Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~11,596,441~~12,886,660 shares of common stock as of ~~November~~August 13, ~~2020.~~2021.

This report on Form 10-Q contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item ~~1A.~~1A “Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020 and ~~under~~in Item 1A of Part II ~~Item 1A. “Risk Factors” contained in~~of this ~~report~~Quarterly Report on Form 10-Q. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

CONSOLIDATED STATEMENTS OF ~~CHANGES IN SHAREHOLDERS’ EQUITY~~OPERATIONS AND COMPREHENSIVE LOSS

Note 1: Organization, Basis of Presentation, and Summary of Significant Accounting Policies

SharpSpring, Inc. (the “Company”, “we”, “our”, or “us”) provides a cloud-based marketing automation solution and a display retargeting platform through ~~our~~its SharpSpring Marketing Automation and SharpSpring Ads (formerly known as Perfect ~~Audience~~Audience) products. ~~SharpSpring~~Our flagship Marketing Automation platform is designed to increase the rates at which businesses generate leads and convert leads to sales opportunities by improving the way businesses communicate with customers and prospects. ~~Perfect Audience~~Our SharpSpring Ads platform empowers marketers to create, manage, and optimize their ad campaigns across thousands of websites. ~~Our~~The Company’s products are marketed directly by us and through a small group of reseller partners to customers around the world.

~~Note 2: Summary~~On June 21, 2021, the Company entered into an Agreement and Plan of ~~Significant Accounting Policies~~Merger, as it may be amended from time to time in accordance with its terms (the “Merger Agreement”) with Constant Contact, Inc., a Delaware corporation (“Constant Contact”) and Groove Merger Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of Constant Contact (“MergerSub”), providing for the merger of MergerSub with and into the Company (the “Merger”) and for the Company to become a wholly-owned subsidiary of Constant Contact.

On January 30, 2020, the World Health Organization declared the coronavirus “COVID-19” outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 included restrictions on travel, quarantines, or “stay‑at‑home” restrictions in certain areas and forced closures for certain types of public places and businesses. COVID‑19, and the recently identified variants of COVID-19, and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets globally, including the geographical areas in which the Company operates.

While it is unknown how long these conditions will last and what the complete financial impact will be, the Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of the business/operations and are unable at this time to predict the continued impact that COVID-19 will have on its business, financial position, and operating results in future periods due to numerous uncertainties.

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of ~~our~~Company management, the Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, ~~2019,~~2020, and these consolidated financial statements include all adjustments consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. The Company’s consolidated financial statements include the accounts of SharpSpring, Inc. and ~~our~~its subsidiaries (the “Company” ~~or “SharpSpring”~~). The Company’s consolidated financial statements reflect the elimination of all significant inter-company accounts and transactions. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, ~~2020.~~2021.

The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019,~~2020, filed with the SEC on March ~~16, 2020, as amended on April~~ 30, ~~2020.~~

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s chief executive officer, in deciding how to allocate resources and assess performance. The Company’s CODM evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. The Company does not present geographical information about revenues because it is impractical to do so.

The functional currency of the Company’s foreign subsidiaries is the local currency. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rates in effect at the balance sheet dates, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at the average exchange rates during the period. Foreign currency translation gains and losses are recorded in other comprehensive income (loss).

Cash equivalents are short-term, liquid investments with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed by major financial institutions and at most times are in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits.

U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, deposits, embedded derivatives (associated with our convertible notes) and accounts payable. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these items. The fair value of the embedded derivatives associated with our convertible notes are calculated using Level 3 unobservable inputs, utilizing a probability-weighted expected value model to determine the liability. The fair value of the embedded derivatives at September 30, 2020, and December 31, 2019, was a liability balance of $0 for each period. The change in fair value for the three months ended September 30, 2020, and 2019, was $0 for each period. The change in fair value for the nine months ended September 30, 2020, and 2019, was $0 and a gain of $0.21 million, respectively.

Accounts receivable are carried at the original invoiced amount less an allowance for doubtful accounts based on the probability of future collection. Management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. The Company reserves for receivables that are determined to be uncollectible, if any, in its allowance for doubtful accounts. After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance. In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition are met, thus creating a contract asset. A portion of our accounts receivable balance is therefore unbilled at each balance sheet date and is reflected as such on the consolidated balance sheet.

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.

~~Examples of critical estimates in valuing certain of the intangible assets and goodwill we have acquired include but are not limited to:~~

~~Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.~~

Finite-lived intangible assets include trade names, developed technologies, customer relationships, and vendor relationships, and are amortized based on the estimated economic benefit over their estimated useful lives, with original periods ranging from 5 to 11 years. We regularly evaluate the reasonableness of the useful lives of these assets. Finite-lived intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. Impairment losses are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments, and the fair value of an asset group. The dynamic economic environment in which the Company operates, and the resulting assumptions used to estimate future cash flows impact the outcome of these impairment tests.

As of September 30, 2020, and December 31, 2019, we had recorded goodwill of $10.94 million and $10.92 million, respectively. Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in the SharpSpring, GraphicMail, and Perfect Audience acquisitions. Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350, ~~“Intangibles - Goodwill and Other”~~ deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests, and tests between annual tests in certain circumstances, based on estimated fair value in accordance with FASB ASC 350-10, and written down when impaired.

~~Third-party costs associated with the issuance of debt are included as a direct reduction to the carrying value of the debt and are amortized to interest expense ratably over the life of the debt.~~

Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, ~~Simplifying the~~ ~~Accounting for Income Taxes~~. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the consolidated financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. There are no material uncertain tax positions taken by the Company on its tax returns. Tax years subsequent to 2017 remain open to examination by U.S. federal and state tax jurisdictions

In determining the provision for income taxes, the Company uses statutory tax rates and tax planning opportunities available to the Company in the jurisdictions in which it operates. This includes recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns to the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items are separately recognized in the period in which they occur. The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature, and amount of deductions and the allocation of income among various tax jurisdictions. As of September 30, 2020, the Company’s Swiss subsidiary, InterInbox SA is under examination by the Switzerland Federal Tax Administration for withholding taxes for the years 2015 through 2018. The Company does not expect any material adjustments as a result of the audit.

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of the assets. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts, and any resulting gain or loss is record in the other expense section of our Consolidated Statement of Comprehensive Loss. Repairs and maintenance costs are expensed as incurred. Depreciation expense related to property and equipment was $0.25 million and $0.16 million for the three months ended September 30, 2020, and 2019, respectively. Depreciation expense related to property and equipment was $0.68 million and $0.44 million for the nine months ended September 30, 2020, and 2019, respectively.

~~Property and equipment as of September 30, 2020 and December 31, 2019, is as follows:~~

The Company generates revenue from contracts with multiple performance obligations, which typically include subscriptions to its cloud-based marketing automation software, professional services which include onboarding and training services, and access to our advertising retargeting platform. The Company’s customers do not have the right to take possession of any of the software. Substantially all of SharpSpring’s revenue is from contracts with customers. The Company recognizes revenue from contracts with customers using a five-step model as prescribed under ASC 606, which is described below:

A customer contract is generally identified when the Company and a customer have an executed arrangement that calls for the Company to provide access to its software or provide professional services in exchange for consideration from the customer.

A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services. A good or service that is promised to a customer is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and a company’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. The Company has determined that subscriptions for its software is distinct because, once a customer has access to the software it purchased, the software is fully functional and does not require any additional development, modification, or customization. Professional services sold are distinct because the customer benefits from the on-boarding and training to make better use of the online software products it purchased.

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer, excluding sales taxes that are collected on behalf of government agencies. The Company estimates any variable consideration to which it will be entitled at contract inception, when determining the transaction price. The Company does not include variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will occur when any uncertainty associated with the variable consideration is resolved.

~~The transaction price is allocated to each performance obligation based on the relative standalone selling prices of the goods or services being provided to the customer.~~

Revenues are recognized when or as control of the promised goods or services is transferred to customers. Revenue from the SharpSpring Marketing Automation and Mail+ software is recognized ratably over the subscription period, which typically ranges from one to twelve months. The Company recognizes revenue from on-boarding and training services as the services are provided, which is generally over 60 days. Revenue related to our other professional services is recognized as the services are provided. The Perfect Audience platform is utilized on an as needed basis, and the related revenue recognized as the service is provided. Cash payments received in advance of providing subscription or services are recorded to deferred revenue until the performance obligation is satisfied.

Our products are billed in arrears or upfront, depending on the product, which creates contract assets (unbilled receivables) and contract liabilities (deferred revenue), respectively. Unbilled receivables occur due to unbilled charges for which the Company has satisfied performance obligations. Deferred revenues occur due to billing up front for charges that the Company has not yet fully satisfied all performance obligations. Both contract assets and liabilities are recognized as the performance obligations are satisfied.

From time to time, the Company offers refunds to customers and experiences credit card chargebacks relating to cardholder disputes that are commonly experienced by businesses that accept credit cards. The Company makes estimates for refunds and credit card chargebacks based on historical experience.

ASC 606 provides guidance on proper recognition of principal versus agent considerations which is used to determine gross versus net revenue recognition. Under ASC 606, the core objective of the guidance on gross versus net revenue recognition is to help determine whether an entity is a principal or an agent in a transaction. In general, the primary difference between these two is the performance obligation being satisfied. The principal has a performance obligation to provide the desired goods or services to the end customer, whereas the agent arranges for the principal to provide the desired goods or services. Additionally, a fundamental characteristic of a principal in a transaction is control. A principal substantively controls the goods and services before they are transferred to the customer as well as controls the price of the good or service being provided. An agent normally receives a commission or fee for these activities. In addition to control, the level at which an entity controls the price of the good or service being transferred determines principal versus agent status. The more discretion over setting price a company has in providing the good or service, the more likely they are considered a principal rather than an agent.

Under the guidance when another party is involved in providing a good or service to a customer, an entity is a principal if the entity obtains control of the asset or right to a service performed by the other party. SharpSpring never takes possession or control of the advertising space and acts an agent facilitating the customer with the desired advertisement inventory from the principal provider through our Perfect Audience retargeting platform. In addition to the lack of control of the advertising inventory, SharpSpring does not have control over the cost of the advertising inventory, but rather only receives a fee for services for providing the advertising inventory to the customer, further demonstrating SharpSpring’s role as the agent in the transaction. Therefore, as an agent in the retargeting transaction SharpSpring records revenue net of the cost of advertising inventory cost incurred for placing advertisements on websites.

Deferred revenue consists of payments received in advance of the Company providing the services. Deferred revenue is earned over the service period identified in each contract. Most our deferred revenue balances (contract liabilities) arise from payments from customers in advance of service on a periodic basis (such as monthly, quarterly, annually, or bi-annually). In situations where a customer pays in advance, the deferred revenue is recognized over the service period defined in the contract. Additionally, the Company has deferred revenue related to implementation fees for its SharpSpring Marketing Automation solution that are paid in advance. These implementation services are typically performed over a 60-day period, and the revenue is recognized over the corresponding period. As of June 30, 2020, and 2019, the Company had deferred revenue balances of $0.66 million and $0.32 million, respectively. Deferred revenue decreased by $0.09 million and increased by $0.19 million during the three months ended September 30, 2020, and 2019, respectively. Deferred revenue balances were $0.86 million and $0.25 million as of December 31, 2019, and 2018, respectively. Deferred revenue decreased by $0.29 million and increased by $0.26 million during the nine months ended September 30, 2020, and 2019, respectively. The Company had deferred revenue contract liability balances of $0.57 million and $0.51 million as of September 30, 2020, and September 30, 2019, respectively.

In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition are met, thus creating a contract asset (unbilled receivable). As of June 30, 2020, and 2019, the Company had unbilled receivables of $1.13 million and $0.88 million, respectively. Substantially all of these services were billed during the three months ended September 30, 2020 and 2019, respectively. Unbilled receivable balances increased by $0.01 million and $0.05 million during the three months ended September 30, 2020, and 2019, respectively. The unbilled receivable balances as of December 31, 2019, and 2018 were $1.0 million and $0.74 million, respectively. Unbilled receivable balances increased by $0.14 million and $0.19 million during the nine months ended September 30, 2020, and 2019, respectively. As of September 30, 2020, and 2019, the Company had unbilled receivables of $1.14 million and $0.93 million, respectively. These unbilled balances were the result of services provided in period, but not yet billed to the customer.

~~We account for loans obtained under the Paycheck Protection Program in Section 1102 of the CARES Act (Note 7) as debt pursuant to FASB ASC 470 -~~ ~~Debt~~~~, which requires the loan to be recognized as a liability. The loan accrues interest in accordance with FASB ASC 835-30 -~~ ~~Interest – Imputation of Interest~~~~, which states that since the loan is prescribed by a government agency, it does not impute interest at the market rate even though it is higher than the stated rate.~~2021.

