial
information for the SMTP email relay business for the year ended
December 31, 2017 and 2016, are
presented in the following table:
|
Year Ended
|
|
|
December 31,
|
|
|
2017
|
2016
|
Revenue
|
$-
|
$2,746,378
|
|
|
|
Cost
of services
|
-
|
642,013
|
Gross
profit
|
-
|
2,104,365
|
|
|
|
Operating
expenses:
|
|
|
Sales
and marketing
|
-
|
177,265
|
Research
and development
|
-
|
152,898
|
General
and administrative
|
-
|
474,048
|
|
|
|
Total
operating expenses
|
-
|
804,211
|
|
|
|
Operating
income
|
-
|
1,300,154
|
Other
income (expense), net, before gain on sale
|
-
|
-
|
|
|
|
Income
before income taxes, before gain on sale
|
-
|
1,300,154
|
Income
tax expense
|
-
|
447,675
|
Net
income, before gain on sale
|
$-
|
$852,479
|
|
|
|
Gain
on sale of discontinued operations
|
-
|
9,814,506
|
Income
from discontinued operations, net of income taxes
|
$-
|
$10,666,985
|
The
financial information above includes the financial results for the
SMTP email relay business through June 27, 2016, plus any residual
costs incurred after June 27, 2016 related to the transition of the
business to the buyer. The results are comprised of revenue and
costs directly attributable to the SMTP email relay business as
well as allocated costs for resources that have historically had
shared roles in our consolidated operations. For resources
performing shared roles, cost allocations have been created based
on estimated work performed and job activities. Although our
SharpSpring and GraphicMail products had utilized the SMTP email
relay sending platform prior to the disposition, no intercompany
revenues have been reflected in the SMTP email relay business
operating results related to the use of the email sending platform
by our other product lines.
Note 6: Goodwill and Other Intangible Assets
Goodwill and acquired intangible assets are initially recorded at
fair value and measured periodically for impairment. In performing
the Company’s annual impairment analysis during the
fourth quarters of 2017 and 2016, the Company determined that the
carrying amount of the Company’s goodwill was recoverable and
no additional tests were required. Since some of the goodwill is
denominated in foreign currencies, relatively minor changes to the
goodwill balance occur over time due to changes in foreign exchange
rates. During the year ended December 31, 2017 and 2016, changes in
foreign exchange rates caused an increase to goodwill of $27,504
and a reduction to goodwill of $36,539, respectively.
In addition to our annual goodwill impairment review, the Company
also performs periodic reviews of the carrying value and
amortization periods of other acquired intangible assets. If
indicators of impairment are present, an estimate of the
undiscounted cash flows that the specific asset is expected to
generate must be made to ensure that the carrying value of the
asset can be recovered. These estimates involve significant
subjectivity.
F-14
During the year ended December 31, 2017, the Company determined
that no indicators of impairment are present. However, during the
year ended December 31, 2016, the Company recorded an impairment
loss of $1,459,541 related to the impaired recovery of its
GraphicMail customer relationship assets due to significant erosion
of that customer base following the migration onto the SharpSpring
Mail+ product. The impairment has been included in the Accumulated
Amortization referenced below.
The following tables set forth the information for intangible
assets subject to amortization and for intangible assets not
subject to amortization.
