SHSP SharpSpring Inc

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Organization, Basis of Presentation, and Summary of Significant Accounting Policies

Organization

SharpSpring, Inc. (the “Company”, “we”, “our”, or “us”) provides a cloud-based marketing automation solution and a display retargeting platform through its SharpSpring Marketing Automation and SharpSpring Ads (formerly known as Perfect Audience) products. Our flagship Marketing Automation platform is designed to increase the rates at which businesses generate leads and convert leads to sales opportunities by improving the way businesses communicate with customers and prospects. Our SharpSpring Ads platform empowers marketers to create, manage, and optimize their ad campaigns across thousands of websites. The Company’s products are marketed directly by us and through a small group of reseller partners to customers around the world.

COVID - 19

On January 30, 2020, the World Health Organization declared the coronavirus “COVID-19” outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 included restrictions on travel, quarantines, or “stay‑at‑home” restrictions in certain areas and forced closures for certain types of public places and businesses. COVID‑19 and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets globally, including the geographical areas in which the Company operates.

While it is unknown how long these conditions will last and what the complete financial impact will be, the Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of the business/operations and are unable at this time to predict the continued impact that COVID-19 will have on its business, financial position, and operating results in future periods due to numerous uncertainties.

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) applicable to interim periods, under the rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of Company management, the Company has prepared the accompanying unaudited consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2020, and these consolidated financial statements include all adjustments consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods presented. The Company’s consolidated financial statements include the accounts of SharpSpring, Inc. and its subsidiaries (the “Company”). The Company’s consolidated financial statements reflect the elimination of all significant inter-company accounts and transactions. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2021.

The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2021.

Concentration of Credit Risk and Significant Customers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company has cash balances at financial institutions that exceed federally insured limits. The Company maintains its cash balances with accredited financial institutions. The Company does believe it is subject to unusual credit risk beyond normal credit risk associated with commercial banking relationships.

Our accounts receivable exposes the Company to credit risk in the event of nonpayment by customers. As of March 31, 2021, two customers had an open accounts receivable balance above 10% of our net accounts receivable balance, which represented 26.1% of the Company’s net accounts receivable balance. As of December 31, 2020, the Company had one customer representing 12.4% of net accounts receivable balance. For the three months ended March 31, 2021 and 2020, there were no customers that exceeded 10% of the Company’s total revenue.

Significant Accounting Policies

There were no material changes to the Company’s significant accounting policies disclosed in “Note 2 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 30, 2021.

Operating Segments

The Company operates as one reportable segment with two operating segments. Our operating segments consist of our SharpSpring Marketing Automation segment and SharpSpring Ads Retargeting segment in accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting. Operating segments are defined as components of an enterprise for which separate financial information is regularly evaluated by the chief operating decision maker (“CODM”), which is the Company’s Chief Executive Officer, in deciding how to allocate resources and assess performance. The Company’s CODM evaluates the Company’s financial information and resources and assess the performance of these resources between its two operating segments. The Company does not separately allocate operating expenses, nor does it fully allocate assets to these operating segments. In accordance with ASC 280, the Company aggregated its two operating segments as one operating segment for financial reporting purposes. The Company does not present geographical information about revenues because it is impractical to do so.

Recently Issued Accounting Standards

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017- 04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, simplifying the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 2021, with early adoption permitted. The Company adopted this ASU on January 1, 2020.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplified the accounting for income taxes. The new accounting guidance removes (i) the exception to the incremental approach for intra-period tax allocations when there is a loss from continuing operations and income or gain from other items such as discontinued operation or other comprehensive income, (ii) the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, (iii) the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and (iv) the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

The new accounting guidance also simplifies the accounting for income taxes by (i) requiring an entity to recognize franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (ii) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, (iii) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, (iv) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, and (v) making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method.

This standard is effective for fiscal and interim periods beginning after December 15, 2020. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

There are no other new accounting pronouncements that are expected to have a material impact on the Company and all subsidiaries thereof. All intercompany balances and transactions have been eliminated upon consolidation.

