FalconStor Software Announces Fourth Quarter 2019 Results Including 22% New Customer Sales Growth

AUSTIN, Texas, March 12, 2020 /PRNewswire/ -- FalconStor Software, Inc. (OTCQB: FALC), a market leader in data protection software for global enterprises, today announced financial results for its fourth quarter ended December 31, 2019.

Key Financial Highlights for the Close of Fiscal 2019:

    --  Continued to demonstrate the growth potential of our innovative and
        modern long-term archive retention and reinstatement product with 38%
        sales growth compared to 2018,
    --  Increased new customer sales year-over-year by 22% across all product
        lines compared to 2018
    --  Achieved total year-over-year sales growth of more than 6% in our core
        regions, which excludes China, compared to 2018,
    --  Intentionally reduced our sales exposure in China to 3% of total sales
        in 2019 from 12% in 2018,
    --  Entered into an amendment to our term loan on December 27, 2019,
        providing the Company with an additional $1,000,000 of gross proceeds
        for operations and R&D investment.

Key Product Highlights

    --  Continued investment in our patent-pending next generation long-term
        archive retention and reinstatement product, StorSafe((TM)), scheduled
        for launch in 1H 2020,
    --  Released our expanded unified management and analytics console,
        StorSight((TM)) which integrates with all FalconStor products,
    --  Expanded partnerships with cloud storage providers, object storage
        providers, and managed service providers.

"The strategic decisions we made throughout 2019 to place additional commercial focus on our long-term archive retention and reinstatement product, within our core regions, delivered encouraging growth in those areas throughout 2019, and has created a focused and healthy foundation for continued growth in 2020", said Todd Brooks, CEO FalconStor. "According to IDC, up to 75% of data managed by an enterprise is directly related to routine data backup and archive. Our long-term archive retention and reinstatement 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 and Object storage alternatives such as Hitachi Content Platform (HCP), Wasabi, IBM-COS, AWS, and Azure are available for improved data storage efficiency."

"To build upon the foundation we have built, I am excited by the progress our team has made in developing our next generation long-term archive retention and reinstatement product, StorSafe((TM)), which will retain the core benefits of our existing product, while adding innovative multi-cloud archive data storage orchestration capabilities to dramatically reduce storage costs, improve security, simplify compliance, and streamline archive data portability. Archive data is critical for the modern enterprise, not only in terms of risk and compliance management, but also in terms of active use of archive data for strategic advantage. StorSafe((TM) )is scheduled for beta launch in the first half of 2020."

Additional Financial Highlights for the Fourth Quarter 2019

While we delivered a 6% sales increase within our core regions, which excludes China, total global sales revenue for the three months ended December 31, 2019 decreased to $4.1 million compared to $4.8 million in the prior year. This global revenue decrease was primarily driven by our intentional strategy to decrease commercial focus in China, and work to refocus development efforts within our business continuity driven data replication products to those enhancements and innovations aligned with our largest and most strategic customers.

Overall, our total operating expenses decreased 7.1% from $3.6 million for the quarter ended December 31, 2018 to $3.3 million for the quarter ended December 31, 2019. This decrease was primarily attributable to tighter expense controls and overall operational efficiencies which better align our current business plan on a run-rate basis. These efficiencies include among other items, stream-lined personnel related costs, global overhead costs and efficiencies realized on our redesigned go-to-market coverage models. We will continue to evaluate the appropriate headcount levels to properly align our resources with our current and long-term outlook and to take actions in areas of the Company that are not performing.

Total cost of revenue decreased 77.7% to $0.2 million for the three months ended December 31, 2019, compared with $0.9 million for the same period of the year. Cost of sales during the current quarter reflects a cumulative $0.4 million one time correction to properly eliminate intercompany transfer pricing adjustments associated with our Asia Pacific sales during the previous three quarters of the current year. Excluding this correction, we recorded $0.6 million in cost of sales, compared to $0.9 million during the fourth quarter of 2018.

