The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as "believes," "anticipates," "expects," "estimates," "plans," "may," "intends," "will," or similar terms. Investors are cautioned that any forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. The following discussion should be read together with the consolidated financial statements and notes to those financial statements included elsewhere in this report.
OVERVIEW
FalconStor Software, Inc. , aDelaware corporation ("we", the "Company" or "FalconStor") is a trusted data protection software leader modernizing disaster recovery and backup operations for the hybrid cloud world. The Company enables enterprise customers and managed service providers to secure, migrate, and protect their data while reducing data storage and long-term retention costs by up to 95%. More than 1,000 organizations and managed service providers worldwide standardize on FalconStor as the foundation for their cloud first data protection future. Our products are offered through and supported by a worldwide network of leading managed service providers ("MSPs"), systems integrators, resellers, and original equipment manufacturers ("OEMs"). Our products address a demand for enterprise data protection driven by the manner in which consumers and businesses are increasingly interacting in a digital space through multiple devices, networks and platforms. The onset of the coronavirus pandemic accelerated this shift, as ongoing remote work and work from home arrangements introduced novel challenges to maintaining enterprise data security. The adoption of increased employee mobility and flexible remote work arrangements, such as a broader incorporation of cloud technology and the option for employees to use their own devices, has introduced additional vulnerabilities that businesses must monitor and protect through solutions like ours in order to maintain enterprise data integrity. Our products are utilized by enterprises and MSPs to address two key areas of enterprise data protection: (i) long-term data retention and recovery, and (ii) data replication to preserve business continuity. Our integration with modern cloud-based data storage environments, such as IBM PowerVS Cloud, AWS and Microsoft Azure, enables our enterprise customers to significantly reduce costs and improve the portability, security and accessibility of their enterprise data. We believe this accessibility is key in our modern world, where data must be protected and intelligently leveraged to facilitate learning, improve product design and drive competitive advantage. Our products can be used regardless of the underlying hardware, cloud and source-data, which enables our enterprise customers to leverage their existing hardware and software investments. Since the beginning of 2020, we have focused our go-to-market efforts on long-term data retention and recovery data protection segments. In 2021, we increased our go-to-market investment within our core regions of theAmericas , EMEA,Japan ,Korea , andSoutheast Asia , and released StorSafeTM, the next generation of ourVirtual Tape Library ("VTL") product family built for MSPs. In 2022, we secured a key strategic relationship with IBM to optimize data protection for on-premises and cloud-native workloads that operate on theIBM Power Systems platform. During the fourth quarter of 2022, we continued to deliver innovation and to enhance each of our products. Our StorSafeTM solution is a vital backup long-term archive retention tool in enterprise IT departments' data protection arsenal and for MSPs that provide data protection as a service to enterprise companies. It enables them to modernize their backup and archive environments, leverage efficient hybrid- and public-cloud storage environments, such as those provided by IBM PowerVS Cloud, AWS and Microsoft Azure, save operational costs, and improve restore performance for rapid remote disaster recovery. Through StorSafeTM, we are making progress expanding our technology to deliver an enterprise-class, highly flexible and efficient backup and long-term data storage optimization solution for the hybrid cloud world. 31 -------------------------------------------------------------------------------- Beyond our long-term retention and reinstatement products, our StorGuardTM business continuity driven data replication solution gives our customers the ability to move workloads to the right destination, on-premises or in the cloud, with advanced insight. This solution is designed for MSPs and enterprise organizations with complex, heterogeneous IT environments and the full spectrum of data management use cases, including but not limited to large enterprises, universities, health care entities and governmental institutions. StorGuardTM is a modern, comprehensive and easy-to-use software solution that enables IT professionals to have complete insight into and control over their organization's data. To provide for greater ease of use for all our products, we also made significant enhancements to our central data