Note 2: Revenue Recognition

Unbilled Receivables

In cases where customers pay for services in arrears, the Company accrues for revenue in advance of billings as long as the criteria for revenue recognition are met, thus creating a contract asset (unbilled receivable). Unbilled receivable balances as of December 31, 2020 and December 31, 2019 of $1.25 million and $1.00 million, respectively, were billed in their entirety during the three months ended March 31, 2021 and 2020. The unbilled receivable balances as of March 31, 2021 and 2020 were $1.26 million and $1.09 million, respectively. These unbilled balances were the results of services provided in the period, but not yet billed to the customer.

Capitalized Cost of Obtaining a Contract

The Company capitalizes sales commission costs which are incremental to obtaining a contract. The Company expenses costs that are related to obtaining a contract but are not incremental such as other sales and marketing costs and other costs that would be incurred regardless of if the contract was obtained. Capitalized costs are amortized using straight-line amortization over a three-year estimated weighted average life of the customer. As of March 31, 2021, the net carrying value of the capitalized cost of obtaining a contract was $1.23 million, of which $0.67 million is included in other current assets and $0.56 million is included in other long-term assets. As of December 31, 2020, the net carrying value of the capitalized cost of obtaining a contract was $1.27 million, of which $0.69 million is included in other current assets and $0.58 million is included in other long-term assets. For the three months ended March 31, 2021 and 2020, the Company amortized $0.20 million and $0.20 million, respectively, in costs directly attributable to obtaining contracts.

Deferred Revenue

Deferred revenue consists of payments received in advance of the Company providing the services. Most of our deferred revenue balances (contract liabilities) arise from payments from customers in advance of service on a periodic basis (such as monthly, quarterly, annually, or bi-annually), while the portion of our deferred revenue balances associated with SharpSpring Ads arises from prepaid deposits for future usage of the platform. Deferred revenue from our SharpSpring Marketing Automation customers is earned over the service period identified in each contract. Deferred revenue from our SharpSpring Ads retargeting customers is earned as the service is used. Additionally, the Company has deferred revenue related to implementation fees for our SharpSpring Marketing Automation solution that are paid in advance, which is recognized over the service period as the performance obligation is met. These implementation services are typically performed over a 60-day period. As of December 31, 2020 and December 2019, the Company had deferred revenue balances of $0.85 million and $0.86 million, respectively. The Company recognized deferred revenue of $1.69 million and $2.02 million for the three months ended March 31, 2021, and 2020, respectively, when our performance obligations were met for the services performed. As of March 31, 2021 and 2020, deferred revenue balances were $0.95 million and $0.77 million, respectively.

Depreciation expense was $0.27 million and $0.20 million for the three months ended March 31, 2021 and 2020, respectively, substantially all of which was recorded in general and administrative expenses.

Note 4: Goodwill and Other Intangible Assets

Goodwill and acquired intangible assets are initially recorded at fair value and is reviewed at least annually for indicators of impairment or more frequently if there are indicators of impairment.

The Company’s intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. Impairment losses are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. During the three months ended March 31, 2021, the Company reclassified our trade name asset for Perfect Audience from an indefinite lived asset to a definite lived asset with a useful life of 3 years as part of our phase out of the Perfect Audience name. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments, and the fair value of an asset group.

Goodwill and other Intangible Assets as of March 31, 2021 and December 31, 2020 are as follows:

Estimated amortization expense for the remainder of 2021 and subsequent years is as follows:

Amortization expense for the three months ended March 31, 2021 and 2020, was $0.17 million and $0.15 million, respectively.

Note 5: Debt

Credit Facility

In March 2016, the Company entered into a $2.5 million revolving loan agreement (the “Credit Facility”) with Western Alliance Bank. The facility originally matured on March 21, 2018 and was amended to mature on June 19, 2022. There are no mandatory amortization provisions, and the Credit Facility is payable in full at maturity. As of March 31, 2021, the Credit Facility is collateralized by a lien on substantially all of the existing and future assets of the Company and secured by a pledge of 100% of the capital stock of SharpSpring Technologies, Inc. and a 65% pledge of the Company’s foreign subsidiaries’ stock. The Credit Facility subjects the Company to a number of restrictive covenants, including financial and non-financial covenants customarily found in loan agreements for similar transactions. The Credit Facility also restricts our ability to pay cash dividends on our common stock. As of March 31, 2021, the credit facility carried an interest rate of 5.0%, there was $1.9 million outstanding under the Credit Facility, and no events of default have occurred. During the three months ended March 31, 2021 and 2020 the Company incurred interest expense of approximately $23,700 and approximately $2,600, respectively.