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash ~~equivalents.~~equivalents and accounts receivable. At ~~September~~June 30, ~~2020,~~2021, and December 31, ~~2019,~~2020, the Company had cash balances at financial institutions that exceed federally insured limits. The Company maintains its cash balances with accredited financial institutions. The Company does not believe ~~that~~ it is subject to unusual credit risk beyond ~~the~~ normal credit risk associated with commercial banking relationships.

Our accounts receivable exposes the Company to credit risk in the event of nonpayment by customers. As of June 30, 2021, two customers had an open accounts receivable balance above 10% of our net accounts receivable balance, which represented 24.1% of the Company’s net accounts receivable balance. As of December 31, 2020, the Company had one customer representing 12.4% of net accounts receivable balance.

There were no customers that accounted for more than 10% of Company’s total revenue for any financial period presented. For the three months ending September 30, 2020, two customers had open accounts receivable balances above 10% of net accounts receivable. The combined balances for these two customers represented approximately 26.4% of net accounts receivable. As of September 30, 2020, no customer with accounts receivable in excess of 10% of the Company’s net accounts receivable had a balance older than 60 days.

~~Cost~~There were no material changes to the Company’s significant accounting policies disclosed in “Note 2 – Summary of ~~services consists primarily~~Significant Accounting Policies” of ~~direct labor costs associated with support, customer onboarding, account management, and technology hosting and license costs associated~~our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the ~~cloud-based platform.~~SEC on March 30, 2021.

~~Credit card processing fees are included as a component of general and administrative expenses and are expensed as incurred.~~

The Company ~~expenses advertising costs~~operates as ~~incurred. Advertising~~one reportable segment with two operating segments. Our operating segments consist of our SharpSpring Marketing Automation segment and marketing expenses, excluding marketing team costs, were $0.62 million and $1.53 million for the three months ended September 30, 2020, and 2019, respectively. Advertising and marketing expenses, excluding marketing team costs, were $2.29 million and $4.56 million for the nine months ended September 30, 2020, and 2019, respectively.

The Company capitalizes certain sales commission costs which are incremental to obtaining a contract. The Company expenses costs that are related to obtaining a contract but are not incremental such as other sales and marketing costs and other costs that would be incurred regardless of if the contract was obtained. Capitalized costs are amortized using straight-line amortization over the estimated weighted average life of the customer, which for the 3 months ended September 30, 2020 and 2019 was approximately 3 years. At September 30, 2020, the net carrying value of the capitalized cost of obtaining a contract was $1.28 million, of which $0.70 million is included in other current assets and $0.58 million is included in other long-term assets. At December 31, 2019, the net carrying value of the capitalized cost of obtaining a contract was $1.20 million, of which $0.68 million is included in other current assets and $0.52 million is included in other long-term assets. The Company amortized expenses for the costs of obtaining contracts of $0.21 million and $0.20 million for the three months ended September 30, 2020, and 2019, respectively. The Company amortized expenses for the costs of obtaining contracts of $0.61 million and $0.63 million for the nine months ended September 30, 2020, and 2019, respectively.

~~We account for stock-based compensation~~SharpSpring Ads Retargeting segment in accordance with ~~FASB ASC 718~~Accounting Standards Codification (“ASC”) 280, ~~Compensation — Stock Compensation~~Segment Reporting. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision maker (“CODM”), which ~~requires companies~~is the Company’s Chief Executive Officer, in deciding how to ~~measure~~allocate resources and assess performance. The Company’s CODM evaluates the ~~cost~~Company’s financial information and resources and assess the performance of ~~employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award.~~these resources between its two operating segments. The Company ~~also provides stock-based compensation~~does not separately allocate operating expenses, nor does it fully allocate assets to ~~non-employee directors which are treated as employees for the purpose of stock-based compensation in~~these operating segments. In accordance with ASC ~~718. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period.~~

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by giving effect to all potentially dilutive common stock equivalents for the period. For purposes of this calculation, options to purchase common stock, unvested restricted stock units, warrants, and the conversion option of the Convertible Notes (Note 6) are potential common shares outstanding. Since280, the Company ~~incurred net losses~~aggregated its two operating segments as one operating segment for ~~each of the periods presented, diluted net loss per share~~financial reporting purposes. The Company does not present geographical information about revenues because it is ~~the same as basic net loss per share. The Company’s potential common shares outstanding were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive.~~

~~Comprehensive loss includes all changes in equity during a period from non-owner sources, such as net income or loss and foreign currency translation adjustments.~~impractical to do so.

~~Recent accounting standards not included below are not expected to have a material impact on our consolidated financial position and results of operations.~~

In January 2017, the Financial Accounting Standards Board (“FASB”) issued ~~guidance~~ Accounting Standards Update (“ASU”) 2017- 04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under ~~previous~~current guidance, Step 2 of the goodwill impairment test ~~required~~requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value ~~was~~is recognized as goodwill impairment. Under the new ~~guidance,~~standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The ~~guidance~~new standard was effective beginning in January 2021, with early adoption permitted. The Company early adopted ~~effective~~this ASU on January 1, ~~2020 and did not have a material impact on the consolidated financial statements.~~2020.

In December 2019, the FASB issued ~~guidance simplifying~~ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplified the accounting for income taxes. The new accounting guidance removes (i) the exception to the incremental approach for intra-period tax allocations when there is a loss from continuing operations and income or gain from other items such as discontinued operation or other comprehensive income, (ii) the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, (iii) the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and (iv) the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

The new accounting guidance also simplifies the accounting for income taxes by (i) requiring an entity to recognize franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (ii) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, (iii) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, (iv) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, and (v) making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

On November 21, 2019, the Company acquired substantially all the assets and assumed certain liabilities of the Perfect Audience business unit from Marin Software Incorporated, a Delaware corporation for cash consideration of $4.6 million. The acquired assets and liabilities were assigned to SharpSpring’s wholly owned subsidiary, SharpSpring Reach, Inc. Perfect Audience is a cloud-based platform that provides display retargeting software services. The transaction was structured as an asset purchase, whereby SharpSpring acquired all of Perfect Audience’s assets used in connection with the business (excluding certain pre-acquisition receivables, cash, and cash equivalents) and only liabilities pertaining to the business such as deferred revenue, accrued publisher costs, accrued bonuses for to the acquired workforce, and any liabilities accruing on or after November 21, 2019.

The allocation of the purchase price is based on management estimates and assumptions, and other information compiled by management, which utilized established valuation techniques appropriate for the industry. The valuation included a combination of the income approach and cost approach, depending upon which was the most appropriate based on the nature and reliability of the data available. The income approach is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. The cost approach considers the cost to replace (or reproduce) the asset and the effects on the assets value of physical, functional, and/or economic obsolescence that has occurred with respect to the asset.

~~The following represents the final allocation of the purchase price to the acquired net tangible and intangible assets acquired and liabilities assumed by SharpSpring:~~

~~Acquired intangible assets include developed technology~~This standard is effective for fiscal and ~~vendor relationships which are amortized over ten years. The acquired trade name assets have an indefinite life~~interim periods beginning after December 15, 2020. We believe the adoption of this standard has not and will ~~be tested for impairment at least annually.~~not have a material impact on our consolidated financial statements.

~~The excess~~There are no other new accounting pronouncements that are expected to have a material impact on the Company and all subsidiaries thereof. All intercompany balances and transactions have been eliminated upon consolidation.

In cases where customers pay for services in arrears, the Company accrues for revenue in advance of ~~purchase consideration over~~billings as long as the ~~fair value~~criteria for revenue recognition are met, thus creating a contract asset (unbilled receivable). As of March 31, 2021, and 2020, the Company had unbilled receivables of $1.26 million and $1.09 million, respectively. Substantially all of these services were billed during the three months ended June 30, 2021, and 2020, respectively. Unbilled receivable balances net ~~tangible~~remained unchanged during the three months ended June 30, 2021. During the three months ended June 30, 2020, unbilled receivables increased by $0.04 million.

Unbilled receivable balances as of December 31, 2020, and ~~identifiable intangible assets acquired was recorded as goodwill~~2019 were $1.25 million and $1.00 million, respectively. Unbilled receivable balances increased by $0.02 million and increased by $0.13 million during the six months ended June 30, 2021, and 2020, respectively. As of ~~$2.05 million. Goodwill will not be amortized but instead tested for impairment at least annually (more frequently if certain indicators are present). Goodwill arose primarily as a~~June 30, 2021, and 2020, the Company had unbilled receivables of $1.27 million and $1.13 million, respectively. These unbilled balances were the result of services provided in period, but not yet billed to the ~~expected future growth~~customer.

Capitalized Cost of the Perfect Audience product and the assembled workforce. The transaction costs associated with the acquisition were approximately $0.18 million and were recorded in general and administrative expense.Obtaining a Contract

The Company ~~uses its best estimates~~capitalizes sales commission costs which are incremental to obtaining a contract. The Company expenses costs that are related to obtaining a contract but are not incremental such as other sales and ~~assumptions~~marketing costs and other costs that would be incurred regardless of if the contract was obtained. Capitalized costs are amortized using straight-line amortization over a three-year estimated weighted average life of the customer. As of June 30, 2021, the net carrying value of the capitalized cost of obtaining a contract was $1.18 million, of which $0.63 million is included in other current assets and $0.55 million is included in other long-term assets. As of December 31, 2020, the net carrying value of the capitalized cost of obtaining a contract was $1.27 million, of which $0.69 million is included in other current assets and $0.58 million is included in other long-term assets. For the three months ended June 30, 2021, and 2020, the Company amortized approximately $0.20 million for each period, in costs directly attributable to ~~assign fair value~~obtaining contracts. For the six months ended June 30, 2021, and 2020, the Company amortized approximately $0.41 million and $0.40 million, respectively, in costs directly attributable to ~~the tangible and intangible assets acquired and liabilities assumed at the acquisition date. The Company’s estimates are inherently uncertain and subject to refinement.~~obtaining contracts.

~~Intangible assets~~Deferred revenue consists of payments received in advance of the Company providing the services. Most of our deferred revenue balances (contract liabilities) arise from payments from customers in advance of service on a periodic basis (such as monthly, quarterly, annually, or bi-annually), while the portion of our deferred revenue balances associated with SharpSpring Ads arises from prepaid deposits for future usage of the platform. Deferred revenue from our SharpSpring Marketing Automation customers is earned over the service period identified in each contract. Deferred revenue from our SharpSpring Ads retargeting customers is earned as the service is used. Additionally, the Company has deferred revenue related to implementation fees for its SharpSpring Marketing Automation solution that are paid in advance, which is recognized over the service period. These implementation services are typically performed over a 60-day period. As of March 31, 2021, and 2020, the Company had deferred revenue balances of $0.95 million and $0.77 million, respectively. Deferred revenue decreased by $0.09 million and decreased by $0.11 million during the three months ended June 30, 2021, and 2020, respectively. Deferred revenue balances were $0.85 million and $0.86 million as ~~follows:~~of December 31, 2020, and 2019, respectively. Deferred revenue increased by $0.01 million and decreased by $0.2 million during the six months ended June 30, 2021, and 2020, respectively. The Company had deferred revenue contract liability balances of $0.86 million and $0.66 million as of June 30, 2021, and June 30, 2020, respectively.

~~Estimated amortization expense~~Disaggregated revenue for the ~~remainder~~three and six months ended June 30, 2021, and 2020, are as follows:

Property and equipment as of ~~2020~~June 30, 2021, and ~~subsequent years~~December 31, 2020, is as follows:

~~Amortization~~Depreciation expense related to property and equipment was $0.43 million and $0.23 million for the three months ended ~~September~~June 30, 2021, and 2020, respectively. Depreciation expense related to property and ~~2019~~equipment was ~~$0.15~~$0.70 million and ~~$0.10~~$0.44 million ~~respectively. Amortization expense~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021, and ~~2019 was $0.49 million and $0.29 million,~~2020, respectively.

Goodwill and acquired intangible assets are initially recorded at fair value and are reviewed at least annually for indicators of impairment or more frequently if there are indicators of impairment.

The Company’s intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. Impairment losses are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. During the six months ended June 30, 2021, the Company reclassified our trade name asset for Perfect Audience from an indefinite lived asset to a definite lived asset with a useful life of 3 years as part of our phase out of the Perfect Audience name. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments, and the fair value of an asset group.

Goodwill and other Intangible Assets as of June 30, 2021, and December 31, 2020, are as follows:

Estimated amortization expense for the remainder of 2021 and subsequent years is as follows:

Amortization expense for three months ended June 30, 2021, and 2020, was $0.17 million and $0.18 million, respectively. Amortization expense for the six months ended June 30, 2021, and 2020, was $0.34 million and $0.34 million, respectively.