|
As of December 31, 2017
|
||
|
Gross
|
|
Net
|
|
Carrying
|
Accumulated
|
Carrying
|
|
Amount
|
Amortization
|
Value
|
Amortized
intangible assets:
|
|
|
|
Trade
names
|
$346,644
|
$(309,640)
|
$37,004
|
Technology
|
3,834,023
|
(2,404,023)
|
1,430,000
|
Customer
relationships
|
4,165,665
|
(3,306,669)
|
858,996
|
Unamortized
intangible assets:
|
8,346,332
|
(6,020,332)
|
2,326,000
|
Goodwill
|
|
|
8,872,898
|
Total
intangible assets
|
|
|
$11,198,898
|
|
As of December 31, 2016
|
||
|
Gross
|
|
Net
|
|
Carrying
|
Accumulated
|
Carrying
|
|
Amount
|
Amortization
|
Value
|
Amortized
intangible assets:
|
|
|
|
Trade
names
|
$326,992
|
$(256,988)
|
$70,004
|
Technology
|
3,686,270
|
(2,001,270)
|
1,685,000
|
Customer
relationships
|
4,024,005
|
(2,928,374)
|
1,095,631
|
Unamortized
intangible assets:
|
8,037,267
|
(5,186,632)
|
2,850,635
|
Goodwill
|
|
|
8,845,394
|
Total
intangible assets
|
|
|
$11,696,029
|
Estimated amortization expense for 2018 and subsequent years is as
follows:
2018
|
$459,996
|
2019
|
381,000
|
2020
|
332,004
|
2021
|
279,996
|
2022
|
228,000
|
Thereafter
|
645,004
|
Total
|
$2,326,000
|
Amortization expense, excluding impairments, for the years ended
December 31, 2017 and 2016 was $527,468 and $1,360,105,
respectively.
F-15
Note 7: Restructuring Costs
During
the year ended December 31, 2016, in an effort to consolidate
operations into one primary office, the Company executed a plan to
close its South African offices in Cape Town and Johannesburg and
terminate approximately 50 resources based in those offices. All
employees were notified of the restructuring during the month of
September 2016. The Company recorded pre-tax restructuring expenses
associated with severance, asset write offs and contract
termination expenses of $294,249 in 2016 as follows:
Cost
of services
|
$83,544
|
Sales
and marketing
|
102,904
|
Research
and development
|
30,693
|
General
and administrative
|
77,108
|
|
$294,249
|
There
was no remaining liability as of December 31, 2017. At December 31,
2016, our remaining liability for restructuring expenses was
$10,705 related to facility closure costs.
Note 8: Credit Facility
In
March 2016, the Company entered into a $2.5 million revolving loan
agreement (the “Loan Agreement”) with Western Alliance
Bank. The facility matures on March 21, 2018 and has no mandatory
amortization provisions and is payable in full at maturity. Loan
proceeds accrue interest at the higher of Western Alliance
Bank’s Prime interest rate (4.50% as of December 31, 2017) or
3.5%, plus 1.75%. The Loan Agreement is collateralized by a lien on
substantially all of the existing and future assets of the Company
and secured by a pledge of 100% of the capital stock of SharpSpring
Technologies, Inc. and Quattro Hosting, LLC and a 65% pledge of the
Company’s foreign subsidiaries’ stock. The Loan
Agreement subjects the Company to a number of restrictive
covenants, including financial and non-financial covenants
customarily found in loan agreements for similar transactions. The
Loan Agreement also restricts our ability to pay cash dividends on
our common stock. During June 2016, the Company amended the Loan
Agreement to modify its financial covenants and allow for the sale
of the SMTP business assets. During October 2017, the Loan
Agreement was amended to waive the minimum adjusted EBITDA
financial covenant for the third quarter of 2017 and modify the
minimum adjusted EBITDA financial covenant for the fourth quarter
of 2017. There are no amounts outstanding under the Loan Agreement
as of December 31, 2017 and no
events of default have occurred to date. As of December 31, 2017,
based on the borrowing base calculations approximately $2.0 million
was available for withdrawal under the Loan Agreement.
Note 9: Shareholders’
Equity
In
March 2016, the Company issued 53,924 shares of common stock to the
former owners of GraphicMail in satisfaction of the GraphicMail
stock-based earn out (see Note 3). Additionally, in March 2016, the
Company received 20,000 shares of stock from the GraphicMail escrow
fund related to an indemnified claim.
In June
2016, the Company issued 1,039,636 shares of common stock to the
RCTW, LLC shareholders to satisfy the remaining stock-based portion
of the SharpSpring earn out (see Note 3).
