FALCONSTOR SOFTWARE INC DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (FORM 10-Q)

FALCONSTOR SOFTWARE INC DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (FORM 10-Q)

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The next Administration's Dialogue and Evaluation of Monetary Situation and
Outcomes of Operations incorporates "forward-looking statements" inside the that means
of Part 27A of the Securities Act of 1933 and Part 21E of the Securities
Change Act of 1934. These forward-looking statements may be recognized by the
use of predictive, future-tense or forward-looking terminology, akin to
"believes," "anticipates," "expects," "estimates," "plans," "could," "intends,"
"will," or comparable phrases. Traders are cautioned that any forward-looking
statements usually are not ensures of future efficiency and contain important
dangers and uncertainties, and that precise outcomes could differ materially from
these projected within the forward-looking statements. The next dialogue
ought to be learn along with the consolidated monetary statements and notes to
these monetary statements included elsewhere on this report.

Overview

FalconStor Software program, Inc., a Delaware company ("we", the "Firm" or
"FalconStor") is a trusted knowledge safety software program chief modernizing catastrophe
restoration and backup operations for the hybrid cloud world. The Firm allows
enterprise prospects and managed service suppliers to safe, migrate, and
defend their knowledge whereas decreasing knowledge storage and long-term retention prices by
as much as 95%. Greater than 1,000 organizations and managed service suppliers worldwide
standardize on FalconStor as the muse for his or her cloud first knowledge
safety future. Our merchandise are provided by and supported by a worldwide
community of main managed service suppliers ("MSPs"), programs integrators,
resellers, and authentic tools producers ("OEMs").

Our merchandise deal with a requirement for enterprise knowledge safety pushed by the
method through which customers and companies are more and more interacting in a
digital area by a number of units, networks and platforms. The onset of the
coronavirus pandemic accelerated this shift, as ongoing distant work and work
from residence preparations launched novel challenges to sustaining enterprise
knowledge safety. The adoption of elevated worker mobility and versatile distant
work preparations, akin to a broader incorporation of cloud know-how and the
choice for workers to make use of their very own units, has launched further
vulnerabilities that companies should monitor and defend by options like
ours with a view to preserve enterprise knowledge integrity.

Our merchandise are utilized by enterprises and MSPs to deal with two key areas of
enterprise knowledge safety: (i) long-term knowledge retention and restoration, and (ii)
knowledge replication to protect enterprise continuity. Our integration with fashionable
cloud-based knowledge storage environments, akin to IBM PowerVS Cloud, AWS and
Microsoft Azure, allows our enterprise prospects to considerably cut back prices
and enhance the portability, safety and accessibility of their enterprise
knowledge. We imagine this accessibility is essential in our fashionable world, the place knowledge should
be protected and intelligently leveraged to facilitate studying, enhance product
design and drive aggressive benefit. Our merchandise can be utilized no matter
the underlying {hardware}, cloud and source-data, which allows our enterprise
prospects to leverage their current {hardware} and software program investments.

Because the starting of 2020, we've centered our go-to-market efforts on
long-term knowledge retention and restoration knowledge safety segments, constructing on the
momentum we generated since 2019. In 2021, we elevated our go-to-market
funding inside our core areas of the Americas, EMEA, Japan, Korea, and
Southeast Asia, and launched StorSafeTM, the subsequent era of our Digital Tape
Library ("VTL") product household constructed for MSPs.

Through the third quarter of 2022, we continued to ship innovation and to
improve every of our merchandise. Our StorSafeTM answer is a crucial backup
long-term archive retention device in enterprise IT departments' knowledge safety
arsenal and for MSPs that present knowledge safety as a service to enterprise
firms. It allows them to modernize their backup and archive environments,
leverage environment friendly hybrid- and public-cloud storage environments, akin to these
supplied by IBM PowerVS Cloud, AWS and Microsoft Azure, save operational prices,
and enhance restore efficiency for speedy distant catastrophe restoration.

Via StorSafeTM, we're making progress increasing our know-how to ship
an enterprise-class, extremely versatile and environment friendly backup and long-term knowledge
storage optimization answer for the hybrid cloud world.


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Past our long-term retention and reinstatement merchandise, our StorGuardTM
enterprise continuity pushed knowledge replication answer offers our prospects the
potential to maneuver workloads to the best vacation spot, on-premises or within the cloud,
with superior perception. This answer is designed for MSPs and enterprise
organizations with advanced, heterogeneous IT environments and the complete spectrum
of knowledge administration use instances, together with however not restricted to massive enterprises,
universities, well being care entities and governmental establishments. StorGuardTM is
a contemporary, complete and easy-to-use software program answer that allows IT
professionals to have full perception into and management over their
group's knowledge.

To offer for better ease of use for all our merchandise, we additionally made
important enhancements to our central knowledge administration console, now referred to as
StorSightTM, to interface with every of our merchandise to offer a holistic view
of an enterprise's complete knowledge safety atmosphere - whether or not on-premises in
knowledge facilities, within the public cloud, or a hybrid - in addition to the important thing analytics,
studies and dashboards our prospects have to repeatedly optimize their
operations.

FalconStor continues to deal with MSPs, enterprise prospects, and OEM companions.
These markets supply probably the most important alternative and are greatest suited to
notice the worth of FalconStor merchandise, and supply an environment friendly and efficient
entry to broad, worldwide markets. Most of our income comes from gross sales to MSPs
and to enterprise prospects by resellers.

