The following discussion and analysis should be read in conjunction with our
consolidated financial statements, included herewith. This discussion should not
be construed to imply that the results discussed herein will necessarily
continue into the future, or that any conclusion reached herein will necessarily
be indicative of actual operating results in the future. Such discussion
represents only the best present assessment of our management. This information
should also be read in conjunction with our audited historical consolidated
financial statements which are included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2020, filed with the Securities and Exchange
Commission on March 30, 2021.
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 SharpSpring Ads 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 SharpSpring Ads 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.
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 Marketing Automation
product and references to "SharpSpring Ads" relate to the SharpSpring Ads
product, while all references to "our Company," "we," "our" or "us" and other
similar terms means SharpSpring, Inc., a Delaware corporation, and wholly owned
subsidiaries.
Agreement and Plan of Merger
On June 21, 2021, the Company entered into an Agreement and Plan of Merger,
("Merger Agreement"), with Constant Contact, Inc., a Delaware corporation,
("Constant Contact"), and Groove Merger Sub, Inc ("MergerSub"), a Delaware
corporation and a direct wholly-owned subsidiary of Constant Contact ("the
Merger"). Pursuant to the terms of the Merger Agreement, MergerSub will merge
with and into SharpSpring and SharpSpring will continue as the surviving
corporation and become a wholly-owned subsidiary of Constant Contact. The
Merger, subject to final shareholder approval and other closing conditions, will
be proposed at a Special Stockholders Meeting to be held on August 25, 2021.
Additional details regarding the proposed Merger can be found within the
Definitive Proxy Statement filed with the SEC on July 30, 2021. We cannot assure
you that the Merger will be completed on the terms or timeline anticipated or at
all. SharpSpring does not have any additional contracts with Constant Contact,
except those related to Merger Agreement.
24
Table of Contents
Effects of COVID-19
The COVID-19 pandemic has affected our businesses, as well as those of our
customers, suppliers, and third-party sellers. We have not experienced any drop
off in the services provided by our various vendors. To serve our customers
while also providing for the safety of our employees and service providers, we
have adapted various steps to protect our employees and customers. We have
enacted a voluntary work-from-home policy to allow our employees to maintain
social distancing while still maintaining our level of productivity and
effectiveness prior to the work-from-home policy. At the onset of the pandemic,
we made certain temporary strategic business decisions to help navigate these
uncertain times such as salary reduction, reduction and reallocation of
marketing budget, and pausing our employee 401(k) matching program. SharpSpring
has successfully reverted these temporary measures after establishing a more
stable view of the impact of the COVID-19 pandemic.
Also described in Note 5, SBA Paycheck Protection Loans, the Company received
$3.40 million from the Small Business Association ("SBA") loan program in April
2020, which as of June 30, 2021, the entire $3.40 million has been forgiven. We
also received an approximately $1.60 million tax refund in June 2020 as a result
of historical net operating losses as described in Note 6, Income Taxes. The SBA
loan program and tax refund are both results of the CARES Act enacted by
Congress in March 2020. This cash infusion continues to allow for increased
flexibility in these uncertain times. In addition, the Company received
approximately $13.94 million from a stock offering, net of issuance costs, in
December 2020.
