10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

or 

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

For the transition period from                                 to                                

Commission File Number:  000-23970

FALCONSTOR SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware				77-0216135
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)
701 Brazos Street	Suite 400	Austin	TX	78701
(Address of principal executive offices)				(Zip Code)

(631) 777-5188

Registrant’s telephone number, including area code

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes ý  No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

The number of shares of common stock outstanding as of November 10, 2021 was 7,082,276.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

		Page
PART I.	Financial Information	4
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets at September 30, 2021 (unaudited) and December 31, 2020	4
	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020	5
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020	6
	Unaudited Condensed Consolidated Statements of Stockholders' Deficit for the three and nine months ended September 30, 2021 and 2020	7
	Unaudited Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2021 and 2020	10
	Notes to the Unaudited Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	43
PART II.	Other Information	44
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 6.	Exhibits	45
SIGNATURES		46

3

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2021		December 31, 2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,474,784	$	1,920,656
Accounts receivable, net of allowances	2,285,117		2,836,571
Prepaid expenses and other current assets	1,537,267		1,837,596
Contract assets	169,835		254,483
Inventory	15,421		15,275
Total current assets	7,482,424		6,864,581
Property and equipment, net	193,028		197,020
Operating lease right-of-use assets, net	140,238		536,272
Deferred tax assets	310,755		330,552
Software development costs, net	14,345		19,278
Other assets	114,828		863,964
Goodwill	4,150,339		4,150,339
Other intangible assets, net	64,295		100,134
Long-term contract assets	192,286		343,934
Total assets	$	12,662,538	$	13,406,074
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable	$	335,092	$	453,791
Accrued expenses	1,018,878		2,293,765
Current portion of lease liabilities	87,381		665,074
Short-term loan, net of debt issuance costs and discounts	—		3,320,863
Deferred revenue	3,709,005		4,603,270
Total current liabilities	5,150,356		11,336,763
Other long-term liabilities	637,099		703,889
Notes payable, net of debt issuance costs and discounts	2,150,574		754,000
Operating lease liabilities, net of current portion	53,430		—
Deferred tax liabilities	525,512		513,027
Deferred revenue, net of current portion	1,569,813		1,765,859
Total liabilities	10,086,784		15,073,538
Commitments and contingencies (Note 11)
Series A redeemable convertible preferred stock, $0.001 par value, 2,000,000 shares authorized, 900,000 shares issued and outstanding, redemption value of $14,195,475 and $13,346,577, respectively	14,075,434		12,940,722
Stockholders' deficit:
Common stock - $0.001 par value, 30,000,000 shares authorized, 7,074,364 shares and 5,949,463 shares issued and outstanding, respectively	7,074		5,949
Additional paid-in capital	112,671,753		110,107,170
Accumulated deficit	(122,283,348)		(122,733,344)
Accumulated other comprehensive loss	(1,895,159)		(1,987,961)
Total stockholders' deficit	(11,499,680)		(14,608,186)
Total liabilities and stockholders' deficit	$	12,662,538	$	13,406,074

See accompanying notes to unaudited condensed consolidated financial statements.

4

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue:
Product revenue	$	1,547,013	$	2,521,695	$	5,288,747	$	5,202,713
Support and services revenue	1,736,456		1,914,705		5,081,795		5,913,486
Total revenue	3,283,469		4,436,400		10,370,542		11,116,199
Cost of revenue:
Product	41,351		48,895		298,966		250,185
Support and service	400,934		367,063		1,233,067		1,109,379
Total cost of revenue	442,285		415,958		1,532,033		1,359,564
Gross profit	2,841,184		4,020,442		8,838,509		9,756,635
Operating expenses:
Research and development costs	711,273		600,430		2,032,360		1,809,354
Selling and marketing	1,610,635		1,026,241		4,267,010		3,027,372
General and administrative	633,954		358,701		2,129,921		2,297,451
Gain on litigation settlement	(632,600)		—		(632,600)		—
Restructuring costs	68,704		317,595		792,754		758,740
Total operating expenses	2,391,966		2,302,967		8,589,445		7,892,917
Operating income (loss)	449,218		1,717,475		249,064		1,863,718
Gain on debt extinguishment	—		—		754,000		—
Interest and other expense	(58,257)		(159,994)		(489,264)		(586,082)
Income (loss) before income taxes	390,961		1,557,481		513,800		1,277,636
Income tax expense (benefit)	16,529		11,272		63,804		44,709
Net income (loss)	$	374,432	$	1,546,209	$	449,996	$	1,232,927
Less: Accrual of Series A redeemable convertible preferred stock dividends	288,802		266,007		848,898		812,362
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	13,517		175,335		285,814		366,566
Net income (loss) attributable to common stockholders	$	72,113	$	1,104,867	$	(684,716)	$	53,999
Basic net income (loss) per share attributable to common stockholders	$	0.01	$	0.19	$	(0.11)	$	0.01
Diluted net income (loss) per share attributable to common stockholders	$	0.01	$	0.19	$	(0.11)	$	0.01
Weighted average basic shares outstanding	6,990,723		5,919,837		6,324,370		5,919,773
Weighted average diluted shares outstanding	7,039,421		5,959,385		6,324,370		5,943,794

See accompanying notes to unaudited condensed consolidated financial statements.

5

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income (loss)	$	374,432	$	1,546,209	$	449,996	$	1,232,927
Other comprehensive income (loss), net of applicable taxes
Foreign currency translation	11,144		(24,234)		92,802		(45,474)
Total other comprehensive income (loss), net of applicable taxes:	11,144		(24,234)		92,802		(45,474)
Total comprehensive income	$	385,576	$	1,521,975	$	542,798	$	1,187,453
Less: Accrual of Series A redeemable convertible preferred stock dividends	288,802		266,007		848,898		812,362
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	13,517		175,335		285,814		366,566
Total comprehensive income (loss) attributable to common stockholders	$	83,257	$	1,080,633	$	(591,914)	$	8,525

See accompanying notes to unaudited condensed consolidated financial statements.

6

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(UNAUDITED)

	Common Stock Outstanding	Common Stock		Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss, Net		Total Stockholders' Deficit
Balance at January 1, 2021	5,949,463	$	5,949	$	110,107,170	$	(122,733,344)	$	(1,987,961)	$	(14,608,186)
Net income (loss)						425,248				425,248
Share-based compensation to employees				4,471						4,471
Accretion of Series A redeemable convertible preferred stock				(197,114)						(197,114)
Dividends on Series A redeemable convertible preferred stock				(277,170)						(277,170)
Foreign currency translation								86,398		86,398
Balance at March 31, 2021	5,949,463	$	5,949	$	109,637,357	$	(122,308,096)	$	(1,901,563)	$	(14,566,353)
Net income (loss)						(349,684)				(349,684)
Sale of common stock in public offering, net of underwriting discounts and offering costs	811,750	812		2,736,958						2,737,770
Share-based compensation to employees				4,697						4,697
Shares issued in connection with vesting of restricted stock	28,151	28		(28)						—
Accretion of Series A redeemable convertible preferred stock				(75,183)						(75,183)
Dividends on Series A redeemable convertible preferred stock				(282,926)						(282,926)
Foreign currency translation								(4,740)		(4,740)
Balance at June 30, 2021	6,789,364	$	6,789	$	112,020,875	$	(122,657,780)	$	(1,906,303)	$	(12,536,419)
Net income (loss)						374,432				374,432
Sale of common stock in public offering, net of underwriting discounts and offering costs	285,000	285		948,281						948,566
Share-based compensation to employees				4,916						4,916
Accretion of Series A redeemable convertible preferred stock				(13,517)						(13,517)
Dividends on Series A redeemable convertible preferred stock				(288,802)						(288,802)
Foreign currency translation								11,144		11,144
Balance at September 30, 2021	7,074,364	7,074		112,671,753		(122,283,348)		(1,895,159)		(11,499,680)

7

See accompanying notes to unaudited condensed consolidated financial statements.

8

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(UNAUDITED)

	Common Stock Outstanding	Common Stock		Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss, Net		Total Stockholders' Deficit
Balance at January 1, 2020	5,918,733	5,919		111,727,888		(123,871,853)		(1,893,260)		(14,031,306)
Net income (loss)						(719,840)				(719,840)
Share-based compensation to employees				4,510						4,510
Shares issued in connection with vesting of restricted stock	1,104	1		(1)						—
Accretion of Series A redeemable convertible preferred stock				(26,090)						(26,090)
Dividends on Series A redeemable convertible preferred stock				(285,760)						(285,760)
Foreign currency translation								(13,153)		(13,153)
Balance at March 31, 2020	5,919,837	$	5,920	$	111,420,547	$	(124,591,693)	$	(1,906,413)	$	(15,071,639)
Net income (loss)						406,558				406,558
Share-based compensation to employees				3,060						3,060
Accretion of Series A redeemable convertible preferred stock				(165,141)						(165,141)
Dividends on Series A redeemable convertible preferred stock				(260,595)						(260,595)
Foreign currency translation								(8,087)		(8,087)
Balance at June 30, 2020	5,919,837	$	5,920	$	110,997,871	$	(124,185,135)	$	(1,914,500)	$	(15,095,844)
Net income (loss)						$	1,546,209			$	1,546,209
Share-based compensation to employees				$	3,822					$	3,822
Accretion of Series A redeemable convertible preferred stock				$	(175,335)					$	(175,335)
Dividends on Series A redeemable convertible preferred stock				$	(266,007)					$	(266,007)
Foreign currency translation								$	(24,234)	$	(24,234)
Balance at September 30, 2020	5,919,837	$	5,920	$	110,560,351	$	(122,638,926)	$	(1,938,734)	$	(14,011,389)

See accompanying notes to unaudited condensed consolidated financial statements.

9

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities:
Net income (loss)	$	449,996	$	1,232,927
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	151,468		162,127
Amortization of debt discount on notes payable	163,769		361,193
Amortization of right of use assets	396,034		987,542
Gain on debt extinguishment	(754,000)		—
Gain on litigation settlement	(632,600)		—
Share-based payment compensation	14,084		11,392
Provision for (recovery of) returns and doubtful accounts	—		70,932
Deferred income taxes (benefit)	12,485		(5,485)
Changes in operating assets and liabilities:
Accounts receivable	541,249		(138,271)
Prepaid expenses and other current assets	271,443		249,383
Contract assets	236,296		432,204
Inventory	—		15,713
Other assets	748,457		(379)
Accounts payable	(53,814)		(571,231)
Accrued expenses and other long-term liabilities	(669,852)		(589,952)
Operating lease liabilities	(524,263)		(1,204,155)
Deferred revenue	(1,058,641)		(1,317,239)
Net cash provided by (used in) operating activities	(707,889)		(303,299)
Cash flows from investing activities:
Purchases of property and equipment	(98,702)		—
Purchase of intangible assets	(10,226)		(63,005)
Net cash provided by (used in) investing activities	(108,928)		(63,005)
Cash flows from financing activities:
Proceeds from public offering, net of underwriting discounts paid	4,181,908		—
Payments of offering costs	(476,143)		—
Proceeds from issuance of PPP loan	—		754,000
Payments of short-term debt	(1,334,058)		(1,000,000)
Net cash provided by (used in) financing activities	2,371,707		(246,000)
Effect of exchange rate changes on cash and cash equivalents	(762)		8,419
Net increase (decrease) in cash and cash equivalents	1,554,128		(603,885)
Cash and cash equivalents, beginning of period	1,920,656		1,475,166
Cash and cash equivalents, end of period	$	3,474,784	$	871,281
Supplemental disclosures:
Cash paid for interest	$	110,408	$	261,095
Non-cash investing and financing activities:
Accrual of deferred offering costs	$	19,429	$	—
Undistributed Series A redeemable convertible preferred stock dividends	$	848,898	$	812,362
Accretion of Series A redeemable convertible preferred stock	$	285,814	$	366,566

See accompanying notes to unaudited condensed consolidated financial statements.

10

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements 

(1) Basis of Presentation

(a)  The Company and Nature of Operations

FalconStor Software, Inc., a Delaware corporation ("we", the "Company" or "FalconStor"), is the 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. More than 1,000 organizations and managed service providers worldwide standardize on FalconStor as the foundation for their cloud first data protection future.

(b) Liquidity

As of September 30, 2021, the Company had a working capital surplus of $2.3 million, which is inclusive of current deferred revenue of $3.7 million, and a stockholders' deficit of $11.5 million. During the nine months ended September 30, 2021, the Company had net income of $0.4 million and negative cash flow from operations of $0.7 million. The Company's total cash balance at September 30, 2021 was $3.5 million, an increase of $1.6 million compared to $1.9 million on December 31, 2020.

The Company’s principal sources of liquidity at September 30, 2021 consisted of cash and future cash anticipated to be generated from operations. The Company generated negative net income yet positive cash flows from operations during the nine months ended September 30, 2021, and it reported positive working capital as of September 30, 2021.

As described in Note (14) Stockholders' Equity, on June 23, 2021, the Company issued and sold an aggregate of 811,750 shares of its common stock in a public offering underwritten by Roth Capital Partners, LLC, ("Roth") which included 86,750 shares purchased by Roth pursuant to the partial exercise of its over-allotment option (the "June Offering"). At a price of $4.10 per share, the Company received net proceeds of approximately $2.7 million after deducting the underwriting discount and estimated offering expenses paid by the Company.

Also, on July 27, 2021 the Company issued and sold an aggregate of 285,000 shares of its common stock in a public offering underwritten by Roth. At a price of $4.10 per share, the Company received net proceeds of approximately $0.9 million after deducting the underwriting discount and estimated offering expenses paid by the Company.

The Company is currently a party to an Amended and Restated Term Loan Credit Agreement, dated as of February 23, 2018, as amended December 27, 2019, by and between the Company and HCP-FVA, LLC (“HCP-FVA”), (the “Amended and Restated Loan Agreement”). In connection with the then-proposed public offering of the Company as described in the Company's Registration Statement on Form S-1, as amended, originally filed on June 3, 2021 (the "Offering"), we entered into a letter agreement with Hale Capital Partners, LP (“Hale Capital”), dated June 2, 2021 (the “Loan Extension Letter Agreement”), that provided for an extension of the maturity date on Hale Capital’s portion of the outstanding indebtedness owed under the Amended and Restated Loan Agreement to June 30, 2023, which constituted approximately $2.2 million of the $3.5 million principal amount outstanding as of June 2, 2021. The remaining $1.3 million of the principal amount outstanding, which was owed to other lenders, was repaid in full on June 30, 2021. See Note (9) Notes Payable for more information. Also, as described further in Note (12) Series A Redeemable Convertible Preferred Stock, the effective date of the mandatory redemption right of the Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) held by HCP-FVA and Hale Capital was extended from July 30, 2021 to July 30, 2023 pursuant to an amendment to the Certificate of Designations, dated as of June 24, 2021. The amendment was approved by our shareholders at our 2021 annual meeting of stockholders and filed with the Delaware Secretary of State on June 25, 2021. If such Series A Preferred Stock was redeemed at September 30, 2021, the Company would have been required to pay the holders of the Series A Preferred Stock $14.2 million.

As discussed in Note (17) Restructuring Costs the Melville, NY office lease which ended on April 30, 2021 with a gross annualized rental cost of $1.5 million, will not be replaced. FalconStor is primarily a virtual company and is redeploying this savings to more productive uses.

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

(c) Impact of the COVID-19 Pandemic

11

We are continuing to monitor the impact of COVID-19, on all aspects of our business. The outbreak of COVID-19 has caused and may continue to cause travel bans or disruptions, and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. The impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases or failing to make payments, and delays or disruptions in our or our partners’ supply chains. As a result, we may experience extended sales cycles, our ability to close transactions with new and existing customers and partners may be negatively impacted, our ability to recognize revenue from software transactions we do close may be negatively impacted, our demand generation activities, and the efficiency and effect of those activities, may be negatively affected, and it has been and, until the COVID-19 outbreak is contained, will continue to be more difficult for us to forecast our operating results. These uncertainties have, and may continue to, put pressure on global economic conditions and overall IT spending and may cause our end customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles and potentially lowering prices for our solutions, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments, any of which could materially harm our business, operating results and financial condition.

Further, our management team is focused on addressing the impacts of COVID-19 on our business, which has required and will continue to require, a large investment of their time and resources and may distract our management team or disrupt our 2021 operating plans. The extent to which COVID-19 ultimately impacts our results of operations, cash flow and financial position will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions taken by governments and authorities to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including as a result of any recession that may occur.

(d)  Principles of Consolidation

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

(e)  Use of Estimates

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

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

(f)  Unaudited Interim Financial Information

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

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position of the Company at September 30, 2021, and the results of its operations for the three and nine months ended September 30, 2021 and 2020. 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, 2020 ("2020 Form 10-K").

12

(g)  Recently Issued Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The objective of the guidance is to improve the effectiveness of disclosure requirements on defined benefit pension plans and other postretirement plans. The guidance is effective for fiscal years beginning after December 15, 2020. Adoption of this new standard did not have a significant impact to our disclosures.

In December 2019, the FASB released ASU 2019-12, which affects general principles within Topic 740, Income Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Adoption of this new standard did not have a material impact on the Company.

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

(2) Summary of Significant Accounting Policies

The Company's significant accounting policies were described in Note (1) Summary of Significant Accounting Policies of the 2020 Form 10-K. There have been no significant changes in the Company's significant accounting policies since December 31, 2020. For a description of the Company's significant accounting policies refer to the 2020 Form 10-K.

Revenue from Contracts with Customers and Associated Balances

Nature of Products and Services

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

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

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

Contract Balances

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

    As of September 30, 2021 and December 31, 2020, accounts receivable, net of allowance for doubtful accounts, was $2.3 million and $2.8 million, respectively. As of September 30, 2021 and December 31, 2020, short and long-term contract assets, net of allowance for doubtful accounts, was $0.4 million and $0.6 million respectively.

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    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, 2021
Balance at January 1, 2020	$	6,369,129
Deferral of revenue	9,281,741
Recognition of revenue	(10,370,542)
Change in reserves	(1,510)
Balance at September 30, 2021	$	5,278,818

    During the three months ended September 30, 2021 and 2020, revenue of $1.0 million and $1.2 million, respectively, and the nine months ended September 30, 2021 and 2020, revenue of $3.9 million and $4.4 million respectively, was recognized from the deferred revenue balance at the beginning of each period.

Deferred revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized as revenue in future periods. Deferred revenue was $5.3 million as of September 30, 2021, of which the Company expects to recognize approximately 70% of such amount as revenue over the next 12 months and the remainder thereafter.

    Approximately $1.8 million of revenue is expected to be recognized from remaining performance obligations for unbilled support and services as of September 30, 2021. We expect to recognize revenue on approximately 42% of these remaining performance obligations over the next twelve months, with the balance recognized thereafter.

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

Significant Judgments

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

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

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

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

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

Disaggregation of Revenue

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

Assets Recognized from Costs to Obtain a Contract with a Customer

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

Leases

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

Right of Use Assets and Liabilities

    We have various operating leases for office facilities that expire through 2021. Below is a summary of our ROU assets and liabilities as of September 30, 2021.

Right of use assets	$	140,238
Lease liability obligations, current	87,381
Lease liability obligations, less current portion	53,430
Total lease liability obligations	$	140,811
Weighted-average remaining lease term	1.87
Weighted-average discount rate	3.57		%

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Components of lease expense:
Operating lease cost	$	88,593	$	442,501	$	712,911	$	1,386,998
Sublease income	—		(75,314)		(100,419)		(430,313)
Net lease cost	$	88,593	$	367,187	$	612,492	$	956,685

    During the three months ended September 30, 2021 and 2020, operating cash flows from operating leases were approximately $57,541 and $357,245, respectively. During the nine months ended September 30, 2021 and 2020, operating cash flows from operating leases were approximately $574,757 and $1,117,557, respectively.

