FalconStor Software Announces Second Quarter 2019 Results Including 15% Global Billings Growth

AUSTIN, Texas, Aug. 14, 2019 /PRNewswire/ -- FalconStor Software, Inc. (OTCQB: FALC), a market leader in software-defined storage and data management, today announced financial results for its second quarter ended June 30, 2019.

Key Financial Highlights for the Second Quarter of Fiscal 2019:

    --  Achieved 15% sales growth, year over year,
    --  Captured 114% of additional sales in the Americas, as compared to the
        same period of the previous year,
    --  Year over year sales from our Backup & Archive Modernization solution
        (VTL) grew 82%,
    --  Our China-specific risk exposure declined to just 2% of total sales, as
        compared to 12% in 2018.

Key Product Highlights

    --  Completed phase 2 integration of our Backup & Archive Modernization
        technology (VTL) into the FalconStor Data Mastery Platform during Q2 in
        order to extend our leading storage orchestration and ease-of-use
        capabilities to backup and archive use cases.
    --  Published expanded independent testing of our VTL technology by the
        Evaluator Group, an information management and data storage analyst
        firm. Their findings conclude that our solution delivers up to 6x better
        price/ performance than the leading competitor.
    --  Completed cloud integrations for Amazon Web Services (AWS) Deep Archive
        storage.
    --  Completed several key software compatibility certifications; including,
        Windows 2019, VMWare 6.5, and 6.7

"Q2 marked an important milestone in our work to return FalconStor to growth, as we increased global billings by 15% as compared to Q2 of 2018," said Todd Brooks, CEO FalconStor. "I am especially pleased with the 82% year-over-year billings growth delivered through our Backup & Archive Modernization solution (VTL). According to IDC, up to 75% of data managed by an enterprise is directly related to routine data backup and archive. Our solution allows an enterprise to leverage existing backup policies and procedures, while ensuring the most stringent backup window is met, data storage capacity is reduced by up to 95%, and Cloud storage alternatives such as AWS, IBM-Cloud, and the Hitachi Content Platform (HCP), are integrated for improved data storage efficiency."

"It is important to note that our Q2 billings grew as compared to Q2 2018 despite the fact we intentionally executed several actions to reduce our revenue exposure in China during the quarter," Brooks continued. "While we will work diligently to support our existing China-based enterprise customers, we have elected to significantly reduce our footprint within the country and any new sales pursuits."

"Finally, despite our exciting growth, I was disappointed that we failed to achieve an operating profit for an eighth straight quarter," Brooks continued. "Achieving both consistent growth, and operating profitability, is key to our success plans. To ensure on-going quarterly cash-flow positive operations, we are implementing several changes, which are primarily targeted at ensuring our commercial dollars are being invested in the most effective way. The significant reduction in our China footprint is a prime example of this decision."

Additional Financial Highlights for the Second Quarter of 2019

On August 6, 2019, following stockholder approval, the Company filed a certificate of amendment (which was effective August 8, 2019) to the Company's Restated Certificate of Incorporation, as amended, with the Delaware Secretary of State to reduce the authorized shares of common stock, $.001 par value per share, to 30,000,000. In connection with this event, the Company effected a 100-for-1 reverse stock split of its issued and outstanding common stock. The par value and authorized shares of common stock were not adjusted as a result of the reverse stock split. Pursuant to Federal Industry Regulatory Authority guidance, the Company's stock will trade on the OTC market under the symbol FALCD, instead of FALC, through August 28, 2019. After this twenty-day period has lapsed, trading of the Company's stock will resume under the symbol FALC. All of the share and per share information presented in the accompanying financial statements have been adjusted to reflect, unless otherwise stated, the reverse common stock split on a retroactive basis for all periods and as of all dates presented.

During the three months ended June 30, 2019, we recorded a GAAP Net Loss of $1.6 million, as compared to a GAAP Net Loss of $1.3 million for the prior year period. Despite our growth in sales, our results were constrained by product mix, as a result higher than anticipated hardware and appliance sales during the current period, which yield significant less profit margins, as compared to our key proprietary technology offerings.

