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 ~~June 30, 2018~~March 31, 2019

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)

DELAWARE	77-0216135
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

~~823 Congress Ave,~~701 Brazos Street, Suite ~~1300,~~400, Austin, TX	78701
(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)

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 filer o	Accelerated filer o
Non-accelerated filer o ~~(Do not check if a smaller reporting company)~~x	Smaller reporting company x
Emerging growth company o

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 ý

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbols	Name of each exchange on which registered
Common Stock, $.001 par value per share	FALC	OTC Market Group
Series A redeemable convertible preferred stock, $.001 par value	FALC	OTC Market Group

The number of shares of common stock outstanding as of ~~July 31, 2018~~April 30, 2019 was ~~97,937,491.~~587,255,165.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX



		Page
PART I.	Financial Information	34

Item 1.	Condensed Consolidated Financial Statements	34

	Condensed Consolidated Balance Sheets at ~~June 30, 2018~~March 31, 2019 (unaudited) and December 31, ~~2017~~2018	34

	Unaudited Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	45

	Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	56

	Unaudited Condensed Consolidated Statements of Stockholder's Deficit for the three months ended March 31, 2019 and 2018

	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~	68

	Notes to the Unaudited Condensed Consolidated Financial Statements	79

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3026

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4232

Item 4.	Controls and Procedures	4232

PART II.	Other Information	4334

Item 1.	Legal Proceedings	4334

Item 1A.	Risk Factors	4334

Item 6.	Exhibits	4435

SIGNATURES		4536

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	4,043,668		$	1,011,472		$	2,368,149		$	3,059,677
Accounts receivable, net of allowances of $208,490 and $354,542, respectively	2,068,998			4,168,015
Accounts receivable, net of allowances of $126,463 and $162,112, respectively							3,328,528			3,605,411
Prepaid expenses and other current assets	1,254,015			1,244,494			1,740,486			1,909,846
Contract assets, net	1,477,619			—
Contract assets							861,862			637,179
Inventory							30,562			14,885
Total current assets	8,844,300			6,423,981			8,329,587			9,226,998
Property and equipment, net of accumulated depreciation of $18,071,912 and $17,926,959, respectively	504,580			636,112
Property and equipment, net of accumulated depreciation of $18,191,988 and $18,194,827, respectively							406,105			433,935
Operating lease right-of-use assets							2,493,530			—
Deferred tax assets, net	597,780			590,977			542,270			545,044
Software development costs, net	185,797			279,414			57,696			88,769
Other assets	941,030			992,760			984,698			919,609
Goodwill	4,150,340			4,150,339			4,150,339			4,150,339
Other intangible assets, net	110,671			141,631			93,116			91,334
Contract assets, net	1,460,494			—			378,357			516,643
Total assets	$	16,794,992		$	13,215,214		$	17,435,698		$	15,972,671
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable	$	820,115		$	1,092,864		$	476,717		$	551,389
Accrued expenses	2,375,718			4,376,235			2,602,595			2,879,473
Short-term loan, net of debt issuance costs and discounts	—			370,151
Deferred revenue, net	7,245,124			11,760,327
Operating lease liabilities, net							1,608,394			—
Deferred revenue							6,150,150			6,859,592
Total current liabilities	10,440,957			17,599,577			10,837,856			10,290,454
Other long-term liabilities	1,715,750			1,154,512			831,014			1,549,692
Notes payable, net	2,525,670			—			2,693,291			3,124,827
Deferred tax liabilities, net	85,559			85,559
Operating lease liabilities, net of current portion							1,531,183			—
Deferred tax liabilities, net of current portion							297,766			297,890
Deferred revenue, net	4,426,638			6,600,363			3,137,942			2,506,898
Total liabilities	19,194,574			25,440,011			19,329,052			17,769,761
Commitments and contingencies (Note 11)
Series A redeemable convertible preferred stock, $.001 par value, 2,000,000 shares authorized, 900,000 shares issued and outstanding, redemption value of $10,527,075 and $9,000,000, respectively	9,040,397			9,000,000
Series A redeemable convertible preferred stock, $.001 par value, 2,000,000 shares authorized, 900,000 shares issued and outstanding, redemption value of $11,384,866 and $11,104,923, respectively							10,132,972			9,756,706
Stockholders' deficit:
Common stock - $.001 par value, 800,000,000 and 100,000,000 shares authorized, respectively, 97,937,491 and 60,091,560 shares issued, respectively and 97,937,491 and 44,563,490 shares outstanding, respectively	97,932			60,090
Common stock - $.001 par value, 800,000,000 shares authorized, 587,255,165 shares issued and 587,255,165 shares outstanding							587,254			587,254
Additional paid-in capital	112,873,099			168,637,157			112,294,831			112,661,846
Accumulated deficit	(122,496,878		)	(130,930,284		)	(123,032,701		)	(122,907,794		)
Common stock held in treasury, at cost (0 and 15,528,070 shares, respectively)	—			(57,032,917		)
Accumulated other comprehensive loss, net	(1,914,132		)	(1,958,843		)	(1,875,710		)	(1,895,102		)
Total stockholders' deficit	(11,439,979		)	(21,224,797		)	(12,026,326		)	(11,553,796		)
Total liabilities and stockholders' deficit	$	16,794,992		$	13,215,214		$	17,435,698		$	15,972,671

See accompanying notes to unaudited condensed consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Revenue:
Product revenue	$	983,645		$	2,499,655		$	2,917,589		$	4,420,707		$	1,745,784		$	1,933,944
Support and services revenue	3,027,936			4,234,671			6,087,941			8,352,734			2,747,194			3,060,005
Total revenue	4,011,581			6,734,326			9,005,530			12,773,441			4,492,978			4,993,949
Cost of revenue:
Product	39,740			351,969			65,890			550,684			79,669			26,150
Support and service	590,309			1,418,663			1,319,197			2,672,579			563,745			728,888
Total cost of revenue	630,049			1,770,632			1,385,087			3,223,263			643,414			755,038
Gross profit	3,381,532			4,963,694			$	7,620,443		$	9,550,178		3,849,564			4,238,911
Operating expenses:
Research and development costs	928,097			2,025,132			1,932,795			4,319,995			947,384			1,004,698
Selling and marketing	872,109			2,109,599			2,065,659			4,160,141			1,040,289			1,193,550
General and administrative	1,451,884			1,345,343			3,106,824			2,966,894			1,476,296			1,654,940
Restructuring costs (benefit)	809,245			—			635,982			(236,302		)	157,693			(173,263		)
Total operating expenses	4,061,335			5,480,074			7,741,260			11,210,728			3,621,662			3,679,925
Operating loss	(679,803		)	(516,380		)	(120,817		)	(1,660,550		)
Operating income													227,902			558,986
Interest and other income (loss), net	(323,750		)	(29,121		)	(313,420		)	125,800			(265,223		)	10,330
Loss before income taxes	(1,003,553		)	(545,501		)	(434,237		)	(1,534,750		)
Provision for income taxes	551			94,300			62,990			217,248
Net loss	$	(1,004,104	)	$	(639,801	)	$	(497,227	)	$	(1,751,998	)
Income (loss) before income taxes													(37,321		)	569,316
Income tax expense													87,586			62,439
Net income (loss)													$	(124,907	)	$	506,877
Less: Accrual of Series A redeemable convertible preferred stock dividends	214,963			215,089			458,130			419,664			247,027			243,167
Less: Deemed dividend on Series A redeemable convertible preferred stock	—			—			2,269,042			—			—			2,269,042
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	77,645			—			115,750			—			129,239			38,105
Net loss attributable to common stockholders	$	(1,296,712	)	$	(854,890	)	$	(3,340,149	)	$	(2,171,662	)	$	(501,173	)	$	(2,043,437	)
Basic net loss per share attributable to common stockholders	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.05	)
Diluted net loss per share attributable to common stockholders	$	(0.02	)	$	(0.02	)	$	(0.05	)	$	(0.05	)
Basic net income (loss) per share attributable to common stockholders													$	0.00		$	(0.05	)
Diluted net income (loss) per share attributable to common stockholders													$	0.00		$	(0.05	)
Weighted average basic shares outstanding	84,448,219			44,440,751			64,616,334			44,265,525			588,798,795			44,564,094
Weighted average diluted shares outstanding	84,448,219			44,440,751			64,616,334			44,265,525			588,798,795			44,564,094

See accompanying notes to unaudited condensed consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Net loss	$	(1,004,104	)	$	(639,801	)	$	(497,227	)	$	(1,751,998	)
Net income (loss)													$	(124,907	)	$	506,877
Other comprehensive income (loss), net of applicable taxes:
Foreign currency translation	129,956			5,433			44,712			(180,096		)	19,392			(85,245		)
Total other comprehensive income (loss), net of applicable taxes:	129,956			5,433			44,712			(180,096		)	19,392			(85,245		)
Total comprehensive loss	$	(874,148	)	$	(634,368	)	$	(452,515	)	$	(1,932,094	)
Total comprehensive income (loss)													$	(105,515	)	$	421,632
Less: Accrual of Series A redeemable convertible preferred stock dividends	214,963			215,089			458,130			419,664			247,027			243,167
Less: Deemed dividend on Series A redeemable convertible preferred stock	—			—			2,269,042			—			—			2,269,042
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	77,645			—			115,750			—			129,239			38,105
Total comprehensive loss attributable to common stockholders	$	(1,166,756	)	$	(849,457	)	$	(3,295,437	)	$	(2,351,758	)	$	(481,781	)	$	(2,128,682	)

See accompanying notes to unaudited condensed consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(UNAUDITED)



	Three Months Ended March 31, 2019 and 2018
	Common Stock	Additional Paid-In Capital			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Loss, Net			Total Stockholders' Deficit
Balance at January 1, 2019	587,254	$	112,661,846		$	(122,907,794	)	$	—		$	(1,895,102	)	$	(11,553,796	)
Net loss					(124,907		)							(124,907		)
Share-based compensation to employees		9,251												9,251
Accretion of Series A redeemable convertible preferred stock		(129,239		)										(129,239		)
Dividends on Series A redeemable convertible preferred stock		(247,027		)										(247,027		)
Foreign currency translation											19,392			19,392
Balance at March 31, 2019	587,254	$	112,294,831		$	(123,032,701	)	$	—		$	(1,875,710	)	$	(12,026,326	)

Balance at January 1, 2018	60,090	$	168,637,157		$	(130,930,284	)	$	(57,032,917	)	$	(1,958,843	)	$	(21,224,797	)
Net income					506,877									506,877
Share-based compensation to employees		(22,895		)										(22,895		)
Accretion of Series A redeemable convertible preferred stock		(38,105		)										(38,105		)
Dividends on Series A redeemable convertible preferred stock		(243,167		)										(243,167		)
Deemed dividends on Series A redeemable convertible preferred stock		(2,269,042		)										(2,269,042		)
Foreign currency translation											(85,245		)	(85,245		)
Cumulative effect of adoption of ASC 606					8,929,204									8,929,204
Balance at March 31, 2018	60,090	$	166,063,948		$	(121,494,203	)	$	(57,032,917	)	$	(2,044,088	)	$	(14,447,170	)

See accompanying notes to unaudited condensed consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Cash flows from operating activities:
Net loss	$	(497,227	)	$	(1,751,998	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net income (loss)							$	(124,907	)	$	506,877
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	346,346			553,455			127,871			179,755
Share-based payment compensation	6,624			501,410			9,251			(22,895		)
Non-cash professional services expenses	—			41,159
Loss on disposal of fixed assets	—			63,774
Provision (benefit) for returns and doubtful accounts	(146,052		)	99,312
Deferred income taxes (benefit)	—			30,124
Provision (recovery of) for returns and doubtful accounts							(35,649		)	(62,052		)
Changes in operating assets and liabilities:
Accounts receivable	2,248,771			1,961,276			325,914			1,143,932
Prepaid expenses and other current assets	425,718			403,937			170,927			280,266
Contract assets	219,141			—			(86,397		)	(253,648		)
Inventory							(15,829		)	—
Other assets	7,572			(154,832		)	(69,164		)	7,610
Accounts payable	(300,168		)	193,640			(64,080		)	81,789
Accrued expenses and other long-term liabilities	(260,174		)	(1,098,547		)	(268,024		)	(697,070		)
Deferred revenue	(1,350,095		)	(2,487,989		)	(74,142		)	47,785
Net cash provided by (used in) operating activities	700,456			(1,645,279		)	(104,229		)	1,212,349
Cash flows from investing activities:
Purchases of property and equipment	(28,408		)	(44,163		)	(42,586		)	(1,809		)
Capitalized software development costs	(23,599		)	—			—			(16,185		)
Security deposits	33,845			(17,152		)	146			17,472
Purchase of intangible assets	(39,861		)	(45,517		)	(26,365		)	(27,276		)
Net cash used in investing activities	(58,023		)	(106,832		)	(68,805		)	(27,798		)
Cash flows from financing activities:
Payments for tax withholding for share-based compensation	—			(25,710		)
Proceeds from issuance of long-term debt, net of issuance costs	2,354,727			—			—			2,358,627
Payments of long term-debt							(489,321		)	—
Net cash provided by (used in) financing activities	2,354,727			(25,710		)	(489,321		)	2,358,627
Effect of exchange rate changes on cash and cash equivalents	35,036			33,988			(29,173		)	8,610
Net increase (decrease) in cash and cash equivalents	3,032,196			(1,743,833		)	(691,528		)	3,551,788
Cash and cash equivalents, beginning of period	1,011,472			3,391,528			3,059,677			1,011,472
Cash and cash equivalents, end of period	$	4,043,668		$	1,647,695		$	2,368,149		$	4,563,260
Supplemental disclosures:
Cash paid for interest	$	34,724		$	—		$	60,833		$	7,101
Cash paid for income taxes, net	$	—		$	135,915		$	—		$	—
Non-cash investing and financing activities:
Undistributed Series A redeemable convertible preferred stock dividends	$	573,880		$	419,664		$	247,027		$	243,167
Warrants issued	$	4,143,000		$	—		$	—		$	4,143,000
Deemed dividend	$	2,269,042		$	—		$	—		$	2,269,042
Discount on preferred stock	$	1,602,428		$	—		$	—		$	1,602,428
Discount on notes payable	$	288,504		$	—		$	—		$	288,504
Accretion of Series A redeemable convertible preferred stock							$	129,239		$	38,105

See accompanying notes to unaudited condensed consolidated financial statements.

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 (the "Company" or "FalconStor"), is a leading storage software company offering a converged data services software platform that is hardware agnostic. The Company develops, manufactures and sells data migration, business continuity, disaster recovery, optimized backup and de-duplication solutions and provides the related maintenance, implementation and engineering services.

(b) Liquidity

As of ~~June 30, 2018,~~March 31, 2019, we had a working capital deficiency of ~~$1.6~~$2.5 million, which is inclusive of current deferred revenue of ~~$7.2~~$6.2 million, and a stockholders' deficit of ~~$11.4~~$12.0 million. During the three months ended ~~June 30, 2018,~~March 31, 2019, we had a net loss of ~~$1.0 million. During the six months ended June 30, 2018, we had a net loss of $0.5~~$0.1 million and ~~positive~~negative cash flow from operations of ~~$0.7~~$0.1 million. Our cash and cash equivalents at ~~June 30, 2018~~March 31, 2019 was ~~$4.0~~$2.4 million, ~~an increase~~a decrease of ~~$3.0~~$0.7 million as compared to December 31, ~~2017.~~

In June 2017, the Board approved a comprehensive plan to improve operating performance (the “2017 Plan”). The 2017 Plan resulted in a realignment in workforce. The 2017 Plan was substantially completed by the end of the Company’s fiscal year ended December 31, 2017, and when combined with previous workforce reductions in the second quarter of Fiscal 2017 reduced the Company’s workforce to approximately 81 employees at December 31, 2017.

On November 17, 2017, HCP-FVA, LLC (the “Lender” or "HCP-FVA") 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 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”).