Note 10: Changes in Accumulated Other
Comprehensive Income (Loss)
|
Foreign Currency
|
|
Translation
|
|
Adjustment
|
Balance
as of December 31, 2016
|
$(445,055)
|
Other
comprehensive income (loss) prior to reclassifications
|
-
|
Amounts
reclassified from accumulated other comprehensive
income
|
-
|
Tax
effect
|
-
|
Net
current period other comprehensive loss
|
(35,707)
|
Balance
as of December 31, 2017
|
$(480,762)
|
F-16
Note 11: Net Loss Per
Share
Computation
of net income per share is as follows:
|
Year Ended
|
|
|
December 31,
|
|
|
2017
|
2016
|
Net
loss from continuing operations
|
$(4,975,238)
|
$(5,715,975)
|
|
|
|
Basic
weighted average common shares outstanding
|
8,395,319
|
7,895,197
|
Add
incremental shares for:
|
|
|
Warrants
|
-
|
-
|
Stock
options
|
-
|
-
|
Diluted
weighted average common shares outstanding
|
8,395,319
|
7,895,197
|
|
|
|
Net
loss per share:
|
|
|
Basic
|
$(0.59)
|
$(0.72)
|
Diluted
|
$(0.59)
|
$(0.72)
|
For the
year ended December 31, 2017,
1,069,330 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 year ended December 31,
2016, 1,128,368 stock options and 170,973 warrants were excluded
from diluted net loss per share, because the effect of including
these potential shares was anti-dilutive.
Pursuant to ASC
260, Earnings Per Share,
since a loss is reported from continuing operations, diluted net
loss per share has been computed with the same average common
shares outstanding as basic net loss per share, even during periods
when the discontinued operations provide for an overall
consolidated net income.
Note
12: Income Taxes
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 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, the Company has
recorded incremental income tax benefit in the amount of $0.1
million, after the impact of valuation allowance, associated with
the Tax Act during the year ended December 31, 2017 and is
reflected in its deferred provision.
F-17
In
response to the enactment of the Tax Act in late 2017, the U.S.
Securities and Exchange Commission issued Staff Accounting Bulletin
No. 118 (“SAB 118”) to address situations where the
accounting is incomplete for certain income tax effects of the Tax
Act upon issuance of an entity’s financial statements for the
reporting period in which the Tax Act was enacted. Under SAB 118, a
company may record provisional amounts during a measurement period
for specific income tax effects of the Tax Act for which the
accounting is incomplete, but a reasonable estimate can be
determined, and when unable to determine a reasonable estimate for
any income tax effects, report provisional amounts in the first
reporting period in which a reasonable estimate can be determined.
The Company has recorded the impact of the tax effects of the Tax
Act, relying on estimates where the accounting is incomplete as of
December 31, 2017. As guidance and technical corrections are issued
in the upcoming quarters, the Company will record updates to its
original provisional estimates.
The Act
reduces the corporate tax rate to 21 percent, effective January 1,
2018. Accordingly, the Company recorded a provisional decrease of
$0.1 million, after the impact of valuation allowance, to deferred
tax liabilities for the year ended December 31, 2017. While the
Company is able to make a reasonable estimate of the impact of the
reduction in corporate rate, it may be affected by other analyses
related to the Tax Act, including, but not limited to, our
calculation of subsequent payments and economic performance
analyses. The analyses will continue throughout 2018 and will be
completed when the Company files its income tax returns in late
2018.