SBA Paycheck Protection Program Loan

In April 2020, SharpSpring entered into two loan agreements with United States Small Business Administration (“SBA”) under the Paycheck Protection Program for a total loan amount of $3.40 million (the “SBA Loans”). The SBA Loans have a maturity date of 2 years from the initial disbursement and carry an interest rate of 1% per year. The application for the SBA Loans requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operation of the Company. This certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support the ongoing operations in a manner that is not significantly detrimental to the business. The receipt of the funds from the SBA Loans and the forgiveness of the SBA Loans is dependent on the Company having initially qualified for the SBA Loans and qualifying for the forgiveness of such loans based on funds being used for certain expenditures such as payroll costs and rent, as required by the terms of the SBA Loans.

The SBA Loans are eligible for forgiveness as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) approved by the U.S. Congress on March 27, 2020 if certain requirements are met. The Company continues to evaluate and monitor the requirements of the CARES Act that allow for forgiveness. The Company applied for forgiveness with the SBA in which on March 11, 2021, the SBA forgave the principal balance and associated accumulated interest of one of the two SBA Loans in full. As a result, the Company recognized $0.17 million to other income in our consolidated statement of operations and comprehensive loss. The total principal and interest on the remaining SBA Loan was $3.26 million as of March 31, 2021 and is under review for forgiveness by the SBA. There is no assurance that the Company’s remaining obligation under the SBA Loans will be forgiven. If the remaining SBA Loan is not forgiven, the Company will be required to repay the remaining loan over the applicable repayment period, commencing after the applicable deferral period. Interest expense related to the SBA Loans for the three months ended March 31, 2021 and 2020 was approximately $0.01 million and $0, respectively. As of March 31, 2021, the current portion of the remaining SBA Loan, was $3.08 million and is included in current liabilities on the Company’s consolidated balance sheet.

Presently, the SBA and other government communications have indicated that all loans in excess of $2.0 million will be subject to audit and that those audits could take up to seven years to complete. If the SBA determines that the SBA Loan was not properly obtained and/or expenditures supporting forgiveness were not appropriate, the Company would be required to repay some or all of the SBA Loan and record additional expense which could have a material adverse effect on our business, financial condition and results of operations in a future period.

Note 6: Income Taxes

SharpSpring income taxes are computed in accordance with ASC Topic 740, Income Taxes. The income tax expense we record in any interim period is based on our estimated effective tax rate for the year for each jurisdiction that we operate in. The calculation of our estimated effective tax rate requires an estimate of pre-tax income by tax jurisdiction, as well as total tax expense (benefit) for the fiscal year. Accordingly, this tax rate is subject to adjustment if, in subsequent interim periods, there are changes to our initial estimates of total tax expense (benefit) or pre-tax income (loss), by jurisdiction.

On March 27, 2020, the CARES Act was enacted into the law. The CARES Act contained many income tax relief provisions including allowing for a 5-year carryback of federal net operating losses generated in tax years beginning in 2018, 2019, or 2020. As required under U.S. GAAP, the effects of tax law changes are recognized in the period of enactment. Accordingly, we recorded an incremental income tax benefit in the amount of $1.6 million associated with the CARES Act related to the carryback of the Company’s 2018 federal net operating loss in the first quarter of 2020.

During the three months ended March 31, 2021 and 2020, the Company recorded income tax expense of $0.01 million and income tax benefit of $1.56 million, respectively. During the three months ended March 31, 2021, and 2020, the Company’s effective tax rate was -0.3% and 61.3%, respectively. For the three months ended March 31, 2021, the effective tax rate varies from our statutory U.S. tax rate due to valuation allowances on losses and income generated in certain other jurisdictions at various tax rates. For the three months ended March 31, 2020, the effective tax rate varies from our statutory U.S. tax rate due to the tax impact of the CARES Act, valuation allowances on losses and income generated in certain other jurisdictions at various tax rates.

