Notes to Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation
(a) The Company and Nature of Operations
FalconStor Software, Inc., a Delaware corporation ("we", the "Company" or "FalconStor"), is the trusted data protection software leader modernizing disaster recovery and backup operations for the hybrid cloud world. The Company enables enterprise customers and managed service providers to secure, migrate, and protect their data while reducing data storage and long-term retention costs. More than 1,000 organizations and managed service providers worldwide standardize on FalconStor as the foundation for their cloud first data protection future.
(b) Liquidity
As of September 30, 2021, the Company had a working capital surplus of $2.3 million, which is inclusive of current deferred revenue of $3.7 million, and a stockholders' deficit of $11.5 million. During the nine months ended September 30, 2021, the Company had net income of $0.4 million and negative cash flow from operations of $0.7 million. The Company's total cash balance at September 30, 2021 was $3.5 million, an increase of $1.6 million compared to $1.9 million on December 31, 2020.
The Company’s principal sources of liquidity at September 30, 2021 consisted of cash and future cash anticipated to be generated from operations. The Company generated negative net income yet positive cash flows from operations during the nine months ended September 30, 2021, and it reported positive working capital as of September 30, 2021.
As described in Note (14) Stockholders' Equity, on June 23, 2021, the Company issued and sold an aggregate of 811,750 shares of its common stock in a public offering underwritten by Roth Capital Partners, LLC, ("Roth") which included 86,750 shares purchased by Roth pursuant to the partial exercise of its over-allotment option (the "June Offering"). At a price of $4.10 per share, the Company received net proceeds of approximately $2.7 million after deducting the underwriting discount and estimated offering expenses paid by the Company.
Also, on July 27, 2021 the Company issued and sold an aggregate of 285,000 shares of its common stock in a public offering underwritten by Roth. At a price of $4.10 per share, the Company received net proceeds of approximately $0.9 million after deducting the underwriting discount and estimated offering expenses paid by the Company.
The Company is currently a party to an Amended and Restated Term Loan Credit Agreement, dated as of February 23, 2018, as amended December 27, 2019, by and between the Company and HCP-FVA, LLC (“HCP-FVA”), (the “Amended and Restated Loan Agreement”). In connection with the then-proposed public offering of the Company as described in the Company's Registration Statement on Form S-1, as amended, originally filed on June 3, 2021 (the "Offering"), we entered into a letter agreement with Hale Capital Partners, LP (“Hale Capital”), dated June 2, 2021 (the “Loan Extension Letter Agreement”), that provided for an extension of the maturity date on Hale Capital’s portion of the outstanding indebtedness owed under the Amended and Restated Loan Agreement to June 30, 2023, which constituted approximately $2.2 million of the $3.5 million principal amount outstanding as of June 2, 2021. The remaining $1.3 million of the principal amount outstanding, which was owed to other lenders, was repaid in full on June 30, 2021. See Note (9) Notes Payable for more information. Also, as described further in Note (12) Series A Redeemable Convertible Preferred Stock, the effective date of the mandatory redemption right of the Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) held by HCP-FVA and Hale Capital was extended from July 30, 2021 to July 30, 2023 pursuant to an amendment to the Certificate of Designations, dated as of June 24, 2021. The amendment was approved by our shareholders at our 2021 annual meeting of stockholders and filed with the Delaware Secretary of State on June 25, 2021. If such Series A Preferred Stock was redeemed at September 30, 2021, the Company would have been required to pay the holders of the Series A Preferred Stock $14.2 million.
As discussed in Note (17) Restructuring Costs the Melville, NY office lease which ended on April 30, 2021 with a gross annualized rental cost of $1.5 million, will not be replaced. FalconStor is primarily a virtual company and is redeploying this savings to more productive uses.
The Company believes its current cash balances together with anticipated cash flows from operating activities will be sufficient to meet its working capital requirements for at least one year from the date the consolidated financial statements were available to be issued.
(c) Impact of the COVID-19 Pandemic
We are continuing to monitor the impact of COVID-19, on all aspects of our business. The outbreak of COVID-19 has caused and may continue to cause travel bans or disruptions, and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. The impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases or failing to make payments, and delays or disruptions in our or our partners’ supply chains. As a result, we may experience extended sales cycles, our ability to close transactions with new and existing customers and partners may be negatively impacted, our ability to recognize revenue from software transactions we do close may be negatively impacted, our demand generation activities, and the efficiency and effect of those activities, may be negatively affected, and it has been and, until the COVID-19 outbreak is contained, will continue to be more difficult for us to forecast our operating results. These uncertainties have, and may continue to, put pressure on global economic conditions and overall IT spending and may cause our end customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles and potentially lowering prices for our solutions, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments, any of which could materially harm our business, operating results and financial condition.
Further, our management team is focused on addressing the impacts of COVID-19 on our business, which has required and will continue to require, a large investment of their time and resources and may distract our management team or disrupt our 2021 operating plans. The extent to which COVID-19 ultimately impacts our results of operations, cash flow and financial position will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions taken by governments and authorities to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including as a result of any recession that may occur.
(d) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(e) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include those related to revenue recognition, accounts receivable allowances, valuation of derivatives, valuation of goodwill and income taxes. Actual results could differ from those estimates.
The financial market volatility in many countries where the Company operates has impacted and may continue to impact the Company’s business. Such conditions could have a material impact on the Company’s significant accounting estimates discussed above.
(f) Unaudited Interim Financial Information
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.
In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position of the Company at September 30, 2021, and the results of its operations for the three and nine months ended September 30, 2021 and 2020. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 ("2020 Form 10-K").
(g) Recently Issued Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The objective of the guidance is to improve the effectiveness of disclosure requirements on defined benefit pension plans and other postretirement plans. The guidance is effective for fiscal years beginning after December 15, 2020. Adoption of this new standard did not have a significant impact to our disclosures.
In December 2019, the FASB released ASU 2019-12, which affects general principles within Topic 740, Income Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Adoption of this new standard did not have a material impact on the Company.
In August 2020, the Financial Accounting Standards Board, or FASB, issued ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which reduces the number of accounting models for convertible instruments and amends the calculation of diluted earnings per share for convertible instruments, among other changes. The guidance is effective for smaller reporting companies as defined by the SEC, for annual reporting periods beginning after December 15, 2023, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
(2) Summary of Significant Accounting Policies
The Company's significant accounting policies were described in Note (1) Summary of Significant Accounting Policies of the 2020 Form 10-K. There have been no significant changes in the Company's significant accounting policies since December 31, 2020. For a description of the Company's significant accounting policies refer to the 2020 Form 10-K.
