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.
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 on November 1, 2020. During the second quarter of
2020, the Company also paused our 401k matching program through March of 2021.
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 our cash position by $1.90 million by drawing down on our
Credit Facility as described in Note 5, Credit Facility. 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 March
31, 2021, $0.17 million has been forgiven and the remaining balance 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 remaining loan of the loan will be forgiven. We also received an
approximately $1.60 million tax refund in June 2020 as a result of historical
net operating losses 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 March 31,
2021, we activated 175 new customers compared to 314 in the same period in 2020.
The first quarter of 2021 was challenging on our sales and marketing funnel as
the direct and indirect impacts of COVID remained. 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. 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 COVID.
COVID has 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 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.
Despite COVID-19, the Company was able to continue to grow revenue in the three
months ended March 31, 2021 compared to both the three months ended March 31 and
December 31, 2020. We believe we have limited the impact of COVID on our
existing customer base, however, we are still experiencing difficulties
attracting new customers with the economic uncertainties of COVID still looming.
It is possible that we could be further impacted from COVID 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 be currently 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.
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Results of Operations
Three Months Ended March 31, 2021, Compared to the Three Months Ended March 31,
2020:
Percent
Three Months Ended Change Change
March 31, from from
2021 2020 Prior Year Prior Year
Revenues and Cost of Sales:
Revenues $ 7,989,231 $ 7,052,729 $ 936,502 13 %
Cost of Sales 1,890,013 2,367,642 (477,629 ) -20 %
Gross Profit $ 6,099,218 $ 4,685,087 $ 1,414,131 30 %
Revenues increased $0.94 million to $7.99 million for the three months ended
March 31, 2021 as compared $7.05 million to the three months ended March 31,
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. Revenues for our flagship marketing automation platform increased
to $7.38 million in the three months ended March 31, 2021, up from $6.36 million
in the three months ended March 31, 2020. Revenue from the SharpSpring Ads
platform decreased $0.05 million to $0.57 million for the three months ended
March 31, 2021 compared to $0.62 million for the three months ended March 31,
2020.
Cost of sales decreased $0.48 million to $1.89 million for the three months
ended March 31, 2021 compared to $2.37 million for the three months ended March
31, 2020. The decrease in cost of sales was driven primarily by a decrease in
employee related costs associated with providing and supporting our technology
platform to more customers of approximately $0.17 million as we have been able
to more efficiently support our customers with greater scale. Costs associated
with our SharpSpring Ads platform for the three months ended March 31, 2021
decreased approximately $0.22 million compared to the same period last year due
to significant initial cost of supporting SharpSpring Ads in the first full
quarter of operations after we acquired the platform in November 2019. In
addition, costs increased $0.02 million during the three months ended March 31,
2021 for hosting costs to support new revenues from both our various products.
Total cost of sales related to the SharpSpring Marketing Automation product
decreased approximately $0.25 million in the first quarter of 2021 compared to
the first quarter of 2020. Gross margin as a percentage of revenue increased
from 66.4% in the first quarter of 2020 to 76.3% in the first 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
March 31, from from
2021 2020 Prior Year Prior Year
Operating expenses:
Sales and marketing $ 3,791,382 $ 3,034,121 $ 757,261 25 %
Research and development 2,115,740 1,578,139 537,601 34 %
General and administrative 2,771,638 2,413,842 357,796 15 %
Intangible asset amortization 171,549 152,801 18,748 12 %
$ 8,850,309 $ 7,178,903 $ 1,671,406 23 %
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Sales and marketing expenses increased $0.76 million to $3.79 million for the
three months ended March 31, 2021 as compared to $3.03 million for the three
months ended March 31, 2020. The increase was primarily due to an increase of
$0.64 million in marketing program spend to drive growth of new sales, in the
three months ended March 31, 2021. Additionally, employee-related costs,
including equity compensation, increased $0.17 million to support increased
marketing program spend in the first quarter of 2021 compared to the same period
of 2020. These increases were partially offset by a decrease of $0.06 million in
recruiting expense related to additional sales and marketing hires made in the
first quarter of 2020.
