UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
(Mark One)


ý ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2022
or 
o ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:  000-23970
FALCONSTOR SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWAREDelaware77-0216135
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
2 Huntington Quadrangle
Melville, New York
501 Congress Avenue		11747Suite 150AustinTX78701
(Address of principal executive offices)(Zip Code)
631-777-5188
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

(631) 777-5188
Registrant’s telephone number, including area code

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filero
☐
Accelerated filero☐
Non-accelerated filero (Do not check if a smaller reporting company)
☒
Smaller reporting companyx☒
Emerging growth companyo
☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o☐ No ýo



The number of shares of common stock outstanding as of October 31, 2017May 4, 2022 was 44,563,490.

7,083,692.



FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
 
Page
34
34
Condensed Consolidated Balance Sheets at September 30, 2017March 31, 2022 (unaudited) and December 31, 20162021
34
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2022 and 20162021
45
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) Income for the three and nine months ended September 30, 2017March 31, 2022 and 20162021
56
Unaudited Condensed Consolidated Statements of Stockholders' Deficit for the three months ended March 31, 2022 and 2021
7
Unaudited Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2022 and 20162021
69
Notes to the Unaudited Condensed Consolidated Financial Statements
710
2728
3835
3935
4037
4037
4037
37
4137
37
4137
4238
4339




3

PART I.  FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30, 2017 December 31, 2016 March 31, 2022December 31, 2021
 (unaudited)   (unaudited) 
Assets    Assets  
Current assets:    Current assets:  
Cash and cash equivalents $1,751,310
 $3,391,528
Cash and cash equivalents$3,381,639 $3,181,209 
Accounts receivable, net of allowances of $419,416 and $260,676, respectively 2,198,718
 5,003,972
Accounts receivable, net of allowancesAccounts receivable, net of allowances825,598 2,855,135 
Prepaid expenses and other current assets 999,790
 1,245,085
Prepaid expenses and other current assets1,264,231 1,074,972 
Contract assetsContract assets426,264 209,936 
Inventory 6,181
 6,181
Inventory— 7,744 
Total current assets 4,955,999
 9,646,766
Total current assets5,897,732 7,328,996 
Property and equipment, net of accumulated depreciation of $18,479,643 and $18,580,547, respectively 753,849
 1,174,942
Deferred tax assets, net 577,934
 577,735
Property and equipment, netProperty and equipment, net128,203 153,904 
Operating lease right-of-use assets, netOperating lease right-of-use assets, net90,893 112,405 
Deferred tax assetsDeferred tax assets29,173 30,190 
Software development costs, net 338,022
 547,558
Software development costs, net41,056 42,695 
Other assets 1,038,504
 973,949
Other assets99,834 106,023 
Goodwill 4,150,339
 4,150,339
Goodwill4,150,339 4,150,339 
Other intangible assets, net 152,147
 209,456
Other intangible assets, net40,826 51,362 
Long-term contract assetsLong-term contract assets463,264 692,712 
Total assets $11,966,794
 $17,280,745
Total assets$10,941,320 $12,668,626 
Liabilities and Stockholders' Deficit  
  
Liabilities and Stockholders' Deficit  
Current liabilities:  
  
Current liabilities:  
Accounts payable $1,156,193
 $419,877
Accounts payable$638,632 $297,033 
Accrued expenses 4,114,109
 4,471,010
Accrued expenses801,815 1,099,257 
Deferred revenue, net 12,334,255
 15,236,123
Current portion of lease liabilitiesCurrent portion of lease liabilities74,349 76,940 
Deferred revenueDeferred revenue4,049,503 4,557,317 
Total current liabilities 17,604,557
 20,127,010
Total current liabilities5,564,299 6,030,547 
Other long-term liabilities 1,114,496
 1,170,844
Other long-term liabilities957,860 950,843 
Deferred tax liabilities, net 272,886
 254,776
Deferred revenue, net 6,453,820
 8,430,692
Notes payable, net of debt issuance costs and discountsNotes payable, net of debt issuance costs and discounts2,156,246 2,154,098 
Operating lease liabilities, net of current portionOperating lease liabilities, net of current portion16,544 35,465 
Deferred tax liabilitiesDeferred tax liabilities500,499 500,499 
Deferred revenue, net of current portionDeferred revenue, net of current portion1,395,179 1,578,769 
Total liabilities 25,445,759
 29,983,322
Total liabilities10,590,627 11,250,221 
Commitments and contingencies (Note 10) 

 

Series A redeemable convertible preferred stock, $.001 par value, 2,000,000 shares authorized, 900,000 shares issued and outstanding, redemption value of $9,000,000 9,000,000
 9,000,000
Commitments and contingencies (Note 11)Commitments and contingencies (Note 11)00
Series A redeemable convertible preferred stock, $0.001 par value, 2,000,000 shares authorized, 900,000 shares issued and outstanding, redemption value of $14,791,195Series A redeemable convertible preferred stock, $0.001 par value, 2,000,000 shares authorized, 900,000 shares issued and outstanding, redemption value of $14,791,19514,700,124 14,384,388 
Stockholders' deficit:  
  
Stockholders' deficit:  
Common stock - $.001 par value, 100,000,000 shares authorized, 60,091,560 and 59,482,989 shares issued, respectively and 44,563,490 and 43,954,919 shares outstanding, respectively 60,092
 59,483
Common stock - $0.001 par value, 30,000,000 shares authorized, 7,082,276 shares issued and outstandingCommon stock - $0.001 par value, 30,000,000 shares authorized, 7,082,276 shares issued and outstanding7,082 7,082 
Additional paid-in capital 168,712,266
 169,091,255
Additional paid-in capital112,042,061 112,349,613 
Accumulated deficit (132,305,514) (131,982,685)Accumulated deficit(124,572,044)(123,462,638)
Common stock held in treasury, at cost (15,528,070 and 15,528,070 shares, respectively) (57,032,917) (57,032,917)
Accumulated other comprehensive loss, net (1,912,892) (1,837,713)
Accumulated other comprehensive lossAccumulated other comprehensive loss(1,826,530)(1,860,040)
Total stockholders' deficit (22,478,965) (21,702,577)Total stockholders' deficit(14,349,431)(12,965,983)
Total liabilities and stockholders' deficit $11,966,794
 $17,280,745
Total liabilities and stockholders' deficit$10,941,320 $12,668,626 
See accompanying notes to unaudited condensed consolidated financial statements.

4


FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months Ended March 31,
 20222021
Revenue:  
Product revenue$594,928 $2,139,729 
Support and services revenue1,454,179 1,688,597 
Total revenue2,049,107 3,828,326 
Cost of revenue: 
Product20,719 222,834 
Support and service394,549 426,173 
Total cost of revenue415,268 649,007 
Gross profit1,633,839 3,179,319 
Operating expenses:  
Research and development costs705,981 659,940 
Selling and marketing1,189,846 1,396,640 
General and administrative849,939 837,867 
Restructuring costs744 302,313 
Total operating expenses2,746,510 3,196,760 
Operating income (loss)(1,112,671)(17,441)
Gain on debt extinguishment— 754,000 
Interest and other expense(117,995)(283,648)
Income (loss) before income taxes(1,230,666)452,911 
Income tax expense (benefit)(121,260)44,616 
Net income (loss)$(1,109,406)$408,295 
Less: Accrual of Series A redeemable convertible preferred stock dividends300,921 277,170 
Less: Accretion to redemption value of Series A redeemable convertible preferred stock14,815 197,114 
Net income (loss) attributable to common stockholders$(1,425,142)$(65,989)
Basic net income (loss) per share attributable to common stockholders$(0.20)$(0.01)
Diluted net income (loss) per share attributable to common stockholders$(0.20)$(0.01)
Weighted average basic shares outstanding7,082,276 5,949,463 
Weighted average diluted shares outstanding7,082,276 5,949,463 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Revenue:        
Product revenue $2,129,125
 $2,245,544
 $6,549,832
 $7,465,996
Support and services revenue 3,976,308
 5,081,266
 12,329,042
 15,361,096
Total revenue 6,105,433
 7,326,810
 18,878,874
 22,827,092
Cost of revenue:  
  
  
  
Product 118,880
 145,986
 669,564
 710,233
Support and service 1,115,703
 1,914,383
 3,788,282
 5,675,728
Total cost of revenue 1,234,583
 2,060,369
 4,457,846
 6,385,961
Gross profit $4,870,850
 $5,266,441
 $14,421,028
 $16,441,131
Operating expenses:  
  
  
  
Research and development costs 1,216,663
 2,514,822
 5,536,658
 9,475,678
Selling and marketing 1,128,850
 2,991,901
 5,288,991
 11,385,051
General and administrative 1,163,676
 1,561,335
 4,130,570
 5,100,739
Restructuring 76,705
 —
 (159,597) 177,389
Total operating expenses 3,585,894
 7,068,058
 14,796,622
 26,138,857
Operating income (loss) 1,284,956
 (1,801,617) (375,594) (9,697,726)
Interest and other (loss) income, net 134,321
 (90,037) 260,121
 265,397
Income (Loss) before income taxes 1,419,277
 (1,891,654) (115,473) (9,432,329)
Provision for (benefit from) income taxes (9,896) 84,519
 207,352
 375,338
Net income (loss) $1,429,173
 $(1,976,173) $(322,825) $(9,807,667)
Less: Accrual of Series A redeemable convertible preferred stock dividends 215,000
 194,012
 634,664
 581,986
Less: Accretion to redemption value of Series A redeemable convertible preferred stock —
 178,619
 —
 513,269
Net income (loss) attributable to common stockholders $1,214,173
 $(2,348,804) $(957,489) $(10,902,922)
Basic net income (loss) per share attributable to common stockholders $0.03
 $(0.05) $(0.02) $(0.25)
Diluted net income (loss) per share attributable to common stockholders $0.02
 $(0.05) $(0.02) $(0.25)
Weighted average basic shares outstanding 44,552,892
 43,488,448
 44,362,367
 42,847,038
Weighted average diluted shares outstanding 54,235,876
 43,488,448
 44,362,367
 42,847,038


See accompanying notes to unaudited condensed consolidated financial statements.




5

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

Three Months Ended March 31,
 20222021
Net income (loss)$(1,109,406)$408,295 
Other comprehensive income (loss), net of applicable taxes  
Foreign currency translation33,510 86,398 
Total other comprehensive income (loss), net of applicable taxes:33,510 86,398 
Total comprehensive income (loss)$(1,075,896)$494,693 
Less: Accrual of Series A redeemable convertible preferred stock dividends300,921 277,170 
Less: Accretion to redemption value of Series A redeemable convertible preferred stock14,815 197,114 
Total comprehensive income (loss) attributable to common stockholders$(1,391,632)$20,409 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Net income (loss) $1,429,173
 $(1,976,173) $(322,825) $(9,807,667)
Other comprehensive income (loss), net of applicable taxes:  
  
  
  
Foreign currency translation 104,917
 59,527
 (75,179) (502,049)
Net unrealized gain (loss) on marketable securities —
 (279) —
 3,477
Net minimum pension liability —
 3,874
 —
 7,728
Total other comprehensive income (loss), net of applicable taxes: 104,917
 63,122
 (75,179) (490,844)
Total comprehensive income (loss) $1,534,090
 $(1,913,051) $(398,004) $(10,298,511)
Less: Accrual of Series A redeemable convertible preferred stock dividends 215,000
 194,012
 634,664
 581,986
Less: Accretion to redemption value of Series A redeemable convertible preferred stock —
 178,619
 —
 513,269
Total comprehensive income (loss) attributable to common stockholders $1,319,090
 $(2,285,682) $(1,032,668) $(11,393,766)


See accompanying notes to unaudited condensed consolidated financial statements.




6

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
Common Stock OutstandingCommon StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Loss, NetTotal Stockholders' Deficit
Balance at January 1, 20227,082,276 $7,082 $112,349,613 $(123,462,638)$(1,860,040)$(12,965,983)
Net income (loss)(1,109,406)(1,109,406)
Share-based compensation to employees8,184 8,184 
Accretion of Series A redeemable convertible preferred stock(14,815)(14,815)
Dividends on Series A redeemable convertible preferred stock(300,921)(300,921)
Foreign currency translation33,510 33,510 
Balance at March 31, 20227,082,276 $7,082 $112,042,061 $(124,572,044)$(1,826,530)$(14,349,431)

See accompanying notes to unaudited condensed consolidated financial statements.
7

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
Common Stock OutstandingCommon StockAdditional Paid-In CapitalAccumulated DeficitAccumulated Other Comprehensive Loss, NetTotal Stockholders' Deficit
Balance at January 1, 20215,949,463 5,949 110,107,170 (123,665,970)(1,987,961)(15,540,812)
Net income (loss)408,295 408,295 
Share-based compensation to employees4,471 4,471 
Shares issued in connection with vesting of restricted stock00— — 
Accretion of Series A redeemable convertible preferred stock(197,114)(197,114)
Dividends on Series A redeemable convertible preferred stock(277,170)(277,170)
Foreign currency translation86,398 86,398 
Balance at March 31, 20215,949,463 $5,949 $109,637,357 $(123,257,675)$(1,901,563)$(15,515,932)

See accompanying notes to unaudited condensed consolidated financial statements.
8

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
  Nine Months Ended September 30,
  2017 2016
Cash flows from operating activities:    
Net loss $(322,825) $(9,807,667)
Adjustments to reconcile net loss to net cash used in operating activities:  
  
Depreciation and amortization 760,409
 1,041,762
Share-based payment compensation 241,992
 851,449
Non-cash professional services expenses 40,000
 1,540,713
Restructuring costs —
 177,389
Payment of restructuring costs —
 (63,714)
Loss on disposal of fixed assets 63,774
 —
Provision for returns and doubtful accounts 99,312
 41,970
Deferred income taxes 35,831
 (273,648)
Changes in operating assets and liabilities:  
  
Accounts receivable 2,820,410
 3,170,149
Prepaid expenses and other current assets 287,844
 425,663
Inventory —
 64,353
Other assets (371,543) 32,587
Accounts payable 710,509
 (271,992)
Accrued expenses and other long-term liabilities (940,641) (1,539,956)
Deferred revenue (4,976,493) (2,517,096)
Net cash used in operating activities (1,551,421) (7,128,038)
Cash flows from investing activities:  
  
Sales of marketable securities —
 7,066,000
Purchases of marketable securities —
 (150,000)
Purchases of property and equipment (9,686) (132,268)
Security deposits (35,028) 82,633
Purchase of intangible assets (63,999) (93,167)
Net cash (used in) provided by investing activities (108,713) 6,773,198
Cash flows from financing activities:  
  
Payments for tax withholding for share-based compensation (25,710) —
Net cash used in financing activities (25,710) —
Effect of exchange rate changes on cash and cash equivalents 45,626
 (14,932)
Net decrease in cash and cash equivalents (1,640,218) (369,772)
Cash and cash equivalents, beginning of period 3,391,528
 6,013,382
Cash and cash equivalents, end of period $1,751,310
 $5,643,610
Supplemental disclosures:  
  
Cash paid for income taxes, net $207,399
 $549,289
Non-cash investing and financing activities:  
  
Undistributed Series A redeemable convertible preferred stock dividends $634,664
 $194,012
Series A redeemable convertible preferred stock dividend payment $—
 $576,779
The Company did not pay any interest for the nine months ended September 30, 2017 and 2016.
 Three Months Ended March 31,
 20222021
Cash flows from operating activities:  
Net income (loss)$(1,109,406)$408,295 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:  
Depreciation and amortization35,519 57,486 
Amortization of debt discount on notes payable2,148 75,705 
Amortization of right of use assets21,512 333,777 
Gain on debt extinguishment— (754,000)
Share-based payment compensation8,184 4,471 
Provision for (recovery of) returns and doubtful accounts(18,740)— 
Deferred income taxes (benefit)— 7,878 
Changes in operating assets and liabilities:  
Accounts receivable2,044,122 (129,714)
Prepaid expenses and other current assets(222,019)(250,034)
Contract assets13,120 30,179 
Inventory7,667 — 
Other assets5,437 (1,031)
Accounts payable389,847 536,721 
Accrued expenses and other long-term liabilities(259,405)131,288 
Operating lease liabilities(21,512)(429,112)
Deferred revenue(682,055)115,750 
Net cash provided by (used in) operating activities214,419 137,659 
Cash flows from investing activities:  
Purchases of property and equipment— (41,121)
Security deposits— 1,588 
Net cash provided by (used in) investing activities— (39,533)
Cash flows from financing activities:  
Net cash provided by (used in) financing activities— — 
Effect of exchange rate changes on cash and cash equivalents(13,989)2,207 
Net increase (decrease) in cash and cash equivalents200,430 100,333 
Cash and cash equivalents, beginning of period3,181,209 1,920,656 
Cash and cash equivalents, end of period$3,381,639 $2,020,989 
Supplemental disclosures:  
Cash paid for interest$21,554 $75,816 
Non-cash investing and financing activities:  
Undistributed Series A redeemable convertible preferred stock dividends$300,921 $277,170 
Accretion of Series A redeemable convertible preferred stock$14,815 $197,114 
See accompanying notes to unaudited condensed consolidated financial statements.

9


FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements


(1) Basis of Presentation


(a)  The Company and Nature of Operations
 
FalconStor Software, Inc., a Delaware Corporation (thecorporation ("we", the "Company" or "FalconStor"), is a leading storage software company offering a convergedthe trusted data services software platform that is hardware agnostic.protection leader modernizing disaster recovery and backup for the hybrid cloud world. The Company develops, manufacturesenables enterprise customers and sellsmanaged service providers to secure, migrate, and protect their data migration, business continuity, disaster recovery, optimized backupwhile reducing data storage and de-duplication solutionslong-term retention costs. More than 1,000 organizations and providesmanaged service providers worldwide standardize on FalconStor as the related maintenance, implementation and engineering services.foundation for their cloud first data protection future.


(b) Going ConcernLiquidity


A fundamental principleAs of the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement,March 31, 2022, the Company has prepared its consolidated financial statements on a going concern basis.

The Company has incurred significant operating losses in the previous eight years and negative cash flow from operations in five of the previous eight years. The Company currently hashad a working capital deficiencysurplus of $12.6$0.3 million, which is inclusive of current deferred revenue of $12.3$4.0 million, and a stockholders' deficit of $22.5$14.3 million. During the ninethree months ended September 30, 2017,March 31, 2022, the Company incurred ahad net loss of $0.3$1.1 million and positive cash flow used infrom operations of $1.6$0.2 million. The Company's total cash balance at September 30, 2017March 31, 2022 was $1.8$3.4 million, a decreasean increase of $1.6$0.2 million as compared to $3.2 million on December 31, 2016. In addition2021.

The Company’s principal sources of liquidity at March 31, 2022 consisted of cash and future cash anticipated to these financial metrics,be generated from operations. The Company generated negative net income yet positive cash flows from operations during the three months ended March 31, 2022, and it reported positive working capital as of March 31, 2022.