Approximate future minimum lease payments for our ROU assets over the remaining lease periods as of September 30, 2021, are as follows:

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2021	30,063
2022	112,232
Total minimum lease payments	142,295
Less interest	1,484
Present value of lease liabilities	140,811

(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, 2021 and 2020:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Stock options	9,640	9,945	9,640	9,945
Restricted stock	—	31,648	63,207	31,648
Series A redeemable convertible preferred stock	87,815	87,815	87,815	87,815
Total anti-dilutive common stock equivalents	97,455	129,408	160,662	129,408

(4) Property and Equipment

The gross carrying amount and accumulated depreciation of property and equipment as of September 30, 2021 and December 31, 2020 are as follows:

	September 30, 2021		December 31, 2020
Gross carrying amount	$	18,876,633	$	18,791,841
Accumulated depreciation	(18,683,605)		(18,594,821)
Property and Equipment, net	$	193,028	$	197,020

For the three months ended September 30, 2021 and 2020, depreciation expense was $29,838 and $44,958, respectively. For the nine months ended September 30, 2021 and 2020, depreciation expense was $100,470 and $135,679, respectively.

(5) Software Development Costs

The gross carrying amount and accumulated amortization of software development costs as of September 30, 2021 and December 31, 2020 are as follows:

	September 30, 2021		December 31, 2020
Gross carrying amount	$	2,950,132	$	2,950,132
Accumulated amortization	(2,935,787)		(2,930,854)
Software development costs, net	$	14,345	$	19,278

During the three months ended September 30, 2021 and 2020, the Company recorded $1,649 and $1,649, respectively, of amortization expense related to capitalized software costs. During the nine months ended September 30, 2021 and 2020, the Company recorded $4,933 and $6,084, respectively, of amortization expense related to capitalized software costs.

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(6) Goodwill and Other Intangible Assets

The gross carrying amount and accumulated amortization of goodwill and other intangible assets as of September 30, 2021 and December 31, 2020 are as follows: 

	September 30, 2021		December 31, 2020
Goodwill	$	4,150,339	$	4,150,339
Other intangible assets:
Gross carrying amount	$	4,038,138	$	4,027,912
Accumulated amortization	(3,973,843)		(3,927,778)
Net carrying amount	$	64,295	$	100,134

    For the three months ended September 30, 2021 and 2020, amortization expense was $13,999 and $18,455, respectively. For the nine months ended September 30, 2021 and 2020, amortization expense was $46,065 and $20,364, respectively.

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(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 provided for the issuance of up to 1,471,997 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. In June 2021, the Company's stockholders approved an amendment to increase the number of shares of our common stock authorized and reserved for issuance under the 2018 Plan by 220,800 shares to a total of 1,692,797 shares. Exercise prices of the options will be determined by the Compensation Committee of the Company's Board of Directors (the "Board"), subject to the consent of Hale Capital. The vesting terms shall be performance based and determined by the Compensation Committee, subject to the consent of Hale Capital, based on various factors, including (i) the return of capital to the holders of the Series A Preferred Stock and the Company’s Common Stock in the event of a change of control, (ii) the repayment of the Company’s obligations under its senior secured debt, and (iii) the Company’s free cash flow.

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, 2021: 

	Shares	Shares Available	Shares
Name of Plan	Authorized	for Grant	Outstanding
FalconStor Software, Inc. 2018 Incentive Stock Plan	1,692,797	132,817	1,463,380

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, 2021: 

Name of Plan	Shares Available for Grant	Shares Outstanding
FalconStor Software, Inc., 2016 Incentive Stock Plan	—	3,850
FalconStor Software, Inc., 2006 Incentive Stock Plan	—	5,790

A summary of the Company’s restricted stock activity for the nine months ended September 30, 2021 is below. Such restricted stock did not bestow any voting or dispositive power and is not deemed outstanding until they vest.

	Number of Restricted Stock Awards
Non-Vested at January 1, 2021	1,386,213
Granted	113,230
Vested	(36,063)
Forfeited	—
Non-Vested at September 30, 2021	1,463,380

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, 2021 and 2020:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenue - Product	$	232	$	—	$	688	$	—
Cost of revenue - support and service	185		104		549		310
Research and development costs	167		433		167		1,289
Selling and marketing	2,915		186		8,475		554
General and administrative	1,417		3,099		4,205		9,239
	$	4,916	$	3,822	$	14,084	$	11,392

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(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, 2021, the Company recorded an income tax provision of $63,804. The effective tax rate for the nine months ended September 30, 2021 was 12.4%. The effective tax rate differs from the statutory rate of 21% due to the mix of foreign and domestic earnings, foreign withholding taxes and the application of valuation allowances. As of September 30, 2021, 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 benefit as such amounts are fully offset with a valuation allowance.

For the nine months ended September 30, 2020, the Company recorded an income tax provision of $44,709. The effective tax rate for the nine months ended September 30, 2020 was 3.5%. The effective tax rate differs from the statutory rate of 21% due to the mix of foreign and domestic earnings and the application of valuation allowances. As of September 30, 2020, 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 benefit as such amounts are fully offset with a valuation allowance.

The Company’s total unrecognized tax benefits, excluding interest, at both September 30, 2021 and September 30, 2020 were $70,260 and $76,275, respectively. As of September 30, 2021 and September 30, 2020, the Company had $36,575 and $33,865, respectively, of accrued interest reflected in accrued expenses.

(9) Notes Payable

    The notes payable balance consists of the following:

Total notes payable, net at January 1, 2021	$	4,074,863
Accretion of discount	75,705
PPP loan forgiveness	(754,000)
Total notes payable, net at March 31, 2021	$	3,396,568
Repayment of short-term debt	(1,334,058)
Accretion of discount	84,086
Total notes payable, net at June 30, 2021	$	2,146,596
Accretion of discount	$	3,978
Total notes payable, net at September 30, 2021	$	2,150,574

Senior Secured Debt

    The senior secured debt bears interest at prime plus 0.75% and had an original maturity date of June 30, 2021.

In connection with the June Offering, we entered into the Loan Extension Letter Agreement on June 2, 2021 which provided for an extension of the maturity date on Hale Capital’s portion of the outstanding indebtedness owed under the Amended and Restated Loan Agreement to June 30, 2023. The amount extended constituted approximately $2.2 million of the $3.5 million principal amount outstanding as of June 2, 2021. The remaining $1.3 million of the outstanding principal, which was owed to other lenders, was repaid in full on June 30, 2021.

The Company concluded that the modification created by this amendment resulted in a troubled debt restructuring under Accounting Standard Codification—Debt (Topic 470) as it was determined that a concession was granted by HCP-FVA. However, as the future payments to be made subsequent to the modification are greater than the carrying value at the time of the modification, no gain or loss was required to be recognized on the troubled debt restructuring. The change is accounted for prospectively using the new effective interest rate of the loan.

As of September 30, 2021, the Company was in compliance with the financial covenants contained in the Amended and Restated Loan Agreement.

Loan under the Paycheck Protection Program

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On April 28, 2020, the Company entered into a loan with Peapack-Gladstone Bank in an aggregate principal amount of $754,000 (the "PPP Loan") pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").

The PPP Loan was evidenced by a promissory note, dated April 28, 2020 and matured two years from the disbursement date and bore interest at a rate of 1.000% per annum, with the first six months of interest deferred. The PPP Loan was subject to forgiveness to the extent proceeds were used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP. The Company used a significant majority of the PPP Loan amount for Qualifying Expenses and the PPP Loan was forgiven on March 30, 2021.

(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, 2021, the Company did not have any Level 1 category assets included 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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, 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, 2021 or December 31, 2020.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2021:

			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	464,972		—		—		464,972
Total derivative liabilities	464,972		—		—		464,972
Total assets and liabilities measured at fair value	$	464,972	$	—	$	—	$	464,972

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The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2020: 

			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	472,851		—		—		472,851
Total derivative liabilities	472,851		—		—		472,851
Total assets and liabilities measured at fair value	$	472,851	$	—	$	—	$	472,851

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 derivatives are included in other long-term liabilities on our consolidated balance sheets.

    The fair value of the Company's Series A Preferred Stock is based on its future cash flows discounted at a 9% yield. The fair value of the Company's note payable is based on its future cash flows discounted at a 7% yield.

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, 2021 and September 30, 2020:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Beginning Balance	$	467,598	$	478,312	$	472,851	$	483,804
Total income recognized in earnings	(2,626)		(2,751)		(7,879)		(8,243)
Ending Balance	$	464,972	$	475,561	$	464,972	$	475,561

(11) Commitments and Contingencies

    The Company’s headquarters are located in Austin, Texas.  The Company had an operating lease covering its Melville, New York office facility that expired in April 2021. The Company also has several additional operating leases related to offices in foreign countries. The expiration dates for these leases occur in 2021. The following is a schedule of future minimum lease payments as well as sublease income for all operating leases as of September 30, 2021:

	Payments
2021	$	30,063
2022	112,232
	$	142,295

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, 2021, the Company has not incurred any costs related to warranty obligations.

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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) Series A Redeemable Convertible Preferred Stock the holders of the Series A Preferred Stock have redemption rights upon certain triggering events. As of September 30, 2021, the Company did not fail any non-financial covenants related to the Company's Series A Preferred Stock.

    In connection with the appointment of Todd Brooks 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 Agreement 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. Mr. Brooks' employment can be terminated at will. Pursuant to the Brooks Agreement and the 2018 Plan, Mr. Brooks received 735,973 shares of restricted stock. If Mr. Brooks’ employment is terminated by the Company other than for cause, he is entitled to receive severance equal to 12 months of his base salary if (i) he has been employed by the Company for at least 12 months at the time of termination or (ii) a change of control has occurred within 6 months of Mr. Brooks’ employment. Except as set forth in the preceding sentence, Mr. Brooks is entitled to receive severance equal to 6 months of his base salary if he has been employed by the Company for less than 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.

    In connection with the appointment of Brad Wolfe as the Company's 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 that exceeds the prior quarter 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) Restructuring Costs, the Company has incurred certain restructuring costs in connection with restructuring plans adopted in 2017 and 2019.

In addition, as of September 30, 2021, the Company's liability for uncertain tax positions totaled $108,091. 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 of $102.488 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 under the Amended and Restated Loan Agreement remains outstanding without the consent of the holders of the Series A Preferred Stock. In addition, the declaration

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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 9.99% of the Company’s currently outstanding shares of common stock.

The Series A Preferred Stock dividends shall accrue whether or not the declaration or payment of such Series A Preferred Stock 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, 2023, subject to the approval of HCP-FVA, 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 (as defined in the Certificate of Designations) 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 Restated Certificate of Incorporation as amended or Amended and Restated 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 holders of our outstanding Series A Preferred Stock have a mandatory redemption right that may be exercised only with the approval of Hale Capital and HCP-FVA. In connection with the then-proposed public offering of the Company as described in the Company's Registration Statement on Form S-1, as amended, originally filed on June 3, 2021, the effective date of such redemption right was extended from July 30, 2021 to July 30, 2023 pursuant to an amendment to the Certificate of Designations, dated as of June 24, 2021. The amendment was approved by our shareholders at our 2021 annual meeting of stockholders and filed with the Delaware Secretary of State on June 25, 2021.

The Company concluded that the modification created by this amendment resulted in a troubled debt restructuring under Accounting Standard Codification—Debt (Topic 470) as it was determined that a concession was granted. However, as the future payments to be made subsequent to the modification are greater than the carrying value at the time of the modification, no gain or loss was required to be recognized on the troubled debt restructuring. The change is accounted for

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prospectively using the new effective interest rate of the preferred stock.

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, 2021 and December 31, 2020, the fair value of these derivative instruments was $464,972 and $472,851, 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, 2021 and September 30, 2020 of $7,879 and $8,243, 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, 2021 and 2020, were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Beginning Balance	$	467,598	$	478,312	$	472,851	$	483,804
Total income recognized in earnings	(2,626)		(2,751)		(7,879)		(8,243)
Ending Balance	$	464,972	$	475,561	$	464,972	$	475,561

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 as follows:

Probability of redemption as part of a fundamental sale transaction	0.5%
Probability of redemption absent a fundamental sale transaction	4.75%
Annual volatility	65%

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 June Offering, Hale Capital Partners, which was the sole holder of the Series A Preferred Stock, agreed to the Series A mandatory extension of the mandatory redemption right 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, 2021 and 2020, respectively.

The Series A Preferred Stock consists of the following:

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Total Series A redeemable convertible preferred stock, net at January 1, 2021	$	12,940,722
Accrued dividends	277,170
Accretion of preferred stock	197,114
Total Series A redeemable convertible preferred stock, net at March 31, 2021	$	13,415,006
Accrued dividends	282,926
Accretion of preferred stock	75,183
Total Series A redeemable convertible preferred stock, net at June 30, 2021	$	13,773,115
Accrued dividends	288,802
Accretion of preferred stock	13,517
Total Series A redeemable convertible preferred stock, net at September 30, 2021	$	14,075,434

(13) Accumulated Other Comprehensive Loss

The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended September 30, 2021 are as follows:

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	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at July 1, 2021	$	(1,914,022)	$	7,719	$	(1,906,303)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	11,144		—		11,144
Total other comprehensive income (loss)	11,144		—		11,144
Accumulated other comprehensive income (loss) at September 30, 2021	$	(1,902,878)	$	7,719	$	(1,895,159)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended September 30, 2020 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at July 1, 2020	$	(1,948,066)	$	33,566	$	(1,914,500)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	(24,234)		—		(24,234)
Total other comprehensive income (loss)	(24,234)		—		(24,234)
Accumulated other comprehensive income (loss) at September 30, 2020	$	(1,972,300)	$	33,566	$	(1,938,734)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the nine months ended September 30, 2021 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at January 1, 2021	$	(1,995,680)	$	7,719	$	(1,987,961)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	92,802		—		92,802
Total other comprehensive income (loss)	92,802		—		92,802
Accumulated other comprehensive income (loss) at September 30, 2021	$	(1,902,878)	$	7,719	$	(1,895,159)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the nine months ended September 30, 2020 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at January 1, 2020	$	(1,926,826)	$	33,566	$	(1,893,260)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	(45,474)		—		(45,474)
Total other comprehensive income (loss)	(45,474)		—		(45,474)
Accumulated other comprehensive income (loss) at September 30, 2020	$	(1,972,300)	$	33,566	$	(1,938,734)

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(14) Stockholders' Equity

Stock Repurchase Activity

During the three and nine months ended September 30, 2021 and 2020, the Company did not repurchase any shares of its common stock. As of September 30, 2021, the Company had the authorization under previous Board approved stock repurchase plans to repurchase 49,078 shares of its common stock based upon its judgment and market conditions.

Common Stock Offerings

On June 23, 2021, the Company issued and sold an aggregate of 811,750 shares of its common stock in a public offering underwritten by Roth, which included 86,750 shares purchased by Roth pursuant to the partial exercise of its over-allotment option. At a price of $4.10 per share, the Company received net proceeds of approximately $2.7 million after deducting the underwriting discount and offering expenses paid by the Company.

On July 27, 2021 the Company issued and sold an aggregate of 285,000 shares of its common stock in a public offering underwritten by Roth. At a price of $4.10 per share, the Company received net proceeds of approximately $0.9 million after deducting the underwriting discount and estimated offering expenses paid by the Company.

(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.

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.

Litigation Settlement with Datatech Enterprises, Inc.

The Company has been involved in litigation with Datatech Enterprises, Inc. ("Datatech") since April 27, 2015 when Falconstor commenced a lawsuit regarding a contractual dispute with Datatech. Falconstor recorded an accrual for a loss contingency in the amount of $0.8 million in the fiscal year ended 2015. On September 23, 2021, Falconstor and Datatech entered into a settlement agreement which resulted in Falconstor issuing payment of $0.2 million to Datatech and recording a gain of $0.6 million. Falconstor issued the payment in full on September 23, 2021. The matter is now fully concluded.

(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, 2021 and 2020, and the location of long-lived assets as of September 30, 2021 and December 31, 2020, are summarized as follows:

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue:
Americas	$	880,010	$	1,834,443	$	4,422,598	$	4,085,936
Europe, Middle East, Africa and Other	1,265,526		1,650,812		3,817,767		4,116,849
Asia Pacific	1,137,933		951,145		2,130,177		2,913,414
Total Revenue	$	3,283,469	$	4,436,400	$	10,370,542	$	11,116,199

	September 30, 2021		December 31, 2020
Long-lived assets:
Americas	$	388,860	$	1,735,986
Europe, Middle East, Africa and Other	19,695		52,690
Asia Pacific	556,925		502,344
Total long-lived assets	$	965,480	$	2,291,020

For the three and nine months ended September 30, 2021, the Company had two customers that accounted for 10% or more of total revenue, respectively. For the three and nine months ended September 30, 2020, the Company had two customer that accounted for 10% or more of total revenue, respectively.

As of September 30, 2021, the Company had two customers that accounted for 10% or more of the gross accounts receivable balance. As of December 31, 2020, the Company had one customer that accounted for 10% or more of the gross accounts receivable balance.

(17) Restructuring Costs

    In June 2017, the Board approved a comprehensive plan to increase operating performance (the “2017 Plan”). 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 86 employees at December 31, 2018. 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 its former Melville, NY office space during the three months ended June 30, 2018. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the Company no longer intends to receive any economic benefit are accrued, net of any anticipated sublease income, when the Company ceases use of the leased space. During the nine months ended September 30, 2021, the Company incurred lease disposal-related costs for this property of $0.7 million. The Melville, NY lease which ended on April 30, 2021 with a gross annualized rental cost of $1.5 million, will not be replaced. The Company expects the remaining accrued severance-related costs of $141,340 at September 30, 2021 to be paid once final settlement litigation is completed, which is expected to occur by December 31, 2021.

In the third quarter of 2019, the Company adopted an expense control plan (the "2019 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. In connection with the 2019 Plan, the Company eliminated 23 positions worldwide, implemented tighter expense controls, ceased non-core activities and downsized several facilities. During the three months ended March 31, 2020, the Company incurred $0.1 million in severance expense as a result of this action. The 2019 Plan was substantially completed as of March 31, 2020.

    Given the commercial uncertainty caused by the novel coronavirus pandemic, or COVID-19, the Company developed and implemented an even more aggressive expense control plan in March 2020 (the "2020 Plan"). The 2020 Plan reduced the Company's annual cash expense run rate by $4.0 million or 29%. The Company furloughed 21 positions worldwide, and 20 of these positions were reinstated by December 31, 2020. During the nine months ended September 30, 2021, the Company has not yet incurred severance expense as a result of this action.

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The following table summarizes the activity during 2020 and 2021 related to restructuring liabilities recorded in connection with the 2017, 2019 and 2020 Plans:

	Severance Related Costs		Facility and Other Costs		Total
Balance at January 1, 2020	$	293,799	$	237,493	$	531,292
Additions (Reductions)	76,708		210,752		287,460
Utilized/Paid	(156,415)		(225,835)		(382,250)
Balance at March 31, 2020	$	214,092	$	222,410	$	436,502
Additions (Reductions)	—		153,685		153,685
Translation Adjustment	4,674		—		4,674
Utilized/Paid	—		(201,211)		(201,211)
Balance at June 30, 2020	$	218,766	$	174,884	$	393,650
Additions (Reductions)	—		317,595		317,595
Translation Adjustment	9,554		—		9,554
Utilized/Paid	—		(366,562)		(366,562)
Balance at September 30, 2020	$	228,320	$	125,917	$	354,237
Additions (Reductions)	—		274,086		274,086
Translation Adjustment	11,124		—		11,124
Utilized/Paid	—		(324,537)		(324,537)
Balance at December 31, 2020	$	239,444	$	75,466	$	314,910
Additions (Reductions)	—		302,313		302,313
Translation Adjustment	(10,393)		—		(10,393)
Utilized/Paid	—		(357,184)		(357,184)
Balance at March 31, 2021	$	229,051	$	20,595	$	249,646
Additions (Reductions)	—		421,737		421,737
Translation Adjustment	2,734		—		2,734
Utilized/Paid	(90,445)		(442,332)		(532,777)
Balance at June 30, 2021	$	141,340	$	—	$	141,340
Translation Adjustment	(3,429)		—		(3,429)
Balance at September 30, 2021	$	137,911	$	—	$	137,911

    The severance and facility related liabilities are included within “accrued expenses” in the accompanying condensed consolidated balance sheets. The expenses under the 2017, 2019 and 2020 Plans are included within “restructuring costs” in the accompanying condensed consolidated statements of operations.

