10-Q

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 September 30, 2022


☐	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 October 31, 2022, the registrant had 7,118,609 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 September 30, 2022 (unaudited) and December 31, 2021	3

	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021	4

	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021	5

	Unaudited Condensed Consolidated Statements of Stockholders' Deficit for the three and nine months ended September 30, 2022 and 2021	6

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021	8

	Notes to the Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	39

PART II.	Other Information	40

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2	Unregistered Sales of Equity Securities and use of Proceeds	40

Item 3	Defaults Upon Senior Securities	40

Item 4	Mine Safety Disclosures	40

Item 5	Other Information	41

Item 6.	Exhibits	42

SIGNATURES		43

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2022			December 31, 2021
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,666,054		$	3,181,209
Accounts receivable, net of allowances		2,288,133			2,855,135
Prepaid expenses and other current assets		885,734			1,074,972
Contract assets		273,945			209,936
Inventory		—			7,744
Total current assets		5,113,866			7,328,996
Property and equipment, net		95,796			153,904
Operating lease right-of-use assets, net		49,626			112,405
Deferred tax assets		26,327			30,190
Software development costs, net		60,123			42,695
Other assets		97,212			106,023
Goodwill		4,150,339			4,150,339
Other intangible assets, net		27,437			51,362
Long-term contract assets		445,017			692,712
Total assets	$	10,065,743		$	12,668,626
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable	$	450,250		$	297,033
Accrued expenses		1,355,927			1,099,257
Current portion of lease liabilities		49,626			76,940
Deferred revenue		3,504,907			4,557,317
Total current liabilities		5,360,710			6,030,547
Other long-term liabilities		954,213			950,843
Notes payable, net of debt issuance costs and discounts		2,164,251			2,154,098
Operating lease liabilities, net of current portion		—			35,465
Deferred tax liabilities		500,499			500,499
Deferred revenue, net of current portion		1,281,279			1,578,769
Total liabilities		10,260,952			11,250,221
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 $15,520,639 and $14,490,274, respectively		15,505,173			14,384,388
Stockholders' deficit:
Common stock, $.001 par value, 30,000,000 shares authorized, 7,111,801 shares and 7,082,276 shares issued and outstanding, respectively		7,112			7,082
Additional paid-in capital		111,264,069			112,349,613
Accumulated deficit		(125,281,898	)		(123,462,638	)
Accumulated other comprehensive loss		(1,689,665	)		(1,860,040	)
Total stockholders' deficit		(15,700,382	)		(12,965,983	)
Total liabilities and stockholders' deficit	$	10,065,743		$	12,668,626

See accompanying notes to unaudited condensed consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Revenue:
Product revenue	$	1,568,110		$	1,547,013		$	3,125,936		$	5,288,747
Support and services revenue		1,491,031			1,736,456			4,376,647			5,081,795
Total revenue		3,059,141			3,283,469			7,502,583			10,370,542
Cost of revenue:
Product		19,711			41,351			65,018			298,966
Support and service		360,393			400,934			1,128,764			1,233,067
Total cost of revenue		380,104			442,285			1,193,782			1,532,033
Gross profit	$	2,679,037		$	2,841,184		$	6,308,801		$	8,838,509
Operating expenses:
Research and development costs		581,941			711,273			1,943,446			2,032,360
Selling and marketing		887,967			1,610,635			3,202,311			4,267,010
General and administrative		826,556			633,954			2,400,561			2,129,921
Gain on litigation settlement		—			(632,600	)		—			(632,600	)
Restructuring costs		—			68,704			744			792,754
Total operating expenses		2,296,464			2,391,966			7,547,062			8,589,445
Operating income (loss)		382,573			449,218			(1,238,261	)		249,064
Gain on debt extinguishment		—			—			—			754,000
Interest and other expense		(111,399	)		(84,049	)		(430,630	)		(544,625	)
Income (loss) before income taxes		271,174			365,169			(1,668,891	)		458,439
Income tax expense (benefit)		49,802			16,529			150,369			63,804
Net income (loss)	$	221,372		$	348,640		$	(1,819,260	)	$	394,635
Less: Accrual of Series A redeemable convertible preferred stock dividends		391,016			288,802			1,030,365			848,898
Less: Accretion to redemption value of Series A redeemable convertible preferred stock		40,023			13,517			90,420			285,814
Net income (loss) attributable to common stockholders	$	(209,667	)	$	46,321		$	(2,940,045	)	$	(740,077	)
Basic net income (loss) per share attributable to common stockholders	$	(0.03	)	$	0.01		$	(0.41	)	$	(0.12	)
Diluted net income (loss) per share attributable to common stockholders	$	(0.03	)	$	0.01		$	(0.41	)	$	(0.12	)
Weighted average basic shares outstanding		7,111,801			6,990,723			7,095,096			6,324,370
Weighted average diluted shares outstanding		7,111,801			7,039,421			7,095,096			6,324,370

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 September 30,					Nine Months Ended September 30,
	2022			2021		2022			2021
Net income (loss)	$	221,372		$	348,640	$	(1,819,260	)	$	394,635
Other comprehensive income (loss), net of applicable taxes
Foreign currency translation		26,004			11,144		170,375			92,802
Total other comprehensive income (loss), net of applicable taxes:		26,004			11,144		170,375			92,802
Total comprehensive income (loss)	$	247,376		$	359,784	$	(1,648,885	)	$	487,437
Less: Accrual of Series A redeemable convertible preferred stock dividends		391,016			288,802		1,030,365			848,898
Less: Accretion to redemption value of Series A redeemable convertible preferred stock		40,023			13,517		90,420			285,814
Total comprehensive income (loss) attributable to common stockholders	$	(183,663	)	$	57,465	$	(2,769,670	)	$	(647,275	)

See accompanying notes to unaudited condensed consolidated financial statements.

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, 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
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	)
Net income (loss)									(931,226	)					(931,226	)
Share-based compensation to employees						19,102									19,102
Shares issued in connection with vesting of restricted stock		29,525		30		(30	)								—
Accretion of Series A redeemable convertible preferred stock						(35,582	)								(35,582	)
Dividends on Series A redeemable convertible preferred stock						(338,428	)								(338,428	)
Foreign currency translation												110,861			110,861
Balance at June 30, 2022		7,111,801		7,112		111,687,123			(125,503,270	)		(1,715,669	)		(15,524,704	)
Net income (loss)									221,372						221,372
Share-based compensation to employees						7,985									7,985
Accretion of Series A redeemable convertible preferred stock						(40,023	)								(40,023	)
Dividends on Series A redeemable convertible preferred stock						(391,016	)								(391,016	)
Foreign currency translation												26,004			26,004
Balance at September 30, 2022		7,111,801		7,112		111,264,069			(125,281,898	)		(1,689,665	)		(15,700,382	)

See accompanying notes to unaudited condensed consolidated financial statements.

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, 2021		5,949,463	$	5,949	$	110,107,170	$	(123,665,970	)	$	(1,987,961	)	$	(15,540,812	)
Net income (loss)								408,295						408,295
Share-based compensation to employees						4,471