10-Q 1 falc-20230331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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.)

501 Congress Avenue, Suite 150

 

Austin, TX

78701

(Address of principal executive offices)

(Zip Code)

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

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, $0.001 Par Value

 

FALC

 

OTCQB

 

 

 

 

 

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 No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

 

 

 

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.

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No

As of May 8, 2023, the registrant had 7,122,199 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


 

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

 

Page

PART I.

Financial Information

3

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets at March 31, 2023 (unaudited) and December 31, 2022

3

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022

4

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022

5

 

 

Unaudited Condensed Consolidated Statements of Stockholders' Deficit for the three months ended March 31, 2023 and 2022

6

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022

8

Notes to the Unaudited Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

33

Item 4.

Controls and Procedures

33

PART II.

Other Information

34

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

 

 

 

Item 2

Unregistered Sales of Equity Securities and use of Proceeds

35

 

 

 

Item 3

Defaults Upon Senior Securities

35

 

 

 

Item 4

Mine Safety Disclosures

35

 

 

 

Item 5

Other Information

35

 

 

 

Item 6.

Exhibits

36

 

 

 

SIGNATURES

 

37

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,839,227

 

 

$

2,011,062

 

Accounts receivable, net

 

 

1,790,174

 

 

 

2,278,802

 

Prepaid expenses and other current assets

 

 

1,033,747

 

 

 

897,493

 

Contract assets, net

 

 

247,451

 

 

 

181,933

 

Total current assets

 

 

4,910,599

 

 

 

5,369,290

 

Property and equipment, net

 

 

78,126

 

 

 

86,263

 

Operating lease right-of-use assets, net

 

 

17,370

 

 

 

34,416

 

Software development costs, net

 

 

46,001

 

 

 

53,057

 

Other assets

 

 

37,741

 

 

 

98,747

 

Goodwill

 

 

4,150,339

 

 

 

4,150,339

 

Other intangible assets, net

 

 

13,285

 

 

 

20,086

 

Long-term contract assets, net

 

 

263,768

 

 

 

357,914

 

Total assets

 

$

9,517,229

 

 

$

10,170,112

 

Liabilities and Stockholders' Deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

436,711

 

 

$

387,379

 

Accrued expenses

 

 

1,220,138

 

 

 

1,427,979

 

Current portion of lease liabilities

 

 

17,370

 

 

 

34,416

 

Short-term note payable

 

 

101,227

 

 

 

177,149

 

Deferred revenue

 

 

3,589,822

 

 

 

3,684,742

 

Total current liabilities

 

 

5,365,268

 

 

 

5,711,665

 

Other long-term liabilities

 

 

956,267

 

 

 

956,023

 

Notes payable, net of debt issuance costs and discounts

 

 

2,165,874

 

 

 

2,163,090

 

Deferred tax liabilities

 

 

537,766

 

 

 

537,651

 

Deferred revenue, net of current portion

 

 

1,402,131

 

 

 

1,281,107

 

Total liabilities

 

 

10,427,306

 

 

 

10,649,536

 

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 $16,299,546 and $15,984,331, respectively

 

 

16,253,084

 

 

 

15,928,018

 

Stockholders' deficit:

 

 

 

 

 

Common stock, $.001 par value, 30,000,000 shares authorized, 7,122,199 shares and 7,118,609 shares issued and outstanding, respectively

 

 

7,122

 

 

 

7,119

 

Additional paid-in capital

 

 

110,524,978

 

 

 

110,844,716

 

Accumulated deficit

 

 

(125,954,948

)

 

 

(125,507,178

)

Accumulated other comprehensive loss

 

 

(1,740,313

)

 

 

(1,752,099

)

Total stockholders' deficit

 

 

(17,163,161

)

 

 

(16,407,442

)

Total liabilities and stockholders' deficit

 

$

9,517,229

 

 

$

10,170,112

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Revenue:

 

 

 

 

 

 

Product revenue

 

$

1,022,186

 

 

$

594,928

 

Support and services revenue

 

 

1,246,210

 

 

 

1,454,179

 

Total revenue

 

 

2,268,396

 

 

 

2,049,107

 

Cost of revenue:

 

 

 

 

Product

 

 

34,129

 

 

 

20,719

 

Support and service

 

 

341,188

 

 

 

394,549

 

Total cost of revenue

 

 

375,317

 

 