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

    The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements can be identified by the use of predictive, future-tense or forward-looking terminology, such as “believes,” “anticipates,” “expects,” “estimates,” “plans,” “may,” “intends,” “will,” or similar terms.  Investors are cautioned that any forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. The following discussion should be read together with the consolidated financial statements and notes to those financial statements included elsewhere in this report.

OVERVIEW

FalconStor is the 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 the increasing demand for hyrid-cloud data protection for multiple devices, networks and platforms across enterprise on-premises data centers, and private and public clouds. 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. As enterprises increasingly look to focus their core IT staffs on application development and refresh, MSPs are increaseingly assuming responsibility for cloud integration and data pretection. Our integration with modern cloud-based data storage environments, such as IBM Cloud, Amazon Web Services (“AWS”) and Microsoft Azure, enables our enterprise customers to significantly reduce costs and improve the portability, security and accessibility of their enterprise data and enables MSPs to serve their cusrtomers with their cloud of choice. 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 segment, building on the momentum we generated in 2019 and increasing profitability. In 2021, we increased our go-to-market investment within our core regions of the Americas, EMEA, Japan, Korea, and Southeast Asia, and released StorSafeTM, the next generation of our Virtual Tape Library (“VTL”) product family built for MSPs.

GAAP subscription revenue increased 35% in the third quarter of 2021 year-over-year and increased 54% for the year-to-date ending September 30, 2021. Desipite the increase in GAAP subscription revenue, GAAP total revenue in the third quarter of 2021 declined 26.0% year-over-year, and GAAP total revenue for the year-to-date ending September 30, 2021 decreased year-over-year by 6.7%. During the third quarter, we generated a net income of $0.4 million, compared to a net income of $1.5 million in third quarter of 2020. For the year to date September 30, 2021, we generated a net income of $0.4 million, compared to a net income of $1.2 million for year to date September 30, 2020.

While uncertainties continue to exist as a result of COVID-19, we have seen our customers and prospects continue to invest in the business critical area of data production in which we sell our solutions.

During the third quarter of 2021, we continued to deliver innovation and 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, AWS and Microsoft Azure, save operational costs, and improve restore performance for rapid remote disaster recovery.

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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.

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 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 data centers, public cloud and 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. Now, we also offer our various licenses on a subscription or term-based model, 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.

COVID-19

    We are closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, on all aspects of our business. In March 2020, the World Health Organization characterized COVID-19 as a pandemic and the President of the United States declared the COVID-19 outbreak a national emergency. Since then, the COVID-19 pandemic has rapidly spread across the globe and has already resulted in significant volatility, uncertainty and economic disruption. The outbreak of COVID-19 has caused and may continue to cause travel bans or disruptions, and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. The impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases or failing to make payments, and delays or disruptions in our or our partners’ supply chains.

RESULTS OF OPERATIONS – FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2020.

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The following table presents revenue and expense line items reported in our condensed consolidated statements of operations and their corresponding percentage of total revenue for the three months ended September 30, 2020 and 2020 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.

	Three Months Ended September 30,								Change Period to Period
(amounts in dollars)	2021				2020
Revenue:
Product revenue	$	1,547,013	47	%	$	2,521,695	57	%	$	(974,682)	(39)	%
Support and services revenue	1,736,456		53	%	1,914,705		43	%	(178,249)		(9)	%
Total revenue	3,283,469		100	%	4,436,400		100	%	(1,152,931)		(26)	%
Cost of revenue:
Product	41,351		1	%	48,895		1	%	(7,544)		(15)	%
Support and service	400,934		12	%	367,063		8	%	33,871		9	%
Total cost of revenue	442,285		13	%	415,958		9	%	26,327		6	%
Gross profit	2,841,184		87	%	4,020,442		91	%	(1,179,258)		(29)	%
Operating expenses:
Research and development costs	711,273		22	%	600,430		14	%	110,843		18	%
Selling and marketing	1,610,635		49	%	1,026,241		23	%	584,394		57	%
General and administrative	633,954		19	%	358,701		8	%	275,253		77	%
Gain on litigation settlement	(632,600)		(19)	%	—		—	%	(632,600)		—	%
Restructuring costs	68,704		2	%	317,595		7	%	(248,891)		(78)	%
Total operating expenses	2,391,966		73	%	2,302,967		52	%	88,999		4	%
Operating income (loss)	449,218		14	%	1,717,475		39	%	(1,268,257)		(74)	%
Interest and other expense	(58,257)		(2)	%	(159,994)		(4)	%	101,737		64	%
Income (loss) before income taxes	390,961		12	%	1,557,481		35	%	(1,166,520)		(75)	%
Income tax expense (benefit)	16,529		1	%	11,272		—	%	5,257		47	%
Net income (loss)	$	374,432	11	%	$	1,546,209	35	%	$	(1,171,777)	(76)	%
Less: Accrual of Series A redeemable convertible preferred stock dividends	288,802		9	%	266,007		6	%	22,795		9	%
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	13,517		—	%	175,335		4	%	(161,818)		(92)	%
Net income (loss) attributable to common stockholders	$	72,113	2	%	$	1,104,867	25	%	$	(1,032,754)	(93)	%

Revenue

Our primary sales focus is on selling software solutions and platforms which includes stand-alone software applications, software integrated with industry standard hardware and sold as one complete integrated solution or sold on a subscription or consumption basis. As a result, our revenue is classified as either: (i) product revenue, or (ii) support and services revenue. During the three months ended September 30, 2021, we recognized revenue of $3.3 million, compared with $4.4 million in the prior year period.

Product Revenue

Product revenue is comprised of sales of both licenses for our software solutions and sales of the platforms on which the software is installed. This includes stand-alone software applications and, 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 in the United States are met.

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For the three months ended September 30, 2021 and 2020, product revenue represented 47% and 57% of our total revenue, respectively. Product revenue of $1,547,013 for the three months ended September 30, 2021 decreased $974,682, or 39%, from $2,521,695 in the prior year period. The decrease is due to revenue from three large contracts in the three months ended September 30, 2020 that did not repeat in the three months ended September 30, 2021.

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.

Maintenance and technical support services revenue for the three months ended September 30, 2021 decreased to $1.6 million, compared to $1.9 million in the prior year period. The decrease is primarily due to a decline in maintenance renewals. 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 over the previous year reflects a decline in maintenance renewal revenue as a result of conversion to subscription contracts and customer attrition.

Professional services revenue for the three months ended September 30, 2021 increased to $94,543, compared to $31,269 in the prior year period. Professional services revenue can vary from period to period based upon (i) the number of solutions sold during the existing and previous periods, (ii) the number of our customers who elect to purchase professional services, (iii) the number of professional services contracts that are performed during the period, and (iv) the number of customers who elect to purchase engineering services. 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.

Cost of Revenue, Gross Profit and Gross Margin

Total cost of revenue for the three months ended September 30, 2021 increased 6% to $442,285, compared with $415,958 in the prior year period. Total gross profit decreased $1.2 million, or 29%, to $2.8 million for the three months ended September 30, 2021, compared with $4.0 million for the prior year period. Total gross margin decreased to 87% for the three months ended September 30, 2021, compared with 91% for the prior year period. The decrease in our total gross profit, in absolute dollars, was primarily due to decreased revenue. Generally, our total gross profits and total gross margins fluctuate based on several factors, including (i) revenue growth levels, (ii) changes in personnel headcount and related costs, and (iii) our product offerings and mix of sales.

Cost of Product Revenue, Gross Profit and Gross Margin

Cost of product revenue consists primarily of hardware and warranty expenses. Cost of product revenue for the three months ended September 30, 2021 decreased to $41,351, compared with $48,895 in the prior year period. Product gross margin for the three months ended September 30, 2021 decreased slightly, year over year, to 97% from 98% for the same period in 2020. This decrease in cost of product revenue for the three months ended September 30, 2021 was primarily due to an intentional shift away from hardware sales in the current period, compared to the prior year period.

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

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. Cost of support and service revenue for the three months ended September 30, 2021 increased 9% to $400,934, compared with $367,063 in the prior year period. Support and service gross margin decreased to 77% for the three months ended September 30, 2021, compared with 81% for the prior year period. The increase was primarily related to an increase in personnel related costs resulting from our reinstatement of workforce that was reduced as part of the 2020 Restructuring Plan implemented in response to the novel coronavirus pandemic. For further information, refer to Note (17) Restructuring Costs to our unaudited condensed consolidated financial statements.

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Operating Expenses

Our operating expenses for the three months ended September 30, 2021 increased slightly by $0.1 million to $2.4 million from $2.3 million, for the previous year period.

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 increased $0.1 million, or 18%, to $0.7 million for the three months ended September 30, 2021, from $0.6 million in the prior year period. The increase was primarily related to an increase in personnel related costs resulting from our reinstatement of workforce that was reduced as part of the 2020 Restructuring Plan implemented in response to the novel coronavirus pandemic. For further information, refer to Note (17) Restructuring Costs to our unaudited condensed consolidated financial statements. We continue to provide substantial resources in support of our research and development activities to continue to enhance and to test our core products and in the development of new innovative products, features and options.

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 increased $0.6 million, or 57%, to $1.6 million for the three months ended September 30, 2021 from $1.0 million in the prior year period. The increase was primarily related to commissions, bonuses and promotional campaign expenses and an increase in personnel related costs resulting from our reinstatement of workforce that was reduced as part of the 2020 Restructuring Plan implemented in response to the novel coronavirus pandemic. For further information, refer to Note (17) Restructuring Costs to our unaudited condensed consolidated financial statements.

Gain on Litigation Settlement

During the three months ended September 30, 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 (15) Litigation, to our unaudited condensed 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 to $0.6 million for the three months ended September 30, 2021, compared to $0.4 million for the prior year period. The increase in general and administrative expenses was due primarily to an accrual reversal for Board fees that occurred in three months ended September 30, 2020 and reductions in professional fees.

Restructuring

    In June 2017, the Board approved the 2017 Plan, a comprehensive plan to increase operating performance. The 2017 Plan resulted in a realignment and reduction in workforce. The 2017 Plan was substantially completed by the end of our fiscal year ended December 31, 2017 and when combined with previous workforce reductions in the second quarter of Fiscal 2017 reduced our workforce to approximately 81 employees at December 31, 2017. As part of this consolidation effort, the Company vacated a portion of its former Melville, NY office space during the three months ended June 30, 2018. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the Company no longer intends to receive any economic benefit are accrued, net of any anticipated sublease income, when the Company ceases use of the leased space. As the lease has terminated in April 2021, there are no further restructuring costs associated with this lease.

During the three months ended September 30, 2019, the Company adopted the 2019 Plan, a plan to better align the Company’s cost structure with the skills and resources required to more effectively execute the Company’s long-term growth strategy and to support revenue levels the Company expected to achieve on a go forward basis, implement tighter expense controls, cease non-core activities and downsize several facilities. During the three months ended September 30, 2021, the Company incurred $0 in severance expense as a result of this action. The 2019 Plan was substantially completed as of March 31, 2020.

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    Given the commercial uncertainty caused by the novel coronavirus pandemic, or COVID-19, the Company developed and implemented the 2020 Plan, an even more aggressive expense control plan in March 2020, that was kept in place for the duration of 2020. The 2020 Plan reduced the Company's annual cash expense run rate by $4.0 million or 29%. The Company furloughed 21 positions worldwide, and 20 of these positions were reinstated by December 31, 2020. During the three months ended September 30, 2021, the Company has not incurred severance expense as a result of this action.

Restructuring expense decreased $0.2 million for the three months ended September 30, 2021 to $0.1 million, compared to a restructuring expense of $0.3 million in the prior year period. Restructuring expense primarily consists of lease disposal activities.

Interest and Other (Loss) Income, Net

Interest and other income (loss), net, decreased $101,737 to a loss of $58,257 for the three months ended September 30, 2021, compared with a loss of $159,994 in the prior year period. The increase in interest and other income (loss) primarily relates to payments made on outstanding debt. The fluctuation in interest and other income (loss) 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 (10) Fair Value Measurements to our unaudited condensed consolidated financial statements.

Income Taxes

Our provision for income taxes consists of state and local, and foreign taxes. For the three months ended September 30, 2021 and 2020, the Company recorded income tax expense of $16,529 and benefit of $11,272, respectively, consisting primarily of state and local, and foreign taxes. 

    As of September 30, 2021, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.

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RESULTS OF OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2020.

The following table presents revenue and expense line items reported in our condensed consolidated statements of operations and their corresponding percentage of total revenue for the nine months ended September 30, 2021 and 2020 and the period-over-period dollar and percentage changes for those line items. Our results of operations are reported as one business segment, represented by our single operating segment.

	Nine Months Ended September 30,								Change Period to Period
(amounts in dollars)	2021				2020
Revenue:
Product revenue	$	5,288,747	51	%	$	5,202,713	47	%	$	86,034	2	%
Support and services revenue	5,081,795		49	%	5,913,486		53	%	(831,691)		(14)	%
Total revenue	10,370,542		100	%	11,116,199		100	%	(745,657)		(7)	%
Cost of revenue:
Product	298,966		3	%	250,185		2	%	48,781		19	%
Support and service	1,233,067		12	%	1,109,379		10	%	123,688		11	%
Total cost of revenue	1,532,033		15	%	1,359,564		12	%	172,469		13	%
Gross profit	8,838,509		85	%	9,756,635		88	%	(918,126)		(9)	%
Operating expenses:
Research and development costs	2,032,360		20	%	1,809,354		16	%	223,006		12	%
Selling and marketing	4,267,010		41	%	3,027,372		27	%	1,239,638		41	%
General and administrative	2,129,921		21	%	2,297,451		21	%	(167,530)		(7)	%
Gain on litigation settlement	(632,600)		(6)	%	—		—	%	(632,600)		—	%
Restructuring costs	792,754		8	%	758,740		7	%	34,014		4	%
Total operating expenses	8,589,445		83	%	7,892,917		71	%	696,528		9	%
Operating income (loss)	249,064		2	%	1,863,718		17	%	(1,614,654)		(87)	%
Gain on debt extinguishment	754,000		7	%	—		—	%	754,000		—	%
Interest and other expense	(489,264)		(5)	%	(586,082)		(5)	%	96,818		17	%
Income (loss) before income taxes	513,800		5	%	1,277,636		11	%	(763,836)		(60)	%
Income tax expense (benefit)	63,804		1	%	44,709		—	%	19,095		43	%
Net income (loss)	$	449,996	4	%	$	1,232,927	11	%	$	(782,931)	(64)	%
Less: Accrual of Series A redeemable convertible preferred stock dividends	848,898		8	%	812,362		7	%	36,536		4	%
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	285,814		3	%	366,566		3	%	(80,752)		(22)	%
Net income (loss) attributable to common stockholders	$	(684,716)	(7)	%	$	53,999	—	%	$	(738,715)	(1,368)	%

Revenue

Our primary sales focus is on selling software solutions and platforms which includes stand-alone software applications, software integrated with industry standard hardware and sold as one complete integrated solution or sold on a subscription or consumption basis. As a result, our revenue is classified as either: (i) product revenue, or (ii) support and services revenue. During the nine months ended September 30, 2021, we recognized revenue of $10.4 million, compared with $11.1 million in the prior year period.

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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 in the United States are met.

For the nine months ended September 30, 2021 and 2020, product revenue represented 51% and 47% of our total revenue, respectively. Product revenue of $5.3 million for the nine months ended September 30, 2021 increased $0.1 million, or 2%, from $5.2 million in the prior year period.

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.

Maintenance and technical support services revenue for the nine months ended September 30, 2021 decreased to $4.8 million, compared to $5.7 million in the prior year period. The decrease is primarily due to a decline in maintenance renewals. 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 over the previous year reflects a decline in maintenance renewal revenue as a result of conversion to subscription contracts and customer attrition.

Professional services revenue for the nine months ended September 30, 2021 increased to $255,522, compared to $183,976 in the prior year period. Professional services revenue can vary from period to period based upon (i) the number of solutions sold during the existing and previous periods, (ii) the number of our customers who elect to purchase professional services, (iii) the number of professional services contracts that are performed during the period, and (iv) the number of customers who elect to purchase engineering services. 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.

Cost of Revenue, Gross Profit and Gross Margin

Total cost of revenue for the nine months ended September 30, 2021 increased 13% to $1.5 million, compared with $1.4 million in the prior year period. Total gross profit decreased $0.9 million, or 9%, to $8.8 million for the nine months ended September 30, 2021, compared with $9.8 million for the prior year period. Total gross margin decreased to 85% compared with 88% for the nine months ended September 30, 2021. The decrease in our total gross profit, in absolute dollars, was primarily due to decreased revenue. Generally, our total gross profits and total gross margins fluctuate based on several factors, including (i) revenue growth levels, (ii) changes in personnel headcount and related costs, and (iii) our product offerings and mix of sales.

Cost of Product Revenue, Gross Profit and Gross Margin

Cost of product revenue consists primarily of hardware and warranty expenses. Cost of product revenue for the nine months ended September 30, 2021 increased slightly to $298,966, compared with $250,185 in the prior year period. Product gross margin for the nine months ended September 30, 2021 declined slightly, year over year, to 94% from 95% for the same period in 2020. The slight increase in cost of product revenue and slight decrease in gross margin for the current year was primarily due to an increase in product revenue while costs increased at a slightly higher rate.

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

Cost of support and service consists primarily of personnel and other costs associated with providing software implementations, technical support under maintenance contracts and training. Cost of support and service revenue for the nine months ended September 30, 2021 increased 11% to $1.2 million, compared with $1.1 million in the prior year period. Support and service gross margin decreased to 76% for the nine months ended September 30, 2021, compared with 81% for the prior year period. The increase was primarily related to an increase in personnel related costs resulting from our reinstatement of workforce that was reduced as part of the 2020 Restructuring Plan implemented in response to the novel coronavirus pandemic.

Operating Expenses

Our operating expenses for the nine months ended September 30, 2021 increased $0.7 million to $8.6 million from $7.9 million, for the previous year period.

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 increased $0.2 million, or 12%, to $2.0 million for the nine months ended September 30, 2021, from $1.8 million in the prior year period. The increase was primarily related to an increase in personnel related costs resulting from our reinstatement of workforce that was reduced as part of the 2020 Restructuring Plan implemented in response to the novel coronavirus pandemic. For further information, refer to Note (17) Restructuring Costs to our unaudited condensed consolidated financial statements. We continue to provide substantial resources in support of our research and development activities to continue to enhance and to test our core products and in the development of new innovative products, features and options.

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 increased $1.2 million, or 41%, to $4.3 million for the nine months ended September 30, 2021 from $3.0 million in the prior year period. The increase in selling and marketing expenses is primarily due to an increase in commissions, bonuses and promotional campaign expenses and an increase in personnel related costs resulting from our reinstatement of workforce that was reduced as part of the 2020 Restructuring Plan implemented in response to the novel coronavirus pandemic. For further information, refer to Note (17) Restructuring Costs to our unaudited condensed consolidated financial statements.

Gain on Litigation Settlement

During the nine months ended September 30, 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 (15) Litigation, to our unaudited condensed 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 declined $0.2 million to $2.1 million for the nine months ended September 30, 2021, compared to $2.3 million for the prior year period. The decrease in general and administrative expenses was due primarily to an accrual reversal for Board fees that occurred in three months ended September 30, 2020 and reductions in professional fees.

Restructuring

    In June 2017, the Board approved the 2017 Plan, a comprehensive plan to increase operating performance. The 2017 Plan resulted in a realignment and reduction in workforce. The 2017 Plan was substantially completed by the end of our fiscal year ended December 31, 2017 and when combined with previous workforce reductions in the second quarter of Fiscal 2017 reduced our workforce to approximately 81 employees at December 31, 2017. As part of this consolidation effort, the Company vacated a portion of its former Melville, NY office space during the three months ended June 30, 2018. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the

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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. As the lease has terminated in April 2021, there are no further restructuring costs associated with this lease.

During the three months ended September 30, 2019, the Company adopted the 2019 Plan, a plan to better align the Company’s cost structure with the skills and resources required to more effectively execute the Company’s long-term growth strategy and to support revenue levels the Company expected to achieve on a go forward basis, implement tighter expense controls, cease non-core activities and downsize several facilities. During the nine months ended September 30, 2021, the Company incurred $0 in severance expense as a result of this action. The 2019 Plan was substantially completed as of March 31, 2020.