Valuation Allowance

We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers many different factors including historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies and the availability of future tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. This is inherently judgmental, since we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction. In making our assessment of deferred tax asset recoverability, we considered our historical financial results, our projected future financial results, the planned reversal of existing deferred tax liabilities, and the impact of any tax planning actions. Based on our analysis we noted both positive and negative factors relative to our ability to support realization of certain deferred tax assets. However, based on the weighting of all the evidence, including the near-term effect on our income projections of investments we are making in our team, product and systems infrastructure, we concluded that it was more likely than not that the majority of our deferred tax assets related to temporary differences and net operating losses may not be recovered. The establishment of a valuation allowance has no effect on our ability to use the underlying deferred tax assets to reduce cash tax payments in the future to the extent that we generate taxable income prior to expiration.

At March 31, 2021 and December 31, 2020, we have established a valuation allowance of $9.5 million and $8.9 million, respectively, against certain deferred tax assets given the uncertainty of recoverability of these amounts.

Note 7: Stock-Based Compensation

From time to time, the Company grants stock options and restricted stock unit awards to officers and employees of the Company. Additionally, the Company grants stock options and awards to directors as compensation for their service to the Company.

In November 2010, the Company adopted the 2010 Stock Incentive Plan (the “2010 Plan”) which was restated in its entirety in August 2018. As amended, up to 2,600,000 shares of common stock were available for issuance under the Plan. The Plan provided for the issuance of stock options and other stock-based awards. As of March 31, 2021, no shares remain available for future issuance under the 2010 Plan.

In April 2019, the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”), which was amend in July 2020. As amended no more than 1,025,000 shares of common stock, plus the number of shares of common stock underlying any award granted under the 2010 Plan that expires, terminates, is canceled, or is forfeited shall be available for grant under the 2019 Plan. The Plan provides for the issuance of stock options and other stock-based awards. During the terms of the Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Awards.

Stock Options

Stock option awards under the 2010 Plan and 2019 Plan (the “Plans”) have a 10-year maximum contractual term and, subject to the provisions regarding Ten Percent Shareholders, must be issued at an exercise price of not less than 100% of the fair market value of the common stock at the date of grant. The Plans are administered by the Board of Directors, which has the authority to determine to whom options may be granted, the period of exercise, and what other restrictions, if any, should apply. Vesting for awards granted to date under the Plans is principally over four years from the date of the grant, with 25% of the award vesting after one year and monthly vesting thereafter.

Option awards are valued based on the grant date fair value of the instruments, net of estimated forfeitures, using a Black-Scholes option pricing model with the following assumptions:

The weighted average grant date fair value of stock options granted during the three months ended March 31, 2021, and 2020, was $9.59 and $5.68, respectively.

For grants prior to January 1, 2015, the volatility assumption was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. For all grants subsequent to January 1, 2015, the volatility assumption reflects the Company’s historic stock volatility for the period of February 1, 2014 forward, which is the date the Company’s stock began actively trading. The risk-free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.

Stock option awards are expensed on a straight-line basis over the requisite service period. During the three months ended March 31, 2021, and 2020, the Company recognized stock compensation expense of $0.26 million and $0.22 million, respectively, associated with stock option awards. At March 31, 2021, future stock compensation expense associated with stock options (net of estimated forfeitures) not yet recognized was $2.76 million and will be recognized over a weighted average remaining vesting period of 2.85 years. The following summarizes stock option activity for the three months ended March 31, 2021:

The total intrinsic value of stock options exercised during the three months ended March 31, 2021, and 2020, were $198,914 and $1,468, respectively.

Restricted Stock Units

Restricted Stock Units (“RSUs”) having a value equal to the fair market value of an identical number of shares of Common Stock, which may, but need not, provide that such restricted award may not be sold, assigned, transferred or otherwise disposed of, pledged or hypothecated as collateral for a loan or as security for the performance of any obligation or for any other purpose for a period determined by the Board of Directors. The Plans are administered by the Board of Directors, which has the authority to determine to whom RSUs may be granted, the period of exercise, and what other restrictions, if any, should apply. Vesting for awards granted to date under the Plans is generally over three years from the date of the grant, Need to the vesting term of "three' years at "33%" after "one" year and "quarterly" thereafter. During the three months ended March 31, 2021, and 2020, the Company granted 9,705 and 35,855 Restricted Stock Units (RSUs), respectively.

