Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Direct Insite Corp. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Revenue Recognition

The Company records revenue in accordance with Accounting Standards Codification (“ASC”) 605 Revenue Recognition (“ASC 605”) and SEC Staff Accounting Bulletin Topic 13 Revenue Recognition in Financial Statements. Revenue is recognized when it is both earned and realizable, that is, when the following criteria are met:

Persuasive evidence of arrangements exist;

Delivery has occurred or services have been rendered;

The seller's price is fixed and determinable; and

Collectability is reasonably assured.

The following are the specific revenue recognition policies for each major category of revenue.

SaaS Services

The Company provides transactional data processing services through its SaaS software solutions to its customers. The customer is charged a monthly fixed rate on a per transaction basis or a fixed fee based on monthly transaction volumes.

Customer Engineering Services

The company provides software development services to its customers, which may require additional development, modification, and customization services to the Company's existing software platform. Software development is billed based on hourly rates or upon acceptance by the customer on a completed contract basis. The company does not sell software licenses, upgrades or enhancements, or post-contract customer services.

Cost of Revenue

Cost of revenue in the consolidated statements of operations is presented along with operations, research and development costs and exclusive of amortization and depreciation which is shown separately. Custom Engineering Service costs related to uncompleted milestones are deferred and included in other current assets, when applicable. For the years ended December 31, 2011 and 2010, research and development expenses were approximately $2,052,000, and $1,753,000, respectively.

Property and Equipment

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the terms of the respective leases or the service lives of the related assets, whichever is shorter.

Capitalized lease assets are amortized over the shorter of the lease term or the service life of the related assets.

Impairment of Long-Lived Assets

ASC 360, Plant, Property, and Equipment (“ASC 360”) requires management judgments regarding the future operating and disposition plans for marginally performing assets, and estimates of expected realizable values for assets to be sold. The Company accounts for its long-lived assets in accordance with ASC 360 for purposes of determining and measuring impairment of its other intangible assets. It is the Company's policy to review the value assigned to its long lived assets, to determine if they have been permanently impaired by adverse conditions whenever events or circumstances indicate the related carrying amount may not be recoverable. If required, an impairment charge would be recorded based on an estimate of future discounted cash flows.

In order to test for recoverability, the Company would compare the sum of an undiscounted cash flow projection from the related long-lived assets to the net carrying amount of such assets. Considerable management judgment is necessary to estimate undiscounted future operating cash flows and fair values and, accordingly, actual results could vary significantly from such estimates. No impairment charges were recognized during the years ended December 31, 2011 and 2010, respectively.

Income Taxes

The Company accounts for income taxes using the asset and liability method. This method requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax basis of assets and liabilities, using enacted tax rates. Additionally, net deferred tax assets are adjusted by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax assets will not be realized. The Company currently has significant deferred tax assets. During the years ended December 31, 2011 and 2010, the Company reviewed previous positive and negative evidence and also reviewed its expected taxable income for future periods and concluded that it is more likely than not that approximately $1,027,000 and $2,867,000, respectively, of tax benefits related to net operating loss carry-forwards will be utilized in future tax years. As a result, the Company's effective tax rate for the years ended December 31, 2011 and 2010 differs from the current statutory rates. In addition, the Company expects to provide a valuation allowance on the remaining future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize the remaining assets, or other significant positive evidence arises that suggests its ability to utilize the remaining assets. The future realization of a portion of its reserved deferred tax assets related to tax benefits associated with the exercise of stock options, if and when realized, will not result in a tax benefit in the consolidated statement of operations, but rather will result in an increase in additional paid-in capital. The Company will continue to re-assess its reserves on deferred income tax assets in future periods on a quarterly basis.

Earnings Per Share

The Company displays earnings per share in accordance with ASC 260, Earnings Per Share (“ASC 260”). ASC 260 requires dual presentation of basic and diluted earnings per share (“EPS”). Basic earnings per share is computed by dividing net (loss) income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The computation of basic and diluted earnings per share is as follows:

For the Year Ended December 31, 2011 (in thousands except per share amounts)

	Net Loss			Shares		Per Share
	Numerator			Denominator		Amount
Basic Earnings Per Share
Net loss attributable to common stockholders	$	(2,657	)		11,813	$	(0.22	)
Effect of Dilutive Securities
Options		--			--
Restricted stock		--			--
Diluted Earnings Per Share	$	(2,657	)		11,813	$	(0.22	)

For the Year Ended December 31, 2010 (in thousands except per share amounts)

	Net Income		Shares		Per Share
	Numerator		Denominator		Amount
Basic Earnings Per Share
Net income attributable to common stockholders	$	991		11,482	$	0.09
Effect of Dilutive Securities
Options		--		178
Restricted stock		--		3
Diluted Earnings Per Share	$	991		11,663	$	0.08

Securities that could potentially dilute basic EPS in the future, that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented, consist of the following (shares are in thousands):

	December 31,
Potential Common Shares	2011		2010
Options to purchase common stock		128		75
Unvested stock grants		35		26

Total Potential Common Shares		163		101

Cash and Cash Equivalents

The Company considers all investments with original maturities of three months or less to be cash equivalents.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects management's best estimate of probable losses inherent in the account receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. Management performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by the review of their current credit information. Collections and payments from customers are continuously monitored. While such bad debt expenses have historically been within expectations and allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. At December 31, 2011 and 2010, an allowance for doubtful accounts is not provided since, in the opinion of management, all accounts are deemed collectible. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company has cash deposits in excess of the maximum amounts insured by FDIC at December 31, 2011 and 2010.

The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. Concentrations of credit risk with respect to accounts receivable and revenue are disclosed in Note 12.

Use of Estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates are used in the accounting related to stock based compensation and valuation allowance on deferred tax assets. Actual results could differ from those estimates.

Stock-Based Compensation

The Company accounts for stock based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employee's requisite service period (generally the vesting period of the equity grant). The fair value of the Company's common stock options are estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company calculates the expected volatility using the historical volatility over the most recent period equal to the expected term and evaluates the extent to which available information indicate that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant exercise activity on stock options. Due to the lack of historical information, the Company determined the expected term of its stock option awards issued using the simplified method. The simplified method assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires. The Company expenses stock-based compensation by using the straight-line method. In accordance with ASC 718, excess tax benefits realized from the exercise of stock-based awards are classified in cash flows from financing activities. The future realization of the reserved deferred tax assets related to these tax benefits associated with the exercise of stock options will result in a credit to additional paid-in capital if the related tax deduction reduces taxes payable. The Company has elected the “with and without approach” regarding ordering of windfall tax benefits to determine whether the windfall tax benefit did reduce taxes payable in the current year. Under this approach, the windfall tax benefit would be recognized in additional paid-in-capital only if an incremental tax benefit is realized after considering all other benefits presently available. As a result, for the year ended December 31, 2011 the Company recorded $126,000 in stock based compensation expense for the fair value of stock-based compensation of which $55,000 related to stock options granted to employees and $71,000 related to restricted stock grants. For the year ended December 31, 2010 the Company recorded $539,000 in stock based compensation expense for the fair value of stock-based compensation all of which related to restricted stock grants. At December 31, 2011, there was approximately $33,000 of total unrecognized stock based compensation costs, which is expected to be recognized over a weighted average period of one year.

Recently Issued and Adopted Accounting Pronouncements

Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial statements.