In March 2016, the Company entered into a $2.5 million revolving loan agreement (the “Credit Facility”) with Western Alliance Bank. The ~~agreement~~facility originally matured on March 21, 2018 and was amended to mature on June 19, 2022. There are no mandatory amortization provisions, and the Credit Facility is payable in full at maturity. As of ~~September~~June 30, ~~2020,~~2021, the Credit Facility is collateralized by a lien on substantially all of the existing and future assets of the Company and secured by a pledge of 100% of the capital stock of SharpSpring Technologies, Inc. and a 65% pledge of the Company’s foreign subsidiaries’ stock. The Credit Facility subjects the Company to a number of restrictive covenants, including financial and non-financial covenants customarily found in loan agreements for similar transactions. The Credit Facility also restricts our ability to pay cash dividends on our common stock. As of ~~September~~June 30, ~~2020,~~2021, the ~~Credit Facility~~credit facility carried an interest rate of 5.0%~~. and~~, there was ~~$1.90~~$1.9 million ~~Line of Credit~~ outstanding under the Credit ~~Facility. As December 31, 2019 there were~~Facility, and no ~~amounts outstanding.~~events of default have occurred. The interest expense relating to the Credit of Facility for three months ended ~~September~~June 30, 2021, and 2020 was approximately $0.02 million and ~~2019 was~~ $0.03 million, ~~and $0,~~ respectively. The interest expense relating to the Credit of Facility for ~~nine months~~six ended ~~September~~June 30, 2021, and 2020 ~~and 2019~~ was ~~$0.06~~approximately $0.05 million and ~~$0, respectively. No events of default have occurred.~~$0.03 million respectively

In March 2018, the Company issued $8.0 million five-year convertible notes (the “Notes”) with an interest rate of 5% “payable in kind”. SharpSpring received net proceeds from the offering of approximately $7.9 million after adjusting for debt issue costs, including financial advisory and legal fees. The Notes were unsecured obligations and were subordinate in right of payment to the Credit Facility (Note 5).

~~The Notes were recorded upon issuance at amortized cost in accordance with applicable accounting guidance.~~ As there was no difference in the amount recorded at inception and the face value of the Notes, interest expense was accreted at the stated interest rate under the terms of the Notes. Total interest expense related to the Notes was impacted by the amortization of the debt issuance cost using the effective interest method.

In accordance with generally accepted accounting principles for convertible debt certain features were determined to be “embedded derivatives” and were bifurcated from the Notes and separately accounted for on a combined basis at fair value as a single derivative. The fair value of the derivatives was $0 at September 30, 2020 and December 31, 2019. The derivative was accounted for at fair value, with subsequent changes in the fair value to be reported as part of other income (expense), net in the Consolidated Statement of Comprehensive Loss.

We incurred certain third-party costs in connection with our issuance of the Notes, principally related to financial advisory and legal fees, which were being amortized to interest expense ratably over the five-year term of the Notes. The following table sets forth total interest expense related to the Notes for the three and nine months ended September 30, 2020, and 2019:

On May 9, 2019, the Company entered into and made effective a Note Conversion Agreement (the “Conversion Agreement”) with SHSP Holdings, LLC (“SHSP Holdings”) and Evercel Holdings, LLC (“Evercel,” and together with SHSP Holdings, the “Investor”), pursuant to which the parties agreed to the conversion (the “Conversion”) of the Notes. The Company’s entry into the Conversion Agreement was unanimously approved by the disinterested members of the Company’s Board of Directors.

Under the Conversion Agreement, the Notes were deemed to have been converted into the Conversion Shares, and any interest in any amount ceased to accrue or be payable with respect to the Notes, and SHSP Holdings ceases to be a holder of any Notes, and the Notes cease to be outstanding, for purposes of the Investors’ Rights Agreement dated as of March 28, 2018. Effective as of the issuance and delivery of the Conversion Shares to SHSP Holdings, the Notes were canceled and terminated in their entirety and of no further force and effect, and any and all indebtedness and other obligations of the Company under the Notes was fully performed and discharged, and any and all claims or rights of SHSP Holdings or its affiliates thereunder were fully and finally extinguished and released. Additionally, under the terms of the Conversion Agreement, the Company agreed to pay in shares 49% of the remaining future interest totaling 115,037 shares. As a result of accelerating the 49% of future interest along with the extinguishment of the convertible notes, the Company incurred a loss on induced conversion of debt of $2.2 million. The loss was measured as the excess fair value of the shares issued under the modified conversion, compared to the fair value of the shares that would have been issued under an unmodified conversion as of the measurement date. Level 1 inputs were used to determine the fair value of the shares paid to the Investor. The loss on conversion was partially offset by a gain of approximately $0.19 million from the write-off of the embedded derivative liability.

~~The Convertible Notes had a net carrying value of $0 as of September 30, 2020 and December 31, 2019, respectively.~~

In April 2020, SharpSpring entered into two loan agreements with United States Small Business Administration (“SBA”) under the Paycheck Protection Program for a total loan amount of $3.40 million ~~(“SBA Loan”~~(the “SBA Loans”). The SBA ~~Loan has~~Loans have a maturity date of 2 years from the initial disbursement and ~~carries~~carry an interest rate of 1% per year. ~~Principal~~The application for the SBA Loans requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operation of the Company. This certification further requires the Company to take into account our current business activity and ~~interest payments begin 7 months~~our ability to access other sources of liquidity sufficient to support the ongoing operations in a manner that is not significantly detrimental to the business. The receipt of the funds from the ~~initial date~~SBA Loans and the forgiveness of ~~disbursement.~~ the SBA Loans is dependent on the Company having initially qualified for the SBA Loans and qualifying for the forgiveness of such loans based on funds being used for certain expenditures such as payroll costs and rent, as required by the terms of the SBA Loans.

The SBA ~~Loan is~~Loans were eligible for forgiveness as part of the ~~CARES~~Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) approved by USthe U.S. Congress on March ~~19,~~27, 2020, if certain requirements ~~are~~were met. The Company ~~continues to evaluate~~applied for forgiveness with the SBA in December 2020, in which on March 11, 2021, the SBA forgave the principal balance and ~~monitor the requirements~~associated accumulated interest of one of the ~~CARES Act that allow for forgiveness. The~~two SBA Loans in full. As a result, the Company ~~has not paid~~recognized $0.17 million to other income in our consolidated statement of operations and comprehensive loss in the six months ending June 30, 2021. On June 11, 2021, the SBA forgave the principal balance and associated accumulated interest ~~relating~~of the second SBA Loans in full. As a result, the Company recognized $3.27 million to other income in our consolidated statement of operations and comprehensive loss in the three and six months ending June 30, 2021. Interest expense related to the SBA ~~loan as of September 30, 2020. The accrued interest expense relating to these loans~~Loans for the three months ended ~~September~~June 30, ~~2020~~2021, and ~~2019~~2020 was approximately ~~$8,000~~$0.01 million and ~~$0,~~$0.01 million, respectively. ~~The accrued interest~~Interest expense ~~relating~~related to ~~these loans~~the SBA Loans for ~~nine~~the six months ended ~~September~~June 30, ~~2020~~2021, and ~~2019~~2020 was approximately ~~$15,000~~$0.02 million and ~~$0,~~$0.01 million , respectively. ~~As of September 30, 2020,~~

Presently, the SBA ~~loan had an outstanding principle balance~~and other government communications have indicated that all loans in excess of ~~$3.40~~$2.0 million ~~included in notes payable.~~

~~The~~will be subject to audit and that those audits could take up to seven years to complete. If the SBA determines that the SBA Loan was not properly obtained and/or expenditures supporting forgiveness were not appropriate, the Company ~~currently rents its primary office facility under a ten-year lease which started in November 2018 (the “2018 Lease”). The term~~would be required to repay some or all of the ~~lease may be extended for an~~SBA Loan and record additional ~~5 years~~expense which could have a material adverse effect on our business, financial condition and results of operations in incremental one-year periods, subject to certain conditions described in the 2018 Lease. In September 2019, the Company entered into an addendum agreement to the 2018 Lease (the “2019 Addendum”) to lease an additional square feet of office space located on the same premises as the 2018 Lease. In May 2020, the Company took possession of the full space included in the 2019 addendum, accounting for approximately an additional 18,000 square feet. The rent expense anda future payments associated with the additional square feet are included in the future minimum lease payments table below. The additional space resulted in an increased lease liability and right-of-use asset of approximately $3.8 million. The term of the addendum extends through the same period as the 2018 Lease. We do not assume renewals in our determination of lease term unless the renewals are deemed to be reasonably assured at lease commencement. The Company continues to evaluate the likelihood of renewal of the 2018 Lease and 2019 Addendum. At the commencement of the 2018 Lease nor subsequently thereafter, renewal has not been reasonably assured.

Determination of whether a contract contains a lease is determined at execution of the contract based on the facts of each contract. The Company elected the package of practical expedients permitted under ASC 842 which allows us to carryforward historical lease classification, assessment on whether a contract was or contains a lease, and initial direct costs for any leases that existed prior to adoption of the standard. The Company has lease agreements with lease and non-lease components, which it has elected to combine for all leases. In addition, the Company does not recognize right-of-use assets or lease liabilities for leases with a term of 12 months or less (“Short-term” leases). Short-term lease payments are recognized in the consolidated statements of comprehensive loss on a straight-line basis over the lease term. The Company is not party to any financing lease.period.

The weighted average remaining lease term as of September 30, is 8.0 years. The weighted average discount rate for our operating leases as of September 30, 2020 is 6.5%. The discount rate of each lease is determined by the Company’s incremental borrowing rate at the time of a lease contract. The lease cost associated with short-term leases for the three months and nine month ended September 30, 2020, and 2019, were $0 for both periods.

Additionally, since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s outstanding warrants, stock options, unvested RSUs, and convertible notes were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table contains all potentially dilutive common stock equivalents:

SharpSpring income taxes are computed in accordance with ASC Topic 740, Income Taxes. The income tax expense we record in any interim period is based on our estimated effective tax rate for the year for each jurisdiction that we operate in. The calculation of our estimated effective tax rate requires an estimate of pre-tax income by tax jurisdiction, as well as total tax expense (benefit) for the fiscal year. Accordingly, this tax rate is subject to adjustment if, in subsequent interim periods, there are changes to our initial estimates of total tax expense (benefit)~~, pre-tax income (loss),~~ or pre-tax income (loss), by jurisdiction.

On March 27, 2020, the ~~Coronavirus Aid, Relief, and Economic Security~~CARES Act ~~(the “CARES Act”)~~ was enacted into the law. The CARES Act contained many income tax relief provisions including allowing for a 5-year carryback of ~~Federal~~federal net operating losses generated in tax years beginning in 2018, 2019, or 2020. As required under U.S. GAAP, the effects of tax law changes are recognized in the period of enactment. Accordingly, we ~~have~~ recorded an incremental income tax benefit in the amount of $1.6 million associated with the CARES Act related to the carryback of the Company’s 2018 federal net operating ~~loss.~~loss in the first quarter of 2020.

During the three months ended ~~September~~June 30, ~~2020,~~2021, and ~~2019,~~2020, the Company recorded income tax expense of ~~$1,706~~approximately $4,000 and $57,000, respectively. During the six months ended June 30, 2021, and 2020, the Company recorded income tax expense of approximately $0.01 million and income tax benefit of $2,291, respectively, from operations. During the nine months ended September 30, 2020, and 2019, the Company recorded income tax benefit of $1,503,625 and income tax expense of $835, respectively, from operations.$1.51 million, respectively. The blended effective tax rate for the ~~nine~~six months ending ~~September~~June 30, 2021, and 2020 was -0.4% and ~~2019, was 30.0% and 0.0%~~43.5%, respectively. The June 30, 2021, effective blended tax rate varies from our statutory U.S. tax rate due to the tax impact of the valuation allowances on losses and income generated in certain other jurisdictions at various tax rates. The June 30, 2020, effective blended tax rate varies from our statutory U.S. tax rate due to the tax impact of the CARES Act, valuation allowances on losses and income generated in certain other jurisdictions at various tax rates.

We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers many different factors including historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies and the availability of future tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. This is inherently judgmental, since we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.

In making our assessment of deferred tax asset recoverability, we considered our historical financial results, our projected future financial results, the planned reversal of existing deferred tax liabilities, and the impact of any tax planning actions. Based on our analysis we noted both positive and negative factors relative to our ability to support realization of certain deferred tax assets. However, based on the weighting of all the evidence, including the ~~near term~~near-term effect on our income projections of investments we are making in our team, product and systems infrastructure, we concluded that it was more likely than not that the majority of our deferred tax assets related to temporary differences and net operating losses may not be recovered. The establishment of a valuation allowance has no effect on our ability to use the underlying deferred tax assets to reduce cash tax payments in the future to the extent that we generate taxable income prior to expiration.

At ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we have established a valuation allowance of ~~$7.08~~$10.1 million and ~~$6.96~~$8.9 million, respectively, against certain deferred tax assets given the uncertainty of recoverability of these amounts.