management console, now called StorSightTM, to interface with each of our products to provide a holistic view of an enterprise's entire data protection environment - whether on-premises in data centers, in the public cloud, or a hybrid - as well as the key analytics, reports and dashboards our customers need to continuously optimize their operations. FalconStor continues to focus on MSPs, enterprise customers, and OEM partners. These markets offer the most significant opportunity and are best suited to realize the value of FalconStor products, and provide an efficient and effective access to broad, worldwide markets. Most of our revenue comes from sales to MSPs and to enterprise customers through resellers. Our "Business Partner" program for our MSPs and resellers provides financial incentives for those partners that are willing to make a commitment to FalconStor through training, marketing and revenue. As part of our review of all of our operations to maximize savings without sacrificing sales, and in connection with our Business Partner program, we continually review our relationship with each of our partners in all regions. We decided to focus on only those partners who have the expertise, personnel and networks to identify potential customers and to service our end users. Historically, the majority of our software licenses have been sold on a capacity basis and have included a perpetual right to use the licensed capacity. However, we have shifted our focus to an annual recurring revenue model through subscription or term-based licenses, which gives a customer the right to utilize our solutions over a designated period of time. We expect revenue from subscription-based licensing to increase over the next several years. Fluctuation in our revenue is driven by the volume and mix of sales from period to period. Revenue allocated to perpetual and term software licenses are recognized at a point in time upon electronic delivery of the download link and the license keys, as these products have significant standalone functionality. Product maintenance and support services are satisfied over time as they are stand-ready obligations throughout the support period. As a result, revenues associated with maintenance services are deferred and recognized as revenue ratably over the term of the contract. Revenues associated with professional services are recognized at a point in time upon customer acceptance. During the fourth quarter of 2022, our shift to recurring revenue based revenue took a material step forward as we continued to expand our strategic reseller relationship with IBM. Through this strategic reseller relationship, IBM and FalconStor co-market joint solutions consisting of FalconStor's VTL/StorSafe software, IBM Cloud Object Storage ("COS"), and IBM Power Virtual Servers ("PowerVS") for efficient application and data migration from on-premises environments to IBM PowerVS Cloud, and on-going SaaS-based backup and restore within IBM PowerVS Cloud. While we expect this relationship to provide healthy recurring revenue growth in the future as our joint solutions will be sold on a monthly consumption basis (MRR), our accelerated focus in these types of hybrid cloud relationships, and associated realignment of our sales teams, will continue to contribute to total GAAP revenue fluctuations in the short-term. In fact, GAAP total revenue in the fourth quarter of 2022 declined 28.5% year-over-year. Given the reduction in GAAP Q4 2022 revenues, we delivered a net income of$20,305 , compared to a net loss of$333,432 in the fourth quarter of 2021, even though we managed operating costs to$2,197,875 in the quarter compared to$3,004,891 in Q4 2021. Despite our year-over-year GAAP total revenue decline, we believe GAAP total revenue will continue to increase each quarter during 2023. In fact, GAAP total revenue decreased to$2,549,665 in the fourth quarter of 2022 compared to$3,059,141 and$2,394,335 in the third and second quarters of 2022, respectively, and we expect sequential quarter-over-quarter GAAP total revenue to continue increasing throughout the balance of 2023. 32 --------------------------------------------------------------------------------
COVID-19
We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including the impact on our operations and on the needs and operations of our customers, suppliers, vendors and business partners.
Thus far, the COVID-19 pandemic has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases or failing to make payments, and delays or disruptions in our or our partners' supply chains. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, and employee-related costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat it, as well as the economic impact on local, regional, national and international markets. If we, or any of the third parties with whom we engage, were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially or negatively affected, which could have a material adverse impact on our business, results of operations and financial condition.
