10-K 1 shsp_10k.htm ANNUAL REPORT shsp_10k
 
 

   
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended December 31, 2019                                  
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from ______________ to ______________
 
Commission file number 001-36280
 
SharpSpring, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
05-0502529
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
identification number)
 
 
 
 
5001 Celebration Pointe Avenue, Suite 410
Gainesville, FL
 
32608
(Address of principal executive offices)
 
(Zip Code)
 
888-428-9605
(Registrant’s telephone number)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class registered
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.001 par value per share
SHSP
The NASDAQ Stock Market LLC
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
 

 

 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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   ☐
Accelerated filer    ☑
Non-accelerated filer     ☐
Smaller reporting company  ☑
 
Emerging growth company  ☐
 
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
 
The aggregate market value of the voting common equity held by non-affiliates of the registrant was $133,259,188 as of June 30, 2019.
 
As of March 13, 2020, there were 11,520,718 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 2020 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, 2019.
 
 
 

 
 
TABLE OF CONTENTS
 
 
 
Page
 
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
34
Item 2.
Properties
34
Item 3.
Legal Proceedings
34
Item 4
Mine Safety Disclosures
34
 
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
35
Item 6.
Selected Financial Data
36
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
36
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
41
Item 8.
Financial Statements and Supplementary Data
41
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
41
Item 9A.
Controls and Procedures
41
Item 9B.
Other Information
44
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
45
Item 11.
Executive Compensation
45
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
45
Item 13.
Certain Relationships and Related Transactions, and Director Independence
45
Item 14.
Principal Accounting Fees and Services
45
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
46
Item 16.
Form 10-K Summary
Signatures
 
47
 
 
 
 

 
 
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 anticipated timing of the development of future products;
projections of costs, revenue, earnings, capital structure and other financial items;
statements of our plans and objectives;
statements regarding the capabilities of our business operations;
statements of expected future economic performance;
statements regarding competition in our market; and
assumptions underlying statements regarding us or our business.
 
 
 
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Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
 
strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses;
the ability of our agency partners to resell the SharpSpring platform to their clients;
security breaches, cybersecurity attacks and other significant disruptions in our information technology systems;
changes in customer demand;
the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors' services;
developments and changes in laws and regulations, including increased regulation of our industry through legislative action and revised rules and standards;
the occurrence of hostilities, political instability or catastrophic events;
the novel coronavirus (“COVID-19”) and its potential impact on our business; and
natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment.
 
The ultimate accuracy 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.
 
 
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ITEM 1. 
BUSINESS
 
Overview
 
SharpSpring, Inc. (the “Company”) is a cloud-based marketing technology company. The SharpSpring platform is designed to improve the way that businesses communicate with their prospects and customers to increase sales. The Company’s flagship 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. The SharpSpring platform is designed and built as a Software as Service (or SaaS) offering. We provide our products on a subscription basis, with additional fees charged if specified volume limits are exceeded by our customers.
 
During the fourth quarter of 2019, we acquired the assets and certain liabilities that comprise our Perfect Audience platform. The Perfect Audience expands our product and service offering into advertisement retargeting for small businesses.
 
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) SharpSpring Reach, Inc., a Delaware corporation; (iii) InterInbox SA, a Swiss corporation; (iv) ERNEPH 2012A (Pty) Ltd., a South African limited company; (v) ERNEPH 2012B (Pty) Ltd., a South African limited company; and (vi) SMTP Holdings S.a.r.l., a Luxembourg S.a.r.l. Unless the context otherwise requires, all references to the “Company,” “we,” “our” or “us” and other similar terms means SharpSpring, Inc., and its subsidiaries.
 
Products and Services
 
SharpSpring
 
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 platform also includes customer relationship management (CRM) technology that enables a business to store, manage, and optimize customer and prospect data in a cloud-based environment.
 
SharpSpring Mail+
 
Our SharpSpring Mail+ product 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. A small portion of our customers utilize our SharpSpring Mail+ product.
 
Perfect Audience
 
Our Perfect Audience platform is a product and service offering to small businesses for display retargeting. Perfect Audience is designed for rapid deployment and offers customers an easy-to-use interface to implement and optimize campaigns across all major networks and devices.
 
 
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Markets & Competition
 
SharpSpring
 
Our SharpSpring product competes primarily in the marketing automation market. The market for marketing automation software and related solutions is evolving, highly competitive with expected competition to increase as barriers decrease as does complexity of the technology decreases. 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, 2019, SharpSpring had approximately 2,500 paying customers and approximately 9,000 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 (part of Salesforce.com), ActiveCampaign 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 its 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, pay-per-click advertising and other digital lead generation activities. We have built special tools in the SharpSpring application to allow agencies to manage their clients on the platform and optimize their efforts across their portfolio. We also have special pricing to agency customers to allow them the flexibility to resell the platform at a profit and 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 based on the number of additional licenses the agency has deployed to their clients. Additionally, we charge customers for certain items if the volume or transactional limits are exceeded, such as emails sent or contacts stored in the platform. In most cases, we provide support to the agency and the agency provides support to their clients on the platform. However, for additional fees, we can provide product support to the agency’s client directly. Our objective is to partner with the agencies to grow and expand our businesses together using the SharpSpring platform.
 
SharpSpring Mail+
 
Approximately one-fifth of our marketing automation customers are individual businesses that have licensed SharpSpring directly without working through an agency. We refer to these customers as “Direct Customers.” Similar to agency customers, Direct Customers pay a monthly subscription fee for the use of the platform, plus an up-front onboarding fee. Additionally, we charge Direct Customers additional transactional charges based on usage over certain limits.
 
 
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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 is the primary key market differentiator.
 
Perfect Audience
 
The Perfect Audience platform was acquired in November of 2019 to enhance the Company’s product and service offering. The Perfect Audience cloud-based platform enables multi-channel retargeting to known leads, plus targeted advertising to new prospects via lookalike audience functionality. It empowers marketers to create, manage, and optimize their ad campaigns across thousands of sites all within one, simple-to-use interface. Perfect Audience adds powerful lead functionality that fuels top-of-the-funnel lead generation efforts, plus additional lead nurturing capabilities to maximize middle-of-the-funnel conversion. These features complement SharpSpring’s core feature set designed to track, nurture, and convert those leads into sales.
 
We are part of a continually evolving and highly competitive marketplace. Most of our competitors have more extensive customer bases, broader customer relationships, 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 exist in the marketing automation market due to complexity of systems, but are decreasing as technology complexity decreases.
 
Sales and Marketing
 
We sell our products globally, through our internal sales teams, and to a lesser extent, third party resellers. 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 and marketing campaigns to attract new customers.
 
 
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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 our marketing campaigns and search engine traffic to attract potential leads. Our marketing efforts to date have been nearly focused on digital marketing agencies, and we have had success signing up over 1,800 marketing agency partners as of December 31, 2019. These agencies become customers and are able to resell SharpSpring to their clients, while paying increased fees to us as their client count expands beyond the base license pack. 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 500 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 2019.
 
The SharpSpring Mail+ product was created in 2016 to migrate GraphicMail customers to the SharpSpring platform. Since that time, we spent limited resources marketing and selling SharpSpring Mail+ as a standalone product and we discontinued its sale to new customers during early 2018. We currently intend to continue supporting SharpSpring Mail+, but may decide to discontinue the SharpSpring Mail+ product altogether in the future. The SharpSpring Mail+ product generated approximately $0.22 million of revenue during 2019.
 
In early 2018, we discontinued its sale to new customers. We currently intend to continue supporting SharpSpring Mail+, but may decide to discontinue the SharpSpring Mail+ product altogether in the future.
 
Customers
 
As of December 31, 2019, we had over 2,500 customers for our SharpSpring product, the majority of which were marketing agencies who resell SharpSpring to their clients. Including agency partners, agency clients and direct end user customers, we had over 9,000 businesses using the SharpSpring platform as of December 31, 2019.
 
As of December 31, 2019, we had approximately 400 customers using our SharpSpring Mail+ product.
 
As of December 31, 2019, we had approximately 1600 customers using our Perfect Audience platform.
 
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 number of customers that prepay for longer periods, such as quarterly or annually. Perfect Audience customers generally are not locked into a month-to-month contract and pay for usage of the platform at the time of use.
 
 
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Technology & Technology Suppliers
 
SharpSpring operates as a multi-tenant Software-as-a-service (or “SaaS”) application. 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). In addition to our technology platform, we offer value to our customers by providing integrations with other technology platforms. SharpSpring Mail+ is a subset of the SharpSpring technology.
 
In early 2018, we discontinued its sale to new customers. We currently intend to continue supporting SharpSpring Mail+, but may decide to discontinue the SharpSpring Mail+ product altogether in the future.
 
Perfect Audience is separate standalone platform that provides multi-channel retargeting to known leads, plus targeted advertising to new prospects via lookalike audience functionality. It empowers marketers to create, manage, and optimize their ad campaigns across thousands of sites using Google, Facebook, Instagram, leading ad exchanges and partner networks. Ads placed via the platform can be seamlessly dispersed and measured across every major advertising network, including Google, Facebook, Yahoo!, AppNexus, Rubicon, and Smaato, providing the tools marketers need to drive incremental leads and sales, while tracking the ROI of their ad spend. With multiple ad networks at their disposal, users can select the best channels for their business’ needs.
 