Our "Enterprise Accomplice" program for our MSPs and resellers supplies monetary
incentives for these companions which might be keen to make a dedication to
FalconStor by coaching, advertising and income. As a part of our evaluate of all
of our operations to maximise financial savings with out sacrificing gross sales, and in
reference to our Enterprise Accomplice program, we frequently evaluate our
relationship with every of our companions in all areas. We determined to deal with
solely these companions who have the experience, personnel and networks to determine
potential prospects and to service our finish customers.

Traditionally, nearly all of our software program licenses have been offered on a capability
foundation and have included a perpetual proper to make use of the licensed capability. Nonetheless,
we've shifted our focus to an annual recurring income mannequin by
subscription or term-based licenses, which supplies a buyer the best to make the most of
our options over a delegated time period. We anticipate income from
subscription-based licensing to extend over the subsequent a number of years.

Fluctuation in our income is pushed by the quantity and mixture of gross sales from interval
to interval. Income allotted to perpetual and time period software program licenses are
acknowledged at a cut-off date upon digital supply of the obtain hyperlink and
the license keys, as these merchandise have important standalone performance.
Product upkeep and assist companies are glad over time as they're
stand-ready obligations all through the assist interval. Because of this, revenues
related to upkeep companies are deferred and acknowledged as income
ratably over the time period of the contract. Revenues related to skilled
companies are acknowledged at a cut-off date upon buyer acceptance.

Through the third quarter of 2022, our shift to recurring income based mostly income
took a cloth step ahead as we continued to broaden our strategic reseller
relationship with IBM. Via this strategic reseller relationship, IBM and
FalconStor co-market joint options consisting of FalconStor's VTL/StorSafe
software program, IBM Cloud Object Storage ("COS"), and IBM Energy Digital Servers
("PowerVS") for environment friendly software and knowledge migration from on-premises
environments to IBM PowerVS Cloud, and on-going SaaS-based backup and restore
inside IBM PowerVS Cloud. Whereas we anticipate this relationship to offer wholesome
recurring income development sooner or later as our joint options can be offered on a
month-to-month consumption foundation (MRR), our accelerated focus in some of these hybrid
cloud relationships, and related realignment of our gross sales groups, will
proceed to contribute to complete GAAP income fluctuations within the short-term. In
reality, GAAP complete income within the third quarter of 2022 declined 6.8%
year-over-year. Given the discount in GAAP Q3 2022 revenues, we delivered a internet
revenue of $221,372, in comparison with a internet revenue of $348,640 within the third quarter of
2021, though we managed working prices to $2,296,464 within the quarter
in comparison with $2,391,966 in Q3 2021. Regardless of our year-over-year GAAP complete income
decline, we imagine GAAP complete income will proceed to extend every quarter
throughout 2022. In reality, GAAP complete income elevated to $3,059,141 within the third
quarter of 2022 in comparison with $2,394,335 and $2,049,107 within the second and first
quarters of 2022, respectively, and we anticipate sequential quarter-over-quarter
GAAP complete income to proceed rising all through the stability of 2022.


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COVID-19

We're carefully monitoring the influence of the 2019 novel coronavirus, or COVID-19,
on all elements of our enterprise. In March 2020, the World Well being Group
characterised COVID-19 as a pandemic and the President of america
declared the COVID-19 outbreak a nationwide emergency. Since then, the COVID-19
pandemic has quickly unfold throughout the globe and has already resulted in
important volatility, uncertainty and financial disruption. The outbreak of
COVID-19 has prompted and should proceed to trigger journey bans or disruptions, and in
some instances, prohibitions of non-essential actions, disruption and shutdown of
companies and better uncertainty in international monetary markets. The influence of
COVID-19 is fluid and unsure, however it has prompted and should proceed to trigger
varied adverse results, together with an incapability to satisfy with precise or
potential prospects, our finish prospects deciding to delay or abandon their
deliberate purchases or failing to make funds, and delays or disruptions in our
or our companions' provide chains.

Operations outcomes – for the three months ended September 30, 2022 In comparison with the three months ending September 30, 2021.

The next desk presents income and expense line gadgets reported in our
condensed consolidated statements of operations and their corresponding
share of complete income for the three months ended September 30, 2022 and
2021 and the period-over-period greenback and share adjustments for these line
gadgets. Our outcomes of operations are reported as one enterprise phase,
represented by our single working phase.

                                        Three Months Ended September 30,                     Change
(quantities in {dollars})                     2022                      2021                 Interval to Interval
Income:
Product income                 $ 1,568,110         51 %  $ 1,547,013         47 %  $   21,097             1 %
Help and companies income      1,491,031         49 %    1,736,456      
  53 %    (245,425 )         (14 )%
Complete income                     3,059,141        100 %    3,283,469        100 %    (224,328 )          (7 )%
Value of income:
Product                              19,711          1 %       41,351          1 %     (21,640 )         (52 )%
Help and repair                 360,393         12 %      400,934         12 %     (40,541 )         (10 )%
Complete value of income               380,104         12 %      442,285         13 %     (62,181 )         (14 )%
Gross revenue                      2,679,037         88 %    2,841,184         87 %    (162,147 )          (6 )%
Working bills:
Analysis and improvement prices      581,941         19 %      711,273         22 %    (129,332 )         (18 )%
Promoting and advertising               887,967         29 %    1,610,635         49 %    (722,668 )         (45 )%
Common and administrative          826,556         27 %      633,954         19 %     192,602            30 %
Achieve on litigation settlement             -          - %     (632,600 )      (19 )%    632,600          (100 )%
Restructuring prices                       -          - %       68,704          2 %     (68,704 )        (100 )%
Complete working bills          2,296,464         75 %    2,391,966         73 %     (95,502 )          (4 )%
Working revenue (loss)             382,573         13 %      449,218         14 %     (66,645 )         (15 )%
Achieve on debt extinguishment               -          - %            -          - %           -             - %