During the three months ended December 31, 2019, we recorded GAAP Operating Income of $0.6 million, compared to GAAP Operating Income of $0.3 million for the prior year period.

We ended the quarter with $1.5 million of cash and cash equivalents, compared to $3.1 million at December 31, 2018.

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. 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.


                                                          
         
     Three Months Ended,



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




     Revenue                                          $
       4.1                                               $
     4.0    $
     4.8



     Non-GAAP Expenses                                $
       3.2                                               $
     4.1    $
     4.0



     Non-GAAP Gross Margin                         95                                   81
     %                       81
                                                     %                                                               %



     Non-GAAP Operating Income (Loss)                 $
       0.9                                               $
     0.1    $
     0.7

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 December 31,           Change

                                                                                                     Period to Period




     
                (in millions except per share data)            2019                          2018



     Total revenue                                      $
     4.1                             100       $
              4.8  100 $
       (0.7)  (15)

                                                                                             %                        %               %



     Total cost of revenue                              $
     0.2                               5       $
              0.9   19 $
       (0.7)  (78)

                                                                                             %                        %               %



     Total operating expenses                           $
     3.3                              81       $
              3.6   75 $
       (0.3)   (7)

                                                                                             %                        %               %



     GAAP operating income (loss)                       $
     0.6                              14       $
              0.3    7   $
       0.2     78

                                                                                             %                        %               %


                                                       
         
          Twelve Months Ended December 31,                Change

                                                                                                                Period to Period




     
                (in millions except per share data)                   2019                          2018



     Total revenue                                       $
        16.5                               100             $
              17.8  100
                                                                                                                                                        %
                                                                                                    %                               %      $
     (1.3)   (7)



     Total cost of revenue                                $
        2.9                                18              $
              3.0   17
                                                                                                                                                        %
                                                                                                    %                               %      $
     (0.1)   (2)



     Total operating expenses                            $
        14.3                                86             $
              14.9   84
                                                                                                                                                        %
                                                                                                    %                               %      $
     (0.6)   (4)



     GAAP operating income (loss)                       $
        (0.7)                              (4)       
     $                          % $
     (0.6) 1,282

                                                                                                    %                                                   %

Conference Call and Webcast Information

The Company will host a conference call to discuss its financial results on Thursday, March 12, 2020 at 3:30 p.m. CDT. To participate in the conference call, please dial:

Toll Free: 1-800-367-2403
International: 1-334-777-6978
Conference ID: 9722775

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.

https://www.webcaster4.com/Webcast/Page/1960/33091

A conference call replay will be available beginning March 12th at 6:30 PM CDT through 6:30 PM CDT on March 19th. To listen to the replay of the call, dial:

Toll Free: 1-888-203-1112
International: 1-719-457-0820
Passcode: 9722775

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) is a technology company whose mission is to deliver technical innovation that creates investment protection, flexibility, and leverage of modern cloud-based technologies for our enterprise customers. We provide software and cloud services that enable our enterprise customers to better manage, protect, secure, and make use of their valuable data. Our customers achieve lower costs, simpler operations, greater data security, higher confidence in their business continuity, and greater ability to effectively use their data assets to drive innovation.

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 and FalconStor Software 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.

CONTACT INFORMATION
For more information, contact:
Brad Wolfe
Chief Financial Officer
FalconStor Software Inc.
investorrelations@falconstor.com


                                                                
       
        FalconStor Software, Inc. and Subsidiaries
                                                                  
       CONDENSED CONSOLIDATED BALANCE SHEETS




                                                                                                                    December 31,                            December 31,
                                                                                                                            2019                       2018



                                                                                                                    (unaudited)



     
                Assets



     Current assets:



     Cash and cash equivalents                                                                                                   $
      1,475,166                           $
        3,059,677



     Accounts receivable, net                                                                                         3,406,550                    3,605,411



     Prepaid expenses and other current assets                                                                        2,252,372                    1,909,846



     Inventory                                                                                                           30,014                       14,885



     Contract assets, net                                                                                               749,515                      637,179




