Convertible Notes

12 Months Ended

Dec. 31, 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 balance was zero as of December 31, 2020.

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 December 31, 2019. There was no embedded derivative liability during 2020. 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 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 years ended December 31, 2020 and 2019:

	Year Ended December 31,
	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	%		4.9	%