RESULTS OF OPERATIONS - FOR THE YEAR ENDED
For the year ended
Total cost of revenue for the year endedDecember 31, 2022 decreased 20% to$1.6 million , compared with$2.0 million for the year endedDecember 31, 2021 . Total gross profit decreased$3.5 million , or 29%, to$8.5 million for the current year, compared with$12.0 million for 2021. Total gross margin decreased to 84% for the current year, compared with 86% for 2021. The decrease in our total gross margin percentage was primarily due to a decrease in both product revenue and support and service revenue, combined with a decrease in hardware product costs as the company no longer primarily sells hardware. Generally, our total gross profits and total gross margins fluctuate based on several factors, including (i) revenue growth /decline levels, (ii) changes costs to provide support and services, and (iii) our product offerings and mix of sales. Overall, our total operating expenses decreased 16% from$11.6 million for the year endedDecember 31, 2021 to$9.7 million for the year endedDecember 31, 2022 . This decrease was primarily attributable to a decrease in selling and marketing costs. We will continue to evaluate the appropriate headcount levels to properly align our resources with our current and long-term outlook and to take actions in areas of the Company that are not performing.
Our net loss for the year ended
Net loss attributable to common stockholders, which includes the effects of the Series A Preferred Stock dividends (including accrued dividends) and accretion, was$3.3 million for the year endedDecember 31, 2022 , compared with a net loss of$1.5 million for the year endedDecember 31, 2021 . We ended the year with$2.0 million of cash and cash equivalents, compared to$3.2 million atDecember 31, 2021 and deferred revenue of$5.0 million as ofDecember 31, 2022 , compared with$6.4 million as ofDecember 31, 2021 . 33 --------------------------------------------------------------------------------
Revenue Years ended December 31, 2022 2021 Revenue: Product revenue$ 4,246,177 $ 6,988,067 Support and services revenue 5,806,071 6,946,828 Total Revenue$ 10,052,248 $ 13,934,895 Year-over-year percentage change Product revenue (39 )% (2 )% Support and services revenue (16 )% (9 )% Total percentage change (28 )% (6 )% Product revenue Product revenue is comprised of sales of both licenses for our software solutions and sales of the platforms on which the software is installed. This includes stand-alone software applications and, on occasion, software integrated with industry standard hardware. We no longer primarily source or sell hardware, rather we facilitate our customers in buying their own hardware. Our products are sold through (i) value-added resellers, (ii) distributors, and/or (iii) directly to end-users. These revenues are recognized when all the applicable criteria under accounting principles generally accepted inthe United States are met. Product revenue represented 42% and 50% of our total revenue for the years endedDecember 31, 2022 and 2021, respectively. Product revenue decreased 39% from$7.0 million for the year endedDecember 31, 2021 to$4.2 million for the year endedDecember 31, 2022 , which resulted from order delays as well as entering into several large multi-year contracts in 2021 that did not repeat in 2022. We continue to invest in our product portfolio by refreshing and updating our existing product lines and developing our next generation of innovative product offerings to drive our sales volume in support of our long-term outlook.