Our platforms are hosted in third party data centers on virtual cloud-based infrastructure. During 2019, 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. Email sending technology is a key part of the application, and we rely on a third party to deliver our platform’s email. We monitor our services for availability, performance and security. We rely on our data center and service 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, our measures the performance of several key performance indicators, including:
 
Customer acquisition costs (CAC)
Net revenue dollar retention
Average revenue per user (ARPU)
Expected lifetime value (LTV)
 
Intellectual Property
 
The Company has one patent for developed technology related to the Perfect Audience platform. This patent has a remaining life of approximately 18 years as of December 31, 2019.
 
Our trade secrets include our competencies in marketing automation, web tracking, integrations, workflow, email editing and display retargeting.
 
We registered “SharpSpring” and the related logo and certain other marks as trademarks in the United States and several other jurisdictions.
 
 
10
 
 
We are the registered holder of a variety of domestic and international domain names that include “sharpspring”, “sharpspringmailplus”, “graphicmail”, “perfectaudience”, and similar variations.
Employees
 
As of December 31, 2019, we have approximately 231 full-time employees located in the United States supporting our operations. None of our employees are covered by collective bargaining agreements. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
 
Properties
 
Our corporate headquarters is a leased office facility located in Gainesville, FL. Presently, we lease approximately 25,000 square feet of office space.
 
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.
 
Available Information
 
Our website address is www.sharpspring.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). Our website and the information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.
 
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
 
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this Annual Report on Form 10-K and in our other public filings before making an investment decision. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. If any such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
 
 
11
 
 
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 results of operations.
 
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.
 
We rely, in large part, on our agency partners’ ability to resell the SharpSpring solution to their clients and service and support their clients that are using the SharpSpring platform.
 
We sell primarily to digital marketing agencies, who purchase a pack of SharpSpring licenses and resell SharpSpring to their end clients. Our agency partners typically perform various services for their clients, including website services, lead generation activities, social media services and other digital marketing services. If our agency partners are not successful in reselling SharpSpring to their clients or are not successful in supporting or servicing their active clients on the SharpSpring platform, the value of our agency partner relationships will not grow, and those agency partners will have a higher risk of attrition. If we cannot retain these agency partners as SharpSpring customers, our revenue and operating performance will be adversely impacted.
 
 
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The novel strain of coronavirus (“COVID-19”) could have an adverse effect on our business operations.
 
In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. The World Health Organization has declared COVID-19 to constitute a “Public Health Emergency of International Concern.” Disruptions to our business operations could occur as a result from quarantines of employees, customers and suppliers in areas affected by the outbreak, and closures of digital marketing agencies, third-party vendor’s manufacturing facilities, and logistics supply chains.
 
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, which would adversely impact our financial performance.
 
If we are unable to attract new customers and retain existing customers on a cost-effective basis, our business and results of operations will be adversely affected.
 
To succeed, we must continue to attract and retain a large number of customers on a cost-effective basis, many of whom have not previously used the types of products and services that we offer. Our sales process involves targeting customers, completing product demos and advancing customers through our marketing and sales pipeline to conversion using our SharpSpring marketing automation product, in addition to relying on outbound marketing and search engine traffic to attract potential leads. We rely on a variety of methods to attract new customers, such as outbound emails, hosting events, paying providers of online services, search engines, directories and other websites to provide content, advertising banners and other links that direct customers to our website. If we are unable to use any of our current marketing initiatives or the cost of such initiatives were to significantly increase or such initiatives or our efforts to satisfy our existing customers are not successful, we may not be able to attract new customers or retain existing customers on a cost-effective basis and, as a result, our revenue and results of operations would be adversely affected.
 
If we fail to develop our brands cost-effectively, our business may be adversely affected.
 
Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brands. If we fail to successfully promote and maintain our brands, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business and results of operations could suffer.
 
 
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Email communications is a key component of our product. At times, delivery of our emails has been 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 monitoring agencies can block emails from reaching individuals that use their spam 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 high 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.
 
We rely on third-party vendors to provide services to crucial parts of our business. If the relationship with these vendors deteriorates or is terminated it may harm our ability to provide our software or services to our customers.
 
SharpSpring depends on the services of third-party vendors to deliver data and provide our software and services. In the future if any of these third-party services are interrupted or terminated our ability to continue provide service to our customers will deteriorate. Any such deterioration could adversely affect our business and our ability to generate revenue. Presently, the novel strain of coronavirus known as COVID-19 has the potential to interrupt many, if not all, of the third-party vendors upon which we rely.
 
Our inability to successfully acquire and integrate our Perfect Audience business or other businesses, assets, products or technologies could harm our operating results.
 
We recently acquired from Marin Software Incorporated the assets and certain liabilities that comprise our Perfect Audience platform. As part of this acquisition we negotiated certain services to facilitate the smooth transition of the Perfect Audience business. We have limited experience in successfully acquiring and integrating businesses, products and technologies, and 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.
 
 
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We may in the future evaluate and pursue other acquisitions and strategic investments in businesses, products or technologies that we believe could complement or expand our existing solutions, expand our customer 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.
 
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
The extent of the impact of the novel strain of coronavirus known as COVID-19 on global commerce
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
 
 
 
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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 2019, approximately 86% of our revenues are currently generated in U.S. Dollars, while approximately 14% 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.
 
The United Kingdom's withdrawal from the European Union could have an adverse impact on our business, financial condition, operating results and cash flows.
 
On January 31, 2020, the United Kingdom ("U.K.") withdrew from the European Union ("E.U."), commonly referred to as Brexit. The U.K. and E.U. agreed to participate in a transition period (the "Transition Period"), due to expire on December 31, 2020, to negotiate a trade agreement and other aspects of their future relationship. Following the Transition Period, the U.K. will no longer be a part of the single market and customs union of the E.U. Currently the relationship between the U.K. and E.U. following the Transition Period is unknown.
 
Brexit may cause fluctuations in the value of the U.K. pound sterling and E.U. euro. Fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our expenses, earnings, cash flows, results of operations, and revenues. We do not engage in foreign currency hedging arrangements.
 
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.
 
 
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If we are unable to maintain our relationships with, and access to, publishers, advertising exchange platforms and other platforms that aggregate the supply of advertising inventory, our business will suffer.
 
We currently depend on relationships with various publishers, including Facebook, Google, OpenX, AppNexus, Yahoo, and Rubicon (among others) Our display retargeting platform interfaces with these publishers’ platforms through APIs. We are subject to the respective platforms’ standard API terms and conditions, which govern the use and distribution of data from these platforms. Our business significantly depends on having access to these APIs on commercially reasonable terms and our business would be harmed if any of these publishers, advertising exchanges or aggregators of advertising inventory discontinues or limits access to their platforms, modifies their terms of use or other policies or place additional restrictions on us as API users, or charges API license fees for API access. Moreover, some of these publishers, such as Google, market competitive solutions for their platforms. Because the advertising inventory suppliers control their APIs, they may develop competitive offerings that are not subject to the limits imposed on us through the API terms and conditions. Publishers, advertising exchanges and advertising inventory aggregators update their API terms of use from time to time and new versions of these terms could impose additional restrictions on us. In addition, publishers, advertising exchanges and advertising inventory aggregators continually update their APIs and may update or modify functionality, which requires us to modify our software to accommodate these changes and to devote technical resources and personnel to these efforts which could otherwise be used to focus on other priorities. Any of these outcomes could cause demand for our products to decrease, our research and development costs to increase, and our results of operations and financial condition to be harmed.
 
If the market for digital advertising slows or declines, our business, growth prospects, and financial condition would be adversely affected.
 
The Perfect Audience platform is dependent on the market for digital advertising. The future growth of our business could be constrained by the level of acceptance and expansion of emerging cloud-based advertising channels, as well as the continued use and growth of existing channels, such as search and display advertising. Even if these channels become widely adopted, advertisers and agencies may not make significant investments in solutions such as ours that help them manage their digital advertising spend across publisher platforms and advertising channels. It is difficult to predict customer adoption rates, customer demand for our platform, the future growth rate and size of the advertising cloud solutions market or the entry of competitive solutions. The continued expansion of the market for advertising cloud solutions depends on a number of factors, including the continued growth of the cloud-based advertising market, the growth of social and mobile as advertising channels and the cost, performance and perceived value associated with advertising cloud solutions, as well as the ability of cloud computing companies to address security and privacy concerns. Further, the cloud computing market is less developed in many jurisdictions outside the United States. If we or other cloud computing providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud computing as a whole, including our applications, may be negatively affected.
 
The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.
 
 
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Our principal competitors include marketing automation companies like HubSpot, Pardot (part of Salesforce.com) 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 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.
 
 
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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.
 
We expect these laws, rules and regulations to make it more difficult and more expensive for us to continue 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 is 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.
 
We may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability for past sales, which could harm our business.
 
State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to SaaS products in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus vary significantly and are complex. As such, we could face possible tax assessments and audits. A successful assertion that we should be collecting additional sales, use, value added or other taxes in jurisdictions where we have not historically done so and do not accrue for such taxes could result in tax liabilities and related penalties for past sales, discourage customers from purchasing our products or otherwise harm our business and operating results.
 
 
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Risks Related To Our Management
 
If we fail to attract and retain key and other 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 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.
 
We believe that our future success will also 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.
 
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.
 
 
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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 do not own the internet protocol addresses that we use, 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 customers’ 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, public health emergencies, 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 or the disruption is remied, and may accordingly lose customers and revenues. In addition, subject to applicable insurance coverage, we may incur substantial costs in repairing any damage.
 
