Convertible Notes

9 Months Ended

Sep. 30, 2020

Convertible Notes

Note 6. Convertible Notes

Note 6: Convertible Notes

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:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Contractual interest paid-in-kind expense (non-cash)	$	-		$	-		$	-		$	139,372
Amortization of debt issuance costs (non-cash)		-			-			-			15,108
Amortization of embedded derivative (non-cash)		-			-			-			(12,205	)
Total interest expense	$	-		$	-		$	-		$	142,275
Effective interest rate		0.0	%		0.0	%		0.0	%		4.9	%

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.