The Tax
Act creates a new requirement that certain income earned by
controlled foreign corporations must be included currently in the
gross income of the U.S. shareholder under the Global Intangible
Low-Taxed Income ("GILTI") provision. Because of the complexity of
the new GILTI tax rules, the Company is continuing to evaluate this
provision of the Tax Act and the application within the
Company’s financial statements. Under U.S. GAAP, the Company
may make an accounting policy choice to: (i) record taxes due on
future U.S. inclusions in taxable income related to GILTI as a
current-period expense when incurred (the “period cost
method”) or (ii) factor such amounts into its measurement of
deferred taxes (the “deferred method”). The
Company’s selection of an accounting policy with respect to
the new GILTI tax rules will depend, in part, on analyzing its
global income to determine whether it expects to have future U.S.
inclusions in taxable income related to GILTI and, if so, what the
impact is expected to be. Because whether the Company expects to
have future U.S. inclusions in taxable income related to GILTI
depends on not only its current structure and estimated future
results of global operations but also its intent and ability to
modify its structure and/or business, it is not yet able to
reasonably estimate the effect of this provision of the Tax Act.
Therefore, the Company has not made any adjustments related to
potential GILTI tax in its financial statements and has not made a
policy decision regarding how to record the tax effects of GILTI as
of December 31, 2017. The Company will continue to analyze the
impact of GILTI as more guidance is issued and a decision will be
made during 2018 on whether to treat the GILTI as a period cost or
a deferred tax item.
The Tax
Act includes a transition tax on the deemed distribution of
previously untaxed accumulated and current earnings and profits of
certain of foreign subsidiaries. To determine the amount of the
transition tax, the Company must determine, in addition to other
factors, the amount of post-1986 earnings and profits of relevant
subsidiaries, as well as the amount of non-U.S. income taxes paid
on such earnings. The Company estimates that it will not have a
transition tax in light of accumulated negative earnings and
profits, accumulated deficit, as of December 31, 2017 for its
applicable foreign subsidiaries. The Company is continuing to
gather additional information to more precisely determine the
amount of the transition tax, if applicable.
Income
taxes for years ended December 31, is summarized as
follows:
|
Year Ended
|
|
|
December 31,
|
|
|
2017
|
2016
|
Current
provision
|
$(2,107,804)
|
$3,451,571
|
Payable
true-up
|
(1,922)
|
101,783
|
Deferred
provision
|
5,618
|
179,159
|
Net
income tax provision
|
(2,104,108)
|
3,732,513
|
Less:
net income tax provision from discontinued operations
|
-
|
(5,601,701)
|
Net
income tax benefit from continuing operations
|
$(2,104,108)
|
$(1,869,188)
|
F-18
|
Year Ended
|
|
|
December 31,
|
|
|
2017
|
2016
|
From
continuing operations:
|
|
|
Federal
|
$(1,944,618)
|
$(2,366,022)
|
State
|
50,934
|
32,928
|
Foreign
|
(210,424)
|
463,906
|
Net
income tax provision
|
$(2,104,108)
|
$(1,869,188)
|
|
|
|
From
discontinued operations:
|
|
|
Federal
|
$-
|
$5,531,353
|
State
|
-
|
70,348
|
Foreign
|
-
|
-
|
Net
income tax provision
|
$-
|
$5,601,701
|
A
reconciliation of income tax for continuing operations computed at
the U.S. statutory rate to the effective income tax rate is as
follows:
|
2017
|
2016
|
||
|
Amount
|
Percent
|
Amount
|
Percent
|
|
|
|
|
|
Federal
statutory rates
|
$(2,369,986)
|
34%
|
$(2,578,955)
|
34%
|
State
income taxes, net of federal benefit
|
(563,944)
|
8%
|
32,928
|
0%
|
Permanent
differences
|
148,246
|
-2%
|
621,683
|
-8%
|
Rate
Change
|
672,562
|
-10%
|
-
|
0%
|
Other
|
141,284
|
-2%
|
375,738
|
-5%
|
Credits
|
(141,256)
|
2%
|
(164,297)
|
2%
|
Foreign
|
381,364
|
-5%
|
29,040
|
0%
|
Valuation
Allowance
|
(372,378)
|
5%
|
(185,325)
|
2%
|
Effective
rate from continuing operations
|
$(2,104,108)
|
30%
|
$(1,869,188)
|
25%
|
The
following is a summary of the components of the Company’s
deferred tax assets:
|
December 31,
|
|
|
2017
|
2016
|
Deferred
tax assets (liabilities)
|
|
|
Accrual
to cash
|
$118,366
|
$184,958
|
Stock-based
compensation
|
193,620
|
595,576
|
Asset
Dispositions
|
-
|
(309,479)
|
Depreciation
|
(103,863)
|
(152,542)
|
Intangibles
|
701,956
|
1,140,222
|
Net
operating loss carryforwards
|
1,110,387
|
939,725
|
Other
|
-
|
16
|
Net
deferred tax asset valuation allowance
|
(2,188,598)
|
(2,560,975)
|
Total
net deferred tax liabilities
|
$(168,132)
|
$(162,499)
|
F-19
The
company has foreign net operating loss carryforwards of $2,530,855
and $3,813,146 as of December 31, 2017 and 2016, respectively. The
company has state net operating loss carryforwards of $9,242,148
and $5,427,424 as of December 31, 2017 and 2016, respectively.