 
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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 customer service, reputation and ability to attract and retain customer. 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 customer orders could result in an immediate loss of revenue to us, and could cause some customers 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; Internet and telecommunications failures; and public health emergencies. Our business interruption insurance may not be sufficient to fully compensate us for losses that may occur.
 
Any significant disruption in service on our websites or in our computer systems, or in our customer support services, could reduce the attractiveness of our products and result in a loss of customers.
 
The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, level of customer service, reputation and ability to attract new customers and retain existing customers. Our production system hardware and the disaster recovery operations for our production system hardware are co-located in third-party hosting facilities. None of the companies who host our systems guarantee that our customers’ access to our products will be uninterrupted, error-free or secure. Our operations depend on their ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity and other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts and similar events. In the event that our arrangements with third-party data centers are terminated, or there is a lapse of service or damage to their facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities. Any interruptions or delays in access to our services, whether as a result of a third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors could damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause customers to cancel their accounts, any of which could adversely affect our business, financial condition and results of operations.
 
Relied upon third-party cloud computing services, 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.
 
 
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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.
 
With one limited exception related to our retargeting platform. we rely upon unpatented proprietary technology, processes and know-how and trade secrets for our marketing automation solution and retargeting platform and we do not have plans to file for additional patent protection. Further, even if we file for additional patent protection, there is no assurance that it will be approved by the US Patent and Trademark Office. 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.
 
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.
 
 
 
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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 subject 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.
 
 
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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 platform are subject to regulations in the United States, European Union and elsewhere. U.S. and European lawmakers and regulators have expressed concern over the use of third-party cookies or web beacons for online behavioral advertising. Legislation adopted 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.
 
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.
 
 
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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 General Data Protection Regulation in the European Union and the Federal Data Protection Act in Germany. If we were found to be in violation of any of these laws or regulations as a result of government enforcement or private litigation, we could be subjected to civil and criminal sanctions, including both monetary fines and injunctive action that could force us to change our business practices, all of which could adversely affect our financial performance and significantly harm our reputation and our business.
 
Privacy concerns and consumers' acceptance of Internet behavior tracking may limit the applicability, use and adoption of our marketing software.
 
Privacy concerns may cause consumers to resist providing the personal data necessary to allow our customers to use our services effectively. We have implemented various features intended to enable our customers to better protect consumer privacy, but these measures may not alleviate all potential privacy concerns and threats. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our services in certain industries. In addition to government activity, privacy advocacy groups and the technology and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. There are numerous lawsuits in process against various technology companies that collect and use personal information. If those lawsuits are successful, it could impact the way we conduct our business and adversely affect our financial results. The costs of compliance with, and other burdens imposed by, the foregoing laws, regulations, policies and actions may limit the use and adoption of our cloud-based marketing software and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance or loss of any such action.
 
Evolving regulations concerning data privacy may restrict our customers’ ability to solicit, collect, process and use data necessary to conduct email campaigns or to analyze the results or may increase their costs, which could harm our business.
 
Federal, state and foreign governments have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing or use of consumers’ personal information. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes. Other proposed legislation could, if enacted, prohibit the use of certain technologies that track individuals’ activities on web pages or that record when individuals click through to an Internet address contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use email addresses, page viewing data, and personal information, which may reduce demand for our products. They may also negatively impact our ability to effectively market our products.
 
 
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The European Union’s General Data Protection Regulation (GDPR) went into effect in May 2018 and created a data protection law framework across the EU, aiming to give citizens back the control of their personal data, while 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. SharpSpring, as a data processor, must clearly disclose any data collection, declare the lawful basis and purpose for data processing, and state how long data is being retained and if it is being shared with any third parties or outside of the European Economic Area. Data subjects have the right to request a portable copy of the data collected by a processor in a common format, and the right to have their data erased under certain circumstances. Public authorities, and businesses whose core activities center around regular or systematic processing of personal data, are required to employ a data protection officer (DPO), who is responsible for managing compliance with the GDPR. Businesses must report any data breaches within 72 hours if they have an adverse effect on user privacy. In some cases, violators of the GDPR may be fined up to €20 million or up to 4% of the annual worldwide turnover of the preceding financial year in case of an enterprise, whichever is greater.
 
In addition to GDPR, California enacted a similar law to GDPR, the California Consumer Privacy Act (CCPA), which took effect in January 2020. The CCPA similarly imposes new obligations with regards to customer data collection and protection. We continue to monitor GDPR, CCPA, and any new or upcoming regulations to ensure compliance and their impact on our ability to provide our marketing automation services display retargeting to our customers.
 
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.
 
 
27
 
 
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 their limited funds on items other than our products. Moreover, if small organizations experience economic hardship, they may be unwilling or unable to expend resources on marketing, including email marketing, which would negatively affect the overall demand for our products, increase customer attrition and could cause our revenue to decline. In addition, we have limited experience operating our business during an economic downturn. Accordingly, we do not know if our current business model will continue to operate effectively during an economic downturn. Furthermore, we are unable to predict the likely duration and severity of potential adverse economic conditions in the U.S. and other countries, but the longer the duration the greater risks we face in operating our business. There can be no assurance, therefore, that worsening economic conditions, or a prolonged or recurring recession, will not have a significant adverse impact on our operating and financial results.
 
U.S. federal legislation entitled Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 imposes certain obligations on the senders of commercial emails, which could minimize the effectiveness of our email marketing product, and establishes financial penalties for non-compliance, which could increase the costs of our business.
 
The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult or other harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act. The ability of our customers’ constituents to opt out of receiving commercial emails may minimize the effectiveness of our email marketing product. Moreover, non-compliance with the CAN-SPAM Act carries significant financial penalties. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email, whether as a result of violations by our customers or if we were deemed to be directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our business. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or increase our operating costs.
 
As Internet commerce develops, federal, state and foreign governments may adopt new laws to regulate Internet commerce, which may negatively affect our business.
 
 
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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 operations of approximately $10.3 million in 2019. 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 and display retargeting platforms 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, 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. 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.
 
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.
 
 
29
 
 
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 the Board of Directors 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.
 
 
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Our common stock is traded on The NASDAQ Capital Market and, despite certain increases of trading volume from time to time, our common stock is considered “thinly-traded,” meaning that the number of persons interested in trading our common stock at any given time may be relatively small or non-existent. Finance transactions resulting in a large amount of newly issued shares that become readily tradable, or other events that cause current stockholders to sell shares, could place downward pressure on the trading price of our stock. The lack of a robust resale market may require a stockholder who desires to sell a large number of shares of common stock to sell the shares in increments over time to mitigate any adverse impact of the sales on the market price of our stock.
 
If our stockholders sell, or the market perceives that our stockholders intend to sell for various reasons, including the ending of restriction on resale, substantial amounts of our common stock in the public market, including shares issued upon the exercise of outstanding options or warrants, the market price of our common stock could fall. Sales of a substantial number of shares of our common stock may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. We may become involved in securities class action litigation that could divert management’s attention and harm our business.
 
Our amended certificate of incorporation and bylaws, and certain provisions of Delaware corporate law, as well as certain of our contracts, contain provisions that could delay or prevent a change in control even if the change in control would be beneficial to our stockholders.
 
Delaware law, as well as our amended certificate of incorporation and bylaws, contains anti-takeover provisions that could delay or prevent a change in control of our Company, even if the change in control would be beneficial to our stockholders.
 
These provisions could lower the price that future investors might be willing to pay for shares of our common stock. These anti-takeover provisions:
 
authorize our board of directors to create and issue, without stockholder approval, preferred stock, thereby increasing the number of outstanding shares, which can deter or prevent a takeover attempt;
prohibit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
empower our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
provide that our board of directors is expressly authorized to adopt, amend or repeal our bylaws; and
provide that our directors will be elected by a plurality of the votes cast in the election of directors.
 
 
 
31
 
 
Section 203 of the Delaware General Corporation Law, the terms of our employee stock option agreements and other contractual provisions may also discourage, delay or prevent a change in control of our Company. Section 203 generally prohibits a Delaware corporation from engaging in a business combination with an interested stockholder for three years after the date the stockholder became an interested stockholder. Our employee stock option agreements include change-in-control provisions that allow us to grant options or stock purchase rights that may become vested immediately upon a change in control. The terms of change of control provisions contained in certain of our senior executive employee agreements may also discourage a change in control of our Company. Our board of directors also has the power to adopt a stockholder rights plan that could delay or prevent a change in control of our Company even if the change in control is generally beneficial to our stockholders. These plans, sometimes called “poison pills,” are oftentimes criticized by institutional investors or their advisors and could affect our rating by such investors or advisors. If our board of directors adopts such a plan, it might have the effect of reducing the price that new investors are willing to pay for shares of our common stock.
 
Together, these charter, statutory and contractual provisions could make the removal of our management and directors more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock. Furthermore, the existence of the foregoing provisions, as well as the significant common stock beneficially owned by our founder, executive officers, and members of our board of directors, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
 
Our quarterly results may fluctuate and if we fail to meet the expectations of analysts or investors, our stock price could decline substantially.
 