 

415,268

 

Gross profit

 

$

1,893,079

 

 

$

1,633,839

 

Operating expenses:

 

 

 

 

 

 

Research and development costs

 

 

618,527

 

 

 

705,981

 

Selling and marketing

 

 

802,566

 

 

 

1,189,846

 

General and administrative

 

 

892,654

 

 

 

849,939

 

Restructuring costs

 

 

 

 

 

744

 

Total operating expenses

 

 

2,313,747

 

 

 

2,746,510

 

Operating income (loss)

 

 

(420,668

)

 

 

(1,112,671

)

Interest and other expense

 

 

(79,863

)

 

 

(117,995

)

Income (loss) before income taxes

 

 

(500,531

)

 

 

(1,230,666

)

Income tax expense (benefit)

 

 

(52,761

)

 

 

(121,260

)

Net income (loss)

 

$

(447,770

)

 

$

(1,109,406

)

Less: Accrual of Series A redeemable convertible preferred stock dividends

 

 

315,215

 

 

 

300,921

 

Less: Accretion to redemption value of Series A redeemable convertible preferred stock

 

 

9,851

 

 

 

14,815

 

Net income (loss) attributable to common stockholders

 

$

(772,836

)

 

$

(1,425,142

)

Basic net income (loss) per share attributable to common stockholders

 

$

(0.11

)

 

$

(0.20

)

Diluted net income (loss) per share attributable to common stockholders

 

$

(0.11

)

 

$

(0.20

)

Weighted average basic shares outstanding

 

 

7,119,735

 

 

 

7,082,276

 

Weighted average diluted shares outstanding

 

 

7,119,735

 

 

 

7,082,276

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

Three Months Ended March 31,

 

 

2023

 

2022

 

Net income (loss)

$

(447,770

)

$

(1,109,406

)

Other comprehensive income (loss), net of applicable taxes

 

 

Foreign currency translation

 

11,786

 

 

33,510

 

Total other comprehensive income (loss), net of applicable
   taxes:

 

11,786

 

 

33,510

 

Total comprehensive income (loss)

$

(435,984

)

$

(1,075,896

)

Less: Accrual of Series A redeemable convertible preferred
   stock dividends

 

315,215

 

 

300,921

 

Less: Accretion to redemption value of Series A redeemable
   convertible preferred stock

 

9,851

 

 

14,815

 

Total comprehensive income (loss) attributable to common
   stockholders

$

(761,050

)

$

(1,391,632

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(UNAUDITED)

 

 

 

Common
Stock
Outstanding

 

 

Common
Stock

 

 

Additional
Paid-In
Capital

 

 

Accumulated
Deficit

 

 

 

Accumulated
Other
Comprehensive
Loss, Net

 

 

Total
Stockholders'
Deficit

 

Balance at January 1, 2023

 

 

7,118,609

 

 

$

7,119

 

 

$

110,844,716

 

 

$

(125,507,178

)

 

 

$

(1,752,099

)

 

$

(16,407,442

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

(447,770

)

 

 

 

 

 

 

(447,770

)

Share-based compensation to employees

 

 

 

 

 

 

 

 

5,331

 

 

 

 

 

 

 

 

 

 

5,331

 

Shares issued in connection with vesting of restricted stock

 

 

3,590

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

Accretion of Series A redeemable convertible preferred stock

 

 

 

 

 

 

 

 

(9,851

)

 

 

 

 

 

 

 

 

 

(9,851

)

Dividends on Series A redeemable convertible preferred stock

 

 

 

 

 

 

 

 

(315,215

)

 

 

 

 

 

 

 

 

 

(315,215

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,786

 

 

 

11,786

 

Balance at March 31, 2023

 

 

7,122,199

 

 

 

7,122

 

 

 

110,524,978

 

 

 

(125,954,948

)

 

 

 

(1,740,313

)

 

 

(17,163,161

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(UNAUDITED)

 

 

 

Common
Stock
Outstanding

 

 

Common
Stock

 

 

Additional
Paid-In
Capital

 

 

Accumulated
Deficit

 

 

 

Accumulated
Other
Comprehensive
Loss, Net

 

 

Total
Stockholders'
Deficit

 

Balance at January 1, 2022

 

 

7,082,276

 

 

$

7,082

 

 

$

112,349,613

 

 

$

(123,462,638

)

 

 