Revenue from Contracts with Customers and Associated Balances
Nature of Products and Services
Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. Revenue allocated to software maintenance and support services is recognized ratably over the contractual support period.
Hardware products consist primarily of servers and associated components and function independently of the software products and as such are accounted for as separate performance obligations. Revenue allocated to hardware maintenance and support services is recognized ratably over the contractual support period.
Professional services are primarily related to software implementation services and associated revenue is recognized upon customer acceptance.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a contract asset when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For perpetual licenses with multi-year maintenance agreements, the company invoices the license and generally one year of maintenance with future maintenance generally invoiced annually. For multi-year subscription licenses, the Company generally invoices customers annually at the beginning of each annual coverage period. The Company records a contract asset related to revenue recognized for multi-year on-premises licenses as its right to payment is conditioned upon providing product support and services in future years.
As of September 30, 2021 and December 31, 2020, accounts receivable, net of allowance for doubtful accounts, was $2.3 million and $2.8 million, respectively. As of September 30, 2021 and December 31, 2020, short and long-term contract assets, net of allowance for doubtful accounts, was $0.4 million and $0.6 million respectively.
Deferred revenue is comprised mainly of unearned revenue related maintenance and technical support on term and perpetual licenses. Maintenance and technical support revenue is recognized ratably over the coverage period. Deferred revenue also includes contracts for professional services to be performed in the future which are recognized as revenue when the Company delivers the related service pursuant to the terms of the customer arrangement.
Changes in deferred revenue were as follows:
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021
|
|
|
Balance at January 1, 2020
|
$
|
6,369,129
|
|
|
Deferral of revenue
|
9,281,741
|
|
|
Recognition of revenue
|
(10,370,542)
|
|
|
Change in reserves
|
(1,510)
|
|
|
Balance at September 30, 2021
|
$
|
5,278,818
|
|
During the three months ended September 30, 2021 and 2020, revenue of $1.0 million and $1.2 million, respectively, and the nine months ended September 30, 2021 and 2020, revenue of $3.9 million and $4.4 million respectively, was recognized from the deferred revenue balance at the beginning of each period.
Deferred revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized as revenue in future periods. Deferred revenue was $5.3 million as of September 30, 2021, of which the Company expects to recognize approximately 70% of such amount as revenue over the next 12 months and the remainder thereafter.
Approximately $1.8 million of revenue is expected to be recognized from remaining performance obligations for unbilled support and services as of September 30, 2021. We expect to recognize revenue on approximately 42% of these remaining performance obligations over the next twelve months, with the balance recognized thereafter.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing its products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with maintenance and support revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with product revenue recognized upon delivery.
Significant Judgments
The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.
Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. For products and services aside from maintenance and support, the Company estimates SSP by adjusting the list price by historical discount percentages. SSP for software and hardware maintenance and support fees is based on the stated percentages of the fees charged for the respective products.
The Company’s perpetual and term software licenses have significant standalone functionality and therefore revenue allocated to these performance obligations are recognized at a point in time upon electronic delivery of the download link and the license keys.
Product maintenance and support services are satisfied over time as they are stand-ready obligations throughout the support period. As a result, revenues associated with maintenance services are deferred and recognized as revenue ratably over the term of the contract.
Revenues associated with professional services are recognized at a point in time upon customer acceptance.
Disaggregation of Revenue
Please refer to the condensed consolidated statements of operations and Note (16) Segment Reporting and Concentrations for discussion on revenue disaggregation by product type and by geography. The Company believes this level of disaggregation sufficiently depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
Assets Recognized from Costs to Obtain a Contract with a Customer
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that its sales commission program meets the requirements for cost capitalization. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets on our consolidated balance sheets. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less.
Leases
We have entered into operating leases for our various facilities. We determine if an arrangement is a lease at inception. Operating leases are included in Right-of-Use ("ROU") assets, and lease liability obligations in our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liability obligations represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We have lease agreements with lease and non-lease components and account for such components as a single lease component. As most of our leases do not provide an implicit rate, we estimated our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. Our lease terms may include options to extend or terminate the lease. Such extended terms have been considered in determining the ROU assets and lease liability obligations when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.
Right of Use Assets and Liabilities
We have various operating leases for office facilities that expire through 2021. Below is a summary of our ROU assets and liabilities as of September 30, 2021.
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|
|
|
|
|
|
|
Right of use assets
|
$
|
140,238
|
|
|
Lease liability obligations, current
|
87,381
|
|
|
Lease liability obligations, less current portion
|
53,430
|
|
|
Total lease liability obligations
|
$
|
140,811
|
|
|
Weighted-average remaining lease term
|
1.87
|
|
Weighted-average discount rate
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Components of lease expense:
|
|
|
|
|
|
|
|
|
Operating lease cost
|
$
|
88,593
|
|
|
$
|
442,501
|
|
|
$
|
712,911
|
|
|
$
|
1,386,998
|
|
|
Sublease income
|
—
|
|
|
(75,314)
|
|
|
(100,419)
|
|
|
(430,313)
|
|
|
Net lease cost
|
$
|
88,593
|
|
|
$
|
367,187
|
|
|
$
|
612,492
|
|
|
$
|
956,685
|
|
During the three months ended September 30, 2021 and 2020, operating cash flows from operating leases were approximately $57,541 and $357,245, respectively. During the nine months ended September 30, 2021 and 2020, operating cash flows from operating leases were approximately $574,757 and $1,117,557, respectively.
Approximate future minimum lease payments for our ROU assets over the remaining lease periods as of September 30, 2021, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
30,063
|
|
|
2022
|
112,232
|
|
|
Total minimum lease payments
|
142,295
|
|
|
Less interest
|
1,484
|
|
|
Present value of lease liabilities
|
140,811
|
|
(3) Earnings Per Share
Basic earnings per share ("EPS") is computed based on the weighted average number of shares of common stock outstanding. Diluted EPS is computed based on the weighted average number of common shares outstanding increased by dilutive common stock equivalents, attributable to stock option awards, restricted stock awards, warrants and the Series A Preferred Stock outstanding.