We offer our U.S. employees the ability to participate in a 401(k) plan. Eligible U.S. employees can contribute up to 100% of their eligible compensation, subject to limitations established by the Internal Revenue Code. Through April 30, 2020, the Company contributed a matching contribution equal to 100% of each such participant’s contribution up to the first 3% of their annual eligible compensation. We charged $0 and $0.08 million to expense in the three months ended September 30, 2020, and 2019, respectively, associated with our matching contribution in those periods. We charged $0.12 million and $0.23 million to expense in the nine months ended September 30, 2020, and 2019, respectively, associated with our matching contribution in those periods.

From time to time, the Company grants stock ~~option~~options and restricted stock ~~units~~unit awards to officers and employees ~~and~~of the Company. Additionally, the Company grants stock options and awards to directors as compensation for their service to the Company.

In November 2010, the Company adopted the 2010 Stock Incentive Plan (the “2010 Plan”) which was restated in its entirety in August 2018. As amended, up to 2,600,000 shares of common stock ~~are~~were available for issuance under the Plan. The Plan ~~provides~~provided for the issuance of stock options and other stock-based awards. ~~The~~As of June 30, 2021, no shares remain available for future issuance under the 2010 ~~Plan expired on September 14, 2020 (except as to options outstanding as of this date).~~Plan.

In April 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”)~~. Upon adoption of the 2019 Plan~~, which was amended in July 2020 and June 2021. As amended no ~~additional awards were granted under the 2010 Plan. No~~ more than ~~697,039~~1,275,000 shares of common stock, plus the number of shares of common stock underlying any award granted under the 2010 Plan that expires, terminates, is canceled, or is forfeited shall be available for grant under the 2019 Plan. The Plan was amended in July 2020 to include an additional 1,025,000 stock options or other stock-based awards to be available for issuance. The Plan provides for the issuance of stock options and other stock-based awards. The Plan provides for the issuance of stock options and other stock-based awards. During the terms of the Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Awards.

Stock option awards under the 2010 Plan and 2019 Plan (the “Plans”) have a 10-year maximum contractual term and, subject to the provisions regarding Ten Percent Shareholders, must be issued at an exercise price of not less than 100% of the fair market value of the common stock at the date of grant. The Plans are administered by the Board of Directors, which has the authority to determine to whom options may be granted, the period of exercise, and what other restrictions, if any, should apply. Vesting for awards granted to date under the Plans is principally over four years from the date of the grant, with 25% of the award vesting after one year and monthly vesting thereafter.

Option awards are valued based on the grant date fair value of the instruments, net of estimated forfeitures, using a Black-Scholes option pricing model with the following assumptions:

The weighted average grant date fair value of stock options granted during the ~~nine~~six months ended ~~September~~June 30, 2021, and 2020, was $9.13 and ~~2019, was $5.11 and $6.43,~~$5.12, respectively.

For grants prior to January 1, 2015, the volatility assumption was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. For all grants subsequent to January 1, 2015, the volatility assumption reflects the Company’s historic stock volatility for the period of February 1, 2014, forward, which is the date the Company’s stock began actively trading. The risk-free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.

Stock option awards are expensed on a straight-line basis over the requisite service period. During the three months ended ~~September~~June 30, ~~2020,~~2021, and ~~2019,~~2020, the Company recognized an expense of ~~$0.34~~$0.35 million and ~~$0.25~~$0.26 million, respectively, associated with stock option awards. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, and ~~2019,~~2020, the Company recognized an expense of ~~$0.81~~$0.60 million and ~~$0.75~~$0.47 million, respectively, associated with stock option awards. At ~~September~~June 30, ~~2020,~~2021, future stock compensation expense associated with stock options (net of estimated forfeitures) not yet recognized was ~~$2.40~~$3.47 million and will be recognized over a weighted average remaining vesting period of ~~2.63~~3.14 years. The following summarizes stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2020:~~2021:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value					Weighted		Weighted		Aggregate
Outstanding at December 31, 2019		1,470,406		$	7.30		7.5	$	6,604,461
										Number of			Average		Average Remaining		Intrinsic
										Options			Exercise Price		Contractual Life		Value
Outstanding at December 31, 2020											1,383,057		$	7.60		7.1	$	12,000,790

Granted		475,605			9.90						346,610			16.71
Exercised		(38,445	)		4.77						(66,023	)		7.59
Expired		(27,500	)		12.65						(187	)		8.76
Forfeited		(268,100	)		11.79						(179,848	)		10.03
Outstanding at September 30, 2020		1,611,966		$	7.29		7.2	$	6,590,764
Outstanding at June 30, 2021											1,483,609		$	9.44		7.1	$	11,266,117

Exercisable at September 30, 2020		932,180		$	5.86		6.1	$	5,085,646
Exercisable at June 30, 2021											864,140		$	6.55		5.8	$	8,935,098

The total intrinsic value of stock options exercised during the three months ended ~~September~~June 30, 2021, and 2020, ~~and 2019,~~ were ~~$0.23~~$0.35 million and $0$0.02 million, respectively. The total intrinsic value of stock options exercised during the ~~nine~~six months ended ~~September~~June 30, 2021, and 2020, ~~and 2019,~~ were ~~$0.25~~$0.55 million and ~~$1.43~~$0.02 million, respectively.

~~The 2019 Plan allows for the granting of~~ Restricted Stock Units (“RSUs”)~~. Under the 2019 Plan the Board of Directors has the authority to determine whom RSUs may be granted, the period of exercise, and what other restrictions, if any, should apply. RSUs have~~ having a value equal to the fair market value of an identical number of shares of Common Stock, which may, but need not, provide that such restricted award may not be sold, assigned, transferred or otherwise disposed of, pledged or hypothecated as collateral for a loan or as security for the performance of any obligation or for any other purpose for a period determined by the Board of Directors. The Plans are administered by the Board of Directors, which has the authority to determine to whom RSUs may be granted, the period of exercise, and what other restrictions, if any, should apply. Vesting for awards granted to date under the ~~2019 Plan~~Plans is generally over ~~four~~three years from the date of the grant, with ~~25%~~33% of the award vesting after one year and ~~monthly~~quarterly vesting thereafter. During the six months ended June 30, 2021, and 2020, the Company granted 125,000 and 35,875 Restricted Stock Units (RSUs), respectively.

RSUs are expensed using a graded vested schedule which are recorded on a straight-line basis over the requisite vesting ~~period.~~period as if the award were, in substance, a single award. During the three months ended ~~September~~June 30, ~~2020,~~2021, and ~~2019,~~2020, the Company recognized ~~a net benefit~~expense of approximately ~~$0.03~~$0.17 million ~~related to forfeited RSU’s during the period~~ and ~~an expense of $0,~~$0.07 million, respectively, associated with RSUs. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, and ~~2019,~~2020, the Company recognized expense of approximately ~~$0.16~~$0.26 million and ~~$0,~~$0.19 million, respectively, associated with RSUs. At ~~September~~June 30, ~~2020,~~2021, future stock compensation expense associated with ~~RSUs~~stock units (net of estimated forfeitures) not yet recognized was approximately ~~$0.24~~$2.42 million and will be recognized over a weighted average remaining vesting period of ~~2.06~~2.87 years. The following summarizes RSU activity for the ~~nine month period~~six months ended ~~September~~June 30, ~~2020:~~2021:

~~The 2019 Plan allows for the granting of~~ Restricted ~~Stock Awards~~stock awards (“RSAs”). Under the 2019 Plan the Board of Directors has the authority to determine whom RSAs may be granted and what other restrictions, if any, should apply. Non-employee Stock awards shares are generally immediately vested. Employee Stock award shares are vested principally over two years from the date of the grant, with 50% of the award vesting after one year and monthly vesting thereafter.

~~Stock awards~~ are valued based on the closing price of our common stock on the date of grant, and compensation cost is recorded immediately if there is no vesting ~~period or~~period. For awards granted that contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized on a straight-line basis over the requisite vesting ~~period.~~period as if the award were, in substance, a single award. During the three months ended ~~September~~June 30, ~~2020,~~2021, and ~~2019,~~2020, the Company recognized expense of approximately ~~$0.08~~$0.06 million and ~~$0.03~~$0.05 million, respectively, associated with Stock Awards. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, and ~~2019,~~2020, the Company recognized expense of approximately ~~$0.17~~$0.11 million and ~~$0.10~~$0.09 million, respectively, associated with Stock Awards. ~~At September~~As of June 30, ~~2020,~~2021, future stock compensation expense associated with ~~stock~~these awards (net of estimated forfeitures) not yet recognized was approximately ~~$0.08~~$0.04 million and will be recognized over a weighted average remaining vesting period of ~~1.5 years. The following summarizes Stock Award activity for the nine month period ended September 30, 2020:~~.75 year.

~~On January~~During the six months ended June 30, ~~2014, in connection with an $11.5 million financing transaction,~~2021, and 2020, the Company issued ~~80,000 warrants~~3,620 and 23,839 shares, respectively. Of such shares issued during the six months ended June 30, 2021, and 2020, 3,620 and 7,504 shares were respectively issued to ~~purchase~~non-employee directors as compensation for their service on the board and immediately vested.

The following table summarizes RSA activity for the six month period ended June 30, 2021:

Additionally, during the first quarter 2021, the Company entered into an agreement with Marietta Davis to issue 8,479 shares of common stock ~~at an exercise price~~in recognition of ~~$7.81 per share with~~Ms. Davis’s previous service to the Company as a ~~term of 5 years. The fair value~~member of the ~~warrants was determined using the Black-Scholes option valuation model. These warrants became exercisable on January 30, 2015. The remaining 30,000~~Board of Directors. Ms. Davis served as a member of the ~~outstanding warrants~~Board of Directors of the Company from 2017 until her resignation as of August 17, 2020. The Company recorded an expense of approximately $0.17 million associated with this issuance. These shares were ~~exercised in May and August 2019. No other warrants have been~~not issued ~~since January 30, 2014. As of September 30, 2020, and December 31,~~from the 2019 ~~there were 0 outstanding warrants.~~Equity Incentive Plan.

~~Intercompany transactions~~Basic net loss per share is computed by dividing net loss by the weighted average number of common stock outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents for the period, including stock options and RSUs. Basic and diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been ~~eliminated in our consolidated financial statements. The convertible notes issued in March 2018 were held directly by SHSP Holdings, LLC (“SHSP Holdings”). Daniel C. Allen, a now former director~~anti-dilutive.

Additionally, since the Company incurred net losses for each of ~~SharpSpring Inc.,~~the periods presented, diluted net loss per share is the ~~founder~~same as basic net loss per share. The Company’s outstanding stock options and ~~manager~~unvested RSUs were not included in the calculation of ~~Corona Park Investment Partners, LLC (“CPIP”). CPIP is a member of Evercel Holdings, LLC and is a member and sole manager of SHSP Holdings. Evercel, Inc. is a member and~~diluted net loss per share as the manager of Evercel Holdings, LLC and is a member of SHSP Holdings. In May 2019, the Company and SHSP Holdings entered into and made effective a Note Conversion Agreement as outlined in Note 6 above. There were no other material related party transactions for the periods presented.effect would be anti-dilutive. The following table contains all potentially dilutive common stock equivalents:

We record a liability for contingencies if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For contingencies where the reasonable estimate of loss is a range, we record a best estimate of loss within the range.

From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on ~~its~~our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company is ~~not~~ currently a party to various litigation, however we are unable to estimate the likelihood or potential loss at this time, as such we have not recorded any ~~litigation~~estimated losses in our Consolidated Statements of Operations and Comprehensive loss. Descriptions of any material litigations are provided below.

Subsequent to the announcement of the Merger Agreement between the Company, Constant Contact, and MergerSub, various lawsuits were filed in connection with the Merger.

On July 21, 2021, a complaint was filed against the Company and certain of its directors and a former director in the United States Southern District Court of New York, captioned Kaczmar v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06227. The action generally alleges failure to adequately disclose material ~~nature.~~information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder (“Rule 14a-9”), as well as an alleged breach of fiduciary duty. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants breached their fiduciary duty, and attorneys’ and experts’ fees. On August 3, 2021, the Company was served with a summons requiring an answer or reply motion within 21 days. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.

On July 30, 2021, a complaint was filed against the Company and its directors in the United States Southern District Court of New York, captioned Ahmed v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06494. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.

On August 2, 2021, a complaint was filed against the Company and certain of its directors and a former director in the United States Eastern District Court of New York, captioned Lavery v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-04312. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.

On August 4, 2021, a complaint was filed against the Company and certain of its directors and a former director in the United States Southern District Court of New York, captioned Lessard v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06602. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.

On August 12, 2021, a complaint was filed against the Company and certain of its directors in the United States District Court of Delaware, captioned Reinhardt v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-01171-UNA. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.

On August 12, 2021, a complaint was filed against the Company and certain of its directors in the United States Southern District Court of New York, captioned Wilhelm v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06804-UA. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.

On August 12, 2021, a complaint was filed against the Company and certain of its directors in the United States Eastern District Court of Pennsylvania, captioned Page v. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-03606-GAM. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.

