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, 2019, filed with the Securities and Exchange
Commission on March 16, 2020, as amended on April 30, 2020.
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" relate to the SharpSpring Marketing Automation
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
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 have implemented a 10% reduction to salaries across most of the Company. In
addition to salary reduction, the company has suspended company bonuses and is
cutting various other non-employee related costs across the board to ensure
future flexibility. The Company has also increased its cash position by $1.9
million by drawing down on our line of credit. As stated in Note 16, Subsequent
Events, the Company received $3.4 million from the Small Business Association
(SBA) loan program on April 21, 2020. We have also filed for a $1.6 million tax
refund as a result of historical net operating losses, which is expected to be
received in the next 90 days. The SBA loan program and tax refund are both
results of the CARES Act enacted by Congress in March. This cash infusion will
allow for increased flexibility in these uncertain times. In addition to the
immediate cash infusions, the Company has an effective Form S-3 shelf
registration statement that would allow for the issuance of additional shares
for future capital flexibility.
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. 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 according to plan, and we remain very optimistic about the long-term
cross-selling opportunities and expanded market available to us through
retargeting.
The impact of COVID-19 on SharpSpring had little impact on the financial results
during the first quarter of 2020 as the majority of the operational adjustments
were made late in the period. We expect the subsequent quarter to see further
impact from COVID-19 and the various operational adjustments we made. The full
extent of the impact to the Company due to the impact of the COVID-19 pandemic
for our second quarter and beyond cannot be currently determined. The extent to
which the COVID-19 pandemic will impact the Company will depend on future
developments, which are highly 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.
Three Months Ended March 31, 2020, Compared to the Three Months Ended March 31,
2019:
Percent
Three Months Ended Change Change
March 31, from from
2020 2019 Prior Year Prior Year
Revenues and Cost of Sales:
Revenues $7,052,729 $5,326,285 $1,726,444 32%
Cost of Sales 2,367,642 1,548,381 819,261 53%
Gross Profit $4,685,087 $3,777,904 $907,183 24%
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Revenues increased for the three months ended March 31, 2020, as compared to the
three months ended March 31, 2019, due to continued growth of our marketing
automation customer base, a price increase put in place during the first quarter
of 2020, and addition of the Perfect Audience platform. SharpSpring continues to
grow its customer base driving more recurring revenue. Revenues for our flagship
marketing automation platform increased to $6.36 million in the three months
ended March 31, 2020, up from $5.26 million in the three months ended March 31,
2019. ThePerfect Audience platform acquired in November of 2019 generated an
additional $0.62 million of new revenue for the three months ended March 31,
2020.
Cost of services increased for the three months ended March 31, 2020, as
compared to the three months ended March 31, 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 of approximately $0.29 million. In addition, costs increased $0.20
million during the three months ended March 31, 2020 for hosting costs to
support new revenues from both the SharpSpring Marketing Automation product as
well as the newly acquired Perfect Audience. Total cost of sales related to the
SharpSpring product went up approximately $0.32 million in the first quarter of
2020 compared to the first quarter of 2019. Total costs of sales added by the
new Perfect Audience product was approximately $0.50 million. Gross margin
percentage decreased from 71% in the first quarter of 2019 to 66% in the first
quarter of 2020. This drop in gross margin percentage is attributable to the
addition of the Perfect Audience platform which has a lower gross margin.
Percent
Three Months Ended Change Change
March 31, from from
2020 2019 Prior Year Prior Year
Operating expenses:
Sales and marketing $3,034,121 $3,008,203 $25,918 1%
Research and development 1,578,139 1,258,728 319,411 25%
General and administrative 2,413,842 2,227,675 186,167 8%
Intangible asset amortization 152,801 95,250 57,551 60%
$7,178,903 $6,589,856 $589,047 9%
Sales and marketing expenses increased for the three months ended March 31,
2020, as compared to the same period in 2019. The increase was primarily due to
an increase in employee-related costs of approximately $0.21 million. Employee
related costs in 2019 include the severance for Chief Revenue Officer from
February 2019. The increase in employee-related costs was partially offset by
reduced marketing program and marketing outsourcing spend of approximately $0.24
million. The Company incurred approximately $0.07 million related to the
recruitment of our Head of Sales and Chief Marketing Officer during the first
quarter of 2020.