Overall, total revenue for the three months ended June 30, 2019 was $4.0 million compared to $4.0 million in the prior year. Revenue recognition on sales is driven by several factors. First, the volume of new product licenses and maintenance sales, both for expansion of our existing installed base and the acquisition of new customers. Second, customer retention, which sustains maintenance renewal revenue over long term sales arrangements.

After our $0.5 million Term Loan repayment, we ended the quarter with $2.4 million of cash and cash equivalents, as compared to $3.1 million at December 31, 2018. Our plan is to be cash flow positive for 2019 and we are on track to achieve this plan.


                                                                     
       Three Months Ended,



     
              (in millions except per share data) June 30, 2019 
       
             December 31,    June 30, 2018
                                                                                           2018



     Revenue                                                 $4.0                          $4.8            $4.0



     Non-GAAP Expenses                                       $4.7                          $4.0            $3.9



     Non-GAAP Gross Margin                                    68%                          81%            84%



     Non-GAAP Operating Income                             $(0.7)                         $0.7            $0.2

Non-GAAP results above exclude the effects of stock-based compensation, restructuring costs and the effects of our Series A redeemable convertible preferred stock. A reconciliation between GAAP and non-GAAP information is provided on page 6 of this release.


                                          Three Months Ended June 30,         Change



     (in millions except per share data)                        2019            2018           Period to Period



     Total revenue                                              $4.0  100 %     $4.0   100 % 
          $         -    - %



     Total cost of revenue                                      $1.3   32 %     $0.6    16 %               $0.7   105 %



     Total operating expenses                                   $3.7   92 %     $4.1   101 %             $(0.4)  (10)%



     GAAP operating income (loss)                             $(1.0) (24)%   $(0.7)  (17)%             $(0.3)   41 %



     GAAP net income (loss)                                   $(1.6) (39)%   $(1.3)  (32)%             $(0.3)   20 %



     GAAP diluted EPS                                        $(0.27)        $(1.54)                     $1.27

Conference Call and Webcast Information

The Company will host a conference call to discuss its financial results on Wednesday, August 14, 2019 at 3:30 p.m. CDT. To participate in the conference call, please dial:

Toll Free: 1-800-353-6461
International: 1-334-323-0501
Conference ID: 8684576

To view the presentation, please copy and paste the following link into your browser and register for this meeting. Once you have registered for the meeting, you will receive an email message confirming your registration.

FALCONSTOR SECOND QUARTER 2019 FINANCIAL TELECONFERENCE AND PRESENTATION

A conference call replay will be available beginning August 14th at 6:30 PM CDT through 6:30 PM CDT on August 21st. To listen to the replay of the call, dial:

Toll Free: 1-888-203-1112
International: 1-719-457-0820
Passcode: 8684576

Non-GAAP Financial Measures

The non-GAAP financial measures used in this press release are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. The Company's management refers to these non-GAAP financial measures in making operating decisions because they provide meaningful supplemental information regarding the Company's operating performance. In addition, these non-GAAP financial measures facilitate management's internal comparisons to the Company's historical operating results and comparisons to competitors' operating results. We include these non-GAAP financial measures (which should be viewed as a supplement to, and not a substitute for, their comparable GAAP measures) in this press release because we believe they are useful to investors in allowing for greater transparency into the supplemental information used by management in its financial and operational decision-making. The non-GAAP financial measures exclude (i) restructuring costs, (ii) effects of our Series A redeemable convertible preferred stock, and (iii) non-cash stock-based compensation charges and any potential tax effects. For a reconciliation of our GAAP and non-GAAP financial results, please refer to our Non-GAAP Operating Data GAAP Reconciliation, presented in this release.

About FalconStor Software

FalconStor Software, Inc (OTCQB: FALC ) empowers IT professionals to achieve mastery of their data - an organization's most precious asset - so they can responsibly push the boundaries of what's possible in the digital economy. The company's award- winning flagship solution, FreeStor®, is a modern, comprehensive and easy-to-use global data mastery software platform that gives IT professionals centralized data management control across all their resources to reduce operational costs, lower risk, and avoid technology compromises. FalconStor's vendor- and hardware-agnostic solutions are designed to work with existing investments across complex environments, including legacy data centers, hyper-converged infrastructure, cloud, and hybrids.