The following represents the common stock equivalents that were excluded from the computation of diluted shares outstanding because their effect would have been anti-dilutive for the three and nine months ended September 30, 2021 and 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Stock options
|
9,640
|
|
|
9,945
|
|
|
9,640
|
|
|
9,945
|
|
|
Restricted stock
|
—
|
|
|
31,648
|
|
|
63,207
|
|
|
31,648
|
|
|
Series A redeemable convertible preferred stock
|
87,815
|
|
|
87,815
|
|
|
87,815
|
|
|
87,815
|
|
|
Total anti-dilutive common stock equivalents
|
97,455
|
|
|
129,408
|
|
|
160,662
|
|
|
129,408
|
|
(4) Property and Equipment
The gross carrying amount and accumulated depreciation of property and equipment as of September 30, 2021 and December 31, 2020 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
18,876,633
|
|
|
$
|
18,791,841
|
|
|
Accumulated depreciation
|
|
(18,683,605)
|
|
|
(18,594,821)
|
|
|
Property and Equipment, net
|
|
$
|
193,028
|
|
|
$
|
197,020
|
|
For the three months ended September 30, 2021 and 2020, depreciation expense was $29,838 and $44,958, respectively. For the nine months ended September 30, 2021 and 2020, depreciation expense was $100,470 and $135,679, respectively.
(5) Software Development Costs
The gross carrying amount and accumulated amortization of software development costs as of September 30, 2021 and December 31, 2020 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
2,950,132
|
|
|
$
|
2,950,132
|
|
|
Accumulated amortization
|
|
(2,935,787)
|
|
|
(2,930,854)
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|
|
Software development costs, net
|
|
$
|
14,345
|
|
|
$
|
19,278
|
|
During the three months ended September 30, 2021 and 2020, the Company recorded $1,649 and $1,649, respectively, of amortization expense related to capitalized software costs. During the nine months ended September 30, 2021 and 2020, the Company recorded $4,933 and $6,084, respectively, of amortization expense related to capitalized software costs.
(6) Goodwill and Other Intangible Assets
The gross carrying amount and accumulated amortization of goodwill and other intangible assets as of September 30, 2021 and December 31, 2020 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Goodwill
|
|
$
|
4,150,339
|
|
|
$
|
4,150,339
|
|
|
Other intangible assets:
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
4,038,138
|
|
|
$
|
4,027,912
|
|
|
Accumulated amortization
|
|
(3,973,843)
|
|
|
(3,927,778)
|
|
|
Net carrying amount
|
|
$
|
64,295
|
|
|
$
|
100,134
|
|
For the three months ended September 30, 2021 and 2020, amortization expense was $13,999 and $18,455, respectively. For the nine months ended September 30, 2021 and 2020, amortization expense was $46,065 and $20,364, respectively.
(7) Share-Based Payment Arrangements
On June 22, 2018, the Company's stockholders adopted the FalconStor Software, Inc. 2018 Incentive Stock Plan (the "2018 Plan"). The 2018 Plan is administered by the Compensation Committee and provided for the issuance of up to 1,471,997 shares of the Company's common stock upon the grant of shares with such restrictions as determined by the Compensation Committee to the employees and directors of, and consultants providing services to, the Company or its affiliates. In June 2021, the Company's stockholders approved an amendment to increase the number of shares of our common stock authorized and reserved for issuance under the 2018 Plan by 220,800 shares to a total of 1,692,797 shares. Exercise prices of the options will be determined by the Compensation Committee of the Company's Board of Directors (the "Board"), subject to the consent of Hale Capital. The vesting terms shall be performance based and determined by the Compensation Committee, subject to the consent of Hale Capital, based on various factors, including (i) the return of capital to the holders of the Series A Preferred Stock and the Company’s Common Stock in the event of a change of control, (ii) the repayment of the Company’s obligations under its senior secured debt, and (iii) the Company’s free cash flow.
The following table summarizes the 2018 Plan, which was the only plan under which the Company was able to grant equity compensation as of September 30, 2021:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Shares Available
|
|
Shares
|
|
Name of Plan
|
|
Authorized
|
|
for Grant
|
|
Outstanding
|
|
FalconStor Software, Inc. 2018 Incentive Stock Plan
|
|
1,692,797
|
|
132,817
|
|
1,463,380
|
The following table summarizes the Company’s equity plans that have terminated or expired but that still have equity awards outstanding as of September 30, 2021:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Plan
|
|
Shares Available for Grant
|
|
Shares Outstanding
|
|
FalconStor Software, Inc., 2016 Incentive Stock Plan
|
|
—
|
|
3,850
|
|
|
|
|
|
|
|
FalconStor Software, Inc., 2006 Incentive Stock Plan
|
|
—
|
|
5,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Company’s restricted stock activity for the nine months ended September 30, 2021 is below. Such restricted stock did not bestow any voting or dispositive power and is not deemed outstanding until they vest.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Awards
|
|
Non-Vested at January 1, 2021
|
|
1,386,213
|
|
|
Granted
|
|
113,230
|
|
|
Vested
|
|
(36,063)
|
|
|
Forfeited
|
|
—
|
|
|
Non-Vested at September 30, 2021
|
|
1,463,380
|
|
The following table summarizes the share-based compensation expense for all awards issued under the Company’s stock equity plans in the following line items in the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Cost of revenue - Product
|
|
$
|
232
|
|
|
$
|
—
|
|
|
$
|
688
|
|
|
$
|
—
|
|
|
Cost of revenue - support and service
|
|
185
|
|
|
104
|
|
|
549
|
|
|
310
|
|
|
Research and development costs
|
|
167
|
|
|
433
|
|
|
167
|
|
|
1,289
|
|
|
Selling and marketing
|
|
2,915
|
|
|
186
|
|
|
8,475
|
|
|
554
|
|
|
General and administrative
|
|
1,417
|
|
|
3,099
|
|
|
4,205
|
|
|
9,239
|
|
|
|
|
$
|
4,916
|
|
|
$
|
3,822
|
|
|
$
|
14,084
|
|
|
$
|
11,392
|
|
(8) Income Taxes
The Company’s provision for income taxes consists principally of state and local, and foreign taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year.
For the nine months ended September 30, 2021, the Company recorded an income tax provision of $63,804. The effective tax rate for the nine months ended September 30, 2021 was 12.4%. The effective tax rate differs from the statutory rate of 21% due to the mix of foreign and domestic earnings, foreign withholding taxes and the application of valuation allowances. As of September 30, 2021, the Company’s conclusion did not change with respect to the realizability of its domestic deferred tax assets and therefore, the Company has not recorded any income tax benefit as such amounts are fully offset with a valuation allowance.