Curiosity and different bills (111,399) (4) % (84,049)

   (3 )%    (27,350 )         (33 )%
Earnings (loss) earlier than revenue
taxes                               271,174          9 %      365,169         11 %     (93,995 )         (26 )%
Earnings tax expense (profit)         49,802          2 %       16,529          1 %      33,273           201 %
Web revenue (loss)               $   221,372          7 %  $   348,640         11 %  $ (127,268 )         (37 )%
Much less: Accrual of Sequence A
redeemable
  convertible most well-liked inventory
dividends                           391,016         13 %      288,802          9 %     102,214            35 %
Much less: Accretion to redemption
worth of
  Sequence A redeemable
convertible most well-liked
  inventory                              40,023          1 %       13,517          0 %      26,506           196 %
Web revenue (loss) attributable
to
  widespread stockholders           $  (209,667 )       (7 )% $    46,321          1 %  $ (255,988 )        (553 )%




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he received

Our major gross sales focus is on promoting software program options and platforms which
contains stand-alone software program purposes, software program built-in with business
commonplace {hardware} and offered as one full built-in answer or offered on a
subscription or consumption foundation. Because of this, our income is assessed as
both: (i) product income, or (ii) assist and companies income. Through the
three months ended September 30, 2022, we acknowledged income of $3,059,141,
in contrast with $3,283,469 within the prior yr interval.

Product income

Product income is comprised of gross sales of each licenses for our software program
options and gross sales of the platforms on which the software program is put in. This
contains stand-alone software program purposes and, now and again, software program built-in
with business commonplace {hardware}. We not primarily supply or promote {hardware},
somewhat we facilitate our prospects in shopping for their very own {hardware}. Our merchandise
are offered by (i) value-added resellers, (ii) distributors, and/or (iii)
on to end-users. These revenues are acknowledged when all of the relevant
standards underneath accounting rules typically accepted in america are
met.

For the three months ended September 30, 2022 and 2021, product income
represented 51% and 47% of our complete income, respectively. Product income of
$1,568,110 for the three months ended September 30, 2022 elevated barely by
$21,097, or 1%, from $1,547,013 within the prior yr interval. Product income throughout
the three months ended September 30, 2022 was akin to product income for
the identical quarter within the prior yr interval.

We proceed to put money into our product portfolio by refreshing and updating our
current product strains and creating our subsequent era of revolutionary product
choices to drive our gross sales quantity in assist of our long-term outlook.

Help and repair income

Help and companies income is comprised of income from (i) upkeep and
technical assist companies, (ii) skilled companies primarily associated to the
implementation of our software program, and (iii) engineering companies. Income derived
from upkeep and technical assist contracts are deferred and acknowledged
ratably over the contractual upkeep time period. Revenues related to
skilled and engineering companies are acknowledged at a cut-off date upon
buyer acceptance.

Upkeep and technical assist companies income for the three months ended
September 30, 2022 decreased by $152,278 to $1,489,635, in comparison with $1,641,913
within the prior yr interval. Our upkeep and technical assist service income
outcomes primarily from (i) the acquisition of upkeep and assist contracts by
our prospects, and (ii) the renewal of upkeep and assist contracts by our
current and new prospects after their preliminary contracts expire. The lower in
upkeep and technical assist service income from the earlier yr
displays a decline in new contracts and renewals.

We acquired $1,396 in skilled companies income for the three months ended
September 30, 2022 as in comparison with $94,543 within the prior yr interval. Skilled
companies income will differ relying on the variety of options for which
prospects elect to buy engineering or skilled companies to help with
their implementations or different tasks. We anticipate skilled companies income
to proceed to differ from interval to interval based mostly upon the variety of prospects who
elect to make the most of our skilled companies upon buying any of our options.

Value Income, Gross Revenue and Gross Margin

Complete value of income for the three months ended September 30, 2022 decreased
14% to $380,104, in contrast with $442,285 within the prior yr interval. Complete gross
revenue decreased $162,147, or 6%, to $2,679,037 for the three months ended
September 30, 2022, in contrast with $2,841,184 for the prior yr interval. Complete
gross margin decreased to 88% for the three months ended September 30, 2022,
in contrast with 87% for the prior yr interval. The lower in our complete gross
revenue, in absolute {dollars}, was as a consequence of decreased income.

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Usually, our complete gross earnings and complete gross margins fluctuate based mostly on
a number of components, together with (i) income development ranges, (ii) adjustments in personnel
headcount and associated prices, and (iii) our product choices and mixture of gross sales.

Product Income Value, Gross Revenue and Gross Margin

Value of product income consists primarily of {hardware} and guarantee bills.
Value of product income for the three months ended September 30, 2022 decreased
to $19,711, in contrast with $41,351 within the prior yr interval. This lower in
value of product income for the three months ended September 30, 2022 was
primarily as a consequence of a continued intentional shift away from {hardware} gross sales within the
present interval, in comparison with the prior yr interval.