Founded in 2000, FalconStor is headquartered in Austin, Texas and has additional offices in New York, Europe and Asia. Our solutions are available and supported by a vast network of system integrators and resellers. For more information, please visit www.falconstor.com.

FalconStor, FalconStor Software, FreeStor, and Intelligent Abstraction are trademarks or registered trademarks of FalconStor Software, Inc., in the U.S. and other countries. All other company and product names contained herein may be trademarks of their respective holders.

Links to websites or pages controlled by parties other than FalconStor are provided for the reader's convenience and information only. FalconStor does not incorporate into this release the information found at those links nor does FalconStor represent or warrant that any information found at those links is complete or accurate. Use of information obtained by following these links is at the reader's own risk.


                        
              
                FalconStor Software, Inc. and Subsidiaries


                           
              
                CONDENSED CONSOLIDATED BALANCE SHEETS




                                         
              
                June 30, 2019     
           
     December 31,
                                                                                                       2018

                                                                                                       ---

                                        
              
                (unaudited)



     
                Assets



     Current assets:


      Cash and cash equivalents                                      $2,400,953                  $3,059,677


      Accounts receivable, net                                        1,706,141                   3,605,411


      Prepaid expenses and other
       current assets                                                 1,736,775                   1,909,846


      Contract assets, net                                              838,273                     637,179



     Inventory                                                         104,737                      14,885



         Total current assets                                         6,786,879                   9,226,998


      Property and equipment,
       net                                                              484,588                     433,935


      Operating lease right-of-
       use assets                                                     2,454,349                           -


      Deferred tax assets, net                                          553,738                     545,044


      Software development
       costs, net                                                        46,136                      88,769


      Other assets, net                                               1,037,877                     919,609



     Goodwill                                                        4,150,339                   4,150,339


      Other intangible assets,
       net                                                               85,746                      91,334



     Contract assets                                                   222,825                     516,643




     Total assets                                                  $15,822,477                 $15,972,671




     
                Liabilities and Stockholders' Deficit



     Current liabilities:


      Accounts payable                                               $1,109,862                    $551,389


      Accrued expenses                                                2,284,591                   2,879,473


      Operating lease
       liabilities                                                    1,753,015                           -


      Deferred revenue, net                                           5,071,197                   6,859,592



         Total current liabilities                                   10,218,665                  10,290,454


      Other long-term
       liabilities                                                      760,574                   1,549,692


      Notes payable, net                                              2,746,419                   3,124,827


      Operating lease
       liabilities                                                    1,281,804                           -


      Deferred tax liabilities,
       net                                                              297,715                     297,890


      Deferred revenue, net                                           3,615,556                   2,506,898



         Total liabilities                                           18,920,733                  17,769,761




     Commitments and contingencies


      Series A redeemable
       convertible preferred
       stock                                                         10,523,748                   9,756,706


         Total stockholders'
          deficit                                                  (13,622,004)               (11,553,796)



         Total liabilities and
          stockholders' deficit                                     $15,822,477                 $15,972,671


                                                                        
              
                FalconStor Software, Inc. and Subsidiaries


                                                                      
              
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                                        
              
                (Unaudited)




                                                                                                                                                            Three Months Ended June 30,         Six Months Ended June 30,

                                                                                                                                                                                            ---

                                                                                                                                                      2019          2018               2019                  2018

                                                                                                                                                                                                           ---


              Revenue:



              Product revenue                                                                                                                  $1,470,430      $983,645         $3,216,214            $2,917,589



              Support and services revenue                                                                                                      2,528,959     3,027,936          5,276,153             6,087,941

                                                                                                                                                                                                           ---


                 Total revenue                                                                                                                  3,999,389     4,011,581          8,492,367             9,005,530

                                                                                                                                                                                                           ---


              Cost of revenue:



              Product                                                                                                                             755,796        39,740            835,470                65,890



              Support and service                                                                                                                 537,105       590,309          1,107,590             1,319,197

                                                                                                                                                                                                           ---


                 Total cost of revenue                                                                                                          1,292,901       630,049          1,943,060             1,385,087