$

(1,860,040

)

 

$

(12,965,983

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

(1,109,406

)

 

 

 

 

 

 

(1,109,406

)

Share-based compensation to employees

 

 

 

 

 

 

 

 

8,184

 

 

 

 

 

 

 

 

 

 

8,184

 

Shares issued in connection with vesting of restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of Series A redeemable convertible preferred stock

 

 

 

 

 

 

 

 

(14,815

)

 

 

 

 

 

 

 

 

 

(14,815

)

Dividends on Series A redeemable convertible preferred stock

 

 

 

 

 

 

 

 

(300,921

)

 

 

 

 

 

 

 

 

 

(300,921

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,510

 

 

 

33,510

 

Balance at March 31, 2022

 

 

7,082,276

 

 

 

7,082

 

 

 

112,042,061

 

 

 

(124,572,044

)

 

 

 

(1,826,530

)

 

 

(14,349,431

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

7


 

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

(447,770

)

 

$

(1,109,406

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

25,101

 

 

 

35,519

 

Amortization of debt discount on notes payable

 

 

2,783

 

 

 

2,148

 

Amortization of right of use assets

 

 

17,046

 

 

 

21,512

 

Share-based payment compensation

 

 

5,331

 

 

 

8,184

 

Recovery of returns and doubtful accounts

 

 

33,695

 

 

 

(18,740

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

452,374

 

 

 

2,044,122

 

Prepaid expenses and other current assets

 

 

(141,566

)

 

 

(222,019

)

Contract assets

 

 

28,628

 

 

 

13,120

 

Inventory

 

 

 

 

 

7,667

 

Other assets

 

 

63,516

 

 

 

5,437

 

Accounts payable

 

 

65,293

 

 

 

389,847

 

Accrued expenses and other long-term liabilities

 

 

(204,083

)

 

 

(259,405

)

Operating lease liabilities

 

 

(17,046

)

 

 

(21,512

)

Deferred revenue

 

 

28,348

 

 

 

(682,055

)

Net cash provided by (used in) operating activities

 

 

(88,350

)

 

 

214,419

 

Cash flows from investing activities:

 

 

 

 

Purchases of property and equipment

 

 

(2,898

)

 

 

 

Net cash provided by (used in) investing activities

 

 

(2,898

)

 

 

 

Cash flows from financing activities:

 

 

 

 

Cash Paid for Payroll Taxes on Restricted Stock Unit Release

 

 

(681

)

 

 

 

Payments of short-term debt

 

 

(75,921

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(76,602

)

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(3,985

)

 

 

(13,989

)

Net increase (decrease) in cash and cash equivalents

 

 

(171,835

)

 

 

200,430

 

Cash and cash equivalents, beginning of period

 

 

2,011,062

 

 

 

3,181,209

 

Cash and cash equivalents, end of period

 

$

1,839,227

 

 

$

3,381,639

 

Supplemental disclosures:

 

 

 

 

 

 

Cash paid for interest

 

$

46,746

 

 

$

21,554

 

Non-cash investing and financing activities:

 

 

 

 

 

 

Undistributed Series A redeemable convertible preferred stock dividends

 

$

315,215

 

 

$

300,921

 

Accretion of Series A redeemable convertible preferred stock

 

$

9,851

 

 

$

14,815

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

8


 

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 ("we", the "Company" or "FalconStor"), is a trusted data protection software leader modernizing disaster recovery and backup operations for the hybrid cloud world. The Company enables enterprise customers and managed service providers to secure, migrate, and protect their data while reducing data storage and long-term retention costs by up to 95%. More than 1,000 organizations and managed service providers worldwide standardize on FalconStor as the foundation for their cloud first data protection future.

 

(b) Liquidity

 

As of March 31, 2023, the Company had a working capital deficiency of $0.5 million, which is inclusive of current deferred revenue of $3.6 million, and a stockholders' deficit of $17.2 million. During the three months ended March 31, 2023, the Company had net loss of $0.4 million and negative cash flow from operations of $0.1 million. The Company's total cash balance as of March 31, 2023 was $1.8 million, a decrease of $0.2 million compared to $2.0 million on December 31, 2022.

 

The Company’s principal sources of liquidity as of March 31, 2023 consisted of cash and future cash anticipated to be generated from operations. The Company generated negative net income and negative cash flows from operations during the three months ended March 31, 2023, and it reported negative working capital as of March 31, 2023.