While, the COVID-19 pandemic has made significant impact on the entire global
economy, the SharpSpring sales and marketing platforms continue to generate
demand in these uncertain times and as a SaaS product we can continue to provide
our product to our customers while still practicing social distancing which is
more difficult in other industries. During the three months ended June 30, 2021,
we activated 159 new customers compared to 260 in the same period in 2020. The
second quarter of 2021 was challenging on our sales and marketing funnel as the
direct and indirect impacts of COVID-19 and the recently identified variants of
COVID-19 remained along with challenges in new customer acquisition within the
business not related to the pandemic. The resulting sales levels will have a
continuing impact on the Company's growth rate throughout 2021 and beyond due to
the Company's recurring revenue model. Additionally, customer acquisition costs
had increased significantly since the onset of the pandemic and that the remote
work environment had added upward pressure on salaries as the Company sought to
continue to hire qualified candidates to fill open positions in a highly
competitive market for a limited number of candidates. Despite a
lower-than-average new logo sales quarter, we believe our tools offer our
customers a chance to thrive in these uncertain times where others are
diminishing. For customers that use the various features our platform provides,
we are deeply embedded in their sales and marketing processes. Our SharpSpring
Ads business has faced downward pressures beyond that of our Marketing
Automation platform as the retargeting industry continues to experience
difficulties as customers spend less on advertisements during this unprecedented
time. We continue to invest in our product as we still expect long term growth
from this business and believe the current economic climate for advertisement
retargeting is temporary only due to COVID-19 and the recently identified
variants of COVID-19. During the first quarter of 2021, we have returned our
marketing spend levels to a pre-pandemic level in an effort to spur growth of
new customers back to levels we were able to achieve prior to the pandemic.
COVID-19 and the recently identified variants of COVID-19 have created a more
global and therefore more competitive employment pool for companies across the
United States as well as the rest of the world. As such, we are no longer
exclusively competing for talented employees with other local companies, but
rather competing with companies across the globe as remote work has become more
widely adopted. We have taken steps to review our total compensation package
including flexibility of working remotely, to ensure we can remain competitive
in the current environment. We believe the steps we have taken will allow us to
remain competitive for top talent needed to grow our company.
25
Table of Contents
Despite COVID-19 and the recently identified variants of COVID-19, the Company
was able to continue to grow revenue in the three months ended June 30, 2021,
compared to both the three months ended March 31, 2021, and June 30, 2020. We
believe we have limited the impact of the pandemic on our existing customer base
as evidenced by our lower than our average attrition rate, however, we are still
experiencing difficulties attracting new customers with the economic
uncertainties of the pandemic still looming. It is possible that we could be
further impacted from COVID-19 and the recently identified variants of COVID-19
in subsequent quarters in ways that we presently do not anticipate; however, at
this time, our business continues to grow. In addition, we have been able to
maintain the size of our workforce throughout the entirety of the pandemic. The
full extent of the impact to the Company due to the impact of the COVID-19
pandemic for the next year and beyond cannot currently be completely determined,
but the Company has taken measures to best position our self to continue to be
successful in these uncertain times. The extent to which the COVID-19 pandemic
will impact the Company will depend on future developments, which are still
uncertain and cannot be reasonably predicted, including the duration of the
outbreak, the increase or reduction in governmental restrictions to businesses
and individuals, the potential for a resurgence of the virus and other factors.
The longer the COVID-19 pandemic continues, the greater the potential negative
financial effect on the Company. We continue to evaluate the impact of global
economic and health conditions to ensure our responses to these uncertain times
are both timely and appropriate.
Results of Operations
Three Months Ended June 30, 2021, Compared to the Three Months Ended June 30,
2020:
Percent
Three Months Ended Change Change
June 30, from from
2021 2020 Prior Year Prior Year
Revenues and Cost of Sales:
Revenues $ 8,106,243 $ 7,270,905 $ 835,338 11%
Cost of Sales 1,984,662 1,873,029 111,633 6%
Gross Profit $ 6,121,581 $ 5,397,876 $ 723,705 13%
Revenues increased $0.84 million to $8.11 million in the three months ended June
30, 2021, as compared to $7.27 million for the three months ended June 30, 2020,
primarily from the combined impact of our two most recent rolling annual price
increases throughout the year put in place during the first quarter of 2021 and
2020 and continued improvement of our attrition from our existing customer base.
Revenues for our flagship marketing automation platform increased to
approximately $7.50 million in the three months ended June 30, 2021, up from
$6.57 million in the three months ended June 30, 2020. Revenue from the
SharpSpring Ads platform decreased $0.09 million to $0.58 million for the three
months ended June 30, 2021, compared to $0.67 million for the three months ended
June 30, 2020.