On August 13, 2021, a complaint was filed against the Company and certain of its directors in the United States Southern District Court of New York, captioned Handiazv. SharpSpring, Inc. et al, Civil Action No. 1:21-CV-06816. The action generally alleges failure to adequately disclose material information in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9. The plaintiff seeks, among other things, equitable relief to enjoin consummation of the Merger, rescission of the Merger and/or rescissory damages, a declaration that the defendants violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9, and attorneys’ and experts’ fees and expenses. The Company and the individual defendants all believe that the claims asserted against each of them are without merit and intend to vigorously defend against this lawsuit.

The Company ~~is not party~~rents our facilities with leases ranging from month-to-month to ~~any non-cancellable~~several years in duration. Most of our service contracts ~~that create~~are on a ~~material future commitment other than its leases~~month-to-month basis, however, some contracts and agreements extend out to longer periods. Future minimum lease payments, and payments due under non-cancelable service contracts are as ~~described in Note 8.~~follows as of June 30, 2021:

State, local and foreign jurisdictions have differing rules and regulations governing sales, franchise, use, value added and other taxes. These rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to SaaS products in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus vary significantly and are complex. As such, we could face possible tax assessments and audits. A successful assertion, by any of these taxing authorities, that we should be collecting additional sales, use, value added or other taxes in jurisdictions where we have not historically done so and do not accrue for such taxes could result in tax liabilities and related penalties for past sales, discourage customers from purchasing our products or otherwise harm our business and operating results. We continue to evaluate the impact of various tax types which may require future sales, franchise, or other tax payments. ~~During~~The Company evaluated the ~~three and nine months ended September 30, 2020, the Company recorded an accrual of $0.26 million~~potential contingent liability with respect to ~~general and administrative expenses in the consolidated statements of comprehensive loss related to a contingent~~ sales tax ~~liability. The $0.26 million accrued is the amount SharpSpring was able to reasonably estimate and is probable~~nexus in accordance with ASC 450 ~~“Contingencies”.~~“Contingencies” and determined the liability is both reasonably estimate and probable. Accordingly, the Company recorded a contingent liability for sales tax of $0.36 million and $0.28 million as of June 30, 2021, and December 31, 2020, respectively. The Company estimates that the total range of exposure related to sales tax contingent liability is approximately $0.20 million to ~~$0.53~~$0.63 million. ~~SharpSpring is unable~~

We offer our U.S. employees the ability to ~~estimate~~participate in a 401(k) plan. Eligible U.S. employees may contribute up to 100% of their eligible compensation, subject to limitations established by the ~~exact amount~~Internal Revenue Code. Historically, the Company contributed a matching contribution equal to 100% of ~~the liability due~~each participant’s contribution up to the ~~complex~~first 3% of their annual eligible compensation. The Company temporarily paused matching contributions from May 1, 2020, through March 21, 2021. The Company incurred expense associated with the matching contribution of approximately $0.08 million and ~~varying nature~~$0.03 million for the three months ended June 30, 2021, and 2020, respectively. The Company incurred expense associated with the matching contribution of ~~state by state nexus laws.~~approximately $0.09 million and $0.12 million for the six months ended June 30, 2021, and 2020, respectively.

The Company has employment agreements with several members of its leadership team and executive officers.

~~The~~On June 21, 2021, the Company ~~operates as one reporting segment. Operating segments are defined as components~~entered into an Agreement and Plan of ~~an enterprise for which separate financial information in regularly evaluated by the chief operating decision maker~~Merger, (“~~CODM”~~Merger Agreement”), ~~which is~~ 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 ~~Company’s chief executive officer, in deciding how~~Merger”). Pursuant to ~~allocate resources~~the terms of the Merger Agreement, MergerSub will merge with and ~~assess performance.~~into SharpSpring and SharpSpring will continue as the surviving corporation and become a wholly-owned subsidiary of Constant Contact. The ~~Company~~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. SharpSpring does not ~~present geographical information about revenues because it is impractical~~have any additional contracts with Constant Contact, except those related to ~~do so. Disaggregated revenue for~~Merger Agreement..

In connection with the Merger Agreement, SharpSpring expects to incur certain transaction-related expenses. These costs related to the transaction are expected to total between $9.50 million and $10.0 million, of which approximately $0.27 million has been incurred and expensed in the three and ~~nine~~six months ~~ended September~~end June 30, ~~2020,~~2021. Between $9.23 million and ~~2019, are as follows:~~$9.73 million of total costs related to the proposed merger may not be payable unless and until the Merger is consummated. In addition, in some circumstances, upon termination of the Merger Agreement, the Company will be required to pay a termination fee of $7.00 million.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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,~~2020, filed with the Securities and Exchange Commission on March ~~16, 2020, as amended on April~~ 30, ~~2020.~~2021.

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~~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 ~~Perfect Audience~~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 Marketing Automation”~~“SharpSpring” relate to the SharpSpring Marketing Automation product and references to ~~“Perfect Audience”~~“SharpSpring Ads” relate to the ~~Perfect Audience~~SharpSpring Ads product, while all references to ~~“Company,~~“our Company,” “we,” “our” or “us” and other similar terms means SharpSpring, Inc., a Delaware corporation, and ~~all~~wholly owned subsidiaries.

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.

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. ~~In addition to our work-from-home policy,~~At the onset of the pandemic, we ~~have~~ made ~~several~~certain temporary strategic business decisions to help navigate these uncertain ~~times.~~

~~We implemented~~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 ~~10% reduction to salaries across most~~more stable view of the ~~Company. The Company reinstated full salaries as~~impact of ~~November 1, 2020. The Company has cut various other non-employee related costs across~~ the board to ensure future flexibility. This includes an approximate 40% reduction in the marketing advertising outsourcing budget 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 COVIDCOVID-19 pandemic.

~~The Company has also increased its cash position by $1.90 million by drawing down on our line of credit as~~Also described in Note 5, ~~Credit Facility. As stated in Note 7,~~ SBA Paycheck Protection ~~Loan,~~Loans, the Company received $3.40 million from the Small Business Association ~~(SBA)~~(“SBA”) loan program in April 2020, which ~~may be forgiven if~~as of June 30, 2021, the ~~criteria defined by the SBA is met.~~entire $3.40 million has been forgiven. We ~~have~~ also received aan approximately $1.60 million tax refund in ~~September~~June 2020 as a result of historical net operating losses as described in Note ~~10,~~6, Income Taxes. The SBA loan program and tax refund are both results of the CARES Act enacted by Congress in ~~March.~~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 ~~third quarter 2020~~three months ended June 30, 2021, we activated ~~265~~159 new customers compared to ~~266~~260 in the same period in ~~2019. We~~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 ~~bring~~hire qualified candidates to fill open positions in a highly competitive market for a limited number of candidates. Despite a lower-than-average new ~~leads, host demos, and drive~~logo sales ~~at promising levels despite the downturns in the overall economy. We~~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 ~~Perfect Audience~~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.~~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.

Despite COVID-19 and the recently identified variants of COVID-19, the Company was able to continue to grow revenue in ~~both the three and nine months ending September 30, 2020 as compared to the same periods in 2019. Revenues during the three months ended September 30, 2020 were substantially flat compared to~~ the three months ended June 30, ~~2020. Although revenue has increased 0.5% for three months ended September 30, 2020 as~~2021, compared to ~~three months ended June 30, 2020 and 28% compared to~~both the three months ended ~~September~~March 31, 2021, and June 30, ~~2019,~~2020. We believe we ~~believe~~have limited the ~~COVID-19~~impact of the pandemic ~~had an adverse effect~~ on our ~~revenue growth this period.~~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 ~~while other companies are seeing layoffs in large numbers.~~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 ~~our fourth quarter~~the next year and beyond cannot currently be ~~currently~~completely determined, but the Company has taken measures to best position ~~ourselves~~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.

Three Months Ended June 30, 2021, Compared to the Three Months Ended June 30, 2020:

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.

~~Three Months Ended September 30, 2020 Compared~~sales increased $0.11 million to ~~the Three Months Ended September 30, 2019~~

~~Revenues increased $1.58~~$1.98 million for the three months ended ~~September~~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.

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 September 30, 2019, primarily due to growth in our SharpSpring Marketing Automation customer base, a price increase put in place in 2020, and the addition of the Perfect Audience platform. Revenues for our SharpSpring Marketing Automation increased to $6.69 million in the three months ended SeptemberJune 30, 2020, ~~from $5.68 million in the three months ended September 30, 2019. The Perfect Audience platform acquired in November of 2019 generated an additional $0.58 million of new revenue~~as we concentrated on internal development work as opposed to outsourced development. Capitalized development costs for the three months ended ~~September~~June 30, ~~2020. This growth~~2021, and June 30, 2020, were $0.14 million and $0.15 million, respectively. The decreased capitalization resulted in ~~revenues was slightly offset by reduced revenue from our SharpSpring Mail+ product, which declined from~~a net increase research and development expense of approximately ~~$0.05~~$0.01 million for the three months ended ~~September~~June 30, ~~2019 to approximately $0.03 million for the three months ended September 30, 2020.~~

~~Cost of services slightly increased $0.03 million for the three months ended September 30, 2020, as~~2021, compared to the three months ended September 30, 2019, primarily due to increased hosting costs of approximately $0.21 million offset partially by decreased employee related costs of approximately $0.15 million associated with providing and supporting our technology platform to more customers. The reduction in employee related costs is largely driven by the approximately 10% reduction to salaries in April 2020. As a percentage of revenues, cost of services was 26% and 32% of revenues for the three months ended September 30, 2020 and 2019, respectively. This represents a year-over-year improvement in gross margin due to increased revenue scale and operating leverage.same period last year.

Sales and marketing expenses decreased approximately $0.40 million for the three months ended September 30, 2020, as compared to the same period in 2019. The decrease was primarily due to a change to utilizing an outbound marketing approach to source more leads internally, which increased our employee related costs, while driving down our marketing program spend for lead generation activities. Program spend decreased by approximately $0.86 million compared to same period last year. Employee-related costs increased by approximately $0.48 million. Other non-employee and non-program costs decreased by approximately $0.03 million compared to the same period in 2019.

Research and development expenses increased $0.17 million for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, primarily due to additional hiring of development and quality assurance staff since the third quarter of 2019. Employee-related costs for this group increased by approximately $0.14 million in the three months ended September 30, 2020, compared to the same period in 2019. Non-employee-related costs, including outsourced development, for this group increased by approximately $0.13 million in the three months ended September 30, 2020, compared to the same period in 2019. These costs were partially offset by capitalized software development work of approximately $0.14 million for the three months ended September 30, 2020, compared to approximately $0.30 million in the same period in 2019.

General and administrative expenses increased $0.73 million for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, primarily due to a contingent loss accrual of $0.26 million for potential sales tax exposure in the United States discussed in Note 15,Commitments and Contingencies, higher employee related costs of approximately $0.22 million associated with business growth and costs associated with the one time severance expense of the Company’s former Chief Financial Officer of approximately $0.08 million. In addition general and administrative expenses increased for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, due to increased facilities costs of approximately $0.11 million primarily related to the addition of office space in the second quarter of 2020 to support the growth of the Company and professional fees of approximately $0.09 million incurred to support increased required public company regulations. Depreciation expense increased by approximately $0.09 million primarily due to the Company’s continued investment in software development.

~~Amortization of intangible assets~~General and administrative expenses increased $1.28 million to $3.52 million for the three months ended ~~September~~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 ~~September~~June 30, ~~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.~~2020.

									Percent												Percent
	Three Months Ended						Change		Change			Three Months Ended						Change			Change
	September 30,						from		from			June 30,						from			from
	2020			2019			Prior Year		Prior Year			2021			2020			Prior Year			Prior Year
Other
Other expense, net	$	(14,075	)	$	(15,781	)	$	1,706		-11	%
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		1,706			(2,291	)		3,997		-174	%	$	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 ~~line of credit, and SBA loans. During~~Credit Facility. For the three months ended ~~September~~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 ~~incurred foreign currency gains~~received and recognized interest income in the amount of approximately ~~$0.01~~$0.05 million ~~compared to approximately losses of approximately $0.03 million~~related to the ~~same period~~tax refund received in ~~2019. The Company incurred $0.04 million of interest expense in the three months ended September 30, 2020 compared to approximately $0 in the same period in 2019.~~June 2020.

During the three months ended ~~September~~June 30, 2021, and June 30, 2020, our income tax ~~provision~~expense was related to income derived in foreign jurisdictions at the applicable statutory tax rates. WeFor 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 ~~income statement~~Consolidated Statement of Operations and Comprehensive Loss for those losses. ~~For the three months ended September 30, 2019, our income tax benefit related to losses derived in foreign jurisdictions at the applicable statutory tax rates~~

~~Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019~~

Six Months Ended June 30, 2021, compared to the Six Months Ended June 30, 2020:

Revenues increased ~~$5.06~~$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 ~~nine~~six months ended ~~September~~June 30, ~~2020, as~~2021, compared to the nine months ended September 30, 2019, primarily due to growth in our SharpSpring Marketing Automation customer base, the price increase put in place in 2020, and addition of the Perfect Audience platform. Revenues for our SharpSpring Marketing Automation increased to $19.62 million in the nine months ended September 30, 2020, from $16.4 million in the nine months ended September 30, 2019. The Perfect Audience platform acquired in November of 2019 generated an additional $1.87 million of new revenue for the nine months ended September 30, 2020. This growth in revenues was slightly offset by reduced revenue from our SharpSpring Mail+ product, which declined from approximately $0.18$1.29 million for the ~~nine~~six months ended ~~September 30, 2019 to approximately $0.14 million for the nine months ended September~~June 30, 2020.