On February 23, 2018, the Company closed on the Commitment and the Lender subscribed for the full $3 million of Units in the Commitment by payment of $2.5 million in cash and the conversion of the $500,000 Short Term Loan. The $3 million term loan has an interest rate of prime plus 0.75% and a maturity date of June 30, 2021. The Lender is an affiliate of Hale Capital Partners, LP (together, "Hale Capital") and the Company's largest shareholder through its ownership of Series A redeemable preferred stock ("Series A Preferred Stock"), and an affiliate of Martin Hale, a Director of the Company. As part of the Commitment, Hale Capital also agreed to postpone the date of the optional redemption of the Series A Preferred Stock from August 5, 2017 to July 30, 2021, and to waive prior breaches of the terms of the Series A Preferred Stock which had triggered a redemption right. See Note (9) ~~Notes Payable and Stock Warrants~~ ~~for further information.~~2018.

We believe that our cash flows from future operations and existing cash on hand are sufficient to conduct our planned operations and meet our contractual ~~requirements.~~requirements for at least one year from the date of issuance of the accompanying consolidated financial statements.

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) Use of Estimates

The preparation of financial statements in conformity with ~~GAAP~~accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include those related to revenue recognition, accounts receivable allowances, share-based payment compensation, valuation of derivatives, capitalizable software development costs, valuation of goodwill and other intangible assets and income taxes. During the first quarter of 2018, the Company also had significant estimates in the determination of the fair value of Series A Preferred Stock, notes payable and warrants issued. 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) 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 the financial position of the Company at ~~June 30, 2018,~~March 31, 2019, and the results of its operations for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. 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, ~~2017~~2018 ("~~2017~~2018 Form 10-K").

(f) Recently Adopted Accounting Pronouncements

~~Revenue from Contracts with Customers~~

In ~~May 2014,~~February 2016, the ~~FASB ("~~Financial Accounting Standards ~~Board"~~Board (the "FASB") issued ~~new guidance~~ASU No. 2016-02, which establishes a right-of-use (ROU) model that requires ~~an entity~~a lessee to ~~recognize the amount~~record a right of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance replaces most existing revenue recognition guidance in GAAP in the United Statesuse (ROU) asset and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted the new guidance as of January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous revenue guidance.

The most significant impact of the standard relates to our accounting for our term license revenue. Specifically, for Freestor software subscription licenses, revenue is now recognized at the time of delivery rather than ratably over the subscription period.

~~The adoption of the standard resulted in an increase to the opening balance of accumulated deficit of $8.9 million, related to the cumulative effect of~~ a decrease in deferred revenue of $5.4 million, an increase in contract assets of $3.1 million from the upfront recognition of term licenses and the general requirement to allocate the transaction price on a relative stand-alone selling price, and an increase of $0.4 million in prepaid expenses and other current assets.

~~Following is a summary of the impact to the Company’s current financial results from adopting the new revenue recognition standard:~~

Statements of Operations Under Previous Guidance New Revenue Standard Adjustment Under Current Accounting Guidance
Three Months Ended June 30, 2018
Product revenue $ 2,407,652
$ (1,424,007 ) $ 983,645
Support and services revenue 2,840,818
187,118
3,027,936
Selling and marketing 850,951
21,158
872,109
Provision for income taxes 551
—
551
Net income (loss) 211,627
(1,215,731 ) (1,004,104 )
Net loss attributable to common stockholders (80,981 ) (1,215,731 ) (1,296,712 )
Basic net income (loss) per share attributable to common stockholders —
(0.02 ) (0.02 )
Diluted net income (loss) per share attributable to common stockholders —
(0.02 ) (0.02 )

Statements of Operations Under Previous Guidance New Revenue Standard Adjustment Under Current Accounting Guidance
Six Months Ended June 30, 2018
Product revenue $ 4,075,136
$ (1,157,547 ) $ 2,917,589
Support and services revenue 6,087,941
—
6,087,941
Selling and marketing 2,009,672
55,987
2,065,659
Provision for income taxes 62,990
—
62,990
Net income (loss) 604,333
(1,101,560 ) (497,227 )
Net loss attributable to common stockholders (2,238,589 ) (1,101,560 ) (3,340,149 )
Basic net loss per share attributable to common stockholders (0.03 ) (0.02 ) (0.05 )
Diluted net loss per share attributable to common stockholders (0.03 ) (0.02 ) (0.05 )

Balance Sheets Under Previous Guidance New Revenue Standard Adjustment Under Current Accounting Guidance
June 30, 2018
Prepaid expenses and other current assets $ 948,272
$ 305,743
$ 1,254,015
Contract assets, net, current —
1,477,619
1,477,619
Contract assets, net, long-term —
1,460,494
1,460,494
Deferred revenue, net, current 10,842,101
(3,596,977 ) 7,245,124
Deferred tax liabilities, net 85,559
—
85,559
Deferred revenue, net, long-term 5,250,834
(824,196 ) 4,426,638
Accumulated deficit (130,161,907 ) 7,665,029
(122,496,878 )

~~Adoption of the revenue recognition standard had no impact to cash from or used in operating, financing, or investing on our condensed consolidated statements of cash flows.~~

~~See Note (2)~~ ~~Summary of Significant Accounting Policies~~ ~~for further details.~~

~~Statements of Cash Flows~~

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 to the effective interest rate 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. The Company has adopted this guidance and it did not have a significant impactlease liability on the ~~Company's financial statements and related disclosures.~~

~~Employee Benefit Plans~~

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 effectivebalance sheet for public entities for annual periods beginning after December 15, 2017, including interim periods, with early adoption permitted, which for the Company is the annual period ending December 31, 2018. The Company has adopted this guidance and it did not have a significant impact on the Company's financial statements and related disclosures.

~~Financial Assets and Financial Liabilities~~

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 Company has adopted this guidance and it did not have a significant impact on the Company's financial statements and related disclosures.

~~(g) Recently Issued Accounting Pronouncements~~

most leases. In July 2018, the FASB issued ASU ~~2018-10~~ ~~Leases (Topic 842),Codification Improvements~~ ~~and ASU~~No. 2018-11, ~~Leases (Topic 842), Targeted Improvements~~,which amends the guidance to ~~provide additional guidance for~~add a method of adoption whereby the ~~adoption of Topic 842~~. ~~ASU 2018-10 clarifies certain provisions and correct unintended applications~~issuer may elect to recognize a cumulative effect adjustment at the beginning of the ~~guidance such~~period of adoption. ASU No. 2018-11 does not require comparative period financial information to be adjusted. Leases will be classified as either finance or operating, with classification affecting the ~~application~~pattern of ~~implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders' equity.ASU 2018-11provides an alternative transition method and practical expedient for separating contract components for~~expense recognition in the ~~adoption of Topic 842~~. ~~In February 2016, the FASB issued~~income statement. ASU 2016-02 ~~Leases (Topic 842)~~ ~~which requires an entity to recognize assets and liabilities arising from~~defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. To determine whether a contract conveys the right to control the use of the identified asset for a period of time, the customer has to have both ~~financing~~(1) the right to obtain substantially all of the economic benefits from the use of the identified asset and ~~operating~~(2) the right to direct the use of the identified asset, a contract does not contain an identified asset if the supplier has a substantive right to substitute such asset ("the leasing criteria"). We have determined that our real estate leases with terms ~~greater than 12 months.~~in excess of one year and which do not include an option to purchase the underlying asset, meet the leasing criteria. On January 1, 2019, we adopted ASU ~~2018-11, ASU 2018-10, and ASU~~No. 2016-02, ~~(collectively, "the new lease standards") are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating~~applying the ~~effect the new lease standards will have on its Condensed Consolidated Financial Statements; however, the Company anticipates recognizing assets and liabilities arising from any~~package of practical expedients to leases that ~~meet~~commenced before the ~~requirements under~~effective date whereby we elected to not reassess the ~~new~~following: (i) whether any expired or existing contracts contain leases; (ii) the lease ~~standards~~classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. We elected to apply the transition provisions as of January 1, 2019, the date of adoption, and we recorded lease ROU assets of $2.9 million and related liabilities of $3.6 million million on ~~the adoption date and including qualitative and quantitative disclosures in the Company’s Notes~~our balance sheet related to ~~the Condensed Consolidated Financial Statements.~~our operating leases. We have no financing leases. There was no change to our consolidated statements of operations or cash flows.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements. The amendments in ASU 2018-09 affect a wide variety of Topics in the FASB Codification and apply to all reporting entities within the scope of the affected accounting guidance. The Company has evaluated ASU 2018-09 in its entirety and determined that the amendments related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, are the only provisions that currently apply to the Company. The amendments in ASU 2018-09 related to Topic 718-740, Compensation-Stock Compensation-Income Taxes, clarify that an entity should recognize excess tax benefits related to stock compensation transactions in the period in which the amount of the deduction is determined. ~~The amendments in~~On January 1, 2019, we adopted ASU 2018-09 ~~related to Topic 718-740 are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does~~and it did not ~~expect the adoption of the new standard to~~ have a material impact on the Company's Condensed Consolidated Financial Statements.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance in Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at

the grant date fair value on the grant date. The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. On January 1, 2019, we adopted ASU 2018-07 ~~is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the~~and it did not have a material impact ~~of the new standard~~ on the Company's Condensed Consolidated Financial Statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Jobs Act (“the Tax Act”) to retained earnings. On January 1, 2019, we adopted ASU 2018-02 and it did not have a material impact on the Company's Condensed Consolidated Financial Statements.

(g) Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The objective of the guidance is to improve the effectiveness of disclosure requirements on defined benefit pension plans and other postretirement plans. The guidance is effective for fiscal years beginning after December 15, ~~2018, with early adoption permitted.~~2020. The Company does not expect ~~the~~ adoption of ~~this accounting~~the new standard to have a material impact on ~~our financial position, results of operations, cash flows, or presentation thereof.~~its Condensed Consolidated Financial Statements.

(2) Summary of Significant Accounting Policies

The Company's significant accounting policies were described in Note (1) Summary of Significant Accounting Policies of the ~~2017~~2018 Form 10-K. There have been no significant changes in the Company's significant accounting policies since December 31, ~~2017,~~2018, other than those noted below. For a description of the Company's other significant accounting policies refer to the ~~2017~~2018 Form 10-K.

Revenue from Contracts with Customers and Associated Balances

Nature of Products and Services

Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. Revenue allocated to software maintenance and support services is recognized ratably over the contractual support period.

Hardware products consist primarily of servers and associated components and function independently of the software products and as such asare accounted for as separate performance obligations. Revenue allocated to hardware maintenance and support services is recognized ratably over the contractual support period.

Professional services are primarily related to software implementation services and associated revenue is recognized upon customer acceptance.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a contract asset or receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For perpetual licenses with multi-year product maintenance agreements, the Company generally invoices customers at the beginning of the coverage period. For multi-year subscription licenses, the Company generally invoices customers annually at the beginning of each annual coverage period. The Company records a contract asset related to revenue recognized for multi-year on-premises licenses as its right to payment is conditioned upon providing product support and services in future years.

~~The opening balance~~As of March 31, 2019 and December 31, 2018, accounts receivable, net of allowance for doubtful accounts, was $4.2 million as of January 1, 2018. There was no adjustment needed to accounts receivable for the cumulative effect of applying ASC 606 under the modified retrospective method. The opening balance of short and long-term contract assets, net of allowance for doubtful accounts, and adjusted for the cumulative effect of applying ASC 606 under the modified retrospective method, was $3.1 million as of January 1, 2018.

~~As of June 30, 2018 and December 31, 2017, accounts receivable, net of allowance for doubtful accounts, was $2.1~~$3.3 million and ~~$4.2~~$3.6 million, respectively. As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, short and long-term contract assets, net of allowance for doubtful accounts, was ~~$2.9~~$1.2 million and ~~$0.0~~$1.2 million, respectively.

The allowances for doubtful accounts reflect the Company’s best estimates of probable losses inherent in the accounts receivable and contract assets’ balances. The Company determines the allowances based on known troubled accounts, historical experience, and other currently available evidence. Write-offs in the accounts receivable and contract assets allowance accounts for the three months ended ~~June 30, 2018~~March 31, 2019 were $0.0 ~~million and $0.0 million, respectively. Write-offs in the accounts receivable and contract assets allowance accounts for the six months ended June 30, 2018 were $0.4~~ million and $0.0 million, respectively.

Deferred revenue is comprised mainly of unearned revenue related maintenance and technical support on term and perpetual licenses. Maintenance and technical support revenue is recognized ratably over the coverage period. Deferred revenue also includes contracts for professional services to be performed in the future which are recognized as revenue when the company delivers the related service pursuant to the terms of the customer arrangement.

Changes in deferred revenue were as follows:

Six Months Ended June 30, 2018
Balance at December 31, 2017 $ 18,360,690
   Cumulative effect of applying ASC 606 under the modified retrospective method* (5,359,579 )
   Deferral of revenue 7,720,187
   Recognition of revenue (9,005,530 )
   Change in reserves (44,006 )
Balance at June 30, 2018 $ 11,671,762

*See Note (1) ~~Basis of Presentation~~ ~~to our unaudited condensed consolidated financial statements for further information.~~



Three Months Ended March 31, 2019
Balance at December 31, 2018	$	9,366,490
Deferral of revenue	4,414,580
Recognition of revenue	(4,492,978		)
Balance at March 31, 2019	$	9,288,092

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 ~~$11.7~~$9.3 million as of ~~June 30, 2018,~~March 31, 2019, of which the Company expects to recognize approximately ~~62%~~66% of the revenue over the next 12 months and the remainder thereafter.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not include a significant financing component. The primary purpose of the Company’s invoicing terms is to provide customers with simplified and predictable ways of purchasing its products and services, not to receive financing from our customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with maintenance and support revenue recognized ratably over the contract period, and multi-year on-premises licenses that are invoiced annually with product revenue recognized upon delivery.

Significant Judgments

The Company’s contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. For products and services aside from maintenance and support, the Company estimates SSP by adjusting the list price by historical discount percentages. SSP for software and hardware maintenance and support fees is based on the stated percentages of the fees charged for the respective products.

The Company’s perpetual and term software licenses have significant standalone functionality and therefore revenue allocated to these performance obligations are recognized at a point in time upon electronic delivery of the download link and the license keys.

Product maintenance and support services are satisfied over time as they are stand-ready obligations throughout the support period. As a result, revenues associated with maintenance services are deferred and recognized as revenue ratably over the term of the contract.

Revenues associated with professional services are recognized at a point in time upon customer acceptance.

Disaggregation of Revenue

Please refer to the condensed consolidated statements of operations and note 16, segment reporting and concentrations, for discussion on revenue disaggregation by product type and by geography. The Company believes this level of disaggregation sufficiently depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

Assets Recognized from Costs to Obtain a Contract with a Customer

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if it expects the benefit of those costs to be longer than one year. The Company has determined that its sales commission program meets the requirements for cost capitalization. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets on our consolidated balance sheets. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less.

Leases

We have entered into operating leases for our various facilities. We determine if an arrangement is a lease at inception. Operating leases are included in ROU assets, and lease liability obligations in our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liability obligations represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. We have lease agreements with lease and non-lease components and account for such components as a single lease component. As most of our leases do not provide an implicit rate, we estimated our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. Our lease terms may include options to extend or terminate the lease. Such extended terms have been considered in determining the ROU assets and lease liability obligations when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.

Right of Use Assets and Liabilities

We have various operating leases for office facilities that expire through 2021. Below is a summary of our right of use assets and liabilities as of March 31, 2019.



Right of use assets	2,493,530
Lease liability obligations, current	1,608,394
Lease liability obligations, less current portion	1,531,183
Total lease liability obligations	3,139,577
Weighted-average remaining lease term	2.07
Weighted-average discount rate	6.20	%

During the three months ended March 31, 2019 and March 31, 2018, we recognized approximately $0.4 million and $0.5 million, respectively, in total operating lease costs. During the three months ended March 31, 2019 and March 31, 2018, operating cash flows from operating leases was approximately $0.5 million and $0.5 million, respectively. During the three months ended March 31, 2019 , we recognized sublease income of approximately $0.2 million. We recorded no sublease income during the three months ended March 31, 2018, as no sublease agreements were in effect at this time.