Support and services revenue
Support and services revenue is comprised of revenue from (i) maintenance and technical support services, (ii) professional services primarily related to the implementation of our software, and (iii) engineering services. Revenue derived from maintenance and technical support contracts are deferred and recognized ratably over the contractual maintenance term. Revenues associated with professional and engineering services are recognized at a point in time upon customer acceptance. Support and services revenue decreased 16% from$6.9 million for the year endedDecember 31, 2021 to$5.8 million for the year endedDecember 31, 2022 . The decrease in support and services revenue from the previous year was primarily attributable to decreases in maintenance and technical support services revenue. Maintenance and technical support services revenue decreased from$6.5 million for the year endedDecember 31, 2021 to$5.7 million for the year ended 2022. Our maintenance and technical support service revenue results primarily from (i) the purchase of maintenance and support contracts by our customers, and (ii) the renewal of maintenance and support contracts by our existing and new customers after their initial contracts expire. The decrease in maintenance and technical support service revenue from the previous year reflects a decline in new contracts and renewals. Professional services revenue decreased from$0.5 million for the year endedDecember 31, 2021 to$0.1 million for the year endedDecember 31, 2022 . Professional services revenue will vary depending on the number of solutions for which customers elect to purchase engineering or professional services to assist with their implementations or other projects. We expect professional services revenue to continue to vary from period to period based upon the number of customers who elect to utilize our professional services upon purchasing any of our solutions. 34 --------------------------------------------------------------------------------
Cost of revenue Years ended December 31, 2022 2021 Cost of revenue: Product$ 97,270 $ 325,089 Support and service 1,467,611 1,627,187 Total cost of revenue$ 1,564,881 $ 1,952,276 Total Gross Profit$ 8,487,367 $ 11,982,619 Gross Margin: Product 98% 95% Support and service 75% 77% Total gross margin 84% 86%
Cost of revenue, gross profit and gross margin
Cost of product revenue consists primarily of hardware and warranty expenses. Cost of support and service revenue consists primarily of personnel and other costs associated with providing software implementations, technical support under maintenance contracts and training. Total gross profit decreased$3.5 million , or 29%, from$12.0 million for the year endedDecember 31, 2021 , to$8.5 million for the year endedDecember 31, 2022 . Total gross margin decreased to 84% for the year endedDecember 31, 2022 , compared with 86% for the year endedDecember 31, 2021 . Cost of product revenue for the year endedDecember 31, 2022 was substantially the same at$0.1 million compared with$0.3 million for the same period in 2021. Product gross margin increased to 98% for the year endedDecember 31, 2022 , compared with 95% for the same period in 2021. Additionally, our cost of support and service revenue for the year endedDecember 31, 2022 was substantially the same at$1.5 million , compared with$1.6 million for the same period in 2021. Support and service gross margin decreased to 75% for the year endedDecember 31, 2022 from 77% for the same period in 2021.
Operating Expenses
Research and Development Costs
Research and development costs consist primarily of personnel costs for product development, and other related costs associated with the development of new products, enhancements to existing products, quality assurance and testing. Research and development costs decreased$0.3 million , or 10%, to$2.6 million for the year endedDecember 31, 2022 , from$2.8 million in 2021. The decrease in research and development costs was primarily related to a continued decrease in overall salaries and benefits expenses, combined with no bonus expense in 2022.
Selling and Marketing
Selling and marketing expenses consist primarily of sales and marketing personnel and related costs, travel, public relations expense, marketing literature and promotions, commissions, trade show expenses, and the costs associated with our foreign sales offices. Selling and marketing expenses decreased$1.7 million , or 29%, to$4.0 million for the year endedDecember 31, 2022 , from$5.7 million for the year endedDecember 31, 2021 . The decrease in selling and marketing expenses was primarily related to commissions, promotional campaign expenses, contractors, professional fees, and no bonus in the year endedDecember 31, 2022 . Gain on Litigation Settlement 35
-------------------------------------------------------------------------------- During the year endedDecember 31, 2021 , we recorded a gain of$0.6 million for a legal settlement of a contractual dispute with a marketing/sales firm. For further information, refer to Note (13) Litigation, to our consolidated financial statements.
General and Administrative
General and administrative expenses consist primarily of personnel costs of general and administrative functions, public company related costs, directors' and officers' insurance, legal and professional fees, and other general corporate overhead costs. General and administrative expenses increased$0.3 million , or 10%, to$3.2 million for the year endedDecember 31, 2022 , from$2.9 million for the year endedDecember 31, 2021 . The increase in general and administrative expenses was due primarily to additions to contractors and professional fees, which are partially offset by an decrease in salary and benefit expenses during the year endedDecember 31, 2022 .