    Given the commercial uncertainty caused by the novel coronavirus pandemic, or COVID-19, the Company developed and implemented the 2020 Plan, an even more aggressive expense control plan in March 2020, that it kept in place for the remainder of 2020. The 2020 Plan reduced the Company's annual cash expense run rate by $4.0 million or 29%. The Company furloughed 21 positions worldwide, and 20 of these positions were reinstated by December 31, 2020. During the nine months ended September 30, 2021, the Company has not yet incurred severance expense as a result of this action.

Restructuring expense increased $34,014 for the nine months ended September 30, 2021 to $792,754, compared to a restructuring expense of $758,740 in the prior year period. For further information, refer to Note (17) Restructuring Costs to our unaudited condensed consolidated financial statements.

Gain on Debt Extinguishment

Gain on debt extinguishment increased $754,000, to a gain of $754,000 for the nine months ended September 30, 2021, compared to $0 in the prior year period. The Company's loan under the PPP was forgiven on March 30, 2021. For further information, refer to Note (9) Notes Payable to our unaudited condensed consolidated financial statements.

Interest and Other (Loss) Income, Net

Interest and other income (loss), net, decreased $96,818 to a loss of $489,264 for the nine months ended September 30, 2021, compared with a loss of $586,082 in the prior year period. The increase in interest and other income (loss) primarily relates to payments made on outstanding debt. The fluctuation in interest and other income (loss) 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 (10) Fair Value Measurements to our unaudited condensed consolidated financial statements.

Income Taxes

Our provision for income taxes consists of state and local, and foreign taxes. For the nine months ended September 30, 2021 and 2020, the Company recorded income tax expense of $63,804 and $44,709, respectively, consisting primarily of state and local, and foreign taxes. 

    As of September 30, 2021, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.

LIQUIDITY AND CAPITAL RESOURCES 

Principal Sources of Liquidity and Company Obligations

    Our principal sources of liquidity are our cash and cash equivalents balances generated from operating, investing and financing activities. Our cash and cash equivalents balance as of September 30, 2021 and December 31, 2020 totaled $3.5 million and $1.9 million, respectively.

As described in Note (14) Stockholders' Equity to our unaudited condensed consolidated financial statements, on June 23, 2021, the Company issued and sold an aggregate of 811,750 shares of its common stock in a public offering underwritten by Roth, which included 86,750 shares purchased by Roth pursuant to the partial exercise of its over-allotment option. At a price of $4.10 per share, the Company received net proceeds of approximately $2.7 million after deducting the underwriting discount and estimated offering expenses paid by the Company.

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Also, as described in Note (14) Stockholders' Equity to our unaudited condensed consolidated financial statements, on July 27, 2021 the Company issued and sold an aggregate of 285,000 shares of its common stock in a public offering underwritten by Roth. At a price of $4.10 per share, the Company received net proceeds of approximately $0.9 million after deducting the underwriting discount and estimated offering expenses paid by the Company.

We are currently a party to the Amended and Restated Loan Agreement. In connection with the then-proposed public offering of the Company as described in the Company's Registration Statement on Form S-1, as amended, originally filed on June 3, 2021, we entered into the Loan Extension Letter Agreement, which provided for an extension of the maturity date on Hale Capital’s portion of the outstanding indebtedness owed under the Amended and Restated Loan Agreement to June 30, 2023, which constituted $2.2 million of the $3.5 million principal amount outstanding as of June 2, 2021. The remaining $1.3 million of the principal amount outstanding, which was owed to other lenders, was repaid in full on June 30, 2021. See Note (9) Notes Payable to our unaudited condensed consolidated financial statements for more information. Also, as described further in Note (12) Series A Redeemable Convertible Preferred Stock to our unaudited condensed consolidated financial statements, Hale Capital, HCP-FVA, an affiliated party of Hale Capital, and other affiliates of Hale Capital extended the commencement of the optional redemption date of the Series A Preferred Stock from July 30, 2021 to July 30, 2023. The amendment was approved by our shareholders at our 2021 annual meeting of stockholders and filed with the Delaware Secretary of State on June 25, 2021. If such Series A Preferred Stock was redeemed at September 30, 2021, the Company would have been required to pay the holders of the Series A Preferred Stock $14.2 million.

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 of Hale 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.

The restrictions in the Amended and Restated Loan Agreement may prevent us from taking actions that we believe would be in the best interests of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. In addition, our ability to comply with the financial and other covenants and restrictions in the Amended and Restated Loan Agreement will largely depend on the pricing of our products and services, and our ability to successfully implement our overall business strategy. We cannot assure you that we will be granted waivers or amendments to the Amended and Restated Loan Agreement if for any reason we are unable to comply with these covenants and restrictions. The breach of any of these covenants and restrictions could result in a default under the Amended and Restated Loan Agreement, which could result in an acceleration of our indebtedness.

As described in Part I, Item 1, Note (9) Notes Payable and Stock Warrants to our unaudited condensed consolidated financial statements, to help ensure adequate liquidity during this period and in light of uncertainties posed by the COVID-19 pandemic, the Company entered into the PPP Loan with Peapack-Gladstone Bank on April 28, 2020 which had an aggregate principal amount of $754,000. The PPP Loan was forgiven on March 30, 2021.

As discussed in Note (17) Restructuring Costs to our unaudited condensed consolidated financial statements, the Melville, NY lease which ended on April 30, 2021 with a gross annualized rental cost of $1.5 million, will not be replaced. FalconStor is primarily a virtual company and expects to redeploy this savings to more productive uses.

Liquidity

As of September 30, 2021, we had a working capital surplus of $2.3 million, which is inclusive of current deferred revenue of $3.7 million, and a stockholders' deficit of $11.5 million. During the nine months ended September 30, 2021, the Company had a net income of $0.4 million and negative cash flow from operations of $0.7 million. The Company's total cash balance at September 30, 2021 was $3.5 million, an increase of $1.6 million compared to December 31, 2020. On April 28, 2020, the Company entered into the PPP Loan with Peapack-Gladstone Bank in an aggregate principal amount of $754,000, which was forgiven by the Small Business Administration on March 30, 2021. On June 30, 2021, the Company repaid in full $1.3 million of the $3.5 million principal amount that was outstanding as of June 2, 2021 under the Amended and Restated Loan Agreement.

In December 2019, the Company entered into an amendment to the Amended and Restated Credit Agreement which provided for a new $2,500,000 term loan facility to the Company with an interest rate of 15% (the “2019 Term Loan”). In addition, while any portion of the 2019 Term Loan is outstanding the Company must satisfy additional financial covenants under the Amended and Restated Credit Agreement. In December 2019, the Company drew down $1,000,000 of the 2019 Term

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Loan, all of which was repaid in September 2020. Accordingly, no amounts are currently outstanding under the 2019 Term Loan.

In the third quarter of 2019, the Company adopted the 2019 Plan, a plan to better align the Company’s cost structure with the skills and resources required to more effectively execute the Company’s long-term growth strategy and to support revenue levels the Company expected to achieve on a go forward basis. In connection with the 2019 Plan, the Company eliminated 23 positions worldwide, implemented tighter expense controls, ceased non-core activities and downsized several facilities. As of December 31, 2020, the 2019 Plan is considered to be completed.

Given the commercial uncertainty caused by the novel coronavirus pandemic, or COVID-19, the Company developed and implemented the 2020 Plan that it kept in place for the remainder of 2020. This plan reduced the Company's annual cash expense run rate by $4.0 million or 29%. The Company has furloughed 21 positions worldwide, and 20 of these positions were reinstated by December 31, 2020. The 2020 Plan was completed on December 31, 2020.

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 November 10, 2022.

Cash Flow Analysis

Cash flow information is as follows:

	Nine Months Ended September 30,
	2021		2020
Cash provided by (used in):
Operating activities	(707,889)		(303,299)
Investing activities	(108,928)		(63,005)
Financing activities	2,371,707		(246,000)
Effect of exchange rate changes	(762)		8,419
Net increase (decrease) in cash and cash equivalents	$	1,554,128	$	(603,885)

Net cash used in operating activities totaled $0.7 million for the nine months ended September 30, 2021, compared with $0.3 million of net cash used in operating activities in the prior year period. The changes in net cash used in operating activities for the nine months ended September 30, 2021, was primarily due to our net income (loss) and adjustments for net changes in operating assets and liabilities, primarily changes in our accounts receivable, deferred revenue, prepaid expenses, inventory, other assets, accounts payable, accrued expenses and other long-term liabilities contributed to the decrease.

Net cash used in investing activities totaled $0.1 million for the nine months ended September 30, 2021, compared with net cash used in investing activities of $0.1 million in the prior year period. Included in investing activities are purchases of property and equipment, intangible assets and cash received from security deposits.

Net cash provided by financing activities totaled $2.4 million for the nine months ended September 30, 2021, compared with net cash used in financing activities of $0.2 million in the prior year period. The change in net cash provided by financing activities in the nine months ended September 30, 2021 included net proceeds from public offerings of our common stock, less offering costs, and payments on our long-term debt. The net cash used in financing activities in the nine months ended September 30, 2020 was attributable to proceeds from the issuance of the PPP Loan and the payoff of the term loan.

Total cash and cash equivalents increased $1.6 million to $3.5 million at September 30, 2021 compared to December 31, 2020.

Contractual Obligations

As of September 30, 2021, 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.

41

    The following is a schedule summarizing our significant obligations to make future payments under contractual obligations as of September 30, 2021:

	Operating Leases		Note Payable (a)		Interest Payments (a)		Long-Term Income Tax Payable (b)		Series A Preferred Stock Mandatory Redemption (c)		Dividends on Series A Preferred Stock (d)
2021	30,063		—		35,107		—		—		—
2022	112,232		—		140,427		—		—		—
2023	—		2,176,621		70,214		—		—		—
Other	—		—		—		108,091		9,000,000		7,504,873
Total contractual obligations	$	142,295	$	2,176,621	$	245,748	$	108,091	$	9,000,000	$	7,504,873

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

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

(c) 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 can occur is July 30, 2023. For further information, see Note (12) Series A Redeemable Convertible Preferred Stock to our unaudited condensed 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 on July 30, 2023, which is the earliest date in which the holders of our Series A Preferred Stock can redeem their shares for cash. For further information, see Note (12) Series A Redeemable Convertible Preferred Stock to our unaudited condensed consolidated financial statements.

Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note (1) Summary of Significant Accounting Policies of our 2020 Form 10-K. We discuss our critical accounting estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K. There have been no significant changes in our significant accounting policies or critical accounting estimates since December 31, 2020.

Impact of Recently Issued Accounting Pronouncements

See Item 1 of Part 1, Condensed Consolidated Financial Statements – Note (1) Basis of Presentation.

Off-Balance Sheet Arrangements

As of September 30, 2021 and December 31, 2020, we had no off-balance sheet arrangements.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

42

Foreign Currency Risk.

We have several offices outside the United States. Accordingly, we are subject to exposure from adverse movements in foreign currency exchange rates. For the nine months ended September 30, 2021 and 2020, approximately 57% and 63%, respectively, of our sales were from outside North America. Not all of these transactions were made in foreign currencies. Our primary exposure is to fluctuations in exchange rates for the U.S. Dollar versus the Euro and Japanese Yen, and to a lesser extent the Canadian Dollar, the Korean Won and the British Pound. Changes in exchange rates in the functional currency for each geographic area’s revenues are primarily offset by the related expenses associated with such revenues. However, changes in exchange rates of a particular currency could impact the re-measurement of such balances on our balance sheets.

If foreign currency exchange rates were to change adversely by 10% from the levels at September 30, 2021, the effect on our results before taxes from foreign currency fluctuations on our balance sheet would be approximately $1.7 million. The above analysis disregards the possibility that rates for different foreign currencies can move in opposite directions and that losses from one currency may be offset by gains from another currency.

Item 4.     Controls and Procedures

Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures,” as such term is defined in Rules 13a-15e and 15d-15e of the Exchange Act, that are designed to ensure that information required to be disclosed in its reports, pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures. In designing and evaluating the disclosure controls and procedures, management has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

The Company’s Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer and principal accounting officer) have evaluated the effectiveness of its “disclosure controls and procedures” as of the end of the period covered this report.

Internal Control Over Financial Reporting

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company; as such term is defined in Rules 13a-15(f) under the Exchange Act, as amended. To evaluate the effectiveness of the Company’s internal control over financial reporting, the Company’s management uses the Integrated Framework (2013) adopted by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021, using the COSO framework (2013). The Company’s management has determined that the Company’s internal control over financial reporting is effective as of that date.

The Principal Executive Officer and the Principal Financial Officer believe that the consolidated financial statements and other information contained in this Quarterly Report on Form 10Q present fairly, in all material respects, our business, financial condition and results of operations.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by our Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

43

PART II.     OTHER INFORMATION

None.

Item 1A.  Risk Factors

We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition, or operating results are set forth in Item 1A to our 2020 Form 10-K.

Unknown Factors

Additional risks and uncertainties of which we are unaware or which currently we deem immaterial also may become important factors that affect us. 

44

Item 6.     Exhibits

31.1	Certification of the Chief Executive Officer
31.2	Certification of the Chief Financial Officer
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
101.1	The following financial statements from FalconStor Software, Inc’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021, formatted in XBRL (eXtensible Business Reporting Language):

(i)	unaudited Condensed Consolidated Balance Sheets – September 30, 2021 and December 31, 2020.
(ii)	unaudited Condensed Consolidated Statement of Operations – Three and Nine Months Ended September 30, 2021 and 2020.
(iii)	unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2021 and 2020.
(iv)	unaudited Condensed Consolidated Statements of Stockholder's Deficit - Three and Nine Months Ended September 30, 2021 and 2020.
(v)	unaudited Condensed Consolidated Statement of Cash Flows – Three and Nine Months Ended September 30, 2021 and 2020.
(vi)	Notes to unaudited Condensed Consolidated Financial Statements – September 30, 2021.

.

45

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FALCONSTOR SOFTWARE, INC.

(Registrant)

/s/ Brad Wolfe

Brad Wolfe

Executive Vice President, Chief Financial Officer and Treasurer

(principal financial and accounting officer)

	/s/ Todd Brooks
	Todd Brooks
	President & Chief Executive Officer
November 10, 2021	(principal executive officer)

46

EX-31.1

Exhibit 31.1

I, Todd Brooks, certify that:

1	I have reviewed this quarterly report on Form 10-Q of FalconStor Software, Inc.;
2	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 10, 2021	/s/ Todd Brooks
	Todd Brooks
	President and Chief Executive Officer
	(principal executive officer)

EX-31.2

Exhibit 31.2

I, Brad Wolfe, certify that:

1	I have reviewed this quarterly report on Form 10-Q of FalconStor Software, Inc.;
2	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 10, 2021	/s/ Brad Wolfe
	Brad Wolfe
	Executive Vice President, Chief Financial Officer and Treasurer
	(principal financial and accounting officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of FalconStor Software, Inc., a Delaware corporation (the Company), on Form 10-Q for the period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the Form 10-Q), I, Todd Brooks, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

(i)     the Form 10-Q fully complies, in all material respects, with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and

(ii)    the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Todd Brooks

Todd Brooks

President and Chief Executive Officer

(principal executive officer)

Date: November 10, 2021

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of FalconStor Software, Inc., a Delaware corporation (the Company), on Form 10-Q for the period ended September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the Form 10-Q), I, Brad Wolfe, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

(i)     the Form 10-Q fully complies, in all material respects, with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and

(ii)     the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Brad Wolfe

Brad Wolfe

Executive Vice President, Chief Financial Officer and Treasurer

(principal financial and accounting officer)

Date: November 10, 2021

XML

Cover - shares	3 Months Ended	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2021	Nov. 10, 2021
Cover [Abstract]
Document Type		10-Q
Document Quarterly Report		true
Document Transition Report		false
Document Period End Date		Sep. 30, 2021
Entity File Number		000-23970
Entity Registrant Name		FALCONSTOR SOFTWARE, INC.
Entity Incorporation, State or Country Code		DE
Entity Tax Identification Number		77-0216135
Entity Address, Address Line One		701 Brazos Street
Entity Address, Address Line Two		Suite 400
Entity Address, City or Town		Austin
Entity Address, State or Province		TX
Entity Address, Postal Zip Code		78701
City Area Code		631
Local Phone Number		777-5188
Entity Current Reporting Status	Yes
Entity Interactive Data Current		Yes
Entity Filer Category		Non-accelerated Filer
Entity Small Business		true
Entity Emerging Growth Company		false
Entity Shell Company		false
Entity Common Stock, Shares Outstanding			7,082,276
Entity Central Index Key		0000922521
Amendment Flag		false
Current Fiscal Year End Date		--12-31
Document Fiscal Period Focus		Q3
Document Fiscal Year Focus		2021

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Current assets:
Cash and cash equivalents	$ 3,474,784	$ 1,920,656
Accounts receivable, net of allowances	2,285,117	2,836,571
Prepaid expenses and other current assets	1,537,267	1,837,596
Contract assets	169,835	254,483
Inventory	15,421	15,275
Total current assets	7,482,424	6,864,581
Property and equipment, net	193,028	197,020
Right of use assets	140,238	536,272
Deferred tax assets	310,755	330,552
Software development costs, net	14,345	19,278
Other assets	114,828	863,964
Goodwill	4,150,339	4,150,339
Other intangible assets, net	64,295	100,134
Long-term contract assets	192,286	343,934
Total assets	12,662,538	13,406,074
Current liabilities:
Accounts payable	335,092	453,791
Accrued expenses	1,018,878	2,293,765
Lease liability obligations, current	87,381	665,074
Short-term loan, net of debt issuance costs and discounts	0	3,320,863
Deferred revenue	3,709,005	4,603,270
Total current liabilities	5,150,356	11,336,763
Other long-term liabilities	637,099	703,889
Notes payable, net of debt issuance costs and discounts	2,150,574	754,000
Lease liability obligations, less current portion	53,430	0
Deferred tax liabilities	525,512	513,027
Deferred revenue, net of current portion	1,569,813	1,765,859
Total liabilities	10,086,784	15,073,538
Commitments and contingencies (Note 11)
Series A redeemable convertible preferred stock, $0.001 par value, 2,000,000 shares authorized, 900,000 shares issued and outstanding, redemption value of $14,195,475 and $13,346,577, respectively	14,075,434	12,940,722
Stockholders' deficit:
Common stock - $0.001 par value, 30,000,000 shares authorized, 7,074,364 shares and 5,949,463 shares issued and outstanding, respectively	7,074	5,949
Additional paid-in capital	112,671,753	110,107,170
Accumulated deficit	(122,283,348)	(122,733,344)
Accumulated other comprehensive loss	(1,895,159)	(1,987,961)
Total stockholders' deficit	(11,499,680)	(14,608,186)
Total liabilities and stockholders' deficit	$ 12,662,538	$ 13,406,074

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Statement of Financial Position [Abstract]
Series A Redeemable convertible preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Series A Redeemable convertible preferred stock, shares authorized (in shares)	2,000,000	2,000,000
Series A Redeemable convertible preferred stock, shares issued (in shares)	900,000	900,000
Series A Redeemable convertible preferred stock, shares outstanding (in shares)	900,000	900,000
Series A redeemable convertible preferred stock, redemption value	$ 14,195,475	$ 13,346,577
Shares issued in connection with vesting of restricted stock	7,074,364	5,949,463
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	30,000,000	30,000,000
Common stock, shares issued (in shares)	7,074,364	5,949,463