26
Table of Contents
Cost of sales increased $0.11 million to $1.98 million for the three months
ended June 30, 2021, compared to $1.87 million for the three months ended June
30, 2020. The increase in cost of sales was driven primarily by an increase in
employee related costs of approximately $0.09 million associated with supporting
our technology platform to more customers. Costs associated with our SharpSpring
Ads platform for the three months ended June 30, 2021, increased approximately
$0.01 million compared to the same period last year. In addition, the total cost
of sales related to the SharpSpring Marketing Automation product increased
approximately $0.10 million in the second quarter of 2021 compared to the second
quarter of 2020. The total costs increased approximately $0.03 million during
the three months ended June 30, 2021, for hosting costs to support new revenues
from both our various products. Gross margin as a percentage of revenue
increased from 74.2% in the second quarter of 2020 to 75.5% in the second
quarter of 2021. This improvement in gross margin is the result of overall
efficiencies within our cost of sales.
Percent
Three Months Ended Change Change
June 30, from from
2021 2020 Prior Year Prior Year
Operating expenses:
Sales and marketing $ 3,915,096 $ 2,395,100 $ 1,519,996 63%
Research and development 2,111,540 1,484,890 626,650 42%
General and administrative 3,522,971 2,244,560 1,278,411 57%
Intangible asset amortization 171,549 183,746 (12,197 ) -7%
$ 9,721,156 $ 6,308,296 $ 3,412,860 54%
Sales and marketing expenses increased $1.52 million to $3.92 million for the
three months ended June 30, 2021, as compared to $2.40 million for the three
months ended June 30, 2020. The increase was primarily due to an increase of
$1.40 million in marketing program spend to drive growth of new sales.
Additionally, employee-related costs, including equity compensation, increased
$0.11 million to support increased marketing program spend during the second
quarter of 2021 compared to the same period of 2020 as well as the return to
full salaries in the fourth quarter of 2020 that were reduced in response to
COVID-19 starting in April 2020. These increases were partially offset by a
decrease of $0.05 million in recruiting expense related to additional sales and
marketing hires made in the second quarter of 2020.
Research and development expenses increased $0.63 million to $2.11 million for
the three months ended June 30, 2021, as compared to $1.48 million for the three
months ended June 30, 2020. The increase in research and development expense is
primarily due to an increase of $0.68 million in employee-related costs,
including equity compensation, tied to increased headcount and a more
competitive salary environment for remote workers as more companies transitioned
to remote workers as a result of COVID-19. Outsourced development costs for the
three months ended June 30, 2021, decreased approximately $0.13 million as
compared to the three months ended June 30, 2020, as we concentrated on internal
development work as opposed to outsourced development. Capitalized development
costs for the three months ended June 30, 2021, and June 30, 2020, were $0.14
million and $0.15 million, respectively. The decreased capitalization resulted
in a net increase research and development expense of approximately $0.01
million for the three months ended June 30, 2021, compared to the same period
last year.
27
Table of Contents
General and administrative expenses increased $1.28 million to $3.52 million for
the three months ended June 30, 2021, as compared to $2.24 million for the three
months ended June 30, 2020. During the three months ended June 30, 2021, the
Company incurred costs of approximately $0.27 million relating to the proposed
Merger. Employee related costs increased approximately $0.41 million during the
three months ended June 30, 2021, compared to the three months ended June 30,
2020, of which $0.13 million is related to increase equity costs. Additionally,
employee related costs increased during the three months ended June 30, 2020,
due to the return to full salaries in the fourth quarter of 2020 that were
reduced in response to COVID-19 starting in April 2020. Facilities and rent
expense for the three months ended June 30, 2021, increased approximately $0.10
million compared to the three months ended June 30, 2020, which was mostly
attributable to the additional office space added during the mid-second quarter
of 2020 at our Gainesville headquarters. Other non-headcount and non-facilities
costs, including insurance premiums and public company registration fees
increased $0.16 million. Expenses from outside professional services not related
to the proposed Merger increased by approximately $0.02 million. Depreciation
expense increased by approximately $0.19 million related to increased property
and equipment expenditures throughout 2020 to furnish the additional office
space as well as increased capitalized software costs.