Our quarterly operating results may fluctuate, and if we fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock could decline. Some of the important factors that could cause our revenue and operating results to fluctuate from quarter to quarter include:
 
our ability to retain existing customers, attract new customers and satisfy our customers’ requirements;
general economic conditions;
changes in our pricing policies;
our ability to expand our business;
our ability to successfully integrate our acquired businesses;
new product and service introductions;
technical difficulties or interruptions in our services;
the timing of additional investments in our hardware and software systems;
regulatory compliance costs;
costs associated with future acquisitions of technologies and businesses; and
extraordinary expenses such as litigation or other dispute-related settlement payments.
 
Some of these factors are not within our control, and the occurrence of one or more of them may cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful and should not be relied upon as an indication of future performance.
 
 
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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 five independent research analysts 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.
 
If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.
 
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. We expect that compliance with these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.
 
The Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, Section 404 of the Sarbanes-Oxley Act, (Section 404), requires us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. Our compliance with applicable provisions of Section 404 requires that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
 
 
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Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an adverse opinion on our internal controls from our independent registered public accounting firm.
 
ITEM 1B. 
UNRESOLVED STAFF COMMENTS
 
None
 
ITEM 2. 
PROPERTIES
 
Our corporate headquarters is a leased office facility located at 5001 Celebration Pointe Avenue, Suite 410, Gainesville, FL 32608.
 
ITEM 3. 
LEGAL PROCEEDINGS
 
We are not a party to any litigation of a material nature.
 
ITEM 4. 
MINE SAFETY DISCLOSURES
 
Not applicable.
 
 
 
34
 
 
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”.
 
Stockholders
 
As of March 13, 2020, there were approximately 51 holders of our common stock including The Depository Trust Company, which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.
 
Dividends
 
Our Company does not pay any cash dividends on its commons stock. 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.
 
 
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Securities Authorized for Issuance under Equity Compensation Plans
 
See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for information regarding securities authorized for issuance
 
Recent Sales of Unregistered Securities
 
None.
 
ITEM 6. 
SELECTED FINANCIAL DATA
 
Not Applicable.
 
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 customers to interact with a lead from an early stage and nurture that potential customer using advanced features until it becomes a qualified sales lead or customer. We primarily offer our premium SharpSpring marketing automation solution, but also have customers on the SharpSpring Mail+ product, which is a subset of the full suite solution. In 2019 the Company acquired the Perfect Audience platform, which allowed us to expand into the display retargeting space.
 
We believe our recent growth has been driven by the strong demand for marketing automation technology solutions, particularly in the small and mid-size business market. Our products are offered at competitive prices with unlimited multi-lingual customer support. Our SharpSpring marketing automation platform employs 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. The Perfect Audience platform employs a usage-based revenue model. Revenue from this platform is dependent on the number of ads placed through the platform and the effectiveness of that ad space.
 
 
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Unless the context otherwise requires, in this section titled Management’s Discussion and Analysis of Financial Condition and Results of Operations references to “SharpSpring” relate to the SharpSpring product and references to “Perfect Audience” relate to the Perfect Audience product, while all references to “our Company,” “we,” “our” or “us” and other similar terms means SharpSpring, Inc., a Delaware corporation, and all subsidiaries.
 
Results of Operations
 
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Year ended
 
 
Change
 
 
Change
 
 
 
December 31,
 
 
from
 
 
from
 
 
 
2019
 
 
2018
 
 
Prior Year
 
 
Prior Year
 
Revenues and Cost of Sales:
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 $22,699,386 
 $18,651,525 
 $4,047,861 
  22%
Cost of Sales
  7,142,416 
  5,798,269 
  1,344,147 
  23%
Gross Profit
 $15,556,970 
 $12,853,256 
 $2,703,714 
  21%
 
    
    
    
    
 
Revenues from continuing operations increased for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to growth in our SharpSpring marketing automation customer base. Revenues for our flagship marketing automation platform increased to $22.2 million in 2019 from $18.3 million in 2018. During 2019, we continued to attract and acquire new customers on the SharpSpring platform, which contributed to our revenue growth. This growth in revenues was partially offset by reduced revenue from our SharpSpring Mail+ product, which declined from $0.4 million in 2018 to $0.2 million in 2019. We expect revenue to continue to increase in 2020 from the realization of the full year value of the net new SharpSpring customers acquired throughout 2019. The acquisition of Perfect Audience in November of 2019 generated an additional $0.3 million of new revenue in the short period offered.
 
Cost of services increased for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily due to increased employee and technology-related costs associated with providing our technology platform to more customers and increased hosting cost with the growth of the Company. As a percentage of revenues, cost of services was 31% of revenues for both years ended December 31, 2019, and December 31, 2018. Although costs increased for support resources related to business growth and initial costs from Perfect Audience, the Company achieved some operating leverage with increased revenues compared to the prior year. We expect costs of services to increase in 2020 in dollar terms, but remain relatively consistent as a percent of revenue, as we add more costs to support customers and promote growth in agency partner relationships, but also continue to create operating leverage in our support and hosting infrastructure.
 
 
 
 
 
 
 
 
 Percent
 
 
 
Year ended
 
 
Change
 
 
Change
 
 
 
December 31,
 
 
from
 
 
from
 
 
 
2019
 
 
2018
 
 
Prior Year
 
 
Prior Year
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing
 $11,785,227 
 $10,092,691 
 $1,692,536 
  17%
Research and development
  5,036,613 
  4,298,031 
  738,582 
  17%
General and administrative
  8,617,073 
  6,358,087 
  2,258,986 
  36%
Non-employee stock issuance expense
  - 
  508,561 
  (508,561)
  -100%
Intangible asset amortization
  381,000 
  460,000 
  (79,000)
  -17%
Total operating expenses
 $25,819,913 
 $21,717,370 
 $4,102,543 
  19%
 
 
 
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Sales and marketing expenses increased for the year ended December 31, 2019, as compared to the year ended December 31, 2018. The increase was primarily due to an increase in marketing program spending for various lead generation activities, which increased by approximately $0.36 million from the prior year. Additionally, we experienced an increase in marketing and sales employee-related costs of approximately $1.3 million in part due to hires made during 2019 to align with the Company’s growth. Also included in the $1.3 million is severance related to the Company’s former CRO in the amount of approximately $0.13 million We expect sales and marketing expenses to increase in 2020 as we devote more resources to acquiring new customers.
 
Research and development expenses increased for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily due to additional hiring of development and quality assurance staff since last year. Employee-related costs for this group increased by approximately $0.89 million in the year ended December 31, 2019, compared to the same period in 2018. Non-employee related costs for this group increased by approximately $0.5 million compared to 2018 primarily driven by the outsourcing of certain development projects. The increase in these costs were partially offset by increased capitalized software development costs of approximately $0.69 million compared to the year ended 2018. We expect research and development spend to increase in 2020 as we increase our team to support future product development commensurate with the growth of our business.
 
General and administrative expenses increased for the year ended December 31, 2019 as compared to the year ended December 31, 2018, with higher employee related costs associated with business growth, higher facilities costs, and higher depreciation. Employee related costs increased approximately $0.80 million compared to 2018. Facilities and depreciation costs to be able to support the growth of the company increased approximately $0.43 million in 2019 compared to 2018. Professional fees related audit, tax, the acquisition of Perfect Audience, and equity transactions increased by approximately by $0.24 million compared to 2018. During 2018 we incurred expenses of approximately $0.25 million related to the closure of our Northeast operations, which included transition of our CFO to the Gainesville office. We expect general and administrative expenses to increase in dollar terms and decrease as a percent of revenue in 2020, as we add costs to support general business growth.
 
During the year ended 2018, the Company issued 36,274 shares to a service provider to satisfy a performance-based contractual arrangement. The Company recorded an expense of approximately $0.51 million associated with this issuance in 2018.
 
Amortization of intangible assets decreased for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily due to the reduction of amortization related to the SharpSpring trade name which became fully amortized in 2018.
 
 
 
 
 
 
 
 
 
 
 
 
Percent
 
 
 
Year ended
 
 
Change
 
 
Change
 
 
 
December 31,
 
 
from
 
 
from
 
 
 
2019
 
 
2018
 
 
Prior Year
 
 
Prior Year
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
Other expenses, net
 $(147,338)
 $(545,482)
 $398,144 
  -73%
Loss on induced conversion
  (2,162,696)
  - 
  (2,162,696)
  n/a 
Gain (loss) on embedded derivative
  214,350 
  (400,220)
  614,570 
  -154%
Provision (benefit) for income taxes
  29,349 
  (330,994)
  360,343 
  -109%
 
 
 
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Other income (expense) is generally related to foreign exchange gains and losses derived from owing amounts or having amounts owed in currencies other than the entity’s functional currency, as well as interest expense related to our convertible notes. Foreign exchange loss for the year ended December 31, 2019, was $0.04 million. Non-cash interest expense for the year ended December 31, 2019, and 2018 was $0.14 million and $0.3 million, respectively.
 
On May 9, 2019, the Company entered into an agreement to convert the Convertible Notes. As a result of the conversion, the company realized a gain on the embedded derivative of $0.21 million, and a loss on conversion of debt of $2.16 million during the year ended December 31, 2019. The company incurred a loss on the embedded derivative of $0.40 million during the year ended December 31, 2018.
 
During the year ended December 31, 2019, our income tax provision from operations related to U.S. States’ income taxes of approximately $25,000 as well as approximately $4,000 of income tax related to foreign jurisdictions. For the year ended December 31, 2018, our income tax benefit from operations related to U.S. consolidated deferred tax liabilities that were reduced by indefinite-lived operating losses created during 2018, increased income tax benefit related to the U.S. 2017 loss carryback, and additional tax benefit derived in foreign jurisdictions.
 