Depending on the jurisdiction, some of these net operating loss
carryovers will begin to expire within 3 years, while other net
operating losses can be carried forward indefinitely as long as the
company is operating. In addition to these figures, the Company has
a U.S. federal net operating loss of approximately $5.2 million
generated in 2017 that is being utilized as a carry-back to the
2016 year. These net operating losses have been tax effected and
shown as income taxes receivable in the balance sheet as of
December 31, 2017.
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.
We have
established valuation allowances of $2.2 million and $2.6 million
as of December 31, 2017 and
December 31, 2016, respectively, against certain deferred tax
assets given the uncertainty of recoverability of these
amounts.
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.
Note 13: Defined Contribution Retirement Plan
Starting
in 2016, we offered our U.S. employees the ability to participate
in a 401(k) plan. Eligible U.S. employees may contribute up to 60%
of their eligible compensation, subject to limitations established
by the Internal Revenue Code. The Company contributes a matching
contribution equal to 100% of each such participant’s
contribution up to the first 3% of their annual eligible
compensation. We charged $198,783 and $108,228 to expense in the
years ended December 31, 2017 and 2016, respectively, associated
with our matching contribution for those years.
Note 14: Related Party Transactions
Intercompany
transactions have been eliminated in our consolidated financial
statements. There were no material related party transactions for
the years ended December 31, 2017 or 2016.
Note 15: Stock-Based Compensation
From
time to time, 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.
F-20
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 option awards granted to date under the Plan have been
principally over four years from the date of the grant, with 25% of
the award vesting after one year with 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:
|
Year Ended
December
31,
|
||
|
2017
|
|
2016
|
Volatility
|
48% - 49%
|
|
38% - 50%
|
Risk-free interest rate
|
1.85% - 2.26%
|
|
1.12% - 1.93%
|
Expected term
|
6.25 years
|
|
6.25 years
|
The
weighted average grant date fair value of stock options granted
during the year ended December
31, 2017 was $2.36.
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 year ended December 31, 2017 and 2016, the Company
recognized expense of $510,978 and $510,002, respectively,
associated with stock option awards. At December 31, 2017, future stock
compensation expense associated with stock options (net of
estimated forfeitures) not yet recognized was $1,216,391 and will
be recognized over a weighted average remaining vesting period of
2.54 years. The following summarizes stock option activity for the
year ended December 31,
2017:
|
|
Weighted
|
Weighted
|
Aggregate
|
|
Number of
|
Average
|
Average Remaining
|
Intrinsic
|
|
Options
|
Exercise Price
|
Contractual Life
|
Value
|
Outstanding
at December 31, 2016
|
1,128,368
|
$5.12
|
7.0
|
$514,439
|
|
|
|
|
|
Granted
|
357,500
|
4.78
|
|
|
Exercised
|
(15,387)
|
1.44
|
|
|
Forfeited
|
(401,151)
|
4.99
|
|
|
Outstanding
at December 31, 2017
|
1,069,330
|
$5.11
|
7.8
|
$90,007
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
475,640
|
$5.46
|
7.0
|
$36,693
|
The
total intrinsic value of stock options exercised during the year
ended December 31, 2017 was
$34,373.
