SHARPSPRING, INC. 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
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.
Unless the context otherwise requires, in this section titled Management's
Discussion and Analysis of Financial Condition and Results of Operations
references to "SharpSpring Marketing Automation" relate to the SharpSpring
Marketing Automation product and references to "Perfect Audience" relate to the
Perfect Audience product, while all references to "Company," "we," "our" or "us"
and other similar terms means
Results of Operations 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 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. In addition to our work-from-home policy, we have made several strategic business decisions to help navigate these uncertain times.
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We implemented a 10% reduction to salaries across most of the Company. The employee salary reduction is temporary but expected to continue at a minimum through the next quarter. In addition to salary reduction, the Company has suspended Company bonuses and has cut various other non-employee related costs across the board to ensure future flexibility. This includes approximately 40% reduction in marketing advertising outsourcing and putting a greater reliance on internal lead generation. The Company delayed any non-essential capital expenditures, which will allow us to continue to maintain flexibility during the COVID pandemic.
The Company has also increased its cash position by
We expect demand for our product to continue to be at or above our numbers from the same periods in 2019 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 second quarter 2020 we signed 276 new customers compared to 290 in the same period in 2019. We continue to bring in new leads, host demos, and drive sales at promising levels despite the downturns in the overall economy. 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. Additionally, our Perfect Audience business has continued to run as anticipated, and we remain optimistic about the long-term cross-selling opportunities and expanded market available to our Company through retargeting.
Despite COVID-19, the Company was able to continue to grow revenue in both the
three and six months ending
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Results of Operations
Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30,
2019
Percent
Three Months Ended Change Change
June 30, from from
2020 2019 Prior Year Prior Year
Revenues and Cost of Sales:
Revenues $ 7,270,905 $ 5,517,433 $ 1,753,472 32 %
Cost of Sales 1,873,029 1,625,818 247,211 15 %
Gross Profit $ 5,397,876 $ 3,891,615 $ 1,506,261 39 %
Revenues increased for the three months ended
Cost of services increased for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , primarily due to increased employee related costs associated with providing and supporting 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 26% and 29% of revenues for the three months endedJune 30, 2020 and 2019, respectively. This represents a year-over-year improvement in gross margin due to increased revenue scale and operating leverage. Percent Three Months Ended Change Change June 30, from from 2020 2019 Prior Year Prior Year Operating expenses: Sales and marketing$ 2,395,100 $ 2,865,610 $ (470,510 ) -16 % Research and development 1,484,890 1,217,981 266,909 22 % General and administrative 2,244,560 1,935,291 309,269 16 % Intangible asset amortization 183,746 95,250 88,496 93 %$ 6,308,296 $ 6,114,132 $ 194,164 3 % 35 Table of Contents
Sales and marketing expenses decreased for the three months ended
Research and development expenses increased for the three months ended
General and administrative expenses increased for the three months ended
Amortization of intangible assets increased for the three months ended
Percent
Three Months Ended Change Change
June 30, from from
2020 2019 Prior Year Prior Year
Other
Other expense, net $ (2,777 ) $ (41,966 ) $ 39,189 -93 %
Loss on induced conversion - (2,162,696 ) 2,162,696 -100 %
Gain on embedded derivative - 189,776 (189,776 ) -100 %
Provision (benefit) for income 7166
taxes 57,187 787 56,400 %
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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 convertible
notes, line of credit, and SBA loans. During the three months ended
On
During the three months ended
Six Months Ended
Percent
Six Months Ended Change Change
June 30, from from
2020 2019 Prior Year Prior Year
Revenues and Cost of Sales:
Revenues $ 14,323,634 $ 10,843,718 $ 3,479,916 32 %
Cost of Sales 4,240,671 3,174,200 1,066,471 34 %
Gross Profit $ 10,082,963 $ 7,669,518 $ 2,413,445 31 %
Revenues increased for the six months ended
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Cost of services increased for the six months ended
Percent
Six Months Ended Change Change
June 30, from from
2020 2019 Prior Year Prior Year
Operating expenses:
Sales and marketing $ 5,429,222 $ 5,873,813 $ (444,591 ) -8 %
Research and development 3,063,029 2,476,709 586,320 24 %
General and administrative 4,658,401 4,162,966 495,435 12 %
Intangible asset amortization 336,547 190,500 146,047 77 %
$ 13,487,199 $ 12,703,988 $ 783,211 6 %
Sales and marketing expenses decreased for the six months ended
Research and development expenses increased for the six months ended
General and administrative expenses increased for the six months ended
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Amortization of intangible assets increased for the six months ended
Percent
Six Months Ended Change Change
June 30, from from
2020 2019 Prior Year Prior Year
Other
Other expense, net $ (59,556 ) $ (146,093 ) $ 86,537 -59 %
Loss on induced conversion - (2,162,696 ) 2,162,696 -100 %
Gain on embedded derivative - 214,350 (214,350 ) -100 %
Provision (benefit) for
income taxes (1,505,331 ) 3,126 (1,508,457 ) -48255 %
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 convertible
notes, line of credit, and SBA loans. During the six months ended
On
During the six months ended
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 Perfect Audience platforms. 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 the
operating cash flows the Company utilized several other sources of cash flows in
2020. In
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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 decreased by
Net cash used in investing activities was approximately
Net cash provided by financing activities was
We had net working capital of approximately
Contractual Obligations
As of
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Significant Accounting Policies
Our significant accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Consolidated Financial Statements. We have consistently applied these policies in all material respects. We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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