Approximate future minimum lease payments for our right of use assets over the remaining lease periods as of March 31, 2019, are as follows:



Remainder of 2019	1,265,236
2020	1,567,637
2021	596,475
Thereafter	—
Total minimum lease payments	3,429,348
Less interest	(289,771	)
Present value of lease liabilities	3,139,577

(3) Earnings Per Share

Basic earnings per share ("EPS") is computed based on the weighted average number of shares of common stock outstanding. Diluted EPS is computed based on the weighted average number of common shares outstanding increased by dilutive common stock equivalents, attributable to stock option awards, restricted stock awards, warrants and the Series A Preferred Stock outstanding.

The following represents the common stock equivalents that were excluded from the computation of diluted shares outstanding because their effect would have been anti-dilutive for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Stock options, warrants and restricted stock 370,239,830
6,427,858
370,239,830
6,427,858
Series A redeemable convertible preferred stock 8,781,516
8,781,516
8,781,516
8,781,516
Total anti-dilutive common stock equivalents 379,021,346
15,209,374
379,021,346
15,209,374

~~The following represents a reconciliation of the numerators and denominators of the basic and diluted EPS computation:~~

Three Months Ended June 30, Six Months Ended June 30,

2018 2017 2018 2017
Numerator
Net loss $ (1,004,104 ) $ (639,801 ) $ (497,227 ) $ (1,751,998 )
Effects of Series A redeemable convertible preferred stock:

Less: Series A redeemable convertible preferred stock dividends 214,963
215,089
458,130
419,664
Less: Deemed dividend on Series A redeemable convertible preferred stock —
—
2,269,042
—
Less: Accretion to redemption value of Series A redeemable convertible preferred stock 77,645
—
115,750
—
Net loss attributable to common stockholders $ (1,296,712 ) $ (854,890 ) $ (3,340,149 ) $ (2,171,662 )
Denominator

Weighted average basic shares outstanding 84,448,219
44,440,751
64,616,334
44,265,525
Effect of dilutive securities:

Stock options, warrants and restricted stock —
—
—
—
Series A redeemable convertible preferred stock —
—
—
—
Weighted average diluted shares outstanding 84,448,219
44,440,751
64,616,334
44,265,525

EPS

Basic net loss per share attributable to common stockholders $ (0.02 ) $ (0.02 ) $ (0.05 ) $ (0.05 )
Diluted net loss per share attributable to common stockholders $ (0.02 ) $ (0.02 ) $ (0.05 ) $ (0.05 )



	Three Months Ended March 31,
	2019	2018
Stock options and restricted stock	1,185,500	424,492,410
Series A redeemable convertible preferred stock	8,781,516	8,781,516
Total anti-dilutive common stock equivalents	9,967,016	433,273,926

(4) Property and Equipment

The gross carrying amount and accumulated depreciation of property and equipment as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are as follows:


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Gross carrying amount	$	18,576,492		$	18,563,071		$	18,598,093		$	18,628,762
Accumulated depreciation	(18,071,912		)	(17,926,959		)	(18,191,988		)	(18,194,827		)
Property and Equipment, net	$	504,580		$	636,112		$	406,105		$	433,935

For the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ depreciation expense was ~~$71,441~~$72,214 and ~~$135,669,~~$86,869, respectively. ~~For the six months ended June 30, 2018 and 2017, depreciation expense was $158,310 and $321,754, respectively.~~

(5) Software Development Costs

The gross carrying amount and accumulated amortization of software development costs as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are as follows:


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Gross carrying amount	$	2,940,812		$	2,917,215		$	2,950,132		$	2,950,132
Accumulated amortization	(2,755,015		)	(2,637,801		)	(2,892,436		)	(2,861,363		)
Software development costs, net	$	185,797		$	279,414		$	57,696		$	88,769

During the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ the Company recorded ~~$58,609~~$31,073 and ~~$61,687, respectively, of amortization expense related to capitalized software costs. During the six months ended June 30, 2018 and 2017, the Company recorded $117,216 and $150,928,~~$58,607, respectively, of amortization expense related to capitalized software costs.

(6) Goodwill and Other Intangible Assets

The gross carrying amount and accumulated amortization of goodwill and other intangible assets as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 are as follows:


	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Goodwill	$	4,150,340		$	4,150,339		$	4,150,339		$	4,150,339
Other intangible assets:
Gross carrying amount	$	3,856,262		$	3,816,402		$	3,917,606		$	3,891,241
Accumulated amortization	(3,745,591		)	(3,674,771		)	(3,824,490		)	(3,799,907		)
Net carrying amount	$	110,671		$	141,631		$	93,116		$	91,334

For the three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ amortization expense was ~~$36,541~~$24,584 and ~~$39,858, respectively. For the six months ended June 30, 2018 and 2017, amortization expense was $70,820 and $80,773,~~$34,279, respectively.

(7) Share-Based Payment Arrangements

On June 22, 2018, the Company's stockholders adopted the FalconStor Software, Inc. 2018 Incentive Stock Plan (the "2018 Plan"). The 2018 Plan is administered by the Compensation Committee and provides for the issuance of up to 147,199,698 shares of the Company's common stock upon the grant of shares with such restrictions as determined by the Compensation Committee to the employees and directors of, and consultants providing services to, the Company or its affiliates. Exercise prices of the options will be determined by the Compensation Committee, subject to the consent of Hale Capital. The vesting terms shall be performance based and determined by the Compensation Committee, subject to the consent of Hale Capital, based on various factors, including (i) the return of capital to the holders of the Series A Preferred Stock and the Company’s Common Stock in the event of a Change of Control, (ii) the repayment of the Company’s obligations under its senior secured debt, and (iii) the Company’s free cash flow. Seventy percent (70%) of the Shares issuable under the 2018 Plan shall be granted as stock ~~options as soon as practicable following the approval of the Plan by the shareholders of the Company.~~options. The remaining thirty percent (30%) of the shares subject to the Plan plus any returned shares will be reserved for future grants of awards to new hires.

The 2016 Incentive Stock Plan (the "2016 Plan") was terminated in April 2018.

The following table summarizes the 2018 Plan, which was the only plan under which the Company was able to grant equity compensation as of ~~June 30, 2018:~~March 31, 2019:



	Shares	Shares Available	Shares
Name of Plan	Authorized	for Grant	Outstanding
FalconStor Software, Inc. 2018 Incentive Stock Plan	147,199,698	147,199,698	—

The following table summarizes the Company’s equity plans that have terminated or expired but that still have equity awards outstanding as of ~~June 30, 2018:~~March 31, 2019:



Name of Plan	Shares Available for Grant	Shares Outstanding
FalconStor Software, Inc., 2016 Incentive Stock Plan	—	~~505,000~~400,000
FalconStor Software, Inc., 2006 Incentive Stock Plan	—	~~1,196,700~~785,500
FalconStor Software, Inc., 2000 Stock Option Plan	—	~~4,500~~—

Related to the ~~aforementioned~~ 2016 Plan, many share-based compensation awards were forfeited and the related expense reversed accordingly, resulting in negative expense infor the ~~period.~~three months ended March 31, 2018. 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 six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017:~~2018:


	Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
	2018		2017		2018			2017		2019		2018
Cost of revenue - Support and Service	4,875		8,834		13,575			65,285		1,593		8,700
Research and development costs	18,744		54,813		41,350			184,528		4,745		22,606
Selling and marketing	4,525		7,198		12,457			63,738		2,410		7,932
General and administrative	1,375		26,310		(60,758		)	229,018		503		(62,133		)
	$	29,519	$	97,155	$	6,624		$	542,569	$	9,251	$	(22,895	)

(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 ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, the Company recorded an income tax provision of ~~$62,990.~~$87,586. The effective tax rate for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 was ~~(14.5%~~(234.7%). The effective tax rate differs from the statutory rate of 21% primarily related to the mix of foreign and domestic earnings as no tax expense or benefit is being recognized on domestic earnings or losses. As of ~~June 30, 2018,~~March 31, 2019, the Company’s conclusion did not change with respect to the realizability of its domestic deferred tax assets and therefore, the Company has not recorded any income tax ~~expense~~benefit as such amounts are fully offset with a valuation allowance.

For the ~~six~~three months ended ~~June 30, 2017,~~March 31, 2018, the Company recorded an income tax provision of ~~$217,248.~~$62,439. The effective tax rate for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 was ~~(14.2%)~~11.0%. The effective tax rate differs from the statutory rate of ~~35%~~21% primarily related to the mix of foreign and domestic earnings as no tax expense or benefit is being recognized on domestic earnings or losses.

The Company’s total unrecognized tax benefits, excluding interest, at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were ~~$180,202.~~$134,246 and 134,246, respectively. As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Company had ~~$90,035~~$60,578 and ~~$82,508,~~$57,860, respectively, of accrued ~~interest.~~interest reflected in accrued expenses.

On December 22, 2017 the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of TCJA. The purpose of SAB No. 118 was to address any uncertainty or diversity of view in applying ASC Topic 740, Income Taxes in the reporting period in which the TCJA was enacted. SAB No. 118 addresses situations where the accounting is incomplete for certain income tax effects of the TJCA upon issuance of a company’s financial statements for the reporting period that includes the enactment date. SAB No. 118 allows for a provisional amount to be recorded if it is a reasonable estimate of the impact of the TCJA. Additionally, SAB No. 118 allows for a measurement period to finalize the impacts of the TCJA, not to extend beyond one year from the date of enactment.

The Company’s accounting for certain elements of the 2017 Tax Cuts and Jobs Act was incomplete as of the period ended December 31, 2017, and remains incomplete as of June 30, 2018. However, the Company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items at December 31, 2017 and June 30, 2018.

(9) Notes Payable and Stock Warrants

On November 17, 2017, HCP-FVA provided a commitment letter to the Company agreeing to finance up to $3 million to the Company 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 Agreement with Lender and certain other loan parties named therein, pursuant to which the Lender made the Short Term Loan to the Company in the principal amount of $500,000.

Pursuant to the terms of the Loan Agreement, the Short Term Loan was secured by all of the assets of the Company and guaranteed by each of the Company’s domestic subsidiaries. The Short Term Loan bore interest at a rate equal to the prime rate plus 0.75%. The Short Term Loan was 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. 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, at an exercise price of $0.001 per share, (the "Backstop Warrants"). 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).

On February 23, 2018, the Company closed on its previously-announced Commitment from HCP-FVA to purchase up to $3 million of Units (as defined below) from the Company to backstop a proposed private placement of Units to certain eligible stockholders of the Company (the “Financing”). HCP-FVA subscribed for the full $3 million of Units (at the Company’s election) in the Commitment by payment of $2.5 million in cash and the conversion of a $500,000 Short-Term Loan into Units.

In the Financing, the Company intends to offer to FalconStor stockholders as of November 17, 2017 who are accredited investors the opportunity to purchase up to a total of 40 million Units (inclusive of subscriptions by HCP-FVA). The Financing is expected to close on or before September 23, 2018, and documentation relating to the Financing is anticipated to be provided to prospective investors during the week of August 15, 2018. Each Unit consists of the following (each, a “Unit”):


i.	$0.10 in senior secured debt (for a total of $4 million of senior secured debt assuming full subscription of the Financing), secured by all of the assets of the Company and guaranteed by each of the Company’s domestic subsidiaries, having an interest rate of prime plus 0.75% and a maturity date of June 30, 2021 (the “Term Loan”);


~~ii.~~	warrants to purchase 12.233 shares of the Company’s common stock for a nominal exercise price (for a total of 489.32 million shares assuming full subscription of the Financing) (the “Financing Warrants”); and


~~iii.~~	0.0225 shares of Series A Preferred Stock at a per Unit price of $0.2643 (subject to increase to take into account accretion of the Series A Preferred Stock after June 30, 2018), all such shares to be acquired directly from their current holder, HCP-FVA.

by other eligible stockholders. If other eligible stockholders subscribe for more than 10 million Units, they will purchase those additional Units consisting of senior secured debt and Series A Preferred Stock directly from HCP-FVA (with the associated Financing Warrants to be issued by the Company directly to the eligible stockholders, and HCP-FVA’s Financing Warrants associated with those additional Units sold to the eligible stockholders to be cancelled in accordance with the terms of such Financing Warrants), subject to HCP-FVA maintaining at least 25% of the total Units to be issued in the Financing. HCP-FVA has agreed to subscribe for more than its pro rata portion of the Units available for purchase in the Financing (based on common stock ownership on an as-converted basis as of November 17, 2017), and if other eligible stockholders elect to subscribe for more than their pro rata share, the remaining Units shall be allocated among such stockholders (including HCP-FVA) based on their common stock ownership on an as-converted basis as of November 17, 2017 and HCP-FVA's right to purchase 25% of the total units in the Financing.

On February 23, 2018, in connection with HCP-FVA’s subscription in the Financing, the Company entered into an Amended and Restated Term Loan Credit Agreement, dated as of the same date (the “Amended and Restated Loan Agreement”), with HCP-FVA and certain other loan parties named therein setting forth the terms of the Term Loan. The Amended and Restated Loan Agreement amends and restates the Loan Agreement.

Under the Amended and Restated Loan Agreement, in the event the Term Loan is prepaid for any reason, such prepayment will be subject to the payment of a premium in an amount equal to 5% of the principal amount prepaid. The Term Loan is required to be prepaid upon the occurrence of certain events, including but not limited to certain assets dispositions, the incurrence of additional indebtedness, the receipt of insurance proceeds, and a change of control, subject to certain exceptions.

The Amended and Restated Loan Agreement has customary representations, warranties and affirmative and negative covenants. The negative covenants include financial covenants by the Company to (i) maintain minimum cash denominated in U.S. dollars plus accounts receivable outstanding for less than 90 days of $2 million, and (ii) until the consummation of the Financing with eligible stockholders (other than HCP-FVA), not permit a variance of more than 10% of net cash flow from the amounts set forth in a rolling weekly detailed budget through the second fiscal quarter of 2018, agreed upon at the signing of the Amended and Restated Loan Agreement. 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 Loan Agreement, HCP-FVA may (and upon the written request of lenders holding in excess of 50% of the Term Loan, which must include HCP-FVA, is required to accelerate payment of all obligations under the Loan Agreement, and seek other available remedies).

Under the Amended and Restated Loan Agreement, the Company also agreed to use its commercially reasonable efforts to obtain, as soon as practicable, the approval of its stockholders to amend the Company’s Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of the Company’s common stock in order to permit the exercise of the Financing Warrants issuable in the Financing (the “Stockholder Approval”). Such stockholder approval has been obtained.

As part of the Commitment, Hale Capital also agreed to postpone the date of the redemption of the Series A Preferred Stock from August 5, 2017 to July 30, 2021, and to waive prior breaches of the terms of the Series A Preferred Stock which had also triggered a redemption right.

If eligible stockholders (other than HCP-FVA) subscribe for and purchase more than fifty percent (50%) of the Units in the Financing on the terms and conditions set forth in Section 10.13 of the Amended and Restated Loan Agreement and Schedule 10.13 thereto, then 66.66% of the number of shares of common stock issued to HCP-FVA in respect of the Backstop Warrants issued upon the closing of the Commitment (or, if the Backstop Warrants issued upon the closing of the Commitment have not then been exercised, issuable to HCP-FVA) upon exercise of such Backstop Warrants, as determined on a post-cashless exercise basis, shall be cancelled (and, if such Backstop Warrants have been exercised on a non-cashless exercise basis, the Company shall reimburse HCP-FVA for the cash exercise price paid in respect of the cancelled warrant shares). In consideration for HCP-FVA’s subscription of 3 million of Units, HCP-FVA was issued Financing Warrants to purchase 366,990,000 shares of the Company’s common stock for a nominal exercise price. The Financing Warrants are currently exercisable as Stockholder Approval has been obtained.

