SEC Info - Falconstor Software Inc. - ‘10-K’ for 12/31/20

2020

2019

Assets

Current assets:

Cash and cash equivalents

i 1,920,656

i 1,475,166

Accounts receivable, net of allowances

i 2,836,571

i 3,406,550

Prepaid expenses and other current assets

i 1,837,596

i 2,252,372

Inventory

i 15,275

i 30,014

Contract assets

i 254,483

i 749,515

Total current assets

i 6,864,581

i 7,913,617

Property and equipment, net of accumulated depreciation and amortization

i 197,020

i 369,273

Operating lease right-of-use assets, net

i 536,272

i 1,842,254

Deferred tax assets

i 330,552

i 258,841

Software development costs, net

i 19,278

i 27,012

Other assets

i 863,964

i 829,335

Goodwill

i 4,150,339

Other intangible assets, net

i 100,134

i 57,718

Long-term contract assets

i 343,934

i 327,757

Total assets

i 13,406,074

i 15,776,146

Liabilities and Stockholders' Deficit

Current liabilities:

Accounts payable

i 453,791

i 1,302,290

Accrued expenses

i 2,293,765

i 2,533,824

Current portion of operating lease liabilities

i 665,074

i 1,655,522

Short-term loan, net of debt issuance costs and discounts

i 3,320,863

i 947,501

Deferred revenue, net

i 4,603,270

i 5,270,190

Total current liabilities

i 11,336,763

i 11,709,327

Other long-term liabilities

i 703,889

i 745,254

Notes payable, net of debt issuance costs and discounts

i 754,000

i 2,906,133

Operating lease liabilities, less current portion

i —

i 624,859

Deferred tax liabilities

i 513,027

i 432,520

Deferred revenue

i 1,765,859

i 2,085,080

Total liabilities

i 15,073,538

i 18,503,173

Commitments and contingencies (Note 11)

Series A redeemable convertible preferred stock, $ i i 0.001 / par value, i i 2,000,000 / shares authorized, i i i i 900,000 / / / shares issued and outstanding, redemption value of $ i 13,346,577 and $ i 12,262,685, respectively

i 12,940,722

i 11,304,279

Stockholders' equity:

Common stock - $ i i 0.001 / par value, i i 30,000,000 / shares authorized, i i 5,949,463 / and i i 5,918,733 / shares issued and outstanding, respectively

i 5,949

i 5,919

Additional paid-in capital

i 110,107,170

i 111,727,888

Accumulated deficit

( i 122,733,344)

( i 123,871,853)

Accumulated other comprehensive loss, net

( i 1,987,961)

( i 1,893,260)

Total stockholders' deficit

( i 14,608,186)

( i 14,031,306)

Total liabilities and stockholders' deficit

i 13,406,074

i 15,776,146

See accompanying notes to consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,

2020

2019

Revenue:

Product revenue

i 7,097,695

i 6,767,595

Support and services revenue

i 7,670,998

i 9,775,976

Total revenue

i 14,768,693

i 16,543,571

Cost of revenue:

Product

i 297,555

i 721,122

Support and service

i 1,529,923

i 2,191,865

Total cost of revenue

i 1,827,478

i 2,912,987

Gross profit

i 12,941,215

i 13,630,584

Operating expenses:

Research and development costs

i 2,467,783

i 3,208,921

Selling and marketing

i 4,601,228

i 4,337,054

General and administrative

i 3,022,350

i 5,635,273

Restructuring costs

i 1,032,826

i 1,104,318

Total operating expenses

i 11,124,187

i 14,285,566

Operating income (loss)

i 1,817,028

( i 654,982)

Interest and other expense

( i 692,838)

( i 604,647)

Income (loss) before income taxes

i 1,124,190

( i 1,259,629)

Income tax expense (benefit)

( i 14,319)

i 492,325

Net income (loss)

i 1,138,509

( i 1,751,954)

Less: Accrual of Series A redeemable convertible preferred stock dividends

i 1,083,892

i i 1,157,762 /

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

i 552,551

i 389,811

Net income (loss) attributable to common stockholders

( i 497,934)

( i 3,299,527)

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

( i 0.08)

( i 0.56)

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

( i 0.08)

( i 0.56)

Weighted average basic shares outstanding

i 5,920,517

i 5,900,621

Weighted average diluted shares outstanding

i 5,920,517

i 5,900,621

See accompanying notes to consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31,

2020

2019

Net income (loss)

i 1,138,509

( i 1,751,954)

Other comprehensive income (loss), net of applicable taxes:

Foreign currency translation

( i 68,854)

( i 4,921)

Net minimum pension liability

( i 25,847)

i 6,763

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

( i 94,701)

i 1,842

Total comprehensive income (loss)

i 1,043,808

( i 1,750,112)

Less: Accrual of Series A redeemable convertible preferred stock dividends

i 1,083,892

i 1,157,762

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

i 552,551

i 389,811

Total comprehensive income (loss) attributable to common stockholders

( i 592,635)

( i 3,297,685)

See accompanying notes to consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

Common Stock Outstanding

Common Stock

Additional Paid-In Capital

Accumulated Deficit

Accumulated Other Comprehensive Loss, Net

Total Stockholders' Deficit

Balance at December 31, 2018

i 5,872,552

i 5,873

i 113,243,227

( i 122,119,899)

( i 1,895,102)

( i 10,765,901)

Net income (loss)

( i 1,751,954)

Restricted stock issued

i 31,000

i 31

( i 31)

—

Warrants exercised

i 15,181

i 15

( i 15)

i —

Share-based compensation

i 32,280

Accretion of Series A redeemable convertible preferred stock

( i 389,811)

Dividends on Series A redeemable convertible preferred stock

( i 1,157,762)

Foreign currency translation

( i 4,921)

Net minimum pension liability

i 6,763

Balance at December 31, 2019

i 5,918,733

i 5,919

i 111,727,888

( i 123,871,853)

( i 1,893,260)

( i 14,031,306)

Net income (loss)

i 1,138,509

Restricted stock issued

i 30,730

i 30

( i 30)

i —

Share-based compensation

i 15,755

Accretion of Series A redeemable convertible preferred stock

( i 552,551)

Dividends on Series A redeemable convertible preferred stock

( i 1,083,892)

Foreign currency translation

( i 68,854)

Net minimum pension liability

( i 25,847)

Balance at December 31, 2020

i 5,949,463

i 5,949

i 110,107,170

( i 122,733,344)

( i 1,987,961)

( i 14,608,186)

See accompanying notes to consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

2020

2019

Cash flows from operating activities:

Net income (loss)

i 1,138,509

( i 1,751,954)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

i 224,518

i 399,798

Share-based payment compensation

i 15,755

i 32,280

Provision for returns and doubtful accounts

i 4,464

i 148,624

Amortization of debt discount on notes payable

i 467,229

i 273,521

Amortization of right of use assets

i 1,305,982

i 1,049,479

Deferred income tax provision

i 8,820

i 412,445

Changes in operating assets and liabilities:

Accounts receivable

i 577,259

i 54,857

Prepaid expenses and other current assets

i 353,689

( i 337,712)

Contract assets

i 478,855

i 76,549

Inventory

i 15,889

( i 14,305)

Other assets

( i 389)

i 1,403

Accounts payable

( i 911,352)

i 730,324

Accrued expenses and other long-term liabilities

( i 339,399)

( i 413,998)

Deferred revenue

( i 1,018,459)

( i 1,238,212)

Operating lease liabilities

( i 1,615,307)

( i 1,322,976)

Net cash provided by (used in) operating activities

i 706,063

( i 1,899,877)

Cash flows from investing activities:

Purchases of property and equipment

i —

( i 171,680)

Security deposits

i 51,734

i 84,678

Purchase of intangible assets

( i 80,810)

( i 55,862)

Net cash provided by (used in) investing activities

( i 29,076)

( i 142,864)

Cash flows from financing activities:

Proceeds from issuance of short-term debt, net of issuance costs

i —

i 944,607

Proceeds from issuance PPP Loan

i 754,000

i —

Payments of long term-debt

( i 1,000,000)

( i 489,321)

Net cash provided by (used in) financing activities

( i 246,000)

i 455,286

Effect of exchange rate changes on cash and cash equivalents

i 14,503

i 2,944

Net increase (decrease) in cash and cash equivalents

i 445,490

( i 1,584,511)

Cash and cash equivalents, beginning of year

i 1,475,166

i 3,059,677

Cash and cash equivalents, end of year

i 1,920,656

i 1,475,166

Supplemental Disclosures:

Cash paid for interest

i 291,821

i 237,176

Cash paid for income taxes, net

i —

Non-cash financing activities:

Undistributed Series A redeemable convertible preferred stock dividends

i 1,083,892

i 1,157,762

Accretion of Series A redeemable convertible preferred stock

i 552,551

i 389,811

See accompanying notes to consolidated financial statements.