Cost of ~~services increased $1.09~~sales decreased $0.37 million to $3.87 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020, as~~2021 compared to $4.24 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020. The decrease in cost of sales was driven primarily ~~due to increased~~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 ~~more customers~~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 ~~and~~for the six months ended June 30, 2021, compared to the same period in 2020. Hosting costs increased ~~hosting costs of approximately $0.62~~$0.05 million ~~associated with~~during the ~~growth of the Company. As~~six months ended June 30, 2021, to support new revenues. Gross margin as a percentage of ~~revenues, cost~~revenue increased from 70.4% in the first six months of ~~services was 28% and 30%~~2020 to 75.9% in the first six of ~~revenues for the nine months ended September 30, 2020 and 2019, respectively.~~2021. This ~~represents a year-over-year~~ improvement in gross margin ~~due to increased revenue scale and operating leverage.~~is the result of overall efficiencies within our cost of sales.

								Percent									Percent
	Nine Months Ended				Change			Change			Six Months Ended				Change		Change
	September 30,				from			from			June 30,				from		from
	2020		2019		Prior Year			Prior Year			2021		2020		Prior Year		Prior Year
Operating expenses:
Sales and marketing	$	8,134,363	$	8,976,466	$	(842,103	)		-9	%	$	7,706,478	$	5,429,222	$	2,277,256		42%
Research and development		4,443,956		3,684,314		759,642			21	%		4,227,280		3,063,029		1,164,251		38%
General and administrative		7,383,655		6,154,295		1,229,360			20	%		6,294,610		4,658,401		1,636,209		35%
Intangible asset amortization		489,348		285,750		203,598			71	%		343,098		336,547		6,551		2%
	$	20,451,322	$	19,100,825	$	1,350,497			7	%	$	18,571,466	$	13,487,199	$	5,084,267		38%

Sales and marketing expenses ~~decreased $0.84~~increased $2.28 million to $7.71 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~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 ~~2019. The decrease was primarily due~~recruiting expense related to ~~a change to utilizing an outbound~~additional sales and marketing approach to source more leads internally, which increased our employee related costs, while driving down our marketing program spend for lead generation activities. Program spend decreased by approximately $2.06 million compared to same period last year. Employee-related costs increased by approximately $1.12 million. Other non-employee and non-program costs increased by approximately $0.10 million compared tohires made in the ~~same period in 2019.~~second six months of 2020.

Research and development expenses increased ~~$0.76~~$1.16 million to approximately $4.23 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~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 ~~nine~~six months ended ~~September~~June 30, ~~2019, primarily due~~2020, as we concentrated on internal development work as opposed to ~~additional hiring of~~outsourced development. Capitalized development ~~and quality assurance staff since last year. Employee-related~~ costs for ~~this group increased by approximately $0.55 million in~~ the ~~nine~~six months ended ~~September~~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 in 2019. Non-employee-related costs, including outsourced development, for this group increased by approximately $0.19 million in the nine months ended September 30, 2020, compared to the same period in 2019. These costs were partially offset by capitalized software development work of approximately $0.56 million for the nine months ended September 30, 2020, compared to approximately $0.58 million in the same period in 2019.last year.

General and administrative expenses increased ~~approximately $1.23~~$1.63 million to $6.29 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, as compared to $4.66 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~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 ~~higher employee related costs associated with business growth of approximately $0.52 million, a contingent loss accrual of $0.26 million~~the return to full salaries in the ~~third~~fourth quarter of 2020 that were reduced in response to COVID-19 starting in April 2020. Facilities and rent expense for ~~potential sales tax exposure in~~ the ~~United States discussed in Note 15~~,~~Commitments~~six months ended June 30, 2021, increased approximately $0.19 million compared to the six months ended June 30, 2020, and ~~Contingencies,~~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 ~~facilities costs of~~$0.24 million. Expenses from outside professional services not related to the proposed Merger decreased by approximately ~~$0.20~~$0.08 million. Depreciation expense increased by approximately $0.26 million ~~primarily associated with~~related to increased property and equipment expenditures throughout 2020 for furniture and leasehold improvements related to the ~~Company adding~~ additional office space acquired in the second quarter of 2020, ~~to support the growth of the Company, and~~as well as increased professional fees of approximately $0.22 million during the nine months ended September 30, 2020 compared to nine months ended September 30, 2019 incurred to support increased required public company regulations. Additionally, corporate governance costs decreased during this period due to the Company’s one time 2019 franchise tax settlement payment of approximately $.32 million Depreciation expense increased by approximately $0.25 million primarily due to the Company’s continued investment incapitalized software development during the nine month ended September 30, 2020. The Company made $0.10 million in donations to various charities in the nine months ended September 30, 2020 compared to approximately $0.03 in the same period in 2019.costs.

Amortization of intangible ~~assets~~ increased $0.01 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, as compared to the ~~nine~~three months ended ~~September~~June 30, ~~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.~~2020.

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~~Credit Facility. For the six months ended June 30, 2021, we also recorded a gain on extinguishment of ~~credit,~~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. During~~Loans (Note 5) for the ~~nine~~six months ended ~~September~~June 30, 2021, and 2020 was approximately $0.06 million and $0.04 million, respectively. For the six months ended June 30, 2020, ~~incurred foreign currency losses~~the Company received and recognized interest income in the amount of ~~approximately $0.10 million compared to~~ approximately $0.05 million to the same period in 2019. The Company incurred approximately $0.08 million of interest expense in the nine months ended September 30, 2020 compared to approximately $0.14 million in the same period in 2019. The Company received interest related to athe tax refund received in ~~September 2020 of approximately $0.05 million.~~June 2020.

During the ~~nine~~six months ended ~~September~~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 ~~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,~~For years 2021 and 2020, we ~~had~~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 ~~income statement~~Consolidated Statement of Operations and Comprehensive Loss for those losses. ~~For the nine months ended September 30, 2019, our income tax benefit primarily related to losses derived in foreign jurisdictions at the applicable statutory tax rates~~

Our primary source of operating cash inflows are payments from customers for use of our SharpSpring Marketing Automation and ~~Perfect Audience~~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 ~~addition to the operating cash flows~~December of 2020, the Company ~~utilized several other sources~~issued 1,000,000 shares of ~~cash flows in 2020.~~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 ~~Loan~~Loans in April 2020. In March 2020, the Company drew down on ~~its~~our available $1.90 million ~~line of credit. In March of 2019, the Company issued 885,500 shares of common stock and received approximately $10.65 million in cash.~~Credit Facility.

Our primary sources of cash outflows from operations include payroll and payments to vendors and third-party service providers.

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.

Net cash used in operating activities decreased by $4.82 million to $1.21 million used in operations for the nine months ended September 30, 2020, compared to approximately $6.03 million used in operations for the nine months ended September 30, 2019. The decrease in cash used in operating activities was attributable primarily to the Company reducing the loss before income taxes from $9.66 million during the nine months ended September 30, 2019 to a loss before taxes of $5.0 million in the nine months ended September 30, 2020. The Company received an approximate $1.60 million tax refund in June 2020.

Net cash used in investing activities was approximately $0.96 million during the nine months ended September 30, 2020, compared to approximately $1.06 million used during the nine months ended September 30, 2019. The change in cash used for investing activities is primarily related to the decrease of approximately $0.08 million in investment in property and equipment in the nine months ended September 30, 2020. 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 $5.46 million during the nine months ended September 30, 2020, compared to $11.6 million net cash received from financing activities during the nine months ended September 30, 2019. The primary sources of the cash provided by financing activities is related to the Company’s $1.90 million line of credit and $3.40 million loan from the SBA Loan. In March 2019, the Company received approximately $10.65 million from the issuance of common stock, net of issuance costs. The Company also received approximately $0.19 million from the exercise of employee stock options during the nine months ended September 30, 2020 compared to approximately $0.93 million from the exercise of employee stock options during the nine months ended September 30, 2019.

WeSharpSpring had net working capital of approximately ~~$9.36~~$21.42 million and ~~$10.38~~$22.81 million as of ~~September~~June 30, ~~2020~~2021, and December 31, ~~2019,~~2020, respectively. Our cash balance was ~~$15.0~~on June 30, 2021, and December 31, 2020, was $25.16 million ~~at September 30,~~and $28.27 million respectively. The cash balances reflect $1.9 million received from our Credit Facility in March 2020, ~~reflecting the $1.90~~$3.4 million received from the ~~draw on our line of credit~~SBA Loans in ~~March~~April 2020, ~~the proceeds of the SBA Loan of $3.40 million,~~ and ~~tax refund of~~ approximately ~~$1.60 million received in June 2020. Our cash balance was $11.88 million on December 31, 2019, reflecting net $10.65~~$13.9 million received from ~~the stock~~secondary offering, net of issuance costs, in ~~March 2019.~~December 2020.

As of ~~September~~June 30, ~~2020,~~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 ~~16, 2020, as amended on April,~~ 30, ~~2020,~~2021, other than those appearing in the notes to the consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

~~Our~~As of June 30, 2021, there were no significant changes in the application of our significant accounting policies ~~including~~or estimation procedures from those presented in our Annual Report on Form 10-K for the ~~assumptions and judgments underlying them, are disclosed in the Notes to the Consolidated Financial Statements.~~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.

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.

Item 3. Quantitative and Qualitative ~~Disclosure~~Disclosures About Market ~~Risk.~~Risk.

We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of seniorThe Company’s management, ~~and the Board of Directors.~~

~~As of the end of the period presented in this report, we carried out an evaluation, under the supervision and~~ with the participation of ~~our management, including~~ the ~~Chief Executive Officer~~Company’s principal executive officer and ~~Chief Financial Officer, of~~principal financial officer, evaluated the effectiveness of the ~~design and operations of our~~Company’s disclosure controls and procedures (as defined in ~~Rule~~Rules 13a-15(e) and 15d-15(e) under the Securities Exchange ~~Act).~~Act of 1934, as amended) as of June 30, 2021. Based ~~upon that~~on this evaluation, ~~our Chief Executive Officer~~the Company’s principal executive officer and ~~Chief Financial Officer~~principal financial officer concluded that, ~~due to material weaknesses in our internal control over financial reporting described below in Management’s Annual Report on Internal Control Over Financial Reporting, our~~as of June 30, 2021 the Company’s disclosure controls and procedures were ~~not~~ effective, ~~as of December 31, 2019. There were no changes~~in that they provide reasonable assurance that information required to ~~our disclosure controls~~be disclosed by the Company in the reports that it files or ~~procedures during the quarter ended September 30, 2020 that materially affected or are reasonably likely to materially affect our financial reporting.~~

Notwithstanding the identified material weaknesses, management believes the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. generally accepted accounting principles.

~~Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)~~submits under the Securities Exchange ~~Act). Management,~~Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including ~~our Chief Executive Officer~~the Company’s principal executive officer and ~~Chief Financial Officer, assessed the effectiveness of our internal control over~~principal financial ~~reporting~~officer, as of December 31, 2019. In making this assessment, our management used the criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting ~~is a process designed~~(as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to ~~provide reasonable assurance regarding~~materially affect, the ~~reliability of financial reporting for external purposes in accordance with generally accepted accounting principles. A company’s~~Company’s internal control over financial ~~reporting includes those policies and procedures that:~~

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives.reporting.

~~We have confidence in our internal controls and procedures. Nevertheless, our~~Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, management does not expect that our disclosure ~~procedures~~controls and ~~controls~~procedures or our internal ~~controls~~control over financial reporting will prevent or detect all errors ~~or intentional~~and all fraud. ~~An internal~~A control system, no matter how ~~well-conceived~~well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of ~~such internal controls~~the control system are met. ~~Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result~~Because of the inherent limitations in all ~~internal~~ control systems, no evaluation of controls can provide absolute assurance that all ~~our~~ control issues and instances of fraud, if any, within the company have been detected.

~~A material weakness~~ The design of any system of controls also is ~~a deficiency,~~based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or ~~combination~~the degree of ~~deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement~~compliance with the policies or procedures may deteriorate. Because of the ~~Company’s annual~~inherent limitations in a cost-effective control system, misstatements due to error or ~~interim financial statements will~~fraud may occur and not be ~~prevented or detected on a timely basis.~~

We acquired Perfect Audience on November 21, 2019 and management excluded from its assessment of the effectiveness of internal control over financial reporting as the December 31, 2019, Perfect Audience total assets and total revenues representing approximately 16.2% and 1.2%, respectively, of our consolidated financial statements as of and for the year ended December 31, 2019.detected.