~~On April 23, 2018, HCP-FVA exercised most of its Backstop Warrants on a cash-less basis and was issued 53,370,601 shares of the Company's common stock.~~

The issuance of the Financing Warrants and the Backstop Warrants in connection with the Commitment and the Financing will have a substantial dilutive effect on all existing stockholders of the Company. For example, if HCP-FVA is the only subscriber in the Financing, Hale Capital will beneficially own, when combined with Hale Capital’s current ownership and shares set aside for management, approximately 73% of the common stock of the Company on an as-converted basis. If the Financing is fully

subscribed and HCP-FVA’s subscription amounts to 25% of the total number of Units issued in the Financing, Hale Capital will beneficially own, when combined with Hale Capital’s current ownership and shares set aside for management, approximately 22% of the common stock of the Company on an as-converted basis.

~~The Commitment and the Financing were approved by the Company’s Board of Directors, based on a recommendation of a special committee of independent directors, with Mr. Hale recusing himself.~~

~~As previously disclosed in the Company’s filings with the Securities and Exchange Commission, the Company was actively seeking financing in order to meet the Company’s operating cash flow needs.~~

During the fiscal year-ended December 31, 2017 and six months ended June 30, 2018, FalconStor was unable to make its Series A Preferred Stock quarterly dividend payments, and was subject to mandatory redemption under the Series A Preferred Stock purchase agreement. In conjunction with the Commitment, Hale Capital agreed to postpone the date of the mandatory redemption of the Series A Preferred Stock from August 5, 2017 to July 30, 2021, and to waive prior breaches of the terms of the Series A Preferred Stock which had also triggered a mandatory redemption right (“Series A Mandatory Redemption Extension”). Accordingly, as a result of these changes, for accounting purposes, the Series A Preferred Stock is considered new Series A Preferred Stock.

As a result, the Company assessed whether the transaction was a troubled debt restructuring. Although the Company meets the criteria of a debtor experiencing financial difficulties as described above in Accounting Standards Code ("ASC") 470-60-55-8, Hale Capital was not granted a concession as defined in ASC 470-60-55-10 as the effective interest rate for both the Series A Preferred Stock and the Original Loan was higher following the restructuring of Series A Preferred Stock and Long-Term Debt compared to the interest rate immediately before the restructuring. Since no concession was granted, Troubled Debt Restructuring accounting guidance does not apply.

As part of the analysis, the present value of the cash flows under the terms of the new Series A Preferred Stock and loans are greater than 10% different than the present value of the old Series A Preferred Stock and loans cash flows, as such extinguishment treatment applies.

~~There is no beneficial conversion feature associated with the revised Series A Preferred Stock.~~

When preferred stock is extinguished, the issuer should include the gain or loss on extinguishment in its net income attributable to common shareholders used to calculate earnings per share, as described in ASC 260-10-S99-2.

When multiple instruments are issued in a single transaction, the total proceeds from the transaction should be allocated among the individual freestanding instruments identified. Since Hale Capital currently holds all of the debt and Series A Preferred Stock, the restructuring is considered to be a capital transaction. As such the gain or loss is recorded in equity.

ASC 470-20-25-2 requires that debt or stock with detachable warrants issued in a bundled transaction with debt and equity proceeds be accounted for separately, based on the relative fair values of each instrument. The proceeds allocated to the Backstop Warrants and Financing Warrants are valued at $4,143,000.

~~Derivative treatment does not apply to the warrants issued in association with the restructuring based upon the warrants being penny warrants (pre-paid stock).~~

Warrants should be considered outstanding in earnings per share calculation if the Company is profitable to common shareholders; otherwise, warrants should be excluded as the effect would be antidilutive.

At the time of the grant, the Company had insufficient shares outstanding to accommodate the exercise of the Financing Warrants granted as detailed in the Background section above. ASC 480 "Distinguishing Liabilities from Equity" is referenced below to determine whether such warrants need to be recorded as liabilities or equity.

Warrant grants that do not have associated outstanding common shares, will be recorded as liabilities as the Company would be required to settle such obligations using cash settlement (deficient by 368,533,620 shares). Changes in the fair value of the liability from period to period should be reflected within earnings. On June 22, 2018, the Company filed a certificate of amendment to the Company’s Restated Certificate of Incorporation to increase the authorized shares of common stock to 800,000,000. As a result, the fair value of these warrants have been reclassified to equity. The warrants contain standard antidilution language; therefore, they do not prevent a freestanding instrument from being considered indexed to the issuer’s own stock.

~~The initial transaction was recorded as follows:~~

At Inception February 23, 2018
Basis Fair Value
Series A redeemable convertible preferred stock, net $ 10,312,113
$ 8,709,684
Notes payable, net 2,728,778
2,457,249
Warrant liability —
4,143,000
Total $ 13,040,891
$ 15,309,933

~~Deemed dividend $ 2,269,042~~

~~The Series A Preferred Stock consists of the following:~~

Series A redeemable convertible preferred stock principal balance $ 9,000,000
Accrued dividends 1,312,112
Discount (1,602,428 )
Total Series A redeemable convertible preferred stock, net at inception on February 23, 2018 8,709,684
Accrued dividends 214,963
Accretion of preferred stock 115,750
Total Series A redeemable convertible preferred stock, net at June 30, 2018 $ 9,040,397

The notes payable balance consists of the following:

Notes payable principal balance $ 3,000,000
Deferred issuance costs (254,247 )
Discount (288,504 )
Total notes payable, net at inception on February 23, 2018 2,457,249
Accretion of discount 72,321
Deferred issuance costs (3,900 )
Total notes payable, net at June 30, 2018 $ 2,525,670



Notes payable principal balance	$	3,000,000
Deferred issuance costs	(254,247		)
Discount	(288,504		)
Total notes payable, net at inception on February 23, 2018	2,457,249
Proceeds from issuance of long-term debt	1,000,000
Revaluation of long-term debt	(447,008		)
Accretion of discount	202,195
Deferred issuance costs	(87,609		)
Total notes payable, net at December 31, 2018	$	3,124,827
Repayment of long-term debt	(489,321		)
Accretion of discount	57,785
Total notes payable, net at March 31, 2019	$	2,693,291

The note bears an interest of prime plus 0.75% and matures on June 30, 2021. As of March 31, 2019, the Company was in compliance with financial covenants.

(10) Fair Value Measurements

The Company measures its cash equivalents and derivative instruments at fair value. Fair value is an exit price, representing the amount that would be received on the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value.

The methodology for measuring fair value specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). As a result, observable and unobservable inputs have created the following fair value hierarchy:

Level 1 – Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities. At ~~June 30, 2018,~~March 31, 2019, the Company did not have any Level 1 category assets included in the condensed consolidated balance sheets. At December 31, ~~2017,~~2018, 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, 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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, 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 ~~June 30, 2018~~March 31, 2019 or December 31, ~~2017.~~2018.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at ~~June 30, 2018:~~March 31, 2019:


			Fair Value Measurements at Reporting Date Using								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)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant other Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Derivative liabilities:
Derivative Instruments	482,871		—		—		482,871		492,327		—		—		492,327
Total derivative liabilities	482,871		—		—		482,871		492,327		—		—		492,327

Total assets and liabilities measured at fair value	$	482,871	$	—	$	—	$	482,871	$	492,327	$	—	$	—	$	492,327

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, ~~2017:~~2018:


			Fair Value Measurements at Reporting Date Using								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)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant other Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Derivative liabilities:
Derivative Instruments	445,838		—		—		445,838		498,086		—		—		498,086
Total derivative liabilities	445,838		—		—		445,838		498,086		—		—		498,086

Total assets and liabilities measured at fair value	$	445,838	$	—	$	—	$	445,838	$	498,086	$	—	$	—	$	498,086

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 fair value of the Company's Series A Preferred Stock is based on its future cash flows discounted at a 15% yield. The fair value of the Company's note payable is based on its future cash flows discounted at 12%. The fair value of the Backstop Warrants and Financing Warrants to purchase approximately ~~424~~422 million shares of the Company's common stock, , was based on the enterprise value of the Company calculated by a third party appraiser less the preferred stock and preferred stock accrued dividends that have a preference over common shares. These warrants were then valued based on a Black Scholes value using volatility of 60% and resulted in a fair value of approximately $0.01 per share.

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 six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~June 30, 2017:~~

March 31, 2018:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019			2018
Beginning Balance	$	445,838	$	355,612	$	445,838	$	336,862	$	498,086		$	445,838
Total loss recognized in earnings	37,033		63,948		37,033		82,698
Total income (loss) recognized in earnings									(5,759		)	—
Ending Balance	$	482,871	$	419,560	$	482,871	$	419,560	$	492,327		$	445,838

(11) Commitments and Contingencies

The Company’s headquarters are located in Austin, Texas. The Company has an operating lease covering its Melville, N.Y. office facility that expires in April 2021. The Company has sublet a portion of this lease. The Company also has several additional operating leases related to offices in foreign countries. The expiration dates for these leases range from 2018 through 2021. The following is a schedule of future minimum lease payments as well as sublease income for all operating leases as of ~~June 30, 2018:~~March 31, 2019:


	Payments		Sublease Income			Net Commitments		Payments		Sublease Income			Net Commitments
2018	1,003,556		(178,414		)	825,142
2019	1,614,843		(428,194		)	1,186,649		1,265,236		(623,776		)	641,460
2020	1,444,247		(428,194		)	1,016,053		1,567,637		(623,776		)	943,861
2021	491,020		(142,731		)	348,289		596,475		(65,194		)	531,281
2022								—		—			—
Thereafter	—		—			—		—		—			—
	$	4,553,666	$	(1,177,533	)	$	3,376,133	$	3,429,348	$	(1,312,746	)	$	2,116,602

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 six~~ months ended ~~June 30, 2018,~~March 31, 2019, 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~~As described under Note 12, the ~~Company to issue shares upon conversion~~holders of the Series A Preferred Stock in accordance with its obligations, the Series A Preferred Stockholders may require the Company to redeem all or some of the Series A 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 Preferred Stock and the closing price as of the occurrence of thehave redemption rights upon certain triggering event. Commencing after July 30, 2021, each Series A Preferred Stockholder can require the Company to redeem its Series A Preferred Stock in cash at a price equal to 100% of the stated value being redeemed plus accrued and unpaid dividends.events. As of ~~December~~March 31, 2016, the Company was not in compliance with the financial covenants of the Series A Preferred Stock for two consecutive quarters, which provides the Series A Preferred Stockholders the right to require the Company to redeem any of the Series A 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 Preferred Stock and the closing price of the Company's common stock as of December 31, 2016. The holder of the Series A Preferred Stock did not exercise this right as the holder of the Series A Preferred Stock subsequently agreed to waive these breaches. As of June 30, 2018,2019, the Company did not fail any non-financial covenants related to the Company's Series A Preferred Stock.

~~As of~~Effective 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 Letter 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, the Company created the 2018 Plan, which was adopted by the Company's stockholders on June 22, 2018. The 2018 Plan provides for the issuance of up to 147,199,698 shares which is based on 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. Mr. Brooks’ employment can be terminated at will. If Mr. Brooks’ employment is terminated by the Company other than for cause he is entitled to receive severance equal to twelve (12) months of his base salary if (i) he has been employed by the Company for at least twelve (12) months at the time of termination or (ii) a change of control has occurred within six (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) months of his base salary if he has been employed by the Company for less than six (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 April 5, 2018, the Company announced the appointment of Brad Wolfe to serve as the Company’s Executive Vice President, Chief Financial Officer and Treasurer, effective April 9, 2018. Mr. Wolfe ~~shall~~ also ~~assume~~assumed the roles of principal financial officer and principal accounting officer of the Company.

In connection with Mr. Wolfe’s appointment as Chief Financial Officer, the Board approved an offer letter to Mr. Wolfe (the “Wolfe Offer Letter”), which was executed on April 4, 2018. The Wolfe Offer Letter provides that Mr. Wolfe is entitled to receive an annualized base salary of $240,000, payable in regular installments in accordance with the Company’s general payroll practices. Mr. Wolfe will also be eligible for a cash bonus of $10,000 for any quarter which has net working capital – cash in excess of $27,500 and additional incentive compensation of an annual bonus of up to $70,000, subject to attainment of performance objectives to be mutually agreed upon and established.

~~During the third quarter of 2013,~~As described under Note 17, the Company ~~adopted a~~has incurred 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~~restructuring plans adopted in 2013 ~~Plan, the Company eliminated over 100 positions worldwide, implemented tighter expense controls, ceased non-core activities~~ and closed or downsized several facilities. As of June 30, 2018, the restructuring accrual totaled $461,362. 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 six months.

In June 2017, 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 the Company’s fiscal year ended December 31, 2017, and when combined with previous workforce reductions in the second quarter of Fiscal 2017 reduced the Company’s workforce to approximately 76 employees. In connection with the 2017 Plan, the Company incurred severance expense of $1.2 million for the fiscal year ended December 31, 2017. In making these changes, the Company prioritized customer support and development while consolidating operations and streamlining direct sales resources allowing the company to focus on the install base and develop alternate channels to the market. In the three months ended June 30, 2018, we had vacated a portion of the Mellville, NY office space. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the Company longer intends to receive any economic benefit are accrued when the Company ceases to use the leased space and have been reduced by estimated sublease income. In the three months ended June 30, 2018, the Company incurred lease disposal-related costs of $0.8 million.

In addition, as of ~~June 30, 2018,~~March 31, 2019, the Company's liability for uncertain tax positions totaled ~~$270,238.~~$194,824. At this time, the settlement period for ~~the positions,~~this liability, including related accrued interest, cannot be determined.

(12) Series A Redeemable Convertible Preferred Stock

~~On September 16, 2013, the~~The Company ~~issued to Hale Capital Partners, LP (“Hale”)~~has 900,000 shares of ~~the Company’s~~ Series A Preferred Stock ~~par value $0.001 per share, at a price~~outstanding. Pursuant to the Amended and Restated Certificate of ~~$10 per share,~~Designations, Preferences and Rights for ~~an aggregate purchase consideration~~the Series A Preferred Stock (the ”Certificate of ~~$9.0 million, which was subsequently transferred to HCP-FVA LLC. Each~~Designations”), each share of Series A Preferred Stock ~~is convertible~~can be converted into ~~common~~shares of the Company’s Common Stock, at an initial conversion price of $1.02488 per share, subject to appropriate adjustments for any stock ~~equivalents,~~dividend, stock split, stock combination, reclassification or similar transaction, (i) at any time at the option of the holder ~~and upon~~or (ii) by the Company if, following the first anniversary of the issuance of the Series A Preferred Stock (subject to extension under certain ~~conversion events described below, at a conversion rate of $1.02488 (as adjusted for stock splits, stock dividends, reverse stock splits, stock combinations, reclassifications and similar events).~~

Ifcircumstances), the volume weighted average trading price per share of ~~common stock~~the Company’s Common Stock for ~~each trading day of any 60~~sixty (60) consecutive trading days exceeds 250% of the conversion price and ~~exceeds~~continues to exceed 225% of the conversion price through the conversion date, subject at all times to the satisfaction of, and ~~certain~~the limitations imposed by, the equity conditions are met such that shares of common stock issued upon conversion can be immediately saleable by the Series A Preferred Stockholders, the Company can convert the Series A 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 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 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 Preferred Stock provides 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 Preferred Stock still have outstanding Series A Preferred Stock, then the Company must offer to repurchase their Series A Preferred Stock. The holder of the Series A Preferred Stock has the right to accept the offer or to retain their Series A Preferred Stock. If the Company does a financing, and the holder of the Series A Preferred Stock elect to have their Series A Preferred Stock repurchased, then the capital raised in excess of $5.0 million will go to repurchase the holders’ Series A Preferred Stock, instead of being able to be used for our business.

~~The Company cannot consummate 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 Preferred Stock.~~

~~In addition to the veto rights~~ set forth in the ~~preceding paragraph, upon consummation~~Certificate of ~~a fundamental sale transaction in which~~Designations (including, without limitation, the ~~consideration is cash and is not approved by the holder of the Series A Preferred Stock, the Series A Preferred Stock shall be redeemed at a per share redemption price equal~~volume limitations set forth therein).