For the nine months ended September 30, 2020, the Company recorded an income tax provision of $44,709. The effective tax rate for the nine months ended September 30, 2020 was 3.5%. The effective tax rate differs from the statutory rate of 21% due to the mix of foreign and domestic earnings and the application of valuation allowances. As of September 30, 2020, the Company’s conclusion did not change with respect to the realizability of its domestic deferred tax assets and therefore, the Company has not recorded any income tax benefit as such amounts are fully offset with a valuation allowance.
The Company’s total unrecognized tax benefits, excluding interest, at both September 30, 2021 and September 30, 2020 were $70,260 and $76,275, respectively. As of September 30, 2021 and September 30, 2020, the Company had $36,575 and $33,865, respectively, of accrued interest reflected in accrued expenses.
(9) Notes Payable
The notes payable balance consists of the following:
|
|
|
|
|
|
|
|
Total notes payable, net at January 1, 2021
|
$
|
4,074,863
|
|
|
Accretion of discount
|
75,705
|
|
|
PPP loan forgiveness
|
(754,000)
|
|
|
Total notes payable, net at March 31, 2021
|
$
|
3,396,568
|
|
|
Repayment of short-term debt
|
(1,334,058)
|
|
|
Accretion of discount
|
84,086
|
|
|
Total notes payable, net at June 30, 2021
|
$
|
2,146,596
|
|
|
Accretion of discount
|
$
|
3,978
|
|
|
Total notes payable, net at September 30, 2021
|
$
|
2,150,574
|
|
Senior Secured Debt
The senior secured debt bears interest at prime plus 0.75% and had an original maturity date of June 30, 2021.
In connection with the June Offering, we entered into the Loan Extension Letter Agreement on June 2, 2021 which provided for an extension of the maturity date on Hale Capital’s portion of the outstanding indebtedness owed under the Amended and Restated Loan Agreement to June 30, 2023. The amount extended constituted approximately $2.2 million of the $3.5 million principal amount outstanding as of June 2, 2021. The remaining $1.3 million of the outstanding principal, which was owed to other lenders, was repaid in full on June 30, 2021.
The Company concluded that the modification created by this amendment resulted in a troubled debt restructuring under Accounting Standard Codification—Debt (Topic 470) as it was determined that a concession was granted by HCP-FVA. However, as the future payments to be made subsequent to the modification are greater than the carrying value at the time of the modification, no gain or loss was required to be recognized on the troubled debt restructuring. The change is accounted for prospectively using the new effective interest rate of the loan.
As of September 30, 2021, the Company was in compliance with the financial covenants contained in the Amended and Restated Loan Agreement.
Loan under the Paycheck Protection Program
On April 28, 2020, the Company entered into a loan with Peapack-Gladstone Bank in an aggregate principal amount of $754,000 (the "PPP Loan") pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").
The PPP Loan was evidenced by a promissory note, dated April 28, 2020 and matured two years from the disbursement date and bore interest at a rate of 1.000% per annum, with the first six months of interest deferred. The PPP Loan was subject to forgiveness to the extent proceeds were used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP. The Company used a significant majority of the PPP Loan amount for Qualifying Expenses and the PPP Loan was forgiven on March 30, 2021.
(10) Fair Value Measurements
The Company measures its cash equivalents and derivative instruments at fair value. Fair value is an exit price, representing the amount that would be received on the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value.
The methodology for measuring fair value specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). As a result, observable and unobservable inputs have created the following fair value hierarchy:
•Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities. At September 30, 2021, the Company did not have any Level 1 category assets included in the condensed consolidated balance sheets.
•Level 2 – Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly. At September 30, 2021 and December 31, 2020, the Company did not have any Level 2 category assets included in the condensed consolidated balance sheets.
•Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. At September 30, 2021 and December 31, 2020, the Level 3 category included derivatives, which are included within other long-term liabilities in the condensed consolidated balance sheets. The Company did not hold any cash and cash equivalents categorized as Level 3 as of September 30, 2021 or December 31, 2020.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant other Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
464,972
|
|
|
—
|
|
|
—
|
|
|
464,972
|
|
|
Total derivative liabilities
|
|
464,972
|
|
|
—
|
|
|
—
|
|
|
464,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets and liabilities measured at fair value
|
|
$
|
464,972
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
464,972
|
|
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant other Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
472,851
|
|
|
—
|
|
|
—
|
|
|
472,851
|
|
|
Total derivative liabilities
|
|
472,851
|
|
|
—
|
|
|
—
|
|
|
472,851
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets and liabilities measured at fair value
|
|
$
|
472,851
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
472,851
|
|
The fair value of the Company’s derivatives were valued using the Black-Scholes pricing model adjusted for probability assumptions, with all significant inputs, except for the probability and volatility assumptions, derived from or corroborated by observable market data such as stock price and interest rates. The probability and volatility assumptions are both significant to the fair value measurement and unobservable. These embedded derivatives are included in Level 3 of the fair value hierarchy. The derivatives are included in other long-term liabilities on our consolidated balance sheets.
The fair value of the Company's Series A Preferred Stock is based on its future cash flows discounted at a 9% yield. The fair value of the Company's note payable is based on its future cash flows discounted at a 7% yield.
The following table presents a reconciliation of the beginning and ending balances of the Company's liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2021 and September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Beginning Balance
|
|
$
|
467,598
|
|
|
$
|
478,312
|
|
|
$
|
472,851
|
|
|
$
|
483,804
|
|
|
Total income recognized in earnings
|
|
(2,626)
|
|
|
(2,751)
|
|
|
(7,879)
|
|
|
(8,243)
|
|
|
Ending Balance
|
|
$
|
464,972
|
|
|
$
|
475,561
|
|
|
$
|
464,972
|
|
|
$
|
475,561
|
|
(11) Commitments and Contingencies
The Company’s headquarters are located in Austin, Texas. The Company had an operating lease covering its Melville, New York office facility that expired in April 2021. The Company also has several additional operating leases related to offices in foreign countries. The expiration dates for these leases occur in 2021. The following is a schedule of future minimum lease payments as well as sublease income for all operating leases as of September 30, 2021:
|
|
|
|
|
|
|
|
|
Payments
|
|
2021
|
$
|
30,063
|
|
|
2022
|
112,232
|
|
|
|
$
|
142,295
|
|
The Company typically provides its customers a warranty on its software products for a period of no more than 90 days. Such warranties are accounted for in accordance with the authoritative guidance issued by the FASB on contingencies. For the three and nine months ended September 30, 2021, the Company has not incurred any costs related to warranty obligations.