~~In connection with our evaluation of the internal controls of the Company, we noted the following deficiencies that we consider to be material weaknesses:~~

The material weaknesses did not result in any identified misstatements to the consolidated financial statements, and there were no changes to previously released financial results. Based on these material weaknesses, the Company’s management concluded that at December 31, 2019, the Company’s internal control over financial reporting was not effective.

The Company’s independent registered public accounting firm, Cherry Bekaert LLP has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, which appears in Part II, Item 8 of our most recent Form 10-K for the period ended December 31, 2019.

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) creating and filling an IT Compliance Oversight function; (ii) developing a training program addressing ITGCs and policies, including educating control owners concerning the principles and requirements of each control, with a focus on those related to change-management and role-based security over IT systems impacting financial reporting and performing a full review or all current policies and procedures to identify current operational and financial reporting principle gaps and implement a cohesive set of policies that define the Company’s standards across systems, departments, and processes, reflected in the supporting documents such as Standard Operating Procedures (SOP) and checklists; (iii) implementing controls to address and maintain documentation of completeness and accuracy of system generated information used to support the operation of the controls; (iv) developing enhanced change-management intake procedures and controls related to changes in IT systems; (v) implementing an IT management review and testing plan to monitor ITGCs with a specific focus on systems supporting our financial reporting processes; and (vi) enhanced monthly reporting on the remediation measures to the Audit Committee of the Board of Directors; (vii) and hiring additional accounting staff, including an assistant controller, to increase the Company’s segregation of duties and allow adequate time for proper documentation of observable evidence of review and approvals.

We believe that these actions will remediate the material weaknesses. The weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal year 2020.

The Company continues to evaluate, plan, and remediate the material weaknesses identified. During the period ending September 30, 2020 there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Not Applicable.~~From time to time our Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. In addition, as described in “Note 9 – Commitments and Contingencies” to our consolidated financial statements, we are party to four lawsuits relating to the Merger. Given the inherent unpredictability of these types of proceedings, however, it is possible that an adverse outcome in one or more of these proceedings could have a material adverse effect on our financial results.

~~The following~~There were no material changes to the risk ~~factor supplements the Risk Factors described~~factors disclosed in ~~the Company’s annual report~~Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, except as ~~amended on April 30, 2020, and should be read in conjunction therewith.~~set forth below.

The ~~extent~~proposed Merger may be delayed or not occur at all for a variety of reasons, including the possibility that the Merger Agreement is terminated prior to ~~which~~ the ~~COVID-19 pandemic will adversely impact our business, financial condition and results~~completion of ~~operations is highly uncertain and cannot be predicted.~~the 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”). Completion of the Merger is subject to customary closing conditions, including (i) approval of the Merger Agreement by our stockholders, (ii) the absence of governmental injunctions or other legal restraints prohibiting the Merger and (iii) the absence of a “Material Adverse Effect,” as defined in the Merger Agreement. In addition, the obligation of each party to consummate the Merger is conditioned upon, among other things, the accuracy of the representations and warranties of the other party (subject to certain materiality exceptions), and material compliance by the other party with its covenants under the Merger Agreement. Therefore, the Merger may not be completed or may not be completed as quickly as expected.

Failure to complete the Merger could adversely affect our business and the market price of our common stock in a number of ways, including:

The ~~COVID-19 pandemic has created significant worldwide uncertainty, volatility~~Merger could divert management’s attention, disrupt our relationships with third parties and ~~economic disruption. The extent to~~employees and result in negative publicity or legal proceedings, any of which ~~COVID-19 will adversely~~could negatively impact our ~~business, financial condition~~operating results and results of operations is dependent upon numerous factors, many of which are highly uncertain, rapidly changing and uncontrollable. These factors include, but are not limited to: (i) the duration and scope of the pandemic; (ii) governmental, business and individual actions that have been and continue to be taken in response to the pandemic, including travel restrictions, quarantines, social distancing, work-from-home and shelter-in-place orders and shut-downs; (iii) the impact on U.S. and global economies and the timing and rate of economic recovery; (iv) potential adverse effects on the financial markets and access to capital; (v) potential goodwill or other impairment charges; (vi) increased cybersecurity risks as a result of pervasive remote working conditions; (vii) our ability to effectively carry out our operations due to any adverse impacts on the health and safety of our employees and their families; (viii) the ability of our agency partners to resell the SharpSpring Marketing Automation platform to their clients. Furthermore, as a result of the COVID-19 pandemic, our employees have been predominantly working from home. The significant increase in remote working, particularly for an extended period of time, could exacerbate certain risks to our business, including an increased risk of cybersecurity events and improper dissemination of personal or confidential information. We do not believe these circumstances have, or will, materially adversely impact our internal controls or financial reporting systems.ongoing business.

We have expended, and continue to expend, significant management time and resources in an effort to complete the Merger, which may have a negative impact on our ongoing business. Uncertainty regarding the outcome of the Merger and our future could disrupt our business relationships with our existing and potential customers, suppliers, vendors and other business partners, who may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us. Uncertainty regarding the outcome of the Merger could also adversely affect our ability to recruit and retain key personnel and other employees. The pendency of the Merger may also result in negative publicity and a negative impression of us in the financial markets. The Merger has resulted in litigation against us and our directors and officers. Such litigation could be distracting to management and may require us to incur significant costs. In addition, litigation could result in the Merger being delayed and/or enjoined by a court of competent jurisdiction, which could prevent the Merger from becoming effective or becoming effective on the expected timeframe. The occurrence of any of these events individually or in combination could have a material and adverse effect on our business, financial condition and results of operations.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are subject to certain restrictions on our business activities and must generally operate our business in the ordinary course, subject to certain exceptions. These restrictions could prevent us from pursuing attractive business opportunities that may arise prior to the consummation of the Merger. Although we may be able to pursue such activities with the Constant Contact’s consent, Constant Contact may not be willing to provide its consent for us to do so.

If the Merger occurs, our shareholders will not be able to participate in any upside to our business.

If the Merger is consummated, each outstanding share of common stock of the Company (other than shares held in the treasury of the Company, owned by Constant Contact or the MergerSub, or any dissenting shares), will cease to be outstanding and will be converted into the right to receive an amount in cash equal to $17.10, without interest, subject to deduction for any required withholding tax or other amounts required to be withheld therefrom. As a result, if our business following the Merger performs well, our current shareholders will not receive any additional consideration and will therefore not receive any benefit from any such future performance of our business.

Litigation could delay and/or prevent the Merger from becoming effective or from becoming effective within the expected timeframe.

We are subject to litigation challenging the Merger. If plaintiffs move for and are successful in obtaining an injunction prohibiting the consummation of the Merger, then such injunction may prevent the Merger from becoming effective or from becoming effective within the expected timeframe, either of which could substantially harm our business.

The Merger Agreement contains provisions that could discourage a potential competing acquirer of us.

The Merger Agreement contains certain customary restrictions of the Company’s ability to solicit, initiate, or knowingly encourage or induce third-party proposals (or knowingly cooperate in connection with such third party proposals) for the acquisition of our stock or assets until the consummation of the Merger or the earlier termination of the Merger Agreement. In addition, subject to certain customary "fiduciary out" exceptions, our Board of Directors is required to recommend that our stockholders vote in favor of the approval of the Merger, the Merger Agreement, and the transactions contemplated thereby. In addition, in some circumstances, upon termination of the Merger Agreement, the Company will be required to pay a termination fee of $7,046,778.

These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of the Company from considering or proposing that acquisition, even if the acquirer was prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the Merger, or might otherwise result in a potential third-party acquirer proposing to pay a lower price to our stockholders than they might otherwise have proposed to pay due to the added expense of the termination fee that may become payable in certain circumstances.

If the Merger Agreement is terminated and the Company decides to seek another business combination, we may not be able to negotiate or consummate a transaction with another party on terms comparable to, or better than, the terms of the Merger Agreement.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~September~~June 30, ~~2020~~2021

Or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		05-0502529
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5001 Celebration Pointe Avenue Suite 410 Gainesville, FL		32608
(Address of principal executive offices)		(Zip Code)

Large accelerated filer	☐	Accelerated filer	☒☐
Non-accelerated filer	☐☒	Smaller reporting company	☒
		Emerging growth company	☐

			Page

PART I – FINANCIAL INFORMATION			45

	Item 1.	Financial Statements:		45
	Consolidated Balance Sheets ~~(unaudited)~~		4
	~~Consolidated Statements of Comprehensive Loss (unaudited)~~(Unaudited)		5
	Consolidated Statements of ~~Changes in Shareholders’ Equity (unaudited)~~Operations and Comprehensive Loss (Unaudited)		6
	Consolidated Statements of ~~Cash Flows (unaudited)~~Changes in Shareholders’ Equity (Unaudited)		7
	Consolidated Statements of Cash Flows (Unaudited)		8
	Notes to the Consolidated Financial Statements ~~(unaudited)~~(Unaudited)		89
~~Item 2.~~	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		3424
~~Item 3.~~	Item 3. Quantitative and Qualitative Disclosures About Market Risk		4332
~~Item 4.~~	Item 4. Controls and Procedures		4332

PART II – OTHER INFORMATION			4634

~~Item 1.~~	Item 1. Legal Proceedings		4634
~~Item 1A.~~	Item 1A. Risk Factors		4634
~~Item 2.~~	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		4736
~~Item 3.~~	Item 3. Defaults Upon Senior Securities		4736
~~Item 4.~~	Item 4. Mine Safety Disclosures		4736
~~Item 5.~~	Item 5. Other Information		4736
~~Item 6.~~	Item 6. Exhibits		4737
SIGNATURES			4838

	·	the proposed Merger (as defined below);
	·	the anticipated timing of the development of future products;
	·	projections of costs, revenue, earnings, capital structure and other financial items;
	·	statements of our plans and objectives;
	·	statements regarding the capabilities of our business operations;
	·	statements of expected future economic performance;
	·	statements regarding competition in our market; and
	·	assumptions underlying statements regarding us or our business.

SharpSpring, Inc.
(Exact name of registrant as specified in its charter)

	·	the proposed acquisition of the Company pursuant to the Agreement and Plan of Merger, dated as of June 21, 2021, as it may be amended from time to time in accordance with its terms (the “Merger Agreement”), by and among Constant Contact, Inc., a Delaware corporation (“Constant Contact”) and Groove Merger Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of Constant Contact (“MergerSub”), providing for the merger of MergerSub with and into the Company (the “Merger”) and for the Company to become a wholly-owned subsidiary of Constant Contact, including the risk that the transaction may not be completed in a timely manner or at all, which may adversely affect the Company’s business and the price of its common stock, the failure to satisfy the conditions to the consummation of the transaction, including the adoption of the Merger Agreement by the shareholders of the Company, and the receipt of certain governmental and regulatory approvals, the effect of the announcement or pendency of the transaction on the Company’s business relationships, operating results, and business generally, risks that the proposed transaction disrupts the Company’s current plans and operations and potential difficulties in the Company’s employee retention as a result of the transaction, risks related to diverting management’s attention from the Company’s ongoing business operations, and the outcome of any legal proceedings that instituted against the Company or the purchaser related to the Merger Agreement or the transaction;
	·	strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses;
	·	the ability of our agency partners to resell the SharpSpring platform to their clients;
	·	security breaches, cybersecurity attacks and other significant disruptions in our information technology systems;
	·	changes in customer demand;
	·	the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors' services;
	·	developments and changes in laws and regulations, including increased regulation of our industry through legislative action and revised rules and standards;
	·	the occurrence of hostilities, political instability or catastrophic events;
	·	the ~~novel~~ coronavirus (“COVID-19”) and its potential impact on our business; and
	·	natural events such as severe weather, fires, floods and earthquakes, or man-made or other disruptions of our operating systems, structures or ~~equipment.~~ equipment;

	September 30,			December 31,
	2020			2019
Assets
Cash and cash equivalents	$	15,018,607		$	11,881,949
Accounts receivable, net of allowance for doubtful accounts of $49,865 and $12,455 at September 30, 2020 and December 31, 2019, respectively		278,624			340,344
Unbilled receivables		1,144,793			998,048
Income taxes receivable		42,179			15,010
Other current assets		1,421,690			1,363,366
Total current assets		17,905,893			14,598,717

Property and equipment, net		2,271,661			1,996,722
Goodwill		10,938,143			10,922,814
Intangibles, net		4,168,652			4,658,000
Deferred income taxes		4,005			0
Right-of-use assets		8,555,919			5,281,530
Other long-term assets		615,994			549,022
Total assets	$	44,460,267		$	38,006,805