Help value, service income, gross revenue and gross margin

Value of assist and repair income consists primarily of personnel and different
prices related to offering software program implementations, technical assist
underneath upkeep contracts and coaching. Value of assist and repair income
for the three months ended September 30, 2022 decreased 10% to $360,393,
in contrast with $400,934 within the prior yr interval. Help and repair gross
margin decreased barely to 76 % for the three months ended September 30, 2022,
in contrast with 77 % for the prior yr interval. The lower in the price of
assist and repair income was primarily associated to decreased contractors and
consulting charges.

Working Bills

Our three-month working bills are over September 30, 2022 decreased by 95,502 {dollars} to me $2,296,464 From $2,391,966for the interval of the earlier yr.

Analysis and improvement prices

Analysis and improvement prices consist primarily of personnel prices for product
improvement, and different associated prices related to the event of latest
merchandise, enhancements to current merchandise, high quality assurance and testing.
Analysis and improvement prices decreased by $129,332, or 18%, to $581,941 for
the three months ended September 30, 2022, from $711,273 within the prior yr
interval. The lower in analysis and improvement prices was primarily associated to
a lower in personnel prices.

Promoting and Advertising

Promoting and advertising bills primarily encompass gross sales and advertising personnel and associated prices, journey, public relations bills, advertising literature and promotions, commissions, commerce truthful bills, and prices related to our abroad gross sales workplaces. Promoting and advertising bills decreased $722,668or 45%, to $887,967 For the three months ending September 30, 2022 From $1,610,635 within the interval of the earlier yr. The lower in promoting and advertising bills is primarily as a consequence of reductions in workers prices, commissions, promotion prices, consulting, contractors {and professional} charges.

common and administrative

Common and administrative bills consist primarily of personnel prices of
common and administrative capabilities, public firm associated prices, administrators'
and officers' insurance coverage, authorized {and professional} charges, and different common
company overhead prices. Common and administrative bills elevated barely
by $192,602 to $826,556 for the three months ended September 30, 2022, in contrast
to $0.6 million for the prior yr interval. The rise typically and
administrative bills was due primarily to a rise in skilled charges
and contractors which had been partially offset by a discount in personnel prices.


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Litigation Settlement Good points

Through the three months ended September 30, 2021, we recorded a achieve of $632,600
million for a authorized settlement of a contractual dispute with a advertising/gross sales
agency.

Restructuring

In June 2017, the Board of Administrators of the Firm (the "Board") accredited a
complete plan to extend working efficiency ("the 2017 Plan"). The 2017
Plan resulted in a realignment and discount in workforce. The 2017 Plan was
considerably accomplished by the tip of our fiscal yr ended December 31, 2017
and when mixed with earlier workforce reductions within the second quarter of
Fiscal 2017 lowered our workforce to roughly 81 staff at December 31,
2017. As a part of this consolidation effort, the Firm vacated a portion of its
former Melville, NY workplace area in the course of the three months ended June 30, 2018. As
the lease has terminated in April 2021, there aren't any additional restructuring prices
related to this lease.

There have been no restructuring bills within the three months ended September 30, 2022down $68,704 from the earlier yr.

Curiosity and different (loss) revenue, internet

Curiosity and different expense, internet, elevated $27,350 to a lack of $111,399 for the
three months ended September 30, 2022, in contrast with a lack of $84,049 within the
prior yr interval. The rise in curiosity and different expense primarily relates
to a rise in foreign money translation loss. The fluctuation in curiosity and
different expense from quarter to quarter additionally pertains to curiosity expense, overseas
foreign money features and losses, curiosity revenue, sublease revenue and the change in
truthful worth of our embedded derivatives. For extra data on our by-product
devices, see Notice (10) Honest Worth Measurements to our unaudited condensed
consolidated monetary statements.

Earnings Taxes

Our provision for revenue taxes consists of state and native, and overseas taxes.
For the three months ended September 30, 2022 and 2021, the Firm recorded
revenue tax provision of $49,802 and provision of $16,529, respectively,
consisting primarily of state and native, and overseas taxes.

From September 30, 2022Our conclusion concerning the realizability of our US deferred tax property has not modified and we’ve recorded a full evaluation provision towards it.

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Outcomes of operations – for the 9 months ended September 30, 2022 In comparison with the 9 months ended September 30, 2021.

The next desk presents income and expense line gadgets reported in our
condensed consolidated statements of operations and their corresponding
share of complete income for the 9 months ended September 30, 2022 and
2021 and the period-over-period greenback and share adjustments for these line
gadgets. Our outcomes of operations are reported as one enterprise phase,
represented by our single working phase.