FALCONSTOR SOFTWARE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) i Summary of Significant Accounting Policies

(a)The Company and Nature of Operations

FalconStor Software, Inc., a Delaware corporation (the "Company" or "FalconStor"), is a leading storage software company offering a converged data services software platform that is hardware agnostic. The Company develops and sells data migration, business continuity, disaster recovery, optimized backup and de-duplication solutions and provides the related maintenance, implementation and engineering services.

(b) i Liquidity

As of December 31, 2020, we had a working capital deficiency of $ i 4.5 million, which is inclusive of current deferred revenue of $ i 4.6 million, and a stockholders' deficit of $ i 14.6 million. During the year ended December 31, 2020, while we had net income of $ i 1.1 million and positive cash flow from operations of $ i 0.7 million. Our cash and cash equivalents at December 31, 2020 was $ i 1.9 million, an increase of $ i 0.4 million as compared to December 31, 2019. On April 28, 2020, the Company entered into a loan with Peapack-Gladstone Bank in an aggregate principal amount of $ i 754,000 (the "Loan"), pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").

The Company’s principal sources of liquidity at December 31, 2020 consisted of cash and future cash anticipated to be generated from operations. The Company generated positive net income and cash flows from operations during the year ended December 31, 2020. Although the Company reported negative working capital as of December 31, 2020, it was primarily due to notes payable and deferred revenue. The Company’s loan agreement with Hale Capital Partners and affiliated entities (“HCP”) mature in June 2021 and the Series A Convertible Preferred Stock, also held by HCP, is subject to redemption in July 2021. The Company intends to renegotiate with HCP, if necessary, and extend the maturity dates of the loan balances and the redemption date of the Series A Preferred Stock to at least April 1, 2022. The Company believes its current cash balances together with anticipated cash flows from operating activities, and its plans to extend the maturity of its borrowings and preferred stock 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.

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) i 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) i 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, share-based payment compensation, valuation of derivatives, capitalizable software development costs, valuation of goodwill and other intangible assets and income taxes. During the first quarter of 2018, the Company also had significant estimates in the determination of the fair value of Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock"), notes payable and warrants issued. Actual results could differ from those estimates.

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

(f) i Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

As of December 31, 2020 and 2019, the fair value of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximated carrying value due to the short maturity of these instruments. See Note (3) Fair Value Measurements for additional information.

(g) i Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible preferred stock are reviewed to determine whether or not they contain embedded derivative instruments that are required under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815 “Derivatives and Hedging” (“ASC 815”) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivatives are required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. See Note (12) Derivative Financial Instruments for additional information.

(h) i Revenue from Contracts with Customers and Associated Balances

The Company derives its revenue from sales of its products, support and services. Product revenue consists of the Company’s software integrated with industry standard hardware and sold as complete turn-key integrated solutions, as stand-alone software applications or sold on a subscription or consumption basis. Depending on the nature of the arrangement revenue, related to turn-key solutions and stand-alone software applications are generally recognized upon shipment and

delivery of license keys. For certain arrangements revenue is recognized based on usage or ratably over the term of the arrangement. Support and services revenue consists of both maintenance revenues and professional services revenues. Revenue is recorded net of applicable sales taxes.

In accordance with the authoritative guidance issued by the FASB on revenue recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has occurred, and collection of the resulting receivable is deemed probable. Products delivered to a customer on a trial basis are not recognized as revenue until the trial period has ended and acceptance has occurred by the customer. Reseller and distributor customers typically send the Company a purchase order when they have an end user identified.

Nature of Products and Services

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

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

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

Contract Balances

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

As of December 31, 2020 and 2019, accounts receivable, net of allowance for doubtful accounts, was $ i 2.8 million and $ i 3.4 million, respectively. Our allowance for doubtful accounts on accounts receivable was $0.2 million as of December 31, 2020 and 2019. As of December 31, 2020 and 2019, short and long-term contract assets, net of allowance for doubtful accounts, was $ i 0.6 million and $ i 1.1 million, respectively. Our allowance for doubtful accounts on contract assets as of December 31, 2020 was i nil.

The allowances for doubtful accounts reflect the Company’s best estimates of probable losses inherent in the accounts receivable and contract assets’ balances. The Company determines the allowances based on known troubled accounts, historical experience, and other currently available evidence. Write-offs in the accounts receivable and contract assets allowance accounts during the years ended December 31, 2020 and 2019 were $ i 0.1 million and $ i 0.0 million, respectively.

Deferred revenue is comprised mainly of unearned revenue related maintenance and technical support on term and perpetual licenses. Maintenance and technical support revenue is recognized ratably over the coverage period. Deferred revenue also includes contracts for professional services to be performed in the future which are recognized as revenue when the company delivers the related service pursuant to the terms of the customer arrangement.

i Changes in deferred revenue were as follows:


Twelve Months Ended December 31, 2020
Balance at December 31, 2019	$	i 7,355,270
Deferral of revenue	i 13,773,421
Recognition of revenue	( i 14,768,693)
Change in reserves	i 9,131
Balance at December 31, 2020	$	i 6,369,129

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 $ i 6.4 million as of December 31, 2020, of which the Company expects to recognize approximately i 72.3% of the revenue over the next 12 months and the remainder thereafter.

Approximately $ i 2.1 million of revenue is expected to be recognized from remaining performance obligations for unbilled support and services as of December 31, 2020. We expected to recognize revenue on approximately i 36% 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.

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

Disaggregation of Revenue

Please refer to the 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.

(i) i 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

i We have various operating leases for office facilities that expire through 2021. Below is a summary of our right of use assets and liabilities as of December 31, 2020.


Right of use assets	$	i 536,272
Lease liability obligations, current	i 665,074
Lease liability obligations, less current portion	i —
Total lease liability obligations	$	i 665,074
Weighted-average remaining lease term	i 0.44
Weighted-average discount rate	i 5.95		%

Our operating lease costs for the year ended December 31, 2020 were as follows:


	Years Ended December 31,
	2020		2019
Components of lease expense:
Operating lease cost	i 1,794,187		i 2,495,865
Sublease income	( i 505,626)		( i 623,776)
Net lease cost	$	i 1,288,561	$	i 1,872,089

During the year ended December 31, 2020, operating cash flows from operating leases was approximately $ i 1.5 million.

i Approximate future minimum lease payments for our right of use assets over the remaining lease periods as of December 31, are as follows:


2021			i 659,754

Total minimum lease payments			i 659,754
Less interest			i 5,320
Present value of lease liabilities			i 665,074

(j) i Property and Equipment

Property and equipment are recorded at cost. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets ( i 3 to i i 7 / years). Leasehold improvements are amortized on a straight-line basis over the terms of the respective leases or over their estimated useful lives, whichever is shorter.

(k) i Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations. The Company has not amortized goodwill related to its acquisitions, but instead tests the balance for impairment. The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. The Company tests goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value.