Restructuring costs
InJune 2017 , the Board of Directors of the Company (the "Board") approved a comprehensive plan to increase operating performance ("the 2017 Plan"). The 2017 Plan resulted in a realignment and reduction in workforce. The 2017 Plan was substantially completed by the end of our fiscal year endedDecember 31, 2017 and when combined with previous workforce reductions in the second quarter of Fiscal 2017 reduced our workforce to approximately 81 employees atDecember 31, 2017 . As part of this consolidation effort, the Company vacated a portion of its formerMelville, NY office space during the three months endedJune 30, 2018 . As the lease has terminated inApril 2021 , there are no further restructuring costs associated with this lease. Restructuring expense decreased$0.8 million for the year endedDecember 31, 2022 to$744 , compared to a$0.8 million restructuring charge in the prior year period. For further information, refer to Note (14) Restructuring Costs, to our consolidated financial statements.
Gain on Debt Extinguishment
Gain on debt extinguishment decreased to
Interest and Other (Loss) Income, Net
Interest and other (loss) income is comprised of interest expense on our term loan, foreign currency gains and losses and the change in fair value our embedded derivatives. Interest and other expense, net, decreased$0.3 million for the year endedDecember 31, 2022 to$0.3 million , compared to$0.7 million for the year endedDecember 31, 2021 . The decrease in interest and other expense primarily relates to payments made on outstanding debt. The fluctuation in interest and other (loss) income from quarter to quarter also relates to interest expense, foreign currency gains and losses, interest income, sublease income and the change in fair value of our embedded derivatives. For more information on our derivative instruments, see Note (3) Fair Value Measurements to our consolidated financial statements.
Income Taxes
For the year ended
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LIQUIDITY AND CAPITAL RESOURCES
Principal Sources of Liquidity
Our principal sources of liquidity are our cash and cash equivalents balances generated from operating, investing and financing activities. Our cash and cash equivalents balance as ofDecember 31, 2022 totaled$2.0 million , compared with$3.2 million as ofDecember 31, 2021 . We are currently a party to the Amended and Restated Term Loan Credit Agreement, dated as ofFebruary 23, 2018 , as amendedDecember 27, 2019 , by and between the Company andHCP-FVA, LLC ("HCP-FVA"), (the "Amended and Restated Loan Agreement"). In connection with the then-proposed public offering of the Company as described in the Company's Registration Statement on Form S-1, as amended, originally filed onJune 3, 2021 , we entered into the Loan Extension Letter Agreement, which provided for an extension of the maturity date on the portion of the outstanding indebtedness owed toHale Capital Partners, LP ("Hale Capital ") under the Amended and Restated Loan Agreement toJune 30, 2023 . The remaining principal amount outstanding, which was owed to other lenders, was repaid in full. OnJuly 19, 2022 , we entered into a letter agreement withHale Capital (the "Second Loan Extension Letter Agreement"), that provided for a subsequent extension of the maturity date on the outstanding indebtedness owed under the Amended and Restated Loan Agreement fromJune 30, 2023 toDecember 31, 2023 . See Note (7) Notes Payable to our consolidated financial statements for more information. OnFebruary 10, 2023 , the Company entered into a letter agreement withHale Capital to further extend the maturity date of the senior secured debt, as described in Note (19), Subsequent Events, to our consolidated financial statements. Also, as described further in Note (8) Series A Redeemable Convertible Preferred Stock to our consolidated financial statements, the effective date of the mandatory redemption right of the Company's Series A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") held byHCP-FVA and Hale Capital was extended fromJuly 30, 2021 toJuly 30, 2023 pursuant to that certain Amendment No. 1 to the Company's Amended and Restated Certificate of Designations, Preferences and Rights of the Series A Preferred Stock, dated as ofJune 24, 2021 (as amended, the "Certificate of Designations"). OnJuly 19, 2022 , the Company andHale Capital entered into a letter agreement pursuant to whichHale Capital agreed not to exercise or to permit the exercise of the mandatory redemption right of the Series A Preferred Stock on or prior toDecember 31, 2023 unless the redemption is in accordance with Section 8(e)(z) of the Certificate of Designations or in accordance with a Breach Event (as defined in the Certificate of Designations). If such Series A Preferred Stock was redeemed atDecember 31, 2022 , the Company would have been required to pay the holders of the Series A Preferred Stock$16.0 million . See Note (8) Series A Redeemable Convertible Preferred Stock to our consolidated financial statements for more information. OnFebruary 10, 2023 , the Company entered into a letter agreement withHale Capital to further extend the redemption date of the Series A Preferred Stock, as described in Note (19), Subsequent Events, to the consolidated financial statements. The Amended and Restated Loan Agreement has customary representations, warranties and affirmative and negative covenants. The negative covenants include financial covenants relating to in-force annual contract value. The Amended and Restated Loan Agreement also contains customary events of default, including but not limited to payment defaults, cross defaults with certain other indebtedness, breaches of covenants, bankruptcy events and a change of control. In the case of an event of default, as administrative agent under the Amended and Restated Loan Agreement, HCP-FVA, an affiliate ofHale Capital may (and upon the written request of lenders holding in excess of 50% of the term loans, which must include HCP-FVA, is required to) accelerate payment of all obligations under the Amended and Restated Loan Agreement, and seek other available remedies.