                                                                                            Change
                                       9 Months Ended September 30,                 Interval to Interval
(quantities in {dollars})                   2022                       2021
Income:
Product income               $  3,125,936         42 %  $  5,288,747         51 %  $ (2,162,811 )      (41 )%
Help and companies income     4,376,647         58 %     5,081,795         49 %      (705,148 )      (14 )%
Complete income                    7,502,583        100 %    10,370,542        100 %    (2,867,959 )      (28 )%
Value of income:
Product                             65,018          1 %       298,966          3 %      (233,948 )      (78 )%
Help and repair              1,128,764         15 %     1,233,067         12 %      (104,303 )       (8 )%
Complete value of income            1,193,782         16 %     1,532,033         15 %      (338,251 )      (22 )%
Gross revenue                     6,308,801         84 %     8,838,509         85 %    (2,529,708 )      (29 )%
Working bills:
Analysis and improvement
prices                            1,943,446         26 %     2,032,360         20 %       (88,914 )       (4 )%
Promoting and advertising            3,202,311         43 %     4,267,010         41 %    (1,064,699 )      (25 )%
Common and administrative       2,400,561         32 %     2,129,921         21 %       270,640         13 %
Achieve on litigation settlement            -          - %      (632,600 )       (6 )%      632,600       (100 )%
Restructuring prices                    744          0 %       792,754          8 %      (792,010 )     (100 )%
Complete working bills         7,547,062        101 %     8,589,445         83 %    (1,042,383 )      (12 )%
Working revenue (loss)         (1,238,261 )      (17 )%      249,064          2 %    (1,487,325 )     (597 )%
Achieve on debt extinguishment              -          - %       754,000          7 %      (754,000 )     (100 )%
Curiosity and different expense        (430,630 )       (6 )%     (544,625 )       (5 )%      113,995         21 %
Earnings (loss) earlier than revenue
taxes                           (1,668,891 )      (22 )%      458,439          4 %    (2,127,330 )     (464 )%
Earnings tax expense (profit)       150,369          2 %        63,804          1 %        86,565        136 %
Web revenue (loss)             $ (1,819,260 )      (24 )% $    394,635          4 %  $ (2,213,895 )     (561 )%
Much less: Accrual of Sequence A
redeemable
  convertible most well-liked inventory
dividends                        1,030,365         14 %       848,898          8 %       181,467         21 %
Much less: Accretion to redemption
worth of Sequence
  A redeemable convertible
most well-liked inventory                     90,420          1 %       285,814          3 %      (195,394 )      (68 )%
Web revenue (loss)
attributable to widespread
  stockholders                $ (2,940,045 )      (39 )% $   (740,077 )       (7 )% $ (2,199,968 )     (297 )%



Income

Our major gross sales focus is on promoting software program options and platforms which
contains stand-alone software program purposes, software program built-in with business
commonplace {hardware} and offered as one full built-in answer or offered on a
subscription or consumption foundation. Because of this, our income is assessed as
both: (i) product income, or (ii) assist and companies income. Through the
9 months ended September 30, 2022, we acknowledged income of $7.5 million,
in contrast with $10.4 million within the prior yr interval.

Product income

Product income is comprised of gross sales of each licenses for our software program
options and gross sales of the platforms on which the software program is put in. This
contains stand-alone software program purposes and, now and again, software program built-in
with business commonplace {hardware}. We not primarily supply or promote {hardware},
somewhat we facilitate our prospects in shopping for their very own {hardware}. Our merchandise
are offered by (i) value-added resellers, (ii) distributors, and/or (iii)
on to end-users. These revenues are acknowledged when all of the relevant
standards underneath accounting rules typically accepted in america are
met.


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For the 9 months ended September 30, 2022 and 2021, product income
represented 42% and 51% of our complete income, respectively. Product income of
$3,125,936 for the 9 months ended September 30, 2022 decreased $2,162,811, or
41%, from $5,288,747 within the prior yr interval. The lower in product income
is because of order delays in addition to coming into into a number of massive multi-year
contracts within the first 9 months of 2021 that didn't repeat within the first half
of 2022.

We proceed to put money into our product portfolio by refreshing and updating our
current product strains and creating our subsequent era of revolutionary product
choices to drive our gross sales quantity in assist of our long-term outlook.

Help and repair income

Help and companies income is comprised of income from (i) upkeep and
technical assist companies, (ii) skilled companies primarily associated to the
implementation of our software program, and (iii) engineering companies. Income derived
from upkeep and technical assist contracts are deferred and acknowledged
ratably over the contractual upkeep time period. Revenues related to
skilled and engineering companies are acknowledged at a cut-off date upon
buyer acceptance.

Upkeep and technical assist companies income for the 9 months ended
September 30, 2022 decreased $456,857 to $4,369,416, in comparison with $4,826,273 in
the prior yr interval. Our upkeep and technical assist service income
outcomes primarily from (i) the acquisition of upkeep and assist contracts by
our prospects, and (ii) the renewal of upkeep and assist contracts by our
current and new prospects after their preliminary contracts expire. The lower in
upkeep and technical assist service income from the earlier yr
displays a decline in new contracts and renewals.

Skilled companies income for the 9 months ended September 30, 2022
decreased to $7,231, in comparison with $255,522 within the prior yr interval. Skilled
companies income will differ relying on the variety of options for which
prospects elect to buy engineering or skilled companies to help with
their implementations or different tasks. We anticipate skilled companies income
to proceed to differ from interval to interval based mostly upon the variety of prospects who
elect to make the most of our skilled companies upon buying any of our options.

Value Income, Gross Revenue and Gross Margin

Complete value of income for the 9 months ended September 30, 2022 decreased 22%
to $1,193,782, in contrast with $1,532,033 within the prior yr interval. Complete gross
revenue decreased $2.5 million, or 28.6%, to $6.3 million for the 9 months
ended September 30, 2022, in contrast with $8.8 million for the prior yr interval.
Complete gross margin decreased barely to 84% for the 9 months ended September
30, 2022, in contrast with 85% for the prior yr interval. The lower in our complete
gross revenue was as a consequence of decreased income. Usually, our complete gross earnings
and complete gross margins fluctuate based mostly on a number of components, together with (i)
income development ranges, (ii) adjustments in personnel headcount and associated prices,
and (iii) our product choices and mixture of gross sales.