The fair value of the Company's single reporting unit for purposes of its goodwill impairment test exceeded its carrying value as of December 31, 2020 and 2019 and thus the Company determined there was no impairment of goodwill. As of December 31, 2020 and 2019, the Company's single reporting unit for purposes of its goodwill impairment test had a negative carrying value and thus the Company determined there was i i no / impairment of goodwill.

Identifiable intangible assets include (i) assets acquired through business combinations, which include customer contracts and intellectual property, and (ii) patents amortized over i three years using the straight-line method.

The gross carrying amount and accumulated amortization of goodwill and other intangible assets as of December 31, 2020 and 2019 are as follows:

Goodwill

i 4,150,339

Other intangible assets:

Gross carrying amount

i 4,027,912

i 3,947,103

Accumulated amortization

( i 3,927,778)

( i 3,889,385)

Net carrying amount

i 100,134

i 57,718

For the years ended December 31, 2020 and 2019, amortization expense was $ i 38,393 and $ i 89,478, respectively. As of December 31, 2020, amortization expense for existing identifiable intangible assets is expected to be $ i 56,747, $ i 30,220 and $ i 13,167 for the years ended December 31, 2021, 2022 and 2023, respectively. Such assets will be fully amortized at December 31, 2023.

(l) i Software Development Costs and Purchased Software Technology

In accordance with the authoritative guidance issued by the FASB on costs of software to be sold, leased, or marketed, costs associated with the development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility of the product has been established. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Amortization of software development costs is recorded at the greater of the straight-line basis over the product’s estimated life, or the ratio of current period revenue of the related products to total current and anticipated future revenue of these products. i The gross carrying amount and accumulated amortization of software development costs as of December 31, 2020 and 2019 are as follows:

Software development costs:

Gross carrying amount

i 2,950,132

Accumulated amortization

( i 2,930,854)

( i 2,923,120)

Software development costs, net

i 19,278

i 27,012

During the years ended December 31, 2020 and 2019, the Company recorded $ i 7,734 and $ i 61,756, respectively, of amortization expense related to capitalized software costs. As of December 31, 2020, amortization expense for software development costs is expected to be $ i 6,583, $ i 6,583 and $ i 6,112 for the years ended December 31, 2021, 2022 and 2023, respectively. Such assets will be fully amortized at December 31, 2023.

(m) i Income Taxes

The Company records income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In determining the period in which related tax benefits are realized for financial reporting purposes, excess share-based compensation deductions included in net operating losses are realized after regular net operating losses are exhausted.

The Company accounts for uncertain tax positions in accordance with the authoritative guidance issued by the FASB on income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return, should be recorded in the financial statements. Pursuant to the authoritative guidance, the Company may recognize the tax benefit from an uncertain tax position only if it meets the “more likely than not” threshold that the position will be sustained on examination by the taxing authority, based on the technical merits of the position or under statute expirations. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. In addition, the authoritative guidance addresses de-recognition, classification, interest and penalties on income taxes, accounting in interim periods, and also requires increased disclosures. See Note (5) Income Taxes Taxes for additional information.

(n) i Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the sum of the expected future cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.

(o) i Share-Based Payments

The Company accounts for share-based payments in accordance with the authoritative guidance issued by the FASB on share-based compensation, which establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under the provisions of the authoritative guidance, share-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period), net of actual forfeitures. For share-based payment awards that contain performance criteria share-based compensation, expense is recorded when the achievement of the performance condition is considered probable of achievement and is recorded on a straight-line basis over the requisite service period. If such performance criteria are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The Company estimates the fair value of share-based payments using the Black-Scholes option-pricing model or the Monte Carlo simulation model if a market condition exists. Share-based compensation expense for a share-based payment award with a market condition is recorded on a straight-line basis over the longer of the explicit service period or the service period derived from the Monte Carlo simulation. Additionally, share-based awards to non-employees are expensed over the period in which the related services are rendered at their fair value. All share-based awards are expected to be fulfilled with new shares of common stock.

(p) i Foreign Currency

Assets and liabilities of foreign operations are translated at rates of exchange at the end of the period, while results of operations are translated at average exchange rates in effect for the period. Gains and losses from the translation of foreign assets and liabilities from the functional currency of the Company’s subsidiaries into the U.S. dollar are classified as accumulated other comprehensive loss in stockholders’ deficit. Gains and losses from foreign currency transactions are included in the consolidated statements of operations within interest and other loss, net. During the years ended December 31, 2020 and 2019, foreign currency transactional losses totaled approximately $ i 7,963 and $ i 158,148, respectively.

(q) i Earnings Per Share (EPS)

Basic 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 and Series A redeemable convertible 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 years ended December 31, 2020 and 2019:

Year Ended December 31,

2020

2019

Stock options, warrants and restricted stock

i 1,395,993

i 1,263,009

Series A redeemable convertible preferred stock

i 87,815

Total anti-dilutive common stock equivalents

i 1,483,808

i 1,350,824

The following represents a reconciliation of the numerators and denominators of the basic and diluted EPS computation:

Year Ended December 31,

2020

2019

Numerator:

Net income (loss)

i 1,138,509

( i 1,751,954)

Effects of Series A redeemable convertible preferred stock:

Less: Accrual of Series A redeemable convertible preferred stock dividends

i 1,083,892

i i 1,157,762 /

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

i 552,551

i 389,811

Net income (loss) attributable to common stockholders

( i 497,934)

( i 3,299,527)

Denominator:

Weighted average basic shares outstanding

i 5,920,517

i 5,900,621

Weighted average diluted shares outstanding

i 5,920,517

i 5,900,621

EPS:

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

( i 0.08)

( i 0.56)

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

( i 0.08)

( i 0.56)

(r) i Investments

As of December 31, 2020 and 2019, the Company did not have any cost-method investments.

(s) i Recently Issued Accounting Pronouncements

In August 2018, the FASB issued 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. The Company does not expect adoption of the new standard to have a material impact on its Condensed Consolidated Financial Statements.

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. The Company does not expect adoption of the new standard to have a material impact on its Condensed Consolidated Financial Statements.

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) i Property and Equipment

Property and equipment consist of the following:

Computer hardware and software

i 16,456,790

i 16,418,916

Furniture and equipment

i 604,300

i 601,928

Leasehold improvements

i 1,730,751

i 1,715,041

Property and equipment, gross

i 18,791,841

i 18,735,885

Less accumulated depreciation and amortization

( i 18,594,821)

( i 18,366,612)

Property and equipment, net

i 197,020

i 369,273

During the years ended December 31, 2020 and December 31, 2019, the Company did i i i i no / / / t write off fixed assets or related accumulated depreciation.

Depreciation and amortization expense was $ i 178,391 and $ i 248,564 in 2020 and 2019, respectively.

(3) i Fair Value Measurements

The Company measures its cash equivalents, marketable securities 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.

Fair Value Hierarchy

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 December 31, 2020 and 2019, the Level 1 category included money market funds and commercial paper, which are included within “cash and cash equivalents” in the 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. The Company had no Level 2 securities at December 31, 2020 and 2019.

•Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. At December 31, 2020 and 2019, the Level 3 category included derivatives, which are included in "other long-term liabilities" in the consolidated balance sheets with the change in fair value from the period included in "interest and other loss, net" in the consolidated statement of operations. The Company did not hold any cash, cash equivalents or marketable securities categorized as Level 3 as of December 31, 2020 or 2019.

Measurement of Fair Value

The Company measures fair value as an exit price using the procedures described below for all assets and liabilities measured at fair value. When available, the Company uses unadjusted quoted market prices to measure fair value and classifies such items within Level 1. If quoted market prices are not available, fair value is based upon financial models that use, when possible, current market-based or independently-sourced market parameters such as interest rates and currency rates. Items valued using financial generated models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be inputs that are readily observable. If quoted market prices are not available, the valuation model used generally depends on the specific asset or liability being valued. The determination of fair value considers various factors including interest rate yield curves and time value underlying the financial instruments.