The Company is currently a party to an Amended and Restated Term Loan Credit Agreement, dated as of February 23, 2018, as amended December 31, 2016,27, 2019, by and between the Company was not in complianceand HCP-FVA, LLC (“HCP-FVA”), (the “Amended and Restated Loan Agreement”). In connection with the financial covenantsthen-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 "June 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, which were mutually agreed to annually, for two consecutive quarters. This breach providesRedeemable Convertible Preferred Stock, the holdereffective date of the Series A redeemable convertible preferred stock with themandatory redemption right to require the Company to redeem any of the Series A redeemable convertible preferred stock at the greater of 100% of the stated value plus accrued and unpaid dividends or the product of the number of shares of common stock underlying the Series A redeemable convertible preferred stock and the closing price of the Company's common stock as of December 31, 2016. To date, the holder of the Series A redeemable convertible preferred stock has neither exercised nor waived this right and accordingly this right may be exercised at any time. In addition, as of August 5, 2017, the holder of the Series A redeemable convertible preferred stock has the right to request a redemption of the Series A redeemable convertible preferred stock. If the holders request that the Series A redeemable convertible preferred stock be redeemed, the Company may not have sufficient liquidity or sufficient surplus as such term is defined under the Delaware General Business Corporation Law ("DGCL") to undertake the redemption. If the Company does not redeem the Series A redeemable convertible preferred stock, the holder of the Series A redeemable convertible preferred stock can pursue other remedies. Refer to Note (11) Series A Redeemable Convertible Preferred Stock for further discussion regarding these other remedies. As further described below,(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 Company's reduced cash balanceCertificate of Designations, dated as of June 24, 2021.The amendment was approved by our shareholders at our 2021 annual meeting of stockholders and history of losses both in and of itself, and in combinationfiled with the redemption rightsDelaware Secretary of State on June 25, 2021. If such Series A Preferred Stock was redeemed at March 31, 2022, the Company would have been required to pay the holders of the Series A redeemable convertible preferred stock, raise substantial doubt about Preferred Stock $14.8 million.

As discussed in Note (17) Restructuring Costs the Company's abilityMelville, 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 continue as a going concern withinmore 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 after November 20, 2017 (thefrom the date that thesethe consolidated financial statements were issued). issued.


The Company's ability to continue as a going concern, including(c) Revision of Previously Issued Financial Statements

Adjustment in the event of a redemption request by the holder, depends on its ability to execute its business plan, increase revenue and billings and reduce expenditures. During 2016, the Company continued to focus on aligning its expense structure with revenue expectations which included tighter expense controls and overall operational efficiencies which better align the Company's current business plan on a run-rate basis. These efficiencies include among other items, stream-lined personnel related costs and global overhead costs and efficiencies realized on the Company's redesigned go-to-market coverage models. In June 2017, the Company's Board of Directors, approved a comprehensive plan to increase operating performance (the “2017 Plan”). The 2017 Plan will result in a realignment and reduction in workforce. The 2017 Plan was substantially completed as of June 30, 2017. These actions are anticipated to result in an annualized cost savings of approximately $10.0 million. In connectionConnection with the 2017 Plan,Adoption of ASC 606, Revenue from Contracts with Customers
During the Company incurred severance expense of $1.0 million. In making these changes, the Company prioritized customer support and development while consolidating operations and cutting direct sales resources, therefore allowing the Company to focus on its install base and develop more efficient market channels. The Company's worldwide headcount was 83 employees as of September 30, 2017, compared with 166 and 226 employees as of December 31, 2016 and 2015, respectively.







Although, the Company was able to reduce its operating expenses from the previous year, the Company's bookings, billings and revenue continued to decline which negatively impacts the Company's ability to continue as a going concern. As previously disclosed in the Company’s public filings, the Company’s failure to generate sufficient revenue, billing control or further reduce expenditures and/or the inability to obtain financing will result in an inability of the Company to continue as a going concern. While the Company was able to reduce expenditures and hence generated net income for the three months ended September 30, 2017 and the Company’s cash and cash equivalents increased slightly between June 30, 2017 and September 30, 2017, the Company’s revenues continued to decrease for such period both in comparison to the comparable period in the fiscal year ended December 31, 2016 as well as compared2021, the Company identified an immaterial accounting error related to the three months ended June 30, 2017. In addition, subsequentbeginning balance adjustment to September 30, 2017, the Company’s cashdeferred revenue and cash equivalents has significantly decreased. Accordingly, to ensure that the Company could meet its operating cash flow needs and continue as a going concern, the Company entered into a short term secured loan in the principal amount of $500,000 (the “Short-Term Loan”) with HCP-FVA, LLC, an affiliate of Hale Capital Partners, LP (together “Hale Capital”) and secured a commitment (the “Commitment”) from Hale Capital to purchase up to $3 million of units from the Company (inclusive of units issued in satisfaction of the Company’s obligations under the Short-Term Loan). The Company has received the Short-Term Loan. The Company’s ability to continue as a going concern will depend on whether it receives the balance of the funds from the Commitment as well as its ability to increase revenues and/or further reduce expenditures of which there can be no assurance. The issuance of warrantsaccumulated deficit in connection with the Short Term Loanadoption of ASC 606, Revenue from Contracts with Customers. There was no impact of the correction on the previously issued consolidated statement of operations or on the consolidated statements of cash flows for the year ended December 31, 2020.
The Company assessed the materiality of this error on prior period financial statements in accordance with the SEC Staff Accounting Bulletin Number 99, Materiality, and Commitment will haveASC 250-10, Accounting Changes and Error Corrections. The Company determined that this error was not material to the financial statements of any prior annual or interim period.
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Embedded Derivative Liability Fair Value Adjustment
During the year ended December 31, 2021, the Company identified an immaterial accounting error related to the fair value adjustments recorded to the embedded derivative liability associated with the Company's Series A Preferred Stock. The redemption feature of the embedded derivative may require cash payment of face value of preferred stock plus the value of accrued but unpaid dividends converted to common stock at a substantial dilutive effectspecified conversion rate at the date of occurrence of a specified breach event. The company recorded the fair value of the liability based on the face value of the preferred stock but not on accrued and unpaid dividends. This error resulted in an understatement of other long-term liabilities and an understatement of interest and other expense in the financial statements included in the Company’s quarterly reports on Form 10-Q and the Company’s annual reports on Form 10-K previously filed with the SEC. The Company assessed the materiality of this error on prior period financial statements in accordance with the SEC Staff Accounting Bulletin Number 99, Materiality, and ASC 250-10, Accounting Changes and Error Corrections. The Company determined that this error was not material to the financial statements of any prior annual or interim period.
To correct the misstatements above, the Company revised its previously issued financial statements as follows:
For the Three Months Ended March 31, 2021
CONSOLIDATED STATEMENT OF OPERATIONSAs Previously ReportedAdjustmentsAs Revised
Interest and other expense$(266,695)$(16,953)$(283,648)
Income (loss) before income taxes$469,864 $(16,953)$452,911 
Net income (loss)$425,248 $(16,953)$408,295 
Net income (loss) attributable to common stockholders$(49,036)$(16,953)$(65,989)
Basic net income (loss) per share attributable to common stockholders$(0.01)$— $(0.01)
Diluted net income (loss) per share attributable to common stockholders$(0.01)$— $(0.01)
For the Three Months Ended March 31, 2021
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)As Previously ReportedAdjustmentsAs Revised
Net income (loss)$425,248 $(16,953)$408,295 
Total comprehensive income (loss)$511,646 $(16,953)$494,693 
Total comprehensive income (loss) attributable to common stockholders$37,362 $(16,953)$20,409 
Total Stockholders' Deficit
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICITAs Previously ReportedAdjustmentsAs Revised
Balance at January 1, 2021$(14,608,186)$(932,626)$(15,540,812)
Net income (loss)$425,248 $(16,953)$408,295 
Balance at March 31, 2021$(14,566,353)$(949,579)$(15,515,932)
For the Three Months Ended March 31, 2021
CONSOLIDATED STATEMENT OF CASH FLOWSAs Previously ReportedAdjustmentsAs Revised
Cash flows from operating activities:
Net income (loss)$425,248 $(16,953)$408,295 
Changes in operating assets and liabilities:
Accrued expenses and other long-term liabilities$114,335 $16,953 $131,288 
Net cash provided by (used in) operating activities$137,659 $— $137,659 


(d) Impact of the COVID-19 Pandemic
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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 stockholders. Please see “Note 17 - Subsequent Event”customers and “Item 5. - Other Information” for more information on the Short-Term Loanpartners 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 Commitment.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.

ToFurther, 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 Company incurs lossesduration and or is unable to receive the balancespread of the funds fromoutbreak, its severity, the Commitment,actions taken by governments and authorities to contain the Company will needvirus or treat its impact, and how quickly and to seek additional financingwhat extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to continueexperience materially adverse impacts to our business as a going concern and there can be no assurance that the Company will be able to obtain financing or that such financing will be on favorable terms. Similar to the Short Term Loan and the Commitment any such financing could be dilutive to our shareholders. Failure to generate sufficient revenue, billings, control or further reduce expenditures and/or the inability to obtain financing will result in an inability of the Company to continueits global economic impact, including as a going concern.result of any recession that may occur.


(c)(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.
 
(d)(e)  Use of Estimates
 
The preparation of financial statements in conformity with GAAPaccounting 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, share-based payment compensation, valuation of derivatives, capitalizable software development costs, valuation of goodwill and other intangible assets 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.
 
(e)(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 present fairly state the financial position of the Company at September 30, 2017,March 31, 2022, and the results of its operations for the three and nine months ended September 30, 2017March 31, 2022 and 2016.2021. 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, 20162021 ("20162021 Form 10-K").


(f)
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(g)  Recently AdoptedIssued Accounting Pronouncements


In March 2016,August 2020, the Financial Accounting Standards Board, ("FASB")or FASB, issued new guidance on accounting for employee share-based payment awards to simplifyASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which reduces the accounting related to several aspectsnumber of accounting models for share-based payment transactions,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 income tax consequencesinterim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of share-based payment transactions, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flows. The Company adopted this guidance as of January 1, 2017. In accordance with this new guidance the Company has made an entity-wide accounting policy election to account for forfeitures when they occur. As a resultadoption of this election, the Company recognized additional stock-based compensation expense of approximately $0.1 million in the first quarter of 2017 to adjust for actual forfeituresstandard on historical share-based payment awards.our consolidated financial statements.


In January 2017,June 2016, the FASB issued new guidance on accountingASU 2016-13, "Financial Instruments – Credit Losses (together with all subsequent amendments, ("Topic 326"))", which replaced the previous U.S. GAAP that required an incurred loss methodology for goodwill to simplifyrecognizing credit losses and delayed recognition until it was probable a loss had been incurred. Topic 326 replaced the goodwill impairment test by eliminating Step 2 of the goodwill impairment test. This new guidance also eliminates the requirements for any reporting unitincurred loss methodology with a zero or negative carrying amountmethodology that reflects expected credit losses and requires consideration of reasonable and supportable information to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The new standard isestimate credit losses. This provision was effective for the annual periodfiscal years beginning after December 15, 2019, including interim reporting periods within that period, which for the Company is the annual period ending December 31, 2020. Earlythose fiscal years, with early adoption is permitted. The Company elected to adopt this guidance as of January 1, 2017, prospectively for impairment tests performed subsequent to January 1, 2017. The Company's single reporting unit for purposes of its goodwill impairment test had a negative carrying value and thus the Company determined there was no impairment of goodwill. During 2017 there have been no triggering events that would require a goodwill impairment test to be performed prior to the Company's annual goodwill impairment test. The adoption of this guidance did not have an impact on the Company's financial statements and related disclosures.

(g)  Recently Issued Accounting Pronouncements

In May 2017,February 2020, the FASB issued new guidance on stock-based compensation to provide clarityASU 2020-02, "Financial Instruments—Credit Losses (Topic 326) and reduce both (1) diversity in practice and (2) cost and complexity when applying the stock-based compensation guidance to a change to the terms or conditions of a share-based payment award. The amendments in this update provide guidance aboutLeases (Topic 842)", which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This new guidance requires application on a prospective basis. This update is effective for public entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted, which for the Company will be the annual period ending December 31, 2018. The Company has not yet adopted this guidance and currently does not expect the adoption of the new guidance by the Company to have a significant impact on the Company's financial statements and related disclosures.

In March 2017, the FASB issued new guidance on retirement benefits, which requires employers to disaggregate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The standard requires employers to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) separately and outside a subtotal of operating income. The income statement guidance requires application on a retrospective basis. This update is effective for public entities for annual periods beginning after December 15, 2017, including interim periods, with early adoption permitted, which for the Company will be the annual period ending December 31, 2018. The Company has not yet adopted this guidance and currently does not expect the adoption of the new guidance by the Company to have a significant impact on the Company's financial statements and related disclosures.

In August 2016, the FASB issued new guidance on presentation and classification of eight specific items within the statement of cash flows, including (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation todelayed the effective interest ratedate of the borrowing, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. This update is effectiveTopic 326 for annualsmaller reporting periods, and interim periods therein, beginning after December 15, 2017, which for the Company will be the annual period ending December 31, 2018. Early adoption, including adoption in an interim period, is permitted. The Company has not yet adopted this guidance and currently does not expect the adoption of the new guidance to have a significant impact on the Company's financial statements and related disclosures.



In February 2016, the FASB issued new guidance on leases to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This new guidance will replace existing guidance on leases in accounting principles generally accepted in the United States when it becomes effective. The new standard is effective for the annual period beginning after December 15, 2018, including interim reporting periods within that period, which for the Company will be the annual period ending December 31, 2019. Early application is permitted. The standard requires the use of a modified retrospective transition method; however, certain optional practical expedients may be applied. The Company's preliminary analysis indicates that the Company will recognize a liability for remaining lease payments and a right-of-use asset related to the Company's operating lease covering its corporate office facility that expires in April 2021. Currently the Company's additional operating leases related to offices in foreign countries are set to expire prior to adoption of the new guidance. The Company is in the initial stages of evaluating the effect of the standard on the Company's financial statements.

In January 2016, the FASB issued new guidance on the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. The standard (i) requires an entity to measure equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring an entity to perform a qualitative assessment to identify impairment, (iii) changes certain presentation and disclosure requirements related to financial assets and financial liabilities, and (iv) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The amendments in this update are effective for fiscal years, and interim periods within thosecompanies until fiscal years beginning after December 15, 2017, which for2022. We are currently evaluating the Company will be the annual period ending December 31, 2018. Early adoption, including adoption in an interim period, is not permitted except for certain amendments in this update. The Company has not yet adopted this guidance and currently does not expectimpact of the adoption of the new guidance by the Company to have a significant impactthis standard on the Company's financial statements and related disclosures.

In May 2014, the FASB issued new guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance will replace most existing revenue recognition guidance in GAAP in the United States when it becomes effective. The new standard is effective for the annual period beginning after December 15, 2017, including interim reporting periods within that period, which for the Company will be the annual period ending December 31, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that this new guidance will have on itsour consolidated financial statements and related disclosures. The Company has formed an implementation team to evaluate the standard's effect on the Company's financial statements. The Company has historically deferred revenue for certain deliverables in its multiple-element arrangements due to a lack of vendor-specific objective evidence (“VSOE”) for purposes of the allocation of the transaction consideration. The Company performed a preliminary analysis, which indicated that the Company will recognize revenue for these arrangements earlier under the new standard than under the existing guidance due to the elimination of the VSOE requirement. The Company has not yet determined what other impact may result from application of the new standard. The Company will use the cumulative effect transition method upon adoption of this guidance. The Company has not progressed beyond the initial stages of evaluating the effect of the standard on the Company's financial statements and currently has concerns about its ability to timely adopt this standard due to its current status and resources.


(2) Summary of Significant Accounting Policies


The Company's significant accounting policies were described in Note (1) "SummarySummary of Significant Accounting Policies"Policies of the 20162021 Form 10-K. The Company's revenue recognition accounting policy is included below for reference. There have been no significant changes in the Company's significant accounting policies since December 31, 2016, other than those noted below in (b) and (c).2021. For a description of the Company's other significant accounting policies refer to the 20162021 Form 10-K.


(a) Revenue Recognitionfrom 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 derivesrecords 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 revenue from sales of its products,right to payment is conditioned upon providing product support and services. Productservices in future years.

    As of March 31, 2022 and December 31, 2021, accounts receivable, net of allowance for doubtful accounts, was $0.8 million and $2.9 million, respectively. As of March 31, 2022 and December 31, 2021, short and long-term contract assets, net of allowance for doubtful accounts, was $0.9 million and $0.9 million, respectively. As of March 31, 2022 and December 31, 2021, allowance for doubtful accounts was $64,833 and $85,816, respectively.

    Deferred revenue consistsis 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
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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:
Three Months Ended March 31, 2022
Balance at January 1, 2022$6,136,086 
   Deferral of revenue1,355,454 
   Recognition of revenue(2,049,107)
   Change in reserves2,249 
Balance at March 31, 2022$5,444,682 

    During the three months ended March 31, 2022 and 2021, revenue of $1.4 million and $1.5 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 $5.4 million as of March 31, 2022, of which the Company expects to recognize approximately 74% of such amount as revenue over the next 12 months and the remainder thereafter.

    Approximately $1.6 million of revenue is expected to be recognized from remaining performance obligations for unbilled support and services as of March 31, 2022. We expect to recognize revenue on approximately 41% 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 software integratedinvoicing terms is to provide customers with industry standard hardwaresimplified and sold as complete turn-key integrated solutions, as stand-alone software applicationspredictable ways of purchasing its products and services, not to receive financing from our customers or sold onto provide customers with financing. Examples include invoicing at the beginning of a subscription or consumption basis. Depending on the nature of the arrangementterm with maintenance and support revenue related to turn-key solutions and stand-alone software applications are generally recognized upon shipment and delivery of license keys. For certain arrangements revenue is recognized based on usage or ratably over the term of the arrangement. Supportcontract 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 revenue consists of both maintenance revenues and professional services revenues. Revenue is recorded net of applicable sales taxes.


In accordance with the authoritative guidance issued by the FASB on revenue recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has occurred, and collection of the resulting receivable is deemed probable. Products delivered to a customer on a trial basiscustomer. Determining whether products and services are not recognized as revenue until the trial period has ended and acceptance has occurred by the customer. Reseller and distributor customers typically send the Company a purchase order when they have an end user identified. For bundled arrangementsconsidered distinct performance obligations that include either maintenance or both maintenance and professional services, the Company uses the residual methodshould be accounted for separately versus together may require significant judgment.
    Judgment is required to determine the amount of product revenue to be recognized. Understandalone selling price (“SSP”) for each distinct performance obligation. For products and services aside from maintenance and support, the residual method, considerationCompany estimates SSP by adjusting the list price by historical discount percentages. SSP for software and hardware maintenance and support fees is allocated tobased on the undelivered elements based upon VSOEstated percentages of the fair value of those elements, withfees charged for the residual of the arrangement fee allocated torespective products.
    The Company’s perpetual and recognized as product revenue. If VSOE does not exist for all undelivered elements of an arrangement, the Company recognizes total revenue from the arrangement ratably over the term of the maintenance agreement. The Company's long-term portion of deferred revenue consists of (i) payments received for maintenance contracts with terms in excess of one year as of the balance sheet date,software licenses have significant standalone functionality and (ii) payments received for product sales bundled with multiple years of maintenance but for which VSOE did not exist for all undelivered elements of the arrangement. The Company provides an allowance for product returns as a reduction of revenue, based upon historical experience and known or expected trends.

When more than one element, such as hardware, software and services are contained in a single arrangement, the Company will first allocate revenue based upon the relative selling price into two categories: (1) non-software components, such as hardware and any hardware-related items, as required system software that functions with the hardware to deliver the essential functionality of the hardware and related post-contract customer support, and software as service subscriptions and (2) software components and applications, such as post-contract customer support and other services. The Company will then allocate revenue within the non-software category to each element based upon their relative selling price using a hierarchy of VSOE, third-party evidence of selling price (“TPE”) or estimated selling prices (“ESP”), if VSOE or TPE does not exist. The Company will allocate revenue within the software category to the undelivered elements based upon their fair value using VSOE with the residualtherefore revenue allocated to the delivered elements. If the Company cannot objectively determine the VSOEthese performance obligations are recognized at a point in time upon electronic delivery of the fair value of any undelivered software element,download link and the Company will defer revenue for all software components until all elementslicense keys.
    Product maintenance and support services are delivered and services have been performed, until fair value can objectively be determined for any remaining undelivered elements, or until software maintenance issatisfied over time as they are stand-ready obligations throughout the only undelivered element which the Company does not have VSOE for, in which case revenue is recognized over the maintenance term for all software elements.

