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"), 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
September 30, 2018
, we had a working capital deficiency of
$3.0 million
, which is inclusive of current deferred revenue of
$6.9 million
, and a stockholders' deficit of
$12.0 million
. During the three months ended
September 30, 2018
, we had a net
loss
of
$0.3 million
. During the nine months ended
September 30, 2018
, we had a net
loss
of
$0.8 million
and
negative
cash flow from operations of
$0.3 million
. Our cash and cash equivalents at
September 30, 2018
was
$2.8 million
,
an increase
of
$1.8 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 the 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.
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.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(d) Use of Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principals ("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
September 30, 2018
, and the results of its operations for the
three and nine
months ended
September 30, 2018
and
2017
. 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
("
2017
Form 10-K").
(f) Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB ("Financial Accounting Standards Board") issued new guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance replaces most existing revenue recognition guidance in GAAP in the United States 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 September 30, 2018
|
|
|
|
Product revenue
|
$
|
1,587,748
|
|
$
|
(579,833
|
)
|
$
|
1,007,915
|
|
Support and services revenue
|
3,052,246
|
|
—
|
|
3,052,246
|
|
Selling and marketing
|
1,132,675
|
|
11,596
|
|
1,144,271
|
|
Income tax expense (benefit)
|
(96,858
|
)
|
—
|
|
(96,858
|
)
|
Net income (loss)
|
259,000
|
|
(591,429
|
)
|
(332,429
|
)
|
Net loss attributable to common stockholders
|
(95,015
|
)
|
(591,429
|
)
|
(686,444
|
)
|
Basic net income (loss) per share attributable to common stockholders
|
—
|
|
(0.01
|
)
|
(0.01
|
)
|
Diluted net income (loss) per share attributable to common stockholders
|
—
|
|
(0.01
|
)
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Operations
|
Under Previous Guidance
|
New Revenue Standard Adjustment
|
Under Current Accounting Guidance
|
Nine Months Ended September 30, 2018
|
|
|
|
Product revenue
|
$
|
5,662,884
|
|
$
|
(1,737,380
|
)
|
$
|
3,925,504
|
|
Support and services revenue
|
9,140,187
|
|
—
|
|
9,140,187
|
|
Selling and marketing
|
3,201,380
|
|
8,550
|
|
3,209,930
|
|
Provision for income taxes
|
(33,868
|
)
|
—
|
|
(33,868
|
)
|
Net income (loss)
|
916,274
|
|
(1,745,930
|
)
|
(829,656
|
)
|
Net loss attributable to common stockholders
|
(2,280,663
|
)
|
(1,745,930
|
)
|
(4,026,593
|
)
|
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
|
September 30, 2018
|
|
|
|
Prepaid expenses and other current assets
|
$
|
1,130,598
|
|
$
|
405,250
|
|
$
|
1,535,848
|
|
Contract assets, net, current
|
—
|
|
1,178,851
|
|
1,178,851
|
|
Contract assets, net, long-term
|
—
|
|
939,930
|
|
939,930
|
|
Deferred revenue, net, current
|
10,481,791
|
|
(3,622,199
|
)
|
6,859,592
|
|
Deferred tax liabilities, net
|
85,559
|
|
—
|
|
85,559
|
|
Deferred revenue, net, long-term
|
3,751,315
|
|
(1,038,473
|
)
|
2,712,842
|
|
Accumulated deficit
|
(130,014,010
|
)
|
7,184,703
|
|
(122,829,307
|
)
|
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 impact 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 effective 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
In July 2018, the FASB issued ASU 2018-10
Leases (Topic 842),Codification Improvements
and ASU 2018-11
Leases (Topic 842), Targeted Improvements
, to provide additional guidance for the adoption of Topic 842
.
ASU 2018-10 clarifies certain provisions and correct unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification, and certain transition adjustments that should be recognized to earnings rather than to stockholders' equity.
ASU 2018-11
provides an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842
.
In February 2016, the FASB issued ASU 2016-02
Leases (Topic 842)
which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases with terms greater than 12 months.
ASU 2018-11, ASU 2018-10, and ASU 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 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 leases that meet the requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures in the Company’s Notes to the Condensed Consolidated Financial Statements.