Under the terms of substantially all of its software license agreements, the Company indemnifies its customers for all costs and damages arising from claims against such customers based on, among other things, allegations that the Company’s software infringes on the intellectual property rights of a third party. In most cases, in the event of an infringement claim, the Company retains the right to (i) procure for the customer the right to continue using the software; (ii) replace or modify the software to eliminate the infringement while providing substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be reasonably achieved, the Company may terminate the license agreement and refund to the customer a pro-rata portion of the license fee paid to the Company. Such indemnification provisions are accounted for in accordance with the authoritative guidance issued by the FASB on guarantees. From time to time, in the ordinary course of business, the Company receives claims for indemnification, typically from OEMs. The Company is not currently aware of any material claims for indemnification.
As described under Note (12) Series A Redeemable Convertible Preferred Stock the holders of the Series A Preferred Stock have redemption rights upon certain triggering events. As of September 30, 2021, the Company did not fail any non-financial covenants related to the Company's Series A Preferred Stock.
In connection with the appointment of Todd Brooks as Chief Executive Officer, the Board approved an offer letter to Mr. Brooks (the “Brooks Agreement”), which was executed on August 14, 2017. The Brooks Agreement provides that Mr. Brooks is entitled to receive an annualized base salary of $350,000, payable in regular installments in accordance with the Company’s general payroll practices. Mr. Brooks will also be eligible for a cash bonus of $17,500 for any quarter that is free cash flow positive on an operating basis and additional incentive compensation of an annual bonus of up to $200,000, subject to attainment of performance objectives to be mutually agreed upon and established. Mr. Brooks' employment can be terminated at will. Pursuant to the Brooks Agreement and the 2018 Plan, Mr. Brooks received 735,973 shares of restricted stock. If Mr. Brooks’ employment is terminated by the Company other than for cause, he is entitled to receive severance equal to 12 months of his base salary if (i) he has been employed by the Company for at least 12 months at the time of termination or (ii) a change of control has occurred within 6 months of Mr. Brooks’ employment. Except as set forth in the preceding sentence, Mr. Brooks is entitled to receive severance equal to 6 months of his base salary if he has been employed by the Company for less than 6 months and his employment was terminated by the Company without cause. Mr. Brooks is also entitled to vacation and other employee benefits in accordance with the Company’s policies as well as reimbursement for an apartment.
In connection with the appointment of Brad Wolfe as the Company's Chief Financial Officer, the Board approved an offer letter to Mr. Wolfe (the “Wolfe Offer Letter”), which was executed on April 4, 2018. The Wolfe Offer Letter provides that Mr. Wolfe is entitled to receive an annualized base salary of $240,000, payable in regular installments in accordance with the Company’s general payroll practices. Mr. Wolfe will also be eligible for a cash bonus of $10,000 for any quarter which has net working capital cash that exceeds the prior quarter and additional incentive compensation of an annual bonus of up to $70,000, subject to attainment of performance objectives to be mutually agreed upon and established.
As described under Note (17) Restructuring Costs, the Company has incurred certain restructuring costs in connection with restructuring plans adopted in 2017 and 2019.
In addition, as of September 30, 2021, the Company's liability for uncertain tax positions totaled $108,091. At this time, the settlement period for this liability, including related accrued interest, cannot be determined.
(12) Series A Redeemable Convertible Preferred Stock
The Company has 900,000 shares of Series A Preferred Stock outstanding. Pursuant to the Amended and Restated Certificate of Designations, Preferences and Rights for the Series A Preferred Stock (the "Certificate of Designations"), each share of Series A Preferred Stock can be converted into shares of the Company’s common stock, at an initial conversion price of $102.488 per share, subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction, (i) at any time at the option of the holder or (ii) by the Company if, following the first anniversary of the issuance of the Series A Preferred Stock (subject to extension under certain circumstances), the volume weighted average trading price per share of the Company’s common stock for sixty (60) consecutive trading days exceeds 250% of the conversion price and continues to exceed 225% of the conversion price through the conversion date, subject at all times to the satisfaction of, and the limitations imposed by, the equity conditions set forth in the Certificate of Designations (including, without limitation, the volume limitations set forth therein).
Pursuant to the Certificate of Designations, the holders of the Series A Preferred Stock are entitled to receive quarterly dividends at the prime rate (provided in the Wall Street Journal Eastern Edition) plus 5% (up to a maximum dividend rate of 10%), payable in cash or in kind (i.e., through the issuance of additional shares of Series A Preferred Stock), except that the Company is not permitted to pay such dividends in cash while any indebtedness under the Amended and Restated Loan Agreement remains outstanding without the consent of the holders of the Series A Preferred Stock. In addition, the declaration
and payment of dividends is subject to compliance with applicable law and unpaid dividends will accrue. A holder’s right to convert its shares of Series A Preferred Stock and receive dividends in the form of common stock is subject to certain limitations including, among other things, that the shares of common stock issuable upon conversion or as dividends will not, prior to receipt of stockholder approval, result in any holder beneficially owning greater than 9.99% of the Company’s currently outstanding shares of common stock.
The Series A Preferred Stock dividends shall accrue whether or not the declaration or payment of such Series A Preferred Stock dividends are prohibited by applicable law, whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends and whether or not such dividends are authorized or declared.
Upon certain triggering events, such as bankruptcy, insolvency or a material adverse effect or failure of the Company to issue shares of common stock upon conversion of the Series A Preferred Stock in accordance with its obligations, the holders may require the Company to redeem all or some of the Series A Preferred Stock at a price per share equal to the greater of (i) the sum of 100% of the stated value of a share of Series A Preferred Stock plus accrued and unpaid dividends with respect thereto, and (ii) the product of the number of shares of common stock underlying a share of Series A Preferred Stock and the closing price as of the occurrence of the triggering event. On or after July 30, 2023, subject to the approval of HCP-FVA, each holder of Series A Preferred Stock can also require the Company to redeem its Series A Preferred Stock in cash at a per share price equal to 100% of the stated value of a share of Series A Preferred Stock plus accrued and unpaid dividends with respect thereto. Notwithstanding the forgoing, no holder of Series A Preferred Stock is permitted to exercise any rights or remedies upon a Breach Event (as defined in the Certificate of Designations) or to exercise any redemption rights under the Certificate of Designations, unless approved by the holders of a majority of the then-outstanding shares of Series A Preferred Stock.