The fair value of the Company’s investments in corporate debt and government securities have been determined utilizing third party pricing services and reviewed by management. The pricing services use inputs to determine fair value which are derived from observable market sources including reportable trades, benchmark curves, credit spreads, broker/dealer quotes, bids, offers, and other industry and economic events. These investments are included in Level 2 of the fair value hierarchy.

The fair value of the Company’s derivatives were valued using the Black-Scholes pricing model adjusted for probability assumptions, with all significant inputs, except for the probability and volatility assumptions, derived from or corroborated by observable market data such as stock price and interest rates. The probability and volatility assumptions are both significant to the fair value measurement and unobservable. These embedded derivatives are included in Level 3 of the fair value hierarchy.

The fair value of the Company’s short-term loan was based upon current rates offered for similar financial instruments to the Company.

Items Measured at Fair Value on a Recurring Basis

The following table presents the Company’s 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

i 472,851

i —

i 472,851

Total derivative liabilities

i 472,851

i —

i 472,851

Total assets and liabilities measured at fair value

i 472,851

i —

i 472,851

The derivative liabilities above are classified as other long-term liabilities in the December 31, 2020 consolidated balance sheet.

The following table presents the Company’s liabilities that are measured at fair value on a recurring basis at December 31, 2019:

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

i 483,804

i —

i 483,804

Total derivative liabilities

i 483,804

i —

i 483,804

Total assets and liabilities measured at fair value

i 483,804

i —

i 483,804

The derivative liabilities above are classified as other long-term liabilities in the December 31, 2019 consolidated balance sheet.

The following table presents the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of each of the years ended December 31, 2020 and 2019:

Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)

Beginning Balance

i 483,804

i 498,086

Total (earnings) loss recognized in earnings

( i 10,953)

( i 14,282)

Ending Balance

i 472,851

i 483,804

Earnings and losses resulting from changes in the fair value of the derivative instruments above are recorded as a component of interest and other expense.

(4) i Accrued Expenses

Accrued expenses are comprised of the following:

Accrued compensation

i 100,102

i 141,233

Accrued consulting and professional fees

i 1,403,445

i 1,603,914

Other accrued expenses

i —

i 48,784

Accrued taxes

i 550,774

i 446,094

Accrued restructuring costs

i 239,444

i 293,799

i 2,293,765

i 2,533,824

(5) i Income Taxes

i Information pertaining to the Company’s income (loss) before income taxes and the applicable provision for income taxes is as follows:

2020

2019

Income (loss) before income taxes:

Domestic income (loss)

i 923,144

( i 1,847,586)

Foreign income (loss)

i 201,046

i 587,957

Total income (loss) before income taxes:

i 1,124,190

( i 1,259,629)

Provision (benefit) for income taxes:

Current:

Federal

( i 116,504)

State and local

i 10,928

( i 40,860)

Foreign

i 82,437

i 237,244

( i 23,139)

i 79,880

Deferred:

Federal

i 131,036

i 121,898

State and local

( i 6,209)

i 12,700

Foreign

( i 116,007)

i 277,847

i 8,820

i 412,445

Total provision (benefit) for income taxes:

( i 14,319)

i 492,325

During 2020 and 2019, the Company recorded a tax provision (benefit) of $( i 14,319) and $ i 492,325, respectively, related to federal, state and local and foreign income taxes. The tax provisions include a tax benefit related to our Minimum Tax Credit carryforwards which are now realizable on a more-likely-than-not basis as such amounts will be refundable under the Tax Cuts and Jobs Act, partially offset with the accrual of foreign withholding taxes as the Company is no longer permanently reinvesting its foreign earnings.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, was enacted March 27, 2020. Among the business provisions, the CARES Act provided for various payroll tax incentives, changes to net operating loss carryback and carryforward rules, business interest expense limitation increases, and bonus depreciation on qualified improvement property. Additionally, the Consolidated Appropriations Act of 2021 was signed on December 27, 2020 which provided additional COVID relief provisions for businesses. The Company has evaluated the impact of both the Acts and has determined that any impact is not material to its financial statements.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

2020

2019

Deferred Tax Assets:

Allowance for receivables

i 34,820

i 52,439

Deferred revenue

i 352,087

i 383,920

Share-based compensation

i 23,647

i 25,127

Accrued expenses and other liabilities

i 331,497

i 232,777

Domestic net operating loss carryforwards

i 20,072,283

i 20,761,781

Foreign net operating loss carryforwards

i 187,114

i 187,328

Tax credit carryforwards

i 3,106,022

AMT tax credit carryforwards

i —

i 116,504

Capital loss carryforwards

i 34,254

i 32,109

Fixed assets

i 155,942

i 179,534

Interest expense carryforwards

i —

i 94,674

Lease liability

i 134,522

i 494,030

Intangibles

i 113,932

i 176,210

Sub-total

i 24,546,120

i 25,842,455

Valuation allowance

( i 23,222,032)

( i 23,613,642)

Total Deferred Tax Assets

i 1,324,088

i 2,228,813

Deferred Tax Liabilities:

Prepaid commissions and other

( i 113,706)

( i 134,618)

Tax method changes

( i 429,836)

( i 913,496)

Right of use asset

( i 105,116)

( i 387,740)

Deferred state income tax

( i 408,089)

( i 470,545)

Foreign withholding taxes

( i 449,816)

( i 496,093)

Total Deferred Tax Liabilities

( i 1,506,563)

( i 2,402,492)

Net Deferred Tax Liabilities

( i 182,475)

( i 173,679)

As of each reporting date, the Company considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. In assessing the Company’s ability to recover its deferred tax assets, the Company evaluated whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. The Company considered all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, historical earnings, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Based on these factors the Company determined that its U.S. deferred tax assets with the exception of its Minimum Tax Credit are not realizable on a more-likely-than-not basis and has recorded a full valuation allowance against such net deferred tax assets. The Company’s valuation allowance decreased by $ i 0.4 million due to operations.

As of December 31, 2020, the Company had approximately $ i 86.4 million, of federal net operating loss carryforwards, of which $ i 81.8 million are set to expire beginning in 2030, if not utilized, and the remaining $ i 4.6 million of which can be carryforward indefinitely. As of December 31, 2020, the Company had approximately $ i 3.1 million of research and development tax credit carryforwards which expire at various dates beginning in 2023, if not utilized. Utilization of the net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credit carryforwards before utilization.

The effective tax rate before income taxes varies from the current statutory federal income tax rate as follows:

2020

2019

Tax at Federal statutory rate

i 236,080

( i 264,522)

Increase (reduction) in income taxes resulting from:

State and local taxes

i 242,992

( i 675,527)

Non-deductible expenses

i 5,702

i 9,100

GILTI

i —

i 208,632

Stock compensation

i —

i 6,236

Net effect of foreign operations

( i 96,210)

( i 10,012)

Uncertain tax positions

( i 1,706)

( i 71,119)

Change in valuation allowance

( i 474,956)

i 1,188,639

Foreign withholding taxes

i 19,299

i 165,099

Other

i 54,480

( i 64,201)

( i 14,319)

i 492,325

Due to the change in U.S. federal tax law, the Company does not intend to indefinitely reinvest any of its unremitted foreign earnings. As of December 31, 2020, the Company has provided for additional foreign withholding taxes totaling approximately $ i 0.4 million on approximately $ i 4.3 million of undistributed earnings of its subsidiaries operating outside of the United States for which withholding tax applies.

i A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, is as follows:

2020

2019

Balance at January 1,

i 81,400

i 134,246

Increases to tax positions taken in prior years

i —

Expiration of statutes of limitation

( i 5,894)

( i 42,207)

Translation

i —

( i 10,639)

Balance at December 31,

i 75,506

i 81,400

At December 31, 2020, $ i 110,846 including interest, if recognized, would reduce the Company’s annual effective tax rate. As of December 31, 2020, the Company had approximately $ i 35,340 of accrued interest. The Company believes it is reasonably possible that $ i 6,462 of its unrecognized tax benefits will reverse within the next 12 months due to expiring statute of limitations. The Company records any interest and penalties related to unrecognized tax benefits in income tax expense.