Amortization of intangible decreased $0.01 million for the three months ended
June 30, 2021, as compared to the three months ended June 30, 2020.
Percent
Three Months Ended Change Change
June 30, from from
2021 2020 Prior Year Prior Year
Other
Other income (expense), net $ (21,354 ) $ (2,777 ) $ (18,577 ) 669%
Gain on extinguishment of debt $ 3,271,101 $ - $ 3,271,101
n/a
Provision (benefit) for income $ $ $
taxes 3,947 57,187 (53,240 ) -93%
Other 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 Credit Facility.
For the three months ended June 30, 2021, we also recorded a gain on
extinguishment of debt of approximately $3.27 million related to forgiveness of
one of our SBA loans in June of 2021. Interest expense relating to our Credit
Facility and SBA Loans (Note 5) for the three months ended June 30, 2021, and
2020 were approximately $0.03 million and $0.04 million, respectively. For the
three months ended June 30, 2020, the Company received and recognized interest
income in the amount of approximately $0.05 million related to the tax refund
received in June 2020.
During the three months ended June 30, 2021, and June 30, 2020, our income tax
expense was related to income derived in foreign jurisdictions at the applicable
statutory tax rates. For years 2021 and 2020, we have recorded a full valuation
allowance against all of our U.S. net operating loss deferred tax assets, as a
result there is no tax benefit recorded on the Consolidated Statement of
Operations and Comprehensive Loss for those losses.
28
Table of Contents
Six Months Ended June 30, 2021, compared to the Six Months Ended June 30, 2020:
Percent
Six Months Ended Change Change
June 30, from from
2021 2020 Prior Year Prior Year
Revenues and Cost of Sales:
Revenues $ 16,095,473 $ 14,323,634 $ 1,771,839 12%
Cost of Sales 3,874,675 4,240,671 (365,996 ) -9%
Gross Profit $ 12,220,798 $ 10,082,963 $ 2,137,835 21%
Revenues increased $1.77 million to $16.10 million in the six months ended June
30, 2021, as compared to $14.32 million in the six months ended June 30, 2020,
primarily from the combined impact of our two most recent rolling annual price
increases throughout the year put in place during the first quarter of 2021 and
2020 and continued improvement of our attrition from our existing customer base.
Revenues for our flagship marketing automation platform increased approximately
$1.95 million to a record $14.88 million in the six months ended June 30, 2021,
up from $12.93 million in the six months ended June 30, 2020. Revenue from the
SharpSpring Ads platform decreased $0.13 million to $1.16 million for the six
months ended June 30, 2021, compared to $1.29 million for the six months ended
June 30, 2020.
Cost of sales decreased $0.37 million to $3.87 million for the six months ended
June 30, 2021 compared to $4.24 million for the six months ended June 30, 2020.
The decrease in cost of sales was driven primarily by an approximate $0.08
million decrease in employee related costs associated with more efficiently
providing and supporting our technology platform. Costs associated with our
SharpSpring Ads platform for the six months ended June 30, 2021, decreased
approximately $0.21 million compared to the same period last year due to
significant initial cost of supporting SharpSpring Ads in the first full six
month of operations after the acquisition of the platform in November 2019. In
addition, total cost of sales related to the SharpSpring Marketing Automation
product decreased approximately $0.16 million for the six months ended June 30,
2021, compared to the same period in 2020. Hosting costs increased $0.05 million
during the six months ended June 30, 2021, to support new revenues. Gross margin
as a percentage of revenue increased from 70.4% in the first six months of 2020
to 75.9% in the first six of 2021. This improvement in gross margin is the
result of overall efficiencies within our cost of sales.