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 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 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. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the 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. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of this accounting standard to have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
(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
Form 10-K. There have been no significant changes in the Company's significant accounting policies since
December 31, 2017
, other than those noted below. For a description of the Company's other significant accounting policies refer to the
2017
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 as 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 of 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
September 30, 2018
and
December 31, 2017
, accounts receivable, net of allowance for doubtful accounts, was
$1.6 million
and
$4.2 million
, respectively. As of
September 30, 2018
and
December 31, 2017
, short and long-term contract assets, net of allowance for doubtful accounts, was
$2.1 million
and
$0.0 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 September 30, 2018
were
$0.0 million
and
$0.0 million
, respectively. Write-offs in the accounts
receivable and contract assets allowance accounts for the
nine months ended September 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:
|
|
|
|
|
Nine Months Ended September 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
|
9,684,556
|
|
Recognition of revenue
|
(13,065,691
|
)
|
Change in reserves
|
(47,542
|
)
|
Balance at September 30, 2018
|
$
|
9,572,434
|
|
*See Note
(1)
Basis of Presentation
to our unaudited condensed consolidated financial statements for further information.
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
$9.6 million
as of
September 30, 2018
, of which the Company expects to recognize approximately
72%
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.
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.
(3) Earnings Per Share
Basic earnings per share ("EPS") is computed based on the weighted average number of shares of common stock outstanding. Diluted EPS is computed based on the weighted average number of common shares outstanding increased by dilutive common stock equivalents, attributable to stock option awards, restricted stock awards, warrants
and the Series A Preferred Stock outstanding.
The following represents the common stock equivalents that were excluded from the computation of diluted shares outstanding because their effect would have been anti-dilutive for the
three and nine
months ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Stock options, warrants and restricted stock
|
|
370,117,830
|
|
|
2,309,950
|
|
|
370,117,830
|
|
|
2,786,418
|
|
Series A redeemable convertible preferred stock
|
|
8,781,516
|
|
|
8,781,516
|
|
|
8,781,516
|
|
|
8,781,516
|
|
Total anti-dilutive common stock equivalents
|
|
378,899,346
|
|
|
11,091,466
|
|
|
378,899,346
|
|
|
11,567,934
|
|
The following represents a reconciliation of the numerators and denominators of the basic and diluted EPS computation:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(332,429
|
)
|
|
$
|
1,429,173
|
|
|
$
|
(829,656
|
)
|
|
$
|
(322,825
|
)
|
Effects of Series A redeemable convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Series A redeemable convertible preferred stock dividends
|
|
229,022
|
|
|
215,000
|
|
|
687,152
|
|
|
634,664
|
|
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
|
|
124,993
|
|
|
—
|
|
|
240,743
|
|
|
—
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(686,444
|
)
|
|
$
|
1,214,173
|
|
|
$
|
(4,026,593
|
)
|
|
$
|
(957,489
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
97,935,348
|
|
|
44,552,892
|
|
|
75,844,719
|
|
|
44,362,367
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, warrants and restricted stock
|
|
—
|
|
|
901,468
|
|
|
—
|
|
|
—
|
|
Series A redeemable convertible preferred stock
|
|
—
|
|
|
8,781,516
|
|
|
—
|
|
|
—
|
|
Weighted average diluted shares outstanding
|
|
97,935,348
|
|
|
54,235,876
|
|
|
75,844,719
|
|
|
44,362,367
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share attributable to common stockholders
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
Diluted net income (loss) per share attributable to common stockholders
|
|
$
|
(0.01
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
(4) Property and Equipment
The gross carrying amount and accumulated depreciation of property and equipment as of
September 30, 2018
and
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Gross carrying amount
|
|
$
|
18,580,596
|
|
|
$
|
18,563,071
|
|
Accumulated depreciation
|
|
(18,137,451
|
)
|
|
(17,926,959
|
)
|
Property and Equipment, net
|
|
$
|
443,145
|
|
|
$
|
636,112
|
|
For the
three months ended September 30, 2018
and
2017
, depreciation expense was
$77,697
and
$107,813
, respectively. For the
nine months ended September 30, 2018
and
2017
, depreciation expense was
$236,007
and
$429,567
, respectively.
(5) Software Development Costs
The gross carrying amount and accumulated amortization of software development costs as of
September 30, 2018
and
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Gross carrying amount
|
|
$
|
2,950,134
|
|
|
$
|
2,917,215
|
|
Accumulated amortization
|
|
(2,813,625
|
)
|
|
(2,637,801
|
)
|
Software development costs, net
|
|
$
|
136,509
|
|
|
$
|
279,414
|
|
During the
three months ended September 30, 2018
and
2017
, the Company recorded
$58,608
and
$58,608
, respectively, of amortization expense related to capitalized software costs. During the
nine months ended September 30, 2018
and
2017
, the Company recorded
$175,824
and
$209,536
, respectively, of amortization expense related to capitalized software costs.