The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2017 through 2020 tax years generally remain subject to examination by federal and most state tax authorities. In addition to the U.S., the Company’s major taxing jurisdictions include China, Taiwan, Japan, France and Germany.

(6) i Accumulated Other Comprehensive Loss

i The changes in Accumulated Other Comprehensive Loss, net of applicable tax, for December 31, 2020 are as follows:

Foreign
Currency
Translation

Net
Minimum
Pension
Liability

Total

Accumulated other comprehensive income (loss) at December 31, 2019

( i 1,926,826)

i 33,566

( i 1,893,260)

Other comprehensive income (loss)

Other comprehensive income (loss) before reclassifications

( i 68,854)

( i 24,997)

( i 93,851)

Amounts reclassified from accumulated other comprehensive income

i —

( i 850)

Total other comprehensive income (loss)

( i 68,854)

( i 25,847)

( i 94,701)

Accumulated other comprehensive income (loss) at December 31, 2020

( i 1,995,680)

i 7,719

( i 1,987,961)

The changes in Accumulated Other Comprehensive Loss, net of applicable tax, for December 31, 2019 are as follows:

Foreign
Currency
Translation

Net
Minimum
Pension
Liability

Total

Accumulated other comprehensive income (loss) at December 31, 2018

( i 1,921,905)

i 26,803

( i 1,895,102)

Other comprehensive income (loss)

Other comprehensive income (loss) before reclassifications

( i 4,921)

i 7,008

i 2,087

Amounts reclassified from accumulated other comprehensive income

i —

( i 245)

Total other comprehensive income (loss)

( i 4,921)

i 6,763

i 1,842

Accumulated other comprehensive income (loss) at December 31, 2019

( i 1,926,826)

i 33,566

( i 1,893,260)

For the year ended December 31, 2020 and 2019, the amounts reclassified to net income (loss) related to the Company’s defined benefit plan and maturities of marketable securities. These amounts are included within “Operating income (loss)" within the consolidated statement of operations.

(7) i Notes Payable and Stock Warrants

On November 17, 2017, HCP-FVA, an entity affiliated with Martin Hale, a director of the Company, provided a commitment, whereby it agreed to finance up to $ i 3 million to the Company on the terms, and subject to the conditions, set forth in the commitment (the "Commitment"). As part of the Commitment, on November 17, 2017, the Company entered into a Loan Agreement with Lender and certain other loan parties named therein, pursuant to which the Lender made a Short Term Loan to the Company in the principal amount of $ i 500,000. Pursuant to the Short Term Loan, HCP-FVA received warrants to purchase i 138,591 shares of the Company's common stock at a nominal exercise price ("Backstop Warrants").

On February 23, 2018, the Company closed on the Commitment from HCP-FVA to purchase up to $ i 3 million of Units (the "Financing"). HCP-FVA subscribed for the full $ i 3 million of Units (at the Company’s election) in the Commitment by payment of $ i 2.5 million in cash and the conversion of the $ i 500,000 Short-Term Loan into Units. In consideration for HCP-FVA’s subscription of i 3 million of Units, HCP-FVA was issued Financing Warrants (as hereinafter defined) to purchase i 3,669,900 shares of the Company’s common stock for a nominal exercise price.

In the Financing, the Company agreed to offer FalconStor stockholders as of November 17, 2017 who were accredited investors the opportunity to purchase up to a total of i 40 million Units (inclusive of subscriptions by HCP-FVA). Each Unit had a purchase price of $ i 0.371063 and consisted of the following (each, a “Unit”):

i.$ i 0.10 in senior secured debt (for a total of $ i 4 million of senior secured debt assuming full subscription of the Financing), secured by all of the assets of the Company and guaranteed by each of the Company’s domestic subsidiaries, having an interest rate of prime plus i 0.75% and a maturity date of June 30, 2021 (the “Term Loan”);

ii.warrants to purchase i 0.12233 shares of the Company’s common stock for a nominal exercise price (for a total of i 4.8932 million shares assuming full subscription of the Financing) (the “Financing Warrants”); and

iii. i 0.0225 shares of Series A Preferred Stock at a per Unit price of $ i 0.271063 (subject to increase to take into account accretion of the Series A Preferred Stock after December 31, 2020), all such shares to be acquired directly from their current holder, HCP-FVA.

The closing of the Commitment effectively constituted HCP-FVA’s purchase of i 30 million Units in the Financing. As a result, the maximum additional funds that the Company could receive in the Financing was $ i 1,000,000 through the purchase of i 10 million Units by other eligible stockholders. In exchange for serving as the backstop for the Financing, upon the closing of the Commitment, HCP-FVA received additional Backstop Warrants to purchase i 415,774 shares of the Company’s common stock for a nominal exercise price, in addition to the i 138,591 Backstop Warrants issued to HCP-FVA in connection with the making of the Short Term Loan.

On February 23, 2018, in connection with HCP-FVA’s subscription in the Financing, the Company entered into an Amended and Restated Term Loan Credit Agreement, dated as of the same date (the “Amended and Restated Loan Agreement”), with HCP-FVA and certain other loan parties named therein setting forth the terms of the Term Loan. The Amended and Restated Loan Agreement amended and restated the Loan Agreement.

Under the Amended and Restated Loan Agreement, in the event the Term Loan is prepaid for any reason, such prepayment will be subject to the payment of a premium in an amount equal to i 5% of the principal amount prepaid. The Term Loan is required to be prepaid upon the occurrence of certain events, including but not limited to certain asset dispositions, the incurrence of additional indebtedness, the receipt of insurance proceeds, and a change of control, subject to certain exceptions.

The Amended and Restated Loan Agreement has customary representations, warranties and affirmative and negative covenants. The negative covenants include financial covenants by the Company to maintain minimum cash denominated in U.S. dollars plus accounts receivable outstanding for less than 90 days of $ i 2 million. The Amended and Restated Loan Agreement also contains customary events of default, including but not limited to payment defaults, cross defaults with certain other indebtedness, breaches of covenants, bankruptcy events and a change of control. In the case of an event of default, as administrative agent under the Loan Agreement, HCP-FVA may (and upon the written request of lenders holding in excess of 50% of the Term Loan, which must include HCP-FVA, is required to accelerate payment of all obligations under the Loan Agreement, and seek other available remedies).

On April 23, 2018, HCP-FVA exercised most of its Backstop Warrants on a cash-less basis and was issued i 533,706 shares of the Company's common stock. HCP-FVA exercised its remaining Backstop Warrants to purchase i 15,436 shares of common stock on May 21, 2019.

The Commitment and the Financing were approved by the Company’s Board of Directors, based on a recommendation of a special committee of independent directors, with Mr. Hale recusing himself.

On October 9, 2018, FalconStor closed on the final tranche of its Financing of Units to certain eligible stockholders of the Company. As a result, the Company received an additional $ i 1,000,000 of gross proceeds from new investors (the “New Investors”) which is in addition to the $ i 3,000,000 of gross proceeds previously received from HCP-FVA through the subscription of i 30,000,000 Units pursuant to the Commitment on February 23, 2018.

In addition to providing the Company with $ i 1,000,000 of gross proceeds, the New Investors purchased $ i 520,000 of the Term Loan held by HCP-FVA and i 342,000 of the i i i i 900,000 / / / shares of Series A Preferred Stock held by HCP-FVA. Financing Warrants to purchase i 636,109 shares of Common Stock held by HCP-FVA were also cancelled. Accordingly, the New Investors held Financing Warrants to purchase i 1,859,420 shares of Common Stock and HCP-FVA then held Financing Warrants to purchase i 3,033,791 shares of Common Stock. The transfer of securities by HCP-FVA to New Investors was subject to certain transfer limitations to ensure the preservation of the Company’s net operating loss carry forward.