                                                                                                                                                                                                           ---


              Gross profit                                                                                                                     $2,706,488    $3,381,532         $6,549,307            $7,620,443



               Operating expenses:



              Research and development costs                                                                                                      764,276       928,097          1,720,847             1,932,795



              Selling and marketing                                                                                                             1,296,909       872,109          2,369,347             2,065,659



              General and administrative                                                                                                        1,397,886     1,451,884          2,826,085             3,106,824



              Restructuring costs                                                                                                                 202,679       809,245            360,372               635,982

                                                                                                                                                                                                           ---


                 Total operating expenses                                                                                                       3,661,750     4,061,335          7,276,651             7,741,260

                                                                                                                                                                                                           ---


                 Operating income (loss)                                                                                                        (955,262)    (679,803)         (727,344)            (120,817)

                                                                                                                                                                                                           ---


              Interest and other loss, net                                                                                                       (80,217)    (323,750)         (345,456)            (313,420)

                                                                                                                                                                                                           ---


                 Income (loss) before income taxes                                                                                            (1,035,479)  (1,003,553)       (1,072,800)            (434,237)



              Income tax expense                                                                                                                  136,244           551            223,830                62,990

                                                                                                                                                                                                           ---


                 Net income (loss)                                                                                                           $(1,171,723) $(1,004,104)      $(1,296,630)           $(497,227)




              Less: Accrual of Series A redeemable convertible preferred stock
    dividends
                                                                                                                                                   256,553       214,963            503,580               458,130



              Less: Deemed dividend on Series A redeemable convertible preferred stock

                                                                                                                                                                                                     2,269,042



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

                                                                                                                                                   134,223        77,645            263,462               115,750




                 Net income (loss) attributable to common stockholders                                                                       $(1,562,499) $(1,296,712)      $(2,063,672)         $(3,340,149)




              Basic net income (loss) per share attributable to common
    stockholders
                                                                                                                                                   $(0.27)      $(1.54)           $(0.35)              $(5.17)




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

                                                                                                                                                   $(0.27)      $(1.54)           $(0.35)              $(5.17)




              Weighted average basic shares outstanding                                                                                         5,879,225       844,482          5,875,907               646,163

                                                                                                                                                                                                           ===


              Weighted average diluted shares outstanding                                                                                       5,879,225       844,482          5,875,907               646,163

                                                                                                                                                                                                           ---


                                                           
              
                FalconStor Software, Inc. and Subsidiaries


                                                     
              
                Reconciliation of GAAP to Non-GAAP Financial Measures


                                                                                
               (Unaudited)




                                                                                                                                                   Three Months Ended June 30,     Six Months Ended June 30,


                                                                                                                                             2019          2018               2019             2018

                                                                                                                                                                                             ---


     GAAP income (loss) from operations                                                                                               $(955,262)   $(679,803)        $(727,344)      $(120,817)



     Non-cash stock option expense (1)                                                                                                    16,231        29,519            $25,482           $6,624



     Restructuring costs (benefit) (3)                                                                                                   202,679       809,245            360,372          635,982

                                                                                                                                                                                             ---


     Non-GAAP income (loss) from operations                                                                                           $(736,352)     $158,961         $(341,490)        $521,789






     GAAP net income (loss) attributable to common stockholders                                                                     $(1,562,499) $(1,296,712)      $(2,063,672)    $(3,340,149)



     Non-cash stock option expense, net of income taxes (2)                                                                               16,231        29,519             25,482            6,624



     Restructuring costs (benefit) (3)                                                                                                   202,679       809,245            360,372          635,982



     Effects of Series A redeemable convertible preferred stock (4)                                                                      390,776       292,608            767,042        2,842,922

                                                                                                                                                                                             ---


     Non-GAAP net income (loss) attributable to common stockholders                                                                   $(952,813)   $(165,340)        $(910,776)        $145,379






     GAAP gross margin                                                                                                                      68 %         84 %              77 %            85 %



     Non-cash stock option expense (1)                                                                                                       0 %          0 %               0 %             0 %

                                                                                                                                                                                             ---


     Non-GAAP gross margin                                                                                                                  68 %         84 %              77 %            85 %

                                                                                                                                                                                             ---




     GAAP gross margin - Product                                                                                                            49 %         96 %              74 %            98 %