(6) Goodwill and Other Intangible Assets
The gross carrying amount and accumulated amortization of goodwill and other intangible assets as of
September 30, 2018
and
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Goodwill
|
|
$
|
4,150,339
|
|
|
$
|
4,150,339
|
|
Other intangible assets:
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
3,879,547
|
|
|
$
|
3,816,402
|
|
Accumulated amortization
|
|
(3,774,172
|
)
|
|
(3,674,771
|
)
|
Net carrying amount
|
|
$
|
105,375
|
|
|
$
|
141,631
|
|
For the
three months ended September 30, 2018
and
2017
, amortization expense was
$28,581
and
$40,533
, respectively. For the
nine months ended September 30, 2018
and
2017
, amortization expense was
$99,401
and
$121,306
, 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 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. 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
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
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
September 30, 2018
:
|
|
|
|
|
|
Name of Plan
|
|
Shares Available for Grant
|
|
Shares Outstanding
|
FalconStor Software, Inc., 2016 Incentive Stock Plan
|
|
—
|
|
505,000
|
FalconStor Software, Inc., 2006 Incentive Stock Plan
|
|
—
|
|
1,074,700
|
FalconStor Software, Inc., 2000 Stock Option Plan
|
|
—
|
|
4,500
|
Related to the 2016 Plan, many share-based compensation awards were forfeited and the related expense reversed accordingly, resulting in negative expense in the period. The following table summarizes the share-based compensation expense for all awards issued under the Company’s stock equity plans in the following line items in the condensed consolidated statements of operations for the
three and nine
months ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of revenue - Support and Service
|
|
6,314
|
|
|
(9,752
|
)
|
|
19,889
|
|
|
55,533
|
|
Research and development costs
|
|
17,883
|
|
|
28,382
|
|
|
59,233
|
|
|
212,910
|
|
Selling and marketing
|
|
3,579
|
|
|
(23,560
|
)
|
|
16,036
|
|
|
40,178
|
|
General and administrative
|
|
1,248
|
|
|
(255,647
|
)
|
|
(59,510
|
)
|
|
(26,629
|
)
|
|
|
$
|
29,024
|
|
|
$
|
(260,577
|
)
|
|
$
|
35,648
|
|
|
$
|
281,992
|
|
(8) Income Taxes
The Company’s provision for income taxes consists principally of state and local, and foreign taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year.
For the
nine months ended September 30, 2018
, the Company recorded an income tax provision of
$(33,868)
. The effective tax rate for the
nine months ended September 30, 2018
was
3.9%
. 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. During the quarter ended September 30, 2018, the Company recorded an income tax benefit of
$0.1 million
related to the reversal of uncertain tax positions. As of
September 30, 2018
, 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 as such amounts are fully offset with a valuation allowance.
For the
nine months ended September 30, 2017
, the Company recorded an income tax provision of
$207,352
. The effective tax rate for the
nine months ended September 30, 2017
was
(179.6%)
. The effective tax rate differs from the statutory rate of 35% 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
September 30, 2018
and
December 31, 2017
were
$137,927
and
180,202
, respectively. As of
September 30, 2018
and
December 31, 2017
, the Company had
$61,242
and
$82,508
, respectively, of accrued interest.
On December 22, 2017 the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of 2017 Tax Cuts and Jobs Act ("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 TCJA was incomplete as of the period ended December 31, 2017, and remains incomplete as of
September 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
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.
On November 17, 2017, HCP-FVA provided the Commitment, whereby it agreed to finance up to
$3 million
to the Company on the terms, and subject to the conditions, set forth in the Commitment letter. As part of the 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 a Short Term Loan to the Company in the principal amount of
$500,000
. Pursuant to the Short Term Loan, HCP-FVA received warrants to purchase
13,859,128
shares of the Company's common stock at a nominal exercise price ("Backstop Warrants").
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 (as defined below) in a proposed private placement (the "Financing") offered to certain eligible stockholders who were stockholders of the Company on November 17, 2017, as described below.