Liabilities and Shareholders' Equity
Accounts payable	$	2,282,795		$	2,052,538
Accrued expenses and other current liabilities		954,309			919,089
Line of credit		1,900,000			0
Deferred revenue		566,084			860,820
Income taxes payable		75,643			13,944
Lease liability, current portion		709,036			370,340
Notes payable, current portion		2,061,263			0
Total current liabilities		8,549,130			4,216,731

Lease liability, net of current portion		7,973,813			4,976,727
Notes payable, net of current portion		1,338,236			0
Total liabilities		17,861,179			9,193,458
Commitments and contingencies (Note 15)

Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at September 30, 2020 and December 31, 2019		0			0
Common stock, $0.001 par value, Authorized shares-50,000,000; issued shares- 11,611,191 at September 30, 2020 and 11,537,163 at December 31, 2019; outstanding shares- 11,591,191 at September 30, 2020 and 11,517,163 at December 31, 2019		11,611			11,537
Additional paid in capital		60,139,290			58,851,285
Accumulated other comprehensive loss		(226,321	)		(224,793	)
Accumulated deficit		(33,241,492	)		(29,740,682	)
Treasury stock		(84,000	)		(84,000	)
Total shareholders' equity		26,599,088			28,813,347

Total liabilities and shareholders' equity	$	44,460,267		$	38,006,805

								Accumulated
					Additional			Other
	Common Stock				Paid in			Comprehensive			Treasury Stock						Accumulated
	Shares		Amount		Capital			Loss			Shares			Amount			Deficit			Total
Balance, June 30, 2019		10,965,794	$	10,966	$	53,211,881		$	(229,620	)		20,000		$	(84,000	)	$	(24,484,741	)	$	28,424,486
Stock based compensation		-		0		252,799			0			-			0			0			252,799
Issuance of common stock for cash		4,292		4		27,228			0			-			0			0			27,232
Issuance of common stock for director services		2,340		2		24,006			0			-	��		0			0			24,008
Foreign currency translation adjustment, net		-		0		0			(4,484	)		-			0			0			(4,484	)
Net loss		-		0		0			0			-			0			(2,527,113	)		(2,527,113	)
Balance, September 30, 2019		10,972,426	$	10,972	$	53,515,915		$	(234,103	)		20,000		$	(84,000	)	$	(27,011,853	)	$	26,196,931

Balance, June 30, 2020		11,554,720		11,555		59,587,378			(230,362	)		20,000			(84,000	)		(31,699,144	)		27,585,427
Stock based compensation		-		0		357,893			0			-			0			0			357,893
Issuance of common stock for cash		34,660		35		167,384			0			-			0			0			167,419
Issuance of common stock for services		3,580		4		32,074			0			-			0			0			32,078
Issuance of common stock under stock plans, net of shares withheld for employee taxes		18,231		18		(5,439	)		0			-			0			0			(5,421	)
Foreign currency translation adjustment		-		0		0			4,041			-			0			0			4,041
Net Loss		-		0		0			0			-			0			(1,542,349	)		(1,542,349	)
Balance, September 30, 2020		11,611,191	$	11,611	$	60,139,290		$	(226,321	)		20,000		$	(84,000	)	$	(33,241,492	)	$	26,599,088

Balance, December 31, 2018		8,639,139	$	8,639	$	30,446,838		$	(231,053	)		20,000		$	(84,000	)	$	(17,352,706	)	$	12,787,718
Stock based compensation		-		0		746,498			0			-			0			0			746,498
Issuance of common stock for cash		1,070,184		1,070		11,605,224			0			-			0			0			11,606,294
Issuance of common stock for director services		6,696		7		95,895			0			-			0			0			95,902
Issuance of common stock for warrant conversions		14,772		15		(15	)		0			-			0			0			0
Issance of commons stock for settlement of notes		1,241,635		1,242		10,621,474			0			-			0			0			10,622,716
Foreign currency translation adjustment		-		0		0			(3,051	)		-			0			0			(3,051	)
Net Loss		-		0		0			0			-			0			(9,659,147	)		(9,659,147	)
Balance, September 30, 2019		10,972,426	$	10,972	$	53,515,915		$	(234,103	)		20,000		$	(84,000	)	$	(27,011,853	)	$	26,196,931

Balance, December 31, 2019		11,537,163		11,537		58,851,285			(224,793	)		20,000			(84,000	)		(29,740,682	)		28,813,347
Stock based compensation		-		0		1,020,971			0			-			0			0			1,020,971
Issuance of common stock for cash		39,320		39		190,841			0			-			0			0			190,880
Issuance of common stock for services		11,084		11		110,039			0			-			0			0			110,050
Issuance of common stock under stock plans, net of shares withheld for employee taxes		23,624		24		(33,846	)		0			-			0			0			(33,822	)
Foreign currency translation adjustment		-		0		0			(1,528	)		-			0			0			(1,528	)
Net Loss		-		0		0			0			-			0			(3,500,810	)		(3,500,810	)
Balance, September 30, 2020		11,611,191	$	11,611	$	60,139,290		$	(226,321	)		20,000		$	(84,000	)		(33,241,492	)	$	26,599,088

	·	~~future expected cash flows from customer contracts and acquired developed technologies and patents;~~

	·	the acquired company’s trade name, vendor relationships, and customer relationships, as well as assumptions about the period of time the acquired trade name will continue to be used in our offerings; and

	·	~~discount rates.~~

~~Leasehold improvements~~		~~3-5 years~~
~~Furniture and fixtures~~		~~3-5 years~~
~~Computing equipment~~		~~3 years~~
~~Software~~		~~3-5 years~~

	·	~~Identify the customer contract;~~

	·	~~Identify performance obligations that are distinct;~~

	·	~~Determine the transaction price;~~

	·	~~Allocate the transaction price to the distinct performance obligations; and~~

Cash Consideration	$	4,566,402
Add:
Net tangible liabilities acquired
Deferred Revenue	$	186,500
Accrued expenses and other current liabilities	$	545,473
Total liabilities	$	731,973
Less:
Net tangible assets acquired
Accounts receivable	$	(55,236	)
Other current assets	$	(20,719	)
Total tangible assets	$	(75,955	)
Intangible assets acquired:
Trade names	$	(381,000	)
Technology	$	(979,000	)
Vendor relationships	$	(1,813,000	)
Total intangible assets	$	(3,173,000	)
Goodwill	$	2,049,420

	As of September 30, 2020
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Value
Amortized intangible assets:
Trade names	$	501,000		(120,000	)	$	381,000
Technology		3,109,000		(1,436,026	)		1,672,974
Customer relationships		1,320,000		(862,253	)		457,747
Vendor relationships		1,813,000		(156,069	)		1,656,931
Unamortized intangible assets:		6,743,000		(2,574,348	)		4,168,652
Goodwill							10,938,143
Total goodwill and intangible assets						$	15,106,795

	As of December 31, 2019
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Value
Amortized intangible assets:
Trade names	$	501,000		(120,000	)	$	381,000
Technology		3,109,000		(1,192,000	)		1,917,000
Customer relationships		1,320,000		(773,000	)		547,000
Vendor relationships		1,813,000		0			1,813,000
Unamortized intangible assets:		6,743,000		(2,085,000	)		4,658,000
Goodwill							10,922,814
Total goodwill and intangible assets						$	15,580,814

Remainder of 2020		152,799
2021		559,200
2022		507,200
2023		459,200
2024		420,200
Thereafter		1,689,053
Indefinite Lived		381,000
Total	$	4,168,652

	As of June 30, 2021
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Value
Amortized intangible assets:
Trade names	$	501,000	$	(183,500	)	$	317,500
Technology		3,109,000		(1,653,703	)		1,455,297
Customer relationships		1,320,000		(941,000	)		379,000
Vendor relationships		1,813,000		(292,044	)		1,520,956
Unamortized intangible assets:		6,743,000		(3,070,247	)		3,672,753
Goodwill							10,230,917
Total goodwill and intangible assets						$	13,903,670

	As of December 31, 2020
	Gross					Net
	Carrying		Accumulated			Carrying
	Amount		Amortization			Value
Amortized intangible assets:
Trade names	$	501,000	$	(120,000	)	$	381,000
Technology		3,109,000		(1,513,751	)		1,595,249
Customer relationships		1,320,000		(892,004	)		427,996
Vendor relationships		1,813,000		(201,394	)		1,611,606
Unamortized intangible assets:		6,743,000		(2,727,149	)		4,015,851
Goodwill							10,250,088
Total goodwill and intangible assets						$	14,265,939

Remainder of 2021	$	343,100
2022		634,200
2023		586,200
2024		420,200
2025		390,200
Thereafter		1,298,853
Total	$	3,672,753

	Debt Obligation
2020	$	360,703
2021		2,270,259
2022		768,537
Total Commitments	$	3,399,499

	Operating Leases
Remainder of 2020		326,436
2021		1,321,598
2022		1,329,525
2023		1,369,159
2024		1,377,086
Thereafter		5,525,881
Total undiscounted cash flows	$	11,249,685
Less imputed interest remaining		(2,566,836	)
Present value of lease liability	$	8,682,849

	Three and Nine Months Ended
	September 30,
	2020		2019
Warrants		-		-
Convertible notes		-		-
Stock options		1,611,966		1,419,844
Restricted stock units (RSUs)		25,716		-
Total		1,637,682		1,419,844

	~~Nine~~Six Months Ended
	~~September~~June 30,

2021			2020	~~2019~~

Volatility	~~52%-56%~~	58%		~~49% - 50%~~52%-56%
Risk Free Interest Rate		0.75% - 1.14%		0.37% - 1.66%		~~1.45% - 2.59%~~
Expected term	~~6.25 years~~		6.25 years		6.25 years

				Weighted
				Average
				Grant Date
	Number of			Fair Value
	Units			Per Share
Unvested at December 31, 2019		50,494		$	11.82

Granted		35,875			12.39
Vested		(10,159	)		12.39
Forfeited		(50,494	)		11.82
Unvested at September 30, 2020		25,716		$	12.39

	Three and Six Months Ended
	June 30,
	2021		2020
Stock options		1,483,609		1,690,728
Restricted stock units (RSUs)		188,710		78,706
Total		1,672,319		1,769,434

	Operating Leases			Non-Cancellable Contracts
Remainder of 2021	$	660,799		$	210,000
2022		1,329,525			472,500
2023		1,369,159			542,500
2024		1,377,086			0
2025		1,416,720			0
Thereafter		4,109,161			0
Total undiscounted cash flows	$	10,262,450		$	1,225,000
Less imputed interest remaining		(2,155,833	)
Present value of lease liability	$	8,106,617

	·	~~Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; `~~

	·	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

	·	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

	·	Ineffective internal control over financial reporting and dependent business process control (automated and manual) related to information technology general controls (ITGCs) around (i) the design and implementation of program change-management over certain information technology (IT) systems that support the Company’s financial reporting processes and related to ineffective ITGCs around design and (ii) implementation of effective user access controls over SaaS and internally hosted applications that support the Company’s financial reporting processes to ensure appropriate segregation of duties and to adequately restrict user and privileged access to appropriate Company personnel.

	·	Due to the extensive effort required in the implementation of Section 404(b) of Sarbanes-Oxley Act of 2002, and as in common many growth companies with limited staff, we identified control deficiencies in financial reporting during our implementation related to: (i) certain entity level controls; (ii) inadequate segregation of duties; and (iii) compliance and review related to certain policies and procedures. As a result, these deficiencies aggregate into an additional material weakness.

	·	the market price of our common stock may decline to the extent that the current market price reflects an assumption that the Merger will be consummated;
	·	if the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, we would be required to pay Constant Contact a termination fee of $7,046,778;
	·	we have incurred, and will continue to incur, significant expenses for professional services in connection with the Merger for which we will have received little or no benefit if the Merger is not consummated; and
	·	a failed Merger may result in negative publicity and/or give a negative impression of us in the investment community or business community generally.

Exhibit No.		Description
2.1		Agreement and Plan of Merger, by and among Constant Contact, Inc., Groove Merger Sub, Inc., and SharpSpring, Inc., dated as of June 21, 2021.
10.1		Employee Agreement – ~~Aaron Jackson (incorporated by reference to the Company’s Form 8-K/A filed on 7/23/20)~~Suaad Sait
10.2		SharpSpring, Inc. 2019 Equity Incentive Plan
10.3		Amendment No. 2 to SharpSpring, Inc. 2019 Equity Incentive Plan
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
~~101~~99.1		~~XBRL~~Form of Voting and Support Agreement, dated as of June 21, 2021, by and among Constant Contact, Inc. and certain stockholders of the Company.
99.2		SharpSpring Employee FAQ
101		XBRL*

	SharpSpring, Inc.

	By:	/s/Richard A. Carlson
		Richard A. Carlson
		Chief Executive Officer ~~and President~~ (Principal Executive Officer) Date: ~~November~~August 16, ~~2020~~2021

	SharpSpring, Inc.

	By:	/s/ Aaron Jackson
		Aaron Jackson ~~Interim~~ Chief Financial Officer
		(Principal Financial Officer) Date: ~~November~~August 16, ~~2020~~2021