Liquidity and Capital Resources
 
Sources and Uses of Cash
 
Our primary source of operating cash inflows are payments from customers for use of our marketing automation technology platform. Such payments are primarily received monthly from customers but can sometimes be received annually in advance of providing the services, yielding a deferred revenue liability on our consolidated balance sheet. In addition to operating cash flows, the Company issued approximately $15.6 million of common stock in 2019 with two separate issuances in March and November 2019, respectively. In March 2018, the Company issued $8.0 million of convertible notes and received $7.9 million in cash net of debt issuance costs. The Company received $1.0 million and approximately $0.6 million from the exercise of stock options in 2019 and 2018 respectively. The Company also received $2.1 million in cash tax refunds in 2018, associated with 2017, U.S. net operating losses that were carried back and applied to income taxes paid for the 2016 year. To provide additional financing flexibility, the Company also has a credit facility in place. No amounts have been borrowed under the facility to date and based on the borrowing base calculations, approximately $2.1 million was available under the facility as of December 31, 2019.
 
Our primary sources of cash outflows from operations include payroll and payments to vendors and third-party service providers.
 
Analysis of Cash Flows
 
Net cash used in operating activities increased by $4.4 million to $8.0 million used in operations for the year ended December 31, 2019, compared to $3.6 million used in operations for the year ended December 31, 2018. The increase in cash used in operating activities was attributable primarily to the net loss increase from $9.5 million to $12.4 million. This partially offset by the non-cash loss of $2.2 million related to the induced conversion of the convertible notes in May 2019. In June 2018 the Company received an approximately $2.1 million tax refund.
 
 
39
 
 
Net cash used in investing activities was $5.9 million during the year ended December 31, 2019, compared to net cash used in investing activities of $0.89 million during the year ended December 31, 2018. The change in cash used for investing activities is primarily related to the purchase of the Perfect Audience assets for $4.6 million in November 2019.
 
Net cash provided by financing activities was $16.6 million during the year ended December 31, 2019, compared to $8.5 million net cash received in financing activities during the year ended December 31, 2018. The majority of the net cash provided by financing activities in 2019 was related to two separate stock raises totaling $15.6 million. During the year ended December 31, 2018, the majority of the cash received related to financing activities is related the Company’s issuance $8.0 million of convertible notes during the first quarter of 2018, for which the Company received $7.9 million after debt issuance costs. The Company also received $0.97 million and $0.6 million in proceeds from the exercise of stock options during the years ended December 31, 2019 and 2018, respectively.
 
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, 2019:
 
 
 
Operating Leases
 
2020
 $742,956 
2021
  766,546 
2022
  771,278 
2023
  794,937 
2024
  799,669 
Thereafter
  3,221,086 
Total Commitments
 $7,096,472 
 
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 (see Note 2).
 
 
40
 
 
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
 
We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to material weaknesses in our internal control over financial reporting described below in Management’s Annual Report on Internal Control Over Financial Reporting, our disclosure controls and procedures were not effective as of December 31, 2019.
 
Notwithstanding the identified material weaknesses, management believes the consolidated financial statements included in this Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. generally accepted accounting principles.
 
Management’s Annual Report on Internal Control Over Financial Reporting 
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, our management used the criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
 
41
 
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:
 
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; `
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
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.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.
 
We have confidence in our internal controls and procedures. Nevertheless, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure procedures and controls or our internal controls will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all our control issues and instances of fraud, if any, have been detected.
 
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
 
We acquired Perfect Audience on November 21, 2019 and management excluded from its assessment of the effectiveness of internal control over financial reporting as the December 31, 2019, Perfect Audience total assets and total revenues representing approximately 16.2% and 1.2%, respectively, of our consolidated financial statements as of and for the year ended December 31, 2019.
 
 
42
 
 
In connection with our evaluation of the internal controls of the Company, we noted the following deficiencies that we consider to be material weaknesses:
 
Ineffective internal control over financial reporting and dependent business process control (automated and manual) related to information technology general controls (ITGCs) around (i) the design and implementation of program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes and related to ineffective ITGCs around design and (ii) implementation of effective user access controls over SaaS and internally hosted applications that support the Company’s financial reporting processes to ensure appropriate segregation of duties and to adequately restrict user and privileged access to appropriate SharpSpring personnel.
 
Due to the extensive effort required in the implementation of section 404b, and as in common many growth companies with limited staff, we identified control deficiencies in financial reporting during our implementation related to: (i) certain entity level controls; (ii) inadequate segregation of duties; and (iii) compliance and review related to certain policies and procedures. As a result, these deficiencies aggregate into an additional material weakness.
 
  The material weaknesses did not result in any identified misstatements to the consolidated financial statements, and there were no changes to previously released financial results. Based on these material weaknesses, the Company’s management concluded that at December 31, 2019, the Company’s internal control over financial reporting was not effective.

The Company’s independent registered public accounting firm, Cherry Bekaert LLP has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, which appears in Item 8 of this Form 10-K.
 
Following identification of the material weaknesses and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year ended December 31, 2019. Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our CEO and CFO have certified that, based on their knowledge, the consolidated financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K. Cherry Bekaert LLP has issued an unqualified opinion on our consolidated financial statements, which is included in Item 8 of this Form 10-K.
 
 
43
 
 
Remediation
 
Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) creating and filling an IT Compliance Oversight function; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to change-management and role-based security over IT systems impacting financial reporting and performing a full review or all current policies and procedures to identify current operational and financial reporting principle gaps and implement a cohesive set of policies that define the company’s standards across systems, departments, and processes, reflected in the supporting documents such as Standard Operating Procedures (SOP) and checklists; (iii) implementing controls to address and maintain documentation of completeness and accuracy of system generated information used to support the operation of the controls; (iv) developing enhanced change-management intake procedures and controls related to changes in IT systems; (v) implementing an IT management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes; and (vi) enhanced monthly reporting on the remediation measures to the Audit Committee of the Board of Directors; (vii) and hiring additional accounting staff, including an assistant controller, to increase the Company’s segregation of duties and allow adequate time for proper documentation of observable evidence of review and approvals.
 
We believe that these actions will remediate the material weaknesses. The weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal year 2020.
 
Changes in Internal Control Over Financial Reporting
 
Other than the material weakness identified during the year, as of December 31, 2019, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during fiscal year 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
ITEM 9B. 
OTHER INFORMATION
 
Not Applicable.
 
 
44
 
 
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 2020 Annual Meeting of Stockholders.
 
ITEM 11. 
EXECUTIVE COMPENSATION
 
The information required by this Item is incorporated by reference from the information contained within our Company’s definitive proxy statement for the 2020 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 the information contained within our Company’s definitive proxy statement for the 2020 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 the information contained within our Company’s definitive proxy statement for the 2020 Annual Meeting of Stockholders.
 
ITEM 14. 
PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The information required by this Item is incorporated by reference from the information contained within our Company’s definitive proxy statement for the 2020 Annual Meeting of Stockholders.
 
 
 
45
 
 
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.
 
 
 
46
 
 
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 16, 2020.
 
 
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 16, 2020
Richard A. Carlson
 
 
 
 
 
 
/s/ Michael Power
 
Chief Financial Officer (Principal Financial Officer)
 
March 16, 2020
Michael Power
 
 
 
 
 
 
 
 
/s/ Steven A. Huey
 
Chair of the Board of Directors
 
March 16, 2020
Steven A. Huey
 
 
 
 
 
 
 
 
 
/s/ Marietta Davis
 
Director
 
March 16, 2020
Marietta Davis
 
 
 
 
 
 
 
 
 
/s/ David A. Buckel
 
Director
 
March 16, 2020
David A. Buckel
 
 
 
 
 
 
 
 
 
/s/ Scott Miller
 
Director
 
March 16, 2020
Scott Miller
 
 
 
 
 
 
 
47
 
 
INDEX TO FINANCIAL STATEMENTS
 
 
 
 
 
 
 
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. and subsidiaries (the Company) as of December 31, 2019 and 2018, 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, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2020, expressed an adverse opinion.
 
Basis for Opinion
 
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the 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 consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that 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 16, 2020
 
 
F-2
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
To the Board of Directors and
Stockholders SharpSpring, Inc.
 
Adverse Opinion on Internal Control over Financial Reporting
 
We have audited SharpSpring, Inc. and subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
 
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. There are material weaknesses (1) related to the operating effectiveness of the Company’s design and implementation of program change-management over certain information technology systems that support the Company’s financial reporting processes (2) the design and implementation of effective user access controls over SaaS and internally hosted applications that support the Company’s financial reporting processes to ensure appropriate segregation of duties and to adequately restrict user and privileged access to appropriate Company personnel. We also identified control deficiencies in financial reporting during our implementation related to: (i) certain entity level controls; (ii) inadequate segregation of duties; and (iii) compliance and review related to certain policies and procedures which were aggregated into an additional material weakness. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and do not affect our opinion on those consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of comprehensive loss, changes in stockholders’ equity, and cash flows of the Company, and our report dated March 16, 2020, expressed an unqualified opinion.
 