On February 23, 2018, the Company closed on the Commitment from HCP-FVA to purchase up to
$3 million
of Units. 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 the
$500,000
Short-Term Loan into Units. In consideration for HCP-FVA’s subscription of
3 million
of Units, HCP-FVA was issued Financing Warrants (as hereinafter defined) to purchase
366,990,000
shares of the Company’s common stock for a nominal exercise price.
In the Financing, the Company agreed to offer FalconStor stockholders as of November 17, 2017 who were accredited investors the opportunity to purchase up to a total of
40 million
Units (inclusive of subscriptions by HCP-FVA). Each Unit had a purchase price of
$0.371063
and consisted 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
$0.271063
(subject to increase to take into account accretion of the Series A Preferred Stock after
September 30, 2018
), all such shares to be acquired directly from their current holder, HCP-FVA.
|
The closing of the Commitment effectively constituted HCP-FVA’s purchase of
30 million
Units in the Financing. As a result, the maximum additional funds that the Company could receive in the Financing was
$1 million
through the purchase of
10 million
Units by other eligible stockholders. If other eligible stockholders subscribed for more than
10 million
Units, they would 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 also 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 elected to subscribe for more than their pro rata share, the remaining Units will 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. In exchange for serving as the backstop for the Financing, upon the closing of the Commitment, HCP-FVA received additional Backstop 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.
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 amended and restated 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 asset 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).
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 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.
On October 9, 2018, FalconStor closed on the final tranche of its private placement offering of Units to certain eligible stockholders of the Company. For further information, refer to Note (18)
Subsequent Events
, to our unaudited condensed consolidated financial statements.
During the fiscal year-ended
December 31, 2017
and
nine months ended September 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 held all of the debt and Series A Preferred Stock, the restructuring is considered to be a capital transaction as of
September 30, 2018
. 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
|
445,887
|
|
Accretion of preferred stock
|
238,841
|
|
Total Series A redeemable convertible preferred stock, net at September 30, 2018
|
$
|
9,394,412
|
|
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
|
103,372
|
|
Deferred issuance costs
|
(30,609
|
)
|
Total notes payable, net at September 30, 2018
|
$
|
2,530,012
|
|
(10) Fair Value Measurements
The Company measures its cash equivalents and derivative instruments at fair value. Fair value is an exit price, representing the amount that would be received on the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants. As a basis for considering such assumptions, the Company utilizes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value.
The methodology for measuring fair value specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs). As a result, observable and unobservable inputs have created the following fair value hierarchy:
|
|
•
|
Level 1
– Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities. At
September 30, 2018
, the Company did not have any Level 1 category assets included in the condensed consolidated balance sheets. At
December 31, 2017
, the Level 1 category included money market funds, which are included within cash and cash equivalents in the condensed consolidated balance sheets.
|
|
|
•
|
Level 2 –
Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly. At
September 30, 2018
and
December 31, 2017
, the Company did not have any Level 2 category assets included in the condensed consolidated balance sheets.
|
|
|
•
|
Level 3
– Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. At
September 30, 2018
and
December 31, 2017
, the Level 3 category included derivatives, which are included within other long-term liabilities in the condensed consolidated balance sheets. The Company did not hold any cash and cash equivalents categorized as Level 3 as of
September 30, 2018
or
December 31, 2017
.
|
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant other Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
498,086
|
|
|
—
|
|
|
—
|
|
|
498,086
|
|
Total derivative liabilities
|
|
498,086
|
|
|
—
|
|
|
—
|
|
|
498,086
|
|
|
|
|
|
|
|
|
|
|
Total assets and liabilities measured at fair value
|
|
$
|
498,086
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
498,086
|
|
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant other Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
445,838
|
|
|
—
|
|
|
—
|
|
|
445,838
|
|
Total derivative liabilities
|
|
445,838
|
|
|
—
|
|
|
—
|
|
|
445,838
|
|
|
|
|
|
|
|
|
|
|
Total assets and liabilities measured at fair value
|
|
$
|
445,838
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
445,838
|
|
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
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 nine
months ended
September 30, 2018
and
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Beginning Balance
|
|
$
|
482,871
|
|
|
$
|
419,560
|
|
|
$
|
445,838
|
|
|
$
|
336,862
|
|
Total loss recognized in earnings
|
|
15,215
|
|
|
5,076
|
|
|
52,248
|
|
|
87,774
|
|
Ending Balance
|
|
$
|
498,086
|
|
|
$
|
424,636
|
|
|
$
|
498,086
|
|
|
$
|
424,636
|
|
(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 for all operating leases as of
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
Sublease Income
|
Net Commitments
|
2018
|
508,144
|
|
(107,048
|
)
|
401,096
|
|
2019
|
1,756,507
|
|
(428,194
|
)
|
1,328,313
|
|
2020
|
1,567,637
|
|
(428,194
|
)
|
1,139,443
|
|
2021
|
491,020
|
|
(142,731
|
)
|
348,289
|
|
Thereafter
|
—
|
|
—
|
|
—
|
|
|
$
|
4,323,308
|
|
$
|
(1,106,167
|
)
|
$
|
3,217,141
|
|
The Company typically provides its customers a warranty on its software products for a period of no more than
90
days. Such warranties are accounted for in accordance with the authoritative guidance issued by the FASB on contingencies. For the
three and nine
months ended
September 30, 2018
, the Company has not incurred any costs related to warranty obligations.