 

The Company is currently a party to an Amended and Restated Term Loan Credit Agreement, dated as of February 23, 2018, as amended December 27, 2019, by and between the Company and HCP-FVA, LLC (“HCP-FVA”), (the “Amended and Restated Loan Agreement”). In connection with the then-proposed public offering of the Company as described in the Company's Registration Statement on Form S-1, as amended, originally filed on June 3, 2021 (the "June Offering"), we entered into a letter agreement with Hale Capital Partners, LP (“Hale Capital”), dated June 2, 2021 (the “Loan Extension Letter Agreement”), that provided for an extension of the maturity date on Hale Capital’s portion of the outstanding indebtedness owed under the Amended and Restated Loan Agreement to June 30, 2023. The remaining principal amount outstanding, which was owed to other lenders, was repaid in full. On July 19, 2022, we entered into a letter agreement with Hale Capital (the "Second Loan Extension Letter Agreement"), that provided for a subsequent extension of the maturity date on the outstanding indebtedness owed under the Amended and Restated Loan Agreement from June 30, 2023 to December 31, 2023. On February 10, 2023, the Company entered into a letter agreement with Hale Capital to further extend the maturity date of the senior secured debt to June 30, 2024 (the "Third Loan Extension Letter Agreement"). See Note (9) Notes Payable for more information.

 

Also, as described further in Note (12) Series A Redeemable Convertible Preferred Stock, the effective date of the mandatory redemption right of the Company's Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) held by HCP-FVA and Hale Capital was extended from July 30, 2021 to July 30, 2023 pursuant to that certain Amendment No. 1 to the Amended and Restated Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of the Company, dated as of June 24, 2021 (as amended, the “Certificate of Designations”). On July 19, 2022, the Company and Hale Capital entered into a letter agreement pursuant to which Hale Capital agreed not to exercise or permit the exercise of the mandatory redemption right of the Series A Preferred Stock on or prior to December 31, 2023 unless the redemption is in accordance with Section 8(e)(z) of the Certificate of Designations or in accordance with a Breach Event (as defined in the Certificate of Designations). If such Series A Preferred Stock was redeemed on March 31, 2023, the Company would have been required to pay the holders of the Series A Preferred Stock $16.3 million. On February 10, 2023, the Company entered into a letter agreement with Hale Capital to further extend the redemption date of the Series A Preferred Stock to June 30, 2024.

 

The Company believes its current cash balances together with anticipated cash flows from operating activities will be sufficient to meet its working capital requirements for at least one year from the date the consolidated financial statements were issued.

9


 

 

(c) COVID-19 Pandemic, Geopolitical and Other Macroeconomic Impacts to our Operating Environment

We are subject to risks and uncertainties arising from macroeconomic and geopolitical conditions, including, but not limited to, inflation, rising interest rates, foreign currency fluctuations, lower consumer spending, geopolitical conflicts, including the conflict in the Ukraine, and continuing effects of the COVID-19 pandemic. We continuously monitor the direct and indirect impacts of these macroeconomic and geopolitical events and trends on our business and financial results.

The full extent to which these macroeconomic and geopolitical conditions impact our business is difficult to predict. Such impacts include, but are not limited to, supply chain and logistical challenges, reduced consumer demand for our products, and an industry-wide slowdown in advertising spending. The impact of COVID-19, for example, is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases or failing to make payments, and delays or disruptions in our or our partners’ supply chains. As a result, we may experience extended sales cycles, our ability to close transactions with new and existing customers and partners may be negatively impacted, our ability to recognize revenue from software transactions we do close may be negatively impacted, our demand generation activities, and the efficiency and effect of those activities, may be negatively affected, and it has been and, until the COVID-19 outbreak is contained, will continue to be more difficult for us to forecast our operating results. These uncertainties have, and may continue to, put pressure on global economic conditions and overall IT spending and may cause our end customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles and potentially lowering prices for our solutions, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments, any of which could materially harm our business, operating results and financial condition.

 

(d) Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

(e) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include those related to revenue recognition, accounts receivable allowances, valuation of derivatives, valuation of goodwill and income taxes. Actual results could differ from those estimates.

The financial market volatility in many countries where the Company operates has impacted and may continue to impact the Company’s business. Such conditions could have a material impact on the Company’s significant accounting estimates discussed above.