Liquidity
As ofDecember 31, 2022 , we had a working capital deficiency of$0.3 million , which is inclusive of current deferred revenue of$3.7 million , and a stockholders' deficit of$16.4 million . During the year endedDecember 31, 2022 , the Company had a net loss of$1.8 million and negative cash flow from operations of$1.2 million . The Company's total cash balance atDecember 31, 2022 was$2.0 million , a decrease of$1.2 million compared toDecember 31, 2021 . OnJune 30, 2021 , the Company repaid$1.3 million of the$3.5 million principal amount that was outstanding as ofJune 2, 2021 under the Amended and Restated Loan Agreement. . Although there can be no assurance, based on its projected cash flows from operations, recently completed financing activities, cost cutting measures in place and existing cash on hand, the Company is projecting to have sufficient liquidity and to be cash flow positive through the next 12 months. 37 --------------------------------------------------------------------------------
Cash Flow Analysis
Cash flow information is as follows:
Years Ended December 31, 2022 2021 Cash provided by (used in): Operating activities$ (1,199,215 ) $ (883,529 ) Investing activities (38,078 ) (182,349 ) Financing activities 177,149 2,332,006 Effect of exchange rate changes (110,003 )
(5,575 )
Net increase (decrease) in cash and cash equivalents
Cash Flows from Operating Activities
For the year endedDecember 31, 2022 , our net cash and cash equivalents used in operating activities was$1.2 million which consisted of a net loss of$1.8 million , partially offset by cash outflows from changes in operating assets and liabilities of$0.3 million and non-cash adjustments of$0.3 million . Non-cash adjustments primarily consisted of depreciation and amortization, amortization of right of use assets and deferred income tax provision. The primary drivers of the changes in operating assets and liabilities were cash inflows from a decrease in accounts receivable, an increase in accrued expenses and other long-term liabilities, a decrease in contract assets, an increase in accounts payable, and a decrease in prepaid expenses and other current assets, which were partially offset by cash outflows from a decrease in deferred revenue. For the year endedDecember 31, 2021 , our net cash and cash equivalents used in operating activities was$0.9 million which consisted of cash outflows from changes in operating assets and liabilities of$0.7 million , non-cash adjustments of$0.2 million and a net loss of$42,253 . The primary drivers of changes in operating assets and liabilities were cash outflows from a decrease in deferred revenue, a decrease in operating lease liabilities, a decrease in accrued expenses and other long-term liabilities, and an increase in contract assets, which were partially offset by cash inflows from a decrease in other assets and a decrease in prepaid expenses and other current assets.
Cash Flows from Investing Activities
For the year ended
For the year endedDecember 31, 2021 , net cash used in investing activities was$0.2 million consisting purchases of property and equipment of$0.1 million , capitalized software development costs of$30,000 and purchase of intangible assets of$10,226 .