RSUs are expensed using a graded vested schedule which are recorded on a straight-line basis over the requisite vesting period as if the award were, in substance, a single award. During the three months ended March 31, 2021, and 2020, the Company recognized stock compensation expense of approximately $0.08 million and $0.12 million, respectively, associated with RSUs. At March 31, 2021, future stock compensation expense associated with stock units (net of estimated forfeitures) not yet recognized was approximately $0.86 million and will be recognized over a weighted average remaining vesting period of 3.12 years. The following summarizes RSU activity for the period ended March 31, 2021:

Restricted Stock Awards

Restricted Stock Awards ("RSAs") are valued based on the closing price of our common stock on the date of grant, and compensation cost is recorded immediately if there is no vesting period. For awards granted that contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized on a straight-line basis over the requisite vesting period as if the award were, in substance, a single award. During the three months ended March 31, 2021, and 2020, the company recognized stock compensation expense of approximately $0.05 million and $0.03 million, respectively, associated with our stock awards. As of March 31, 2021, future stock compensation expense associated with these awards (net of estimated forfeitures) not yet recognized was approximately $0.07 million and will be recognized over a weighted average remaining vesting period of 1 year.

During the three months ended March 31, 2021, and 2020, the Company issued 1,784 and 2,680 shares, respectively, all of which were to non-employee directors as compensation for their service on the board. Such stock awards are immediately vested.

The following table summarizes RSA activity for the period ended March 31, 2021:

Additionally, during the quarter the Company entered into an agreement with Marietta Davis to issue 8,479 shares of common stock in recognition of Ms. Davis’s previous service to the Company as a member of the Board of Directors. Ms. Davis served as a member of the Board of Directors of the Company from 2017 until her resignation as of August 17, 2020. The Company recorded an expense of approximately $0.17 million associated with this issuance. These shares were not issued from the 2019 Equity Incentive Plan.

Note 8: Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common stock outstanding for the period. Diluted net loss per share is computed by giving effect to all potential dilutive common stock equivalents for the period, including stock options and RSUs. Basic and diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.

Additionally, since the Company incurred net losses for each of the periods presented, diluted net loss per share is the same as basic net loss per share. The Company’s outstanding stock options and unvested RSUs were not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table contains all potentially dilutive common stock equivalents:

Note 9: Commitments and Contingencies

Legal Proceedings

From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company is not currently a party to any litigation of a material nature.

Commitments

The Company rents our facilities with leases ranging from month-to-month to several years in duration. Most of our service contracts are on a month-to-month basis, however, some contracts and agreements extend out to longer periods. Future minimum lease payments, debt obligations, and payments due under non-cancelable service contracts are as follows as of March 31, 2021:

Sales and Franchise Taxes

State, local and foreign jurisdictions have differing rules and regulations governing sales, franchise, use, value added and other taxes. These rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to SaaS products in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus vary significantly and are complex. As such, we could face possible tax assessments and audits. A successful assertion, by any of these taxing authorities, that we should be collecting additional sales, use, value added or other taxes in jurisdictions where we have not historically done so and do not accrue for such taxes could result in tax liabilities and related penalties for past sales, discourage customers from purchasing our products or otherwise harm our business and operating results. We continue to evaluate the impact of various tax types which may require future sales, franchise, or other tax payments. The Company evaluated the potential contingent liability with respect to sales tax nexus in accordance with ASC 450 “Contingencies” and determined the liability is both reasonably estimate and probable. Accordingly, the Company recorded a contingent liability for sales tax of $0.33 million and $0.28 million as of March 31, 2021 and December 31, 2020, respectively. The Company estimates that the total range of exposure related to sales tax contingent liability is approximately $0.20 million to $0.59 million.

Defined Contribution Retirement Plan

We offer our U.S. employees the ability to participate in a 401(k) plan. Eligible U.S. employees may contribute up to 100% of their eligible compensation, subject to limitations established by the Internal Revenue Code. Historically, the Company contributed a matching contribution equal to 100% of each participant’s contribution up to the first 3% of their annual eligible compensation. The Company temporarily paused matching contributions from May 1, 2020 through March 21, 2021. The Company incurred expense associated with the matching contribution of approximately $0.01 million and $0.09 million for the three months ended March 31, 2021 and 2020, respectively.

Employment Agreements

The Company has employment agreements with several members of its leadership team and executive officers.