Percent
Six Months Ended Change Change
June 30, from from
2021 2020 Prior Year Prior Year
Operating expenses:
Sales and marketing $ 7,706,478 $ 5,429,222 $ 2,277,256 42%
Research and development 4,227,280 3,063,029 1,164,251 38%
General and administrative 6,294,610 4,658,401 1,636,209 35%
Intangible asset amortization 343,098 336,547 6,551 2%
$ 18,571,466 $ 13,487,199 $ 5,084,267 38%
Sales and marketing expenses increased $2.28 million to $7.71 million for the
six months ended June 30, 2021, as compared to $5.43 million for the six months
ended June 30, 2020. The increase was primarily due to an increase of $2.04
million in marketing program spend to drive growth of new sales, in the six
months ended June 30, 2021, as the Company returned marketing program spend to
pre-COVID levels. Additionally, employee-related costs, including equity
compensation, increased $0.28 million to support increased marketing program
spend in the second six months of 2021 compared to the same period of 2020.
These increases were partially offset by a decrease of $0.12 million in
recruiting expense related to additional sales and marketing hires made in the
second six months of 2020.
29
Table of Contents
Research and development expenses increased $1.16 million to approximately $4.23
million for the six months ended June 30, 2021, as compared to $3.06 million for
the six months ended June 30, 2020. The increase in research and development
expense is primarily due to an increase of $1.22 million in employee-related
costs, including equity compensation, tied to increased headcount and a more
competitive salary environment for remote workers as more companies transitioned
to remote workers as a result of COVID-19. Outsourced development costs for the
six months ended June 30, 2021, decreased approximately $0.31 million as
compared to the six months ended June 30, 2020, as we concentrated on internal
development work as opposed to outsourced development. Capitalized development
costs for the six months ended June 30, 2021, and June 30, 2020, were $0.20
million and $0.42 million, respectively. The decrease capitalization resulted in
a net increase research and development expense of approximately $0.22 million
for the six months ended June 30, 2021, compared to the same period last year.
General and administrative expenses increased $1.63 million to $6.29 million for
the six months ended June 30, 2021, as compared to $4.66 million for the six
months ended June 30, 2020. During the six months ended June 30, 2021, the
Company incurred costs of approximately $0.27 million relating to the proposed
Merger. Employee related costs increased approximately $0.54 million during the
six months ended June 30, 2021, compared to the six months ended June 30, 2020,
primarily due to the return to full salaries in the fourth quarter of 2020 that
were reduced in response to COVID-19 starting in April 2020. Facilities and rent
expense for the six months ended June 30, 2021, increased approximately $0.19
million compared to the six months ended June 30, 2020, and was mostly related
to the addition of office space at our Gainesville headquarters during the
mid-second quarter of 2020. Other non-headcount and non-facilities costs,
including insurance premiums and public company registration fees increased
$0.24 million. Expenses from outside professional services not related to the
proposed Merger decreased by approximately $0.08 million. Depreciation expense
increased by approximately $0.26 million related to increased property and
equipment expenditures throughout 2020 for furniture and leasehold improvements
related to the additional office space acquired in the second quarter of 2020,
as well as increased capitalized software costs.
Amortization of intangible increased $0.01 million for the six months ended June
30, 2021, as compared to the three months ended June 30, 2020.
Percent
Six Months Ended Change Change
June 30, from from
2021 2020 Prior Year Prior Year
Other
Other income (expense), net $ (14,519 ) $ (59,556 ) $ 45,037 -76%
Gain on extinguishment of debt $ 3,438,077 $ - $ 3,438,077 n/a
Provision (benefit) for income
taxes $ 10,520 $ (1,505,331 ) $ 1,515,851 -101%
Other 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 Credit Facility.
For the six months ended June 30, 2021, we also recorded a gain on
extinguishment of debt of approximately $3.44 million related to forgiveness of
one of our SBA loans in June of 2021. Interest expense relating to our Credit
Facility and SBA Loans (Note 5) for the six months ended June 30, 2021, and 2020
was approximately $0.06 million and $0.04 million, respectively. For the six
months ended June 30, 2020, the Company received and recognized interest income
in the amount of approximately $0.05 million related to the tax refund received
in June 2020.