Product Income Value, Gross Revenue and Gross Margin

Value of product income consists primarily of {hardware} and guarantee bills.
Value of product income for the 9 months ended September 30, 2022 decreased
to $65,018, in contrast with $298,966 within the prior yr interval. Product gross
margin for the 9 months ended September 30, 2022 elevated, yr over yr,
to 98 % from 94 % for a similar interval in 2021. This lower in value of product
income for the 9 months ended September 30, 2022 was primarily as a consequence of a
continued intentional shift away from {hardware} gross sales within the present interval,
in comparison with the prior yr interval.

Help value, service income, gross revenue and gross margin

Value of assist and repair income consists primarily of personnel and different
prices related to offering software program implementations, technical assist
underneath upkeep contracts and coaching. Value of assist and repair income
for the 9 months ended September 30, 2022 decreased 8% to $1,128,764,
in contrast with $1,233,067 within the prior yr interval. Help and repair gross

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margin decreased barely to 74% for the 9 months ended September 30, 2022,
in contrast with 76% for the prior yr interval. The lower in the price of assist
and repair income, in absolute {dollars}, was primarily associated to decreased
personnel value and worker bonuses.

Working bills

Our working bills for the 9 months have ended September 30, 2022 decreased by
$1.0 million to me $7.5 million From $8.6 millionfor the interval of the earlier yr.

Analysis and improvement prices

Analysis and improvement prices consist primarily of personnel prices for product
improvement, and different associated prices related to the event of latest
merchandise, enhancements to current merchandise, high quality assurance and testing.
Analysis and improvement prices decreased $88,914, or 4%, to $1,943,446 for the
9 months ended September 30, 2022, from $2,032,360 within the prior yr interval.
The lower in analysis and improvement prices was primarily associated to a
lower in personnel prices and bonuses.

Promoting and Advertising

Promoting and advertising bills primarily encompass gross sales and advertising personnel and associated prices, journey, public relations bills, advertising literature and promotions, commissions, commerce truthful bills, and prices related to our abroad gross sales workplaces. Promoting and advertising bills decreased $1.1 millionor 25%, to $3.2 million For the 9 months ended
September 30, 2022 From $4.3 million within the interval of the earlier yr. The lower in promoting and advertising bills is especially as a consequence of reductions in commissions, personnel prices, worker bonuses and promotion prices.

common and administrative

Common and administrative bills consist primarily of personnel prices of
common and administrative capabilities, public firm associated prices, administrators'
and officers' insurance coverage, authorized {and professional} charges, and different common
company overhead prices. Common and administrative bills elevated by
$270,640 to $2,400,561 for the 9 months ended September 30, 2022, in comparison with
$2,129,921 for the prior yr interval. The rise typically and administrative
bills was due primarily to a rise in skilled charges and contractors
which had been partially offset by a discount in personnel prices.

Litigation Settlement Good points

Through the 9 months ended September 30, 2021, we recorded a achieve of $632,600
million for a authorized settlement of a contractual dispute with a advertising/gross sales
agency.

Restructuring

In June 2017, the Board of Administrators of the Firm (the "Board") accredited a
complete plan to extend working efficiency ("the 2017 Plan"). The 2017
Plan resulted in a realignment and discount in workforce. The 2017 Plan was
considerably accomplished by the tip of our fiscal yr ended December 31, 2017
and when mixed with earlier workforce reductions within the second quarter of
Fiscal 2017 lowered our workforce to roughly 81 staff at December 31,
2017. As a part of this consolidation effort, the Firm vacated a portion of its
former Melville, NY workplace area in the course of the three months ended June 30, 2018. As
the lease has terminated in April 2021, there aren't any additional restructuring prices
related to this lease.

Restructuring expense decreased $792,010 for the 9 months ended September 30,
2022 to $744, in comparison with a restructuring expense of $792,754 within the prior yr
interval.


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Debt Reimbursement Good points

Achieve on debt extinguishment decreased $754,000 for the 9 months ended
September 30, 2022, from $754,000 for the 9 months ended September 30, 2021.
The debt extinguishment throughout such 9 months ended September 30, 2021
mirrored the forgiveness of the Firm's PPP Paycheck Safety Program mortgage,
which was issued by Peapack Gladstone Financial institution in an combination principal quantity of
$754,000, and forgiven in full on March 30, 2021.

Curiosity and different (loss) revenue, internet

Curiosity and different expense, internet, decreased $113,995 to a lack of $430,630 for
the 9 months ended September 30, 2022, in contrast with a lack of $544,625 in
the prior yr interval. The decreased curiosity and different expense primarily
pertains to a lower curiosity expense because of funds made on
excellent debt, which has been partially offset by a rise in foreign money
translation loss. The fluctuation in curiosity and different expense from quarter to
quarter additionally pertains to curiosity expense, overseas foreign money features and losses,
curiosity revenue, sublease revenue and the change in truthful worth of our embedded
derivatives. For extra data on our by-product devices, see Notice (10)
Honest Worth Measurements to our unaudited condensed consolidated monetary
statements.