Revenuessupport 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 software implementation and software engineeringprofessional services are recognized whenat a point in time upon customer acceptance.
Disaggregation of Revenue
    Please refer to the services are performed. Costs of providing these services are included in cost of support and services.
The Company has entered into various distribution, licensing and joint promotion agreements with OEMs, whereby the Company has provided the OEM a non-exclusive software license to install the Company’s software on certain hardware or to resell the Company’s software in exchange for payments based on the products distributed by these OEMs. Such payments from the OEM or distributor are recognized as revenue in the period reported by the OEM.

From time to time the Company will enter into funded software development arrangements. Under such arrangements, revenue recognition will not commence until final delivery and/or acceptance of the product. For arrangements where the Company has VSOE for the undelivered elements, the Company will follow the residual method and recognize product revenue upon final delivery and/or acceptance of the product. For arrangements where the Company does not have VSOE for the undelivered elements, the Company will recognize the entire arrangement fee ratably commencing at the time of final delivery and/or acceptance through the end of the service period in the arrangement. Certain arrangements, for which VSOE of fair value for the undelivered maintenance elements cannot be established, are accounted for as a single unit of account. The revenue recognized from single units of accounting are typically allocated and classified on thecondensed consolidated statements of operations asand 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 support and services revenue. Since VSOE cannot be established, VSOE of similar maintenance offerings provides the basiscash flows are affected by economic factors.
14


Assets Recognized from Costs to Obtain a Contract with a Customer

    The Company recognizes an asset for the supportincremental 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 services revenue classification,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 remaining residual consideration provides the basisamortization 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 product revenue classification.



(b) Share-Based Payments

The Company accounts for share-basedlease term and lease liability obligations represent our obligation to make lease payments in accordance witharising from the authoritative guidance issued by the FASB on share-based compensation, which establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under the provisions of the authoritative guidance, share-based compensation expense is measuredlease. ROU assets and liabilities are recognized at the grantcommencement date based on the fairpresent value of lease payments over the award,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 as an expense over the requisite employee service period (generally the vesting period), net of actual forfeitures. For share-based payment awards that contain performance criteria share-based compensation, expense is recorded when the achievement of the performance condition is considered probable of achievement and is recorded on a straight-line basis over the requisite service period. If such performance criteria are not met, no compensation cost is recognizedlease term.

Right of Use Assets and any recognized compensation cost is reversed. The Company estimates the fair value of share-based payments using the Black-Scholes option-pricing model or the Monte Carlo simulation model if a market condition exists. Share-based compensation expenseLiabilities

    We have various operating leases for a share-based payment award with a market condition is recorded on a straight-line basis over the longer of the explicit service period or the service period derived from the Monte Carlo simulation. Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value. All share-based awardsoffice facilities that are expected to be fulfilled with new sharescontinue through 2023. Below is a summary of common stock.our ROU assets and liabilities as of March 31, 2022.


(c)Right of use assetsGoodwill and Other Intangible Assets$90,893 
Lease liability obligations, current74,349 
Lease liability obligations, less current portion16,544 
Total lease liability obligations$90,893 
Weighted-average remaining lease term1.25
Weighted-average discount rate3.35 %

Goodwill represents
Three Months Ended March 31,
20222021
Components of lease expense:
   Operating lease cost$32,094 $414,351 
   Sublease income— (75,314)
Net lease cost$32,094 $339,037 

    During the excess of the purchase pricethree months ended March 31, 2022 and 2021, operating cash flows from operating leases were approximately $19,249 and $354,968, respectively.

Approximate future minimum lease payments for our ROU assets over the estimated fair valueremaining lease periods as of net tangible and identifiable intangible assets acquired in business combinations. The Company has not amortized goodwill related to its acquisitions, but instead tests the balance for impairment. The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. The Company tests goodwill for impairment by comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value, the computed difference represents the amount of impairment. The Company's single reporting unit for purposes of its goodwill impairment test has a negative carrying value and thus the Company has determined there was no impairment of goodwill. During the second and third quarters of 2017, there were no triggering events that would require a goodwill impairment test to be performed prior to the Company's annual goodwill impairment test.March 31, 2022, are as follows:
15

202257,747 
202338,498 
Total minimum lease payments96,245 
Less interest5,352 
Present value of lease liabilities90,893 

(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, warrantsand the Series A redeemable convertible preferred stockPreferred 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, 2017March 31, 2022 and 2016:2021:
 Three Months Ended March 31,
20222021
Stock options5,690 9,780 
Restricted stock86,520 93,612 
Series A redeemable convertible preferred stock144,321 132,930 
Total anti-dilutive common stock equivalents236,531 236,322 
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Stock options and restricted stock 2,309,950
 6,677,895
 2,786,418
 6,677,895
Series A redeemable convertible preferred stock 8,781,516
 8,781,516
 8,781,516
 8,781,516
Total anti-dilutive common stock equivalents 11,091,466
 15,459,411
 11,567,934
 15,459,411




The following represents a reconciliation of the numerators and denominators of the basic and diluted EPS computation:  
  Three Months Ended September 30, Nine Months Ended September 30,

 2017 2016 2017 2016
Numerator        
Net income (loss) $1,429,173
 $(1,976,173) $(322,825) $(9,807,667)
Effects of Series A redeemable convertible preferred stock:  
  
  
  
Less: Series A redeemable convertible preferred stock dividends 215,000
 194,012
 634,664
 581,986
Less: Accretion to redemption value of Series A redeemable convertible preferred stock —
 178,619
 —
 513,269
Net income (loss) attributable to common stockholders $1,214,173
 $(2,348,804) $(957,489) $(10,902,922)
Denominator  
  
  
  
Weighted average basic shares outstanding 44,552,892
 43,488,448
 44,362,367
 42,847,038
Effect of dilutive securities:  
  
  
  
Stock options and restricted stock 901,468
 —
 —
 —
Series A redeemable convertible preferred stock 8,781,516
 —
 —
 —
Weighted average diluted shares outstanding 54,235,876
 43,488,448
 44,362,367
 42,847,038
EPS  
  
  
  
Basic net income (loss) per share attributable to common stockholders $0.03
 $(0.05) $(0.02) $(0.25)
Diluted net income (loss) per share attributable to common stockholders $0.02
 $(0.05) $(0.02) $(0.25)

(4) Property and Equipment


The gross carrying amount and accumulated depreciation of property and equipment as of September 30, 2017March 31, 2022 and December 31, 20162021 are as follows:
March 31, 2022December 31, 2021
Gross carrying amount$15,530,663 $15,544,212 
Accumulated depreciation(15,402,460)(15,390,308)
Property and Equipment, net$128,203 $153,904 
  September 30, 2017 December 31, 2016
Property and Equipment:    
Gross carrying amount $19,233,492
 $19,755,489
Accumulated depreciation (18,479,643) (18,580,547)
Property and Equipment, net $753,849
 $1,174,942


For the three months ended September 30, 2017March 31, 2022 and 2016,2021, depreciation expense was $107,812$23,344 and $154,948, respectively. For the nine months ended September 30, 2017 and 2016, depreciation expense was $429,566 and $560,324,$39,765, respectively.


(5) Software Development Costs


The gross carrying amount and accumulated amortization of software development costs as of September 30, 2017March 31, 2022 and December 31, 20162021 are as follows:
March 31, 2022December 31, 2021
Gross carrying amount$2,980,132 $2,980,132 
Accumulated amortization(2,939,076)(2,937,437)
Software development costs, net$41,056 $42,695 
  September 30, 2017 December 31, 2016
Software development costs:    
Gross carrying amount $2,917,215
 $2,917,215
Accumulated amortization (2,579,193) (2,369,657)
Software development costs, net $338,022
 $547,558


During the three months ended September 30, 2017March 31, 2022 and 2016,2021, the Company recorded $58,608$1,639 and $99,654, respectively, of amortization expense related to capitalized software costs. During the nine months ended September 30, 2017 and 2016, the Company recorded $209,536 and $360,017,$1,639, respectively, of amortization expense related to capitalized software costs.




16

(6) Goodwill and Other Intangible Assets


The gross carrying amount and accumulated amortization of goodwill and other intangible assets as of September 30, 2017March 31, 2022 and December 31, 20162021 are as follows: 
March 31, 2022December 31, 2021
Goodwill$4,150,339 $4,150,339 
Other intangible assets:  
Gross carrying amount$4,038,138 $4,038,138 
Accumulated amortization(3,997,312)(3,986,776)
Net carrying amount$40,826 $51,362 
  September 30, 2017 December 31, 2016
Goodwill $4,150,339
 $4,150,339
Other intangible assets:  
  
Gross carrying amount $3,789,435
 $3,725,437
Accumulated amortization (3,637,288) (3,515,981)
Net carrying amount $152,147
 $209,456


For the three months ended September 30, 2017March 31, 2022 and 2016,2021, amortization expense was $40,533$10,536 and $39,186, respectively. For the nine months ended September 30, 2017 and 2016, amortization expense was $121,306 and $121,421,$16,082, respectively.


17

(7) Share-Based Payment Arrangements


On September 30, 2017,June 22, 2018, the total shares available for issuance underCompany's stockholders adopted the FalconStor Software, Inc. 20162018 Incentive Stock Plan (the "2016"2018 Plan") totaled 3,161,300. Pursuant. The 2018 Plan is administered by the Compensation Committee (the “Compensation Committee”) of the Company’s Board of Directors (the “Board”) and initially 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 2016 Plan, if, on July 1stemployees and directors of, any calendar year in whichand consultants providing services to, the 2016 Plan is in effect,Company or its affiliates. In June 2021, the Company's stockholders approved an amendment to increase the number of shares of our common stock as to which options, restricted sharesauthorized and restricted stock units may be granted under the 2016 Plan is less than five percent (5%) of the number of outstanding shares of stock, then the number of shares of stock availablereserved for issuance under the 20162018 Plan is automatically increased so that the number equals five percent (5%)by 220,800 shares to a total of 1,692,797 shares. Exercise prices of the shares of stock outstanding. In no event shalloptions will be determined by the number of shares of stockCompensation Committee, subject to the 2016 Plan inconsent of Hale Capital. The vesting terms will be performance based and determined by the aggregate exceed twenty million shares,Compensation Committee, subject to adjustment as provided in the 2016 Plan. On July 1, 2017,consent of Hale Capital, based on various factors, including (i) the total numberreturn of outstanding sharescapital to the holders of the Series A Preferred Stock and the Company’s common stock totaled 44,525,990. Pursuant toin the 2016 Plan,event of a change of control, (ii) the total shares available for issuancerepayment of the Company’s obligations under its senior secured debt, and (iii) the 2016 Plan thus increased 2,081,080 to 2,226,300 shares available for issuance as of July 1, 2017.Company’s free cash flow.


The following table summarizes the plans2018 Plan, which was the only plan under which the Company was able to grant equity compensation as of September 30, 2017:March 31, 2022: 
 SharesShares AvailableShares
Name of PlanAuthorizedfor GrantOutstanding
FalconStor Software, Inc. 2018 Incentive Stock Plan1,692,79752,0161,545,623
  Shares Shares Available Shares Last Date for Grant
Name of Plan Authorized for Grant Outstanding of Shares
FalconStor Software, Inc., 2016 Incentive Stock Plan 2,166,606 3,161,300 565,000 April 27, 2026
FalconStor Software, Inc., 2016 Outside Directors Equity Compensation Plan 1,000,000 583,532 409,868 April 27, 2019


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, 2017: 
March 31, 2022: 
Name of PlanShares Available for GrantShares Outstanding
FalconStor Software, Inc., 2016 Incentive Stock Plan—2,250
FalconStor Software, Inc., 2006 Incentive Stock Plan—3,440
Name of PlanShares Available for GrantShares Outstanding
FalconStor Software, Inc., 2006 Incentive Stock Plan—1,714,850
FalconStor Software, Inc., 2013 Outside Directors Equity Compensation Plan—10,200
FalconStor Software, Inc., 2000 Stock Option Plan—31,500


A summary of the Company’s restricted stock activity for the three months ended March 31, 2022 is below. Such restricted stock did not bestow any voting or dispositive power and is not deemed outstanding until they vest.

Related to the aforementioned 2017 Plan, many share-based compensation awards were forfeited and the related expense reversed accordingly, resulting in negative expense in the period.
Number of Restricted Stock Awards
Non-Vested at January 1, 20221,513,380 
Granted113,230 
Vested(4,248)
Forfeited(82,429)
Non-Vested at March 31, 20221,539,933 


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, 2017March 31, 2022 and 2016:2021:
 Three Months Ended March 31,
 20222021
Cost of revenue - Product$227 $227 
Cost of revenue - support and service181 181 
Research and development costs1,879 — 
Selling and marketing4,511 2,677 
General and administrative1,386 1,386 
 $8,184 $4,471 
18
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Cost of revenue - Product $—
 $—
 $—
 $—
Cost of revenue - Support and Service (9,752) 16,684
 55,533
 85,521
Research and development costs 28,382
 80,310
 212,910
 1,652,107
Selling and marketing (23,560) 88,907
 40,178
 231,979
General and administrative (255,647) 88,305
 (26,629) 422,555
  $(260,577) $274,206
 $281,992
 $2,392,162

On March 7, 2016, the Company issued an aggregate of 507,070 shares of the Company's common stock to Cumulus Logic, LLC, as a milestone payment pursuant to the terms of a Software License and Development Agreement between the Company and Cumulus Logic, LLC. The shares have an aggregate value of $765,000 based on the 30 day trading day average of the Company's common stock immediately prior to July 29, 2015, the date that the License and Development Agreement was executed. The Company recognized share-based compensation expense of $699,757 related to this transaction based on the fair value per share of the common stock on the date of issue of $1.38. This expense was included in "research and development costs" in the accompanying consolidated statements of operations.

On April 1, 2016, the Company issued an aggregate of 591,582 shares of the Company's common stock to Cumulus Logic, LLC, as the final milestone payment pursuant to the terms of a Software License and Development Agreement between the Company and Cumulus Logic, LLC. The shares have an aggregate value of $892,500 based on the 30 day trading day average of the Company's common stock immediately prior to July 29, 2015, the date that the License and Development Agreement was executed. On April 1, 2016, the Company recognized share-based compensation expense of $786,804 related to this transaction based on the fair value per share of the common stock on the date of issue of $1.33.

(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 ninethree months ended September 30, 2017 and 2016,March 31, 2022, the Company recorded an income tax provisionbenefit of $207,352 and $375,338, respectively, consisting primarily of state and local and foreign taxes.$121,260. The effective tax rate for the ninethree months ended September 30, 2017 and September 30, 2016March 31, 2022 was (179.6%) and (4.0%), respectively.9.9%. The difference in the Company’s effective tax rate differs from the statutory rate of 35% is primarily attributable21% due to the mix of foreign and domestic earnings, as no tax benefit is being recognized on domestic losses. Duringforeign withholding taxes and the three months ended September 30, 2017 the Company recorded and income tax benefitapplication of $0.0 million related to the reversal of uncertain tax positions.valuation allowances. As of September 30, 2017,March 31, 2022, the Company’s conclusion did not change with respect to the realizability of its domestic deferred tax assets and therefore, the Company hashad not recorded any income tax benefit attributable to domestic losses in connectionas such amounts are fully offset with forecastinga valuation allowance.

For the 2017 estimated annualthree months ended March 31, 2021, the Company recorded an income tax provision of $44,616. The effective tax rate.rate for the three months ended March 31, 2021 was 9.9%. 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, 2017,March 31, 2021, the Company’s conclusion did not change with respect to the realizability of its domestic deferred tax assets and therefore, the Company had not recorded any income tax benefit as such amounts are fully offset with a valuation allowance totaled approximately $39.2 million. allowance.

The Company’s total unrecognized tax benefits, excluding interest, at September 30, 2017as of March 31, 2022 and DecemberMarch 31, 20162021 were $164,292$79,518 and $217,461,$75,506, respectively.

At September 30, 2017, $241,287 of unrecognized tax benefits, including interest, if recognized, would reduce the Company’s effective tax rate. As of September 30, 2017March 31, 2022 and DecemberMarch 31, 2016,2021, the Company had $76,995$44,462 and $111,278,$37,207, respectively, of accrued interest.interest reflected in accrued expenses.

(9) Notes Payable


    The notes payable balance consists of the following:
Total notes payable, net at January 1, 2022$2,154,098 
Accretion of discount2,148 
Total notes payable, net at March 31, 2022$2,156,246 
(9)
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 March 31, 2022, the Company was in compliance with the financial covenants contained in the Amended and Restated Loan Agreement.

(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.
 

19


Fair Value Hierarchy
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, 2017March 31, 2022, the Company did not have any Level 1 category assets included in the condensed consolidated balance sheets. At December 31, 2016, the Level 1 category included money market funds, which are included within cash and cash equivalents 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, 2017March 31, 2022 and December 31, 2016,2021, 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, 2017March 31, 2022 and December 31, 2016,2021, 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, 2017March 31, 2022 or December 31, 2016.
2021.


The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2017:March 31, 2022:
  Fair Value Measurements at Reporting Date Using
TotalQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant other Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
Derivative liabilities:    
Derivative Instruments784,325 — — 784,325 
Total derivative liabilities784,325 — — 784,325 
Total assets and liabilities measured at fair value$784,325 $— $— $784,325 
    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)
Cash equivalents:        
Money market funds $—
 $—
 $—
 $—
Total cash equivalents —
 —
 —
 —
Derivative liabilities:  
  
  
  
Derivative Instruments 424,636
 —
 —
 424,636
Total derivative liabilities 424,636
 —
 —
 424,636
         
Total assets and liabilities measured at fair value $424,636
 $—
 $—
 $424,636


The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2016:2021: 
  Fair Value Measurements at Reporting Date Using
TotalQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant other Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
Derivative liabilities:
Derivative Instruments776,623 — — 776,623 
Total derivative liabilities776,623 — — 776,623 
Total assets and liabilities measured at fair value$776,623 $— $— $776,623 
20

    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)
Cash equivalents:        
Money market funds and commercial paper $1,133,280
 $1,133,280
 $—
 $—
Total cash equivalents 1,133,280
 1,133,280
 —
 —
Derivative liabilities:        
Derivative Instruments 336,862
 —
 —
 336,862
Total derivative liabilities 336,862
 —
 —
 336,862
         
Total assets and liabilities measured at fair value $1,470,142
 $1,133,280
 $—
 $336,862


Measurement of Fair Value
 
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 5% 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, 2017March 31, 2022 and September 30, 2016:March 31, 2021:
Three Months Ended March 31,
20222021
Beginning Balance$776,623 $703,747 
Total loss recognized in earnings7,702 14,323 
Ending Balance$784,325 $718,070 

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Beginning Balance $419,560
 $164,670
 $336,862
 $82,024
Total loss recognized in earnings 5,076
 8,997
 87,774
 91,643
Ending Balance $424,636
 $173,667
 $424,636
 $173,667

(10)(11) Commitments and Contingencies
 
The Company has an operating lease covering its corporate office facility that expires in April 2021. The Company also has several additional operating leases related to offices in foreign countries with expiration dates ranging from 2017 through 2019. The following is a schedule of future minimum lease payments for all operating leases as of September 30, 2017: 
2017$648,816
20181,967,248
20191,614,843
20201,444,247
2021491,020
Thereafter—
 $6,166,174

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, 2017,March 31, 2022, 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.
 