Stock Awards
During
the year ended December 31,
2017 and 2016, the Company issued 60,011 and 50,976 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 immediately if
there is no vesting period or on a straight-line basis over the
vesting period. The total fair value of stock awards granted,
vested and expensed during the year ended December 31, 2017 and 2016 was $272,976 and
$220,530, respectively. As of December
31, 2017, there was no unrecognized compensation cost
related to stock awards.
F-21
Note 16: Warrants
On
January 30, 2014, in connection with an $11.5 million financing
transaction, the Company issued 80,000 warrants to purchase common
stock at an exercise price of $7.81 per share with a term of 5
years. The fair value of the warrants was determined using the
Black-Scholes option valuation model. The warrants expire on
January 30, 2020 and have a remaining contractual life of 2.1 years
as of December 31, 2017. These warrants became exercisable on
January 30, 2015.
The
following table summarizes information about the Company’s
warrants at December 31, 2017:
|
|
Weighted
|
Weighted
|
|
|
Number of
|
Average
|
Average Remaining
|
Intrinsic
|
|
Units
|
Exercise Price
|
Contractual Term
|
Value
|
Outstanding
at December 31, 2016
|
170,973
|
$6.26
|
4.6
|
$33,660
|
|
|
|
|
|
Granted
|
-
|
-
|
|
|
Cancelled
|
(90,973)
|
4.90
|
|
|
Outstanding
at December 31, 2017
|
80,000
|
$7.81
|
2.1
|
$-
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
80,000
|
$7.81
|
2.1
|
$-
|
No
warrants were issued in 2017 or 2016.
Note 17: Commitments and Contingencies
Litigation
The
Company may from time to time be involved in legal proceedings
arising from the normal course of business. The Company is not a party to any litigation of a
material nature.
Operating Leases and Service Contracts
The Company typically rents office facilities with leases involving
multi-year commitments. The Company incurred rent expense
associated with its leased facilities of $430,930 and $500,183
during the years ended December 31, 2017 and December 31, 2016,
respectively. Although some of our service contracts are on a
month-to-month basis, we sometimes enter into non-cancelable
service contracts for longer periods of time, some of which may
last several years. Future minimum lease payments and payments due
under non-cancelable service contracts are as follows as of
December 31, 2017:
2018
|
$483,204
|
2019
|
373,015
|
2020
|
382,884
|
2021
|
292,843
|
2022
|
-
|
Thereafter
|
-
|
|
$1,531,946
|
Employment Agreements
The
Company has employment agreements with several members of its
leadership team and executive officers.
F-22
INDEX TO EXHIBITS
Exhibit
Number
|
|
Title of Document
|
|
Location
|
|
Certificate of Incorporation
|
|
Incorporated by reference to our Form S-1 filed on December 2,
2010
|
|
|
Amendment to Certificate of Incorporation
|
|
Incorporated by reference to our Form 8-K filed on December 17,
2013
|
|
|
Amendment to Certificate of Incorporation
|
|
Incorporated by reference to our Form 8-K filed December 1,
2015
|
|
|
Bylaws
|
|
Incorporated by reference to our Form S-1 filed on December 2,
2010
|
|
|
Extension Agreement dated March 15, 2016, by and between the
Company and RCTW, LLC.