Pursuant to the ~~greater~~Certificate of (i) 250% of the stated value of the Series A 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 Preferred Stock on an as converted basis as of June 30, 2018) 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 Preferred Stock ~~shall be~~are entitled to receive ~~from~~quarterly dividends at the ~~proceeds~~prime rate (provided in the Wall Street Journal Eastern Edition) plus 5% (up to a maximum dividend rate of 10%), payable in cash or in kind (i.e., through the issuance of additional shares of Series A Preferred Stock), except that the Company is not permitted to pay such dividends in cash while any indebtedness under the Company’s Amended and Restated Loan Agreement remains outstanding without the consent of the ~~transaction, prior to the~~ holders ~~of the Common Stock, an amount equal to 100% of the stated value plus accrued and unpaid dividends. The stated value and accrued and unpaid dividends~~ of the Series A Preferred Stock. In addition, the declaration and payment of dividends is subject to compliance with applicable law and unpaid dividends will accrue. A holder’s right to convert its shares of Series A Preferred Stock ~~at June 30, 2018~~and receive dividends in the form of Common Stock is ~~$10.5 million.~~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 19.99% of the Company’s currently outstanding shares of Common Stock.

The Series A Preferred dividends shall accrue whether or not the declaration or payment of such Series A Preferred 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 Preferred Stock in accordance with its obligations, the ~~Series A Preferred Stockholder~~holders may require the Company to redeem all or some of the Series A Preferred Stock at a price per share equal to the greater of (i) the sum of 100% of the stated value of a share of Series A Preferred Stock plus accrued and unpaid dividends orwith respect thereto, and (ii) the product of the number of shares of ~~common stock~~Common Stock underlying ~~the~~a share of Series A Preferred Stock and the closing price as of the occurrence of the triggering event. On or after July 30, 2021, each holder of Series A Preferred ~~Stockholder~~Stock can also require the Company to redeem its Series A Preferred Stock in cash at a per share price equal to 100% of the stated value ~~being redeemed~~of a share of Series A Preferred Stock plus accrued and unpaid ~~dividends. If~~dividends with respect thereto. Notwithstanding the ~~Company does not have~~forgoing, no holder of Series A Preferred Stock is permitted to exercise any rights or remedies upon a Breach Event or to exercise any redemption rights under the ~~funds necessary to redeem~~Certificate of Designations, unless approved by the holders of a majority of the then outstanding shares of Series A Preferred Stock.

Upon consummation of a fundamental sale transaction, the Series A Preferred Stock shall be redeemed at a per share redemption price equal to the dividends accruing on any outstanding Series A Preferred Stock will increase to prime plus 10% (from prime plus 5%). For each six months that the Series A Preferred Stock remains unredeemed, the dividend rate increases by 1%, subject to a maximum dividend rategreater of ~~19%. In addition, the Company's failure to redeem the Series A Preferred Stock would be considered a “Breach Event” under the agreements with the holders~~(y) 250% of the Series A Preferred Stock. If a Breach Event were to occur and the Company is in default under or has breached any provision in respect of its obligations to redeem the Series A Preferred Stock, then, under the agreements with the holders of our Series A Preferred Stock, the Company's Board of Directors would automatically be increased, with the holdersper share purchase price of the Series A Preferred Stock ~~having~~and (z) the ~~right to appoint the new directors, so that the holders~~price payable in respect of ~~the Series A Preferred stock would have appointed a majority~~such share of the Board of Directors. This would give the holders of the Series A 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 Preferred Stock ~~for two consecutive quarters, which provides the~~if such share of Series A Preferred ~~Stockholders~~Stock had been converted into such number of shares of Common Stock in accordance with the Certificate of Designations (but without giving effect to any limitations or restrictions contained therein) immediately prior to such fundamental sale transaction; provided however that the 250% threshold is changed to 100% if the fundamental sale transaction is approved by the two Series A Directors (as defined in the Certificate of

Designations). In addition, if the Company consummates an equity or debt financing that results in more than $5.0 million of net proceeds to the Company and/or its subsidiaries, the holders of Series A Preferred Stock will have the right, but not the obligation, to require the Company to ~~redeem any~~use the net proceeds in excess of $5.0 million to repurchase all or a portion of the Series A Preferred Stock at a per share price equal to the greater of (i) the sum of 100% of the stated value of such share of Series A Preferred Stock plus accrued and unpaid dividends ~~or the product of~~with respect thereto, and (ii) the number of shares of ~~common stock underlying the~~Common Stock into which such share of Series A Preferred ~~Sock and~~Stock is then convertible multiplied by the greater of (y) the closing price of the ~~Company's common stock as~~Common Stock on the date of ~~December 31, 2016. As part~~announcement of such financing or (z) the closing price of the ~~Amended Restated Loan Agreement,~~Common Stock on the ~~holder~~date of ~~the Series A Preferred Stock agreed to waive these breaches. As of June 30, 2018, the Company did not fail any non-financial covenants related to the Company's Series A Preferred Stock.~~

The holders of the Series A Preferred Stock are 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, September 30, 2017 and December 31, 2017, due to the lack of sufficient surplus to pay dividends as required by the Delaware General Corporation Law, the Company was not permitted to pay dividends in cash or through the issuance of common stock. As of June 30, 2018, the Company's liability for dividends to the holder of the Series A Preferred Stock totaled $1,642,825.

financing.

Each ~~share~~holder of Series A Preferred Stock has a vote equal to the number of shares of ~~common stock~~Common Stock into which ~~the~~its Series A Preferred 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, the ~~holder~~holders of a majority of the Series A Preferred Stock must approve certain actions, including approving any amendments to the ~~Company's charter~~Company’s Charter or ~~bylaws~~Bylaws that adversely affects the voting powers, preferences or other rights of the Series A Preferred Stock; payment of dividends or distributions; any liquidation, capitalization, reorganization or any other fundamental transaction of the ~~Company, other than that set forth above;~~Company; issuance of ~~certain~~any equity ~~securities~~security senior to or inon parity with the Series A Preferred Stock as to dividend rights, redemption rights, liquidation preference and other rights; issuances of equity below the conversion price; any liens or borrowings other than non-convertible indebtedness from standard commercial lenders which does not exceed 80% of the Company’s accounts receivable; and the redemption or purchase of any of the capital stock of the Company.

The Company has classified the Series A Preferred Stock as temporary equity in the financial statements as it is subject to redemption at the option of the holder under certain circumstances. As a result of the Company’s analysis of all the embedded conversion and put features within the Series A Preferred Stock, the contingent redemption put options in the Series A Preferred Stock were determined to not be clearly and closely related to the debt-type host and also did not meet any other scope exceptions for derivative accounting. Therefore, the contingent redemption put options are being accounted for as derivative instruments and the fair value of these derivative instruments was bifurcated from the Series A Preferred Stock and recorded as a liability.

As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 the fair value of these derivative instruments was ~~$482,871~~$492,327 and ~~$445,838,~~$498,086, respectively, and were included in "other long-term liabilities" within the consolidated balance sheets. The loss on the change in fair value of these derivative instruments for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and March 31, 2018 of $(5,759) and ~~June 30, 2017 of $37,033 and $82,698,~~$0, respectively, were included in “interest and other loss, net” within the consolidated statement of operations.

The fair value of these derivative instruments and the loss recorded on the change in the fair value of these derivative instruments, which was included in “Interest and other income, net” within the condensed consolidated statement of operations, for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019			2018
Beginning Balance	$	445,838	$	355,612	$	445,838	$	336,862	$	498,086		$	445,838
Total loss recognized in earnings	37,033		63,948		37,033		82,698
Total income (loss) recognized in earnings									(5,759		)	—
Ending Balance	$	482,871	$	419,560	$	482,871	$	419,560	$	492,327		$	445,838

At the time of issuance, the Company recorded transaction costs, a beneficial conversion feature and the fair value allocated to the embedded derivatives as discounts to the Series A Preferred Stock. These costs were being accreted to the Series A Preferred Stock using the effective interest method through the stated redemption date of August 5, 2017, which represents the earliest redemption date of the instrument. This accretion was accelerated as of December 31, 2016 due to the failure of the financial covenants and the redemption right of the holders at that time. In connection with the Commitment, Hale agreed to the Series A mandatory extension 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 statement of operations and in determining ~~loss~~income (loss) per share for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively. The following represents a reconciliation of net loss attributable to common stockholders for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Net loss	$	(1,004,104	)	$	(639,801	)	$	(497,227	)	$	(1,751,998	)
Net income (loss)													$	(124,907	)	$	506,877
Effects of Series A redeemable convertible preferred stock:
Less: Accrual of Series A redeemable convertible preferred stock dividends	214,963			215,089			458,130			419,664			247,027			243,167
Less: Deemed dividend on Series A redeemable convertible preferred stock	—			—			2,269,042			—			—			2,269,042
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	77,645			—			115,750			—			129,239			38,105
Net loss attributable to common stockholders	$	(1,296,712	)	$	(854,890	)	$	(3,340,149	)	$	(2,171,662	)	$	(501,173	)	$	(2,043,437	)

The Series A Preferred Stock consists of the following:



Series A redeemable convertible preferred stock principal balance	$	9,000,000
Accrued dividends	1,312,112
Discount	(1,602,428		)
Total Series A redeemable convertible preferred stock, net at inception on February 23, 2018	8,709,684
Accrued dividends	683,742
Accretion of preferred stock	363,280
Total Series A redeemable convertible preferred stock, net at December 31, 2018	$	9,756,706
Accrued dividends	247,027
Accretion of preferred stock	129,239
Total Series A redeemable convertible preferred stock, net at March 31, 2019	$	10,132,972

(13) Accumulated Other Comprehensive Loss

The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended ~~June 30, 2018~~March 31, 2019 are as follows:

Foreign Currency
Translation Net Unrealized Gains (Losses) on Marketable
Securities Net Minimum
Pension Liability Total
Accumulated other comprehensive income (loss) at March 31, 2018 $ (2,066,185 ) $ —
$ 22,097
$ (2,044,088 )
Other comprehensive income (loss)

Other comprehensive income before reclassifications 129,956
—
—
129,956
Amounts reclassified from accumulated other comprehensive income (loss) —
—
—
—
Total other comprehensive income 129,956
—
—
129,956
Accumulated other comprehensive income (loss) at June 30, 2018 $ (1,936,229 ) $ —
$ 22,097
$ (1,914,132 )

~~The changes in Accumulated Other Comprehensive Loss, net of tax, for the six months ended June 30, 2018 are as follows:~~

Foreign Currency
Translation Net Unrealized (Losses) Gains on Marketable
Securities Net Minimum
Pension Liability Total
Accumulated other comprehensive income (loss) at December 31, 2017 $ (1,980,940 ) $ —
$ 22,097
$ (1,958,843 )
Other comprehensive income (loss)

Other comprehensive income (loss) before reclassifications 44,711
—
—
44,711
Amounts reclassified from accumulated other comprehensive income (loss) —
—
—
—
Total other comprehensive income (loss) 44,711
—
—
44,711
Accumulated other comprehensive income (loss) at June 30, 2018 $ (1,936,229 ) $ —
$ 22,097
$ (1,914,132 )



	Foreign Currency Translation			Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at December 31, 2018	$	(1,921,905	)	$	26,803	$	(1,895,102	)
Other comprehensive income (loss)
Other comprehensive income	19,392			—		19,392
Total other comprehensive income	19,392			—		19,392
Accumulated other comprehensive income (loss) at March 31, 2019	$	(1,902,513	)	$	26,803	$	(1,875,710	)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended ~~June 30, 2017~~March 31, 2018 are as follows:

Foreign Currency
Translation Net Unrealized
Gains (Losses) on Marketable
Securities Net Minimum
Pension Liability Total
Accumulated other comprehensive income (loss) at March 31, 2017 $ (2,051,917 ) $ —
$ 28,675
$ (2,023,242 )
Other comprehensive income (loss)

Other comprehensive income before reclassifications 5,433
—
—
5,433
Amounts reclassified from accumulated other comprehensive income (loss) —
—
—
—
Total other comprehensive income 5,433
—
—
5,433
Accumulated other comprehensive income (loss) at June 30, 2017 $ (2,046,484 ) $ —
$ 28,675
$ (2,017,809 )

~~The changes in Accumulated Other Comprehensive Loss, net of tax, for the six months ended June 30, 2017 are as follows:~~


	Foreign Currency Translation			Net Unrealized (Losses) Gains on Marketable Securities		Net Minimum Pension Liability		Total			Foreign Currency Translation			Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at December 31, 2016	$	(1,866,388	)	$	—	$	28,675	$	(1,837,713	)
Accumulated other comprehensive income (loss) at December 31, 2017											$	(1,980,940	)	$	22,097	$	(1,958,843	)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	(180,096		)	—		—		(180,096		)	(85,245		)	—		(85,245		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			—		—		—
Total other comprehensive income (loss)	(180,096		)	—		—		(180,096		)	(85,245		)	—		(85,245		)
Accumulated other comprehensive income (loss) at June 30, 2017	$	(2,046,484	)	$	—	$	28,675	$	(2,017,809	)
Accumulated other comprehensive income (loss) at March 31, 2018											$	(2,066,185	)	$	22,097	$	(2,044,088	)

For the three and six months ended June 30, 2018, the amounts reclassified to net income (loss) related to the Company’s defined benefit plan and maturity of marketable securities. These amounts are included within “~~Operating income (loss)” within the condensed consolidated statements of operations.~~

(14) Stockholders' Equity

Amendments to Articles of Incorporation

On June 22, 2018, following stockholder approval, the Company filed a certificate of amendment ~~(the “Charter Amendment”)~~ to the Company’s Restated Certificate of Incorporation, as amended, with the Delaware Secretary of State to increase the authorized shares of common stock, $.001 par value per share, to 800,000,000 and filed an Amended and Restated Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock ~~(the “Amended and Restated Certificate of Designations”)~~ with the Delaware Secretary of State to implement certain modifications to the terms of the Company’s Series A Preferred Stock.

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 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 six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ the Company did not repurchase any shares of its common stock. As of ~~June 30, 2018,~~March 31, 2019, the Company had the authorization under previous Board approved stock repurchase plans to repurchase 4,907,839 shares of its common stock based upon its judgment and market conditions.

(15) Litigation

In view of the inherent difficulty of predicting the outcome of litigation, particularly where the claimants seek very large or indeterminate damages, the Company generally cannot predict what the eventual outcome of the pending matters will be, what

the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

In accordance with the authoritative guidance issued by the FASB on contingencies, the Company accrues anticipated costs of settlement, damages and losses for claims to the extent specific losses are probable and estimable. The Company records a receivable for insurance recoveries when such amounts are probable and collectable. In such cases, there may be an exposure to loss in excess of any amounts accrued. If, at the time of evaluation, the loss contingency related to a litigation is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable and, the Company will expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, the Company will accrue the minimum amount of the range.

~~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.

(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 six~~ months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ and the location of long-lived assets as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, are summarized as follows:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
Revenue:
Americas	$	931,246	$	2,040,247	$	2,062,895	$	3,641,494	$	2,073,314	$	1,131,649
Asia Pacific	1,631,910		2,445,409		3,580,334		4,696,486		1,000,817		1,948,424
Europe, Middle East, Africa and Other	1,448,425		2,248,670		3,362,301		4,435,461		1,418,847		1,913,876
Total Revenue	$	4,011,581	$	6,734,326	$	9,005,530	$	12,773,441	$	4,492,978	$	4,993,949


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Long-lived assets:
Americas	$	6,976,675	$	5,754,977	$	8,049,632	$	5,852,995
Asia Pacific	787,199		822,885		880,119		736,970
Europe, Middle East, Africa and Other	186,818		213,371		176,360		155,708
Total long-lived assets	$	7,950,692	$	6,791,233	$	9,106,111	$	6,745,673

For the three ~~and six~~ months ended ~~June 30, 2018,~~March 31, 2019, the Company had one customer that accounted for 10% or more of total revenue. For the three ~~and six~~ months ended ~~June 30, 2017,~~March 31, 2018, the Company had no customers that accounted for 10% of total revenue.