Upon certain triggering events, such as bankruptcy, insolvency or a material adverse effect, failure to achieve minimum financial covenants or failure of the Company to issue shares upon conversion of the As described under Note (12) Series A redeemable convertible preferred stock in accordance with its obligations, the Series A redeemable convertible preferred stockholders may require the Company to redeem all or some of the Series A redeemable convertible preferred stock at a price equal to the greater of 100% of the stated value plus accrued and unpaid dividends or the product of the number of shares of common stock underlying the Series A redeemable convertible preferred stock and the closing price as of the occurrence of the triggering event. Commencing after August 5, 2017, each Series A redeemable convertible preferred stockholder can require the Company to redeem its Series A redeemable convertible preferred stock in cash at a price equal to 100% of the stated value being redeemed plus accrued and unpaid dividends. As of December 31, 2016, the Company was not in compliance with the financial covenants of the Series A redeemable convertible preferred stock for two consecutive quarters, which provides the Series A redeemable convertible preferred stockholders the right to require the Company to redeem any of the Series A redeemable convertible preferred stock at the greater of 100% of the stated value plus accrued and unpaid dividends or the product of the number of shares of common stock underlying the Series A redeemable convertible preferred stock and the closing price of the Company's common stock as of December 31, 2016. To date,Redeemable Convertible Preferred Stock the holders of the Series A redeemable convertible preferred stockPreferred Stock have neither exercised nor waived this right and accordingly this right may be exercised at any time.redemption rights upon certain triggering events. As of September 30, 2017,March 31, 2022, the Company did not fail any non-financial covenants related to the Company's Series A redeemable convertible preferred stock.Preferred Stock.


On July 24, 2015, the Company entered into an Independent Marketing Agreement with RFN Prime Marketing Inc., to provide among other items, certain sales and marketing deliverables to the Company in exchange for up to 2.55 million shares of restricted Company common stock which was to be issued based on certain milestone achievements and/or transactions over a twenty-four month period. The Independent Marketing Agreement with RFN Prime Marketing Inc., was terminated effective March 31, 2017 and none of the performance milestones had been met, and therefore no restricted Company common stock was issued.

On June 14, 2017, the Company accepted the resignation of Gary Quinn from his position as Chief Executive Officer and President and as a Director of the Company effective July 1, 2017.    In connection with Mr. Quinn’s departure, on June 14, 2017 the Company and Mr. Quinn entered into a Separation Agreement and General Release (the “Quinn Separation Agreement”). Under the terms of the Quinn Separation Agreement, the Company paid Mr. Quinn his current salary through July 24, 2017 and any COBRA expenses through January 31, 2019 to the extent that Mr. Quinn’s health insurance is not covered by the health insurance plan of another entity.


On August 15, 2017, the Company accepted the resignationappointment of Todd Oseth from his position as Chief Executive Officer and President of the Company. In connection with Mr. Oseth’s departure, on August 15, 2017 the Company and Mr. Oseth entered into a Separation Agreement and General Release (the “Oseth Separation Agreement”). Under the terms of the Oseth Separation Agreement, the Company will, among other things, pay Mr. Oseth his current salary through March 1, 2018 and any COBRA expenses through February 15, 2018 to the extent that Mr. Oseth’s health insurance is not covered by the health insurance plan of another entity.

As of August 14, 2017, the Board appointed Todd Brooks as Chief Executive Officer effective August 14, 2017.

In connection with Mr. Brooks’ appointment 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 Offer LetterAgreement 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. Pursuant to the Brooks Agreement, it is the intention of the Company to create an equity plan for all employees subject to stockholder approval, for up to 15% of the equity of the Company on a fully diluted basis, plus potentially two additional tranches of 2.5% of the equity of the Company on a fully diluted basis, at the time the equity plan is adopted following stockholder approval. Vesting of the equity issued under the plan would occur only upon a sale of the Company’s assets or capital stock at a premium to the valuation of the Company at the time the equity plan is adopted. Mr. Brooks’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 twelve (12)12 months of his base salary if (i) he has been employed by the Company for at least twelve (12)12 months at the time of termination or (ii) a change of control has occurred within six (6)6 months of Mr. Brooks’ employment. Except as set forth in the preceding sentence, Mr. Brooks is entitled to receive severance equal to six (6)6 months of his base salary if he has been employed by the Company for less than six (6)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.




On August 14, 2017, the Board appointed Patrick McClain to serve as the Company’s Executive Vice President, Chief Financial Officer and Treasurer. Mr. McClain also assumed the roles of principal financial officer and principal accounting officer of the Company.    In connection with Mr. McClain’sSita’s appointment as Chief Financial Officer, the Board approved an offer letter toIndependent Contractor Services Agreement with Alucria Consulting, Inc. (“Alucria”), an entity owned by Mr. McClainSita (the “McClain“Sita Agreement”), which was
21

executed on August 17, 2017.February 11, 2022. The McClainSita Agreement provides that Mr. McClainAlucria is entitled to receive an annualized base salarya fee of $240,000, payable in regular installments in accordance with the Company’s general payroll practices. Mr. McClain$20,000 per month. Alucria will also be eligible for a cash bonus of $10,000 for any quarter that is free cash flow positive on an operating basis and additional incentive compensation of an annual bonuspayment of up to $80,000, subject to attainment$60,000 annually, based upon the achievement of performance objectives to be mutually agreed upon and established. Mr. McClain’s employment can be terminated at will. If Mr. McClain’s employment is terminatedgoals determined by the Company, other than for cause he is entitled to be paid quarterly in accordance with standard Company policies. Mr. Sita will also receive severance equala grant of shares of the Company’s common stock, to six (6) months of his base salary if (i) he has been employedbe governed by the Company for at least twelve (12) months atCompany’s 2018 Stock Incentive Plan and subject to specific vesting conditions.

The term of the time of termination or (ii) a change of control has occurred within six (6) months of Mr. McClain’s employment. Except as set forth in the preceding sentence, Mr. McClain is entitled to receive severance equal to three (3) months of his base salary if he has been employed by the Company for less than six (6) months and his employment wasSita Agreement expires on July 1, 2023, unless earlier terminated by the Company without cause. Mr. McClain is also entitled to vacation and other employee benefitseither party in accordance with the Company’s policies.terms therein.


During the third quarter of 2013,     As described under Note (17) Restructuring Costs, the Company adopted aincurred certain restructuring plan intended 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 (the “2013 Plan”).  Incosts in connection with the 2013 Plan, the Company eliminated over 100 positions worldwide, implemented tighter expense controls, ceased non-core activitiesrestructuring plans adopted in 2017 and closed or downsized several facilities. As of September 30, 2017, the restructuring accrual totaled $648,399. The 2013 Plan was substantially completed by December 31, 2014; however, the Company expects the majority of the remaining accrued severance related costs to be paid once final settlement litigation is completed, which can be at various times over the next three to twenty-four months.2019.


In addition, as of September 30, 2017,March 31, 2022, the Company's liability for uncertain tax positions totaled $241,287.$123,979. At this time, the settlement period for the positions,this liability, including related accrued interest, cannot be determined.
 
(11)(12) Series A Redeemable Convertible Preferred Stock
 
On September 16, 2013, theThe Company issued to Hale Capital Partners, LP (“Hale”)has 900,000 shares of the Company’s Series A redeemable convertible preferred stock,Preferred Stock outstanding with a par value $0.001 per share atand a pricestated value of $10 per share. Pursuant to the Amended and Restated Certificate of Designations, Preferences and Rights for an aggregate purchase considerationthe Series A Preferred Stock (the "Certificate of $9.0 million, which was subsequently transferred to HCP-FVA LLC. EachDesignations"), each share of Series A redeemable convertible preferred stock is convertiblePreferred Stock can be converted into shares of the Company’s common stock, equivalents,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 and upon certain mandatory conversion events described below, at a conversion rateor (ii) by the Company if, following the first anniversary of $1.02488 (as adjusted for stock splits, stock dividends, reverse stock splits, stock combinations, reclassifications and similar events). The Company received net proceeds of approximately $8.7 million from the issuance of the redeemable convertible preferred stock in 2013, net of transaction costs.

IfSeries A Preferred Stock (subject to extension under certain circumstances), the volume weighted average trading price per share of the Company’s common stock for each trading day of any 60sixty (60) consecutive trading days exceeds 250% of the conversion price and exceedscontinues to exceed 225% of the conversion price through the conversion date, subject at all times to the satisfaction of, and certainthe limitations imposed by, the equity conditions are met such that shares of common stock issued upon conversion can be immediately salable by the Series A redeemable convertible preferred stockholders, the Company can convert the Series A redeemable convertible preferred stock up to an amount equal to the greater of 25% of the daily trading volume for the 20 consecutive trading days immediately preceding the conversion date or the amount of an identified bona fide block trade at a price reasonably acceptable to the applicable Series A redeemable convertible preferred stockholder, but which price is not less than the arithmetic average of the weighted average prices of the common stock for the five trading days immediately preceding such sale.

The holder of the Series A redeemable convertible preferred stock has veto power over certain future financings, and certain rights to participate in any subsequent financing, whether through debt or equity (subject to certain exclusions). In addition, the Company's agreement with the holder of the Series A redeemable convertible preferred stock provide that if, at the time of certain future debt or equity financings, the proceeds of which exceed $5.0 million, the holder of the Series A redeemable convertible preferred stock still has outstanding Series A redeemable convertible preferred stock, then the Company must offer to repurchase their Series A redeemable convertible preferred stock. The holder of the Series A redeemable convertible preferred stock has the right to accept the offer or to retain their Series A redeemable convertible preferred stock. If the Company does a financing, and the holder of the Series A redeemable convertible preferred stock elects to have their Series A redeemable convertible preferred stock repurchased, then the capital raised in excess of $5.0 million will go to repurchase the holders’ Series A redeemable convertible preferred stock, instead of being able to be used for our business.

The Company cannot consummate a liquidation or a fundamental sale transaction in which the consideration is stock or a combination of cash and stock without the consent of the holder of the Series A redeemable convertible preferred stock.



In addition to the veto rights set forth in the preceding paragraph, upon consummationCertificate of a fundamental sale transaction in whichDesignations (including, without limitation, the consideration is cash and is not approved by the holder of the Series A redeemable convertible preferred stock, the Series A redeemable convertible preferred stock shall be redeemed at a per share redemption price equalvolume limitations set forth therein).
Pursuant to the greaterCertificate of (i) 250% of the stated value of the Series A redeemable convertible preferred stock (which is currently equal to $22.5 million or $2.56 per share of common stock held by the holder of the Series A redeemable convertible preferred stock on an as converted basis as of September 30, 2017) and (ii) the price such holder would receive in the transaction on an as converted basis. In addition in the event of the liquidation of the Company or a Fundamental Transaction of the Company (which includes a merger or sale of the Company),Designations, the holders of the Series A redeemable convertible preferred stock shall bePreferred Stock are entitled to receive fromquarterly dividends at the proceedsprime 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 transaction, priorissuance 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 Common Stock, an amount equalSeries A Preferred Stock. In addition, the declaration and payment of dividends is subject to 100% of the stated value plus accrued and unpaid dividends. The stated value and accruedcompliance 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 redeemable convertible preferred stock at September 30, 2017 is $9.8 million.

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 failure to achieve minimum financial covenants or failure of the Company to issue shares of common stock upon conversion of the Series A redeemable convertible preferred stockPreferred Stock in accordance with its obligations, the Series A redeemable convertible preferred stockholderholders may require the Company to redeem all or some of the Series A redeemable convertible preferred stockPreferred 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 orwith respect thereto, and (ii) the product of the number of shares of common stock underlying thea share of Series A redeemable convertible preferred stockPreferred Stock (and accrued and unpaid dividends with respect thereto) and the closing price as of the occurrence of the triggering event. On or after August 5, 2017,July 30, 2023, subject to the approval of HCP-FVA, each holder of Series A redeemable convertible preferred stockholderPreferred Stock can also require the Company to redeem its Series A redeemable convertible preferred stockPreferred Stock in cash at a per share price equal to 100% of the stated value being redeemedof a share of Series A Preferred Stock plus accrued and unpaid dividends. Ifdividends with respect thereto. Notwithstanding the Company does not haveforgoing, no holder of Series A Preferred Stock is permitted to exercise any rights or remedies upon a Breach Event (as defined in the funds necessaryCertificate of Designations) or to redeemexercise 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 redeemable convertible preferred stock,Preferred Stock will be redeemed at a per share redemption price equal to the dividends accruing on any outstanding Series A redeemable convertible preferred stock will increase to prime plus 10% (from prime plus 5%). For each six months thatgreater of (y) 250% of the Series A redeemable convertible preferred stock remains unredeemed, the dividend rate increases by 1%, subject to a maximum dividend rate of 19%. In addition, the Company's failure to redeem the Series A redeemable convertible preferred stock would be considered a “Breach Event” under the agreements with the holderper share purchase price of the Series A redeemable convertible preferred stock. If a Breach Event were to occurPreferred Stock and (z) the Company is in default under or has breached any provisionprice payable in respect of its obligations to redeem thesuch share of Series A redeemable convertible preferredPreferred Stock if such share of Series A Preferred Stock had been converted
22

into such number of shares of common stock then, under the agreementsin accordance with the holderCertificate of ourDesignations (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 redeemable convertible preferred stock,Directors (as defined in the Company's BoardCertificate of Directors would automatically be increased, withDesignations). 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 the Series A redeemable convertible preferred stock havingPreferred Stock will have the right, to appointbut not the new directors, so that the holders of the Series A redeemable convertible preferred stock would have appointed a majority of the Board of Directors. This would give the holder of the Series A redeemable convertible preferred stock control of the Company. As of December 31, 2016, the Company was not in compliance with the financial covenants of the Series A redeemable convertible preferred stock for two consecutive quarters, which provides the Series A redeemable convertible preferred stockholder the rightobligation, to require the Company to redeem anyuse the net proceeds in excess of $5.0 million to repurchase all or a portion of the Series A redeemable convertible preferred stockPreferred 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 or the product ofwith respect thereto, and (ii) the number of shares of common stock underlying theinto which such share of Series A redeemablePreferred Stock is then convertible preferred stock andmultiplied by the greater of (y) the closing price of the Company's common stock ason the date of December 31, 2016. To date,announcement of such financing or (z) the holderclosing price of the Series A redeemable convertible preferredcommon stock has neither exercised nor waived this right and accordingly this right may be exercised at any time. Ason the date of September 30, 2017, the Company did not fail any non-financial covenants related to the Company's Series A redeemable convertible preferred stock.

The holder of the Series A redeemable convertible preferred stock is entitled to receive quarterly dividends at the Prime Rate (Wall Street Journal Eastern Edition) plus 5% (up to a maximum amount of 10%), payable in cash, provided, that if the Company will not have at least $1.0 million in positive cash flow for any calendar quarter after giving effect to the paymentconsummation of such dividends, the Company, at its election, can pay such dividends in whole or in part in cash, provided that cash flow from operations is not negative, and the remainder can be accrued or paid in common stock to the extent certain equity conditions are satisfied. As of December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017, due to the lack of sufficient surplus to pay dividends as required by the DGCL, the Company was not permitted to pay the fourth quarter 2016 and first, second and third quarter 2017 dividends in cash or through the issuance of the Company's common stock and accrued the aforementioned dividends. As of September 30, 2017, the Company's liability for dividends to the holder of the Series A redeemable convertible preferred stock totaled $830,568.



financing.
Each shareholder of Series A redeemable convertible preferred stockPreferred Stock has a vote equal to the number of shares of common stock into which theits Series A redeemable convertible preferred stockPreferred Stock would be convertible as of the record date of September 13, 2013. The Company’s closing stock price on the record date was $1.23 per share, which results in voting power of an aggregate of 7,317,073 shares.date. In addition, holderthe holders of a majority of the Series A redeemable convertible preferred stockPreferred Stock must approve certain actions, including approving any amendments to the Company's charterCompany’s Restated Certificate of Incorporation as amended or bylawsAmended and Restated Bylaws that adversely affects the voting powers, preferences or other rights of the Series A redeemable convertible preferred stock;Preferred Stock; payment of dividends or distributions; any liquidation, capitalization, reorganization or any other fundamental transaction of the Company, other than as set forth above;Company; issuance of certainany equity securitiessecurity senior to or inon parity with the Series A redeemable convertible preferred stockPreferred Stock as to dividend rights, redemption rights, liquidation preference and other rights; issuances of equity below the conversion price; incur 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 June Offering, 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 redeemable convertible preferred stockPreferred 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 redeemable convertible preferred stock,Preferred Stock, the contingent redemption put options in the Series A redeemable convertible preferred stockPreferred 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 redeemable convertible preferred stockPreferred Stock and recorded as a liability.


    As of March 31, 2022 and December 31, 2021, the fair value of these derivative instruments was $784,325 and $776,623, respectively, and were included in "other long-term liabilities" within the consolidated balance sheets. The (income) loss on the change in fair value of these derivative instruments for the three months ended March 31, 2022 and March 31, 2021 of 7,702 and $14,323, respectively, were included in “interest and other expense, 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, 2017March 31, 2022 and 2016,2021, were as follows:
Three Months Ended March 31,
20222021
Beginning Balance$776,623 $703,747 
Total loss recognized in earnings7,702 14,323 
Ending Balance$784,325 $718,070 

23

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Beginning Balance $419,560
 $164,670
 $336,862
 $82,024
Total loss recognized in earnings 5,076
 8,997
 87,774
 91,643
Ending Balance $424,636
 $173,667
 $424,636
 $173,667
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 transaction0.5%
Probability of redemption absent a fundamental sale transaction4.75%
Annual volatility65%

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 redeemable convertible preferred stock.Preferred Stock. These costs were being accreted to the Series A redeemable convertible preferred stockPreferred 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 as noted above.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 loss attributable to common stockholders on the condensed consolidated statement of operations and in determining loss per share for the three and nine months ended September 30, 2017March 31, 2022 and 2016. 2021, respectively.