30
Table of Contents
During the six months ended June 30, 2021, our income tax expense was related to
income derived in foreign jurisdictions at the applicable statutory tax rates.
During the six months ended June 30, 2020, our income tax benefit was related to
carryback of net operating loss for our consolidated U.S. entities for the years
prior to 2019 as result of changes to the tax law from the CARES Act. For years
2021 and 2020, we have recorded a full valuation allowance against all of our
U.S. net operating loss deferred tax assets, so there is no tax benefit recorded
on the Consolidated Statement of Operations and Comprehensive Loss for those
losses.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary source of operating cash inflows are payments from customers for use
of our SharpSpring Marketing Automation and SharpSpring Ads platforms. Such
payments are primarily received monthly and weekly respectively from customers
but can sometimes be received in advance of providing the services, yielding a
deferred revenue liability on our consolidated balance sheet. In December of
2020, the Company issued 1,000,000 shares of common stock and raised
approximately $13.94 million, net of issuance costs. In June 2020, we received a
tax refund of approximately $1.60 million as net operating losses in prior years
that could be realized as part of the tax law changes in the CARES Act. In
addition to the tax refund the Company received approximately $3.40 million from
the SBA Loans in April 2020. In March 2020, the Company drew down on our
available $1.90 million Credit Facility.
Our primary sources of cash outflows from operations include payroll and
payments to vendors and third-party service providers.
Analysis of Cash Flow
Net cash used in operating activities increased by $2.31 million to $3.31
million used in operations for the six months ended June 30, 2021, compared to
approximately $0.99 million for the six months ended June 30, 2020. The increase
in cash used in operating activities was attributable primarily to the increase
in operating loss of $2.95 million to $6.35 million for the six months ended
June 30, 2021 up from $3.40 million net loss for the six months ended June 30,
2020.
Net cash used in investing activities improved by approximately $0.40 million to
$0.37 million for the six months ended June 30, 2021, compared to $0.78 million
for the six months ended June 30, 2020. The decrease in cash used for investing
activities was primarily related to the reduced investment in property and
equipment and decreased in investment in capitalized software development during
the six months ended June 30, 2021, compared to the six months ended June 30,
2020.
Net cash provided by financing activities decreased by $4.83 million to $0.47
million for the six months ended June 30, 2021, compared to $5.29 million for
the six months ended June 30, 2020. The decrease in cash provided by financing
activities was primarily related the proceeds received from the Company's $3.40
million SBA Loan and $1.90 million from our Credit Facility during the six
months ended June 30, 2020 (Note 5). This decrease in cash flow was slightly
offset by the increase of $0.48 million from proceeds from the exercise of
employee stock options received during the six months ended June 30, 2021,
compared to $0.02 million received during the six months ended June 30, 2020.
31
Table of Contents
SharpSpring had net working capital of approximately $21.42 million and $22.81
million as of June 30, 2021, and December 31, 2020, respectively. Our cash
balance was on June 30, 2021, and December 31, 2020, was $25.16 million and
$28.27 million respectively. The cash balances reflect $1.9 million received
from our Credit Facility in March 2020, $3.4 million received from the SBA Loans
in April 2020, and approximately $13.9 million received from secondary offering,
net of issuance costs, in December 2020.
Contractual Obligations
As of June 30, 2021, there were no material changes in our contractual
obligations from those disclosed in our Annual Report on Form 10-K filed with
the SEC on March 30, 2021, other than those appearing in the notes to the
consolidated financial statements appearing elsewhere in this Quarterly Report
on Form 10-Q.
Significant Accounting Policies
As of June 30, 2021, there were no significant changes in the application of our
significant accounting policies or estimation procedures from those presented in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. We
have consistently applied these policies in all material respects. We do not
believe that our operations to date have involved uncertainty of accounting
treatment, subjective judgment, or estimates, to any significant degree.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
© Edgar Online, source Glimpses
SHARPSPRING, INC. 