Cash Flows from Financing Activities
For the year endedDecember 31, 2022 , net cash provided by financing activities was$0.2 million consisting of proceeds from short-term debt of$0.3 million and payments of short-term debt of$0.1 million . For the year endedDecember 31, 2021 , net cash provided by financing activities was$2.3 million consisting of proceeds from public offerings of our common stock of$4.2 million , partially offset by payments of short-term debt of$1.3 million and payments of offering costs of$0.5 million . 38 --------------------------------------------------------------------------------
Contractual Obligations
As ofDecember 31, 2022 , our significant commitments are related to (i) the Amended and Restated Loan Agreement, (ii) our operating leases for our office facilities, (iii) dividends (including accrued dividends) on our Series A Preferred Stock, and (iv) the potential redemption of the Series A Preferred Stock as discussed above.
The following is a schedule summarizing our significant obligations to make
future payments under contractual obligations as of
Series A Dividends on Interest Long-Term Preferred Stock Series A Operating Note Payable Payments Income Tax Mandatory Preferred Stock Leases (a) (a) Payable (b) Redemption (c) (d) 2023$ 34,753 $ 2,429,689 $ 179,027 $ -$ 9,000,000 $ 9,056,178 2024 - - - 113,169 - -
Total contractual obligations
- $ -
(a)
Represents our liability under the Amended and Restated Term Loan Credit Agreement which, as ofDecember 31, 2022 , has a maturity date ofDecember 31, 2023 . OnFebruary 10, 2023 , the Company entered into a letter agreement withHale Capital to extend the maturity date toJune 30, 2024 . See Note (7), Notes Payable, and Note (19), Subsequent Events, to our consolidated financial statements for further information.
(b)
Represents our liability for uncertain tax positions. We are unable to make a reasonably reliable estimate of the timing of payments due to uncertainties in the timing of tax audit outcomes. However, the period in which the payable is expected to reverse due to statute expiration is the second quarter of 2024.
(c)
Represents our potential liability if the holders of our Series A Preferred Stock redeem their shares for cash. The earliest date in which a redemption could occur wasJuly 30, 2023 . However, onJuly 19, 2022 , the Company andHale Capital entered into a letter agreement pursuant to whichHale Capital agreed not to exercise or to permit the exercise of the mandatory redemption right of the Series A Preferred Stock on or prior toDecember 31, 2023 unless the redemption is in accordance with Section 8(e)(z) of the Certificate of Designations or in accordance with a Breach Event (as defined in the Certificate of Designations). OnFebruary 10, 2023 , the Company entered into a letter agreement withHale Capital to further extend the redemption date of the Series A Preferred Stock, as described in Note (19), Subsequent Events, to our consolidated financial statements. For further information, see Note (8) Series A Redeemable Convertible Preferred Stock to our consolidated financial statements.
(d)
Our agreements with the holders of the Series A Preferred Stock provide that such holders will receive quarterly dividends on the Series A Preferred Stock at prime rate plus 5%, subject to a maximum dividend rate of 10%. We also have the ability to accrue and roll over dividends. Due to the lack of sufficient surplus to pay dividends as required by the Delaware General Corporation Law, the Company was not permitted to pay the fourth quarter 2016 dividend in cash or common stock and has been accruing its quarterly dividends since then. This amount represents our potential liability to pay preferred stock dividends in cash onJuly 30, 2023 , which was the earliest date in which the holders of our Series A Preferred Stock could redeem their shares for cash. However, onJuly 19, 2022 , the Company andHale Capital entered into a letter agreement pursuant to whichHale Capital agreed not to exercise or to permit the exercise of the mandatory redemption right of the Series A Preferred Stock on or prior toDecember 31, 2023 unless the redemption is in accordance with Section 8(e)(z) of the Certificate of Designations or in accordance with a Breach Event (as defined in the Certificate of Designations). OnFebruary 10, 2023 , the Company entered into a letter agreement withHale Capital to further extend the redemption date of the Series A Preferred Stock, as described in Note (19), Subsequent Events, to our consolidated financial statements. For further information, see Note (12), Series A Redeemable Convertible Preferred Stock, to our consolidated financial statements.
