SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to share-based compensation, capitalization of software development costs, and income taxes. Actual results may differ from these estimates.

Revenue Recognition

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

We determine revenue recognition through the following five steps:

· Identify the contract with the customer;

· Identify the performance obligations in the contract;

· Determine the transaction price;

· Allocate the transaction price to the performance obligations in the contract; and

· Recognize revenue when, or as, the performance obligations are satisfied.

We generate substantially all our revenue from Software as a Service (“SaaS”), which are comprised of fixed subscription fees from customer accounts on the Managed Platform. SaaS (also referred to as “subscription”) revenue is recognized on a ratable basis over the contractual subscription term of the arrangement beginning on the date that our service is made available to the customer. Certain SaaS fees are invoiced in advance on an annual, semi-annual, or quarterly basis. Any funds received for services not provided yet are held in deferred revenue and are recorded as revenue when the related performance obligations have been satisfied.

Non-subscription revenue consists of PDF remediation services and is recognized upon delivery. Consideration payable under these arrangements is based on usage.

The following table presents our revenues disaggregated by sales channel:

	Nine months ended
	September 30,
	2020		2019
	(in thousands)
Direct (Enterprise)	$	8,104	$	5,135
Indirect (Vertical partners)		6,698		2,063
Other		83		—
Total revenues	$	14,885	$	7,198

The Company records accounts receivable for amounts invoiced to customers for which the Company has an unconditional right to consideration as provided under the contractual arrangement. Unbilled receivables include amounts related to the Company’s contractual right to consideration for completed performance obligations not yet invoiced. Deferred revenue includes payments received in advance of performance under the contract. Our unbilled receivables and deferred revenue are reported on an individual contract basis at the end of each reporting period. Unbilled receivables are classified as current or noncurrent based on the timing of when we expect to bill the customer. Deferred revenue is classified as current or noncurrent based on the timing of when we expect to recognize revenue.

The table below summarizes our deferred revenue as of September 30, 2020 and December 31, 2019:

	September 30,		December 31,
	2020		2019
	(in thousands)
Deferred revenue - current	$	5,587	$	5,372
Deferred revenue - noncurrent		110		153
Total deferred revenue	$	5,697	$	5,525

In the nine-month period ended September 30, 2020 we recognized $4,724,000, or 85%, in revenue from deferred revenue outstanding as of December 31, 2019.

In the three months ended September 30, 2020, two customers (including affiliates of such customers) accounted for 15% and 11%, respectively, of our total revenue. In the nine months ended September 30, 2020 one customer accounted for 16% of our total revenue. In the three and nine months ended September 30, 2019, one customer accounted for 9% and 10% of our total revenue, respectively.

Two customers represented 14% and 11%, respectively, of total accounts receivable as of September 30, 2020. At December 31, 2019, one customer represented 40% of the outstanding accounts receivable

Deferred Costs (Contract acquisition costs)

Deferred Costs (Contract acquisition costs)

The Company capitalizes initial and renewal sales commission payments in the period a customer contract is obtained and customer payment is received, and amortizes deferred commission costs on a straight-line basis over the expected period of benefit, which we have deemed to be the contract term. As a practical expedient, we expense sales commissions as incurred when the amortization period of related deferred commission costs would have been less than one year.

The table below summarizes the deferred commission costs as of September 30, 2020 and December 31, 2019:

	September 30,		December 31,
	2020		2019
	(in thousands)
Deferred costs - current	$	179	$	183
Deferred costs - noncurrent		102		145
Total deferred costs	$	281	$	328

Amortization expense associated with sales commissions was included in selling and marketing expenses on the consolidated statements of operations and totaled $51,000 and $162,000 for the three- and nine-month periods ended September 30, 2020, respectively, and $67,000 and $175,000 for the three- and nine-month periods ended September 30, 2019, respectively. There were no impairment losses for these capitalized costs for the three and nine months ended September 30, 2020 and 2019

Stock-Based Compensation

Share-Based Compensation

The Company periodically issues options, warrants and restricted stock units (“RSUs”) as compensation for services received. The fair value of the award is measured on the grant date. The fair value amount is then recognized as expense over the requisite vesting period during which services are required to be provided in exchange for the award.

The fair value of options and warrants awards is measured on the grant date using a Black-Scholes option pricing model, which includes assumptions that are subjective and are generally derived from external data (such as risk-free rate of interest) and historical data (such as volatility factor, expected term, and forfeiture rates). Future grants of equity awards accounted for as share-based compensation could have a material impact on reported expenses depending upon the number, value, and vesting period of future awards.

We estimate the fair value of restricted stock unit awards with time- or performance-based vesting using the value of our common stock on the date of grant. We estimate the fair value of market-based restricted stock units using a Monte Carlo simulation model on the date of grant.

We expense the compensation cost associated with time-based options, warrants and RSUs as the restriction period lapses, which is typically a one- to three-year service period with the Company. Compensation expense related to performance-based options and RSUs is recognized on a straight-line basis over the requisite service period, provided that it is probable that performance conditions will be achieved, with probability assessed on a quarterly basis and any changes in expectations recognized as an adjustment to earnings in the period of the change. Compensation cost is not recognized for service- and performance-based awards that do not vest because service or performance conditions are not satisfied and any previously recognized compensation cost is reversed. Compensation costs related to awards with market conditions are recognized on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied, and is not reversed provided that the requisite service period derived from the Monte-Carlo simulation has been completed. If vesting occurs prior to the end of the requisite service period, expense is accelerated and fully recognized through the vesting date.

In the three- and nine-month periods ended September 30, 2020, we awarded 89,900 and 181,092 options, respectively, and 305,145 and 659,821 RSUs, respectively, to employees, officers, and consultants of the Company, which included a grant to our Interim Chief Executive Officer of 260,000 RSUs with performance-based and market-based conditions in the third quarter of 2020.