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Revenue:
Total revenue	$ 3,283,469	$ 4,436,400	$ 10,370,542	$ 11,116,199
Cost of revenue:
Total cost of revenue	442,285	415,958	1,532,033	1,359,564
Gross profit	2,841,184	4,020,442	8,838,509	9,756,635
Operating expenses:
Research and development costs	711,273	600,430	2,032,360	1,809,354
Selling and marketing	1,610,635	1,026,241	4,267,010	3,027,372
General and administrative	633,954	358,701	2,129,921	2,297,451
Gain (Loss) Related to Litigation Settlement	(632,600)	0	(632,600)	0
Restructuring costs	68,704	317,595	792,754	758,740
Total operating expenses	2,391,966	2,302,967	8,589,445	7,892,917
Operating income (loss)	449,218	1,717,475	249,064	1,863,718
Gain on debt extinguishment	0	0	754,000	0
Interest and other expense	(58,257)	(159,994)	(489,264)	(586,082)
Income (loss) before income taxes	390,961	1,557,481	513,800	1,277,636
Income tax expense (benefit)	16,529	11,272	63,804	44,709
Net income (loss)	374,432	1,546,209	449,996	1,232,927
Less: Accrual of Series A redeemable convertible preferred stock dividends	288,802	266,007	848,898	812,362
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	13,517	175,335	285,814	366,566
Net income (loss) attributable to common stockholders	$ 72,113	$ 1,104,867	$ (684,716)	$ 53,999
Basic net income (loss) per share attributable to common stockholders	$ 0.01	$ 0.19	$ (0.11)	$ 0.01
Diluted net income (loss) per share attributable to common stockholders	$ 0.01	$ 0.19	$ (0.11)	$ 0.01
Weighted average basic shares outstanding	6,990,723	5,919,837	6,324,370	5,919,773
Weighted average diluted shares outstanding	7,039,421	5,959,385	6,324,370	5,943,794
Product revenue
Revenue:
Total revenue	$ 1,547,013	$ 2,521,695	$ 5,288,747	$ 5,202,713
Cost of revenue:
Total cost of revenue	41,351	48,895	298,966	250,185
Support and services revenue
Revenue:
Total revenue	1,736,456	1,914,705	5,081,795	5,913,486
Cost of revenue:
Total cost of revenue	$ 400,934	$ 367,063	$ 1,233,067	$ 1,109,379

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Statement of Comprehensive Income [Abstract]
Net income (loss)	$ 374,432	$ 1,546,209	$ 449,996	$ 1,232,927
Other comprehensive income (loss), net of applicable taxes
Foreign currency translation	11,144	(24,234)	92,802	(45,474)
Total other comprehensive income (loss), net of applicable taxes:	11,144	(24,234)	92,802	(45,474)
Total comprehensive income	385,576	1,521,975	542,798	1,187,453
Less: Accrual of Series A redeemable convertible preferred stock dividends	288,802	266,007	848,898	812,362
Less: Accretion to redemption value of Series A redeemable convertible preferred stock	13,517	175,335	285,814	366,566
Total comprehensive income (loss) attributable to common stockholders	$ 83,257	$ 1,080,633	$ (591,914)	$ 8,525

XML

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (Unaudited) Statement - USD ($)	Total	Common Stock	Additional Paid-in Capital [Member]	Accumulated Deficit [Member]	AOCI Attributable to Parent [Member]
Beginning balance (shares) at Dec. 31, 2019		5,918,733
Beginning balance at Dec. 31, 2019	$ (14,031,306)	$ 5,919	$ 111,727,888	$ (123,871,853)	$ (1,893,260)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	(719,840)			(719,840)
Share-based compensation to employees	4,510		4,510
Shares issued in connection with vesting of restricted stock (shares)		1,104
Shares issued in connection with vesting of restricted stock	0	$ 1	(1)
Accretion of Series A redeemable convertible preferred stock	(26,090)		(26,090)
Dividends on Series A redeemable convertible preferred stock	(285,760)		(285,760)
Foreign currency translation	(13,153)				(13,153)
Ending balance (shares) at Mar. 31, 2020		5,919,837
Ending balance at Mar. 31, 2020	(15,071,639)	$ 5,920	111,420,547	(124,591,693)	(1,906,413)
Beginning balance (shares) at Dec. 31, 2019		5,918,733
Beginning balance at Dec. 31, 2019	(14,031,306)	$ 5,919	111,727,888	(123,871,853)	(1,893,260)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	1,232,927
Accretion of Series A redeemable convertible preferred stock	(366,566)
Dividends on Series A redeemable convertible preferred stock	(812,362)
Foreign currency translation	(45,474)
Ending balance (shares) at Sep. 30, 2020		5,919,837
Ending balance at Sep. 30, 2020	(14,011,389)	$ 5,920	110,560,351	(122,638,926)	(1,938,734)
Beginning balance (shares) at Mar. 31, 2020		5,919,837
Beginning balance at Mar. 31, 2020	(15,071,639)	$ 5,920	111,420,547	(124,591,693)	(1,906,413)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	406,558			406,558
Share-based compensation to employees	3,060		3,060
Accretion of Series A redeemable convertible preferred stock	(165,141)		(165,141)
Dividends on Series A redeemable convertible preferred stock	(260,595)		(260,595)
Foreign currency translation	(8,087)				(8,087)
Ending balance (shares) at Jun. 30, 2020		5,919,837
Ending balance at Jun. 30, 2020	(15,095,844)	$ 5,920	110,997,871	(124,185,135)	(1,914,500)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	1,546,209			1,546,209
Share-based compensation to employees	3,822		3,822
Accretion of Series A redeemable convertible preferred stock	(175,335)		(175,335)
Dividends on Series A redeemable convertible preferred stock	(266,007)		(266,007)
Foreign currency translation	(24,234)				(24,234)
Ending balance (shares) at Sep. 30, 2020		5,919,837
Ending balance at Sep. 30, 2020	(14,011,389)	$ 5,920	110,560,351	(122,638,926)	(1,938,734)
Beginning balance (shares) at Dec. 31, 2020		5,949,463
Beginning balance at Dec. 31, 2020	(14,608,186)	$ 5,949	110,107,170	(122,733,344)	(1,987,961)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	425,248			425,248
Share-based compensation to employees	4,471		4,471
Accretion of Series A redeemable convertible preferred stock	(197,114)		(197,114)
Dividends on Series A redeemable convertible preferred stock	(277,170)		(277,170)
Foreign currency translation	86,398				86,398
Ending balance (shares) at Mar. 31, 2021		5,949,463
Ending balance at Mar. 31, 2021	(14,566,353)	$ 5,949	109,637,357	(122,308,096)	(1,901,563)
Beginning balance (shares) at Dec. 31, 2020		5,949,463
Beginning balance at Dec. 31, 2020	(14,608,186)	$ 5,949	110,107,170	(122,733,344)	(1,987,961)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	449,996
Accretion of Series A redeemable convertible preferred stock	(285,814)
Dividends on Series A redeemable convertible preferred stock	(848,898)
Foreign currency translation	92,802
Ending balance (shares) at Sep. 30, 2021		7,074,364
Ending balance at Sep. 30, 2021	(11,499,680)	$ 7,074	112,671,753	(122,283,348)	(1,895,159)
Beginning balance (shares) at Mar. 31, 2021		5,949,463
Beginning balance at Mar. 31, 2021	(14,566,353)	$ 5,949	109,637,357	(122,308,096)	(1,901,563)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	(349,684)			(349,684)
Stock Issued During Period, Shares, New Issues		811,750
Stock Issued During Period, Value, New Issues	2,737,770	$ 812	2,736,958
Share-based compensation to employees	4,697		4,697
Shares issued in connection with vesting of restricted stock (shares)		28,151
Shares issued in connection with vesting of restricted stock	0		(28)
Accretion of Series A redeemable convertible preferred stock	(75,183)		(75,183)
Dividends on Series A redeemable convertible preferred stock	(282,926)		(282,926)
Foreign currency translation	(4,740)				(4,740)
Ending balance (shares) at Jun. 30, 2021		6,789,364
Ending balance at Jun. 30, 2021	(12,536,419)	$ 6,789	112,020,875	(122,657,780)	(1,906,303)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net loss	374,432			374,432
Stock Issued During Period, Shares, New Issues		285,000
Stock Issued During Period, Value, New Issues	948,566	$ 285	948,281
Share-based compensation to employees	4,916		4,916
Shares issued in connection with vesting of restricted stock		$ 28
Accretion of Series A redeemable convertible preferred stock	(13,517)		(13,517)
Dividends on Series A redeemable convertible preferred stock	(288,802)		(288,802)
Foreign currency translation	11,144				11,144
Ending balance (shares) at Sep. 30, 2021		7,074,364
Ending balance at Sep. 30, 2021	$ (11,499,680)	$ 7,074	$ 112,671,753	$ (122,283,348)	$ (1,895,159)

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020
Cash flows from operating activities:
Net income (loss)	$ 449,996	$ 1,232,927
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	151,468	162,127
Amortization of debt discount on notes payable	163,769	361,193
Amortization of right of use assets	396,034	987,542
Gain on debt extinguishment	(754,000)	0
Gain (Loss) Related to Litigation Settlement	(632,600)	0
Share-based payment compensation	14,084	11,392
Provision for (recovery of) returns and doubtful accounts	0	70,932
Deferred income taxes (benefit)	12,485	(5,485)
Changes in operating assets and liabilities:
Accounts receivable	541,249	(138,271)
Prepaid expenses and other current assets	271,443	249,383
Contract assets	236,296	432,204
Inventory	0	15,713
Other assets	748,457	(379)
Accounts payable	(53,814)	(571,231)
Accrued expenses and other long-term liabilities	(669,852)	(589,952)
Operating lease liabilities	(524,263)	(1,204,155)
Deferred revenue	(1,058,641)	(1,317,239)
Net cash provided by (used in) operating activities	(707,889)	(303,299)
Cash flows from investing activities:
Purchases of property and equipment	(98,702)	0
Purchase of intangible assets	(10,226)	(63,005)
Net cash provided by (used in) investing activities	(108,928)	(63,005)
Cash flows from financing activities:
Proceeds from public offering, net of underwriting discounts paid	4,181,908	0
Payments of offering costs	(476,143)	0
Proceeds from issuance of PPP loan	0	754,000
Payments of short-term debt	(1,334,058)	(1,000,000)
Net cash provided by (used in) financing activities	2,371,707	(246,000)
Effect of exchange rate changes on cash and cash equivalents	(762)	8,419
Net increase (decrease) in cash and cash equivalents	1,554,128	(603,885)
Cash and cash equivalents, beginning of period	1,920,656	1,475,166
Cash and cash equivalents, end of period	3,474,784	871,281
Supplemental disclosures:
Cash paid for interest	110,408	261,095
Non-cash investing and financing activities:
Accrual of deferred offering costs	19,429	0
Undistributed Series A redeemable convertible preferred stock dividends	848,898	812,362
Accretion of Series A redeemable convertible preferred stock	$ 285,814	$ 366,566

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Basis of Presentation

9 Months Ended

Sep. 30, 2021

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

Basis of Presentation

(a)  The Company and Nature of Operations

FalconStor Software, Inc., a Delaware corporation ("we", the "Company" or "FalconStor"), is the 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. More than 1,000 organizations and managed service providers worldwide standardize on FalconStor as the foundation for their cloud first data protection future.

(b) Liquidity

As of September 30, 2021, the Company had a working capital surplus of $2.3 million, which is inclusive of current deferred revenue of $3.7 million, and a stockholders' deficit of $11.5 million. During the nine months ended September 30, 2021, the Company had net income of $0.4 million and negative cash flow from operations of $0.7 million. The Company's total cash balance at September 30, 2021 was $3.5 million, an increase of $1.6 million compared to $1.9 million on December 31, 2020.

The Company’s principal sources of liquidity at September 30, 2021 consisted of cash and future cash anticipated to be generated from operations. The Company generated negative net income yet positive cash flows from operations during the nine months ended September 30, 2021, and it reported positive working capital as of September 30, 2021.

As described in Note (14) Stockholders' Equity, on June 23, 2021, the Company issued and sold an aggregate of 811,750 shares of its common stock in a public offering underwritten by Roth Capital Partners, LLC, ("Roth") which included 86,750 shares purchased by Roth pursuant to the partial exercise of its over-allotment option (the "June Offering"). At a price of $4.10 per share, the Company received net proceeds of approximately $2.7 million after deducting the underwriting discount and estimated offering expenses paid by the Company.

Also, on July 27, 2021 the Company issued and sold an aggregate of 285,000 shares of its common stock in a public offering underwritten by Roth. At a price of $4.10 per share, the Company received net proceeds of approximately $0.9 million after deducting the underwriting discount and estimated offering expenses paid by the Company.

The Company is currently a party to an Amended and Restated Term Loan Credit Agreement, dated as of February 23, 2018, as amended December 27, 2019, by and between the Company and HCP-FVA, LLC (“HCP-FVA”), (the “Amended and Restated Loan Agreement”). In connection with the then-proposed public offering of the Company as described in the Company's Registration Statement on Form S-1, as amended, originally filed on June 3, 2021 (the "Offering"), we entered into a letter agreement with Hale Capital Partners, LP (“Hale Capital”), dated June 2, 2021 (the “Loan Extension Letter Agreement”), that provided for an extension of the maturity date on Hale Capital’s portion of the outstanding indebtedness owed under the Amended and Restated Loan Agreement to June 30, 2023, which constituted approximately $2.2 million of the $3.5 million principal amount outstanding as of June 2, 2021. The remaining $1.3 million of the principal amount outstanding, which was owed to other lenders, was repaid in full on June 30, 2021. See Note (9) Notes Payable for more information. Also, as described further in Note (12) Series A Redeemable Convertible Preferred Stock, the effective date of the mandatory redemption right of the Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) held by HCP-FVA and Hale Capital was extended from July 30, 2021 to July 30, 2023 pursuant to an amendment to the Certificate of Designations, dated as of June 24, 2021. The amendment was approved by our shareholders at our 2021 annual meeting of stockholders and filed with the Delaware Secretary of State on June 25, 2021. If such Series A Preferred Stock was redeemed at September 30, 2021, the Company would have been required to pay the holders of the Series A Preferred Stock $14.2 million.

As discussed in Note (17) Restructuring Costs the Melville, NY office lease which ended on April 30, 2021 with a gross annualized rental cost of $1.5 million, will not be replaced. FalconStor is primarily a virtual company and is redeploying this savings to more productive uses.

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

(c) Impact of the COVID-19 Pandemic

We are continuing to monitor the impact of COVID-19, on all aspects of our business. The outbreak of COVID-19 has caused and may continue to cause travel bans or disruptions, and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. The impact of COVID-19 is fluid and uncertain, but it has caused and may continue to cause various negative effects, including an inability to meet with actual or potential customers, our end customers deciding to delay or abandon their planned purchases or failing to make payments, and delays or disruptions in our or our partners’ supply chains. As a result, we may experience extended sales cycles, our ability to close transactions with new and existing customers and partners may be negatively impacted, our ability to recognize revenue from software transactions we do close may be negatively impacted, our demand generation activities, and the efficiency and effect of those activities, may be negatively affected, and it has been and, until the COVID-19 outbreak is contained, will continue to be more difficult for us to forecast our operating results. These uncertainties have, and may continue to, put pressure on global economic conditions and overall IT spending and may cause our end customers to modify spending priorities or delay or abandon purchasing decisions, thereby lengthening sales cycles and potentially lowering prices for our solutions, and may make it difficult for us to forecast our sales and operating results and to make decisions about future investments, any of which could materially harm our business, operating results and financial condition.

Further, our management team is focused on addressing the impacts of COVID-19 on our business, which has required and will continue to require, a large investment of their time and resources and may distract our management team or disrupt our 2021 operating plans. The extent to which COVID-19 ultimately impacts our results of operations, cash flow and financial position will depend on future developments, which are uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions taken by governments and authorities to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including as a result of any recession that may occur.

(d)  Principles of Consolidation

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

(e)  Use of Estimates

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

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

(f)  Unaudited Interim Financial Information

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

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position of the Company at September 30, 2021, and the results of its operations for the three and nine months ended September 30, 2021 and 2020. 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, 2020 ("2020 Form 10-K").

(g)  Recently Issued Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The objective of the guidance is to improve the effectiveness of disclosure requirements on defined benefit pension plans and other postretirement plans. The guidance is effective for fiscal years beginning after December 15, 2020. Adoption of this new standard did not have a significant impact to our disclosures.

In December 2019, the FASB released ASU 2019-12, which affects general principles within Topic 740, Income Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Adoption of this new standard did not have a material impact on the Company.

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

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2021

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

The Company's significant accounting policies were described in Note (1) Summary of Significant Accounting Policies of the 2020 Form 10-K. There have been no significant changes in the Company's significant accounting policies since December 31, 2020. For a description of the Company's significant accounting policies refer to the 2020 Form 10-K.

Revenue from Contracts with Customers and Associated Balances

Nature of Products and Services

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

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

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

Contract Balances

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

    As of September 30, 2021 and December 31, 2020, accounts receivable, net of allowance for doubtful accounts, was $2.3 million and $2.8 million, respectively. As of September 30, 2021 and December 31, 2020, short and long-term contract assets, net of allowance for doubtful accounts, was $0.4 million and $0.6 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, 2021
Balance at January 1, 2020	$	6,369,129
Deferral of revenue	9,281,741
Recognition of revenue	(10,370,542)
Change in reserves	(1,510)
Balance at September 30, 2021	$	5,278,818

    During the three months ended September 30, 2021 and 2020, revenue of $1.0 million and $1.2 million, respectively, and the nine months ended September 30, 2021 and 2020, revenue of $3.9 million and $4.4 million respectively, was recognized from the deferred revenue balance at the beginning of each period.

Deferred revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized as revenue in future periods. Deferred revenue was $5.3 million as of September 30, 2021, of which the Company expects to recognize approximately 70% of such amount as revenue over the next 12 months and the remainder thereafter.

    Approximately $1.8 million of revenue is expected to be recognized from remaining performance obligations for unbilled support and services as of September 30, 2021. We expect to recognize revenue on approximately 42% of these remaining performance obligations over the next twelve months, with the balance recognized thereafter.

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

Significant Judgments

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

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

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

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

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

Disaggregation of Revenue

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

Assets Recognized from Costs to Obtain a Contract with a Customer

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

Leases

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

Right of Use Assets and Liabilities

    We have various operating leases for office facilities that expire through 2021. Below is a summary of our ROU assets and liabilities as of September 30, 2021.

Right of use assets	$	140,238
Lease liability obligations, current	87,381
Lease liability obligations, less current portion	53,430
Total lease liability obligations	$	140,811
Weighted-average remaining lease term	1.87
Weighted-average discount rate	3.57		%

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Components of lease expense:
Operating lease cost	$	88,593	$	442,501	$	712,911	$	1,386,998
Sublease income	—		(75,314)		(100,419)		(430,313)
Net lease cost	$	88,593	$	367,187	$	612,492	$	956,685

    During the three months ended September 30, 2021 and 2020, operating cash flows from operating leases were approximately $57,541 and $357,245, respectively. During the nine months ended September 30, 2021 and 2020, operating cash flows from operating leases were approximately $574,757 and $1,117,557, respectively.

Approximate future minimum lease payments for our ROU assets over the remaining lease periods as of September 30, 2021, are as follows:

2021	30,063
2022	112,232
Total minimum lease payments	142,295
Less interest	1,484
Present value of lease liabilities	140,811

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Earnings Per Share

9 Months Ended

Sep. 30, 2021

Earnings Per Share [Abstract]

Earnings Per Share

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, 2021 and 2020:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Stock options	9,640	9,945	9,640	9,945
Restricted stock	—	31,648	63,207	31,648
Series A redeemable convertible preferred stock	87,815	87,815	87,815	87,815
Total anti-dilutive common stock equivalents	97,455	129,408	160,662	129,408

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Property and Equipment

9 Months Ended

Sep. 30, 2021

Property, Plant and Equipment [Abstract]

Property and Equipment

Property and Equipment

The gross carrying amount and accumulated depreciation of property and equipment as of September 30, 2021 and December 31, 2020 are as follows:

	September 30, 2021		December 31, 2020
Gross carrying amount	$	18,876,633	$	18,791,841
Accumulated depreciation	(18,683,605)		(18,594,821)
Property and Equipment, net	$	193,028	$	197,020

For the three months ended September 30, 2021 and 2020, depreciation expense was $29,838 and $44,958, respectively. For the nine months ended September 30, 2021 and 2020, depreciation expense was $100,470 and $135,679, respectively.