Research and development expenses increased $0.54 million to $2.12 million for
the three months ended March 31, 2021 as compared to $1.58 million for the three
months ended March 31, 2020. The increase in research and development expense is
primarily due to an increase of $0.54 million in employee-related costs,
including equity compensation, tied to increased headcount and a more
competitive salary environment for remote workers as more companies transition
to remote workers as a result of COVID-19. Outsourced development costs for the
three months ended March 31, 2021 decreased approximately $0.18 million as
compared to the three months ended March 31, 2020 as we concentrated on internal
development work as opposed to outsourced development. Capitalized development
costs for the three months ended March 31, 2021, and March 31, 2020 were $0.07
million and $0.27 million, respectively. The smaller capitalization resulted in
a net increase research and development expense of approximately $0.20 million
for the three months ended March 31, 2021 compared to the same period last year.
General and administrative expenses increased $0.36 million to $2.77 million for
the three months ended March 31, 2021 as compared to $2.41 million for the three
months ended March 31, 2020. Facilities and rent expense for the three months
ended March 31, 2021 increased approximately $0.10 million compared to the three
months ended March 31, 2020 and was mostly related to the addition of office
space at our Gainesville headquarters during the second quarter of 2020.
Employee related costs increased approximately $0.13 million compared to the
three months ended March 31, 2020, to support increased financial and general
operational needs of the business. Other non-headcount and non-facilities costs,
including insurance premiums and public company registration fees increased
$0.07 million. Expenses from outside professional services decreased by
approximately $0.96 million. Depreciation expense increased by approximately
$0.07 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 assets increased $0.02 million to $0.17 million for
the three months ended March 31, 2021 as compared to $0.15 million the three
months ended March 31, 2020 due primarily to the change from indefinite lived to
definite lived asset of our Perfect Audience trade name in the first quarter of
2021 (Note 4).
Percent
Three Months Ended Change Change
March 31, from from
2021 2020 Prior Year Prior Year
Other
Other income (expense), net $ 173,809 $ (56,778 ) $ 230,587 -406 %
Provision (benefit) for income
taxes 6,573 (1,562,517 ) 1,569,090 -100 %
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 March 31, 2021, we also recorded a gain on
extinguishment of debt of approximately $0.17 million related to forgiveness of
one of our SBA loans in March of 2021. Interest expense relating to our Credit
Facility and SBA Loans (Note 5) for the three months ended March 31, 2021 and
2020 was approximately $0.03 million and $2,600, respectively.
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During the three months ended March 31, 2021, our income tax expense was related
to income derived in foreign jurisdictions at the applicable statutory tax
rates. 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 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 improved by $0.27 million to $1.37 million
used in operations for the three months ended March 31, 2021 compared to
approximately $1.64 million for the three months ended March 31, 2020. The
decrease in cash used in operating activities was attributable primarily to
timing of payments related to our accrued expenses and other current
liabilities.
Net cash used in investing activities improved by $0.32 million to $0.10 million
for the three months ended March 31, 2021 compared to $0.41 million for the
three months ended March 31, 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 three months ended March 31, 2021 compared to the three months ended March
31, 2020.
Net cash provided by financing activities decreased by $1.73 million to $0.16
million for the three months ended March 31, 2021 compared to $1.88 million for
the three months ended March 31, 2020. The decrease in cash provided by
financing activities was primarily related to the Company's $1.9 million
proceeds received from our Credit Facility during the three months ended March
31, 2020 (Note 5). This decrease in cash flow was slightly offset by the $0.18
million proceeds from the exercise of employee stock options received during the
three months ended March 31, 2021, compared to $0.01 million received during the
three months ended March 31, 2020.
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We had net working capital of approximately $20.75 million and $22.81 million as
of March 31, 2021, and December 31, 2020, respectively. Our cash balance was
$26.86 million on March 31, 2021, reflecting the $1.9 million received from our
Credit Facility and $3.4 million received from the SBA Loans in March and April
2020, respectively. Our cash balance was $28.27 million on December 31, 2020
reflecting the $13.9 million secondary offering, net of issuance costs, in
December 2020.
Contractual Obligations
As of March 31, 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 March 31, 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.
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