Under the terms of substantially all of its software license agreements, the Company indemnifies its customers for all costs and damages arising from claims against such customers based on, among other things, allegations that the Company’s software infringes on the intellectual property rights of a third party. In most cases, in the event of an infringement claim, the Company retains the right to (i) procure for the customer the right to continue using the software; (ii) replace or modify the software to eliminate the infringement while providing substantially equivalent functionality; or (iii) if neither (i) nor (ii) can be reasonably achieved, the Company may terminate the license agreement and refund to the customer a pro-rata portion of the license fee paid to the Company. Such indemnification provisions are accounted for in accordance with the authoritative guidance issued by the FASB on guarantees. From time to time, in the ordinary course of business, the Company receives claims for indemnification, typically from OEMs. The Company is not currently aware of any material claims for indemnification.
As described under Note
12
, the holders of the Series A Preferred Stock have redemption rights upon certain triggering events. As of
September 30, 2018
, the Company did not fail any non-financial covenants related to the Company's Series A Preferred Stock.
As of August 14, 2017, the Board appointed Todd Brooks as Chief Executive Officer effective August 14, 2017.
In connection with Mr. Brooks’ appointment as Chief Executive Officer, the Board approved an offer letter to Mr. Brooks (the “Brooks Agreement”), which was executed on August 14, 2017. The Brooks Offer 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 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.
As described under Note 17, the Company has incurred certain restructuring costs in connection with restructuring plans adopted in 2013 and 2017.
In addition, as of
September 30, 2018
, the Company's liability for uncertain tax positions totaled
$199,169
. At this time, the settlement period for this liability, including related accrued interest, cannot be determined.
(
12
) Series A Redeemable Convertible Preferred Stock
The Company has
900,000
shares of Series A Preferred Stock outstanding
.
Pursuant to the Amended and Restated Certificate of Designations, Preferences and Rights for the Series A Preferred Stock (the ”Certificate of Designations”), each share of Series A Preferred Stock can be converted into shares of the Company’s Common Stock, at an initial conversion price equal to
$1.02488
per share, subject to appropriate adjustments for any stock dividend, stock split, stock combination, reclassification or similar transaction, (i) at any time at the option of the holder or (ii) by the Company if, following the first anniversary of the issuance of the Series A Preferred Stock (subject to extension under certain circumstances), the volume weighted average trading price per share of the Company’s Common Stock for sixty (
60
) consecutive trading days exceeds
250%
of the conversion price and continues to exceed
225%
of the conversion price through the conversion date, subject at all times to the satisfaction of, and the limitations imposed by, the equity conditions set forth in the Certificate of Designations (including, without limitation, the volume limitations set forth therein).