Basis for Opinion
 
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (Item 9A). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
F-3
 

Definition and Limitations of Internal Control over Financial Reporting
 
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (Item 9A). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
Disclaimer on Additional Information in Management’s Report
 
We do not express an opinion or any other form of assurance on management’s statements, included in the accompanying Management’s Report on Internal Control over Financial Reporting, (Item 9A), referring to corrective actions taken after December 31, 2019, relative to the aforementioned material weaknesses in internal control over financial reporting.
 
/s/ Cherry Bekaert LLP
 
We have served as the Company’s auditor since 2016.
Atlanta, Georgia
March 16, 2020
 
F-4
 
 
SHARPSPRING, INC.
CONSOLIDATED BALANCE SHEETS
 
 
 
 
December 31,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Assets
 
 
 
 
 
 
Cash and cash equivalents
 $11,881,949 
 $9,320,866 
Accounts receivable, net of allowance for doubtful accounts of $12,455 and $127,516 at December 31, 2019 and December 31, 2018, respectively
  340,344 
  80,521 
Unbilled receivables
  998,048 
  740,425 
Income taxes receivable
  15,010 
  22,913 
Other current assets
  1,363,366 
  1,184,217 
Total current assets
  14,598,717 
  11,348,942 
 
    
    
Property and equipment, net
  1,996,722 
  1,260,798 
Goodwill
  10,922,814 
  8,866,413 
Intangibles, net
  4,658,000 
  1,866,000 
Right-of-use assets
  5,281,530 
  - 
Other long-term assets
  549,022 
  665,123 
Total assets
 $38,006,805 
 $24,007,276 
 
    
    
Liabilities and Shareholders' Equity
    
    
Accounts payable
 $2,052,538 
 $1,613,477 
Accrued expenses and other current liabilities
  919,089 
  774,944 
Deferred revenue
  860,820 
  250,656 
Income taxes payable
  13,944 
  23,705 
Lease liability, current portion
  370,340 
  - 
Total current liabilities
  4,216,731 
  2,662,782 
 
    
    
Convertible notes, including accrued interest
  - 
  8,342,426 
Convertible notes embedded derivative
  - 
  214,350 
Lease liability, net of current portion
  4,976,727 
  - 
Total liabilities
  9,193,458 
  11,219,558 
Commitments and contingencies (Note 13)
    
    
 
    
    
Shareholders' equity:
    
    
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at December 31, 2019 and December 31, 2018
  - 
  - 
Common stock, $0.001 par value, Authorized shares-50,000,000; issued shares- 11,537,163 at December 31, 2019 and 8,639,139 at December 31, 2018; outstanding shares- 11,517,163 at December 31, 2019 and 8,619,139 at December 31, 2018
  11,537 
  8,639 
Additional paid in capital
  58,851,285 
  30,446,838 
Accumulated other comprehensive loss
  (224,793)
  (231,053)
Accumulated deficit
  (29,740,682)
  (17,352,706)
Treasury stock
  (84,000)
  (84,000)
Total shareholders' equity
  28,813,347 
  12,787,718 
 
    
    
Total liabilities and shareholders' equity
 $38,006,805 
 $24,007,276 
 
    
    
 
 
See accompanying notes to the consolidated financial statements.
 
F-5
 
 
SharpSpring, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
Year ended    
 
 
 
December 31,    
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Revenue, net
 $22,699,386 
 $18,651,525 
 
    
    
Cost of services
  7,142,416 
  5,798,269 
Gross profit
  15,556,970 
  12,853,256 
 
    
    
Operating expenses:
    
    
Sales and marketing
  11,785,227 
  10,092,691 
Research and development
  5,036,613 
  4,298,031 
General and administrative
  8,617,073 
  6,358,087 
Non-employee stock issuance expense
  - 
  508,561 
Intangible asset amortization
  381,000 
  460,000 
 
    
    
Total operating expenses
  25,819,913 
  21,717,370 
 
    
    
Operating loss
  (10,262,943)
  (8,864,114)
 
    
    
Other expenses, net
  (147,338)
  (545,482)
Loss on induced conversion
  (2,162,696)
  - 
Gain (loss) on embedded derivative
  214,350 
  (400,220)
 
    
    
Loss before income taxes
  (12,358,627)
  (9,809,816)
Provision (benefit) for income taxes
  29,349 
  (330,994)
Net loss
 $(12,387,976)
 $(9,478,822)
 
    
    
Basic net loss per share
 $(1.20)
 $(1.11)
Diluted net loss per share
 $(1.20)
 $(1.11)
 
    
    
Shares used in computing basic net loss per share
  10,323,889 
  8,512,297 
Shares used in computing diluted net loss per share
  10,323,889 
  8,512,297 
 
    
    
Other comprehensive income (loss):
    
    
Foreign currency translation adjustment, net
  6,260 
  249,709 
Comprehensive loss
 $(12,381,716)
 $(9,229,113)
 
See accompanying notes to the consolidated financial statements.
 
F-6
 
 
SHARPSPRING, INC.
CONSOLIDATED STATEMENTS 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, 2017
  8,456,061 
 $8,456 
 $28,362,397 
 $(480,762)
  20,000 
 $(84,000)
 $(7,873,883)
 $19,932,208 
Stock based compensation - stock options
  - 
  - 
  801,655 
  - 
  - 
  - 
  - 
  801,655 
Issuance of common stock for cash
  113,090 
  113 
  596,274 
  - 
  - 
  - 
  - 
  596,387 
Issuance of common stock for director services
  23,302 
  24 
  177,998 
  - 
  - 
  - 
  - 
  178,022 
Issuance of common stock for other non-employee services
  36,274 
  36 
  508,525 
  - 
  - 
  - 
  - 
  508,561 
Issuance of common stock for warrant conversions
  10,412 
  10 
  (10)
  - 
  - 
  - 
  - 
  - 
Foreign currency translation adjustment, net
  - 
  - 
  - 
  249,709 
  - 
  - 
  - 
  249,709 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  (9,478,823)
  (9,478,823)
Balance, December 31, 2018
  8,639,139 
 $8,639 
 $30,446,838 
 $(231,053)
  20,000 
 $(84,000)
 $(17,352,706)
 $12,787,718 
 
    
    
    
    
    
    
    
    
Balance, December 31, 2018
  8,639,139 
 $8,639 
 $30,446,838 
 $(231,053)
  20,000 
 $(84,000)
 $(17,352,706)
 $12,787,718 
Stock based compensation - stock options
  - 
  - 
  1,076,324 
  - 
  - 
  - 
  - 
  1,076,324 
Issuance of common stock for cash
  1,631,331 
  1,631 
  16,578,784 
  - 
  - 
  - 
  - 
  16,580,415 
Issuance of common stock for director services
  10,286 
  10 
  127,878 
  - 
  - 
  - 
  - 
  127,888 
Issuance of common stock for warrant conversions
  14,772 
  15 
  (15)
  - 
  - 
  - 
  - 
  - 
Issance of commons stock for settlement of notes
  1,241,635 
  1,242 
  10,621,474 
  - 
  - 
  - 
  - 
  10,622,716 
Foreign currency translation adjustment, net
  - 
  - 
  - 
  6,260 
  - 
  - 
  - 
  6,260 
Net Loss
  - 
  - 
  - 
  - 
  - 
  - 
  (12,387,976)
  (12,387,976)
Balance, December 31, 2019
  11,537,163 
 $11,537 
 $58,851,285 
 $(224,793)
  20,000 
 $(84,000)
 $(29,740,682)
 $28,813,347 
 
    
    
    
    
    
    
    
    
 
 
 
 
See accompanying notes to the consolidated financial statements.
 
F-7
 
 
SHARPSPRING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Year ended
 
 
 
December 31,
 
 
 
2019
 
 
2018
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(12,387,976)
 $(9,478,822)
Adjustments to reconcile loss from operations:
    
    
Depreciation and amortization
  1,010,123 
  892,233 
Amortization of costs to acquire contracts
  804,780 
  758,014 
Non-cash stock compensation
  1,204,213 
  964,676 
Non-employee stock issuance expense
  - 
  508,561 
Deferred income taxes
  - 
  (168,119)
Gain on disposal of property and equipment
  (617)
  (4,700)
Non-cash interest
  139,372 
  304,301 
Amortization of debt issuance costs and embedded derivative
  2,903 
  (6,088)
(Gain)/loss on embedded derivative
  (214,350)
  400,220 
Loss on induced conversion
  2,162,696 
  - 
Unrealized foreign currency loss
  25,425 
  289,339 
Changes in assets and liabilities:
    
    
Accounts receivable
  (204,217)
  3,896 
Unbilled receivables
  (254,987)
  (187,246)
Right-of-use assets
  433,980 
  - 
Other assets
  (837,082)
  (1,097,683)
Income taxes, net
  (2,094)
  1,966,648 
Accounts payable
  439,028 
  1,094,281 
Lease liabilities
  (377,264)
  - 
Other liabilities
  (392,480)
  162,984 
Deferred revenue
  421,405 
  (27,283)
Net cash used in operating activities
  (8,027,142)
  (3,624,788)
 
    
    
Cash flows from investing activities
    
    
Acquisition of business
  (4,566,402)
  - 
Purchases of property and equipment
  (1,365,048)
  (893,886)
Proceeds from the sale of property and equipment
  617 
  4,700 
Net cash used in investing activities
  (5,930,833)
  (889,186)
 
    
    
Cash flows used in financing activities:
    
    
Proceeds from issuance of convertible note
  - 
  8,000,000 
Debt issuance costs
  - 
  (141,657)
Proceeds from exercise of stock options
  968,986 
  596,387 
Proceeds (cost) from issuance of common stock, net
  15,587,990 
  - 
Net cash provided by financing activities
  16,556,976 
  8,454,730 
 
    
    
Effect of exchange rate on cash
  (37,918)
  (19,637)
 
    
    
Change in cash and cash equivalents
  2,561,083 
  3,921,119 
 
    
    
Cash and cash equivalents, beginning of period
  9,320,866 
  5,399,747 
 
    
    
Cash and cash equivalents, end of period
 $11,881,949 
 $9,320,866 
 
    
    
Supplemental information on consolidated statements of cash flows:
    
    
Cash paid during the period for
    
    
Income taxes, net
 $11,013 
 $(2,099,762)
Non-cash activities
    
    
Right-of-use asset obtained for lease liability
 $5,715,510 
 $- 
Convertible notes liability relieved upon conversion
 $8,484,701 
 $- 
Embedded derivative liability relieved upon conversion
 $189,776 
 $- 
 
    
    
 
    
    
 
 
 
See accompanying notes to the consolidated financial statements.
 