Research and development expenses increased for the three months ended March 31,
2020, as compared to the three months ended March 31, 2019. Employee-related
costs increased by approximately $0.24 million in the three months ended March
31, 2020, compared to the same period in 2019 mainly due to additional hiring of
staff since last year. Outsourced development costs increased by $0.17 million
for three months ended March 31, 2020 compared to the same period in 2019. Other
non-employee related costs increased by approximately $0.07 million in the three
months ended March 31, 2020, compared to the same period in 2019. These amounts
were partially offset by increased capitalized software development of
approximately $0.16 million for the three months ended March 31, 2020, compared
to the same period in the prior year.
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General and administrative expenses increased for the three months ended March
31, 2020, as compared to the three months ended March 31, 2019, primarily due to
higher employee related costs associated with business growth of approximately
$0.20 million. Additionally, depreciation expense increased by approximately
$0.07 million related to increased property and equipment expenditures
throughout 2019 and 2020. Professional fees related to legal and accounting
increased by $0.13 million during the three months ended March 31, 2020. Cost
associated with other non-employee related costs grew approximately $0.09
million during the three months ended March 31, 2020 to continue to support the
growth of the Company. These increases in costs are offset in part by reduced
corporate governance expense of approximately $0.32 million. This reduction is
mostly attributable to a one time franchise tax payment of approximately $0.32
million in the first quarter of 2019.
Amortization of intangible assets increased for the three months ended March 31,
2020, as compared to the three months ended March 31, 2019, due primarily to the
intangible assets acquired as part of the Perfect Audience acquisition on
November 21, 2019 (Note 3).
Percent
Three Months Ended Change Change
March 31, from from
2020 2019 Prior Year Prior Year
Other
Other expense, net $(56,778) $(104,126) $47,348 -45%
Gain on embedded derivative - 24,574 (24,574) -100%
Provision (benefit) for income taxes (1,562,517) 2,339 (1,564,856) -66903%
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 line of credit
in 2020 and convertible notes in 2019. Interest expense relating to our line of
credit (Note 5) for the three months ended March 31, 2020, and 2019, was $2,602
and zero, respectively. Non-cash interest expense relating to convertible notes
for the three months ended March 31, 2020, and 2019, was approximately zero and
$0.10 million respectively.
We recorded a gain on the embedded derivative of zero and $.02 million during
the three months ended March 31, 2020 and 2019 respectively.
During the three months ended March 31, 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 2019 and 2020, we have recorded a full valuation allowance against the
majority of our U.S. net operating loss deferred tax assets, so there is no tax
benefit recorded on the Consolidated Statement of Comprehensive Loss for those
losses. For the three months ended March 31, 2019, our income tax provision
related to income derived in foreign jurisdictions at the applicable statutory
tax rates.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary source of operating cash inflows are payments from customers for use
of our marketing automation technology 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 operating
cash flows, the Company drew down on its line of credit in the amount of $1.9
million in March 2020. In March of 2019, the Company issued 885,500 shares of
common stock and received $10.7 million in cash net of stock issuance costs. The
company also has an effective Form S-3 shelf registration statement that would
allow for the issuance of additional shares for future flexibility.
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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 $0.85 million to $1.64
million used in operations for the three months ended March 31, 2020, compared
to approximately $2.49 million used in operations for the three months ended
March 31, 2019. The decrease in cash used in operating activities was
attributable primarily to timing of payments related to our Accounts payable.
Net cash used in investing activities was approximately $0.41 million during the
three months endedMarch 31, 2020, compared to approximately $0.35 million used
during the three months ended March 31, 2019. The increase in cash used for
investing activities during the three months ended March 31, 2020, is primarily
related to the increased investment in property and equipment as SharpSpring
increased its investment in capitalized software development.
Net cash provided by financing activities was $1.88 million during the three
months ended March 31, 2020, compared to $11.28 million net cash received from
financing activities during the three months ended March 31, 2019. The majority
of the net cash provided by financing activities for the three months ended
March 31, 2020, is related to the Company's $1.9 million proceeds received from
our line of credit (Note 5). The company received $10.7 million related to the
net proceeds from the stock offering completed in March 2019. The Company also
received approximately $0.60 million from the exercise of employee stock options
during the three months ended March 31, 2019.
We had net working capital of approximately $9.65 million and $10.38 million as
of March 31, 2020, and December 31, 2019, respectively. Our cash balance was
$11.63 million at March 31, 2020, reflecting the $1.9 million received from the
draw on our line of credit in March 2020. Our cash balance was $11.88 million on
December 31, 2019, reflecting net $10.7 million received from the stock offering
in March 2019.
Contractual Obligations
As of March 31, 2020, 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 16, 2020, as amended on April, 30 2020, 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
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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