Pursuant to the Certificate of Designations, the holders of the Series A Preferred Stock are entitled to receive quarterly dividends at the prime rate (provided in the Wall Street Journal Eastern Edition) plus
5%
(up to a maximum dividend rate of
10%
), payable in cash or in kind (i.e., through the issuance of additional shares of Series A Preferred Stock), except that the Company is not permitted to pay such dividends in cash while any indebtedness and the Company’s Amendment and Restated Loan Agreement remains outstanding without the consent of the holders of the Series A Preferred Stock. In addition, the declaration and payment of dividends is subject to compliance with applicable law and unpaid dividends will accrue. A holder’s right to convert its shares of Series A Preferred Stock and receive dividends in the form of Common Stock is subject to certain limitations including, among other things, that the shares of Common Stock issuable upon conversion or as dividends will not, prior to receipt of stockholder approval, result in any holder beneficially owning greater than
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 or failure of the Company to issue shares of Common Stock upon conversion of the Series A Preferred Stock in accordance with its obligations, the holders may require the Company to redeem all or some of the Series A Preferred Stock at a price per share equal to the greater of (i) the sum of
100%
of the stated value of a share of Series A Preferred Stock plus accrued and unpaid dividends with respect thereto, and (ii) the product of the number of shares of Common Stock underlying a share of Series A Preferred Stock and the closing price as of the occurrence of the triggering event. On or after July 30, 2021, each holder of Series A Preferred Stock can also require the Company to redeem its Series A Preferred Stock in cash at a per share price equal to
100%
of the stated value of a share of Series A Preferred Stock plus accrued and unpaid dividends with respect thereto. Notwithstanding the forgoing, no holder of Series A Preferred Stock is permitted to exercise any rights or remedies upon a Breach Event or to exercise any redemption rights under the Certificate of Designations, unless approved by the holders of a majority of the then outstanding shares of Series A Preferred Stock.
Upon consummation of a fundamental sale transaction, the Series A Preferred Stock shall be redeemed at a per share redemption price equal to the greater of (y)
250%
of the per share purchase price of the Series A Preferred Stock and (z) the price payable in respect of such share of Series A Preferred Stock if such share of Series A Preferred Stock had been converted into such number of shares of Common Stock in accordance with the Certificate of Designations (but without giving effect to any limitations or restrictions contained therein) immediately prior to such fundamental sale transaction; provided however that the
250%
threshold is changed to
100%
if the fundamental sale transaction is approved by the two Series A Directors (as defined in the Certificate of
Designations). In addition, if the Company consummates an equity or debt financing that results in more than
$5.0 million
of net proceeds to the Company and/or its subsidiaries, the holders of Series A Preferred Stock will have the right, but not the obligation, to require the Company to use the net proceeds in excess of
$5.0 million
to repurchase all or a portion of the Series A Preferred Stock at a per share price equal to the greater of (i) the sum of
100%
of the stated value of such share of Series A Preferred Stock plus accrued and unpaid dividends with respect thereto, and (ii) the number of shares of Common Stock into which such share of Series A Preferred Stock is then convertible multiplied by the greater of (y) the closing price of the Common Stock on the date of announcement of such financing or (z) the closing price of the Common Stock on the date of consummation of such financing.
Each holder of Series A Preferred Stock has a vote equal to the number of shares of Common Stock into which its Series A Preferred Stock would be convertible as of the record date. In addition, the holders of a majority of the Series A Preferred Stock must approve certain actions, including approving any amendments to the Company’s Charter or Bylaws that adversely affects the voting powers, preferences or other rights of the Series A Preferred Stock; payment of dividends or distributions; any liquidation, capitalization, reorganization or any other fundamental transaction of the Company; issuance of any equity security senior to or on parity with the Series A Preferred Stock as to dividend rights, redemption rights, liquidation preference and other rights; issuances of equity below the conversion price; any liens or borrowings other than non-convertible indebtedness from standard commercial lenders which does not exceed
80%
of the Company’s accounts receivable; and the redemption or purchase of any of the capital stock of the Company.
The Company has classified the Series A Preferred Stock as temporary equity in the financial statements as it is subject to redemption at the option of the holder under certain circumstances.
As a result of the Company’s analysis of all the embedded conversion and put features within the Series A Preferred Stock, the contingent redemption put options in the Series A Preferred Stock were determined to not be clearly and closely related to the debt-type host and also did not meet any other scope exceptions for derivative accounting. Therefore, the contingent redemption put options are being accounted for as derivative instruments and the fair value of these derivative instruments was bifurcated from the Series A Preferred Stock and recorded as a liability.
As of
September 30, 2018
and
December 31, 2017
the fair value of these derivative instruments was
$498,086
and
$445,838
, respectively, and were included in "other long-term liabilities" within the consolidated balance sheets. The loss on the change in fair value of these derivative instruments for the
nine months ended September 30, 2018
and
September 30, 2017
of
$52,248
and
$87,774
, respectively, were included in “interest and other loss, net” within the consolidated statement of operations.