The following represents a reconciliationSeries A Preferred Stock consists of net loss attributable to common stockholders for the three and nine months ended September 30, 2017 and 2016:following:
Total Series A redeemable convertible preferred stock, net at January 1, 2022$14,384,388 
Accrued dividends300,921
Accretion of preferred stock14,815
Total Series A redeemable convertible preferred stock, net at March 31, 2022$14,700,124 

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Net loss $1,429,173
 $(1,976,173) $(322,825) $(9,807,667)
Effects of Series A redeemable convertible preferred stock:  
  
  
  
Less: Series A redeemable convertible preferred stock dividends 215,000
 194,012
 634,664
 581,986
Less: Accretion to redemption value of Series A redeemable convertible preferred stock —
 178,619
 —
 513,269
Net gain (loss) attributable to common stockholders $1,214,173
 $(2,348,804) $(957,489) $(10,902,922)



(12)(13) Accumulated Other Comprehensive (Loss) IncomeLoss

The changes in Accumulated Other Comprehensive (Loss) Income,Loss, net of tax, for the three months ended September 30, 2017March 31, 2022 are as follows:
24

  Foreign Currency
Translation		 Net Unrealized Gains (Losses) on Marketable
Securities		 Net Minimum
Pension Liability		 Total
Accumulated other comprehensive (loss) income at June 30, 2017 $(2,046,484) $—
 $28,675
 $(2,017,809)
Other comprehensive (loss) income  
  
  
  
Other comprehensive (loss) income before reclassifications 104,917
 —
 —
 104,917
Amounts reclassified from accumulated other comprehensive (loss) income —
 —
 —
 —
Total other comprehensive (loss) income 104,917
 —
 —
 104,917
Accumulated other comprehensive (loss) income at September 30, 2017 $(1,941,567) $—
 $28,675
 $(1,912,892)
 Foreign Currency
Translation		Net Minimum
Pension Liability		Total
Accumulated other comprehensive income (loss) at January 1, 2022$(1,881,005)$20,965 $(1,860,040)
Other comprehensive income (loss)   
Other comprehensive income (loss) before reclassifications33,510 — 33,510 
Total other comprehensive income (loss)33,510 — 33,510 
Accumulated other comprehensive income (loss) at March 31, 2022$(1,847,495)$20,965 $(1,826,530)


The changes in Accumulated Other Comprehensive (Loss) Income, net of tax, for the nine months ended September 30, 2017 are as follows:
  Foreign Currency
Translation		 Net Unrealized (Losses) Gains on Marketable
Securities		 Net Minimum
Pension Liability		 Total
Accumulated other comprehensive (loss) income at December 31, 2016 $(1,866,388) $—
 $28,675
 $(1,837,713)
Other comprehensive (loss) income  
  
  
  
Other comprehensive (loss) income before reclassifications (75,179) —
 —
 (75,179)
Amounts reclassified from accumulated other comprehensive (loss) income —
 —
 —
 —
Total other comprehensive (loss) income (75,179) —
 —
 (75,179)
Accumulated other comprehensive (loss) income at September 30, 2017 $(1,941,567) $—
 $28,675
 $(1,912,892)

The changes in Accumulated Other Comprehensive (Loss) Income,Loss, net of tax, for the three months ended September 30, 2016March 31, 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 $(1,987,961)
Other comprehensive income (loss)   
Other comprehensive income (loss) before reclassifications86,398 — 86,398 
Total other comprehensive income (loss)86,398 — 86,398 
Accumulated other comprehensive income (loss) at March 31, 2021$(1,909,282)$7,719 $(1,901,563)
  Foreign Currency
Translation		 Net Unrealized
Gains (Losses) on Marketable
Securities		 Net Minimum
Pension Liability		 Total
Accumulated other comprehensive (loss) income at June 30, 2016 $(2,288,570) $350
 $31,040
 $(2,257,180)
Other comprehensive (loss) income  
  
  
  
Other comprehensive (loss) income before reclassifications 59,527
 (1,289) 2,616
 60,854
Amounts reclassified from accumulated other comprehensive (loss) income —
 1,010
 1,258
 2,268
Total other comprehensive (loss) income 59,527
 (279) 3,874
 63,122
Accumulated other comprehensive (loss) income at September 30, 2016 $(2,229,043) $71
 $34,914
 $(2,194,058)

 


The changes in Accumulated Other Comprehensive (Loss) Income, net of tax, for the nine months ended September 30, 2016 are as follows:
  Foreign Currency
Translation		 Net Unrealized (Losses) Gains on Marketable
Securities		 Net Minimum
Pension Liability		 Total
Accumulated other comprehensive (loss) income at December 31, 2015 $(1,726,994) $(3,406) $27,186
 $(1,703,214)
Other comprehensive (loss) income  
  
  
  
Other comprehensive (loss) income before reclassifications (502,049) 1,224
 4,039
 (496,786)
Amounts reclassified from accumulated other comprehensive (loss) income —
 2,253
 3,689
 5,942
Total other comprehensive (loss) income (502,049) 3,477
 7,728
 (490,844)
Accumulated other comprehensive (loss) income at Sept 30, 2016 $(2,229,043) $71
 $34,914
 $(2,194,058)

For the three and nine months ended September 30, 2017, the amounts reclassified to net loss related to the Company’s defined benefit plan and maturity of marketable securities. These amounts are included within “Operating loss” within the condensed consolidated statements of operations.
(13)(14) Stockholders' Equity


Stock Repurchase Activity
  
On April 22, 2015, the Company’s Board of Directors (the "Board") approved a new stock buy-back program (the "Repurchase Program"). The Repurchase Program authorizes management to repurchase in the aggregate up to five million shares of the Company's common stock. Repurchases may be made by the Company from time to time in open-market or privately-negotiated transactions as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The Repurchase Program superseded and replaced the Company's prior stock buy-back program. The Repurchase Program does not obligate the Company to make repurchases at any specific time or situation. The Company was required to obtain approvals from the Series A redeemable convertible preferred stockholders for the Repurchase Program. The Repurchase Program does not have an expiration date and may be amended or terminated by the Board at any time without prior notice.
During the three and nine months ended September 30, 2017March 31, 2022 and 2016,2021, the Company did not repurchase any shares of its common stock. As of September 30, 2017,March 31, 2022, the Company had the authorization to repurchase 4,907,83949,078 shares of its common stock based upon its judgment and market conditions.


Common Stock Offerings
(14)
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 Capital Partners, LLC (“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
25

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.



Other Claims

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.

The Company continues to assess certain litigation and claims to determine the amounts, if any, that the Company believes may be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could materially adversely impact the Company’s financial results, its cash flows and its cash reserves.
(15)
(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, 2017March 31, 2022 and 2016,2021, and the location of long-lived assets as of September 30, 2017March 31, 2022 and December 31, 2016,2021, are summarized as follows:
 Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,

 2017 2016 2017 201620222021
Revenue:        Revenue:
Americas $1,742,556
 $1,856,175
 $5,384,051
 $6,909,801
Americas$848,308 $1,708,177 
Europe, Middle East, Africa and OtherEurope, Middle East, Africa and Other804,994 1,610,856 
Asia Pacific 2,243,820
 2,958,989
 6,940,306
 8,645,233
Asia Pacific395,805 509,293 
Europe, Middle East, Africa and Other 2,119,057
 2,511,646
 6,554,517
 7,272,058
Total Revenue $6,105,433
 $7,326,810
 $18,878,874
 $22,827,092
Total Revenue$2,049,107 $3,828,326 
 September 30, 2017 December 31, 2016March 31, 2022December 31, 2021
Long-lived assets:    Long-lived assets:
Americas $5,920,211
 $6,525,612
Americas$614,477 $858,417 
Europe, Middle East, Africa and OtherEurope, Middle East, Africa and Other15,889 18,364 
Asia Pacific 831,464
 890,051
Asia Pacific222,057 261,148 
Europe, Middle East, Africa and Other 261,025
 218,316
Total long-lived assets $7,012,700
 $7,633,979
Total long-lived assets$852,423 $1,137,929 
 
For both the three and nine months ended September 30, 2017,March 31, 2022, the Company had no2 customers that accounted for 10% or more of total revenue.revenue, respectively. For both the three and nine months ended September 30, 2016,March 31, 2021, the Company had one customer2 customers that accounted for 15%10% or more of total revenue.revenue, respectively.


As of September 30, 2017,March 31, 2022, the Company had one customer3 customers that accounted for 16%10% or more of the gross accounts receivable balance. As of December 31, 2016,2021, the Company had three2 customers that accounted for 15%, 14% and 12%, respectively,10% or more of the gross accounts receivable balance.




(16)(17) Restructuring Costs
 
In the third quarter of 2013, the Company adopted the 2013 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 2013 Plan, the Company eliminated over 100 positions worldwide, implemented tighter expense controls, ceased non-core activities and closed or downsized several facilities. The 2013 Plan was substantially completed by December 31, 2014; however, we expect the majority of the severance related costs to be paid once final settlement litigation is completed, which can be at various times over the next three to twenty-four months. The following table summarizes the activity during 2017 related to restructuring liabilities recorded in connection with the 2013 Plan:

  Severance related costs
Balance at December 31, 2016 $846,337
Additions (Reductions) (236,302)
Utilized/Paid —
Balance at March 31, 2017 $610,035
Additions (Reductions) —
Utilized/Paid (38,341)
Balance at June 30, 2017 $571,694
Additions (Reductions) 76,705
Utilized/Paid —
Balance at September 30, 2017 $648,399

    In June 2017, the Board approved a comprehensive plan to increase operating performance (the “2017 Plan”).

The 2017 Plan will result in a realignment and reduction in workforce. Whenwas substantially completed by the end of the Company’s fiscal year endingended December 31, 2017, the Company expects that the 2017 Planand when combined with previous workforce reductions in the second quarter of Fiscalfiscal 2017 will have reduced the Company’s workforce to
26

approximately 80 employees. These actions are anticipated to result in an annualized cost savings of approximately $10.0 million. In connection with the 2017 Plan, the Company expects to incur total estimated charges of up to $1.0 million, consisting primarily of severance.86 employees at December 31, 2018. In making these changes, the Company prioritized customer support and development while consolidating operations and cuttingstreamlining direct sales resources, allowing the companyCompany 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. During the three months ended March 31, 2021, the Company incurred lease disposal-related costs for this property of $0.3 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 $132,129 as of March 31, 2022 to be paid once final settlement litigation is completed, which is expected to occur by December 31, 2022.


The following table summarizes the activity during 2021 through March 31, 2022 related to restructuring liabilities recorded in connection with the 2017, 2019 and 2020 Plans:
Severance Related CostsFacility and Other CostsTotal
Balance at January 1, 2021$239,444 $75,466 $314,910 
Provisions/Additions— 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 
Provisions/Additions— 421,737 421,737 
Translation Adjustment2,734 — 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 
Translation Adjustment(3,248)— (3,248)
Balance at December 31, 2021$134,663 $— $134,663 
Provisions/Additions— 744 744 
Translation Adjustment(2,534)— (2,534)
Balance at March 31, 2022$132,129 $744 $132,873 

    The severance and facility related liabilities are included within “accrued expenses” in the accompanying condensed consolidated balance sheets. The expenses under the 20132017 Plan are included within “restructuring costs” in the accompanying condensed consolidated statements of operations.




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(17) Subsequent Events


  On November 17, 2017, HCP-FVA, LLC (the “Lender”) provided a commitment letter to the Company agreeing to finance up to $3 million to the Company (the “Commitment”) on the terms, and subject to the conditions, set forth in that certain commitment letter, as further described below.  As part of that Commitment, on November 17, 2017, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Lender and certain other loan parties named therein, pursuant to which the Lender made a short term loan to the Company in the principal amount of $500,000 (the “Short Term Loan”).  The Lender is an affiliate of Hale Capital Partners, LP (together, “Hale Capital”), the Company’s largest stockholder through its ownership of Series A Redeemable Preferred Stock , and an affiliate of FalconStor director, Martin Hale. 

                Pursuant to the terms of the Loan Agreement, the Short Term Loan is secured by all of the assets of the Company and guaranteed by each of the Company’s domestic subsidiaries.  The Short Term Loan bears interest at a rate equal to the prime rate plus 0.75%, which will be increased by an additional 5% during the continuance of a Default or Event of Default (as each term is defined in the Loan Agreement).  The Short Term Loan will be due and payable on May 17, 2018, unless prepaid or satisfied through the issuance by the Company of units in a proposed private placement which will be offered to certain eligible stockholders existing on the date of the Loan Agreement (the “Proposed Offering”).  Such units would consist of senior secured debt in the aggregate principal amount of the Short Term Loan and nominal warrants to purchase approximately 61,165,134 shares of the Company’s common stock, as further described below. 

                In the event the Short Term Loan is prepaid, such prepayment will be subject to the payment of a premium in an amount equal to 5% of the principal amount of the Short Term Loan prepaid.   The Short Term Loan must be repaid in the event of certain fundamental events, incurrence of any additional indebtedness, other than permitted indebtedness (as defined in the Loan Agreement), upon a change of control and with any insurance proceeds not reinvested in the Company.  The Loan Agreement has customary representations, warranties and affirmative and negative covenants.  In addition, the Company is required to maintain a minimum total liquidity of $2 million and cannot permit a variance of more than 10% of net cash flow from the amounts set forth in a rolling weekly detailed budget agreed upon at the signing of the Loan Agreement. 

                In consideration for making the Short Term Loan and Commitment, the Company issued a warrant to purchase 13,859,128 shares of common stock at an exercise price of $0.001 per share, which warrant has customary terms and conditions and permits cashless exercises (the “Initial Backstop Warrant”).  Upon the funding of all or any portion of the Commitment, the Company will issue an additional warrant (the “Additional Backstop Warrant” and, together with the Initial Backstop Warrant, the “Backstop Warrants”) to purchase 41,577,382 shares of common stock at an exercise price of $0.001 per share, which warrant shall be in substantially the same form as the Initial Backstop Warrant.  Fifty percent (50%) of the Backstop Warrants (or the shares of common stock issuable upon exercise thereof on a post-cashless exercise basis) are subject to cancellation in the event that more than half of the units in the Proposed Offering are purchased by eligible stockholders (other than Hale Capital).  The Backstop Warrants are in addition to the nominal warrants to be issued upon purchase of any units in the Proposed Offering.

                As part of the Commitment, the Proposed Offering contemplates the private placement of approximately $14.08 million of units, which assumes year end closing, with each unit consisting of senior secured debt, nominal warrants and shares of the Company’s Series A Preferred Stock held by Hale Capital.  If the Proposed Offering is fully subscribed, $4 million of the total offering proceeds would be paid to the Company in exchange for the portion of the units consisting of secured debt and warrants and approximately $10.08 million of the total offering proceeds (less any portion attributable to the units purchased by Hale Capital) would be paid to Hale Capital for the purchase of its Series A Preferred Stock.  Pursuant to the terms of the Commitment, the Lender has committed to purchase 75% of the total number of the portion of the units to be issued by the Company in the Proposed Offering to ensure the Company receives at least $3 million of total offering proceeds, inclusive of the units issuable upon conversion of the Short Term Loan.

 The issuance of warrants in connection with the Short Term Loan and Commitment, will have a substantial dilutive effect on all existing stockholders of the Company. For example, if Lender funds the full Commitment, Hale Capital will beneficially own, when combined with Hale Capital’s current ownership, and the warrants issued in connection with the Short Term Loan and shares set aside for management, approximately 73% of the Company, on an as-converted basis.  If Lender funds only 25% of the total number of units to be issued in the Proposed Offering due to purchases of units by eligible stockholders of the Company electing to partially draw on the Commitment, Hale Capital will beneficially own, when combined with Hale Capital’s current ownership, the warrants issued in connection with the Short Term Loan and shares set aside for management, approximately 21.5% of the Company, on an as-converted basis.



Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as “believes,” “anticipates,” “expects,” “estimates,” “plans,” “may,” “intends,” “will,” or similar terms.  Investors are cautioned that any forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. The following discussion should be read together with the consolidated financial statements and notes to those financial statements included elsewhere in this report.
 
OVERVIEW


Q3 marks an important pointFalconStor Software, Inc., a Delaware corporation ("we", the "Company" or "FalconStor") is a trusted data protection software leader modernizing disaster recovery and backup operations for Falconstorthe 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 by up to 95%. More than 1,000 organizations and managed service providers worldwide standardize on FalconStor as the strategic restructuring launched earlier in 2017, and additional focus implemented during the quarter, have produced a return to profitability.foundation for their cloud first data protection future. Our products are offered through and supported by a worldwide network of leading managed service providers (“MSPs”), systems integrators, resellers, and original equipment manufacturers (“OEMs”).

Our products address a demand for enterprise data protection driven by the manner in which consumers and businesses are increasingly interacting in a digital space through multiple devices, networks and platforms. The onset of the coronavirus pandemic accelerated this shift, as ongoing remote work and work from home arrangements introduced novel challenges to maintaining enterprise data security. The adoption of increased employee mobility and flexible remote work arrangements, such as a broader incorporation of cloud technology and the option for employees to use their own devices, has introduced additional vulnerabilities that businesses must monitor and protect through solutions playlike ours in order to maintain enterprise data integrity.

Our products are utilized by enterprises and MSPs to address two key areas of enterprise data protection: (i) long-term data retention and recovery, and (ii) data replication to preserve business continuity. Our integration with modern cloud-based data storage environments, such as IBM Cloud, AWS and Microsoft Azure, enables our enterprise customers to significantly reduce costs and improve the portability, security and accessibility of their enterprise data. We believe this accessibility is key in our modern world, where data must be protected and intelligently leveraged to facilitate learning, improve product design and drive competitive advantage. Our products can be used regardless of the underlying hardware, cloud and source-data, which enables our enterprise customers to leverage their existing hardware and software investments.

Since the beginning of 2020, we have focused our go to market efforts on long-term data retention and recovery data protection segment, building on the momentum we generated in 2019 and increasing profitability. In 2021, we increased our go-to-market investment within our core regions of the Americas, EMEA, Japan, Korea, and Southeast Asia, and released StorSafeTM, the next generation of our Virtual Tape Library (“VTL”) product family built for MSPs.
During the first quarter of 2022, we continued to deliver innovation and enhance each of our products. Our StorSafeTM solution is a key rolevital backup long-term archive retention tool in managingenterprise IT departments’ data protection arsenal and protecting criticalfor MSPs that provide data withinprotection as a service to enterprise companies. It enables them to modernize their backup and archive environments, leverage efficient hybrid- and public-cloud storage environments, such as those provided by IBM Cloud, AWS and Microsoft Azure, save operational costs, and improve restore performance for rapid remote disaster recovery.

Through StorSafeTM, we are making progress expanding our technology to deliver an enterprise-class, highly flexible and efficient backup and long-term data storage optimization solution for the hybrid cloud world.

Beyond our long-term retention and reinstatement products, our StorGuardTM business continuity driven data replication solution gives our customers the ability to move workloads to the right destination, on-premises or in the cloud, with advanced insight. This solution is designed for MSPs and enterprise organizations with complex, heterogeneous IT environments and the full spectrum of data management use cases, including but not limited to large enterprises, around the world. Our current focusuniversities, health care entities and governmental institutions. StorGuardTM is on creating the financial stability necessarymodern, comprehensive and easy-to-use software solution that enables IT professionals to continue innovatinghave complete insight into and delivering outstanding valuecontrol over their organization’s data.

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To provide for greater ease of use for all our products, we also made significant enhancements to our existing partnerscentral data management console, now called StorSightTM, to interface with each of our products to provide a holistic view of an enterprise’s entire data protection environment – whether on-premises data centers, public cloud and hybrid – as well as the key analytics, reports and dashboards our customers while positioningneed to continuously optimize their operations.

FalconStor continues to focus on MSPs, enterprise customers, and OEM partners. These markets offer the company for future growth.most significant opportunity and are best suited to realize the value of FalconStor products, and provide an efficient and effective access to broad, worldwide markets. Most of our revenue comes from sales to MSPs and to enterprise customers through resellers.


Our net income increased“Business Partner” program for our MSPs and resellers provides financial incentives for those partners that are willing to make a commitment to FalconStor through training, marketing and revenue. As part of our review of all of our operations to maximize savings without sacrificing sales, and in connection with our Business Partner program, we continually review our relationship with each of our partners in all regions. We decided to focus on only those partners who have the three months ended September 30, 2017expertise, personnel and networks to $1.4 million, comparedidentify potential customers and to service our end users.

Historically, the majority of our software licenses have been sold on a capacity basis and have included a perpetual right to use the licensed capacity. Now, we also offer our various licenses on a subscription or term-based model, which gives a customer the right to utilize our solutions over a designated period of time. We expect revenue from subscription-based licensing to increase over the next several years.

Fluctuation in our revenue is driven by the volume and mix of sales from period to period. Revenue allocated to perpetual and term software licenses are recognized at a point in time upon electronic delivery of the download link and the license keys, as these products have significant standalone functionality. 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.

During the first quarter of 2022, our shift to recurring revenue based revenue took a material step forward as we worked to secure a strategic reseller relationship with IBM. Through this strategic reseller relationship, IBM and FalconStor will co-market joint solutions consisting of FalconStor’s VTL/StorSafe software, IBM Cloud Object Storage (“COS”), and IBM Power Virtual Servers (“Power VS”) for efficient application and data migration from on-premises environments to IBM Power VS, and on-going SaaS-based backup and restore within IBM Power VS. While we expect this relationship to provide healthy recurring revenue growth in the future as our joint solutions will be sold on a monthly consumption basis (MRR), our accelerated focus in these types of hybrid cloud relationships, and associated realignment of our sales teams, will continue to contribute to total GAAP revenue fluctuations in the short-term. In fact, GAAP total revenue in the first quarter of 2022 declined 46.5% year-over-year as our accelerated focus on advancing critical hybrid cloud relationships negatively impacted our legacy on-premises revenue. Given the reduction in GAAP Q1 2022 revenue we incurred a net loss of $2.0$1.1 million, compared to a net income of $0.4 million in first quarter of 2021, even though we managed operating costs to $2.7 million in the comparable prior year period. Includedquarter compared to $3.2 million in Q1 2021. Despite the reduction in legacy on-premises revenue during the quarter, our legacy recurring renewal rate was a healthy 86%.

