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.
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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.
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 SharpSpring, Inc., a Delaware corporation, and all
subsidiaries.
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.
We implemented a 10% reduction to salaries across most of the Company and paused
quarterly bonuses in the second quarter of 2020. The Company reinstated full
salaries and quarterly bonuses in November 1, 2020. The Company also paused its
401k matching programs. The Company also cut various other non-employee related
costs across the board to ensure future flexibility. This included an
approximate 40% reduction in the marketing program spend and putting a greater
reliance on internal lead generation through the majority of 2020. The Company
delayed any non-essential capital expenditures, which allowed us to maintain
cash flow flexibility during the COVID pandemic.
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The Company increased its cash position by $1.90 million by drawing down on our
line of credit as described in Note 5, Credit Facility. As stated in Note 7, SBA
Paycheck Protection Loans, the Company received $3.40 million from the Small
Business Association ("SBA") loan program in April 2020, which may be forgiven
if the criteria defined by the SBA is met. The Company has filed the application
for forgiveness with SBA but has not yet received a decision from the SBA as to
whether full or part of the loans will be forgiven, as of December 31, 2020. We
have also received an approximately $1.60 million tax refund in June 2020 as a
result of historical net operating losses described in Note 10, Income Taxes.
The SBA loan program and tax refund are both results of the CARES Act enacted by
Congress in March. 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 year ended December 31, 2020, we
activated 1053 new customers compared to 998 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. Our Perfect
Audience 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.
Despite COVID-19, the Company was able to continue to grow revenue in the year
ended 2020 compared to the same period in 2019. Although revenue has increased,
we believe the COVID-19 pandemic had an adverse effect on our revenue growth
this period. It is possible that we could be further impacted from 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 while other companies are seeing layoffs in
large numbers. 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 be currently
determined, but the Company has taken measures to best position itself 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.
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Results of Operations
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Percent
Year Ended Change Change
December 31, from from
2020 2019 Prior Year Prior Year
Revenues and Cost of Sales:
Revenues $ 29,287,882 $ 22,699,386 $ 6,588,496 29 %
Cost of Sales 8,062,564 7,142,416 920,148 13 %
Gross Profit $ 21,225,318 $ 15,556,970 $ 5,668,348 36 %
Revenues from continuing operations increased approximately $6.59 million for
the year ended December 31, 2020 as compared to the year ended December 31,
2019, primarily due to growth in revenues from our SharpSpring Marketing
Automation customer base, a price increase put in place in 2020, and the
addition of the Perfect Audience platform which allowed for further cross-sale
revenue from our existing customer base as well as adding a standalone customer
base. Revenues for our SharpSpring Marketing Automation increased to
approximately $26.6 million in 2020 from $22.2 million in 2019. During 2020, we
continued to attract and acquire new customers on the SharpSpring platform,
which contributed to our revenue growth. The Perfect Audience platform acquired
in November of 2019 generated approximately $2.52 million of revenue for the
year ended December 31, 2020 compared to $0.27 million for the year ended
December 31, 2019. This growth in revenues was partially offset by reduced
revenue from our SharpSpring Mail+ product, which declined from approximately
$0.22 million for the year ended December 31, 2019 compared to approximately
$0.18 million for the year ended December 31, 2020. We expect revenue to
continue to increase in 2021 from the realization of the full year value of the
net new SharpSpring customers acquired throughout 2020.
Cost of services increased for year ended December 31, 2020, as compared to the
year ended December 31, 2019, primarily due to additional cost from Perfect
Audience associated with supporting the new product line. Employee related costs
increased approximately $0.04 million. Hosting costs increased approximately
$0.7 million associated with the addition of the Perfect Audience product and
the growth of the SharpSpring platform and customer base. Cost of Sales
increased in dollar terms for the year ended December 31, 2020 compared to the
year ended December 31, 2019, however, as a percentage of revenue the Cost of
Sales decreased significantly from 31.5% to 27.5% for the year ended December
31, 2019 compared to the year ended December 31, 2020. This improvement in gross
margin is the result of continued improvement in efficiencies and improved
operating leverage. Additionally, 2020 saw a temporary salary cut from April
through October of 2020 as part of a cost cutting measure during the initial
phases of COVID-19. We expect costs of sales to increase in 2021 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
while growing revenues.