(f) Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position of the Company at March 31, 2023, and the results of its operations for the three months ended March 31, 2023 and 2022. 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

10


 

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, 2022 ("2022 Form 10-K").

 

(g) Recently Issued Accounting Pronouncements

 

In August 2020, the Financial Accounting Standards Board, or FASB, issued ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which reduces the number of accounting models for convertible instruments and amends the calculation of diluted earnings per share for convertible instruments, among other changes. The guidance is effective for smaller reporting companies as defined by the SEC, for annual reporting periods beginning after December 15, 2023, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (together with all subsequent amendments, ("Topic 326"))", which replaced the previous U.S. GAAP that required an incurred loss methodology for recognizing credit losses and delayed recognition until it was probable a loss had been incurred. Topic 326 replaced the incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of reasonable and supportable information to estimate credit losses. This provision was effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. In February 2020, the FASB issued ASU 2020-02, "Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)", which delayed the effective date of Topic 326 for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company adopted Topic 326 effective January 1, 2023. The impact of adoption of this standard was not material on the Company’s 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 2022 Form 10-K. There have been no significant changes in the Company's significant accounting policies since December 31, 2022. For a description of the Company's significant accounting policies refer to the 2022 Form 10-K.

Revenue from Contracts with Customers and Associated Balances

Nature of Products and Services

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

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

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

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a contract asset when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For perpetual licenses with multi-year maintenance agreements, the Company invoices the license and generally one year of maintenance with future maintenance generally invoiced annually. For multi-year subscription licenses, the Company generally invoices customers annually at

11


 

the beginning of each annual coverage period. The Company records a contract asset related to revenue recognized for multi-year on-premises licenses as its right to payment is conditioned upon providing product support and services in future years.

As of March 31, 2023 and December 31, 2022, accounts receivable, net of allowance for doubtful accounts, was $1.8 million and $2.3 million, respectively. A provision for expected credit losses for accounts receivables and contract assets that share similar risk characteristics is recorded based on an evaluation of historical loss experience, current conditions, and reasonable and supportable forecasts. Accounts are written off when it becomes apparent that such amounts will not be collected, generally when amounts are past due by greater than nine months. Our provision for credit loss on accounts receivable was $54,869 as of March 31, 2023 and $25,720 as of December 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, short and long-term contract assets, net of provision for credit loss, was $0.5 million and $0.5 million, respectively. Our provision for credit loss on contract assets was $5,112 and zero as of March 31, 2023 and December 31, 2022 , 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:

 

Three Months Ended March 31, 2023

 

 

 

Balance at January 1, 2023

 

$

4,965,849

 

   Deferral of revenue

 

 

2,293,933

 

   Recognition of revenue

 

 

(2,268,396

)

   Change in reserves

 

 

567

 

Balance at March 31, 2023

 

$

4,991,953

 

 

During the three months ended March 31, 2023 and 2022, revenue of $1.3 million and $1.4 million respectively, was recognized from the deferred revenue balance at the beginning of each period.

Deferred revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized as revenue in future periods. Deferred revenue was $5.0 million as of March 31, 2023, of which the Company expects to recognize approximately 72% of such amount as revenue over the next 12 months and the remainder thereafter.

Approximately $1.6 million of revenue is expected to be recognized from remaining performance obligations for unbilled support and services as of March 31, 2023. We expect to recognize revenue on approximately 39% of these remaining performance obligations over the next twelve months, with the balance recognized thereafter.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 90 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that 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, and 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.

12


 

SSP for software and hardware maintenance and support fees is based on the stated percentages of the fees charged for the respective products.

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

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

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

Disaggregation of Revenue

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

Assets Recognized from Costs to Obtain a Contract with a Customer

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

Leases

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

Right of Use Assets and Liabilities

We have various operating leases for office facilities that are expected to continue through 2023. Below is a summary of our ROU assets and liabilities as of March 31, 2023.

 

Right of use assets

 

$

17,370

 

Lease liability obligations, current

 

 

17,370

 

Lease liability obligations, less current portion

 

 

 

Total lease liability obligations

 

$

17,370

 

Weighted-average remaining lease term

 

0.25

 

Weighted-average discount rate

 

 

3.35

%

 

13


 

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

Components of lease expense:

 

 

 

 

 

 

   Operating lease cost

 

$

33,118