Upon consummation of a fundamental sale transaction, the Series A Preferred Stock shall be redeemed at a per share redemption price equal to the greater of (y) 250% of the per share purchase price of the Series A Preferred Stock and (z) the price payable in respect of such share of Series A Preferred Stock if such share of Series A Preferred Stock had been converted into such number of shares of common stock in accordance with the Certificate of Designations (but without giving effect to any limitations or restrictions contained therein) immediately prior to such fundamental sale transaction; provided however that the 250% threshold is changed to 100% if the fundamental sale transaction is approved by the two Series A Directors (as defined in the Certificate of Designations). In addition, if the Company consummates an equity or debt financing that results in more than $5.0 million of net proceeds to the Company and/or its subsidiaries, the holders of Series A Preferred Stock will have the right, but not the obligation, to require the Company to use the net proceeds in excess of $5.0 million to repurchase all or a portion of the Series A Preferred Stock at a per share price equal to the greater of (i) the sum of 100% of the stated value of such share of Series A Preferred Stock plus accrued and unpaid dividends with respect thereto, and (ii) the number of shares of common stock into which such share of Series A Preferred Stock is then convertible multiplied by the greater of (y) the closing price of the common stock on the date of announcement of such financing or (z) the closing price of the common stock on the date of consummation of such financing.
Each holder of Series A Preferred Stock has a vote equal to the number of shares of common stock into which its Series A Preferred Stock would be convertible as of the record date. In addition, the holders of a majority of the Series A Preferred Stock must approve certain actions, including approving any amendments to the Company’s Restated Certificate of Incorporation as amended or Amended and Restated Bylaws that adversely affects the voting powers, preferences or other rights of the Series A Preferred Stock; payment of dividends or distributions; any liquidation, capitalization, reorganization or any other fundamental transaction of the Company; issuance of any equity security senior to or on parity with the Series A Preferred Stock as to dividend rights, redemption rights, liquidation preference and other rights; issuances of equity below the conversion price; any liens or borrowings other than non-convertible indebtedness from standard commercial lenders which does not exceed 80% of the Company’s accounts receivable; and the redemption or purchase of any of the capital stock of the Company.
The holders of our outstanding Series A Preferred Stock have a mandatory redemption right that may be exercised only with the approval of Hale Capital and HCP-FVA. In connection with the then-proposed public offering of the Company as described in the Company's Registration Statement on Form S-1, as amended, originally filed on June 3, 2021, the effective date of such redemption right was extended from July 30, 2021 to July 30, 2023 pursuant to an amendment to the Certificate of Designations, dated as of June 24, 2021. The amendment was approved by our shareholders at our 2021 annual meeting of stockholders and filed with the Delaware Secretary of State on June 25, 2021.
The Company concluded that the modification created by this amendment resulted in a troubled debt restructuring under Accounting Standard Codification—Debt (Topic 470) as it was determined that a concession was granted. However, as the future payments to be made subsequent to the modification are greater than the carrying value at the time of the modification, no gain or loss was required to be recognized on the troubled debt restructuring. The change is accounted for
prospectively using the new effective interest rate of the preferred stock.
The Company has classified the Series A Preferred Stock as temporary equity in the financial statements as it is subject to redemption at the option of the holder under certain circumstances. As a result of the Company’s analysis of all the embedded conversion and put features within the Series A Preferred Stock, the contingent redemption put options in the Series A Preferred Stock were determined to not be clearly and closely related to the debt-type host and also did not meet any other scope exceptions for derivative accounting. Therefore, the contingent redemption put options are being accounted for as derivative instruments and the fair value of these derivative instruments was bifurcated from the Series A Preferred Stock and recorded as a liability.
As of September 30, 2021 and December 31, 2020, the fair value of these derivative instruments was $464,972 and $472,851, respectively, and were included in "other long-term liabilities" within the consolidated balance sheets. The loss on the change in fair value of these derivative instruments for the nine months ended September 30, 2021 and September 30, 2020 of $7,879 and $8,243, respectively, were included in “interest and other loss, net” within the consolidated statement of operations.
The fair value of these derivative instruments and the loss recorded on the change in the fair value of these derivative instruments, which was included in “Interest and other income, net” within the condensed consolidated statement of operations, for the three and nine months ended September 30, 2021 and 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Beginning Balance
|
|
$
|
467,598
|
|
|
$
|
478,312
|
|
|
$
|
472,851
|
|
|
$
|
483,804
|
|
|
Total income recognized in earnings
|
|
(2,626)
|
|
|
(2,751)
|
|
|
(7,879)
|
|
|
(8,243)
|
|
|
Ending Balance
|
|
$
|
464,972
|
|
|
$
|
475,561
|
|
|
$
|
464,972
|
|
|
$
|
475,561
|
|
The Company’s derivatives were valued using the Black-Scholes pricing model adjusted for probability assumptions, with all significant inputs, except for the probability and volatility assumptions, derived from or corroborated by observable market data such as stock price and interest rates. The probability and volatility assumptions are as follows:
|
|
|
|
|
|
|
|
Probability of redemption as part of a fundamental sale transaction
|
0.5%
|
|
Probability of redemption absent a fundamental sale transaction
|
4.75%
|
|
Annual volatility
|
65%
|
At the time of issuance, the Company recorded transaction costs, a beneficial conversion feature and the fair value allocated to the embedded derivatives as discounts to the Series A Preferred Stock. These costs were being accreted to the Series A Preferred Stock using the effective interest method through the stated redemption date of August 5, 2017, which represents the earliest redemption date of the instrument. This accretion was accelerated as of December 31, 2016 due to the failure of the financial covenants and the redemption right of the holders at that time. In connection with the June Offering, Hale Capital Partners, which was the sole holder of the Series A Preferred Stock, agreed to the Series A mandatory extension of the mandatory redemption right and waived prior breaches of the terms of the Series A Preferred Stock. The Company included deductions for accretion, deemed and accrued dividends on the Series A Preferred Stock as adjustments to net income (loss) attributable to common stockholders on the statement of operations and in determining income (loss) per share for the three and nine months ended September 30, 2021 and 2020, respectively.