The fair value of these derivative instruments and the loss recorded on the change in the fair value of these derivative instruments, which was included in “Interest and other income, net” within the condensed consolidated statement of operations, for the
three and nine
months ended
September 30, 2018
and
2017
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Beginning Balance
|
|
$
|
482,871
|
|
|
$
|
419,560
|
|
|
$
|
445,838
|
|
|
$
|
336,862
|
|
Total loss recognized in earnings
|
|
15,215
|
|
|
5,076
|
|
|
52,248
|
|
|
87,774
|
|
Ending Balance
|
|
$
|
498,086
|
|
|
$
|
424,636
|
|
|
$
|
498,086
|
|
|
$
|
424,636
|
|
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 income (loss) attributable to common stockholders
on the statement of operations and in determining
income (loss) per share
for the
three and nine
months ended
September 30, 2018
and
2017
, respectively. The following represents a reconciliation of net loss attributable to common stockholders for the
three and nine
months ended
September 30, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income (loss)
|
|
$
|
(332,429
|
)
|
|
$
|
1,429,173
|
|
|
$
|
(829,656
|
)
|
|
$
|
(322,825
|
)
|
Effects of Series A redeemable convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accrual of Series A redeemable convertible preferred stock dividends
|
|
229,022
|
|
|
215,000
|
|
|
687,152
|
|
|
634,664
|
|
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
|
|
124,993
|
|
|
—
|
|
|
240,743
|
|
|
—
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(686,444
|
)
|
|
$
|
1,214,173
|
|
|
$
|
(4,026,593
|
)
|
|
$
|
(957,489
|
)
|
(13) Accumulated Other Comprehensive Loss
The changes in Accumulated Other Comprehensive Loss, net of tax, for the
three months ended September 30, 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 June 30, 2018
|
|
$
|
(1,936,229
|
)
|
|
$
|
—
|
|
|
$
|
22,097
|
|
|
$
|
(1,914,132
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
70,061
|
|
|
—
|
|
|
—
|
|
|
70,061
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other comprehensive income
|
|
70,061
|
|
|
—
|
|
|
—
|
|
|
70,061
|
|
Accumulated other comprehensive income (loss) at September 30, 2018
|
|
$
|
(1,866,168
|
)
|
|
$
|
—
|
|
|
$
|
22,097
|
|
|
$
|
(1,844,071
|
)
|
The changes in Accumulated Other Comprehensive Loss, net of tax, for the
nine months ended September 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 before reclassifications
|
|
114,772
|
|
|
—
|
|
|
—
|
|
|
114,772
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other comprehensive income
|
|
114,772
|
|
|
—
|
|
|
—
|
|
|
114,772
|
|
Accumulated other comprehensive income (loss) at September 30, 2018
|
|
$
|
(1,866,168
|
)
|
|
$
|
—
|
|
|
$
|
22,097
|
|
|
$
|
(1,844,071
|
)
|
The changes in Accumulated Other Comprehensive Loss, net of tax, for the
three months ended September 30, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
|
|
Net Unrealized
Gains (Losses) on Marketable
Securities
|
|
Net Minimum
Pension Liability
|
|
Total
|
Accumulated other comprehensive income (loss) at June 30, 2017
|
|
$
|
(2,046,484
|
)
|
|
$
|
—
|
|
|
$
|
28,675
|
|
|
$
|
(2,017,809
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
104,917
|
|
|
—
|
|
|
—
|
|
|
104,917
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other comprehensive income
|
|
104,917
|
|
|
—
|
|
|
—
|
|
|
104,917
|
|
Accumulated other comprehensive income (loss) at September 30, 2017
|
|
$
|
(1,941,567
|
)
|
|
$
|
—
|
|
|
$
|
28,675
|
|
|
$
|
(1,912,892
|
)
|
The changes in Accumulated Other Comprehensive Loss, net of tax, for the
nine months ended September 30, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
|
|
Net Unrealized (Losses) Gains on Marketable
Securities
|
|
Net Minimum
Pension Liability
|
|
Total
|
Accumulated other comprehensive income (loss) at December 31, 2016
|
|
$
|
(1,866,388
|
)
|
|
$
|
—
|
|
|
$
|
28,675
|
|
|
$
|
(1,837,713
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(75,179
|
)
|
|
—
|
|
|
—
|
|
|
(75,179
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other comprehensive income (loss)
|
|
(75,179
|
)
|
|
—
|
|
|
—
|
|
|
(75,179
|
)
|
Accumulated other comprehensive income (loss) at September 30, 2017
|
|
$
|
(1,941,567
|
)
|
|
$
|
—
|
|
|
$
|
28,675
|
|
|
$
|