COVID-19

    We are closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of our business. In March 2020, the World Health Organization characterized COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty and economic disruption. 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 operating results for the three months ended September 30, 2017 and 2016 was severance expense of $0.2 million and $0.4 million, respectively.or our partners’ supply chains.

Despite the material increase in our net income to $1.4 million, we ended the quarter with $1.8 million of cash and cash equivalents compared with $3.4 million at December 31, 2016. In addition, subsequent to September 30, 2017, the Company's cash and cash equivalents has significantly decreased. Accordingly, to ensure the Company could meet its operating cash flow and continue as a going concern, the Company entered into the short term loan (as hereinafter defined) and secured the Commitment (as hereinafter defined). Net cash used in operations for the 9 months ended September 30, 2017 was $1.6 million, compared with $7.1 million in the comparable prior year period. As discussed under "Liquidity and Capital Resources - Going Concern," our ability to continue as a going concern depends on our ability to increase revenue, further reduce expenses and/or obtain the balance of the Commitment, or other financing.

Deferred revenue as of September 30, 2017 totaled $18.8 million, compared with $23.7 million as of December 31, 2016.

Overall, total revenue for the three months ended September 30, 2017 decreased 17% to $6.1 million, compared with $7.3 million in the prior year period. We attribute the decline in total revenues to several factors. First, the volume of new product licenses and maintenance sales, both for expansion of our existing installed base and in the acquisition of new customers declined from the prior year. Second, customer attrition continued which has decreased maintenance renewal revenue.
Total cost of revenue for the three months ended September 30, 2017 decreased 40% to $1.2 million, compared with $2.1 million in the prior year period. Total gross profit decreased $0.4 million, or 7.5%, to $4.9 million for the three months ended September 30, 2017, compared with $5.3 million for the prior year period. Total gross margin increased to 80% for the three months ended September 30, 2017, compared with 72% for the prior year period. The decrease in our total gross profit was primarily due to the decrease in revenue and the increase in total gross margin was primarily due to the mix of sales and cost reduction initiatives. Generally, our total gross profits and total gross margins fluctuate based on several factors, including (i) revenue growth levels, (ii) changes in personnel headcount and related costs, and (iii) our product offerings and mix of sales.
Overall, our total operating expenses for the three months ended September 30, 2017 decreased 49% to $3.6 million, compared with $7.1 million in the comparable prior year period. This decrease was primarily attributable to tighter expense controls and overall operational efficiencies which better align our current business plan on a run-rate basis. These efficiencies include among other items, stream-lined personnel related costs and global overhead costs and efficiencies realized on our redesigned go-to-market coverage models. Our worldwide headcount was 83 employees as of September 30, 2017, compared with 185 employees as of September 30, 2016.



RESULTS OF OPERATIONS – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2022 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2016.MARCH 31, 2021.

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The following table presents revenue and expense line items reported in our Consolidated Statementscondensed consolidated statements of Operationsoperations and their corresponding percentage of total revenue for the three months ended September 30, 2017March 31, 2022 and 20162021 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.
Three Months Ended March 31, Change
Period to Period
(amounts in dollars)
20222021
Revenue:
Product revenue$594,928 29 %$2,139,729 56 %$(1,544,801)(72)%
Support and services revenue1,454,179 71 %1,688,597 44 %(234,418)(14)%
Total revenue2,049,107 100 %3,828,326 100 %(1,779,219)(46)%
Cost of revenue:
Product20,719 1 %222,834 6 %(202,115)(91)%
Support and service394,549 19 %426,173 11 %(31,624)(7)%
Total cost of revenue415,268 20 %649,007 17 %(233,739)(36)%
Gross profit1,633,839 80 %3,179,319 83 %(1,545,480)(49)%
Operating expenses:
Research and development costs705,981 34 %659,940 17 %46,041 7 %
Selling and marketing1,189,846 58 %1,396,640 36 %(206,794)(15)%
General and administrative849,939 41 %837,867 22 %12,072 1 %
Gain on litigation settlement— — %— — %— — %
Restructuring costs744 — %302,313 8 %(301,569)(100)%
Total operating expenses2,746,510 134 %3,196,760 84 %(450,250)(14)%
Operating income (loss)(1,112,671)(54)%(17,441)— %(1,095,230)(6,280)%
Gain on debt extinguishment— — %754,000 20 %(754,000)(100)%
Interest and other expense(117,995)(6)%(283,648)(7)%165,653 58 %
Income (loss) before income taxes(1,230,666)(60)%452,911 12 %(1,683,577)(372)%
Income tax expense (benefit)(121,260)(6)%44,616 1 %(165,876)(372)%
Net income (loss)$(1,109,406)(54)%$408,295 11 %$(1,517,701)(372)%
Less: Accrual of Series A redeemable convertible preferred stock dividends300,921 15 %277,170 7 %23,751 9 %
Less: Accretion to redemption value of Series A redeemable convertible preferred stock14,815 1 %197,114 5 %(182,299)(92)%
Net income (loss) attributable to common stockholders$(1,425,142)(70)%$(65,989)(2)%$(1,359,153)(2,060)%
 Three Months Ended September 30,  Change
Period to Period
  2017 2016 
Revenue:             
Product revenue$2,129,125
 35 % $2,245,544
 31 % $(116,419) (5)%
Support and services revenue3,976,308
 65 % 5,081,266
 69 % (1,104,958) (22)%
Total revenue6,105,433
 100 % 7,326,810
 100 % (1,221,377) (17)%
Cost of revenue:  
    
      
Product118,880
 2 % 145,986
 2 % (27,106) (19)%
Support and service1,115,703
 18 % 1,914,383
 26 % (798,680) (42)%
Total cost of revenue1,234,583
 20 % 2,060,369
 28 % (825,786) (40)%
Gross profit4,870,850
 80 % 5,266,441
 72 % (395,591) (8)%
Operating expenses:           
Research and development costs1,216,663
 20 % 2,514,822
 34 % (1,298,159) (52)%
Selling and marketing1,128,850
 18 % 2,991,901
 41 % (1,863,051) (62)%
General and administrative1,163,676
 19 % 1,561,335
 21 % (397,659) (25)%
Restructuring76,705
 1 % —
 — % 76,705
 — %
Total operating expenses3,585,894
 59 % 7,068,058
 96 % (3,482,164) (49)%
Operating income (loss)1,284,956
 21 % (1,801,617) (25)% 3,086,573
 *
Interest and other (loss) income, net134,321
 2 % (90,037) (1)% 224,358
 *
Income (Loss) before income taxes1,419,277
 23 % (1,891,654) (26)% 3,310,931
 *
Provision for (benefit from) income taxes(9,896) — % 84,519
 1 % (94,415) *
Net income (loss)$1,429,173
 23 % $(1,976,173) (27)% $3,405,346
 *
Less: Accrual of Series A redeemable convertible preferred stock dividends215,000
 4 % 194,012
 3 % 20,988
 11 %
Less: Accretion to redemption value of Series A redeemable convertible preferred stock—
 — % 178,619
 2 % (178,619) (100)%
Net income (loss) attributable to common stockholders$1,214,173
 20 % $(2,348,804) (32)% $3,562,977
 

            

           


Revenue
Revenue


Our primary sales focus is on selling software solutions and platforms which includes stand-alone software applications, software integrated with industry standard hardware and sold as one complete integrated solution or sold on a subscription or consumption basis. As a result, our revenue is classified as either: (i) product revenue, or (ii) support and services revenue. Total revenue forDuring the three months ended September 30, 2017 decreased 17% to $6.1March 31, 2022, we recognized revenue of $2.0 million, compared with $7.3$3.8 million in the prior year period.


Product revenueRevenue
 
Product revenue is comprised of sales of both licenses for our software solutions and sales of the platforms on which the software is installed. This includes stand-alone software applications and, on occasion, software integrated with industry standard hardware. We no longer primarily source or sell hardware, sold as one complete integrated solution or sold on a subscription or consumption basis.rather we facilitate our customers in buying their own hardware. Our products are sold through (i) value-added resellers, (ii) distributors, and/or (iii) directly to end-users. These revenues are recognized when all the applicable criteria under accounting principles generally accepted in the United States are met.



30


For the three months ended March 31, 2022 and 2021, product revenue represented 29% and 56% of our total revenue, respectively. Product revenue of $594,928 for the three months ended September 30, 2017March 31, 2022 decreased 5% to $2.1 million, compared with $2.2 million$1,544,801, or 72%, from $2,139,729 in the prior year period. Product revenue represented 35% and 31% of our total revenue for the three months ended September 30, 2017 and 2016, respectively. Product revenue from our FreeStor product decreased by $0.1 million; however, this was offset by an increase ofThe decrease in product revenue from our legacy productsis due to a delay in orders until the second quarter of $0.1 million for the three months ended September 30, 2017, compared with the prior year period. Product revenue from our FreeStor product represented 41% and 47% of our total product revenue for the three months ended September 30, 2017 and 2016, respectively. Product revenue from our legacy products represented 59% and 53% of our total product revenue for the three months ended September 30, 2017 and 2016, respectively.2022.


We continue to invest in our product portfolio by refreshing and updating our existing product lines and developing our next generation of innovative product offerings to drive our sales volume in support of our long-term outlook.


Support and services revenueServices Revenue


Support and services revenue is comprised of revenue from (i) maintenance and technical support services, (ii) professional services primarily related to the implementation of our software, and (iii) engineering services. Revenue derived from maintenance and technical support contracts are deferred and recognized ratably over the contractual maintenance term. Professional services revenue is recognized in the period that the related services are performed or over the contractual term if vendor-specific objective evidence ("VSOE") does not exist for all undelivered elements. EngineeringRevenues associated with professional and engineering services are recognized at a point in time upon customer acceptance or over the remaining contract term if VSOE does not exist for the remaining deliverables upon acceptance.


SupportMaintenance and technical support services revenue for the three months ended September 30, 2017March 31, 2022 decreased 22% to $4.0$1.4 million, compared with $5.1to $1.6 million in the prior year period. The decrease in maintenance and technical support services revenue is primarily due to a decline in maintenance renewals. Our maintenance and technical support service revenue results primarily from (i) the purchase of maintenance and support contracts by our customers, and (ii) the renewal of maintenance and support contracts by our existing and new customers after their initial contracts expire. During the three months ended September 30, 2017, maintenance and technical support services revenue was the primary driver of the decrease. Maintenance and technical support services revenue related to our legacy products decreased $1.3 million, primarily driven by customer attrition and the overall decline in product license sales over the past twelve to twenty-four months, partially offset by a $0.2 million increaseThe decrease in maintenance and technical support services revenue related to our FreeStor product. The conversion of existing customers using our legacy products to our Freestor subscription product has resulted and will continue to result in a shift ofservice revenue from the previous year reflects a decline in maintenance and technical support servicesrenewal revenue as a result of conversion to product revenue.subscription contracts.
 
Professional services revenue remained consistent at $0.1 million for the three months ended September 30, 2017 and 2016.March 31, 2022 decreased to $5,835, compared to $104,493 in the prior year period. Professional services revenue can vary from period to period based upon (i) the number of solutions sold during the existing and previous periods, (ii) the number of our customers who elect to purchase professional services, (iii) the number of professional services contracts that are performed during the period, and (iv) the number of customers who elect to purchase engineering services. We expect professional services revenue to continue to vary from period to period based upon the number of customers who elect to utilize our professional services upon purchasing any of our solutions.


Cost of Revenue, Gross Profit and Gross Margin


Total cost of revenue for the three months ended September 30, 2017March 31, 2022 decreased 40%36% to $1.2 million,$415,268, compared with $2.1 million$649,007 in the prior year period. Total gross profit decreased $0.4$1.5 million, or 8%49%, to $4.9$1.6 million for the three months ended September 30, 2017,March 31, 2022, compared with $5.3$3.2 million for the prior year period. Total gross margin increaseddecreased to 80% for the three months ended September 30, 2017,March 31, 2022, compared with 72%83% for the prior year period. The decrease in our total gross profit, in absolute dollars, was primarily due to the decrease in revenue and the increase in total gross margin was primarily due to the mix of sales and cost reduction initiatives.decreased revenue. Generally, our total gross profits and total gross margins fluctuate based on several factors, including (i) revenue growth levels, (ii) changes in personnel headcount and related costs, and (iii) our product offerings and mix of sales.


Cost of Product Revenue, Gross Profit and Gross Margin


Cost of product revenue consists primarily of industry standard hardware we purchase and integrate with our software for turn-key integrated solutions, personnel costs, amortization of capitalized software and shipping and logistics costs.warranty expenses. Cost of product revenue for the three months ended September 30, 2017March 31, 2022 decreased 19% to $0.12 million,$20,719, compared with $0.15 million$222,834 in the prior year period. Product gross margin increased to 94% for the three months ended September 30, 2017, compared with 93%March 31, 2022 increased, year over year, to 97% from 90% for the prior year period. The increasesame period in 2021. This decrease in cost of product gross marginrevenue for the three months ended March 31, 2022 was primarily attributabledue to a decreasean intentional shift away from hardware sales in the percentage of our product revenue from sales of our stand-alone software applications, which have higher gross margins than sales of our fully integrated solutions with hardware appliances,current period, compared withto the prior year period.
 


Cost of Support and Service Revenue, Gross Profit and Gross Margin


Cost of support and service revenue consists primarily of personnel and other costs associated with providing software implementations, technical support under maintenance contracts and training. Cost of support and service revenue for the three months ended September 30, 2017March 31, 2022 decreased 42%7% to $1.1 million,$394,549, compared with $1.9 million$426,173 in the prior year period. Support and service gross margin increaseddecreased slightly to 72%73% for the three months ended September 30, 2017,March 31, 2022, compared with 62%75% for the prior year period,period. The decrease in the cost of support and service revenue, in absolute dollars, was primarily attributablerelated to a reduction in personnel related costs.decrease rental costs and employee bonuses.


31

Operating Expenses


Our operating expenses for the three months ended September 30, 2017March 31, 2022 decreased 49%by $0.5 million to $3.6$2.7 million compared with $7.1from $3.2 million, in the prior year period. This decrease was primarily attributable to tighter expense controls and overall operational efficiencies which better align our current business plan on a run-rate basis. These efficiencies include among other items, stream-lined personnel related costs and global overhead costs and efficiencies realized on our redesigned go-to-market coverage models. Our worldwide headcount was 83 employees as of September 30, 2017, compared with 185 employees as of September 30, 2016. We will continue to evaluate the appropriate headcount levels to properly align our resources with our current and long-term outlook and to take actions in areas of the Company that are not performing. Included in the operating results for the three months ended September 30, 2017 and 2016 was a benefit of $0.3 million and an expense of $0.3 million of share-based compensation expense, respectively.previous year period.


Research and Development Costs
 
Research and development costs consist primarily of personnel costs for product development, share-based compensation expense, and other related costs associated with the development of new products, enhancements to existing products, quality assurance and testing. Research and development costs decreased $1.3 million,increased $46,041, or 52%7%, to $1.2 million$705,981 for the three months ended September 30, 2017,March 31, 2022, from $2.5 million$659,940 in the prior year period. The decreaseincrease in research and development costs was primarily related to a decreasean increase in personnel related costs, as we continue to allocate the appropriate level of resources based upon the product development roadmap schedule. We believe we continue to provide adequate levels of resources in support of our research and development activities to continue to enhance and to test our core products and in the development of new innovative products, features and options. Share-based compensation expense included in research and development expenses for the three months ended September 30, 2017 and 2016 was less than $0.1 million and $0.1 million, respectively. Included in share-based compensation expense for the three months ended September 30, 2016 was $0.8 million related to costs associated with our exclusive source code license and development agreement which were paid through the issuance of our common stock.costs.
 
Selling and Marketing

Selling and marketing expenses consist primarily of sales and marketing personnel and related costs, share-based compensation expense, travel, public relations expense, marketing literature and promotions, commissions, trade show expenses, and the costs associated with our foreign sales offices. Selling and marketing expenses decreased $1.9declined $0.2 million, or 62%15%, to $1.1$1.2 million for the three months ended September 30, 2017,March 31, 2022 from $3.0$1.4 million in the prior year period. The decrease in selling and marketing expenses was primarily attributablerelated to a decreasereductions in personnel related costs including a decreasecommissions and employee bonuses which were partially offset by an increase in our sales and marketing headcount as we continue to optimize our go-to-market coverage models around the world. Share-based compensation expense included in selling and marketing expenses for the three months ended September 30, 2017 and 2016 was less than $0.1 million and $0.1 million, respectively.consulting fees.

General and Administrative
 
General and administrative expenses consist primarily of personnel costs of general and administrative functions, share-based compensation expense, public company related costs, directors’ and officers’ insurance, legal and professional fees, and other general corporate overhead costs. General and administrative expenses decreased $0.4 million or 25%,increased slightly by $12,072 to $1.2 million$849,939 for the three months ended SeptemberMarch 31, 2022, compared to $837,867 for the prior year period. The increase in general and administrative expenses was due primarily to an increase in professional services which are partially offset by a reduction in employee bonuses.

Restructuring
    In June 2017, the Board of Directors of the Company (the “Board”) approved a comprehensive plan to increase operating performance ("the 2017 Plan"). The 2017 Plan resulted in a realignment and reduction in workforce. The 2017 Plan was substantially completed by the end of our fiscal year ended December 31, 2017 and when combined with previous workforce reductions in the second quarter of Fiscal 2017 reduced our workforce to approximately 81 employees at December 31, 2017. 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, 2017, from $1.6 million2018. As the lease has terminated in April 2021, there are no further restructuring costs associated with this lease.

Restructuring expense decreased $301,569 for the three months ended March 31, 2022 to $744, compared to a restructuring expense of $302,313 in the prior year period. The decrease in general and administrative expenses was primarily attributable to continuing to optimize personnel costs, professional fees and other various general and administrative costs within the Company. Relatedrestructuring expense is due to the aforementioned 2017 Plan, many share-based compensation awardsreduction in lease expenses that were forfeited and the related expense reversed accordingly, resulting in negative expense in the period. Share-based compensation expense included in general and administrative expensesclassified as restructuring costs.

Gain on Debt Extinguishment

Gain on debt extinguishment decreased $754,000 for the three months ended September 30, 2017 and 2016 was $(0.3) million and $0.1 million, respectively.



Restructuring
In the third quarter of 2013, we adopted a restructuring plan intended to better align our cost structure with the skills and resources required to more effectively execute our long-term growth strategy and to support revenue levels we expect to achieve on a go forward basis. In connection with the 2013 Plan, we eliminated over 100 positions worldwide, implemented tighter expense controls, ceased non-core activities and closed or downsized several facilities. Restructuring expense increased $0.1 millionMarch 31, 2022, from $754,000 for the three months ended SeptemberMarch 31, 2021. The debt extinguishment during such three months ended March 31, 2021 reflected the forgiveness of the Company’s PPP Paycheck Protection Program loan, which was issued by Peapack Gladstone Bank in an aggregate principal amount of $754,000, and forgiven in full on March 30, 2017 to $0.1 million, compared to no restructuring expense in the prior year period. For further information, refer to Note (16) Restructuring Costs, to our unaudited condensed consolidated financial statements.2021.


Interest and other (loss) income, netOther (Loss) Income, Net
 
Interest and other (loss) income,expense, net, increased $0.2 milliondecreased $165,653 to an incomea loss of $0.1 million$117,995 for the three months ended September 30, 2017,March 31, 2022, compared with a loss of $0.1 million$283,648 in the prior year period. The decrease in interest and other expense primarily relates to payments made on outstanding debt. The fluctuation in interest and other (loss) incomeexpense from quarter to quarter also relates to interest expense, foreign currency gains and losses, interest income, sublease income and the change in fair value of our embedded derivatives. For more information on our derivative instruments, see Note (10) Fair Value Measurements to our unaudited condensed consolidated financial statements.