In December 2018, the Company received proceeds of approximately $ i 489,321 from the exercise of Financing Warrants. In January of 2019, these proceeds were applied as a partial repayment of principle under the Term Loan.

On December 27, 2019, the Company entered into Amendment No. 1 to Amended and Restated Term Loan Credit Agreement, by and among the Company, certain of the Company’s affiliates in their capacities as guarantors, HCP-FVA as administrative agent for the lenders party thereto (the “Lenders”), ESW Capital, LLC (“ESW”), as co-agent, and the Lenders, to provide for, among other things, a new $2,500,000 term loan facility to the Company (the “2019 Term Loan”). The Amendment also provides for certain financial covenants. On December 27, 2019, the Company drew down $1,000,000 of the 2019 Term Loan and the Company has paid a fixed amount of interest on such advance equal to i 15% of the principal amount advanced. On September 27, 2020, the Company paid the 2019 Term Loan in full.

ASC 470-20-25-2 requires that debt or stock with detachable warrants issued in a bundled transaction with debt and equity proceeds be accounted for separately, based on the relative fair values of each instrument. The proceeds allocated to the Backstop Warrants and Financing Warrants were valued at $ i 4,143,000.

Derivative treatment did not apply to the warrants issued in association with the restructuring based upon the warrants being penny warrants (pre-paid stock).

i The initial transaction was recorded as follows:


At Inception	February 23, 2018
	Basis		Fair Value
Series A redeemable convertible preferred stock, net	$	i 10,312,113	$	i 8,709,684
Notes payable, net	i 2,728,778		i 2,457,249
Warrant liability	i —		i 4,143,000
Total	$	i 13,040,891	$	i 15,309,933


Deemed dividend						$	i 2,269,042

The Series A Preferred Stock consists of the following:


Series A redeemable convertible preferred stock principal balance	$	i 9,000,000
Accrued dividends	i 1,312,112
Discount	( i 1,602,428)
Total Series A redeemable convertible preferred stock, net at inception on February 23, 2018	i 8,709,684
Accrued dividends	i 683,742
Accretion of preferred stock	i 363,280
Total Series A redeemable convertible preferred stock, net at December 31, 2018	i 9,756,706
Accrued dividends	i 1,157,762
Accretion of preferred stock	i 389,811
Total Series A redeemable convertible preferred stock, net at December 31, 2019	i 11,304,279
Accrued dividends	i 1,083,892
Accretion of preferred stock	i 552,551
Total Series A redeemable convertible preferred stock, net at December 31, 2020	$	i 12,940,722

The notes payable balance consists of the following:


Notes payable principal balance	$	i 3,000,000
Deferred issuance costs	( i 254,247)
Discount	( i 288,504)
Total notes payable, net at inception on February 23, 2018	i 2,457,249
Proceeds from issuance of long-term debt	i 1,000,000
Revaluation of long-term debt	( i 447,008)
Accretion of discount	i 202,195
Deferred issuance costs	( i 87,609)
Total notes payable, net at December 31, 2018	i 3,124,827
Repayment of long-term debt	( i 489,321)
Proceeds from issuance of short-term debt	i 1,000,000
Discount and accretion of discount	i 273,521
Deferred issuance costs	( i 55,393)
Total notes payable, net at December 31, 2019	$	i 3,853,634
Accretion of discount	i 467,229
Proceeds from issuance of the PPP loan	i 754,000
Repayment of short-term debt	( i 1,000,000)
Total notes payable, net at December 31, 2020	$	i 4,074,863

The $ i 4 million senior secured debt bears interest at prime plus i 0.75% and matures on June 30, 2021. As of December 31, 2020, the Company was in compliance with the financial covenants contained in the Amended and Restated Term Loan Credit Agreement.

Loan under the Paycheck Protection Program

On April 28, 2020, the Company entered into the Loan with Peapack-Gladstone Bank in an aggregate principal amount of $ i 754,000, pursuant to the PPP under the CARES Act.

The Loan is evidenced by a promissory note (the “Note”) dated April 28, 2020. The Loan matures i two years from the disbursement date and bears interest at a rate of i 1.000% per annum, with the first i six months of interest deferred. Principal and interest are payable monthly commencing six months after the disbursement date and may be prepaid by the Company at any time prior to maturity with i no prepayment penalties.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. The Loan is subject to forgiveness to the extent proceeds are 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 has used a significant majority of the Loan amount for Qualifying Expenses. However, no assurance is provided that the Company will obtain forgiveness of the Loan in whole or in part.

The Loan is included in notes payable, net of debt issuance costs and discounts in the accompanying condensed consolidated balance sheet..

(8) i Series A Redeemable Convertible Preferred Stock

The Company has i 900,000 shares of Series A Preferred Stock outstanding. Pursuant to the Amended and Restated Certificate of Designations, Preferences and Rights for the Series A Preferred Stock (the ”Certificate of Designations”), each share of Series A Preferred Stock can be converted into shares of the Company’s common stock, at an initial conversion price equal to $ i 102.49 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 ( i 60) consecutive trading days exceeds i 250% of the conversion price and continues to exceed i 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 i 5% (up to a maximum dividend rate of i 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 Company’s Amended and Restated Term Loan and Credit 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 i 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 i 100% of the stated value of a share of Series A Preferred Stock plus accrued and unpaid dividends with respect thereto, and (ii) the product of the number of shares of common stock underlying a share of Series A Preferred Stock and the closing price as of the occurrence of the triggering event. On or after July 30, 2021, each holder of Series A Preferred Stock can also require the Company to redeem its Series A Preferred Stock in cash at a per share price equal to i 100% of the stated value of a share of Series A Preferred Stock plus accrued and unpaid dividends with respect thereto. Notwithstanding the forgoing, no holder of Series A Preferred Stock is permitted to exercise any rights or remedies upon a Breach Event or to exercise any redemption rights under the Certificate of Designations, unless approved by the holders of a majority of the then outstanding shares of Series A Preferred Stock.

Upon consummation of a fundamental sale transaction, the Series A Preferred Stock shall be redeemed at a per share redemption price equal to the greater of (y) i 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 i 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 $ i 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 $ i 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 i 80% of the Company’s accounts receivable; and the redemption or purchase of any of the capital stock of the Company.

The Company has classified the Series A Preferred Stock as temporary equity in the financial statements as it is subject to redemption at the option of the holder under certain circumstances. As a result of the Company’s analysis of all the embedded conversion and put features within the Series A Preferred Stock, the contingent redemption put options in the Series A Preferred Stock were determined to not be clearly and closely related to the debt-type host and also did not meet any other scope exceptions for derivative accounting. Therefore, the contingent redemption put options are being accounted for as derivative instruments and the fair value of these derivative instruments was bifurcated from the Series A Preferred Stock and recorded as a liability.

As of December 31, 2020 and December 31, 2019 the fair value of these derivative instruments was $ i 472,851 and $ i 483,804, respectively, and were included in "other long-term liabilities" within the consolidated balance sheets. The gain on the change in fair value of these derivative instruments for the twelve months ended December 31, 2020 and December 31, 2019 of $ i 10,953 and $ i 14,282, respectively, were included in “interest and other expense” within the consolidated statement of operations.

i 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 expense” within the consolidated statement of operations, for the twelve months ended December 31, 2020 and 2019, were as follows:

Years Ended December 31,

2020

2019

Beginning Balance

i 483,804

i 498,086

Total (gain) loss recognized in earnings

( i 10,953)

( i 14,282)

Ending Balance

i 472,851

i 483,804

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. i The probability and volatility assumptions are as follows:


Probability of redemption as part of a fundamental sale transaction			i 0.5%
Probability of redemption absent a fundamental sale transaction			i 4.75%
Annual volatility			i 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 Commitment, Hale Capital Partners, LP, 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 twelve months ended December 31, 2020 and 2019, respectively. i The following represents a reconciliation of net loss attributable to common stockholders for the twelve months ended December 31, 2020 and 2019, respectively:

Years Ended December 31,

2020

2019

Net income (loss)

i 1,138,509

( i 1,751,954)

Effects of Series A redeemable convertible preferred stock:

Less: Accrual of Series A redeemable convertible preferred stock dividends

i 1,083,892

i i 1,157,762 /

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

i 552,551

i 389,811

Net income (loss) attributable to common stockholders

( i 497,934)

( i 3,299,527)

(9) i Stockholders’ Equity

Stock Repurchase Activity

During the year ended December 31, 2020 and December 31, 2019, the Company repurchased i no shares of its common stock. As of December 31, 2020, the Company had the authorization to repurchase i 49,078 shares of its common stock based upon its judgment and market conditions.