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Software Development Costs

9 Months Ended

Sep. 30, 2021

Research and Development [Abstract]

Software Development Costs

Software Development Costs

The gross carrying amount and accumulated amortization of software development costs as of September 30, 2021 and December 31, 2020 are as follows:

	September 30, 2021		December 31, 2020
Gross carrying amount	$	2,950,132	$	2,950,132
Accumulated amortization	(2,935,787)		(2,930,854)
Software development costs, net	$	14,345	$	19,278

During the three months ended September 30, 2021 and 2020, the Company recorded $1,649 and $1,649, respectively, of amortization expense related to capitalized software costs. During the nine months ended September 30, 2021 and 2020, the Company recorded $4,933 and $6,084, respectively, of amortization expense related to capitalized software costs.

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Goodwill and Other Intangible Assets

9 Months Ended

Sep. 30, 2021

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

The gross carrying amount and accumulated amortization of goodwill and other intangible assets as of September 30, 2021 and December 31, 2020 are as follows: 

	September 30, 2021		December 31, 2020
Goodwill	$	4,150,339	$	4,150,339
Other intangible assets:
Gross carrying amount	$	4,038,138	$	4,027,912
Accumulated amortization	(3,973,843)		(3,927,778)
Net carrying amount	$	64,295	$	100,134

    For the three months ended September 30, 2021 and 2020, amortization expense was $13,999 and $18,455, respectively. For the nine months ended September 30, 2021 and 2020, amortization expense was $46,065 and $20,364, respectively.

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Share-Based Payment Arrangements

9 Months Ended

Sep. 30, 2021

Share-based Payment Arrangement [Abstract]

Share-Based Payment Arrangements

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 provided for the issuance of up to 1,471,997 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. In June 2021, the Company's stockholders approved an amendment to increase the number of shares of our common stock authorized and reserved for issuance under the 2018 Plan by 220,800 shares to a total of 1,692,797 shares. Exercise prices of the options will be determined by the Compensation Committee of the Company's Board of Directors (the "Board"), subject to the consent of Hale Capital. The vesting terms shall be performance based and determined by the Compensation Committee, subject to the consent of Hale Capital, based on various factors, including (i) the return of capital to the holders of the Series A Preferred Stock and the Company’s Common Stock in the event of a change of control, (ii) the repayment of the Company’s obligations under its senior secured debt, and (iii) the Company’s free cash flow.

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, 2021: 

	Shares	Shares Available	Shares
Name of Plan	Authorized	for Grant	Outstanding
FalconStor Software, Inc. 2018 Incentive Stock Plan	1,692,797	132,817	1,463,380

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, 2021: 

Name of Plan	Shares Available for Grant	Shares Outstanding
FalconStor Software, Inc., 2016 Incentive Stock Plan	—	3,850
FalconStor Software, Inc., 2006 Incentive Stock Plan	—	5,790

A summary of the Company’s restricted stock activity for the nine months ended September 30, 2021 is below. Such restricted stock did not bestow any voting or dispositive power and is not deemed outstanding until they vest.

	Number of Restricted Stock Awards
Non-Vested at January 1, 2021	1,386,213
Granted	113,230
Vested	(36,063)
Forfeited	—
Non-Vested at September 30, 2021	1,463,380

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, 2021 and 2020:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenue - Product	$	232	$	—	$	688	$	—
Cost of revenue - support and service	185		104		549		310
Research and development costs	167		433		167		1,289
Selling and marketing	2,915		186		8,475		554
General and administrative	1,417		3,099		4,205		9,239
	$	4,916	$	3,822	$	14,084	$	11,392

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Income Taxes

9 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

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, 2021, the Company recorded an income tax provision of $63,804. The effective tax rate for the nine months ended September 30, 2021 was 12.4%. The effective tax rate differs from the statutory rate of 21% due to the mix of foreign and domestic earnings, foreign withholding taxes and the application of valuation allowances. As of September 30, 2021, 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 benefit as such amounts are fully offset with a valuation allowance.

For the nine months ended September 30, 2020, the Company recorded an income tax provision of $44,709. The effective tax rate for the nine months ended September 30, 2020 was 3.5%. The effective tax rate differs from the statutory rate of 21% due to the mix of foreign and domestic earnings and the application of valuation allowances. As of September 30, 2020, 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 benefit as such amounts are fully offset with a valuation allowance.

The Company’s total unrecognized tax benefits, excluding interest, at both September 30, 2021 and September 30, 2020 were $70,260 and $76,275, respectively. As of September 30, 2021 and September 30, 2020, the Company had $36,575 and $33,865, respectively, of accrued interest reflected in accrued expenses.

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Notes Payable

9 Months Ended

Sep. 30, 2021

Payables and Accruals [Abstract]

Notes Payable

Notes Payable

    The notes payable balance consists of the following:

Total notes payable, net at January 1, 2021	$	4,074,863
Accretion of discount	75,705
PPP loan forgiveness	(754,000)
Total notes payable, net at March 31, 2021	$	3,396,568
Repayment of short-term debt	(1,334,058)
Accretion of discount	84,086
Total notes payable, net at June 30, 2021	$	2,146,596
Accretion of discount	$	3,978
Total notes payable, net at September 30, 2021	$	2,150,574

Senior Secured Debt

    The senior secured debt bears interest at prime plus 0.75% and had an original maturity date of June 30, 2021.

In connection with the June Offering, we entered into the Loan Extension Letter Agreement on June 2, 2021 which provided for an extension of the maturity date on Hale Capital’s portion of the outstanding indebtedness owed under the Amended and Restated Loan Agreement to June 30, 2023. The amount extended constituted approximately $2.2 million of the $3.5 million principal amount outstanding as of June 2, 2021. The remaining $1.3 million of the outstanding principal, which was owed to other lenders, was repaid in full on June 30, 2021.

The Company concluded that the modification created by this amendment resulted in a troubled debt restructuring under Accounting Standard Codification—Debt (Topic 470) as it was determined that a concession was granted by HCP-FVA. However, as the future payments to be made subsequent to the modification are greater than the carrying value at the time of the modification, no gain or loss was required to be recognized on the troubled debt restructuring. The change is accounted for prospectively using the new effective interest rate of the loan.

As of September 30, 2021, the Company was in compliance with the financial covenants contained in the Amended and Restated Loan Agreement.

Loan under the Paycheck Protection Program

On April 28, 2020, the Company entered into a loan with Peapack-Gladstone Bank in an aggregate principal amount of $754,000 (the "PPP Loan") pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").

The PPP Loan was evidenced by a promissory note, dated April 28, 2020 and matured two years from the disbursement date and bore interest at a rate of 1.000% per annum, with the first six months of interest deferred. The PPP Loan was subject to forgiveness to the extent proceeds were used for payroll costs, including payments required to continue group health care benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP. The Company used a significant majority of the PPP Loan amount for Qualifying Expenses and the PPP Loan was forgiven on March 30, 2021.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2021

Fair Value Disclosures [Abstract]

Fair Value Measurements

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, 2021, the Company did not have any Level 1 category assets included 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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, 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, 2021 or December 31, 2020.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2021:

			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	464,972		—		—		464,972
Total derivative liabilities	464,972		—		—		464,972
Total assets and liabilities measured at fair value	$	464,972	$	—	$	—	$	464,972

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2020: 

			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	472,851		—		—		472,851
Total derivative liabilities	472,851		—		—		472,851
Total assets and liabilities measured at fair value	$	472,851	$	—	$	—	$	472,851

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 derivatives are included in other long-term liabilities on our consolidated balance sheets.

    The fair value of the Company's Series A Preferred Stock is based on its future cash flows discounted at a 9% yield. The fair value of the Company's note payable is based on its future cash flows discounted at a 7% yield.

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, 2021 and September 30, 2020:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Beginning Balance	$	467,598	$	478,312	$	472,851	$	483,804
Total income recognized in earnings	(2,626)		(2,751)		(7,879)		(8,243)
Ending Balance	$	464,972	$	475,561	$	464,972	$	475,561

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2021

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

    The Company’s headquarters are located in Austin, Texas.  The Company had an operating lease covering its Melville, New York office facility that expired in April 2021. The Company also has several additional operating leases related to offices in foreign countries. The expiration dates for these leases occur in 2021. The following is a schedule of future minimum lease payments as well as sublease income for all operating leases as of September 30, 2021:

	Payments
2021	$	30,063
2022	112,232
	$	142,295

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, 2021, 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) Series A Redeemable Convertible Preferred Stock the holders of the Series A Preferred Stock have redemption rights upon certain triggering events. As of September 30, 2021, the Company did not fail any non-financial covenants related to the Company's Series A Preferred Stock.

    In connection with the appointment of Todd Brooks 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 Agreement 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. Mr. Brooks' employment can be terminated at will. Pursuant to the Brooks Agreement and the 2018 Plan, Mr. Brooks received 735,973 shares of restricted stock. If Mr. Brooks’ employment is terminated by the Company other than for cause, he is entitled to receive severance equal to 12 months of his base salary if (i) he has been employed by the Company for at least 12 months at the time of termination or (ii) a change of control has occurred within 6 months of Mr. Brooks’ employment. Except as set forth in the preceding sentence, Mr. Brooks is entitled to receive severance equal to 6 months of his base salary if he has been employed by the Company for less than 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.

    In connection with the appointment of Brad Wolfe as the Company's 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 that exceeds the prior quarter 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) Restructuring Costs, the Company has incurred certain restructuring costs in connection with restructuring plans adopted in 2017 and 2019.

In addition, as of September 30, 2021, the Company's liability for uncertain tax positions totaled $108,091. At this time, the settlement period for this liability, including related accrued interest, cannot be determined.

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Series A Redeemable Convertible Preferred Stock

9 Months Ended

Sep. 30, 2021

Equity [Abstract]

Series A Redeemable Convertible Preferred Stock

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 of $102.488 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 under the Amended 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 9.99% of the Company’s currently outstanding shares of common stock.

The Series A Preferred Stock dividends shall accrue whether or not the declaration or payment of such Series A Preferred Stock 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, 2023, subject to the approval of HCP-FVA, 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 (as defined in the Certificate of Designations) 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 Restated Certificate of Incorporation as amended or Amended and Restated 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 holders of our outstanding Series A Preferred Stock have a mandatory redemption right that may be exercised only with the approval of Hale Capital and HCP-FVA. In connection with the then-proposed public offering of the Company as described in the Company's Registration Statement on Form S-1, as amended, originally filed on June 3, 2021, the effective date of such redemption right was extended from July 30, 2021 to July 30, 2023 pursuant to an amendment to the Certificate of Designations, dated as of June 24, 2021. The amendment was approved by our shareholders at our 2021 annual meeting of stockholders and filed with the Delaware Secretary of State on June 25, 2021.

The Company concluded that the modification created by this amendment resulted in a troubled debt restructuring under Accounting Standard Codification—Debt (Topic 470) as it was determined that a concession was granted. However, as the future payments to be made subsequent to the modification are greater than the carrying value at the time of the modification, no gain or loss was required to be recognized on the troubled debt restructuring. The change is accounted for

prospectively using the new effective interest rate of the preferred stock.

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, 2021 and December 31, 2020, the fair value of these derivative instruments was $464,972 and $472,851, 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, 2021 and September 30, 2020 of $7,879 and $8,243, 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, 2021 and 2020, were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Beginning Balance	$	467,598	$	478,312	$	472,851	$	483,804
Total income recognized in earnings	(2,626)		(2,751)		(7,879)		(8,243)
Ending Balance	$	464,972	$	475,561	$	464,972	$	475,561

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 as follows:

Probability of redemption as part of a fundamental sale transaction	0.5%
Probability of redemption absent a fundamental sale transaction	4.75%
Annual volatility	65%

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 June Offering, Hale Capital Partners, which was the sole holder of the Series A Preferred Stock, agreed to the Series A mandatory extension of the mandatory redemption right 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, 2021 and 2020, respectively.

The Series A Preferred Stock consists of the following:

Total Series A redeemable convertible preferred stock, net at January 1, 2021	$	12,940,722
Accrued dividends	277,170
Accretion of preferred stock	197,114
Total Series A redeemable convertible preferred stock, net at March 31, 2021	$	13,415,006
Accrued dividends	282,926
Accretion of preferred stock	75,183
Total Series A redeemable convertible preferred stock, net at June 30, 2021	$	13,773,115
Accrued dividends	288,802
Accretion of preferred stock	13,517
Total Series A redeemable convertible preferred stock, net at September 30, 2021	$	14,075,434

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Accumulated Other Comprehensive Loss

9 Months Ended

Sep. 30, 2021

Equity [Abstract]

Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss

The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended September 30, 2021 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at July 1, 2021	$	(1,914,022)	$	7,719	$	(1,906,303)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	11,144		—		11,144
Total other comprehensive income (loss)	11,144		—		11,144
Accumulated other comprehensive income (loss) at September 30, 2021	$	(1,902,878)	$	7,719	$	(1,895,159)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended September 30, 2020 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at July 1, 2020	$	(1,948,066)	$	33,566	$	(1,914,500)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	(24,234)		—		(24,234)
Total other comprehensive income (loss)	(24,234)		—		(24,234)
Accumulated other comprehensive income (loss) at September 30, 2020	$	(1,972,300)	$	33,566	$	(1,938,734)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the nine months ended September 30, 2021 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at January 1, 2021	$	(1,995,680)	$	7,719	$	(1,987,961)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	92,802		—		92,802
Total other comprehensive income (loss)	92,802		—		92,802
Accumulated other comprehensive income (loss) at September 30, 2021	$	(1,902,878)	$	7,719	$	(1,895,159)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the nine months ended September 30, 2020 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at January 1, 2020	$	(1,926,826)	$	33,566	$	(1,893,260)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	(45,474)		—		(45,474)
Total other comprehensive income (loss)	(45,474)		—		(45,474)
Accumulated other comprehensive income (loss) at September 30, 2020	$	(1,972,300)	$	33,566	$	(1,938,734)

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Stockholders' Equity

9 Months Ended

Sep. 30, 2021

Equity [Abstract]

Stockholders' Equity

Stockholders' Equity

Stock Repurchase Activity

During the three and nine months ended September 30, 2021 and 2020, the Company did not repurchase any shares of its common stock. As of September 30, 2021, the Company had the authorization under previous Board approved stock repurchase plans to repurchase 49,078 shares of its common stock based upon its judgment and market conditions.

Common Stock Offerings

On June 23, 2021, the Company issued and sold an aggregate of 811,750 shares of its common stock in a public offering underwritten by Roth, which included 86,750 shares purchased by Roth pursuant to the partial exercise of its over-allotment option. At a price of $4.10 per share, the Company received net proceeds of approximately $2.7 million after deducting the underwriting discount and offering expenses paid by the Company.

On July 27, 2021 the Company issued and sold an aggregate of 285,000 shares of its common stock in a public offering underwritten by Roth. At a price of $4.10 per share, the Company received net proceeds of approximately $0.9 million after deducting the underwriting discount and estimated offering expenses paid by the Company.

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Litigation

9 Months Ended

Sep. 30, 2021

Commitments and Contingencies Disclosure [Abstract]

Litigation

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.

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.

Litigation Settlement with Datatech Enterprises, Inc.

The Company has been involved in litigation with Datatech Enterprises, Inc. ("Datatech") since April 27, 2015 when Falconstor commenced a lawsuit regarding a contractual dispute with Datatech. Falconstor recorded an accrual for a loss contingency in the amount of $0.8 million in the fiscal year ended 2015. On September 23, 2021, Falconstor and Datatech entered into a settlement agreement which resulted in Falconstor issuing payment of $0.2 million to Datatech and recording a gain of $0.6 million. Falconstor issued the payment in full on September 23, 2021. The matter is now fully concluded.

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Segment Reporting and Concentrations

9 Months Ended

Sep. 30, 2021

Segment Reporting [Abstract]

Segment Reporting and Concentrations

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, 2021 and 2020, and the location of long-lived assets as of September 30, 2021 and December 31, 2020, are summarized as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue:
Americas	$	880,010	$	1,834,443	$	4,422,598	$	4,085,936
Europe, Middle East, Africa and Other	1,265,526		1,650,812		3,817,767		4,116,849
Asia Pacific	1,137,933		951,145		2,130,177		2,913,414
Total Revenue	$	3,283,469	$	4,436,400	$	10,370,542	$	11,116,199

	September 30, 2021		December 31, 2020
Long-lived assets:
Americas	$	388,860	$	1,735,986
Europe, Middle East, Africa and Other	19,695		52,690
Asia Pacific	556,925		502,344
Total long-lived assets	$	965,480	$	2,291,020

For the three and nine months ended September 30, 2021, the Company had two customers that accounted for 10% or more of total revenue, respectively. For the three and nine months ended September 30, 2020, the Company had two customer that accounted for 10% or more of total revenue, respectively.

As of September 30, 2021, the Company had two customers that accounted for 10% or more of the gross accounts receivable balance. As of December 31, 2020, the Company had one customer that accounted for 10% or more of the gross accounts receivable balance.

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Restructuring Costs

9 Months Ended

Sep. 30, 2021

Restructuring and Related Activities [Abstract]

Restructuring Costs

Restructuring Costs

    In June 2017, the Board approved a comprehensive plan to increase operating performance (the “2017 Plan”). 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 86 employees at December 31, 2018. 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 its former Melville, NY office space during the three months ended June 30, 2018. In accordance with accounting standards governing costs associated with exit or disposal activities, expenses related to future rental payments for which the Company no longer intends to receive any economic benefit are accrued, net of any anticipated sublease income, when the Company ceases use of the leased space. During the nine months ended September 30, 2021, the Company incurred lease disposal-related costs for this property of $0.7 million. The Melville, NY lease which ended on April 30, 2021 with a gross annualized rental cost of $1.5 million, will not be replaced. The Company expects the remaining accrued severance-related costs of $141,340 at September 30, 2021 to be paid once final settlement litigation is completed, which is expected to occur by December 31, 2021.

In the third quarter of 2019, the Company adopted an expense control plan (the "2019 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. In connection with the 2019 Plan, the Company eliminated 23 positions worldwide, implemented tighter expense controls, ceased non-core activities and downsized several facilities. During the three months ended March 31, 2020, the Company incurred $0.1 million in severance expense as a result of this action. The 2019 Plan was substantially completed as of March 31, 2020.

    Given the commercial uncertainty caused by the novel coronavirus pandemic, or COVID-19, the Company developed and implemented an even more aggressive expense control plan in March 2020 (the "2020 Plan"). The 2020 Plan reduced the Company's annual cash expense run rate by $4.0 million or 29%. The Company furloughed 21 positions worldwide, and 20 of these positions were reinstated by December 31, 2020. During the nine months ended September 30, 2021, the Company has not yet incurred severance expense as a result of this action.

The following table summarizes the activity during 2020 and 2021 related to restructuring liabilities recorded in connection with the 2017, 2019 and 2020 Plans:

	Severance Related Costs		Facility and Other Costs		Total
Balance at January 1, 2020	$	293,799	$	237,493	$	531,292
Additions (Reductions)	76,708		210,752		287,460
Utilized/Paid	(156,415)		(225,835)		(382,250)
Balance at March 31, 2020	$	214,092	$	222,410	$	436,502
Additions (Reductions)	—		153,685		153,685
Translation Adjustment	4,674		—		4,674
Utilized/Paid	—		(201,211)		(201,211)
Balance at June 30, 2020	$	218,766	$	174,884	$	393,650
Additions (Reductions)	—		317,595		317,595
Translation Adjustment	9,554		—		9,554
Utilized/Paid	—		(366,562)		(366,562)
Balance at September 30, 2020	$	228,320	$	125,917	$	354,237
Additions (Reductions)	—		274,086		274,086
Translation Adjustment	11,124		—		11,124
Utilized/Paid	—		(324,537)		(324,537)
Balance at December 31, 2020	$	239,444	$	75,466	$	314,910
Additions (Reductions)	—		302,313		302,313
Translation Adjustment	(10,393)		—		(10,393)
Utilized/Paid	—		(357,184)		(357,184)
Balance at March 31, 2021	$	229,051	$	20,595	$	249,646
Additions (Reductions)	—		421,737		421,737
Translation Adjustment	2,734		—		2,734
Utilized/Paid	(90,445)		(442,332)		(532,777)
Balance at June 30, 2021	$	141,340	$	—	$	141,340
Translation Adjustment	(3,429)		—		(3,429)
Balance at September 30, 2021	$	137,911	$	—	$	137,911

    The severance and facility related liabilities are included within “accrued expenses” in the accompanying condensed consolidated balance sheets. The expenses under the 2017, 2019 and 2020 Plans are included within “restructuring costs” in the accompanying condensed consolidated statements of operations.