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Percent
Year Ended Change Change
December 31, from from
2020 2019 Prior Year Prior Year
Operating expenses:
Sales and marketing $ 10,888,944 $ 11,785,227 $ (896,283 ) -8 %
Research and development 6,072,103 5,036,613 1,035,490 21 %
General and administrative 10,227,128 8,617,073 1,610,055 19 %
Intangible asset amortization 642,149 381,000 261,149 69 %
Impairment of goodwill 710,000 - 710,000 n/a
$ 28,540,324 $ 25,819,913 $ 2,720,411 11 %
Sales and marketing expenses decreased approximately $0.90 million for the year
ended December 31, 2020, as compared to the same period in 2019. The decrease
was primarily due to reducing marketing program spend and putting a greater
reliance on internal lead generation through the majority of 2020, which
increased our employee related costs. Program spend decreased by approximately
$2.44 million compared to same period last year. Employee-related costs
increased by approximately $1.62 million. The shift in costs from a program
spend to employee related costs was due to a shift to an outbound lead
generation strategy, which allowed for us to have better control over costs to
acquire customers during the uncertainty of COVID-19. Other non-employee and
non-program costs increased by approximately $0.06 million compared to the same
period in 2019. During 2019, employee related costs included 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 2021 as we devote more
resources to acquiring new customers and expect sales and marketing, as a
percentage of revenue, to return to similar levels seen in 2019.
Research and development expenses increased for the year ended December 31,
2020, as compared to the year ended December 31, 2019, primarily due to
additional hiring of development and quality assurance staff since last year.
Employee-related costs for this group increased by approximately $0.85 million
in the year ended December 31, 2020, compared to the same period in 2019.
Non-employee-related costs, including outsourced development, for this group
increased by approximately $0.96 million in the year ended December 31, 2020,
compared to the same period in 2019. These costs were partially offset by
capitalized software development work which decreased by approximately $0.09
million to $0.74 million. We expect research and development spend to increase
in 2021 as we increase our team to support future product development
commensurate with the growth of our business but remain relatively consistent as
a percentage of revenue.
General and administrative expenses increased for the year ended December 31,
2020, as compared to the year ended December 31, 2019, primarily due to higher
employee related costs associated with business growth of approximately $0.78
million, a contingent loss of $0.28 million accrued during 2020 for sales tax
exposure in the United States discussed in Note 15, Commitments and
Contingencies, and increased facilities costs of approximately $0.3 million
primarily associated with the Company adding additional office space in the
second quarter of 2020 to support the growth of the Company. Depreciation
expense increased by approximately $0.32 million primarily due to the Company's
continued investment in software development. The Company made $0.10 million in
donations to various charities in the year ended December 31, 2020 compared to
approximately $0.03 million in the same period in 2019. The increase was
partially offset by the decrease of $0.16 million of legal costs associated with
the purchase of Perfect Audience incurred in the year end December 31, 2019 that
was not incurred in year ended December 31, 2020. We expect general and
administrative expenses to increase incrementally in dollar terms but decrease
as a percent of revenue in 2021, as we add costs to support general business
growth.
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Amortization of intangible assets increased for the year ended December 31,
2020, as compared to the year ended December 31, 2019. The increase in
intangible amortization is principally due to the additions of intangibles as
part of the acquisition of the Perfect Audience business in November 2019.
The Company incurred an impairment of goodwill related to its Perfect Audience
reporting unit of approximately $0.71 million in the year ended December 31,
2020 as described in Note 4 in the Notes to the Consolidated Financial
Statements.
Percent
Year Ended Change Change
December 31, from from
2020 2019 Prior Year Prior Year
Other
Other expense, net $ (19,988 ) $ (147,338 ) $ 127,350 -86 %
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 (1,505,965 ) 29,349 (1,535,314 ) -5231 %
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 year ended December 31, 2020,
the Company incurred foreign currency losses of approximately $0.02 million
compared to approximately $0.04 million to the same period in 2019. The Company
incurred approximately $0.1 million of interest expense in the year ended
December 31, 2020 compared to approximately $0.14 million in the same period in
2019. The Company received interest related to a tax refund received in June
2020 of approximately $0.05 million.