The Series A Preferred Stock consists of the following:
|
|
|
|
|
|
|
|
Total Series A redeemable convertible preferred stock, net at January 1, 2021
|
$
|
12,940,722
|
|
|
Accrued dividends
|
277,170
|
|
Accretion of preferred stock
|
197,114
|
|
Total Series A redeemable convertible preferred stock, net at March 31, 2021
|
$
|
13,415,006
|
|
|
Accrued dividends
|
282,926
|
|
Accretion of preferred stock
|
75,183
|
|
Total Series A redeemable convertible preferred stock, net at June 30, 2021
|
$
|
13,773,115
|
|
|
Accrued dividends
|
288,802
|
|
Accretion of preferred stock
|
13,517
|
|
Total Series A redeemable convertible preferred stock, net at September 30, 2021
|
$
|
14,075,434
|
|
(13) Accumulated Other Comprehensive Loss
The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended September 30, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
|
|
Net Minimum
Pension Liability
|
|
Total
|
|
Accumulated other comprehensive income (loss) at July 1, 2021
|
|
$
|
(1,914,022)
|
|
|
$
|
7,719
|
|
|
$
|
(1,906,303)
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
11,144
|
|
|
—
|
|
|
11,144
|
|
|
Total other comprehensive income (loss)
|
|
11,144
|
|
|
—
|
|
|
11,144
|
|
|
Accumulated other comprehensive income (loss) at September 30, 2021
|
|
$
|
(1,902,878)
|
|
|
$
|
7,719
|
|
|
$
|
(1,895,159)
|
|
The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended September 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
|
|
Net Minimum
Pension Liability
|
|
Total
|
|
Accumulated other comprehensive income (loss) at July 1, 2020
|
|
$
|
(1,948,066)
|
|
|
$
|
33,566
|
|
|
$
|
(1,914,500)
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(24,234)
|
|
|
—
|
|
|
(24,234)
|
|
|
Total other comprehensive income (loss)
|
|
(24,234)
|
|
|
—
|
|
|
(24,234)
|
|
|
Accumulated other comprehensive income (loss) at September 30, 2020
|
|
$
|
(1,972,300)
|
|
|
$
|
33,566
|
|
|
$
|
(1,938,734)
|
|
The changes in Accumulated Other Comprehensive Loss, net of tax, for the nine months ended September 30, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
|
|
Net Minimum
Pension Liability
|
|
Total
|
|
Accumulated other comprehensive income (loss) at January 1, 2021
|
|
$
|
(1,995,680)
|
|
|
$
|
7,719
|
|
|
$
|
(1,987,961)
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
92,802
|
|
|
—
|
|
|
92,802
|
|
|
Total other comprehensive income (loss)
|
|
92,802
|
|
|
—
|
|
|
92,802
|
|
|
Accumulated other comprehensive income (loss) at September 30, 2021
|
|
$
|
(1,902,878)
|
|
|
$
|
7,719
|
|
|
$
|
(1,895,159)
|
|
The changes in Accumulated Other Comprehensive Loss, net of tax, for the nine months ended September 30, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
|
|
Net Minimum
Pension Liability
|
|
Total
|
|
Accumulated other comprehensive income (loss) at January 1, 2020
|
|
$
|
(1,926,826)
|
|
|
$
|
33,566
|
|
|
$
|
(1,893,260)
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(45,474)
|
|
|
—
|
|
|
(45,474)
|
|
|
Total other comprehensive income (loss)
|
|
(45,474)
|
|
|
—
|
|
|
(45,474)
|
|
|
Accumulated other comprehensive income (loss) at September 30, 2020
|
|
$
|
(1,972,300)
|
|
|
$
|
33,566
|
|
|
$
|
(1,938,734)
|
|
(14) Stockholders' Equity
Stock Repurchase Activity
During the three and nine months ended September 30, 2021 and 2020, the Company did not repurchase any shares of its common stock. As of September 30, 2021, the Company had the authorization under previous Board approved stock repurchase plans to repurchase 49,078 shares of its common stock based upon its judgment and market conditions.
Common Stock Offerings
On June 23, 2021, the Company issued and sold an aggregate of 811,750 shares of its common stock in a public offering underwritten by Roth, which included 86,750 shares purchased by Roth pursuant to the partial exercise of its over-allotment option. At a price of $4.10 per share, the Company received net proceeds of approximately $2.7 million after deducting the underwriting discount and offering expenses paid by the Company.
On July 27, 2021 the Company issued and sold an aggregate of 285,000 shares of its common stock in a public offering underwritten by Roth. At a price of $4.10 per share, the Company received net proceeds of approximately $0.9 million after deducting the underwriting discount and estimated offering expenses paid by the Company.
(15) Litigation
In view of the inherent difficulty of predicting the outcome of litigation, particularly where the claimants seek very large or indeterminate damages, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
In accordance with the authoritative guidance issued by the FASB on contingencies, the Company accrues anticipated costs of settlement, damages and losses for claims to the extent specific losses are probable and estimable. The Company records a receivable for insurance recoveries when such amounts are probable and collectable. In such cases, there may be an exposure to loss in excess of any amounts accrued. If, at the time of evaluation, the loss contingency related to a litigation is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable and, the Company will expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, the Company will accrue the minimum amount of the range.
The Company is subject to various legal proceedings and claims, asserted or unasserted, which arise in the ordinary course of business. While the outcome of any such matters cannot be predicted with certainty, such matters are not expected to have a material adverse effect on the Company’s financial condition or operating results.
Litigation Settlement with Datatech Enterprises, Inc.
The Company has been involved in litigation with Datatech Enterprises, Inc. ("Datatech") since April 27, 2015 when Falconstor commenced a lawsuit regarding a contractual dispute with Datatech. Falconstor recorded an accrual for a loss contingency in the amount of $0.8 million in the fiscal year ended 2015. On September 23, 2021, Falconstor and Datatech entered into a settlement agreement which resulted in Falconstor issuing payment of $0.2 million to Datatech and recording a gain of $0.6 million. Falconstor issued the payment in full on September 23, 2021. The matter is now fully concluded.
(16) Segment Reporting and Concentrations
The Company is organized in a single operating segment for purposes of making operating decisions and assessing performance. Revenue from the United States to customers in the following geographical areas for the three and nine months ended September 30, 2021 and 2020, and the location of long-lived assets as of September 30, 2021 and December 31, 2020, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
880,010
|
|
|
$
|
1,834,443
|
|
|
$
|
4,422,598
|
|
|
$
|
4,085,936
|
|
|
Europe, Middle East, Africa and Other
|
|
1,265,526
|
|
|
1,650,812
|
|
|
3,817,767
|
|
|
4,116,849
|
|
|
Asia Pacific
|
|
1,137,933
|
|
|
951,145
|
|
|
2,130,177
|
|
|
2,913,414
|
|
|
Total Revenue
|
|
$
|
3,283,469
|
|
|
$
|
4,436,400
|
|
|
$
|
10,370,542
|
|
|
$
|
11,116,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
Long-lived assets:
|
|
|
|
|
|
Americas
|
|
$
|
388,860
|
|
|
$
|
1,735,986
|
|
|
Europe, Middle East, Africa and Other
|
|
19,695
|
|
|
52,690
|
|
|
Asia Pacific
|
|
556,925
|
|
|
502,344
|
|
|
Total long-lived assets
|
|
$
|
965,480
|
|
|
$
|
2,291,020
|
|
For the three and nine months ended September 30, 2021, the Company had two customers that accounted for 10% or more of total revenue, respectively. For the three and nine months ended September 30, 2020, the Company had two customer that accounted for 10% or more of total revenue, respectively.