32

Income Taxes
 
Our provision for income taxes consists of federal, state and local, and foreign taxes. For the three months ended September 30, 2017March 31, 2022 and 2016,2021, the Company recorded an income tax benefit of $0.0 million$121,260 and $0.1 million,provision of $44,616, respectively, consisting primarily of state and local, and foreign taxes. Our domestic

    As of March 31, 2022, our conclusion regarding the realizability of our US deferred tax assets aredid not realizable on a more-likely-than-not basischange and therefore, we have recorded a full valuation allowance against our domestic deferred tax assets. During the three months ended September 30, 2017, our conclusion did not change with respect to our domestic deferred tax assets and therefore, we have not recorded any benefit for our domestic losses in connection with forecasting the 2017 estimated annual effective tax rate.them.




RESULTS OF OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2016.
The following table presents revenue and expense line items reported in our Consolidated Statements of Operations and their corresponding percentage of total revenue for the nine months ended September 30, 2017 and 2016 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.
 Nine Months Ended September 30,  Change
Period to Period
  2017 2016 
Revenue:           
Product revenue$6,549,832
 35 % $7,465,996
 33 % $(916,164) (12)%
Support and services revenue12,329,042
 65 % 15,361,096
 67 % (3,032,054) (20)%
Total revenue18,878,874
 100 % 22,827,092
 100 % (3,948,218) (17)%
Cost of revenue: 
    
      
Product669,564
 4 % 710,233
 3 % (40,669) (6)%
Support and service3,788,282
 20 % 5,675,728
 25 % (1,887,446) (33)%
Total cost of revenue4,457,846
 24 % 6,385,961
 28 % (1,928,115) (30)%
Gross profit14,421,028
 76 % 16,441,131
 72 % (2,020,103) (12)%
Operating expenses:           
Research and development costs5,536,658
 29 % 9,475,678
 42 % (3,939,020) (42)%
Selling and marketing5,288,991
 28 % 11,385,051
 50 % (6,096,060) (54)%
General and administrative4,130,570
 22 % 5,100,739
 22 % (970,169) (19)%
Restructuring(159,597) (1)% 177,389
 1 % (336,986) *
Total operating expenses14,796,622
 78 % 26,138,857
 115 % (11,342,235) (43)%
Operating income (loss)(375,594) (2)% (9,697,726) (42)% 9,322,132
 (96)%
Interest and other (loss) income, net260,121
 1 % 265,397
 1 % (5,276) (2)%
Income (Loss) before income taxes(115,473) (1)% (9,432,329) (41)% 9,316,856
 (99)%
Provision for (benefit from) income taxes207,352
 1 % 375,338
 2 % (167,986) (45)%
Net income (loss)$(322,825) (2)% $(9,807,667) (43)% $9,484,842
 (97)%
Less: Accrual of Series A redeemable convertible preferred stock dividends634,664
 3 % 581,986
 3 % 52,678
 9 %
Less: Accretion to redemption value of Series A redeemable convertible preferred stock—
 — % 513,269
 2 % (513,269) (100)%
Net income (loss) attributable to common stockholders$(957,489) (5)% $(10,902,922) (48)% $9,945,433
 (91)%
            

           

Revenue

Total revenue for the nine months ended September 30, 2017 decreased 17% to $18.9 million, compared with $22.8 million in the prior year period.

Product revenue

Product revenue for the nine months ended September 30, 2017 decreased 12% to $6.5 million, compared with $7.5 million in the prior year period. Product revenue represented 35% and 33% of our total revenue for the nine months ended September 30, 2017 and 2016, respectively. Product revenue from our FreeStor product increased $0.5 million; however, this increase was more than offset by a decrease of product revenue from our legacy products of $1.3 million for the nine months ended September 30, 2017, compared with the prior year period. The overall decline in product revenue was primarily due to: (i) challenges in obtaining new customers and, (ii) a decrease in the volume of sales from our legacy product lines. Product revenue from our FreeStor product represented 42% and 32% of our total product revenue for the nine months ended September 30, 2017 and 2016, respectively. Product revenue from our legacy products represented 58% and 68% of our total product revenue for the nine months ended September 30, 2017 and 2016, respectively.



We continue to invest in our product portfolio by refreshing our existing product lines and developing our next generation of innovative product offerings to drive our sales volume in support of our long-term outlook.

Support and services revenue

Support and services revenue for the nine months ended September 30, 2017 decreased 20% to $12.3 million, compared with $15.4 million in the prior year period. Our maintenance and technical support service revenue results primarily from (i) the purchase of maintenance and support contracts by our customers, and (ii) the renewal of maintenance and support contracts by our existing and new customers after their initial contracts expire. During the nine months ended September 30, 2017, maintenance and technical support services revenue was the primary driver of the decrease. Maintenance and technical support services revenue related to our legacy products decreased $4.1 million, primarily driven by customer attrition and the overall decline in product license sales over the past twelve to twenty-four months, partially offset by a $1.1 million increase in maintenance and technical support services revenue related to our FreeStor product. The conversion of existing customers using our legacy products to our Freestor subscription product has resulted and will continue to result in a shift of revenue from maintenance and technical support services revenue to product revenue.
Professional services revenue remained consistent at $0.5 million for the nine months ended September 30, 2017 and 2016. Professional services revenue can vary from period to period based upon (i) the number of solutions sold during the existing and previous periods, (ii) the number of our customers who elect to purchase professional services, (iii) the number of professional services contracts that are performed during the period, and (iv) the number of customers who elect to purchase engineering services. We expect professional services revenue to vary from period to period based upon the number of customers who elect to utilize our professional services upon purchasing any of our solutions.

Cost of Revenue, Gross Profit and Gross Margin

Total cost of revenue for the nine months ended September 30, 2017 decreased 30% to $4.5 million, compared with $6.4 million in the prior year period. Total gross profit decreased $2.0 million, or 12%, to $14.4 million for the nine months ended September 30, 2017, compared with $16.4 million for the prior year period. Total gross margin increased to 76% for the nine months ended September 30, 2017, compared with 72% for the prior year period. The decrease in our total gross profit was primarily due to the decrease in revenue and the increase in total gross margin was primarily due to the mix of sales and cost reduction initiatives. Generally, our total gross profits and total gross margins fluctuate based on several factors, including (i) revenue growth levels, (ii) changes in personnel headcount and related costs, and (iii) our product offerings and mix of sales.

Cost of Product Revenue, Gross Profit and Gross Margin

Cost of product revenue for the nine months ended September 30, 2017 stayed substantially the same, at $0.7 million, compared with $0.7 million in the prior year period. Product gross margin also stayed the same for the nine months ended September 30, 2017, at 90%, when compared with the prior year period.
Cost of Support and Service Revenue, Gross Profit and Gross Margin

Cost of support and service revenue for the nine months ended September 30, 2017 decreased 33% to $3.8 million, compared with $5.7 million in the prior year period. Support and service gross margin increased to 69% for the nine months ended September 30, 2017, compared with 63% for the prior year period, primarily attributable to a reduction in personnel related costs and a severance benefit recorded as a result of litigation settlement with a former employee compared with the prior year period.



Operating Expenses

Our operating expenses for the nine months ended September 30, 2017 decreased 43% to $14.8 million, compared with $26.1 million in the prior year period. This decrease was primarily attributable to tighter expense controls and overall operational efficiencies which better align our current business plan on a run-rate basis. These efficiencies include among other items, stream-lined personnel related costs and global overhead costs and efficiencies realized on our redesigned go-to-market coverage models. Our worldwide headcount was 83 employees as of September 30, 2017, compared with 185 employees as of September 30, 2016. We will continue to evaluate the appropriate headcount levels to properly align our resources with our current and long-term outlook and to take actions in areas of the Company that are not performing. Included in the operating results for the nine months ended September 30, 2017 and 2016 was $0.2 million and $2.3 million of share-based compensation expense, respectively.

Research and Development Costs
Research and development costs decreased $3.9 million, or 42%, to $5.5 million for the nine months ended September 30, 2017, from $9.5 million in the prior year period. The decrease was primarily related to a decrease in share-based compensation expense and personnel related costs, as we continue to allocate the appropriate level of resources based upon the product development roadmap schedule. We continue to provide substantial resources in support of our research and development activities to continue to enhance and to test our core products and in the development of new innovative products, features and options. Share-based compensation expense included in research and development expenses for the nine months ended September 30, 2017 and 2016 was $0.2 million and $1.7 million, respectively. Included in share-based compensation expense for the nine months ended September 30, 2017 was $1.5 million related to costs associated with our exclusive source code license and development agreement which were paid through the issuance of our common stock.
Selling and Marketing
Selling and marketing expenses decreased $6.1 million, or 54%, to $5.3 million for the nine months ended September 30, 2017, from $11.4 million in the prior year period. The decrease in selling and marketing expenses was primarily attributable to a decrease in personnel related costs including a decrease in our sales and marketing headcount as we continue to optimize our go-to-market coverage models around the world. Share-based compensation expense included in selling and marketing expenses for the nine months ended September 30, 2017 and 2016 was less than $0.1 million and $0.2 million, respectively.
General and Administrative
General and administrative expenses decreased $1.0 million or 19%, to $4.1 million for the nine months ended September 30, 2017, from $5.1 million in the prior year period. The decrease in general and administrative expenses was primarily attributable to continuing to optimize personnel costs, professional fees and other various general and administrative costs within the Company. Share-based compensation expense included in general and administrative expenses for the nine months ended September 30, 2017 and 2016 was less than $0.0 million and $0.4 million, respectively.

Restructuring
Restructuring costs for the nine months ended September 30, 2017 was a benefit of $0.2 million due to a favorable settlement with a former employee and $0.2 million of restructuring costs in the prior period. For further information, refer to Note (16) Restructuring Costs, to our unaudited condensed consolidated financial statements.

Interest and other (loss) income, net
Interest and other (loss) income, net, remained approximately the same at $0.3 million for the nine months ended September 30, 2017 and 2016. The fluctuation in interest and other (loss) income from quarter to quarter relates to foreign currency gains and losses, interest income, sublease income and the change in our embedded derivatives.

Income Taxes
Our provision for income taxes consists of federal, state and local, and foreign taxes. For the nine months ended September 30, 2017 and 2016, the Company recorded an income provision of $0.2 million and $0.4 million, respectively. Our domestic deferred tax assets are not realizable on a more-likely-than-not basis and, therefore, we have recorded a full valuation allowance against our domestic deferred tax assets. During the nine months ended September 30, 2017, our conclusion did not change with respect to our domestic deferred tax assets and therefore, we have not recorded any benefit for our expected net domestic deferred tax assets for the full year 2017 estimated annual effective tax rate.



LIQUIDITY AND CAPITAL RESOURCES


Principal Sources of Liquidity and Company Obligations


Our principal sources of liquidity are our cash and cash equivalents balances generated from operating, investing and financing activities. Our cash and cash equivalents balance as of September 30, 2017March 31, 2022 and December 31, 20162021 totaled $1.8$3.4 million and $3.4$3.2 million, respectively. Subsequent

As described in Note (14) Stockholders' Equity to September 30, 2017,our unaudited condensed consolidated financial statements, 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 estimated offering expenses paid by the Company.

Also, as described in Note (14) Stockholders' Equity to our unaudited condensed consolidated financial statements, 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.

We are currently a party to the 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, we entered into the Loan Extension Letter Agreement, which provided for an extension of the maturity date on the portion of the outstanding indebtedness owed to Hale Capital Partners, LP (“Hale Capital”) under the Amended and Restated Loan Agreement to June 30, 2023, which constituted $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 to our unaudited condensed consolidated financial statements for more information. Also, as described further in Note (12) Series A Redeemable Convertible Preferred Stock to our unaudited condensed consolidated financial statements, Hale Capital, HCP-FVA, an affiliated party of Hale Capital, and other affiliates of Hale Capital extended the commencement of the optional redemption date of the Company’s Series A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") from July 30, 2021 to July 30, 2023. 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 March 31, 2022, the Company would have been required to pay the holders of the Series A Preferred Stock $14.8 million. The Company believes its current cash balances, together with anticipated cash flows from operating activities and cash equivalents have significantly decreased.the extensions of the maturity of its borrowings and preferred stock, 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.


Going ConcernThe Amended and Restated Loan Agreement has customary representations, warranties and affirmative and negative covenants. The negative covenants include financial covenants relating to in-force annual contract value. The Amended and Restated Loan Agreement also contains customary events of default, including but not limited to payment defaults, cross defaults with certain other indebtedness, breaches of covenants, bankruptcy events and a change of control. In the case of an event of default, as administrative agent under the Amended and Restated Loan Agreement, HCP-FVA, an affiliate of Hale Capital may (and upon the written request of lenders holding in excess of 50% of the term loans, which must include HCP-FVA, is required to) accelerate payment of all obligations under the Amended and Restated Loan Agreement, and seek other available remedies.


We have incurred significant operating lossesThe restrictions in the previous eight yearsAmended and negative cash flowRestated Loan Agreement may prevent us from operationstaking actions that we believe would be in fivethe best interests of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. In addition, our ability to comply with the previous eight years.financial and other covenants and restrictions in the Amended and Restated Loan Agreement will largely depend on the pricing of our products and services, and our ability to successfully implement our overall business strategy. We currently havecannot assure you that we
33

will be granted waivers or amendments to the Amended and Restated Loan Agreement if for any reason we are unable to comply with these covenants and restrictions. The breach of any of these covenants and restrictions could result in a default under the Amended and Restated Loan Agreement, which could result in an acceleration of our indebtedness.

As discussed in Note (17) Restructuring Costs to our unaudited condensed consolidated financial statements, the Melville, NY 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 expects to redeploy this savings to more productive uses.

Liquidity

As of March 31, 2022, we had a working capital deficiencysurplus of $12.6$0.3 million, which is inclusive of current deferred revenue of $12.3$4.0 million, and a stockholders' deficit of $22.5$14.3 million. During the ninethree months ended September 30, 2017, we incurredMarch 31, 2022, the Company had a net loss of $0.3$1.1 million and positive cash flow used infrom operations of $1.6$0.2 million. OurThe Company's total cash balance at September 30, 2017March 31, 2022 was $1.8$3.4 million, a decreasean increase of $(1.6)$0.2 million as compared to December 31, 2016. In addition to these financial metrics,2021. On June 30, 2021, the Company repaid in full $1.3 million of the $3.5 million principal amount that was outstanding as of December 31, 2016, we were notJune 2, 2021 under the Amended and Restated Loan Agreement.

Based on its projected cash flows from operations, recently completed financing activities, cost cutting measures in compliance withplace and existing cash on hand, the financial covenants of the Series A redeemable convertible preferred stock, which were mutually agreedCompany is projecting to annually, for two consecutive quarters. This breach provides the holder of the Series A redeemable convertible preferred stock with the right to require us to redeem any of the Series A redeemable convertible preferred stock at the greater of 100% of the stated value plus accrued and unpaid dividends or the product of the number of shares of common stock underlying the Series A redeemable convertible preferred stock and the closing price of our common stock as of December 31, 2016. To date, the holder of the Series A redeemable convertible preferred stock has neither exercised nor waived this right and accordingly this right may be exercised at any time. In addition, as of August 5, 2017, the holder of the Series A redeemable convertible preferred stock has the right to request a redemption of the Series A redeemable convertible preferred stock. If the holder requests that the Series A redeemable convertible preferred stock be redeemed, we may not have sufficient liquidity and to undertake the redemption. If we do not redeem the Series A redeemable convertible preferred stock, the holder of the Series A redeemable convertible preferred stock can pursue other remedies. Refer to Note (11) Series A Redeemable Convertible Preferred Stock for further discussion regarding these other remedies. Our reduced cash balance and history of losses both in and of itself, and in combination with the redemption rights of the holders of the Series A redeemable convertible preferred stock, raise substantial doubt about our ability to continue as a going concern within one year after November 20, 2017 (the date that these financial statements were issued). 

Our ability to continue as a going concern, including in the event of a redemption request by the holder, depends on our ability to execute our business plan, increase revenue and billings and reduce expenditures. During 2016, we continued to focus on aligning our expense structure with revenue expectations which included tighter expense controls and overall operational efficiencies which better align our current business plan on a run-rate basis. These efficiencies include among other items, stream-lined personnel related costs and global overhead costs and efficiencies realized on our redesigned go-to-market coverage models. In June 2017, our Board of Directors, approved the 2017 Plan which will result in a realignment and reduction in workforce. The 2017 Plan was substantially completed as of September 30, 2017. These actions are anticipated to result in an annualized cost savings of approximately $10.0 million. In connection with the 2017 Plan, we incurred severance expense of $1.0 million. In making these changes, we prioritized customer support and development while consolidating operations and cutting direct sales resources, therefore allowing us to focus on its install base and develop more efficient market channels. Our worldwide headcount was 83 employees as of September 30, 2017, compared with 166 and 226 employees as of December 31, 2016 and 2015, respectively. Although, we were able to reduce our operating expenses, our bookings, billings and revenue continued to decline which negatively impacts our ability to continue as a going concern.

As previously disclosed in the Company’s public filings, the Company’s failure to generate sufficient revenue, billing control or further reduce expenditures and/or the inability to obtain financing will result in an inability of the Company to continue as a going concern. While the Company was able to reduce expenditures and hence generated net income for the three months ended September 30, 2017 and the Company’s cash and cash equivalents increased slightly between June 30,2017 and September 30,2017, the Company’s revenues continued to decrease for such period both in comparison to the comparable period in the fiscal year ended December 31, 2016 as well as compared to the three months ended June 30, 2017. In addition, subsequent to September 30,2017, the Company’s cash and cash equivalents has significantly decreased. Accordingly, to ensure that the Company could meet its operatingbe cash flow needs and continue as a going concern, the Company entered into a short term secured loan in the principal amount of $500,000 (the “Short-Term Loan”) with HCP-FVA, LLC, an affiliate of Hale Capital Partners, LP (together “Hale Capital”) and secured a commitment (the “Commitment”) from Hale Capital to purchase up to $3 million of units from the Company (inclusive of units issued in satisfaction of the Company’s obligations under the Short-Term Loan). The Company has received the Short-Term Loan. The Company’s ability to continue as a going concern will depend on whether it receives the balance of the funds from the Commitment as well as its ability to increase revenuespositive through May 11, 2023.


and/or further reduce expenditures of which there can be no assurance. The issuance of warrants in connection with the Short Term Loan and Commitment will have a substantial dilutive effect on all existing stockholders. Please see “Note 17 - Subsequent Event” and “Item 5. - Other Information” for more information on the Short-Term Loan and the Commitment.

To the extent that we incur losses and/or are unable to receive the balance of the funds from the Commitment, we will need to seek additional financing to continue as a going concern and there can be no assurance that we will be able to obtain financing or that such financing will be on favorable terms. Similar to the Short Term Loan and the Commitment, any such financing could be dilutive to our shareholders. Failure to generate sufficient revenue, billings, control or further reduce expenditures and/or the inability to obtain financing will result in an inability to continue as a going concern.


Cash Flow Analysis


Cash flow information is as follows:
 Three Months Ended March 31,
 20222021
Cash provided by (used in):  
Operating activities214,419 137,659 
Investing activities— (39,533)
Financing activities— — 
Effect of exchange rate changes(13,989)2,207 
Net increase (decrease) in cash and cash equivalents$200,430 $100,333 
  Nine Months Ended September 30,
  2017 2016
Cash (used in) provided by:    
Operating activities (1,551,421) (7,128,038)
Investing activities (108,713) 6,773,198
Financing activities (25,710) —
Effect of exchange rate changes 45,626
 (14,932)
Net (decrease) in cash and cash equivalents $(1,640,218) $(369,772)


Net cash used inprovided by operating activities totaled $1.6$0.2 million for the ninethree months ended September 30, 2017,March 31, 2022, compared with $7.1$0.1 million of net cash provided by operating activities in the prior year period. The changes in net cash used inprovided by operating activities for the ninethree months ended September 30, 2017,March 31, 2022, was primarily due to our net loss, non-cash adjustments to net loss, and adjustments for net changes in operating assets and liabilities, primarily changes in our accounts receivable, deferred revenue, prepaid expenses, inventory, other assets, accounts payable, accrued expenses and other long-term liabilities contributed to the decrease.liabilities.