Off-Balance Sheet Arrangements
As of
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Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are those related to revenue recognition, accounts receivable allowances, deferred income taxes, accounting for share-based payments, goodwill and other intangible assets, software development costs, fair value measurements and litigation.
Revenue Recognition. 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.
Accounts Receivable. We review accounts receivable to determine which receivables are doubtful of collection. In making the determination of the appropriate allowance for uncollectible accounts and returns, we consider (i) historical return rates, (ii) specific past due accounts, (iii) analysis of our accounts receivable aging, (iv) customer payment terms, (v) historical collections, write-offs and returns, (vi) changes in customer demand and relationships, (vii) actual cash collections on our accounts receivables and (viii) concentrations of credit risk and customer credit worthiness. When determining the appropriate allowance for uncollectable accounts and returns each period, the actual customer collections of outstanding account receivable balances impact the required allowance for returns. We recorded a benefit and expense of$54,044 and$72,461 for the years endedDecember 31, 2022 and 2021, respectively. These amounts are included within our consolidated statement of operations in each respective year. Changes in the product return rates, credit worthiness of customers, general economic conditions and other factors may impact the level of future write-offs, revenue and our general and administrative expenses. Income Taxes. As discussed further in Note (5) Income Taxes, to our consolidated financial statements, in accordance with the authoritative guidance issued by the FASB on income taxes, we regularly evaluate our ability to recover deferred tax assets, and report such deferred tax assets at the amount that is determined to be more-likely-than-not recoverable. The Company records income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In determining the period in which related tax benefits are realized for financial reporting purposes, excess share-based compensation deductions included in net operating losses are realized after regular net operating losses are exhausted. We account for uncertain tax positions in accordance with the authoritative guidance issued by the FASB on income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return, should be recorded in the financial statements. Pursuant to the authoritative guidance, we may recognize the tax benefit from an uncertain tax position only if it meets the "more likely than not" threshold that the position will be sustained on examination by the taxing authority, based on the technical merits of the position or under statute expirations. The tax benefits recognized in the financial statements from such a position should be 40 -------------------------------------------------------------------------------- measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. In addition, the authoritative guidance addresses de-recognition, classification, interest and penalties on income taxes, accounting in interim periods, and requires increased disclosures.Goodwill . As discussed further in Note (1) Summary of Significant Accounting Policies, to our consolidated financial statements, we account for goodwill and other intangible assets in accordance with the authoritative guidance issued by the FASB on goodwill and other intangibles. The authoritative guidance requires an impairment-only approach to accounting for goodwill and other intangibles with an indefinite life. Absent any prior indicators of impairment, we perform an annual impairment analysis during the fourth quarter of each of our fiscal years. As of bothDecember 31, 2022 and 2021, we had$4.2 million of goodwill. As ofDecember 31, 2022 and 2021, we had$20,086 and$0.1 million (net of accumulated amortization), respectively, of other identifiable intangible assets. We do not amortize goodwill, but we assess for impairment at least annually onDecember 31st and more often if a trigger event occurs. In accordance with FASB Accounting Standards Codification ("ASC") 350, "Goodwill and Other" ("ASC 350") our goodwill impairment test includes only one step, which is a comparison of the carrying value of our one reporting unit to its fair value. Pursuant to ASC 350, any excess carrying value, up to the amount of goodwill allocated to that reporting unit, is impaired. AtDecember 31, 2022 and 2021, the fair value of the company's single reporting unit for purposes of its goodwill impairment test exceeded it carrying value and thus the Company determined there was no impairment of goodwill.
Impact of Recently Issued Accounting Pronouncements
See Item 8 of Part II, Consolidated Financial Statements - Note (1) Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements.
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