F-8
 
 
SHARPSPRING, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1: Organization
 
SharpSpring, Inc. (the “Company”) provides a cloud-based marketing automation solution and a display retargeting platform through our SharpSpring and Perfect Audience products respectively. SharpSpring is designed to increase the rates at which businesses generate leads and convert leads to sales opportunities by improving the way businesses communicate with customers and prospects. Our products are marketed directly by us and through a small group of reseller partners to customers around the world.
 
Note 2: Summary of Significant Accounting Policies
 
Basis of Presentation and Consolidation
 
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The Company’s consolidated financial statements include the accounts of SharpSpring, Inc. and our subsidiaries (the “Company”). The Company’s 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 functional currency of the Company’s foreign subsidiaries is the local currency. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at the average exchange rates during the period. Foreign currency translation gains and losses are recorded in other comprehensive income (loss).
 
 
F-9
 
 
Cash and Cash Equivalents
 
Cash equivalents are short-term, liquid investments with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed by major financial institutions and at most times are in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits.
 
Fair Value of Financial Instruments
 
U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, deposits, embedded derivatives (associated with our convertible notes) and accounts payable. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the short-term nature of these items. The fair value of the embedded derivatives associated with our convertible notes are calculated using Level 3 unobservable inputs, utilizing a probability-weighted expected value model to determine the liability. The fair value of the embedded derivatives at December 31, 2019 and December 31, 2018 was a liability balance of zero and $0.21 million, respectively. The change in fair value for the year ended December 31, 2019 and 2018 was a gain of $0.21 million and loss of $0.4 million.
 
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. After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance. 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 are met, thus creating a contract asset. A portion of our accounts receivable balance is therefore unbilled at each balance sheet date and is reflected as such on the consolidated balance sheet.
 
Business Combinations
 
Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.
 
 
 
F-10
 
 
Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:
 
future expected cash flows from customer contracts and acquired developed technologies and patents;
the acquired company’s trade name, vendor relationships, and customer relationships, as well as assumptions about the period of time the acquired trade name will continue to be used in our offerings; and
discount rates.
 
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
 
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 Indefinite-Lived Intangible Assets
 
As of December 31, 2019 and 2018, we had recorded goodwill of $10.9 million and $8.9 million, 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, GraphicMail, and Perfect Audience acquisitions. In 2019, Goodwill increased due to the Perfect Audience acquisition (See Note 3). Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other” deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests, and tests between annual tests in certain circumstances, based on estimated fair value in accordance with FASB ASC 350-10, and written down when impaired.
 
The Company also has indefinite-lived intangible assets. As of December 31, 2019, and 2018, we had recorded indefinite-lived intangible assets of $0.38 million and zero, respectively (see Note 4). These assets are not 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 350-30, and written down when impaired.
 
 
F-11
 
 
Debt Issuance Costs
 
Third-party costs associated with the issuance of debt are included as a direct reduction to the carrying value of the debt and are amortized as effective interest expense ratably over the life of the debt. There was no debt issuance costs during the year ended December 31, 2019. For the year ended December 31, 2018 we incurred debt issuance costs of approximately $141,000. These costs were included as a direct reduction tot the carrying value of the debt as part of the Notes on our consolidated balance sheets and are amortized to interest expense ratably over the five-year term of the Notes. Upon conversion of the Notes in 2019, the remaining balance of the debt issuance costs was expensed along with the remaining balance of the Notes.
 
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 consolidated financial statements. Deferred tax assets and liabilities are included in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
 
The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the consolidated financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. There are no material uncertain tax positions taken by the Company on its tax returns. Tax years subsequent to 2017 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, 2019, the Company was being examined by the U.S. tax authorities related to the 2016 and 2017 tax years. The Company does not expect any material adjustments as a result of the audit. The Company received notification February 14, 2020 that the examination had been closed with no changes. The Company received notification January 14, 2020 that it’s Swiss subsidiary, InterInbox SA is under examination from the Switzerland Federal Tax Administration for the years 2015 through 2018. The Company does not expect any material adjustments as a result of the audit.
 
 
F-12
 
 
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 related to property and equipment was $0.63 million and $0.43 million for the years ended December 31, 2019 and 2018, respectively.
 
Property and equipment as of December 31 is as follows:
 
 
 
December 31,
 
 
December 31,
 
 
 
2019
 
 
2018
 
Property and equipment, gross:
 
 
 
 
 
 
Leasehold improvements
 $290,977 
 $197,268 
Furniture and fixtures
  678,774 
  611,171 
Computer equipment and software
  2,350,758 
  1,135,012 
Total
  3,320,509 
  1,943,451 
Less: Accumulated depreciation and amortization
  (1,323,787)
  (682,653)
 
 $1,996,722 
 $1,260,798 
 
Useful lives are as follows:
 
Leasehold improvements
5 years
Furniture and fixtures
3-5 years
Computing equipment
3 years
Software
3-5 years
Revenue Recognition
 
The Company generates revenue from contracts with multiple performance obligations, which typically include subscriptions to its cloud-based marketing automation software and professional services which include on-boarding and training services. The Company’s customers do not have the right to take possession of the software. Substantially all of SharpSpring’s revenue is from contracts with customers. The Company recognizes revenue from contracts with customers using a five-step model, which is described below:
 
Identify the customer contract;
Identify performance obligations that are distinct;
Determine the transaction price;
Allocate the transaction price to the distinct performance obligations; and
Recognize revenue as the performance obligations are satisfied.
 
 
F-13
 
 
Identify the customer contract
 
A customer contract is generally identified when the Company and a customer have executed arrangement that calls for the Company to provide access to its software and provide professional services in exchange for consideration from the customer.
 
Identify performance obligations that are distinct
 
A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services.  A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.  The Company has determined that subscriptions for its software is distinct because, once a customer has access to the software it purchased, the software is fully functional and does not require any additional development, modification, or customization.  Professional services sold are distinct because the customer benefits from the on-boarding and training to make better use of the online software products it purchased.
 
Determine the transaction price
 
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies.  The Company estimates any variable consideration to which it will be entitled at contract inception, when determining the transaction price.  The Company does not include variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will occur when any uncertainty associated with the variable consideration is resolved.
 
Allocate the transaction price to the distinct performance obligations
 
The transaction price is allocated to each performance obligation based on the relative standalone selling prices of the goods or services being provided to the customer.  
 
Recognize revenue as the performance obligations are satisfied
 
Revenues are recognized when or as control of the promised goods or services is transferred to customers.  Revenue from the SharpSpring marketing automation and Mail+ software is recognized ratably over the subscription period, which is typically one month. Revenue related to our professional services is recognized as the services are provided. The Perfect Audience software is utilized on an as needed basis, and the related revenue recognized as the service is provided. SharpSpring’s subscription contracts range from one to twelve months. The Company recognizes revenue from on-boarding and training services as the services are provided, which is generally 60 days. Cash payments received in advance of providing subscription or services are recorded to deferred revenue until the performance obligation is satisfied.
 
 
F-14
 
  
Our products are typically billed in arrears or upfront, depending on the product, which creates contract assets (unbilled receivables) and contract liabilities (deferred revenue). Unbilled receivables occur due to unbilled charges for which the Company has satisfied performance obligations. Deferred revenues occur due to billing up front for charges that the Company has not yet fully satisfied all performance obligations. Both contract assets and liabilities are recognized as it is used.
 
From time to time, the Company offers refunds to customers and experiences credit card chargebacks relating to cardholder disputes that are commonly experienced by businesses that accept credit cards. The Company makes estimates for refunds and credit card chargebacks based on historical experience.
 
Deferred Revenue
 
Deferred revenue consists of payments received in advance of the Company providing services. Deferred revenue is earned over the service period identified in each contract. The majority of our deferred revenue balances (contract liabilities) arise from upfront implementation and training fees for its SharpSpring marketing automation solution that are paid in advance. These services are typically performed over a 60-day period, and the revenue is recognized over that period. Additionally, some of the Company’s customers pay for services in advance on a periodic basis (such as monthly, quarterly, annually or bi-annually). In situations where a customer pays in advance for a one-year service period, the deferred revenue is recognized over that service period. Deferred revenue balances were $0.25 million and $0.28 million as of December 31, 2018 and 2017, respectively. Deferred revenue during the year ended December 31, 2019 increased by $0.61 million and decreased by $0.03 million during the year ended December 31, 2018. The Company had deferred revenue contract liability balances of $0.86 million and $0.25 million as of December 31, 2019 and 2018, respectively. The Company expects to recognize a majority of the revenue on these remaining performance obligations within 12 months. Approximately 4% of the deferred revenue balance is related to prepaid credits. These credits are recognized as they are used. The Company expects to recognize approximately half of the remaining credits within 12 months. As part of the acquisition of Perfect Audience, the Company acquired approximately $0.19 million of deferred revenue.
 