NetThere was no cash used in investing activities totaled $0.1 million for the nine months ended September 30, 2017, compared with net cashor provided by investing activities of $6.8 million in the prior year period. Included in investing activities for the ninethree months ended September 30, 2017 are purchases of property and equipment,March 31, 2022. Net cash paid for security deposits and purchases of intangible assets. Includedused in investing activities in the prior year period aretotaled $39,533. Included in investing activities for the sales and purchases of our marketable securities,three months ended March 31, 2021 are purchases of property and equipment and cash received forfrom security deposits and purchases of intangible assets. Net sales of our marketable securitiesdeposits.

There was no cash used in or provided by financing activities for the prior year period were $6.9 million.
There were minimal financing activity cash flows during the ninethree months ended September 30, 2017, which related to tax withholdings for employee share-based payment awards,March 31, 2022 and none for the prior year period.three months ended March 31, 2021.

Total cash and cash equivalents decreased $1.6increased $0.2 million to $1.8$3.4 million at September 30, 2017March 31, 2022 compared to December 31, 2016.2021.


Contractual Obligations


As of September 30, 2017, we did not have any debt andMarch 31, 2022, our significant commitments are related to (i) our offer letter with our Presidentthe Amended and Chief Executive Officer,Restated Loan Agreement, (ii) our operating leases for our office leases,facilities, (iii) dividends (including accrued dividends) on our Series A redeemable convertible preferred stock,Preferred Stock, and (iv) the potential redemption of the Series A redeemable convertible preferred stockPreferred Stock as discussed above. As

    The following is a schedule summarizing our significant obligations to make future payments under contractual obligations as of March 31, 2022:
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Operating LeasesNote Payable (a)Interest Payments (a)Long-Term Income Tax Payable (b)Series A Preferred Stock Mandatory Redemption (c)Dividends on Series A Preferred Stock (d)
202257,747 — 87,065 — — — 
202338,498 2,176,621 43,532 — — — 
Other— — — 123,979 9,000,000 7,504,873 
Total contractual obligations$96,245 $2,176,621 $130,597 $123,979 $9,000,000 $7,504,873 

(a) See Note (9) Notes Payable to our unaudited condensed consolidated financial statements for further described under "Item 5.- Other Information",information and for a detailed description of the Company has entered into the ShortAmended and Restated Term Loan and secured the Commitment.Credit Agreement.




Upon certain triggering events, such as bankruptcy, insolvency or(b) Represents our liability for uncertain tax positions. We are unable to make a material adverse effect, failure to achieve minimum financial covenants or failure to issue shares upon conversionreasonably reliable estimate of the timing of payments due to uncertainties in the timing of tax audit outcomes.
(c) Represents our potential liability if the holders of our Series A redeemable convertible preferred stockPreferred Stock redeem their shares for cash. The earliest date in accordance with our obligations, the which a redemption can occur is July 30, 2023. For further information, see Note (12) Series A redeemable convertible preferred stockholder may require usRedeemable Convertible Preferred Stock to redeem all or some of the Series A redeemable convertible preferred stock at a price equal to the greater of 100% of the stated value plus accrued and unpaid dividends or the product of the number of shares of common stock underlying the Series A redeemable convertible preferred stock and the closing price as of the occurrence of the triggering event. On or after August 5, 2017, each Series A redeemable convertible preferred stockholder can require us to redeem its Series A redeemable convertible preferred stock in cash at a price equal to 100% of the stated value being redeemed plus accrued and unpaid dividends. In addition in the event of the liquidation of the Company or a Fundamental Transaction of the Company,our unaudited condensed consolidated financial statements.

(d) Our agreements with the holders of the Series A redeemable convertible preferred stock shall be entitled toPreferred Stock provide that such holders will receive prior to the holders of the Common Stock, an amount equal to 100% of the stated value plus accrued and unpaid dividends. As of December 31, 2016, we were not in compliance with the financial covenants ofquarterly dividends on the Series A redeemable convertible preferred stock for two consecutive quarters, which provides the Series A redeemable convertible preferred stockholder the right to require us to redeem any of the Series A redeemable convertible preferred stockPreferred Stock at the greater of 100% of the stated valueprime rate plus accrued and unpaid dividends or the product of the number of shares of common stock underlying the Series A redeemable convertible preferred stock and the closing price of our common stock as of December 31, 2016. To date, the holder of the Series A redeemable convertible preferred stock has neither exercised nor waived this right and accordingly this right may be exercised at any time. As of September 30, 2017, we did not fail any non-financial covenants related to our Series A redeemable convertible preferred stock.

The holder of the Series A redeemable convertible preferred stock is entitled to receive quarterly dividends at the Prime Rate (Wall Street Journal Eastern Edition) plus 5% (up, subject to a maximum amountdividend rate of 10%), payable in cash, provided, that if we will not. We also have at least $1.0 million in positive cash flow for any calendar quarter after giving effectthe ability to the payment of such dividends, we, at our election, can pay such dividends in whole or in part in cash, provided that cash flow from operations is not negative,accrue and the remainder can be accrued or paid in common stock to the extent certain equity conditions are satisfied. As of December 31, 2016, March 31, 2017 and September 30, 2017, dueroll over dividends. Due to the lack of sufficient surplus to pay dividends as required by the Delaware General Business Corporation Law, we werethe Company was not permitted to pay the fourth quarter of 2016 dividend in cash or the first, secondcommon stock and third quarter of 2017has been accruing its quarterly dividends since then. This amount represents our potential liability to pay preferred stock dividends in cash or throughon July 30, 2023, which is the issuanceearliest date in which the holders of our common stock and accrued these dividends. As of September 30, 2017, our liability for dividends to the holder of the Series A redeemable convertible preferred stock totaled $830,568.Preferred Stock can redeem their shares for cash. For further information, see Note (12) Series A Redeemable Convertible Preferred Stock to our unaudited condensed consolidated financial statements.

We have an operating lease covering our corporate office facility that expires in April 2021. We also have several operating leases related to offices in both the United States and foreign countries. The expiration dates for these leases range from 2017 through 2019. The following is a schedule of future minimum lease payments for all operating leases as of September 30, 2017:
2017$648,816
20181,967,248
20191,614,843
20201,444,247
2021491,020
Thereafter—
 $6,166,174
In addition, as of September 30, 2017, our liability for uncertain tax positions totaled $241,287. Due to the uncertainty relating to the timing of future payments, such amounts are not presented in the above schedule.

Critical Accounting Policies and Estimates
 
We describe our significant accounting policies in Note (1), "SummarySummary of Significant Accounting Policies"Policies of our 20162021 Form 10-K. We discuss our critical accounting estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 20162021 Form 10-K. There have been no significant changes in our significant accounting policies or critical accounting estimates since December 31, 2016, other than those noted below.2021.




Share-Based Payments

The Company accounts for share-based payments in accordance with the authoritative guidance issued by the FASB on share-based compensation, which establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under the provisions of the authoritative guidance, share-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period), net of actual forfeitures. For share-based payment awards that contain performance criteria share-based compensation expense is recorded when the achievement of the performance condition is considered probable of achievement and is recorded straight-line over the requisite service period. If such performance criteria are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The Company estimates the fair value of share-based payments using the Black-Scholes option-pricing model or the Monte Carlo simulation model if a market condition exists. Share-based compensation expense for a share-based payment award with a market condition is recorded straight-line over the longer of the explicit service period or the service period derived from the Monte Carlo simulation. Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value. All share-based awards are expected to be fulfilled with new shares of common stock.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations. The Company has not amortized goodwill related to its acquisitions, but instead tests the balance for impairment. The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. The Company tests goodwill for impairment by comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value, the computed difference represents the amount of impairment. The Company's single reporting unit for purposes of its goodwill impairment test had a negative carrying value and thus the Company has determined there to be no impairment of goodwill. During 2017 there were no triggering events that would require a goodwill impairment test to be performed prior to the Company's annual goodwill impairment test.
Impact of Recently Issued Accounting Pronouncements


See Item 1 of Part 1, Condensed Consolidated Financial Statements – Note (1) Basis of Presentation.
 
Off-Balance Sheet Arrangements
 
As of September 30, 2017March 31, 2022 and December 31, 2016,2021, we had no off-balance sheet arrangements.


Item 3.     Quantitative and Qualitative Disclosures About Market Risk
 
Foreign Currency Risk.

We have several offices outsideare not required to provide the United States. Accordingly,information required by this item as we are subject to exposure from adverse movementsconsidered a smaller reporting company, as defined in foreign currency exchange rates. For the three months ended September 30, 2017 and 2016, approximately 71% and 75%Section 229.10(f)(1) of our sales were from outside North America. Not all of these transactions were made in foreign currencies. Our primary exposure is to fluctuations in exchange rates for the U.S. Dollar versus the Euro and Japanese Yen, and to a lesser extent the Canadian Dollar, the Korean Won and the British Pound. Changes in exchange rates in the functional currency for each geographic area’s revenues are primarily offset by the related expenses associated with such revenues. However, changes in exchange rates of a particular currency could impact the re-measurement of such balances on our balance sheets.

If foreign currency exchange rates were to change adversely by 10% from the levels at September 30, 2017, the effect on our results before taxes from foreign currency fluctuations on our balance sheet would be approximately $1.6 million. The above analysis disregards the possibility that rates for different foreign currencies can move in opposite directions and that losses from one currency may be offset by gains from another currency.Regulation S-K.
 


Item 4.     Controls and Procedures
 
Under the supervisionDisclosure Controls and with the participation of our management, including our principal executive officerProcedures

The Company maintains “disclosure controls and principal financial officer, we have evaluated the effectivenessprocedures,” as such term is defined in Rules 13a-15e and 15d-15e of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. No changes in the Company's internal control over financial reporting occurred during the quarter ended September 30, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Disclosure controls and procedures are proceduresExchange Act, that are designed to ensure that information required to be disclosed by us in theits reports, that we file or submit underpursuant to the Securities Exchange Act, of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC'sSEC’s rules and forms. Disclosure controlsforms, and procedures include, without limitation, controls and procedures designed to ensure that such information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to ourits management, including our principal executive officerits Chief Executive Officer and principal financial officer,Chief Financial
35

Officer, as appropriate, to allow timely decisions regarding the required disclosure.disclosures. In designing and evaluating the disclosure controls and procedures, management has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.
The Company’s Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer and principal accounting officer) have evaluated the effectiveness of its “disclosure controls and procedures” as of the end of the period covered this report.

Internal Control Over Financial Reporting

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company; as such term is defined in Rules 13a-15(f) under the Exchange Act, as amended. To evaluate the effectiveness of the Company’s internal control over financial reporting, the Company’s management uses the Integrated Framework (2013) adopted by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2022, using the COSO framework (2013). The Company’s management has determined that the Company’s internal control over financial reporting is effective as of that date.

The Principal Executive Officer and the Principal Financial Officer believe that the consolidated financial statements and other information contained in this Quarterly Report on Form 10Q present fairly, in all material respects, our business, financial condition and results of operations.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by our Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



 

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PART II.     OTHER INFORMATION
 
Item 1. Legal Proceedings

SeeFrom time to time we are party to legal proceedings that we believe to be ordinary, routine litigation incidental to the discussionbusiness of present or former operations. 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 material litigation in Note (14) Litigation, to the unaudited condensed consolidated financial statements, which is incorporated by reference in Item 1.condition or operating results.
 
Item 1A.  Risk Factors
 
We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition, or operating results are set forth in Item 1A to our 20162021 Form 10-K.

As described in this Form 10-Q, the Company's ability to continue as a going concern is dependent on its ability to receive the balance of the funds from the Commitment and not incur future losses of which there can be no assurance. In addition, the Short Term Loan and the Commitment will cause substantial dilution to our existing stockholders and accordingly could impact the ability of our common stock to trade on the OTCQB market and could also negatively impact the trading price our common stock.

Our common stock has been delisted from the Nasdaq Capital Market. The delisting of our common stock from the Nasdaq Capital Market and a subsequent delisting from the OTCQB market could materially impact the liquidity of our common stock.


Unknown Factors

Additional risks and uncertainties of which we are unaware or which currently we deem immaterial also may become important factors that affect us. 




Item 2. Unregistered Sales of Equity Securities and use of Proceeds

None.

Item 3. Defaults Upon Senior Securities


As of December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017, due to the lack of sufficient surplus to pay dividends as required by the Delaware General Business Corporation Law, we were not permitted to pay the fourth quarter of 2016 or the first, second and third quarter of 2017 dividends in cash or through the issuance of our common stock and accrued these dividends. As of September 30, 2017, our liability for dividends to the holder of the Series A redeemable convertible preferred stock totaled $830,568.None.


Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information


                On November 17, 2017, HCP-FVA, LLC (the “Lender”) provided a commitment letter to the Company agreeing to finance up to $3 million to the Company (the “Commitment”) on the terms, and subject to the conditions, set forth in that certain commitment letter, as further described below.  As part of that Commitment, on November 17, 2017, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Lender and certain other loan parties named therein, pursuant to which the Lender made a short term loan to the Company in the principal amount of $500,000 (the “Short Term Loan”).  The Lender is an affiliate of Hale Capital Partners, LP (together, “Hale Capital”), the Company’s largest stockholder through its ownership of Series A Redeemable Preferred Stock , and an affiliate of FalconStor director, Martin Hale. None.
                Pursuant to the terms of the Loan Agreement, the Short Term Loan is secured by all of the assets of the Company and guaranteed by each of the Company’s domestic subsidiaries.  The Short Term Loan bears interest at a rate equal to the prime rate plus 0.75%, which will be increased by an additional 5% during the continuance of a Default or Event of Default (as each term is defined in the Loan Agreement).  The Short Term Loan will be due and payable on May 17, 2018, unless prepaid or satisfied through the issuance by the Company of units in a proposed private placement which will be offered to certain eligible stockholders existing on the date of the Loan Agreement (the “Proposed Offering”).  Such units would consist of senior secured debt in the aggregate principal amount of the Short Term Loan and nominal warrants to purchase approximately 61,165,134 shares of the Company’s common stock, as further described below. 
                In the event the Short Term Loan is prepaid, such prepayment will be subject to the payment of a premium in an amount equal to 5% of the principal amount of the Short Term Loan prepaid.   The Short Term Loan must be repaid in the event of certain fundamental events, incurrence of any additional indebtedness, other than permitted indebtedness (as defined in the Loan Agreement), upon a change of control and with any insurance proceeds not reinvested in the Company.  The Loan Agreement has customary representations, warrants and affirmative and negative covenants.  In  addition, the Company is required to maintain a minimum total liquidity of $2 million and cannot permit a variance of more than 10% of net cash flow from the amounts set forth in a rolling weekly detailed budget agreed upon at the signing of the Loan Agreement. 
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                In consideration for making the Short Term Loan and Commitment, the Company issued a warrant to purchase 13,859,128 shares of common stock at an exercise price of $0.001 per share, which warrant has customary terms and conditions and permits cashless exercises (the “Initial Backstop Warrant”).  Upon the funding of all or any portion of the Commitment, the Company will issue an additional warrant (the “Additional Backstop Warrant” and, together with the Initial Backstop Warrant, the “Backstop Warrants”) to purchase 41,577,382 shares of common stock at an exercise price of $0.001 per share, which warrant shall be in substantially the same form as the Initial Backstop Warrant.  Fifty percent (50%) of the Backstop Warrants (or the shares of common stock issuable upon exercise thereof on a post-cashless exercise basis) are subject to cancellation in the event that more than half of the units in the Proposed Offering are purchased by eligible stockholders (other than Hale Capital).  The Backstop Warrants are in addition to the nominal warrants to be issued upon purchase of any units in the Proposed Offering.

                As part of the Commitment, the Proposed Offering contemplates the private placement of approximately $14.08 million of units, which assumes year end closing, with each unit consisting of senior secured debt, nominal warrants and shares of the Company’s Series A Preferred Stock held by Hale Capital.  If the Proposed Offering is fully subscribed, $4 million of the total offering proceeds would be paid to the Company in exchange for the portion of the units consisting of secured debt and warrants and approximately $10.08 million of the total offering proceeds (less any portion attributable to the units purchased by Hale Capital) would be paid to Hale Capital for the purchase of its Series A Preferred Stock.  Pursuant to the terms of the Commitment, the Lender has committed to purchase 75% of the total number of units to be issued in the Proposed Offering to ensure the Company receives at least $3 million of total offering proceeds, inclusive of the units issuable upon conversion of the Short Term Loan.
                The issuance of warrants in connection with the Short Term Loan and Commitment, will have a substantial dilutive effect on all existing stockholders of the Company. For example, if Lender funds the full Commitment, Hale Capital will beneficially own, when combined with Hale Capital’s current ownership, and the warrants issued in connection with the Short Term Loan and shares set aside for management, approximately 73% of the Company, on an as-converted basis.  If Lender funds only 25% of the total number of units to be issued in the Proposed Offering due to purchases of units by eligible stockholders of


the Company electing to partially draw on the Commitment, Hale Capital will beneficially own, when combined with Hale Capital’s current ownership, the warrants issued in connection with the Short Term Loan and shares set aside for management, approximately 21.5% of the Company, on an as-converted basis.


Item 6.     Exhibits
10.131.1
Separation Agreement between FalconStor Software, Inc., and Todd Oseth, dated August 15, 2017, incorporated herein by reference to Exhibit 10.1 to the Registrant's current report on Form 8-K filed August 17, 2017. (1)
10.2
Agreement between FalconStor Software, Inc. and Todd Brooks, dated August 14, 2017,incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed August 17,2017. (1)

10.3
Separation Agreement and General Release between FalconStor Software, Inc. and Daniel Murale, dated August 16, 2017, incorporated by reference to Exhibit 10.3 to the Registrant’s current report on Form 8-K filed August 17, 2017. (1)

10.4
Agreement between FalconStor Software, Inc. and Patrick McClain, dated August 17, 2017, incorporated by reference to Exhibit 10.4 to the Registrant’s current report on Form 8-K filed August 17, 2017. (1)


31.1
Certification of the Chief Executive Officer
31.2
Certification of the Chief Financial Officer
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
101.1The following financial statements from FalconStor Software, Inc’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017,March 31, 2022, formatted in XBRL (eXtensible Business Reporting Language):
(i)unaudited Condensed Consolidated Balance Sheets – March 31, 2022 and December 31, 2021.
(i)(ii)unaudited Condensed Consolidated Balance Sheets – September 30, 2017 and December 31, 2016.
(ii)unaudited Condensed Consolidated Statement of Operations – Three and Nine Months Ended September 30, 2017March 31, 2022 and 2016.2021.
(iii)unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2017March 31, 2022 and 2016.2021.
(iv)unaudited Condensed Consolidated Statements of Stockholder's Deficit - Three Months Ended March 31, 2022 and 2021.
(v)unaudited Condensed Consolidated Statement of Cash Flows – NineThree and Months Ended September 30, 2017March 31, 2022 and 2016.2021.
(v)(vi)Notes to unaudited Condensed Consolidated Financial Statements – September 30, 2017.March 31, 2022.

104.0Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
.
(1) Management contract or compensatory plan or arrangement.
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FALCONSTOR SOFTWARE, INC.
(Registrant)
/s/ Patrick McClainVincent Sita
Patrick McClainVincent Sita
Executive Vice President, Chief Financial Officer and Treasurer
(principal financial and accounting officer)
 

/s/ Todd Brooks
Todd Brooks
President & Chief Executive Officer
November 20, 2017May 11, 2022(principal executive officer)



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