|
|
Incorporated by reference to our Form 8-K filed on March 17,
2016
|
|
|
Asset Purchase Agreement dated August 12, 2014, by and between
the Company and RCTW, LLC
|
|
Incorporated by reference to our Form 8-K filed on August 15,
2014
|
|
|
Loan Agreement dated March 21, 2016, by and
among SharpSpring, Inc., Quattro Hosting LLC, SharpSpring
Technologies, Inc. and Western Alliance Bank
|
|
Incorporated by reference to our Form 8-K filed on March 22,
2016
|
|
|
Intellectual Property Security Agreement dated March 21, 2016,
by and among SharpSpring, Inc., Quattro Hosting LLC,
SharpSpring Technologies, Inc. and Western Alliance
Bank
|
|
Incorporated by reference to our Form 8-K filed on March 22,
2016
|
|
|
Loan and Security Modification Agreement dated June 24, 2016, by
and among SharpSpring, Inc., Quattro Hosting LLC, SharpSpring
Technologies, Inc. and Western Alliance Bank
|
|
Incorporated by reference to our Form 8-K filed on June 28,
2016
|
|
|
Loan
and Security Modification Agreement dated October 25, 2017, by and
among SharpSpring, Inc., Quattro Hosting LLC, SharpSpring
Technologies, Inc. and Western Alliance Bank
|
|
Incorporated by
reference to our Form 8-K filed on October 30, 2017
|
|
|
Amendment to 2010 Employee Stock Plan
|
|
Incorporated by reference to Appendix A to the Company’s
Definitive Schedule 14A filed on May 1, 2017
|
|
|
2010 Employee Stock Plan
|
|
Incorporated by reference to Form S-1 filed on December 2,
2010
|
|
|
Asset Purchase Agreement dated June 27, 2016, by and between
SharpSpring, Inc. and The Electric Mail Company
|
|
Incorporated by reference to our Form 8-K filed June 28,
2016
|
|
|
2017
Executive Bonus Plan
|
|
Incorporated by
reference to the Company’s Form 8-K filed May 5,
2017
|
|
|
Richard Carlson
Employee Agreement Amendment dated February 8, 2018
|
|
Incorporated by
reference to the Company’s Form 8-K filed on February 12,
2018
|
|
|
Richard Carlson
Employee Agreement Amendment dated March 30, 2017
|
|
Incorporated by
reference to the Company’s Form 8-K filed on April 5,
2017
|
|
|
Richard Carlson
Employee Agreement dated September 13, 2015
|
|
Incorporated by
reference to our Form 8-K filed on September 14, 2015
|
|
|
Travis Whitton Employee Agreement Amendment dated February 8,
2018
|
|
Incorporated by
reference to the Company’s Form 8-K filed on February 12,
2018
|
|
|
Travis Whitton Employee Agreement Amendment dated July 28,
2017
|
|
Incorporated by
reference to the Company’s Form 8-K filed on
August 1, 2017
|
|
|
Travis Whitton Employee Agreement Amendment dated June 19,
2015
|
|
Incorporated by reference to our Form 8-K filed on July 8,
2016
|
|
|
Travis Whitton Employee Agreement dated August 15,
2014
|
|
Incorporated by reference to our Form 8-K filed on July 8,
2016
|
|
|
Edward Lawton Employee Agreement Amendment dated February 8,
2018
|
|
Incorporated by
reference to the Company’s Form 8-K filed on February 12,
2018
|
|
|
Edward Lawton Employee Agreement Amendment dated July 28,
2017
|
|
Incorporated by reference to the Company’s Form 8-K filed on
August 1, 2017
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Edward Lawton Employee Agreement Amendment dated June 19,
2015
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Incorporated by reference to the Company’s Form 8-K filed on
June 24, 2015
|
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Edward Lawton Employee Agreement dated August 15, 2014
|
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Incorporated by reference to the Company’s Form 8-K filed on
August 18, 2014
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Code of Ethics and Business Standards
|
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Incorporated by reference to our Form 8-K filed on January 14,
2014
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Subsidiaries of the registrant
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Incorporated by reference to Note 3 of the Financial Statements
included in Part II – Item 7 of this Form 10-K
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Consent
of Independent Registered Public Accounting Firm - Cherry Bekaert
LLP
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Filed
herewith
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Certification of Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
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Filed herewith
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Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
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Filed herewith
|
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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
|
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Furnished herewith
|
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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
|
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Furnished herewith
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101.1
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XBRL
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Filed herewith
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