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Basis of Presentation (Policies)

9 Months Ended

Sep. 30, 2021

Organization, Consolidation and Presentation of Financial Statements [Abstract]

The Company and Nature of Operations

The Company and Nature of Operations

FalconStor Software, Inc., a Delaware corporation ("we", the "Company" or "FalconStor"), is the 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. More than 1,000 organizations and managed service providers worldwide standardize on FalconStor as the foundation for their cloud first data protection future.

Principles of Consolidation

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.

Use of Estimates

Use of Estimates

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

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

Unaudited Interim Financial Information

Unaudited Interim Financial Information

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

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly state the financial position of the Company at September 30, 2021, and the results of its operations for the three and nine months ended September 30, 2021 and 2020. 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, 2020 ("2020 Form 10-K").

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The objective of the guidance is to improve the effectiveness of disclosure requirements on defined benefit pension plans and other postretirement plans. The guidance is effective for fiscal years beginning after December 15, 2020. Adoption of this new standard did not have a significant impact to our disclosures.

In December 2019, the FASB released ASU 2019-12, which affects general principles within Topic 740, Income Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. Adoption of this new standard did not have a material impact on the Company.

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

Revenue from Contract with Customers and Associated Balances

Revenue from Contracts with Customers and Associated Balances

Nature of Products and Services

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

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

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

Contract Balances

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

    As of September 30, 2021 and December 31, 2020, accounts receivable, net of allowance for doubtful accounts, was $2.3 million and $2.8 million, respectively. As of September 30, 2021 and December 31, 2020, short and long-term contract assets, net of allowance for doubtful accounts, was $0.4 million and $0.6 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.

Deferred revenue includes invoiced revenue allocated to remaining performance obligations that has not yet been recognized and will be recognized as revenue in future periods. Deferred revenue was $5.3 million as of September 30, 2021, of which the Company expects to recognize approximately 70% of such amount as revenue over the next 12 months and the remainder thereafter.

    Approximately $1.8 million of revenue is expected to be recognized from remaining performance obligations for unbilled support and services as of September 30, 2021. We expect to recognize revenue on approximately 42% of these remaining performance obligations over the next twelve months, with the balance recognized thereafter.

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

Significant Judgments

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

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

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

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

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

Disaggregation of Revenue

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

Assets Recognized from Costs to Obtain a Contract with a Customer

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

Leases

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

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2021

Accounting Policies [Abstract]

Schedule of Changes in Deferred Revenue

Changes in deferred revenue were as follows:

Nine Months Ended September 30, 2021
Balance at January 1, 2020	$	6,369,129
Deferral of revenue	9,281,741
Recognition of revenue	(10,370,542)
Change in reserves	(1,510)
Balance at September 30, 2021	$	5,278,818

Assets And Liabilities, Lessee

We have various operating leases for office facilities that expire through 2021. Below is a summary of our ROU assets and liabilities as of September 30, 2021.

Right of use assets	$	140,238
Lease liability obligations, current	87,381
Lease liability obligations, less current portion	53,430
Total lease liability obligations	$	140,811
Weighted-average remaining lease term	1.87
Weighted-average discount rate	3.57		%

Lease Cost

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Components of lease expense:
Operating lease cost	$	88,593	$	442,501	$	712,911	$	1,386,998
Sublease income	—		(75,314)		(100,419)		(430,313)
Net lease cost	$	88,593	$	367,187	$	612,492	$	956,685

Operating Leases Maturity

Approximate future minimum lease payments for our ROU assets over the remaining lease periods as of September 30, 2021, are as follows:

2021	30,063
2022	112,232
Total minimum lease payments	142,295
Less interest	1,484
Present value of lease liabilities	140,811

The following is a schedule of future minimum lease payments as well as sublease income for all operating leases as of September 30, 2021:

	Payments
2021	$	30,063
2022	112,232
	$	142,295

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2021

Earnings Per Share [Abstract]

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

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, 2021 and 2020:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Stock options	9,640	9,945	9,640	9,945
Restricted stock	—	31,648	63,207	31,648
Series A redeemable convertible preferred stock	87,815	87,815	87,815	87,815
Total anti-dilutive common stock equivalents	97,455	129,408	160,662	129,408

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2021

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

The gross carrying amount and accumulated depreciation of property and equipment as of September 30, 2021 and December 31, 2020 are as follows:

	September 30, 2021		December 31, 2020
Gross carrying amount	$	18,876,633	$	18,791,841
Accumulated depreciation	(18,683,605)		(18,594,821)
Property and Equipment, net	$	193,028	$	197,020

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Software Development Costs (Tables)

9 Months Ended

Sep. 30, 2021

Research and Development [Abstract]

Summary of Software Development Costs

The gross carrying amount and accumulated amortization of software development costs as of September 30, 2021 and December 31, 2020 are as follows:

	September 30, 2021		December 31, 2020
Gross carrying amount	$	2,950,132	$	2,950,132
Accumulated amortization	(2,935,787)		(2,930,854)
Software development costs, net	$	14,345	$	19,278

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Goodwill and Other Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2021

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Intangible Assets and Goodwill

The gross carrying amount and accumulated amortization of goodwill and other intangible assets as of September 30, 2021 and December 31, 2020 are as follows: 

	September 30, 2021		December 31, 2020
Goodwill	$	4,150,339	$	4,150,339
Other intangible assets:
Gross carrying amount	$	4,038,138	$	4,027,912
Accumulated amortization	(3,973,843)		(3,927,778)
Net carrying amount	$	64,295	$	100,134

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Share-Based Payment Arrangements (Tables)

9 Months Ended

Sep. 30, 2021

Share-based Payment Arrangement [Abstract]

Details of Stock Option Plan

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, 2021: 

	Shares	Shares Available	Shares
Name of Plan	Authorized	for Grant	Outstanding
FalconStor Software, Inc. 2018 Incentive Stock Plan	1,692,797	132,817	1,463,380

Schedule of Equity Awards Outstanding

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, 2021: 

Name of Plan	Shares Available for Grant	Shares Outstanding
FalconStor Software, Inc., 2016 Incentive Stock Plan	—	3,850
FalconStor Software, Inc., 2006 Incentive Stock Plan	—	5,790

Share-based Payment Arrangement, Restricted Stock and Restricted Stock Unit, Activity

A summary of the Company’s restricted stock activity for the nine months ended September 30, 2021 is below. Such restricted stock did not bestow any voting or dispositive power and is not deemed outstanding until they vest.

	Number of Restricted Stock Awards
Non-Vested at January 1, 2021	1,386,213
Granted	113,230
Vested	(36,063)
Forfeited	—
Non-Vested at September 30, 2021	1,463,380

Schedule Of Share Based Compensation Recognized

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, 2021 and 2020:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenue - Product	$	232	$	—	$	688	$	—
Cost of revenue - support and service	185		104		549		310
Research and development costs	167		433		167		1,289
Selling and marketing	2,915		186		8,475		554
General and administrative	1,417		3,099		4,205		9,239
	$	4,916	$	3,822	$	14,084	$	11,392

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Notes Payable (Tables)

9 Months Ended

Sep. 30, 2021

Payables and Accruals [Abstract]

Schedule of Notes Payable

The notes payable balance consists of the following:

Total notes payable, net at January 1, 2021	$	4,074,863
Accretion of discount	75,705
PPP loan forgiveness	(754,000)
Total notes payable, net at March 31, 2021	$	3,396,568
Repayment of short-term debt	(1,334,058)
Accretion of discount	84,086
Total notes payable, net at June 30, 2021	$	2,146,596
Accretion of discount	$	3,978
Total notes payable, net at September 30, 2021	$	2,150,574

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2021

Fair Value Disclosures [Abstract]

Schedule of Fair Value Assets Measured On Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2021:

			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	464,972		—		—		464,972
Total derivative liabilities	464,972		—		—		464,972
Total assets and liabilities measured at fair value	$	464,972	$	—	$	—	$	464,972

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2020: 

			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	472,851		—		—		472,851
Total derivative liabilities	472,851		—		—		472,851
Total assets and liabilities measured at fair value	$	472,851	$	—	$	—	$	472,851

Fair Value Measurements using Significant Unobservable Inputs

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, 2021 and September 30, 2020:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Beginning Balance	$	467,598	$	478,312	$	472,851	$	483,804
Total income recognized in earnings	(2,626)		(2,751)		(7,879)		(8,243)
Ending Balance	$	464,972	$	475,561	$	464,972	$	475,561

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2021

Commitments and Contingencies Disclosure [Abstract]

Future Minimum Payments for Operating Leases

Approximate future minimum lease payments for our ROU assets over the remaining lease periods as of September 30, 2021, are as follows:

2021	30,063
2022	112,232
Total minimum lease payments	142,295
Less interest	1,484
Present value of lease liabilities	140,811

The following is a schedule of future minimum lease payments as well as sublease income for all operating leases as of September 30, 2021:

	Payments
2021	$	30,063
2022	112,232
	$	142,295

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Series A Redeemable Convertible Preferred Stock (Tables)

9 Months Ended

Sep. 30, 2021

Equity [Abstract]

Embedded Derivative Instruments Rollforward

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, 2021 and 2020, were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Beginning Balance	$	467,598	$	478,312	$	472,851	$	483,804
Total income recognized in earnings	(2,626)		(2,751)		(7,879)		(8,243)
Ending Balance	$	464,972	$	475,561	$	464,972	$	475,561

Derivative Probability and Volatility Assumptions

The probability and volatility assumptions are as follows:

Probability of redemption as part of a fundamental sale transaction	0.5%
Probability of redemption absent a fundamental sale transaction	4.75%
Annual volatility	65%

Schedule of Components of Series A Preferred Stock

The Series A Preferred Stock consists of the following:

Total Series A redeemable convertible preferred stock, net at January 1, 2021	$	12,940,722
Accrued dividends	277,170
Accretion of preferred stock	197,114
Total Series A redeemable convertible preferred stock, net at March 31, 2021	$	13,415,006
Accrued dividends	282,926
Accretion of preferred stock	75,183
Total Series A redeemable convertible preferred stock, net at June 30, 2021	$	13,773,115
Accrued dividends	288,802
Accretion of preferred stock	13,517
Total Series A redeemable convertible preferred stock, net at September 30, 2021	$	14,075,434

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Accumulated Other Comprehensive Loss (Tables)

9 Months Ended

Sep. 30, 2020

Equity [Abstract]

Schedule of accumulated other comprehensive loss

The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended September 30, 2021 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at July 1, 2021	$	(1,914,022)	$	7,719	$	(1,906,303)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	11,144		—		11,144
Total other comprehensive income (loss)	11,144		—		11,144
Accumulated other comprehensive income (loss) at September 30, 2021	$	(1,902,878)	$	7,719	$	(1,895,159)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the three months ended September 30, 2020 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at July 1, 2020	$	(1,948,066)	$	33,566	$	(1,914,500)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	(24,234)		—		(24,234)
Total other comprehensive income (loss)	(24,234)		—		(24,234)
Accumulated other comprehensive income (loss) at September 30, 2020	$	(1,972,300)	$	33,566	$	(1,938,734)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the nine months ended September 30, 2021 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at January 1, 2021	$	(1,995,680)	$	7,719	$	(1,987,961)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	92,802		—		92,802
Total other comprehensive income (loss)	92,802		—		92,802
Accumulated other comprehensive income (loss) at September 30, 2021	$	(1,902,878)	$	7,719	$	(1,895,159)

The changes in Accumulated Other Comprehensive Loss, net of tax, for the nine months ended September 30, 2020 are as follows:

	Foreign Currency Translation		Net Minimum Pension Liability		Total
Accumulated other comprehensive income (loss) at January 1, 2020	$	(1,926,826)	$	33,566	$	(1,893,260)
Other comprehensive income (loss)
Other comprehensive income (loss) before reclassifications	(45,474)		—		(45,474)
Total other comprehensive income (loss)	(45,474)		—		(45,474)
Accumulated other comprehensive income (loss) at September 30, 2020	$	(1,972,300)	$	33,566	$	(1,938,734)

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Segment Reporting and Concentrations (Tables)

9 Months Ended

Sep. 30, 2021

Segment Reporting [Abstract]

Schedule of Revenues And Long Lived Assets By Geographical Areas

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, 2021 and 2020, and the location of long-lived assets as of September 30, 2021 and December 31, 2020, are summarized as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue:
Americas	$	880,010	$	1,834,443	$	4,422,598	$	4,085,936
Europe, Middle East, Africa and Other	1,265,526		1,650,812		3,817,767		4,116,849
Asia Pacific	1,137,933		951,145		2,130,177		2,913,414
Total Revenue	$	3,283,469	$	4,436,400	$	10,370,542	$	11,116,199

	September 30, 2021		December 31, 2020
Long-lived assets:
Americas	$	388,860	$	1,735,986
Europe, Middle East, Africa and Other	19,695		52,690
Asia Pacific	556,925		502,344
Total long-lived assets	$	965,480	$	2,291,020

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Restructuring Costs (Tables)

9 Months Ended

Sep. 30, 2021

Restructuring and Related Activities [Abstract]

Schedule Of Restructuring Costs

The following table summarizes the activity during 2020 and 2021 related to restructuring liabilities recorded in connection with the 2017, 2019 and 2020 Plans:

	Severance Related Costs		Facility and Other Costs		Total
Balance at January 1, 2020	$	293,799	$	237,493	$	531,292
Additions (Reductions)	76,708		210,752		287,460
Utilized/Paid	(156,415)		(225,835)		(382,250)
Balance at March 31, 2020	$	214,092	$	222,410	$	436,502
Additions (Reductions)	—		153,685		153,685
Translation Adjustment	4,674		—		4,674
Utilized/Paid	—		(201,211)		(201,211)
Balance at June 30, 2020	$	218,766	$	174,884	$	393,650
Additions (Reductions)	—		317,595		317,595
Translation Adjustment	9,554		—		9,554
Utilized/Paid	—		(366,562)		(366,562)
Balance at September 30, 2020	$	228,320	$	125,917	$	354,237
Additions (Reductions)	—		274,086		274,086
Translation Adjustment	11,124		—		11,124
Utilized/Paid	—		(324,537)		(324,537)
Balance at December 31, 2020	$	239,444	$	75,466	$	314,910
Additions (Reductions)	—		302,313		302,313
Translation Adjustment	(10,393)		—		(10,393)
Utilized/Paid	—		(357,184)		(357,184)
Balance at March 31, 2021	$	229,051	$	20,595	$	249,646
Additions (Reductions)	—		421,737		421,737
Translation Adjustment	2,734		—		2,734
Utilized/Paid	(90,445)		(442,332)		(532,777)
Balance at June 30, 2021	$	141,340	$	—	$	141,340
Translation Adjustment	(3,429)		—		(3,429)
Balance at September 30, 2021	$	137,911	$	—	$	137,911

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Basis of Presentation - Narrative (Details) - USD ($)				3 Months Ended						9 Months Ended
	Jul. 27, 2021	Jun. 30, 2021	Jun. 23, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Sep. 30, 2021	Sep. 30, 2020	Jun. 02, 2021	Dec. 31, 2020
Organization, Consolidation And Presentation Of Financial Statements [Line Items]
Working Capital Deficiency				$ 2,300,000						$ 2,300,000
Deferred revenue				3,709,005						3,709,005			$ 4,603,270
Total Stockholders' Deficit				(11,499,680)						(11,499,680)			(14,608,186)
Net income (loss)				374,432	$ (349,684)	$ 425,248	$ 1,546,209	$ 406,558	$ (719,840)	449,996	$ 1,232,927
Net cash used in operating activities										(707,889)	(303,299)
Cash and cash equivalents				3,474,784						3,474,784			1,920,656
Cash Period Change										1,600,000
Stock Issued During Period, Shares, New Issues	285,000
Stock Issued During Period, Value, New Issues	$ 900,000		$ 2,700,000	948,566	2,737,770
Shares Issued, Price Per Share	$ 4.10		$ 4.10
Proceeds from public offering, net of underwriting discounts paid										4,181,908	0
Repayments of Short-term Debt		$ 1,300,000			$ 1,334,058					1,334,058	$ 1,000,000
Series A redeemable convertible preferred stock, redemption value				$ 14,195,475						$ 14,195,475			$ 13,346,577
Common Stock
Organization, Consolidation And Presentation Of Financial Statements [Line Items]
Stock Issued During Period, Shares, New Issues			811,750	285,000	811,750
Stock Issued During Period, Value, New Issues				$ 285	$ 812
Common Stock | Over-Allotment
Organization, Consolidation And Presentation Of Financial Statements [Line Items]
Stock Issued During Period, Shares, New Issues			86,750
Amended and Restated Loan Agreement
Organization, Consolidation And Presentation Of Financial Statements [Line Items]
Notes payable												$ 3,500,000
Amended and Restated Loan Agreement | HCP-FVA, LLC
Organization, Consolidation And Presentation Of Financial Statements [Line Items]
Notes payable												$ 2,200,000

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Summary of Significant Accounting Policies - Additional Information (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2020
Accounting Policies [Abstract]
Accounts receivable, net of allowances	$ 2,285,117		$ 2,285,117		$ 2,836,571
Contract with Customer, Asset, after Allowance for Credit Loss	400,000		400,000		600,000
Deferred revenue	5,278,818		$ 5,278,818		$ 6,369,129
Revenue expected to be recognized during next 12 months (percent)			70.00%
Remaining performance obligation	$ 1,800,000		$ 1,800,000
Remaining performance obligation expected to be recognized over next 12 months (percent)	42.00%		42.00%
Deferred Revenue, Revenue Recognized	$ 1,000,000	$ 1,200,000	$ 3,900,000	$ 4,400,000

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Summary of Significant Accounting Policies - Changes in Deferred Revenue (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Movement in Deferred Revenue [Roll Forward]
Balance at January 1, 2020			$ 6,369,129
Deferral of revenue			9,281,741
Recognition of revenue			(10,370,542)
Change in reserves			(1,510)
Balance at September 30, 2021	$ 5,278,818		5,278,818
Deferred Revenue, Revenue Recognized	$ 1,000,000	$ 1,200,000	$ 3,900,000	$ 4,400,000

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Summary of Significant Accounting Policies - Right of Use Assets and Liabilities (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2020
Leases [Abstract]
Right of use assets	$ 140,238		$ 140,238		$ 536,272
Lease liability obligations, current	87,381		87,381		665,074
Lease liability obligations, less current portion	53,430		53,430		$ 0
Total lease liability obligations	$ 140,811		$ 140,811
Weighted-average remaining lease term	1 year 10 months 13 days		1 year 10 months 13 days
Weighted-average discount rate	3.57%		3.57%
Operating lease cost	$ 88,593	$ 442,501	$ 712,911	$ 1,386,998
Sublease income	0	(75,314)	(100,419)	(430,313)
Net lease cost	88,593	367,187	612,492	956,685
Operating Lease, Payments	$ 57,541	$ 357,245	$ 574,757	$ 1,117,557

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Summary of Significant Accounting Policies - Lease Maturities (Details)	Sep. 30, 2021 USD ($)
Leases [Abstract]
2021	$ 30,063
2022	112,232
Total minimum lease payments	142,295
Less interest	(1,484)
Total lease liability obligations	$ 140,811

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Earnings Per Share (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive common stock equivalents	97,455	129,408	160,662	129,408
Stock options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive common stock equivalents	9,640	9,945	9,640	9,945
Restricted stock
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive common stock equivalents	0	31,648	63,207	31,648
Series A redeemable convertible preferred stock
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive common stock equivalents	87,815	87,815	87,815	87,815

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Property and Equipment (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2020
Property, Plant and Equipment [Abstract]
Gross carrying amount	$ 18,876,633		$ 18,876,633		$ 18,791,841
Accumulated depreciation	(18,683,605)		(18,683,605)		(18,594,821)
Property and Equipment, net	193,028		193,028		$ 197,020
Depreciation expense	$ 29,838	$ 44,958	$ 100,470	$ 135,679