Unbilled Receivable
 
In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition is met, thus creating a contract asset. The accrued revenue contract asset balances were $0.74 million and $0.55 million as of December 31, 2018 and 2017, respectively. Revenue billed that was included in accrued revenue at the beginning of the year ended December 31, 2019 and 2018 was $0.74 million and $0.55 million, respectively. The accrued revenue not billed and ending balance in years ended December 31, 2019 and 2018 was $1.0 million and $0.74 million 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, 2019 and 2018, the Company had cash balances at financial institutions that exceed federally insured limits. The Company maintains its cash balances with accredited financial institutions. The Company does not believe it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
 
 
F-15
 
 
For the years ended December 31, 2019, and 2018, there were no customers that accounted for more than 10% of total revenue. For the year ended December 31, 2019 two customers had open accounts receivable balances which were above 10% of net accounts receivable, accounting for approximately 43% of net accounts receivable. As of February 29, 2020, these customers had no accounts receivable balance older than 30 days. For the year ended December 31, 2018 there were no customers that accounted for more than 10% of the net 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.
 
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, excluding marketing team costs, were $5.8 million and $5.7 million for the years ended December 31, 2019 and 2018, respectively, and are included as a component of sales and marketing expense.
 
Capitalized Cost of Obtaining a Contract
 
The Company capitalizes sales commission costs which are incremental to obtaining a contract. We expense costs that are related to obtaining a contract but are not incremental such as other sales and marketing costs and other costs that would be incurred regardless of if the contract was obtained. Capitalized costs are amortized using straight-line amortization over the estimated weighted average life of the customer, which we have estimated to be 3 years. At December 31, 2019, the net carrying value of the capitalized cost of obtaining a contract was $1.2 million, of which $0.68 million is included in other current assets and $0.52 million is included in other long-term assets. At December 31, 2018, the net carrying value of the capitalized cost of obtaining a contract was $1.31 million, of which $0.7 million is included in other current assets and $0.61 million is included in other long-term assets. The Company amortized costs directly attributable to obtaining contracts of $0.8 million and $0.76 million during the years ended December 31, 2019 and 2018, respectively.
 
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. The Company also provides stock-based compensation to non-employee directors which are treated as employees for the purpose of stock-based compensation in accordance with ASC 718. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period.
 
 
F-16
 
 
Net Loss Per Share
 
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potentially dilutive common stock equivalents for the period. For purposes of this calculation, options to purchase common stock, warrants, and the conversion option of the Convertible Notes (Note 6) are considered to be potential common shares outstanding. Since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s potential common shares outstanding were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive.
 
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 May 2014, the FASB issued updated guidance and disclosure requirements for recognizing revenue from contracts with customers. This new revenue recognition standard became effective for the Company on January 1, 2018. In addition to providing guidance on when and how revenue is recognized, the new standard also provides guidance on accounting for costs of obtaining contracts primarily related to aligning the expense with the period in which the value is recognized. As a result of this new standard, the Company was required to capitalize certain costs related to obtaining contracts associated with commissions expense paid to salespeople. The Company is using the retrospective transition method to adjust each prior reporting period presented for this new method of accounting for costs associated with obtaining contracts. The application of the retrospective transition was applied to all contracts at the date of initial application. The following tables present our results under our historical method and as adjusted to reflect these accounting changes.
 
 
F-17
 
 
 
 
Historical Accounting Method
 
 
Effect of Adoption of New ASU
 
 
As Adjusted
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31, 2018
 
 
 
 
 
 
 
 
 
Sales and Marketing Expense
  10,183,186 
  (90,495)
  10,092,691 
Total operating expense
  21,807,865 
  (90,495)
  21,717,370 
Operating loss
  (8,954,609)
  90,495 
  (8,864,114)
Loss before income taxes
  (9,900,311)
  90,495 
  (9,809,816)
Net loss
  (9,569,317)
  90,495 
  (9,478,822)
Basic net loss per share
  (1.12)
  0.01 
  (1.11)
Diluted net loss per share
  (1.12)
  0.01 
  (1.11)
 
    
    
    
Balance as of December 31, 2018
    
    
    
Other current assets
  485,058 
  699,159 
  1,184,217 
Other long-term assets
  54,954 
  610,169 
  665,123 
Total assets
  22,697,947 
  1,309,329 
  24,007,276 
Accumulated deficit
  (18,662,035)
  1,309,329 
  (17,352,706)
 
 
F-18
 
 
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.
 
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. The guidance became effective for the Company on January 1, 2019. The Company is using the modified retrospective transition method which allows the Company to recognize and measure leases as of the adoption date, January 1, 2019, with the cumulative impact being reflected in the opening balance of retained earnings. The application of the modified retrospective transition was applied to all active leases at the date of initial application. There was no impact to the Company’s retained earnings for the implementation of this accounting standard. The following tables present the cumulative impact on our financial statements upon adoption.
 
 
F-19
 
 

 
 
Impact upon adoption of new ASU
 
As of January 1, 2019
 
 
 
Right-of-use assets
  5,715,510 
Total Assets
 $5,715,510 
 
    
Accrued expenses and other current liabilities
 $(8,821)
Lease liability (current)
  344,883 
Lease liability (non-current)
  5,379,448 
Total Liabilities
 $5,715,510 
 
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new accounting guidance removes the following:
 
the exception to the incremental approach for intra-period tax allocations when there is a loss from continuing operations and income or gain from other items such as discontinued operation or other comprehensive income,
the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment,
the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and
the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
 
The new accounting guidance also simplifies the accounting for income taxes by:
 
requiring an entity to recognize franchise tax that is partially based on income as an income based tax and account for any incremental amount incurred as a non-income-based tax,
requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction,
specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements,
requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, and
making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.
 
This standard is effective for fiscal and interim periods beginning after December 15, 2020. The Company anticipates that the adoption of this standard will not have a material impact on its financial statements.
 
Note 3: Acquisitions
 
On November 21, 2019, the Company acquired substantially all the assets and assumed certain liabilities of the Perfect Audience business unit from Marin Software Incorporated, a Delaware corporation for cash consideration of $4.6 million. The acquired assets and liabilities were assigned to SharpSpring’s wholly owned subsidiary SharpSpring Reach, Inc. Perfect Audience is a cloud-based platform that provides display retargeting software products and services. The transaction was structured as an asset purchase, whereby the SharpSpring acquired all of Perfect Audience’s assets used in connection with the business (excluding certain pre-acquisition receivables, cash, and cash equivalents) and only liabilities pertaining to the business such as deferred revenue, accrued publisher costs, accrued bonuses for to the acquired workforce, and any liabilities accruing on or after November 21, 2020.
 
 
F-20
 
 
 
The allocation of the purchase price is based on management estimates and assumptions, and other information compiled by management, which utilized established valuation techniques appropriate for the industry. The valuation included a combination of the income approach and cost approach, depending upon which was the most appropriate based on the nature and reliability of the data available. The income approach is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. The cost approach takes into account the cost to replace (or reproduce) the asset and the effects on the assets value of physical, functional and/or economic obsolescence that has occurred with respect to the asset.
 
The following represents the initial allocation of the purchase price to the acquired net tangible and intangible assets acquired and liabilities assumed by SharpSpring:
 
Cash Consideration
 $4,566,402 
Add:
    
Net tangible assets acquired
    
Deferred Revenue
 $186,500 
Accrued expenses and other current liabilities
 $545,473 
Total liabilities
 $731,973 
Less:
    
Net tangible assets acquired
    
Accounts receivable
 $(55,236)
Other current assets
 $(20,719)
Total tangible assets
 $(75,955)
Intangible assets acquired:
    
Trade names
 $(381,000)
Technology
 $(979,000)
Vendor relationships
 $(1,813,000)
Total intangible assets
 $(3,173,000)
Goodwill
 $2,049,420 
 
Acquired intangible assets include developed technology and vendor relationships which are amortized over ten years. The acquired trade name assets have an indefinite life and will be tested for impairment at least annually.
 
The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill of $2.05 million. Goodwill will not be amortized but instead tested for impairment at least annually (more frequently if certain indicators are present). Goodwill arose primarily as a result of the expected future growth of the Perfect Audience product and the assembled workforce. The transaction costs associated with the acquisition were approximately $0.18 million and were recorded in general and administrative expense.
 
The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement.
 
 
F-21
 
  
Pro Forma Results of Operations (Unaudited)
 
The following table summarizes selected unaudited pro forma consolidated statements of operations data for the year ended December 31, 2019 and 2018 as if the acquisition of Perfect Audience had been completed at the beginning of the year.
 
 
 
Year ended
 
 
 
December 31,
 
 
 
2019
 
 
2018
 
Net revenues
 $2,980,148 
 $4,423,069 
Gross profit
 $1,649,482 
 $3,120,694 
Net income
 $257,154 
 $1,140,637 
Net income per share:
    
    
Basic
 $0.02 
 $0.13 
Diluted
 $0.02