     Non-cash stock option expense (1)                                                                                                       0 %          0 %               0 %             0 %

                                                                                                                                                                                             ---


     Non-GAAP gross margin - Product                                                                                                        49 %         96 %              74 %            98 %

                                                                                                                                                                                             ---




     GAAP gross margin - Support and Service                                                                                                79 %         81 %              79 %            78 %



     Non-cash stock option expense (1)                                                                                                       0 %          0 %               0 %             0 %

                                                                                                                                                                                             ---


     Non-GAAP gross margin - Support and Service                                                                                            79 %         81 %              79 %            78 %

                                                                                                                                                                                             ---




     GAAP operating margin                                                                                                        
            (24%)        (17%)              (9%)            (1%)



     Non-cash stock option expense (1)                                                                                                        0%           1%                -%             -%



     Restructuring costs (3)                                                                                                                  5%          20%                4%              7%

                                                                                                                                                                                             ---


     Non-GAAP operating margin                                                                                                    
            (19%)           4%              (5%)              6%

                                                                                                                                                                                             ---




     GAAP Basic EPS                                                                                                                      $(0.27)      $(1.54)           $(0.35)         $(5.17)



     Non-cash stock option expense, net of income taxes (2)                                                                                 0.00          0.03               0.00             0.01



     Restructuring costs (3)                                                                                                                0.04          0.96               0.06             0.98



     Effects of Series A redeemable convertible preferred stock (4)                                                                         0.07          0.35               0.13             4.40

                                                                                                                                                                                             ---


     Non-GAAP Basic EPS                                                                                                                  $(0.16)      $(0.20)           $(0.16)           $0.22






     GAAP Diluted EPS                                                                                                                    $(0.27)      $(1.54)           $(0.35)         $(5.17)



     Non-cash stock option expense, net of income taxes (2)                                                                                 0.00          0.03               0.00             0.01



     Restructuring costs (3)                                                                                                                0.04          0.96               0.06             0.98



     Effects of Series A redeemable convertible preferred stock (4)                                                                         0.07          0.35               0.13             4.40

                                                                                                                                                                                             ---


     Non-GAAP Diluted EPS                                                                                                                $(0.16)      $(0.20)           $(0.16)           $0.04






     Weighted average basic shares outstanding (GAAP and Non- GAAP)

                                                                                                                                        5,879,225       844,482          5,875,907          646,163




     Weighted average diluted shares outstanding (GAAP)                                                                                5,879,225       844,482          5,875,907          646,163

                                                                                                                                                                                             ===


     Weighted average diluted shares outstanding (Non-GAAP)                                                                            5,879,225       844,482          5,875,907        3,685,463

                                                                                                                                                                                             ---






     Footnotes:



     (1)  Represents non-cash, stock-based compensation charges as follows:



                                                              Three Months Ended June 30,                  Six Months Ended June 30,


                                                         2019         2018                   2019     2018



     Cost of revenue - Support and Service              $449       $4,875                  2,042   13,575



     Research and development costs                      861       18,744                  5,606   41,350



     Selling and marketing                             1,248        4,525                  3,658   12,457



     General and administrative                       13,673        1,375                 14,176 (60,758)




     Total non-cash stock based compensation expense $16,231      $29,519                $25,482   $6,624




              (2)              Represents the effects of non-cash
                                  stock-based compensation expense
                                  recognized, net of related income
                                  tax effects. For the three and six
                                  months ended June 30, 2019 and
                                  2018, the tax expense for both
                                  GAAP and Non-GAAP basis
                                  approximate the same amount.





              (3)              Represents restructuring costs
                                  which were incurred during each
                                  respective period presented.





              (4)              Represents the effects of the
                                  accretion to redemption value of
                                  the Series A redeemable
                                  convertible preferred stock,
                                  accrual of Series A redeemable
                                  convertible preferred stock
                                  dividends and deemed dividend on
                                  Series A redeemable convertible
                                  preferred stock.

For more information, contact:
FalconStor Software, Inc.
Brad Wolfe
Chief Financial Officer
brad.wolfe@falconstor.com

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SOURCE FalconStor Software, Inc.