(10) i Share-Based Payment Arrangements

On June 22, 2018, the Company's stockholders adopted the FalconStor Software, Inc. 2018 Incentive Stock Plan (the "2018 Plan"). The 2018 Plan is administered by the Compensation Committee and provides for the issuance of up to i 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. Exercise prices of the options will be determined by the Compensation Committee of the Company's Board of Directors, subject to the consent of Hale Capital Partners, LP. The vesting terms shall be performance based and determined by the Committee, subject to the consent of Hale Capital Partners, LP, 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 December 31, 2020:

Name of Plan

Shares
Authorized

Shares Available
for Grant

Shares
Outstanding

FalconStor Software, Inc. 2018 Incentive Stock Plan

i 1,471,997

i 25,247

i 1,386,213

i The following table summarizes the Company’s equity plans that have expired but that still have equity awards outstanding as of December 31, 2020:

Name of Plan

Shares Available for Grant

Shares Outstanding

FalconStor Software, Inc., 2016 Incentive Stock Plan

i —

i 3,850

FalconStor Software, Inc., 2006 Incentive Stock Plan

i —

i 5,930

All outstanding options granted under the Company’s equity plans have terms of i ten years.

A summary of the Company’s stock option activity for 2020 is as follows:

Number of
Options

Weighted
Average
Price

Weighted
Average
Remaining
Contractual
Life (Years)

Aggregate
Intrinsic
Value

Options Outstanding at December 31, 2019

i 10,445

i 127.53

i 4.96

i —

Granted

i —

Exercised

i —

Forfeited

i —

Expired

( i 665)

i 331.50

Options Outstanding at December 31, 2020

i 9,780

i 113.66

i 4.25

i —

Options Exercisable at December 31, 2020

i 9,780

i 113.66

i 4.25

i —

Options Expected to Vest after December 31, 2020

i —

i 0.00

i —

Stock option exercises are fulfilled with new shares of common stock.

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 consolidated statements of operations:

Years ended December 31,

2020

2019

Cost of revenue - Support and Service

i 496

i 2,250

Research and development costs

i 942

i 6,348

Selling and marketing

i 785

i 4,030

General and administrative

i 13,532

i 19,652

i 15,755

i 32,280

The Company did not recognize any tax benefits related to share-based compensation expense during the years ended December 31, 2020 and 2019.

The Company has the ability to issue both restricted stock and restricted stock units. The fair value of the restricted stock awards and restricted stock units are expensed at the fair value per share at date of grant for directors, officers and employees. i A summary of the total stock-based compensation expense related to restricted stock units, which is included in the Company’s total share-based compensation expense for each respective year, is as follows:


	Years ended December 31,
	2020		2019
Directors, officers and employees	$	i 15,756	$	i 23,031

A summary of the Company’s restricted stock activity for 2020 is as follows:


						Number of Restricted Stock Awards
Non-Vested at December 31, 2019						i 1,147,002
Granted						i 360,638
Vested						( i 30,730)
Forfeited						( i 90,697)
Non-Vested at December 31, 2020						i 1,386,213

Restricted stock units are fulfilled with new shares of common stock. The total intrinsic value of restricted stock for which the restrictions lapsed during the years ended was $ i 15,365 and $ i 485,519 for the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2020, total unrecognized compensation costs for unvested restricted stock unit awards was $ i 683,928, including $ i 649,133 relating to performance-based awards. The performance condition for such awards was not deemed probable at grant dates or at December 31, 2020 and the cost related to such awards will begin to be recognized once the performance condition is deemed probable. The remaining amount of $ i 34,795 is expected to be recognized over a weighted-average period of i 2.4 years as of December 31, 2020.

As of December 31, 2020, the Company had i 1,421,240 shares of common stock reserved for issuance upon the exercise or vesting of stock options and restricted stock.

(11) i Commitments and Contingencies

The Company’s headquarters are located in Austin, Texas. The Company has an operating lease covering its Melville, N.Y. office facility that expires in April 2021. The Company also has several additional operating leases related to offices in foreign countries. The expiration dates for these leases occur in 2021. i The following is a schedule of future minimum lease payments for all operating leases as of December 31, 2020:


2021	i 659,754
Thereafter	i —
	$	i 659,754

These leases require the Company to pay its proportionate share of real estate taxes and other common charges.

The Company typically provides its customers a warranty on its software products for a period of no more than i 90 days. Such warranties are accounted for in accordance with the authoritative guidance issued by the FASB on contingencies. For the year ended December 31, 2020, the Company has not incurred any costs related to warranty obligations.

Under the terms of substantially all of its software license agreements, the Company has agreed to indemnify 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 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 8, the holders of the Series A Preferred Stock have redemption rights upon certain triggering events. As of December 31, 2020, 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 $ i 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 $ i 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 $ i 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 twelve ( i 12) months of his base salary if (i) he has been employed by the Company for at least twelve ( i 12) months at the time of termination or (ii) a change of control has occurred within six ( i 6) months of Mr. Brooks’ employment. Except as set forth in the preceding sentence, Mr. Brooks is entitled to receive severance equal to six ( i 6) months of his base salary if he has been employed by the Company for less than six ( i 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 $ i 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 $ i 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 $ i 70,000, subject to attainment of performance objectives to be mutually agreed upon and established.

As described under Note 14, the Company has incurred certain restructuring costs in connection with restructuring plans adopted in 2017 and 2019.

In addition, as of December 31, 2020, our liability for uncertain tax positions totaled $ i 111,142. At this time, the settlement period for the positions, including related accrued interest, cannot be determined.

(12) i Derivative Financial Instruments

The Company does not use derivative financial instruments for trading or speculative purposes. As of December 31, 2020 and 2019, the Company had no foreign currency forward contracts outstanding. The Company did i i no / t utilize foreign currency forward contracts during the years ended December 31, 2020 and 2019.

As a result of the Company’s analysis of all the embedded conversion and put features within its Series A redeemable convertible preferred stock, the contingent redemption put options in the Series A redeemable convertible 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 were bifurcated from the Series A redeemable convertible preferred stock and recorded as a liability. At the time of issuance of the Series A redeemable convertible preferred stock the fair value of these derivative instruments were recorded as a reduction to preferred stock. As of December 31, 2020 and 2019, the fair value of these derivative instruments was $ i 472,851 and $ i 483,804, respectively, and were included in "other long-term liabilities" within the consolidated balance sheets. The gain on the change in fair value of these derivative instruments for 2020 of $ i 10,953 and the gain on the change in fair value of these derivative instruments for 2019 of $ i 14,282, were included in “interest and other loss, net” within the consolidated statement of operations.

(13) i Litigation

In view of the inherent difficulty of predicting the outcome of litigation, particularly where the claimants seek very large or indeterminate damages, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

In accordance with the authoritative guidance issued by the FASB on contingencies, the Company accrues anticipated costs of settlement, damages and losses for claims to the extent specific losses are probable and estimable. The Company records a receivable for insurance recoveries when such amounts are probable and collectable. In such cases, there may be an exposure to loss in excess of any amounts accrued. If, at the time of evaluation, the loss contingency related to a litigation is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable and, the Company will expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, the Company will accrue the minimum amount of the range.