As of ~~June 30, 2018,~~March 31, 2019, the Company had nothree customers that accounted for 10% or more of the gross accounts receivable balance. As of December 31, ~~2017,~~2018, the Company had one customer that accounted for ~~23%~~10% or more of the gross accounts receivable balance.

(17) Restructuring Costs

In the third quarter of 2013, the Company adopted ~~the 2013 Plan~~a 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.~~basis (the "2013 Plan"). 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 remaining severance related costs to be paid once final settlement litigation is completed, which can be at various times over the next six months.

In June 2017, 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 the Company’s fiscal year ended December 31, 2017, and when combined with previous workforce reductions in the second quarter of Fiscal 2017 reduced the Company’s workforce to approximately ~~76 employees.~~86 employees at December 31, 2018. In connection with the 2017 Plan, the Company incurred severance expense of $1.2 million for the fiscal year ended December 31, 2017. In making these changes, the Company prioritized customer support and development while consolidating operations and streamlining direct sales resources, allowing the Company to focus on the install base and develop alternate channels to the market. As part of this consolidation effort the Company vacated a portion of the Mellville, NY office space during the three months ended June 30, 2018. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the Company no longer intends to receive any economic benefit are accrued, net of any anticipated sublease income, when the Company ceases use of the leased space. During the three months ended ~~June 30, 2018,~~March 31, 2019, the Company incurred lease disposal-related costs for this property of ~~$0.8~~$0.2 million.

The following table summarizes the activity during 2018 and 2019 related to restructuring liabilities recorded in connection with the 2013 and 2017 Plans:


	Severance Related Costs			Facility and Other Costs			Total			Severance Related Costs			Facility and Other Costs			Total
Balance at December 31, 2017	$	648,399		$	—		$	648,399		$	648,399		$	—		$	648,399
Additions (Reductions)	(173,263		)	—			(173,263		)	(173,263		)	—			(173,263		)
Utilized/Paid	(13,774		)	—			(13,774		)	(13,774		)	—			(13,774		)
Balance at March 31, 2018	$	461,362		$	—		$	461,362		$	461,362		$	—		$	461,362
Additions (Reductions)	—			809,245			809,245			—			809,245			809,245
Utilized/Paid	—			(312,507		)	(312,507		)	—			(312,507		)	(312,507		)
Balance at June 30, 2018	$	461,362		$	496,738		$	958,100		$	461,362		$	496,738		$	958,100
Additions (Reductions)										—			315,283			315,283
Utilized/Paid										—			(331,405		)	(331,405		)
Balance at September 30, 2018										$	461,362		$	480,616		$	941,978
Additions (Reductions)										—			310,314			310,314
Utilized/Paid										—			(337,484		)	(337,484		)
Balance at December 31, 2018										$	461,362		$	453,446		$	914,808
Additions (Reductions)										—			157,693			157,693
Utilized/Paid										—			(187,833		)	(187,833		)
Balance at March 31, 2019										$	461,362		$	423,306		$	884,668

The severance and facility related liabilities are included within “accrued expenses” in the accompanying condensed consolidated balance sheets. The expenses under the 2013 and 2017 Plans are included within “restructuring costs” in the accompanying condensed consolidated statements of operations.

(18) Subsequent Events

Management has evaluated subsequent events through May 15, 2019, the date which these consolidated financial statements were issued, noting no items that would impact the accounting for events or transactions in the current period require disclosures.

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

We are pleased with our sales performance and financial results for the ~~operational efficiencies we achieved during the current~~ quarter, which ~~should better position us for~~continued the return to profitability the Company has sustained since the end of 2017. The three months ended March 31, 2019 marked our seventh consecutive quarter of operational profitability before restructuring charges. Our products play a key role in efficiently managing and protecting critical data within enterprises around the world, and we are pleased with our recent sales success in key strategic markets, such as ~~we approach~~ the ~~final six months of 2018.~~Americas. Given our improved financial stability due to our recently completed financing and continually improving operational efforts, our focus for the balance of the year will ~~shift~~be to seize upon strategic growth and foster continued product ~~innovation and strategic growth. Our products play a key role in efficiently managing and protecting critical data within enterprises around the world.~~innovation.

We adopted the new accounting standard for revenue recognition effective January 1, 2018 using the modified retrospective transition method. This new standard had a material impact on our consolidated financial statements. Beginning in fiscal year 2018, our financial results reflect adoption of the standard including a cumulative effect adjustment on January 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for that period. Refer to Note (1) ~~Basis of Presentation~~ ~~to our consolidated financial statements for further information.~~

~~Our net loss for~~During the three months ended ~~June 30, 2018 increased to $1.0~~March 31, 2019 we recorded a net loss of $0.1 million, as compared with a net ~~loss~~income of ~~$0.6~~$0.5 million for the same period of the previous year, in part as a result of the impact of ~~this newly adopted accounting standard, in addition to other~~ non cash restructuring charges incurred in connection with our cost reduction ~~efforts.~~efforts, and the timing of our revenue recognition, as the majority of our sales for the current year peaked at the end of the quarter.

While our net loss increased as compared to the prior year period, net cash provided by operations increased by $2.3 million to $0.7 million for the six months ended June 30, 2018, as compared to $1.6 million of net cash used by operations for the six months ended June 30, 2017. As a result of net cash flow provided by operations and the closing of the commitment from HCP-FVA, LLC (“HCP-FVA”) to provide $3.0 million in financing (the “Commitment”), we ended the quarter with $4.0 million of cash and cash equivalents, as compared to $1.0 million at December 31, 2017.

Deferred revenue as of ~~June 30, 2018~~March 31, 2019 totaled ~~$11.7~~$9.3 million, compared with ~~$18.4~~$9.4 million as of December 31, 2017. The decrease is primarily attributable to our adoption of new revenue recognition accounting guidance on January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. ~~For further information, refer to Note (1)~~ ~~Basis of Presentation~~, ~~to our unaudited condensed consolidated financial statements.~~

Overall, total revenue for the three months ended ~~June 30, 2018~~March 31, 2019 decreased ~~40%~~10% to ~~$4.0~~$4.5 million, compared with ~~$6.7~~$5.0 million in the prior year period. This decline in revenue was significantly impacted by our adoption of the new revenue recognition guidance on January 1, 2018 using the modified retrospective transition method which resulted in a $1.2 million decrease in revenue. The ~~remaining~~ decrease in revenue was driven by 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 decreased maintenance renewal ~~revenue.~~revenue, and finally timing, as the volume of our sales peaked during the final weeks of the quarter.

Total cost of revenue for the three months ended ~~June 30, 2018~~March 31, 2019 decreased ~~64%~~15% to $0.6 million, compared with ~~$1.8~~$0.8 million in the prior year period. Total gross profit decreased ~~$1.6~~$0.4 million, or ~~32%~~9%, to ~~$3.4~~$3.8 million for the three months ended ~~June 30, 2018,~~March 31, 2019, compared with ~~$5.0~~$4.2 million for the prior year period. Total gross margin increased to ~~84%~~86% for the three months ended ~~June 30, 2018,~~March 31, 2019, compared with ~~74%~~85% for the prior year period. The decrease in our total gross profit in absolute dollars was primarily due to the decrease in revenue. The increase in total gross margin was primarily due to the mix of sales and our 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 ~~June 30, 2018 decreased 26%~~March 31, 2019 declined 0.1 million, or 2%, to ~~$4.1~~$3.6 million, as compared ~~with $5.5~~to $3.7 million infor 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, streamlined personnel related costs and global overhead costs and efficiencies realized on our redesigned go-to-marketsame period of the previous year.

~~coverage models. Our worldwide headcount was 76 employees as of June 30, 2018, compared with 97 employees as of June 30, 2017.~~

RESULTS OF OPERATIONS – FOR THE THREE MONTHS ENDED ~~JUNE 30, 2018~~MARCH 31, 2019 COMPARED WITH THE THREE MONTHS ENDED ~~JUNE 30, 2017.~~MARCH 31, 2018.

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 three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ 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 June 30,										Change Period to Period					Three Months Ended March 31,										Change Period to Period
	2018					2017					Change Period to Period					2019					2018					Change Period to Period
Revenue:
Product revenue	$	983,645		25	%	$	2,499,655		37	%	$	(1,516,010	)	(61	)%	$	1,745,784		39	%	$	1,933,944		39	%	$	(188,160	)	(10	)%
Support and services revenue	3,027,936			75	%	4,234,671			63	%	(1,206,735		)	(28	)%	2,747,194			61	%	3,060,005			61	%	(312,811		)	(10	)%
Total revenue	4,011,581			100	%	6,734,326			100	%	(2,722,745		)	(40	)%	4,492,978			100	%	4,993,949			100	%	(500,971		)	(10	)%
Cost of revenue:
Product	39,740			1	%	351,969			5	%	(312,229		)	(89	)%	79,669			2	%	26,150			1	%	53,519			205	%
Support and service	590,309			15	%	1,418,663			21	%	(828,354		)	(58	)%	563,745			13	%	728,888			15	%	(165,143		)	(23	)%
Total cost of revenue	630,049			16	%	1,770,632			26	%	(1,140,583		)	(64	)%	643,414			14	%	755,038			15	%	(111,624		)	(15	)%
Gross profit	3,381,532			84	%	4,963,694			74	%	(1,582,162		)	(32	)%	3,849,564			86	%	4,238,911			85	%	(389,347		)	(9	)%
Operating expenses:
Research and development costs	928,097			23	%	2,025,132			30	%	(1,097,035		)	(54	)%	947,384			21	%	1,004,698			20	%	(57,314		)	(6	)%
Selling and marketing	872,109			22	%	2,109,599			31	%	(1,237,490		)	(59	)%	1,040,289			23	%	1,193,550			24	%	(153,261		)	(13	)%
General and administrative	1,451,884			36	%	1,345,343			20	%	106,541			8	%	1,476,296			33	%	1,654,940			33	%	(178,644		)	(11	)%
Restructuring costs	809,245			20	%	—			—	%	809,245			—	%
Restructuring costs (benefit)																157,693			4	%	(173,263		)	(3	)%	330,956			*
Total operating expenses	4,061,335			101	%	5,480,074			81	%	(1,418,739		)	(26	)%	3,621,662			81	%	3,679,925			74	%	(58,263		)	(2	)%
Operating loss	(679,803		)	(17	)%	(516,380		)	(8	)%	(163,423		)	32	%
Interest and other loss	(323,750		)	(8	)%	(29,121		)	—	%	(294,629		)	1,012	%
Loss before income taxes	(1,003,553		)	(25	)%	(545,501		)	(8	)%	(458,052		)	84	%
Provision for income taxes	551			—	%	94,300			1	%	(93,749		)	(99	)%
Net loss	$	(1,004,104	)	(25	)%	$	(639,801	)	(10	)%	$	(364,303	)	57	%
Operating income																227,902			5	%	558,986			11	%	(331,084		)	(59	)%
Interest and other income (loss), net																(265,223		)	(6	)%	10,330			—	%	(275,553		)	*
Income (loss) before income taxes																(37,321		)	(1	)%	569,316			11	%	(606,637		)	*
Income tax expense																87,586			2	%	62,439			1	%	25,147			40	%
Net income (loss)																$	(124,907	)	(3	)%	$	506,877		10	%	$	(631,784	)	*
Less: Accrual of Series A redeemable convertible preferred stock dividends	214,963			5	%	215,089			3	%	(126		)	—	%	247,027			5	%	243,167			5	%	3,860			2	%
Less: Deemed dividend on Series A redeemable convertible preferred stock	—			—	%	—			—	%	—			—	%	—			—	%	2,269,042			45	%	(2,269,042		)	(100	)%
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	77,645			2	%	—			—	%	77,645			—	%	129,239			3	%	38,105			1	%	91,134			239	%
Net loss attributable to common stockholders	$	(1,296,712	)	(32	)%	$	(854,890	)	(13	)%	$	(441,822	)	52	%	$	(501,173	)	(11	)%	$	(2,043,437	)	(41	)%	$	1,542,264		(75	)%

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 for the three months ended ~~June 30, 2018~~March 31, 2019 decreased ~~40%~~10% to ~~$4.0~~$4.5 million, compared with ~~$6.7~~$5.0 million in the prior year period.

Product revenue

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 software integrated with industry standard hardware, sold as one complete integrated solution or sold on a subscription or consumption basis. 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.

For the three months ended March 31, 2019 and 2018, product revenue represented 39% of our total revenue. Product revenue of ~~$1.0~~$1.7 million for the three months ended ~~June 30, 2018~~March 31, 2019 decreased ~~$1.5~~$0.2 million, or 10%, from ~~$2.5~~$1.9 million in the prior year period. Product revenue represented 25% and 37% of our total revenue for the three months ended June 30, 2018 and 2017, respectively. Product revenue decreased $1.4 million for the three months ended June 30, 2018 due to the adoption of new revenue accounting guidance on January 1, 2018 using the modified retrospective method. Prior period amounts have not been adjusted under the modified retrospective method. See Note (1) ~~Basis of Presentation~~ ~~to our unaudited condensed consolidated financial statements for further information.~~

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 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. Engineering services are recognized upon customer acceptance.

Maintenance and technical support services revenue for the three months ended ~~June 30, 2018~~March 31, 2019 decreased to ~~$2.9~~$2.6 million, as compared ~~with $4.1~~to $2.9 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. The decrease in revenue over the previous year reflects a decline in maintenance renewal revenue, as a result of customer attrition, a smaller volume of new customers, ~~and~~ a decline in new product license and maintenance ~~sales.~~sales and timing, as our sales for the current period peaked near the close of the quarter.

Professional services revenue for the three months ended ~~June 30, 2018 decreased to~~March 31, 2019 remained constant, at $0.1 million, ~~compared with $0.2 million in the prior~~ year ~~period.~~over year. 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.

Cost of Revenue, Gross Profit and Gross Margin

Total cost of revenue for the three months ended ~~June 30, 2018~~March 31, 2019 decreased ~~64%~~15% to $0.6 million, compared with ~~$1.8~~$0.8 million in the prior year period. Total gross profit decreased ~~$1.6~~$0.4 million, or ~~32%~~9%, to ~~$3.4~~$3.8 million for the three months ended ~~June 30, 2018,~~March 31, 2019, compared with ~~$5.0~~$4.2 million for the prior year period. Total gross margin increased to ~~84%~~86% for the three months ended ~~June 30, 2018,~~March 31, 2019, compared with ~~74%~~85% for the prior year period. The decrease in our total gross profit, in absolute dollars, was primarily due to the decrease in revenue. The increase in total gross margin was driven by cost reduction initiatives and sales mix during the current reporting period. 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. Cost of product revenue for the three months ended ~~June 30, 2018 decreased 89%~~March 31, 2019 increased 205% to ~~$39,740,~~$79,669, compared with ~~$351,969~~$26,150 in the prior year period. Product gross margin ~~increased to 96%~~ for the three months ended ~~June 30, 2018,~~March 31, 2019 declined modestly, year over year, to 95% from 99% for the same period in 2018. The decrease in product gross margin in absolute dollars was primarily attributable to a decline in product sales revenue, year over year. The decline in margin for the current year period was primarily due to product mix, as the volume of our appliance and hardware sales, which deliver a lower margin, increased 110%, as compared ~~with 86% for~~to the prior year period. The increase in product gross margin was primarily attributable to an increase in the percentage of 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.

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

Cost of support and service 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 ~~June 30, 2018~~March 31, 2019 decreased ~~58%~~23% to $0.6 million, compared with ~~$1.4~~$0.7 million in the prior year period. Support and service gross margin increased to ~~81%~~79% for the three months ended ~~June 30, 2018,~~March 31, 2019, compared with ~~66%~~76% for the prior year period, primarily attributable to a reduction in personnel related costs.