Earnings Taxes

Our provision for revenue taxes consists of state and native, and overseas taxes.
For the 9 months ended September 30, 2022 and 2021, the Firm recorded
revenue tax provision of $150,369 and $63,804, respectively, consisting primarily
of state and native, and overseas taxes.

From September 30, 2022Our conclusion concerning the realizability of our US deferred tax property has not modified and we’ve recorded a full evaluation provision towards it.

Liquidity and capital assets

The primary sources of liquidity and obligations of the corporate

Our principal sources of liquidity are our money and money equivalents balances
generated from working, investing and financing actions. Our money and money
equivalents stability as of September 30, 2022 and December 31, 2021 totaled $1.7
million and $3.2 million, respectively.

We're at the moment a celebration to the Amended and Restated Time period Mortgage Credit score Settlement,
dated as of February 23, 2018, as amended December 27, 2019, by and between the
Firm and HCP-FVA, LLC ("HCP-FVA"), (the "Amended and Restated Mortgage
Settlement"). In reference to the then-proposed public providing of the Firm
as described within the Firm's Registration Assertion on Kind S-1, as amended,
initially filed on June 3, 2021, we entered into the Mortgage Extension Letter
Settlement, which supplied for an extension of the maturity date on the portion
of the excellent indebtedness owed to Hale Capital Companions, LP ("Hale
Capital") underneath the Amended and Restated Mortgage Settlement to June 30, 2023. The
remaining principal quantity excellent, which was owed to different lenders, was
repaid in full. On July 19, 2022, we entered right into a letter settlement with Hale
Capital (the "Second Mortgage Extension Letter Settlement"), that supplied for a
subsequent extension of the maturity date on the excellent indebtedness owed
underneath the Amended and Restated Mortgage Settlement from June 30, 2023 to December 31,
2023. See Notice (9) Notes Payable to our unaudited condensed consolidated
monetary statements for extra data. Additionally, as described additional in Notice
(12) Sequence A Redeemable Convertible Most popular Inventory to our unaudited condensed
consolidated monetary statements, the efficient date of the obligatory
redemption proper of the Firm's Sequence A Redeemable Convertible Most popular
Inventory (the "Sequence A Most popular Inventory") held by HCP-FVA and Hale Capital was
prolonged from July 30, 2021 to July 30, 2023 pursuant to that sure Modification
No. 1 to the Firm's Amended and Restated Certificates of Designations,
Preferences and Rights of the Sequence A Most popular Inventory, dated as of June 24,
2021 (as amended, the "Certificates of Designations"). On July 19, 2022, the
Firm and Hale Capital entered right into a letter settlement pursuant to which Hale
Capital agreed to not train or to allow the train of the obligatory
redemption proper of the Sequence A Most popular Inventory on or previous to December 31,
2023 until the redemption is in accordance with Part 8(e)(z) of the
Certificates of Designations or in accordance with

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a Breach Occasion (as outlined within the Certificates of Designations). If such Sequence A
Most popular Inventory was redeemed at September 30, 2022, the Firm would have been
required to pay the holders of the Sequence A Most popular Inventory $15.5 million.

The Amended and Restated Mortgage Settlement has customary representations,
warranties and affirmative and adverse covenants. The adverse covenants
embrace monetary covenants regarding in-force annual contract worth. The
Amended and Restated Mortgage Settlement additionally incorporates customary occasions of default,
together with however not restricted to cost defaults, cross defaults with sure different
indebtedness, breaches of covenants, chapter occasions and a change of management.
Within the case of an occasion of default, as administrative agent underneath the Amended
and Restated Mortgage Settlement, HCP-FVA, an affiliate of Hale Capital could (and upon
the written request of lenders holding in extra of fifty% of the time period loans, which
should embrace HCP-FVA, is required to) speed up cost of all obligations
underneath the Amended and Restated Mortgage Settlement, and search different obtainable
cures.

As mentioned in Notice (17) Restructuring Prices to our unaudited condensed
consolidated monetary statements, the Melville, NY lease which ended on April
30, 2021 with a gross annualized rental value of $1.5 million, is not going to be
changed. FalconStor is primarily a digital firm and expects to redeploy this
financial savings to extra productive makes use of.

Liquidity

As of September 30, 2022, we had a working capital deficiency of $0.2 million,
which is inclusive of present deferred income of $3.5 million, and a
stockholders' deficit of $15.7 million. Through the 9 months ended September
30, 2022, the Firm had a internet lack of $1.8 million and adverse money movement from
operations of $1.4 million. The Firm's complete money stability at September 30,
2022 was $1.7 million, a lower of $1.5 million in comparison with December 31, 2021.
On June 30, 2021, the Firm repaid in full $1.3 million of the $3.5 million
principal quantity that was excellent as of June 2, 2021 underneath the Amended and
Restated Mortgage Settlement.

Though there may be no assurance, based mostly on its projected money flows from
operations, lately accomplished financing actions, value slicing measures in
place and current money available, the Firm is projecting to have enough
liquidity and to be money movement optimistic by the subsequent 12 months.

money movement evaluation

The money movement data is as follows:

                                                           9 Months Ended September 30,
                                                              2022                  2021
Money supplied by (utilized in):
Working actions                                    $      (1,417,959 )     $    (707,889 )
Investing actions                                              (38,078 )          (108,928 )
Financing actions                                                    -           2,371,707
Impact of change charge adjustments                                   (59,118 )              (762 )

Web enhance (lower) in money and money equivalents $1,515,155

$1,554,128



Web money utilized in working actions totaled $1.4 million for the 9 months
ended September 30, 2022, in contrast with $0.7 million of internet money utilized in
working actions within the prior yr interval. The change in internet money utilized in
working actions for the 9 months ended September 30, 2022 versus the
prior yr was primarily as a consequence of our internet loss, a bigger lower in deferred
income, partially offset with a achieve on debt extinguishment and a bigger
lower in accounts receivable.