The performance condition for 105,000 of the RSUs in the CEO award is based on the achievement of Monthly Recurring Revenue (“MRR”) targets. The Company did not record any stock-based compensation expense related to these performance-based RSUs in the three months ended September 30, 2020 as the achievement of performance targets during the requisite period was not deemed probable. The Company will continue to evaluate the probability of achieving the performance conditions in future periods and record the appropriate expense if necessary. The market condition for the remaining 155,000 RSUs in the award is based on the Company’s stock price targets. The Company used a Monte Carlo simulation to determine the grant-date fair value for the market-based RSUs. The weighted-average assumptions used in the Monte-Carlo simulation were as follows: 5-year historical volatility of 136.52%, 5-year risk-free rate of 0.26%, and a performance period of 5 years. The Company recorded $464,000 in stock-based compensation expense related to these market-based RSUs in the three months ended September 30, 2020.

In the three- and nine-month periods ended September 30, 2020, no warrants were issued and no stock-based compensation expense related to warrants was incurred. As of September 30, 2020, there was no remaining unamortized stock-based compensation expense related to warrants.

The following table summarizes the stock-based compensation expense recorded for the three and nine months ended September 30, 2020 and 2019:

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(in thousands)
Stock Options	$	79	$	71	$	200	$	237
RSUs		1,010		202		1,804		760
Total	$	1,089	$	273	$	2,004	$	997

As of September 30, 2020, the outstanding unrecognized stock-based compensation expense related to options and RSUs was  $1,352,000 and $6,058,000, respectively, which may be recognized through June 2025, subject to achievement of service, performance, and market conditions

Earnings (Loss) Per Share ("EPS")

Earnings (Loss) Per Share (“EPS”)

Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted EPS is calculated based on the net income (loss) available to common stockholders and the weighted average number of shares of common stock outstanding during the period, adjusted for the effects of all potential dilutive common stock issuances related to options, warrants, restricted stock units and convertible preferred stock. The dilutive effect of our share-based awards and warrants is computed using the treasury stock method, which assumes all share-based awards and warrants are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (i.e., the difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted EPS calculation. The dilutive effect of our convertible preferred stock is computed using the if-converted method, which assumes conversion at the beginning of the year. However, when a net loss exists, no potential common stock equivalents are included in the computation of the diluted per-share amount because the computation would result in an anti-dilutive per-share amount.

Potentially dilutive securities excluded from the computation of basic and diluted net loss per share for the nine months ended September 30, 2020 and 2019 were as follows:

	2020	2019
	( in thousands)
Preferred stock	290	293
Options	683	904
Warrants	85	537
Restricted stock units	846	381
Total	1,904	2,115

The following table summarizes the stock option activity for the nine months ended September 30, 2020:

				Weighted		Intrinsic
		Weighted		Average		Value
	Number of	Average		Remaining		of
	Options	Exercise Price		Term	Exercisable	Options
Outstanding at December 31, 2019	965,043	$	3.70	3.01	759,631	$	1,666,266
Granted	181,092		10.60	5.00
Exercised	(315,630)		2.12
Forfeited/Expired	(147,091)		8.02
Outstanding at September 30, 2020	683,414	$	5.33	2.48	444,329	$	6,323,007

The following table summarizes the restricted stock unit activity for the nine months ended September 30, 2020:

Restricted stock units outstanding as of December 31, 2019	428,919
Granted	659,821
Settled	(88,799)
Forfeited/Canceled	(154,080)
Total restricted stock units outstanding at September 30, 2020	845,861
Vested at September 30, 2020	268,174
Unvested restricted stock units as of September 30, 2020	577,687

The following table summarizes the warrant activity for the nine months ended September 30, 2020:

				Weighted	Intrinsic
		Weighted		Average	Value
	Number of	Average		Remaining	of
	Warrants	Exercise Price		Term	Warrants
Outstanding at December 31, 2019	424,708	$	5.31	0.82	$	189,450
Granted	—		—
Exercised	(317,467)		4.76
Forfeited/Expired	(22,188)		9.59
Outstanding at September 30, 2020	85,053	$	6.25	1.19	$	708,917

Fair Value Measurements

Fair Value Measurements

Fair value is an estimate of the exit price, representing the amount that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date). Fair value measurements are not adjusted for transaction cost. Fair value measurement under U.S. GAAP provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Level 3: Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.

An asset or liability’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining the fair value of assets and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 and Level 2 assets or liabilities.

The Company had no assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019.

The table below provides information on our liabilities that are measured at fair value on a recurring basis:

			Fair Value
	Fair Value		Hierarchy
	(in thousands)
Liabilities
Warrant liability (1), September 30, 2020	$	—	Level 3
Warrant liability (1), December 31, 2019	$	120	Level 3

(1)The fair value of the warrant liability was determined using the Black-Scholes pricing model (refer to Note 5 – Debt for additional information on our warrant liability). Fair value adjustments are included within change in fair value of warrant liability in the consolidated statements of operations. In the third quarter of 2020, the warrant liability was extinguished upon full exercise of these warrants, which were issued in connection with our credit facility (see Note 5 - Debt), and we recognized a gain of $593,000 and $120,000 for the three and nine months ended September 30, 2020, respectively, related to the extinguishment of the liability.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." This ASU clarifies the accounting treatment for implementation costs for cloud computing arrangements (hosting arrangements) that is a service contract. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact our financial position, results of operations or disclosures.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This ASU adds, modifies, and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, "Fair Value Measurement." This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We adopted this guidance effective January 1, 2020. The adoption of this guidance did not impact our financial position, results of operations or disclosures