Operating Expenses

Our operating expenses for the three months ended ~~June 30, 2018 decreased 26%~~March 31, 2019 declined 0.1 million to ~~$4.1~~$3.6 million ~~compared with $5.5~~from $3.7 million, infor the ~~prior~~previous year period. Operating expenses include $0.2 million of restructuring costs incurred in connection with our cost reduction efforts during the current period. Excluding restructuring charges, operating expenses declined $0.4 million, as compared to the same period of the previous year. This ~~decrease~~decline 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 76 employees as of June 30, 2018, compared with 97 employees as of June 30, 2017.~~ 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. This decline in operating expenses was partially offset by $0.8 million of restructuring costs incurred in connection with our cost reduction efforts during the current period. Our operating results for the three months ended June 30, 2018 and 2017 also reflect $0.0 million and $0.1 million of share-based compensation expense, respectively.

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 ~~$1.1~~$0.1 million, or ~~54%~~6%, to $0.9 million for the three months ended ~~June 30, 2018,~~March 31, 2019, from ~~$2.0~~$1.0 million in the prior year period. The decrease was primarily related to a decrease in personnel related costs resulting from our realignment and reduction in workforce and continued efforts 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 three months ended June 30, 2018 and 2017 was $0.0 million and $0.1 million, respectively.~~

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~~declined $0.2 million to $1.0 million from $1.2 ~~million, or 59%, to $0.9~~ million for the ~~three months ended June 30, 2018, from $2.1 million in the prior~~previous year period. The decrease ~~in selling and marketing expenses~~ was primarily ~~attributable~~related to a decrease in ~~headcount~~personnel related costs resulting from our realignment and reduction in workforce, ~~as well as continued efforts to optimize our go-to-market coverage models around the world. Share-based compensation~~tighter expense ~~included in selling~~controls and ~~marketing expenses for the three months ended June 30, 2018 and 2017 was $0.0 million and $0.0 million, respectively.~~overall operational efficiencies.

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 ofdeclined $0.2 million to $1.5 million for the three months ended ~~June 30, 2018 remained consistent with general and administrative expenses of $1.3~~March 31, 2019, as compared to $1.7 million for the prior year period. ~~Share-based compensation~~This decline, year over year, reflects a decrease in personnel related costs resulting from our reduction in headcount, tighter expense ~~included in general~~controls and ~~administrative expenses for the three months ended June 30, 2018 and 2017 was $0.0 million and $0.0 million, respectively.~~overall operational efficiencies.

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 (the "2013 Plan"). 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.

In June 2017, 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 ~~76 employees.~~81 employees at December 31, 2017. These actions are anticipated to result in an annualized cost savings of approximately $10.0 million. As part of this consolidation effort, the Company vacated a portion of the Mellville, NY office space during the three months ended June 30, 2018. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the Company no longer intends to receive any economic benefit are accrued, net of any anticipated sublease income, when the Company ceases use of the leased space. During the three months ended ~~June 30, 2018,~~March 31, 2019, the Company incurred lease disposal-related costs for this property of ~~$809,245.0~~$0.2 million.

Restructuring expense increased ~~$0.8 million for the three months ended June 30, 2018 to $0.8 million, compared to $0.0 million in the prior year period. For further information, refer to Note (17)~~ ~~Restructuring Costs, to our unaudited condensed consolidated financial statements.~~

~~Interest and other (loss) income, net~~

~~Interest and other income (loss), net, decreased $0.3 million to a loss of~~ $0.3 million for the three months ended ~~June 30, 2018, compared with a loss of $0.0 million in the prior year period. The fluctuation in interest and other income (loss) from quarter~~March 31, 2019 to quarter relates to foreign currency gains and losses, interest income, sublease income and the change in our embedded derivatives. The decrease in interest and other income (loss) for the three months ended June 30, 2018 as compared to the prior year period was driven in part by $0.1 million of interest expense incurred in connection with the HCP-FVA Commitment.

~~Income Taxes~~

Our provision for income taxes consists of state and local, and foreign taxes. For the three months ended June 30, 2018 and 2017, the Company recorded an income tax provision of $0.0 million and $0.1 million, respectively, consisting primarily of state and local, and foreign taxes.

~~As of June 30, 2018, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.~~

~~RESULTS OF OPERATIONS – FOR THE SIX MONTHS ENDED JUNE 30, 2018 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2017.~~

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 six months ended June 30, 2018 and 2017 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.

Six Months Ended June 30, Change
Period to Period
(amounts in dollars)
2018 2017
Revenue:

Product revenue $ 2,917,589
32 % $ 4,420,707
35 % $ (1,503,118 ) (34 )%
Support and services revenue 6,087,941
68 % 8,352,734
65 % (2,264,793 ) (27 )%
Total revenue 9,005,530
100 % 12,773,441
100 % (3,767,911 ) (29 )%
Cost of revenue:

Product 65,890
1 % 550,684
4 % (484,794 ) (88 )%
Support and service 1,319,197
15 % 2,672,579
21 % (1,353,382 ) (51 )%
Total cost of revenue 1,385,087
15 % 3,223,263
25 % (1,838,176 ) (57 )%
Gross profit 7,620,443
85 % 9,550,178
75 % (1,929,735 ) (20 )%
Operating expenses:

Research and development costs 1,932,795
21 % 4,319,995
34 % (2,387,200 ) (55 )%
Selling and marketing 2,065,659
23 % 4,160,141
33 % (2,094,482 ) (50 )%
General and administrative 3,106,824
34 % 2,966,894
23 % 139,930
5 %
Investigation, litigation, and settlement related costs —
— % —
— % —
— %
Restructuring costs (benefit) 635,982
7 % (236,302 ) (2 )% 872,284
*
Total operating expenses 7,741,260
86 % 11,210,728
88 % (3,469,468 ) (31 )%
Operating loss (120,817 ) (1 )% (1,660,550 ) (13 )% 1,539,733
(93 )%
Interest and other income (loss), net (313,420 ) (3 )% 125,800
1 % (439,220 ) *
Loss before income taxes (434,237 ) (5 )% (1,534,750 ) (12 )% 1,100,513
(72 )%
Provision for income taxes 62,990
1 % 217,248
2 % (154,258 ) (71 )%
Net loss $ (497,227 ) (6 )% $ (1,751,998 ) (14 )% $ 1,254,771
(72 )%
Less: Accrual of Series A redeemable convertible preferred stock dividends 458,130
5 % 419,664
3 % 38,466
9 %
Less: Deemed dividend on Series A redeemable convertible preferred stock 2,269,042
25 % —
— % 2,269,042
— %
Less: Accretion to redemption value of Series A redeemable convertible preferred stock 115,750
1 % —
— % 115,750
— %
Net loss attributable to common stockholders $ (3,340,149 ) (37 )% $ (2,171,662 ) (17 )% $ (1,168,487 ) 54 %

~~Total revenue for the six months ended June 30, 2018 decreased 29% to $9.0 million, compared with $12.8 million in the prior year period.~~

~~Product revenue~~

Product revenue decreased $1.5 million to $2.9 million for the six months ended June 30, 2018 from $4.4 million for six months ended June 30, 2017. Product revenue represented 32% and 35% of our total revenue for the six months ended June 30, 2018 and 2017, respectively. Product revenue decreased $1.2 million for the six months ended June 30, 2018 due to the adoption of new revenue accounting guidance on January 1, 2018 using the modified retrospective method. Prior period amounts have not been adjusted under the modified retrospective method. See Note (1) ~~Basis of Presentation~~ ~~to our unaudited condensed consolidated financial statements for further information.~~

~~Support and services revenue~~

Maintenance and technical support services revenue for the six months ended June 30, 2018 decreased to $5.9 million, compared with $8.0 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. The decrease in revenue over the previous year reflects a decline in maintenance renewal revenue, as a result of customer attrition, a smaller volume of new customers, and a decline in new product license and maintenance sales.

~~Professional services revenue for the six months ended June 30, 2018 decreased to~~ $0.2 million, compared with $0.3 million 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.

~~Cost of Revenue, Gross Profit and Gross Margin~~

Total cost of revenue for the six months ended June 30, 2018 decreased 57% to $1.4 million, compared with $3.2 million in the prior year period. Total gross profit decreased $1.9 million, or 20%, to $7.6 million for the six months ended June 30, 2018, compared with $9.6 million for the prior year period. Total gross margin increased to 85% for the six months ended June 30, 2018, compared with 75% for the prior year period. The decrease in our total gross profit in absolute dollars was primarily due to a decline in revenue. The increase in total gross margin was primarily driven by sales mix and cost reduction initiatives during the current year. 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 six months ended June 30, 2018 decreased 88% to $65,890, compared with $550,684 in the prior year period. Product gross margin increased to 98% for the six months ended June 30, 2018, compared with 88% for the prior year period. The increase in product gross margin was primarily attributable to an increase 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.

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

Cost of support and service revenue for the six months ended June 30, 2018 decreased 51% to $1.3 million, compared with $2.7 million in the prior year period. Support and service gross margin increased to 78% for the six months ended June 30, 2018, compared with 68% for the prior year period, primarily attributable to a reduction in personnel related costs.

~~Operating Expenses~~

Our operating expenses for the six months ended June 30, 2018 decreased 31% to $7.7 million, compared with $11.2 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 76 employees as of June 30, 2018, compared with 97 employees as of June 30, 2017. 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. This decline in operating expenses included $0.6 million in restructuring costs incurred in connection with our cost reduction efforts during the current period. Operating results for the six months ended June 30, 2018 and 2017 also reflect $0.0 million and $0.5 million of share-based compensation expense, respectively.

~~Research and Development Costs~~

Research and development costs decreased $2.4 million, or 55%, to $1.9 million for the six months ended June 30, 2018, from $4.3 million in the prior year period. The decrease was primarily related to a decrease in personnel related costs resulting from our realignment and reduction in workforce and continued efforts 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 six months ended June 30, 2018 and 2017 was $0.0 million and $0.2 million, respectively.

~~Selling and Marketing~~

Selling and marketing expenses decreased $2.1 million, or 50%, to $2.1 million for the six months ended June 30, 2018, from $4.2 million in the prior year period. The decrease in selling and marketing expenses was primarily attributable to a decrease in headcount resulting from our realignment and reduction in workforce as well as continued efforts to optimize our go-to-market coverage models around the world. Share-based compensation expense included in selling and marketing expenses for the six months ended June 30, 2018 and 2017 was $0.0 million and $0.1 million, respectively.

~~General and Administrative~~

General and administrative expenses of $3.1 million for the six months ended June 30, 2018 remained consistent with general and administrative expenses of $3.0 million for the prior year period. Share-based compensation expense included in general and administrative expenses for the six months ended June 30, 2018 and 2017 was $(0.1) million and $0.2 million, respectively.

~~Restructuring~~

In the third quarter of 2013, we adopted the 2013 Plan which was 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 (the "2013 Plan"). 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.

In June 2017, the Board 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 76 employees. These actions are anticipated to result in an annualized cost savings of approximately $10.0 million. As part of this consolidation effort the Company vacated a portion of the Mellville, NY office space during the three months ended June 30, 2018. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the Company no longer intends to receive any economic benefit are accrued, net of any anticipated sublease income, when the Company ceases use of the leased space. During the three months ended June 30, 2018, the Company incurred lease disposal-related costs for this property of $809,245.0 million.

~~Restructuring costs increased $0.9 million for the six months ended June 30, 2018 to $0.6~~ million, as compared to a ~~$(0.2) million~~ restructuring benefit of $0.2 million in the prior year period. For further information, refer to Note (17) Restructuring Costs, to our unaudited condensed consolidated financial statements.

Interest and other (loss) income, net

Interest and other income (loss), net, decreased ~~$0.4~~$0.3 million to a loss of $0.3 million for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, compared with income of ~~$0.1~~$0.0 million in the prior year period. The fluctuation in interest and other income (loss) from quarter to quarter relates to interest expense, foreign currency gains and losses, interest income, sublease income and the change in fair value of our embedded derivatives.

The ~~increase~~decrease in interest and other income (loss) for the ~~six~~three months ended ~~June 30, 2018~~March 31, 2019 as compared to the prior year period was driven in part by ~~$0.1~~$0.2 million of interest expense incurred in connection with ~~the HCP-FVA Commitment.~~our Term Loan.

Income Taxes

Our provision for income taxes consists of state and local, and foreign taxes. For the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ the Company recorded an income tax provision of $0.1 million ~~and $0.2 million, respectively,~~ consisting primarily of state and local, and foreign taxes.

As of ~~June 30, 2018,~~March 31, 2019, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.

LIQUIDITY AND CAPITAL RESOURCES

Principal Sources of Liquidity

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 totaled ~~$4.0~~$2.4 million and ~~$1.0~~$3.1 million, respectively.

On February 23, 2018, we closed on our previously-announced Commitment from HCP-FVA to purchase up to $3 million of Units to backstop a proposed private placement of Units to certain eligible stockholders Such decrease was primarily the result of the ~~Company (the “Financing”). HCP-FVA subscribed for the full $3~~$0.5 million prepayment of Units (at the Company’s election) in the Commitment by payment of $2.5 million in cash and the conversion of a $500,000 short-term loan provided by HCP-FVA to the Company in November 2017 (the “Short Term Loan”) into Units. HCP-FVA is an affiliate of Hale Capital Partners, LP (together with HCP-FVA, “Hale Capital”), the Company’s largest stockholder through its ownership of the Company’s Series A Redeemable Preferred Stock (the “Series A Preferred Stock”), and an affiliate of FalconStor director, Martin Hale.

In the Financing, the Company intends to offer to FalconStor stockholders as of November 17, 2017 who are accredited investors the opportunity to purchase up to a total of 40 million Units (inclusive of subscriptions by HCP-FVA). The Financing is expected to close on or before September 23, 2018, and documentation relating to the Financing is anticipated to provided to prospective investors during the week of August 13, 2018. Any current shareholder of the Company who is an accredited investor and a shareholder of the Company prior to the stock date should contact the Company if they are interested in participating in the Financing. Each Unit consists of the following (each, a “Unit”):


i.	$0.10 in senior secured debt (for a total of $4 million of senior secured debt assuming full subscription of the Financing), secured by all of the assets of the Company and guaranteed by each of the Company’s domestic subsidiaries, having an interest rate of prime plus 0.75% and a maturity date of June 30, 2021 (the “Term Loan”);


~~ii.~~	warrants to purchase 12.233 shares of the Company’s common stock for a nominal exercise price (for a total of 489.32 million shares assuming full subscription of the Financing) (the “Financing Warrants”); and


~~iii.~~	0.0225 shares of Series A Preferred Stock at a per Unit price of $0.2643 (subject to increase to take into account accretion of the Series A Preferred Stock after June 30, 2018), all such shares to be acquired directly from their current holder, HCP-FVA.

The closing of the Commitment effectively constitutes HCP-FVA’s purchase of 30 million Units in the Financing. As a result, the maximum additional funds that the Company may receive in the Financing is $1 million through the purchase of 10 million Units by other eligible stockholders. If other eligible stockholders subscribe for more than 10 million Units, they will purchase those additional Units consisting of senior secured debt and Series A Preferred Stock directly from HCP-FVA (with the associated Financing Warrants to be issued by the Company directly to the eligible stockholders, and HCP-FVA’s Financing Warrants associated with those additional Units sold to the eligible stockholders to be cancelled in accordance with the terms of such Financing Warrants), subject to HCP-FVA maintaining at least 25% of the total Units to be issued in the Financing. HCP-FVA has agreed to subscribe for more than its pro rata portion of the Units available for purchase in the Financing (based on common stock ownership on an as-converted basis as of November 17, 2017), and if other eligible stockholders elect to subscribe for more than their pro rata share, the remaining Units shall be allocated among such stockholders (including HCP-FVA) based on their common

~~stock ownership on an as-converted basis as of November 17, 2017 and HCP's right to purchase 25% of the units in the Financing as a result of providing the Commitment.~~

~~Under~~outstanding principle owed under the Amended and Restated Loan Agreement induring the event the Term Loan is prepaid for any reason, such prepayment will be subject to the payment of a premium in an amount equal to 5% of the principal amount prepaid. The Term Loan is required to be prepaid upon the occurrence of certain events, including but not limited to certain assets dispositions, the incurrence of additional indebtedness, the receipt of insurance proceeds, and a change of control, subject to certain exceptions.