Other Claims

The Company is subject to various legal proceedings and claims, asserted or unasserted, which arise in the ordinary course of business. While the outcome of any such matters cannot be predicted with certainty, such matters are not expected to have a material adverse effect on the Company’s financial condition or operating results.

The Company continues to assess certain litigation and claims to determine the amounts, if any, that the Company believes may be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could materially adversely impact the Company’s financial results, its cash flows and its cash reserves.

(14) i 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 ending December 31, 2017, and when combined with previous workforce reductions in the second quarter of Fiscal 2017 reduced the Company’s workforce to approximately i 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 the Mellville, 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 fiscal year ended December 31, 2020, the Company incurred lease disposal-related costs for this property of $ i 956,118. As of December 31, 2020, $ i 75,466 of the Company's remaining accrued lease disposal cost has been recorded as a component of operating lease liabilities. The Company expects the remaining accrued severance-related costs of $ i 239,444 as of December 31, 2020 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 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 i 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 $ i 0.1 million in severance expense as a result of this action. The 2019 Plan was substantially completed at 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, that it is prepared to keep in place for the remainder of 2020 (the "2020 Plan"). The 2020 Plan reduced the Company's annual cash expense run rate by $ i 4.0 million or i 29%. The Company has furloughed i 21 positions worldwide, and i 20 of these positions were reinstated by the fourth quarter of 2020. During the nine months ended September 30, 2020, the Company has not yet incurred severance expense as a result of this action.

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

Severance related costs

Facility and other costs

Total

Balance at December 31, 2018

i 461,361

i 453,447

i 914,808

Provisions/Additions

i 245,910

i 858,408

i 1,104,318

Utilized/Paid

( i 413,472)

( i 1,074,362)

( i 1,487,834)

Balance at December 31, 2019

i 293,799

i 237,493

i 531,292

Provisions/Additions

i 76,708

i 956,118

i 1,032,826

Translation Adjustment

i 25,353

i —

i 25,353

Utilized/Paid

( i 156,416)

( i 1,118,145)

( i 1,274,561)

Balance at December 31, 2020

i 239,444

i 75,466

i 314,910

In the accompanying consolidated balance sheets, the Company's remaining accrued severance and other charges are included within “accrued expenses” and "accounts payable". The Company's remaining accrued facility cost has been recorded as a component of "operating lease liabilities". Expenses incurred under the 2017, 2019 and 2020 Plans during the years ended December 31, 2020 and 2019 are included within “restructuring costs” in the accompanying consolidated statements of operations.

(15) i Employee Benefit Plans

Defined Contribution Plan

Effective July 2002, the Company established a voluntary savings and defined contribution plan (the “Plan”) under Section 401(k) of the Internal Revenue Code. This Plan covers all U.S. employees meeting certain eligibility requirements and allows participants to contribute a portion of their annual compensation. Employees are 100% vested in their own contributions. For the years ended December 31, 2020 and 2019, the Company did i i no / t make any contributions to the Plan.

Effective July 1, 2007, the Company, in accordance with the labor pension system in Taiwan, contributes i 6% of salaries to individual pension accounts managed by the Bureau of Labor Insurance. The plan covers all Taiwan employees that elect the new pension system and all employees hired after July 1, 2005. For the years ended December 31, 2020 and 2019, the Company contributed approximately $ i 2,000 and $ i 4,000, respectively.

Defined Benefit Plan

The Company has a defined benefit plan covering employees in Taiwan. The Company accounts for its defined benefit plan in accordance with the authoritative guidance issued by the FASB on retirement benefits, which requires the Company to recognize the funded status of its defined benefit plan in the accompanying consolidated balance sheet, with the corresponding adjustment to accumulated other comprehensive income, net of tax.

At December 31, 2020 and 2019, $ i 7,719 and $ i 33,566, respectively, is included in accumulated other comprehensive (loss) income for amounts that have not yet been recognized in net periodic pension cost. These amounts include the following: unrecognized transition obligation of $ i 0 and $ i 0 at December 31, 2020 and 2019, respectively, and unrecognized actuarial gains of $ i 9,872 and $ i 33,566 at December 31, 2020 and 2019, respectively. During 2020, the total amount recorded in other comprehensive (loss) income related to the pension plan was $( i 25,847) (net of tax), which consisted of an actuarial loss of $ i 25,847 and the recognition of $ i 0 of transition obligations recognized during 2020 as a component of net periodic pension cost. The transition obligation and actuarial gain included in accumulated other comprehensive (loss) income and expected to be recognized in net periodic pension cost for the year ended December 31, 2021, is $ i 0 and $ i 18 respectively.

i Pension information for the years ended December 31, 2020 and 2019, is as follows:

2020

2019

Accumulated benefit obligation

i 65,188

i 170,879

Changes in projected benefit obligation:

Projected benefit obligation at beginning of year

i 180,151

i 174,261

Interest cost

i 1,207

i 1,469

Actuarial gain

i 28,834

i 389

Benefits paid

( i 121,838)

i —

Service cost

i —

Currency translation

i 7,157

i 4,032

Projected benefit obligation at end of year

i 95,511

i 180,151

Changes in plan assets:

Fair value of plan assets at beginning of year

i 149,903

i 134,351

Actual return on plan assets

i 6,226

i 8,069

Benefits paid

( i 121,838)

i —

Employer contributions

i 2,012

i 4,041

Currency translation

i 4,173

i 3,442

Fair value of plan assets at end of year

i 40,476

i 149,903

Funded status

( i 55,035)

( i 30,248)

The underfunded status of the Company's defined benefit plan has been recorded as a component of other long-term liabilities as of December 31, 2020 and 2019.

Components of net periodic pension cost:

Interest cost

i 1,207

i 1,469

Expected return on plan assets

( i 1,005)

( i 1,133)

Amortization of net (gain) loss

( i 1,052)

( i 581)

Service cost

i —

Net periodic pension (benefit) cost

( i 850)

( i 245)

The Company makes contributions to the plan so that minimum contribution requirements, as determined by government regulations, are met. Company contributions of approximately $ i 2,000 are expected to be made during 2021. Benefit payments of $ i 78,000 are expected to be paid through 2030.

The Company utilized the following assumptions in computing the benefit obligation at December 31, 2020 and 2019 as follows:


	Years ended December 31,
	2020		2019
Discount rate	i 0.43	%	i 0.66	%
Rate of increase in compensation levels	i 2.50	%	i 1.00	%
Expected long-term rate of return on plan assets	i 0.43	%	i 0.66	%

(16) i Segment Reporting and Concentrations

The Company is organized in a single operating segment for purposes of making operating decisions and assessing performance. i Revenues from the United States to customers in the following geographical areas for the years ended December 31, 2020 and 2019, and the location of long-lived assets as of December 31, 2020 and 2019, are summarized as follows:

Years ended December 31,

2020

2019

Revenues:

Americas

i 5,387,128

i 4,299,840

Asia Pacific

i 3,655,011

i 6,212,275

Europe, Middle East, Africa and Other

i 5,726,554

i 6,031,456

Total Revenues

i 14,768,693

i 16,543,571

2020

2019

Long-lived assets:

Americas

i 1,735,986

i 2,603,521

Asia Pacific

i 502,344

i 860,023

Europe, Middle East, Africa and Other

i 52,690

i 190,928

Total long-lived assets

i 2,291,020

i 3,654,472

For the year ended December 31, 2020, the Company had i two customers that accounted for more than 10% of total revenue. For the year ended 2019, the Company had i two customers that accounted for more than 10% of total revenue.

As of December 31, 2020 and 2019, the Company had i i one / customer that accounted for more than 10% of the gross accounts receivable balance, respectively.

(17) i Valuation and Qualifying Accounts – Allowance for Returns and Doubtful Accounts

Period Ended

Balance at Beginning of Period

Charges / (Benefits) to Revenue

(Increases) Deductions

Balance at End of Period

i 216,153

i 4,464

i 69,282

i 151,335