Web money utilized in investing actions totaled $38,078 for the 9 months ended
September 30, 2022, in contrast with $108,928 of internet money utilized in investing
actions within the prior yr interval. The change in internet money utilized in investing
actions versus the prior yr was primarily as a consequence of a lower in safety
deposits refunds.


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There was no money utilized in or supplied by financing actions for the 9
months ended September 30, 2022, in contrast with internet money supplied by financing
actions of $2,371,707 within the prior yr interval. The web money supplied by
financing actions within the prior yr interval included internet proceeds from a
public providing of our widespread inventory, much less providing prices, and funds on our
long-term debt.

Complete money and money equivalents decreased $1.5 million to me $1.7 million in
September 30, 2022 In comparison with December 31, 2021.

contractual obligations

As of September 30, 2022, our important commitments are associated to (i) the
Amended and Restated Mortgage Settlement, (ii) our working leases for our workplace
amenities, (iii) dividends (together with accrued dividends) on our Sequence A
Most popular Inventory, and (iv) the potential redemption of the Sequence A Most popular
Inventory as mentioned above.

Under is a desk summarizing our important commitments to make future funds underneath contractual obligations as of September 30, 2022:

                                                                                                Sequence A          Dividends on
                                                             Curiosity        Lengthy-Time period       Most popular Inventory        Sequence A
                           Working       Notice Payable      Funds        Earnings Tax         Necessary        Most popular Inventory
                             Leases            (a)              (a)         Payable (b)      Redemption (c)            (d)
2022                      $     19,249     $          -     $    21,766     $          -     $             -     $             -
2023                            38,498        2,176,621          87,065                -                   -                   -
Different                                -                -               -          113,788           9,000,000           8,852,447
Complete contractual
obligations               $     57,747     $  2,176,621     $   108,831     $    113,788     $     9,000,000     $     8,852,447



(a) See Notice (9) Notes Payable to our unaudited condensed consolidated monetary
statements for additional data and for an in depth description of the Amended
and Restated Time period Mortgage Credit score Settlement.

(b) Represents our legal responsibility for unsure tax positions. We're unable to make
a fairly dependable estimate of the timing of funds as a consequence of uncertainties in
the timing of tax audit outcomes.

(c) Represents our potential legal responsibility if the holders of our Sequence A Most popular
Inventory redeem their shares for money. The earliest date through which a redemption
might happen as of September 30, 2022 was July 30, 2023. Nonetheless, on July 19,
2022, the Firm and Hale Capital entered right into a letter settlement pursuant to
which Hale Capital agreed to not train or to allow the train of the
obligatory redemption proper of the Sequence A Most popular Inventory on or previous to
December 31, 2023 until the redemption is in accordance with Part 8(e)(z) of
the Certificates of Designations or in accordance with a Breach Occasion (as outlined
within the Certificates of Designations). For additional data, see Notice (12)
Sequence A Redeemable Convertible Most popular Inventory to our unaudited condensed
consolidated monetary statements.

(d) Our agreements with the holders of the Sequence A Most popular Inventory present that
such holders will obtain quarterly dividends on the Sequence A Most popular Inventory at
prime charge plus 5%, topic to a most dividend charge of 10%. We even have the
potential to accrue and roll over dividends. Because of the lack of enough surplus
to pay dividends as required by the Delaware Common Company Legislation, the
Firm was not permitted to pay the fourth quarter 2016 dividend in money or
widespread inventory and has been accruing its quarterly dividends since then. This
quantity represents our potential legal responsibility to pay most well-liked inventory dividends in
money on July 30, 2023, which was the earliest date through which the holders of our
Sequence A Most popular Inventory might redeem their shares for money as of September 30,
2022. Nonetheless, on July 19, 2022, the Firm and Hale Capital entered right into a
letter settlement pursuant to which Hale Capital agreed to not train or to
allow the train of the obligatory redemption proper of the Sequence A Most popular
Inventory on or previous to December 31, 2023 until the redemption is in accordance
with Part 8(e)(z) of the Certificates of Designations or in accordance with a
Breach Occasion (as outlined within the Certificates of Designations). For additional
data, see Notice (12) Sequence A Redeemable Convertible Most popular Inventory to
our unaudited condensed consolidated monetary statements.

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SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

We describe our important accounting insurance policies in Notice (1) Abstract of
Vital Accounting Insurance policies of our 2021 Kind 10-Okay. We talk about our essential
accounting estimates in Merchandise 7, "Administration's Dialogue and Evaluation of
Monetary Situation and Outcomes of Operations" of our 2021 Kind 10-Okay. There have
been no important adjustments in our important accounting insurance policies or essential
accounting estimates since December 31, 2021.

Impression of newly issued accounting statements

See word No. (1) Foundation of presentation on our unaudited condensed consolidated monetary statements.

Steadiness Sheet Preparations

From September 30, 2022 And the December 31, 2021We had no off-balance sheet preparations.

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