In exchange for serving as the backstop for the Financing, upon the closing of the Commitment, HCP-FVA received warrants to purchase 41,577,382 shares of the Company’s common stock for a nominal exercise price, in addition to the 13,859,128 Backstop Warrants issued to HCP-FVA in connection with the making of the Short Term Loan. If eligible stockholders (other than HCP-FVA) subscribe for and purchase more than fifty percent (50%) of the Units in the Financing on the terms and conditions set forth in Section 10.13 of the Amended and Restated Loan Agreement and Schedule 10.13 thereto, then 66.66% of the number of shares of common stock issued to HCP-FVA in respect of the Backstop Warrants issued upon the closing of the Commitment (or, if the Backstop Warrants issued upon the closing of the Commitment have not then been exercised, issuable to HCP-FVA) upon exercise of such Backstop Warrants, as determined on a post-cashless exercise basis, shall be cancelled (and, if such Backstop Warrants have been exercised on a non-cashless exercise basis, the Company shall reimburse HCP-FVA for the cash exercise price paid in respect of the cancelled warrant shares). The Backstop Warrants are in addition to the Financing Warrants issuable in the Financing. In consideration for HCP-FVA’s subscription of 3 million of Units, HCP-FVA was issued Financing Warrants to purchase 366,990,000 shares of the Company’s common stock for a nominal exercise price. The Financing Warrants are currently exercisable as stockholder approval to increase the Company's authorized capital has been obtained. On April 23, 2018, HCP-FVA exercised substantially all of it's Backstop Warrants on a cash-less basis and was issued 53,370,601 shares of the Company's common stock.three months ended March 31, 2019.

We believe that our cash flows from operations and existing cash on hand are sufficient to conduct our planned operations and meet our contractual requirements through 2019.

Cash Flow Analysis

Cash flow information is as follows:


	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Cash (used in) provided by:
Operating activities	700,456			(1,645,279		)	(104,229		)	1,212,349
Investing activities	(58,023		)	(106,832		)	(68,805		)	(27,798		)
Financing activities	2,354,727			(25,710		)	(489,321		)	2,358,627
Effect of exchange rate changes	35,036			33,988			(29,173		)	8,610
Net increase (decrease) in cash and cash equivalents	$	3,032,196		$	(1,743,833	)	$	(691,528	)	$	3,551,788

Net cash ~~provided by~~used in operating activities totaled ~~$0.7~~$0.1 million for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, compared with ~~$1.6~~$1.2 million of net cash ~~used in~~provided by operating activities in the prior year period. The changes in net cash ~~provided by~~used in operating activities for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, was primarily due to our net income (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.

Net cash used in investing activities totaled $0.1 million for the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, compared with net cash used in investing activities of ~~$0.1~~$0.0 million in the prior year period. Included in investing activities are purchases of property and equipment, capitalized software development costs, cash received from security deposits and purchases of intangible assets.

Net cash used in financing activities totaled $(0.5) million for the three months ended March 31, 2019, compared with net cash provided by financing activities ~~totaled~~of $2.4 ~~million for the six months ended June 30, 2018, compared with net cash used in financing activities of $0.0~~ million in the prior year period. The three months ended March 31, 2019 reflects the partial repayment of principle under our Term Loan in January of the current year. Included in ~~financing activities for~~ the ~~six~~three months ended ~~June 30,~~March 31, 2018 are proceeds from the issuance of long-term ~~debt. There were minimal financing activity cash flows~~debt received in connection with the Commitment during the ~~six months ended June 30, 2017, which related to tax withholdings for employee share-based payment awards.~~prior year.

Total cash and cash equivalents ~~increased $3.0~~decreased $0.7 million to ~~$4.0~~$2.4 million at ~~June 30, 2018~~March 31, 2019 compared to December 31, ~~2017.~~2018.

Contractual Obligations

As of ~~June 30, 2018,~~March 31, 2019, our significant commitments are related to (i) the Amended Restated Loan Agreement, (ii) our operating leases for our office ~~leases,~~facilities, (iii) dividends (including accrued dividends) on our Series A Preferred Stock, and (iv) the potential redemption of the Series A Preferred Stock as discussed above.

The following is a schedule summarizing our significant obligations to make future payments under contractual obligations as of ~~June 30, 2018:~~

March 31, 2019:


	Operating Leases			Note Payable (c)		Interest Payments (a) (c)		Long-Term Income Tax Payable (b)		Series A Preferred Stock Mandatory Redemption		Dividends on Series A Preferred Stock		Operating Leases			Note Payable (c)		Interest Payments (a) (c)		Long-Term Income Tax Payable (b)		Series A Preferred Stock Mandatory Redemption		Dividends on Series A Preferred Stock
2018	$	1,003,556		$	—	$	86,020	$	—	$	—	$	—
2019	1,614,843			—		172,041		—		—		—		$	1,265,236		$	—	$	187,500	$	—	$	—	$	—
2020	1,444,247			—		172,041		—		—		—		1,567,637			—		250,000		—		—		—
2021	491,020			3,000,000		86,020		—		—		5,138,673		596,475			3,510,679		125,000		—		—		—
2022														—			—		—		—		—		—
Other	—			—		—		270,238		9,000,000		—		—			—		—		194,824		9,000,000		5,244,240
Total contractual obligations	$	4,553,666		$	3,000,000	$	516,122	$	270,238	$	9,000,000	$	5,138,673	$	3,429,348		$	3,510,679	$	562,500	$	194,824	$	9,000,000	$	5,244,240
Sublease income	$	(1,177,533	)	$	—	$	—	$	—	$	—	$	—	$	(1,312,746	)	$	—	$	—	$	—	$	—	$	—
Net contractual obligations	$	3,376,133		$	3,000,000	$	516,122	$	270,238	$	9,000,000	$	5,138,673	$	2,116,602		$	3,510,679	$	562,500	$	194,824	$	9,000,000	$	5,244,240

(a) The cash obligations for interest requirements reflect floating rate debt obligations on the balance of our Note Payable at ~~June 30, 2018~~March 31, 2019 using interest rate in effect at such time.

(b) Represents our liability for uncertain tax positions. We are unable to make a reasonably reliable estimate of the timing of payments due to uncertainties in the timing of tax audit outcomes.

(c) See Note (9) Notes Payable and Stock Warrants to our unaudited condensed consolidated financial statements for further ~~information.~~information and for a detailed description of the Amended and Restated Loan Agreement.

Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note (1), "Summary of Significant Accounting Policies" of our ~~2017~~2018 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 ~~2017~~2018 Form 10-K. There have been no significant changes in our significant accounting policies or critical accounting estimates since December 31, ~~2017,~~2018, other than those noted below.

Revenue Recognition

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment.

Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. For products and services aside from maintenance and support, we estimate SSP by adjusting the list price by historical discount percentages. SSP for software and hardware maintenance and support fees is based on the stated percentages of the fees charged for the respective products.

Our perpetual and term software licenses have significant standalone functionality and therefore revenue allocated to these performance obligations are recognized at a point in time upon electronic delivery of the download link and the license keys.

Revenues associated with professional services are recognized at a point in time upon customer acceptance.

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 ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, we had no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk.

We have several offices outside the United States. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. For the three months ended ~~June 30,~~March 31, 2019 and 2018, approximately 78% and ~~2017, approximately~~ 77% ~~and 71%~~ 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 ~~June 30, 2018,~~March 31, 2019, 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.

Item 4. Controls and Procedures

~~Under the supervision~~Disclosure Controls and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness 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 June 30, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.Procedures

Disclosure controls and procedures are procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness 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 not effective as of the end of the period covered by this report. We describe this deficiency and the steps we have taken to remedy such deficiency in our discussion of internal control over financial reporting below.

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 Securities and Exchange Act of 1934, 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, 2019, using the COSO framework (2013). The Company’s management has determined that the Company’s internal control over financial reporting is not effective as of that date because of the following material weakness:

During the three months ended March 31, 2019, the Company did not fully document all the COSO framework (2013) mandated system controls in place nor did the Company have an independent party complete testing of the controls as of March 31, 2019. The Company has implemented certain mitigating controls such as secondary reviews by senior management, variance analysis reporting and cash-flow monitoring, which insured that both internal and external financial reporting included all the information and disclosures required by generally accepted accounting principles in the United States of America.

Notwithstanding the above, the Principal Executive Officer and the Principal Financial Officer believe that the consolidated financial statements and other information contained in this Annual Report present fairly, in all material respects, our business, financial condition and results of operations.

Remediation

The Company is implementing the appropriate system controls mandated by the COSO framework (2013) for 2019 and plans to conduct independent audit testing of these controls which are implemented.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See the discussion of the Company’s material litigation in Note (15) Litigation, to the unaudited condensed consolidated financial statements, which is incorporated by reference in Item 1.

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 ~~2017~~2018 Form 10-K.

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 6. Exhibits



~~10.1~~	Separation Agreement between FalconStor Software, Inc., and Patrick McClain, dated April 9, 2018, incorporated herein by reference to Exhibit 10.1 to the Registrant's current report on Form 8-K filed April 11, 2018. (1)

~~10.2~~	~~Agreement between FalconStor Software, Inc. and Brad Wolfe, dated April 4, 2018, incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed April 11, 2018. (1)~~

~~10.3~~	~~Falconstor Software Inc. 2018 Stock Incentive Plan, incorporated by reference to the Definitive Proxy Statement on Schedule 14A filed on June 5, 2018.~~

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)

101.1	The following financial statements from FalconStor Software, Inc’s Quarterly Report on Form 10-Q for the quarterly period ended ~~June 30, 2018,~~March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language):



	(i)	unaudited Condensed Consolidated Balance Sheets – ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

	(ii)	unaudited Condensed Consolidated Statement of Operations – Three ~~and Six~~ Months Ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

	(iii)	unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) – Three ~~and Six~~ Months Ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

	(iv)	unaudited Condensed Consolidated ~~Statement~~Statements of ~~Cash Flows – Six~~Stockholder's Deficit - Three Months Ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018.

	(v)	unaudited Condensed Consolidated Statement of Cash Flows – Three Months Ended March 31, 2019 and 2018.

	(vi)	Notes to unaudited Condensed Consolidated Financial Statements – ~~June 30, 2018.~~March 31, 2019.

~~(1) Management contract or compensatory plan or arrangement.~~.

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/ Brad Wolfe
	Brad Wolfe
	Executive Vice President, Chief Financial Officer and Treasurer
	(principal financial and accounting officer)



	/s/ Todd Brooks
	Todd Brooks
	President & Chief Executive Officer
~~August 14, 2018~~May 15, 2019	(principal executive officer)

4536



Statements of Operations	Under Previous Guidance			New Revenue Standard Adjustment			Under Current Accounting Guidance
Three Months Ended June 30, 2018
Product revenue	$	2,407,652		$	(1,424,007	)	$	983,645
Support and services revenue	2,840,818			187,118			3,027,936
Selling and marketing	850,951			21,158			872,109
Provision for income taxes	551			—			551
Net income (loss)	211,627			(1,215,731		)	(1,004,104		)
Net loss attributable to common stockholders	(80,981		)	(1,215,731		)	(1,296,712		)
Basic net income (loss) per share attributable to common stockholders	—			(0.02		)	(0.02		)
Diluted net income (loss) per share attributable to common stockholders	—			(0.02		)	(0.02		)



Balance Sheets	Under Previous Guidance			New Revenue Standard Adjustment			Under Current Accounting Guidance
June 30, 2018
Prepaid expenses and other current assets	$	948,272		$	305,743		$	1,254,015
Contract assets, net, current	—			1,477,619			1,477,619
Contract assets, net, long-term	—			1,460,494			1,460,494
Deferred revenue, net, current	10,842,101			(3,596,977		)	7,245,124
Deferred tax liabilities, net	85,559			—			85,559
Deferred revenue, net, long-term	5,250,834			(824,196		)	4,426,638
Accumulated deficit	(130,161,907		)	7,665,029			(122,496,878		)



Six Months Ended June 30, 2018
Balance at December 31, 2017	$	18,360,690
Cumulative effect of applying ASC 606 under the modified retrospective method*	(5,359,579		)
Deferral of revenue	7,720,187
Recognition of revenue	(9,005,530		)
Change in reserves	(44,006		)
Balance at June 30, 2018	$	11,671,762



At Inception	February 23, 2018
	Basis		Fair Value
Series A redeemable convertible preferred stock, net	$	10,312,113	$	8,709,684
Notes payable, net	2,728,778		2,457,249
Warrant liability	—		4,143,000
Total	$	13,040,891	$	15,309,933



	Foreign Currency Translation			Net Unrealized Gains (Losses) on Marketable Securities		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at March 31, 2018	$	(2,066,185	)	$	—	$	22,097	$	(2,044,088	)
Other comprehensive income (loss)
Other comprehensive income before reclassifications	129,956			—		—		129,956
Amounts reclassified from accumulated other comprehensive income (loss)	—			—		—		—
Total other comprehensive income	129,956			—		—		129,956
Accumulated other comprehensive income (loss) at June 30, 2018	$	(1,936,229	)	$	—	$	22,097	$	(1,914,132	)



	Foreign Currency Translation			Net Unrealized Gains (Losses) on Marketable Securities		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at March 31, 2017	$	(2,051,917	)	$	—	$	28,675	$	(2,023,242	)
Other comprehensive income (loss)
Other comprehensive income before reclassifications	5,433			—		—		5,433
Amounts reclassified from accumulated other comprehensive income (loss)	—			—		—		—
Total other comprehensive income	5,433			—		—		5,433
Accumulated other comprehensive income (loss) at June 30, 2017	$	(2,046,484	)	$	—	$	28,675	$	(2,017,809	)



	Six Months Ended June 30,										Change Period to Period
(amounts in dollars)	2018					2017					Change Period to Period
Revenue:
Product revenue	$	2,917,589		32	%	$	4,420,707		35	%	$	(1,503,118	)	(34	)%
Support and services revenue	6,087,941			68	%	8,352,734			65	%	(2,264,793		)	(27	)%
Total revenue	9,005,530			100	%	12,773,441			100	%	(3,767,911		)	(29	)%
Cost of revenue:
Product	65,890			1	%	550,684			4	%	(484,794		)	(88	)%
Support and service	1,319,197			15	%	2,672,579			21	%	(1,353,382		)	(51	)%
Total cost of revenue	1,385,087			15	%	3,223,263			25	%	(1,838,176		)	(57	)%
Gross profit	7,620,443			85	%	9,550,178			75	%	(1,929,735		)	(20	)%
Operating expenses:
Research and development costs	1,932,795			21	%	4,319,995			34	%	(2,387,200		)	(55	)%
Selling and marketing	2,065,659			23	%	4,160,141			33	%	(2,094,482		)	(50	)%
General and administrative	3,106,824			34	%	2,966,894			23	%	139,930			5	%
Investigation, litigation, and settlement related costs	—			—	%	—			—	%	—			—	%
Restructuring costs (benefit)	635,982			7	%	(236,302		)	(2	)%	872,284			*
Total operating expenses	7,741,260			86	%	11,210,728			88	%	(3,469,468		)	(31	)%
Operating loss	(120,817		)	(1	)%	(1,660,550		)	(13	)%	1,539,733			(93	)%
Interest and other income (loss), net	(313,420		)	(3	)%	125,800			1	%	(439,220		)	*
Loss before income taxes	(434,237		)	(5	)%	(1,534,750		)	(12	)%	1,100,513			(72	)%
Provision for income taxes	62,990			1	%	217,248			2	%	(154,258		)	(71	)%
Net loss	$	(497,227	)	(6	)%	$	(1,751,998	)	(14	)%	$	1,254,771		(72	)%
Less: Accrual of Series A redeemable convertible preferred stock dividends	458,130			5	%	419,664			3	%	38,466			9	%
Less: Deemed dividend on Series A redeemable convertible preferred stock	2,269,042			25	%	—			—	%	2,269,042			—	%
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	115,750			1	%	—			—	%	115,750			—	%
Net loss attributable to common stockholders	$	(3,340,149	)	(37	)%	$	(2,171,662	)	(17	)%	$	(1,168,487	)	54	%