NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies are presented in “Note 3 – Significant Accounting Policies” in the 2020 Form 10-K. Users of financial information for interim periods are encouraged to refer to the footnotes to the financial statements contained in the 2020 Form 10-K when reviewing interim financial results.

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, allowance for doubtful accounts, and impairment of long-lived assets and goodwill. Actual results may differ from these estimates.

Revenue Recognition

We derive our revenue primarily from the sale of internally-developed software by a software-as-a-service (“SaaS”) delivery model, as well as ongoing from professional services support, through our direct sales force or through third-party resellers. Our SaaS fees include continuous support and maintenance.

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.

Performance obligations are the unit of accounting for revenue recognition and generally represent the distinct goods or services that are promised to the customer. If we determine that we have not satisfied a performance obligation, we will defer recognition of the revenue until the performance obligation is deemed to be satisfied. SaaS agreements are generally non-cancelable, although clients typically have the right to terminate their contracts for cause if we fail to perform material obligations.

Our SaaS (also referred to as “subscription”) revenue is comprised of fixed subscription fees from customer accounts on our platform. SaaS 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 and Mobile App report 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:


	Three months ended
	March 31,
(in thousands)	2021		2020
Partner and Marketplace	$	3,178	$	1,874
Enterprise		2,610		2,387
Total revenues	$	5,788	$	4,261

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 March 31, 2021 and December 31, 2020:


	March 31,		December 31,
(in thousands)	2021		2020
Deferred revenue - current	$	6,196	$	6,328
Deferred revenue - noncurrent		74		83
Total deferred revenue	$	6,270	$	6,411

In the three-month period ended March 31, 2021 we recognized $2,485,000, or 39%, in revenue from deferred revenue outstanding as of December 31, 2020.

In the three months ended March 31, 2021, two customers (including affiliates of such customer) accounted for 20% and 10%, respectively, of our total revenue. In the three months ended March 31, 2020, one customer accounted for 18% of our total revenue.

Two customers represented 25% and 14%, respectively, of total accounts receivable as of March 31, 2021. Three customers with long standing relationships with the Company represented 25%, 13% and 13%, respectively, of total accounts receivable as of December 31, 2020.

Deferred Costs (Contract acquisition costs)

Our sales commission plans may provide for multiple commission payments, including an initial payment in the period a customer contract is obtained, or the first invoice is paid, and deferred payments over the life of the contract as future payments are collected from the customers.

We capitalize initial and renewal sales commission payments in the period the commission is earned, which generally occurs when a customer contract is obtained or when the customer is billed, and amortize deferred commission costs on a straight-line basis over the expected period of benefit, which we have deemed to be the contract term, except when the commission payment is expected to provide economic benefit for a period longer than the contract term, such as for new customer or incremental sales where renewals are expected, and renewal commissions are not commensurate with initial commissions. As a practical expedient, we expense sales commissions as incurred when the amortization period of related deferred commission costs would have been one year or less.

The table below summarizes the deferred commission costs as of March 31, 2021 and December 31, 2020:


	March 31,		December 31,
(in thousands)	2021		2020
Deferred costs - current	$	161	$	152
Deferred costs - noncurrent		82		77
Total deferred costs	$	243	$	229

Amortization expense associated with sales commissions was included in selling and marketing expenses on the statements of operations and totaled $47,000 and $56,000 for the three-month periods ended March 31, 2021 and 2020, respectively. There were no impairment losses for these capitalized costs for the three months ended March 31, 2021 and 2020.

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. Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such amounts were paid in cash.

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 stock-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 unit awards 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.

The following table summarizes the stock-based compensation expense recorded for the three months ended March 31, 2021 and 2020:


	Three months ended March 31,
(in thousands)	2021		2020
Stock Options	$	149	$	85
Restricted Stock Units		1,598		171
Unrestricted Shares of Common Stock		34		—
Total	$	1,781	$	256

As of March 31, 2021, the outstanding unrecognized stock-based compensation expense related to options and RSUs was $996,000 and $9,040,000, respectively, which may be recognized through March 2026, subject to achievement of service, performance, and market conditions

In the first quarter of 2021, we granted 100,000 RSUs with performance-based and market-based conditions to our Interim Chief Executive Officer (“CEO”). The performance condition for 50,000 of such RSUs is based on the achievement of Monthly Recurring Revenue (“MRR”) targets. In the three months ended March 31, 2021, stock-based compensation expense associated with performance-based RSUs awarded to our CEO in current and previous years was zero and $211,000, respectively. We did not record any stock-based compensation expense related to the 50,000 performance-based RSUs awarded to our CEO in 2021 as the achievement of performance targets during the requisite period was not deemed probable. The Company will continue to reassess the probability of achieving the performance conditions in future periods and record the appropriate expense if necessary. The market condition for the remaining 50,000 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 116.95%, 5-year risk-free rate of 0.79%, and a performance period of 5 years. The Company recorded $459,000 in stock-based compensation expense associated to market-based RSUs in the three months ended March 31, 2021, $50,000 of which were related to RSUs granted in the current fiscal year.

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 outstanding as of March 31, 2021 and 2020, which were excluded from the computation of basic and diluted net loss per share for the years then ended, are as follows:


	March 31,
( in thousands)	2021	2020
Preferred stock (1)	266	298
Options	336	924
Warrants	64	403
Restricted stock units	995	419
Total	1,661	2,044

(1)

Represents number of shares of common stock that are issuable as of March 31, 2021 upon conversion of 90,000 shares of Series A Convertible Preferred Stock.

The following table summarizes the stock option, warrants, and RSUs activity for the three months ended March 31, 2021:


	Options	Warrants	RSUs
Outstanding at, December 31, 2020	516,911	81,053	958,378
Granted	—	—	157,630
Exercised	(137,702)	(16,800)	(91,945)
Forfeited/Expired	(43,589)	—	(29,350)
Outstanding at, March 31, 2021	335,620	64,253	994,713
Vested at, March 31, 2021	161,575	64,253	265,697
Unvested at, March 31, 2021	174,045	—	729,016