(1,912,892
|
)
|
For the
three and nine
months ended
September 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
During the
three and nine
months ended
September 30, 2018
and
2017
, the Company did not repurchase any shares of its common stock. As of
September 30, 2018
, 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 nine
months ended
September 30, 2018
and
2017
, and the location of long-lived assets as of
September 30, 2018
and
December 31, 2017
, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
1,585,465
|
|
|
$
|
1,742,556
|
|
|
$
|
3,648,360
|
|
|
$
|
5,384,051
|
|
Asia Pacific
|
|
961,632
|
|
|
2,243,820
|
|
|
4,541,966
|
|
|
6,940,306
|
|
Europe, Middle East, Africa and Other
|
|
1,513,064
|
|
|
2,119,057
|
|
|
4,875,365
|
|
|
6,554,517
|
|
Total Revenue
|
|
$
|
4,060,161
|
|
|
$
|
6,105,433
|
|
|
$
|
13,065,691
|
|
|
$
|
18,878,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Long-lived assets:
|
|
|
|
|
Americas
|
|
$
|
6,391,673
|
|
|
$
|
5,754,977
|
|
Asia Pacific
|
|
755,907
|
|
|
822,885
|
|
Europe, Middle East, Africa and Other
|
|
179,840
|
|
|
213,371
|
|
Total long-lived assets
|
|
$
|
7,327,420
|
|
|
$
|
6,791,233
|
|
For the
three and nine
months ended
September 30, 2018
, the Company had
one
customer that accounted for
10%
or more of total revenue. For the
three and nine
months ended
September 30, 2017
, the Company had
no
customers that accounted for
10%
of total revenue.
As of
September 30, 2018
, the Company had
no
customers that accounted for 10% or more of the gross accounts receivable balance. As of
December 31, 2017
, the Company had
one
customer that accounted for
23%
of the gross accounts receivable balance.
(17)
Restructuring Costs
In the third quarter of 2013, the Company adopted 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 (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
81
employees at
December 31, 2017
. 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
nine months ended September 30, 2018
. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the Company no longer intends to receive any economic benefit are accrued, net of any anticipated sublease income, when the Company ceases use of the leased space. During the
nine months ended September 30, 2018
, the Company incurred lease disposal-related costs for this property of
$1.1
million.
The following table summarizes the activity during 2018 related to restructuring liabilities recorded in connection with the 2013 and 2017 Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Related Costs
|
|
Facility and Other Costs
|
|
Total
|
Balance at December 31, 2017
|
|
$
|
648,399
|
|
|
$
|
—
|
|
|
$
|
648,399
|
|
Additions (Reductions)
|
|
(173,263
|
)
|
|
—
|
|
|
(173,263
|
)
|
Utilized/Paid
|
|
(13,774
|
)
|
|
—
|
|
|
(13,774
|
)
|
Balance at March 31, 2018
|
|
$
|
461,362
|
|
|
$
|
—
|
|
|
$
|
461,362
|
|
Additions (Reductions)
|
|
—
|
|
|
809,245
|
|
|
809,245
|
|
Utilized/Paid
|
|
—
|
|
|
(312,507
|
)
|
|
(312,507
|
)
|
Balance at June 30, 2018
|
|
$
|
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
|
|
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
On October 9, 2018, FalconStor closed on the final tranche of its previously-announced Financing of Units to certain eligible stockholders of the Company. As a result, the Company received an additional
$1,000,000
of gross proceeds from new investors (the “New Investors”) which is in addition to the
$3,000,000
of gross proceeds previously received from HCP-FVA through the subscription of
30,000,000
Units pursuant to the Commitment on February 23, 2018.
In addition to providing the Company with
$1,000,000
of gross proceeds, the New Investors purchased
$520,000
of the Term Loan held by HCP-FVA and
342,000
of the
900,000
shares of Series A Preferred Stock held by HCP-FVA. Financing Warrants to purchase
63,610,935
shares of Common Stock held by HCP-FVA were also cancelled. Accordingly, the New Investors hold Financing Warrants to purchase
185,942,007
shares of Common Stock and HCP-FVA now holds Financing Warrants to purchase
303,379,065
shares of Common Stock. The transfer of securities by HCP-FVA to New Investors was subject to certain transfer limitations to ensure the preservation of the Company’s net operating loss carry forward.