As of September 30, 2021, the Company had two customers that accounted for 10% or more of the gross accounts receivable balance. As of December 31, 2020, the Company had one customer that accounted for 10% or more of the gross accounts receivable balance.
(17) Restructuring Costs
In June 2017, the Board approved a comprehensive plan to increase operating performance (the “2017 Plan”). The 2017 Plan was substantially completed by the end of the Company’s fiscal year ended December 31, 2017, and when combined with previous workforce reductions in the second quarter of fiscal 2017 reduced the Company’s workforce to approximately 86 employees at December 31, 2018. In making these changes, the Company prioritized customer support and development while consolidating operations and streamlining direct sales resources, allowing the Company to focus on the install base and develop alternate channels to the market. As part of this consolidation effort, the Company vacated a portion of its former Melville, NY office space during the three months ended June 30, 2018. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the Company no longer intends to receive any economic benefit are accrued, net of any anticipated sublease income, when the Company ceases use of the leased space. During the nine months ended September 30, 2021, the Company incurred lease disposal-related costs for this property of $0.7 million. The Melville, NY lease which ended on April 30, 2021 with a gross annualized rental cost of $1.5 million, will not be replaced. The Company expects the remaining accrued severance-related costs of $141,340 at September 30, 2021 to be paid once final settlement litigation is completed, which is expected to occur by December 31, 2021.
In the third quarter of 2019, the Company adopted an expense control plan (the "2019 Plan") to better align the Company’s cost structure with the skills and resources required to more effectively execute the Company’s long-term growth strategy and to support revenue levels the Company expected to achieve on a go forward basis. In connection with the 2019 Plan, the Company eliminated 23 positions worldwide, implemented tighter expense controls, ceased non-core activities and downsized several facilities. During the three months ended March 31, 2020, the Company incurred $0.1 million in severance expense as a result of this action. The 2019 Plan was substantially completed as of March 31, 2020.
Given the commercial uncertainty caused by the novel coronavirus pandemic, or COVID-19, the Company developed and implemented an even more aggressive expense control plan in March 2020 (the "2020 Plan"). The 2020 Plan reduced the Company's annual cash expense run rate by $4.0 million or 29%. The Company furloughed 21 positions worldwide, and 20 of these positions were reinstated by December 31, 2020. During the nine months ended September 30, 2021, the Company has not yet incurred severance expense as a result of this action.
The following table summarizes the activity during 2020 and 2021 related to restructuring liabilities recorded in connection with the 2017, 2019 and 2020 Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Related Costs
|
|
Facility and Other Costs
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020
|
|
$
|
293,799
|
|
|
$
|
237,493
|
|
|
$
|
531,292
|
|
|
Additions (Reductions)
|
|
76,708
|
|
|
210,752
|
|
|
287,460
|
|
|
Utilized/Paid
|
|
(156,415)
|
|
|
(225,835)
|
|
|
(382,250)
|
|
|
Balance at March 31, 2020
|
|
$
|
214,092
|
|
|
$
|
222,410
|
|
|
$
|
436,502
|
|
|
Additions (Reductions)
|
|
—
|
|
|
153,685
|
|
|
153,685
|
|
|
Translation Adjustment
|
|
4,674
|
|
|
—
|
|
|
4,674
|
|
|
Utilized/Paid
|
|
—
|
|
|
(201,211)
|
|
|
(201,211)
|
|
|
Balance at June 30, 2020
|
|
$
|
218,766
|
|
|
$
|
174,884
|
|
|
$
|
393,650
|
|
|
Additions (Reductions)
|
|
—
|
|
|
317,595
|
|
|
317,595
|
|
|
Translation Adjustment
|
|
9,554
|
|
|
—
|
|
|
9,554
|
|
|
Utilized/Paid
|
|
—
|
|
|
(366,562)
|
|
|
(366,562)
|
|
|
Balance at September 30, 2020
|
|
$
|
228,320
|
|
|
$
|
125,917
|
|
|
$
|
354,237
|
|
|
Additions (Reductions)
|
|
—
|
|
|
274,086
|
|
|
274,086
|
|
|
Translation Adjustment
|
|
11,124
|
|
|
—
|
|
|
11,124
|
|
|
Utilized/Paid
|
|
—
|
|
|
(324,537)
|
|
|
(324,537)
|
|
|
Balance at December 31, 2020
|
|
$
|
239,444
|
|
|
$
|
75,466
|
|
|
$
|
314,910
|
|
|
Additions (Reductions)
|
|
—
|
|
|
302,313
|
|
|
302,313
|
|
|
Translation Adjustment
|
|
(10,393)
|
|
|
—
|
|
|
(10,393)
|
|
|
Utilized/Paid
|
|
—
|
|
|
(357,184)
|
|
|
(357,184)
|
|
|
Balance at March 31, 2021
|
|
$
|
229,051
|
|
|
$
|
20,595
|
|
|
$
|
249,646
|
|
|
Additions (Reductions)
|
|
—
|
|
|
421,737
|
|
|
421,737
|
|
|
Translation Adjustment
|
|
2,734
|
|
|
—
|
|
|
2,734
|
|
|
Utilized/Paid
|
|
(90,445)
|
|
|
(442,332)
|
|
|
(532,777)
|
|
|
Balance at June 30, 2021
|
|
$
|
141,340
|
|
|
$
|
—
|
|
|
$
|
141,340
|
|
|
Translation Adjustment
|
|
(3,429)
|
|
|
—
|
|
|
(3,429)
|
|
|
Balance at September 30, 2021
|
|
$
|
137,911
|
|
|
$
|
—
|
|
|
$
|
137,911
|
|
The severance and facility related liabilities are included within “accrued expenses” in the accompanying condensed consolidated balance sheets. The expenses under the 2017, 2019 and 2020 Plans are included within “restructuring costs” in the accompanying condensed consolidated statements of operations.