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Software Development Costs (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2020
Research and Development [Abstract]
Gross carrying amount	$ 2,950,132		$ 2,950,132		$ 2,950,132
Accumulated amortization	(2,935,787)		(2,935,787)		(2,930,854)
Software development costs, net	14,345		14,345		$ 19,278
Capitalized Computer Software, Amortization	$ 1,649	$ 1,649	$ 4,933	$ 6,084

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Goodwill and Other Intangible Assets (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2020
Goodwill and Intangible Assets Disclosure [Abstract]
Goodwill	$ 4,150,339		$ 4,150,339		$ 4,150,339
Other intangible assets:
Gross carrying amount	4,038,138		4,038,138		4,027,912
Accumulated amortization	(3,973,843)		(3,973,843)		(3,927,778)
Net carrying amount	64,295		64,295		$ 100,134
Amortization of intangible assets	$ 13,999	$ 18,455	$ 46,065	$ 20,364

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Share-Based Payment Arrangements (Detail Narrative) - FalconStor Software, Inc., 2018 Incentive Stock Plan - shares	3 Months Ended
	Jun. 30, 2021	Sep. 30, 2021	Jun. 22, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares Authorized (in shares)		1,692,797	1,471,997
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized	220,800

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Share-Based Payment Arrangements (Details) - FalconStor Software, Inc., 2018 Incentive Stock Plan - shares	Sep. 30, 2021	Jun. 22, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares Authorized (in shares)	1,692,797	1,471,997
Shares Available for Grant (in shares)	132,817
Shares Outstanding (in shares)	1,463,380

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Share-Based Payment Arrangements - Equity Plans Terminated or Expired (Details)	Sep. 30, 2021 shares
FalconStor Software, Inc., 2016 Incentive Stock Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares Available for Grant (in shares)	0
Shares Outstanding (in shares)	3,850
FalconStor Software, Inc., 2006 Incentive Stock Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares Available for Grant (in shares)	0
Shares Outstanding (in shares)	5,790

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Share-Based Payment Arrangements Restricted Stock Activity (Details)	9 Months Ended
	Sep. 30, 2021 shares
Restricted Stock Activity [Roll Forward]
Nonvested, beginning (in shares)	1,386,213
Granted (in shares)	113,230
Vested (in shares)	(36,063)
Forfeited (in shares)	0
Nonvested, ending (in shares)	1,463,380

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Share-Based Payment Arrangements - Share-Based Compensation Expense (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	$ 4,916	$ 3,822	$ 14,084	$ 11,392
Cost of revenue - Product
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	232	0	688	0
Cost of revenue - support and service
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	185	104	549	310
Research and development costs
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	167	433	167	1,289
Selling and marketing
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	2,915	186	8,475	554
General and administrative
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	$ 1,417	$ 3,099	$ 4,205	$ 9,239

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Income Taxes (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2020
Income Tax Disclosure [Abstract]
Income tax provision	$ 16,529	$ 11,272	$ 63,804	$ 44,709
Effective income tax rate			12.40%	3.50%
Unrecognized tax benefits	70,260	$ 76,275	$ 70,260	$ 76,275
Unrecognized tax benefits, interest on income taxes accrued	$ 36,575		$ 36,575		$ 33,865

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Notes Payable - Components of Notes Payable (Details) - USD ($)		3 Months Ended			9 Months Ended
	Jun. 30, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Sep. 30, 2021	Sep. 30, 2020
Movement In Notes Payable [Roll Forward]
Total notes payable, beginning		$ 2,146,596	$ 3,396,568	$ 4,074,863	$ 4,074,863
Accretion of discount		3,978	84,086	75,705
Payments of short-term debt	$ (1,300,000)		(1,334,058)		(1,334,058)	$ (1,000,000)
Total notes payable, ending	$ 2,146,596	$ 2,150,574	$ 2,146,596	3,396,568	$ 2,150,574
Paycheck Protection Program [Member]
Movement In Notes Payable [Roll Forward]
PPP loan forgiveness				$ (754,000)

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Notes Payable - Additional Information (Details) - USD ($)				3 Months Ended	9 Months Ended
	Jun. 30, 2021	Apr. 28, 2020	Feb. 23, 2018	Jun. 30, 2021	Sep. 30, 2021	Sep. 30, 2020	Jun. 02, 2021
Debt Instrument [Line Items]
Payments of short-term debt	$ (1,300,000)			$ (1,334,058)	$ (1,334,058)	$ (1,000,000)
Amended and Restated Loan Agreement
Debt Instrument [Line Items]
Notes payable							$ 3,500,000
Amended and Restated Loan Agreement | HCP-FVA, LLC
Debt Instrument [Line Items]
Notes payable							$ 2,200,000
Paycheck Protection Program [Member]
Debt Instrument [Line Items]
Proceeds from Notes Payable		$ 754,000
Long-term Debt, Term		2 years
Debt Instrument, Interest Rate, Stated Percentage		1.00%
Note Payable, Interest Deferral Period		6 months
Senior Secured Debt [Member]
Debt Instrument [Line Items]
Debt Instrument, Basis Spread on Variable Rate			0.75%

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Fair Value Measurements (Details) - Recurring - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Derivative liabilities:
Derivative Instruments	$ 464,972	$ 472,851
Total derivative liabilities	464,972	472,851
Total assets and liabilities measured at fair value	464,972	472,851
Fair Value, Inputs, Level 1
Derivative liabilities:
Derivative Instruments	0	0
Total derivative liabilities	0	0
Total assets and liabilities measured at fair value	0	0
Fair Value, Inputs, Level 2
Derivative liabilities:
Derivative Instruments	0	0
Total derivative liabilities	0	0
Total assets and liabilities measured at fair value	0	0
Fair Value, Inputs, Level 3
Derivative liabilities:
Derivative Instruments	464,972	472,851
Total derivative liabilities	464,972	472,851
Total assets and liabilities measured at fair value	$ 464,972	$ 472,851

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Fair Value Measurements (Narrative) (Details) - Future Cash Flows - Discount Rate	Sep. 30, 2021
Preferred Stock
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Discount yield of preferred equity	0.09
Notes Payable
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Fair value discount yield of note payable	0.07

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Fair Value Measurements - Rollforward (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation, Calculation [Roll Forward]
Beginning Balance	$ 467,598	$ 478,312	$ 472,851	$ 483,804
Total income recognized in earnings	(2,626)	(2,751)	(7,879)	(8,243)
Ending Balance	$ 464,972	$ 475,561	$ 464,972	$ 475,561

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Commitments and Contingencies (Details)	Sep. 30, 2021 USD ($)
Payments
2021	$ 30,063
2022	112,232
Total minimum lease payments	$ 142,295

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Commitments and Contingencies (Narrative) (Details) - USD ($)			9 Months Ended
	Apr. 05, 2018	Aug. 14, 2017	Sep. 30, 2021
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits [Line Items]
Maximum length of warranty on software products			90 days
Uncertainty in income tax liability			$ 108,091
Chief Executive Officer
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits [Line Items]
Salary and Wage, NonOfficer, Excluding Cost of Good and Service Sold		$ 350,000
Accrued bonuses		$ 17,500
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Outstanding, Number		735,973
Severance payment period		6 months
Award requisite period		6 months
Chief Financial Officer
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits [Line Items]
Salary and Wage, NonOfficer, Excluding Cost of Good and Service Sold	$ 240,000
Accrued bonuses	10,000
Deferred Bonus | Chief Executive Officer
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits [Line Items]
Accrued bonuses		$ 200,000
Deferred Bonus | Chief Financial Officer
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits [Line Items]
Accrued bonuses	$ 70,000
Upon Termination | Chief Executive Officer
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits [Line Items]
Severance payment period		12 months
Award requisite period		12 months
Change of control period		6 months

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Series A Redeemable Convertible Preferred Stock (Details Narrative)	3 Months Ended		9 Months Ended
	Sep. 30, 2021 USD ($) shares	Sep. 30, 2020 USD ($)	Sep. 30, 2021 USD ($) Integer shares	Sep. 30, 2020 USD ($)	Jun. 30, 2021 USD ($)	Dec. 31, 2020 USD ($) shares	Jun. 30, 2020 USD ($)	Dec. 31, 2019 USD ($)	Sep. 16, 2013 $ / shares shares
Class of Stock [Line Items]
Series A Redeemable convertible preferred stock, shares outstanding (in shares) | shares	900,000		900,000			900,000
Consecutive trading days, convertible debt threshold | Integer			60
Series A redeemable convertible preferred stock redemption price upon fundamental sale, percentage of per share purchase price			250.00%
Threshold of stock price trigger, percentage			225.00%
Upon certain triggering events holders can redeem			100.00%
Series A redeemable convertible preferred stock, financing proceeds threshold			$ 5,000,000
Percentage of accounts receivable			80.00%
Fair Value, Net Derivative Asset (Liability) Measured on Recurring Basis with Unobservable Inputs	$ 464,972	$ 475,561	$ 464,972	$ 475,561	$ 467,598	$ 472,851	$ 478,312	$ 483,804
Loss on change in fair value	(2,626)	$ (2,751)	$ (7,879)	$ (8,243)
Series A redeemable convertible preferred stock
Class of Stock [Line Items]
Series A redeemable convertible preferred stock, conversion price | $ / shares									$ 102.488
Series A redeemable convertible preferred stock | Prime rate
Class of Stock [Line Items]
Basis spread on Series A redeemable convertible preferred stock dividend, percentage			5.00%
Series A redeemable convertible preferred stock, basis spread of dividend			10.00%
Maximum
Class of Stock [Line Items]
Potential ownership percentage by controlling owners (greater than)			9.99%
Recurring
Class of Stock [Line Items]
Derivative Instruments	$ 464,972		$ 464,972			$ 472,851
HCP-FVA, LLC | Series A redeemable convertible preferred stock
Class of Stock [Line Items]
Series A Redeemable convertible preferred stock, shares outstanding (in shares) | shares									900,000

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Series A Redeemable Convertible Preferred Stock - Rollforward (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Equity [Abstract]
Beginning Balance	$ 467,598	$ 478,312	$ 472,851	$ 483,804
Total income recognized in earnings	(2,626)	(2,751)	(7,879)	(8,243)
Ending Balance	$ 464,972	$ 475,561	$ 464,972	$ 475,561

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Series A Redeemable Convertible Preferred Stock - Probability and Volatility Assumptions (Details)	9 Months Ended
	Sep. 30, 2021
Equity [Abstract]
Probability of redemption as part of a fundamental sale transaction	0.50%
Probability of redemption absent a fundamental sale transaction	4.75%
Annual volatility	65.00%

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Series A Redeemable Convertible Preferred Stock - Components of Preferred Stock (Details) - USD ($)	3 Months Ended
	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021
Increase (Decrease) in Temporary Equity [Roll Forward]
Beginning balance			$ 12,940,722
Ending balance	$ 14,075,434
Redeemable Preferred Stock [Member]
Increase (Decrease) in Temporary Equity [Roll Forward]
Beginning balance	13,773,115	$ 13,415,006	12,940,722
Accrued dividends	288,802	282,926	277,170
Accretion of preferred stock	13,517	75,183	197,114
Ending balance	$ 14,075,434	$ 13,773,115	$ 13,415,006

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Accumulated Other Comprehensive Loss (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Accumulated Other Comprehensive Income (Loss), Net of Tax [Roll Forward]
Accumulated other comprehensive (loss) income, beginning balance			$ (14,608,186)
Other comprehensive income (loss) before reclassifications	$ 11,144	$ (24,234)	92,802	$ (45,474)
Total other comprehensive income (loss)	11,144	(24,234)	92,802	(45,474)
Accumulated other comprehensive (loss) income, ending balance	(11,499,680)		(11,499,680)
Foreign Currency Translation
Accumulated Other Comprehensive Income (Loss), Net of Tax [Roll Forward]
Accumulated other comprehensive (loss) income, beginning balance	(1,914,022)	(1,948,066)	(1,995,680)	(1,926,826)
Other comprehensive income (loss) before reclassifications	11,144	(24,234)	92,802	(45,474)
Total other comprehensive income (loss)	11,144	(24,234)	92,802	(45,474)
Accumulated other comprehensive (loss) income, ending balance	(1,902,878)	(1,972,300)	(1,902,878)	(1,972,300)
Net Minimum Pension Liability
Accumulated Other Comprehensive Income (Loss), Net of Tax [Roll Forward]
Accumulated other comprehensive (loss) income, beginning balance	7,719	33,566	7,719	33,566
Other comprehensive income (loss) before reclassifications	0	0	0	0
Total other comprehensive income (loss)	0	0	0	0
Accumulated other comprehensive (loss) income, ending balance	7,719	33,566	7,719	33,566
AOCI Attributable to Parent [Member]
Accumulated Other Comprehensive Income (Loss), Net of Tax [Roll Forward]
Accumulated other comprehensive (loss) income, beginning balance	(1,906,303)	(1,914,500)	(1,987,961)	(1,893,260)
Accumulated other comprehensive (loss) income, ending balance	$ (1,895,159)	$ (1,938,734)	$ (1,895,159)	$ (1,938,734)

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Stockholders' Equity (Details Narrative) - USD ($)			3 Months Ended			9 Months Ended
	Jul. 27, 2021	Jun. 23, 2021	Sep. 30, 2021	Jun. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Class of Stock [Line Items]
Stock repurchased during period (shares)			0		0	0	0
Remaining number of shares authorized for repurchased			49,078			49,078
Stock Issued During Period, Shares, New Issues	285,000
Shares Issued, Price Per Share	$ 4.10	$ 4.10
Stock Issued During Period, Value, New Issues	$ 900,000	$ 2,700,000	$ 948,566	$ 2,737,770
Common Stock
Class of Stock [Line Items]
Stock Issued During Period, Shares, New Issues		811,750	285,000	811,750
Stock Issued During Period, Value, New Issues			$ 285	$ 812
Common Stock | Over-Allotment
Class of Stock [Line Items]
Stock Issued During Period, Shares, New Issues		86,750

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Litigation (Details Narrative) - USD ($)		3 Months Ended		9 Months Ended
	Sep. 23, 2021	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Apr. 27, 2015
Other Liabilities Disclosure [Abstract]
Loss Contingency Accrual						$ 800,000
Payments for Legal Settlements	$ 200,000
Gain (Loss) Related to Litigation Settlement		$ (632,600)	$ 0	$ (632,600)	$ 0

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Segment Reporting and Concentrations - Schedule Of Segment Reporting By Geographical Areas (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2020
Revenue:
Total revenue	$ 3,283,469	$ 4,436,400	$ 10,370,542	$ 11,116,199
Long-lived assets:
Total long-lived assets	965,480		965,480		$ 2,291,020
Americas
Revenue:
Total revenue	880,010	1,834,443	4,422,598	4,085,936
Long-lived assets:
Total long-lived assets	388,860		388,860		1,735,986
Europe, Middle East, Africa and Other
Revenue:
Total revenue	1,265,526	1,650,812	3,817,767	4,116,849
Long-lived assets:
Total long-lived assets	19,695		19,695		52,690
Asia Pacific
Revenue:
Total revenue	1,137,933	$ 951,145	2,130,177	$ 2,913,414
Long-lived assets:
Total long-lived assets	$ 556,925		$ 556,925		$ 502,344

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Segment Reporting and Concentrations (Details Narrative)	3 Months Ended		9 Months Ended
	Sep. 30, 2021 customer Integer	Sep. 30, 2020 customer	Sep. 30, 2020 customer	Dec. 31, 2020 Integer
Segment Reporting [Abstract]
Number of Customers Accounting for More than 10 Percent of Revenue | customer	2	2	2
Number Of Customers With Significant Accounts Receivable Balance | Integer	2			1

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Restructuring Costs (Details Narrative)	3 Months Ended							6 Months Ended	9 Months Ended
	Sep. 30, 2021 USD ($) position	Jun. 30, 2021 USD ($)	Mar. 31, 2021 USD ($)	Dec. 31, 2020 USD ($)	Sep. 30, 2020 USD ($)	Jun. 30, 2020 USD ($)	Mar. 31, 2020 USD ($)	Jun. 30, 2021 USD ($)	Sep. 30, 2021 USD ($) position	Sep. 30, 2020 USD ($)	Apr. 30, 2021 USD ($)	Dec. 31, 2019 USD ($)
Restructuring Cost and Reserve [Line Items]
Restructuring costs	$ 68,704	$ 421,737	$ 302,313	$ 274,086	$ 317,595	$ 153,685	$ 287,460		$ 792,754	$ 758,740
Restructuring Reserve	$ 137,911	141,340	249,646	314,910	354,237	393,650	436,502	$ 141,340	$ 137,911	354,237		$ 531,292
Restructuring Costs Under 2017 Plan
Restructuring Cost and Reserve [Line Items]
Entity number of employees												86
Gross Annualized Rental Cost											$ 1,500,000
Restructuring Costs Under 2019 Plan
Restructuring Cost and Reserve [Line Items]
Restructuring costs		100,000
Number of positions eliminated, worldwide | position									23
Restructuring Costs Under 2020 Plan
Restructuring Cost and Reserve [Line Items]
Annual Expense Run Rate Reduction								$ 4,000,000
Annual Expense Run Rate Reduction Percentage								29.00%
Number of positions furloughed | position	21
Number of furloughed positions reinstated | position	20
Lease-Disposal Related Costs
Restructuring Cost and Reserve [Line Items]
Restructuring costs		421,737	302,313	274,086	317,595	153,685	210,752
Restructuring Reserve	$ 0	0	20,595	75,466	125,917	174,884	222,410	$ 0	$ 0	125,917		$ 237,493
Lease-Disposal Related Costs | Restructuring Costs Under 2017 Plan
Restructuring Cost and Reserve [Line Items]
Restructuring costs									700,000
Employee Severance | Restructuring Costs Under 2017 Plan
Restructuring Cost and Reserve [Line Items]
Restructuring costs		0	0	0	0	0	76,708
Restructuring Reserve	$ 137,911	$ 141,340	$ 229,051	$ 239,444	$ 228,320	$ 218,766	$ 214,092	$ 141,340	$ 137,911	$ 228,320		$ 293,799

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Restructuring Costs - Schedule Of Restructuring Costs (Details) - USD ($)	3 Months Ended							9 Months Ended
	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Sep. 30, 2021	Sep. 30, 2020
Restructuring Reserve [Roll Forward]
Beginning Balance	$ 141,340	$ 249,646	$ 314,910	$ 354,237	$ 393,650	$ 436,502	$ 531,292	$ 314,910	$ 531,292
Provisions/Additions	68,704	421,737	302,313	274,086	317,595	153,685	287,460	792,754	758,740
Utilized/Paid		(532,777)	(357,184)	(324,537)	(366,562)	(201,211)	(382,250)
Translation Adjustment	(3,429)	2,734	(10,393)	11,124	9,554	4,674
Ending Balance	137,911	141,340	249,646	314,910	354,237	393,650	436,502	137,911	354,237
Employee Severance | Restructuring Costs Under 2017 Plan
Restructuring Reserve [Roll Forward]
Beginning Balance	141,340	229,051	239,444	228,320	218,766	214,092	293,799	239,444	293,799
Provisions/Additions		0	0	0	0	0	76,708
Utilized/Paid		(90,445)	0	0	0	0	(156,415)
Translation Adjustment	(3,429)	2,734	(10,393)	11,124	9,554	4,674
Ending Balance	137,911	141,340	229,051	239,444	228,320	218,766	214,092	137,911	228,320
Facility and Other Costs
Restructuring Reserve [Roll Forward]
Beginning Balance	0	20,595	75,466	125,917	174,884	222,410	237,493	75,466	237,493
Provisions/Additions		421,737	302,313	274,086	317,595	153,685	210,752
Utilized/Paid		(442,332)	(357,184)	(324,537)	(366,562)	(201,211)	(225,835)
Translation Adjustment	0	0	0	0	0	0
Ending Balance	$ 0	$ 0	$ 20,595	$ 75,466	$ 125,917	$ 174,884	$ 222,410	0	$ 125,917
Facility and Other Costs | Restructuring Costs Under 2017 Plan
Restructuring Reserve [Roll Forward]
Provisions/Additions								$ 700,000