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, 2020, our income tax benefit was primarily
related to a 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. Prior to March 31, 2020, we had 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 income statement for those losses. During the year ended
December 31, 2020, our $1.50 million net income tax benefit is comprised of a
federal benefit of approximately $1.56 million related to our NOL carrybacks,
U.S. States' income tax benefit of approximately $8,000, and income tax derived
from foreign jurisdictions of approximately $59,000. During the year ended
December 31, 2019, our income tax provision of approximately $29,000 was U.S.
States' income taxes of approximately $25,000 as well as approximately $4,000 of
income tax related to foreign jurisdictions.
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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 sheets. In addition to the
operating cash flows the Company utilized several other sources of cash flows in
2020. 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 its available $1.90 million line of credit. In
December of 2020, the Company issued 1,000,000 shares of common stock and raised
$13.9 million in cash, net of issuance costs. In 2019 the Company raised
approximately $15.6 million, net of issuance costs, from two separate secondary
stock offerings in March and November 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 decreased by approximately $5.18 million
to approximately $2.85 million used in operations for the year ended December
31, 2020, compared to approximately $8.03 million used in operations for the
year ended December 31, 2019. The decrease in cash used in operating activities
was attributable primarily to the Company reducing our net loss from
approximately $12.39 million during the year ended December 31, 2019 to a loss
of approximately $5.83 million for the year ended December 31, 2020. Included in
the improvement of the net loss is a $1.60 million benefit from the refund of
income tax related to prior years' net operating losses.
Net cash used in investing activities was approximately $1.15 million during the
year ended December 31, 2020, compared to approximately $5.93 million used
during the year ended December 31, 2019. The change in cash used for investing
activities is primarily related the purchase of the Perfect Audience assets for
$4.6 million in November 2019. In addition, net cash used in investing
activities decreased approximately $0.22 million in investment in property and
equipment and capitalized software development in the year ended December 31,
2020 as compared to the same period in 2019. The Company delayed any
non-essential capital expenditures, which will allow us to continue to maintain
flexibility during the COVID pandemic.
Net cash provided by financing activities was $20.47 million during the year
ended December 31, 2020, compared to $16.56 million net cash received from
financing activities during the year ended December 31, 2019. The primary
sources of the cash provided by financing activities is related to the Company's
$1.90 million line of credit, $3.40 million of loans from the SBA Loans, and
$13.9 million, net of issuance cost, from the issuance of 1,000,000 shares of
common stock in December 2020. In 2019, the Company raised approximately $15.6
million, net of issuance costs, from two separate issuances of common stock in
March and November 2019. The Company also received approximately $1.27 million
from the exercise of employee stock options during the year ended December 31,
2020 compared to approximately $0.97 million from the exercise of employee stock
options during the year ended December 31, 2019.
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We had net working capital of approximately $22.81 million and $10.38 million as
of December 31, 2020 and December 31, 2019, respectively. Our cash balance was
$28.27 million at December 31, 2020 reflecting the $1.90 million received from
the draw on our line of credit in March 2020, the proceeds of the SBA Loans of
$3.40 million, tax refund of approximately $1.60 million received in June 2020,
and received $13.9 million in cash received from the stock offering, net of
issuance costs, in December 2020. Our cash balance was $11.88 million on
December 31, 2019, reflecting approximately $15.6 million cash received from two
separate common stock issuances, net of issuance costs, in March and November
2019.
Contractual Obligations
SharpSpring favors short term agreements in order to maintain flexibility in
future operations. From time-to-time SharpSpring will engage in contracts that
are greater than 12 months. 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. SharpSpring
may also enter into debt agreements that are greater than one year. Future
minimum lease payments, payments due under non-cancelable service contracts, and
debt obligations from contracts greater than 1 year are as follows as of
December 31, 2020:
Operating Debt
Leases Obligation
2021 1,321,598 2,630,962
2022 1,329,525 768,538
2023 1,369,159 -
2024 1,377,086 -
2025 1,416,720
Thereafter 4,109,161 -
Total Commitments $ 10,923,249 $ 3,399,500Significant 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.
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 Note 2 to the consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K.
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