     Total current assets                                                                                             7,913,617                    9,226,998



     Property and equipment, net                                                                                        369,273                      433,935



     Operating lease right-of-use assets, net                                                                         1,842,254



     Deferred tax assets, net                                                                                           258,841                      545,044



     Software development costs, net                                                                                     27,012                       88,769



     Other assets, net                                                                                                  829,335                      919,609



     Goodwill                                                                                                         4,150,339                    4,150,339



     Other intangible assets, net                                                                                        57,718                       91,334



     Contract assets, net                                                                                               327,757                      516,643




      Total assets                                                                                                              $
      15,776,146                          $
        15,972,671




     
                Liabilities and Stockholders' Deficit



     Current liabilities:



     Accounts payable                                                                                                            $
      1,302,290                             $
        551,389



     Accrued expenses                                                                                                 2,533,824                    2,879,473



     Current portion of operating lease liabilities                                                                   1,655,522



     Short-term loan, net of debt issuance costs and discounts                                                          947,501



     Deferred revenue, net                                                                                            5,270,190                    6,859,592




     Total current liabilities                                                                                       11,709,327                   10,290,454



     Other long-term liabilities                                                                                        745,254                    1,549,692



     Notes payable, net                                                                                               2,906,133                    3,124,827



     Operating lease liabilities, less current portion                                                                  624,859



     Deferred tax liabilities, net                                                                                      432,520                      297,890



     Deferred revenue, net                                                                                            2,085,080                    1,719,003




     Total liabilities                                                                                               18,503,173                   16,981,866




     Commitments and contingencies



     Series A redeemable convertible preferred stock                                                                 11,304,279                    9,756,706



     Total stockholders' deficit                                                                                   (14,031,306)                (10,765,901)




     Total liabilities and stockholders' deficit                                                                                $
      15,776,146                          $
        15,972,671


                                                                            
         
                FalconStor Software, Inc. and Subsidiaries
                                                                              
            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                                                            
                (Unaudited)




                                                                                                             Three Months Ended            
         
               Twelve Months Ended

                                                                                        
              
                December 31,                   
         
               December 31,


                                                                                     2019                                           2018               2019                      2018




              Revenue:



              Product revenue                                                              $
              1,887,599                           $
         1,841,028                              $
          6,767,595       $
          5,766,532



              Support and services revenue                                     2,191,160                                        2,931,187                       9,775,976                        12,071,374




              Total revenue                                                    4,078,759                                        4,772,215                      16,543,571                        17,837,906




              Cost of revenue:



              Total cost of revenue                                              197,084                                          884,375                       2,912,987                         2,977,904




              Gross profit                                                                 $
              3,881,675                           $
         3,887,840                             $
          13,630,584      $
          14,860,002



              Operating expenses:



              Research and development costs                                     705,913                                          915,511                       3,208,921                         3,913,337



              Selling and marketing                                              900,271                                        1,243,767                       4,337,054                         4,453,697



              General and administrative                                       1,355,085                                        1,103,190                       5,635,273                         5,278,768



              Restructuring costs                                                359,117                                          310,313                       1,104,318                         1,261,578




              Total operating expenses                                         3,320,386                                        3,572,781                      14,285,566                        14,907,380




              Operating income (loss)                                            561,289                                          315,059                       (654,982)                         (47,378)




              Interest and other expense                                       (135,930)                                       (124,961)                       (604,647)                        (626,048)




              Income (loss) before income taxes                                  425,359                                          190,098                     (1,259,629)                         (673,426)



              Income tax expense                                                 323,769                                          267,156                         492,325                           233,288




              Net income (loss)                                                              $
              101,590                            $
         (77,058)                           $
          (1,751,954)      $
          (906,714)




              Less: Accrual of Series A redeemable convertible preferred         296,584                                          348,825                       1,157,762                         1,035,977
    stock dividends



              Less: Accretion to redemption value of Series A redeemable          78,101                                           13,469                         389,811                           254,212
    onvertible preferred stock



              Less: Deemed dividend on Series A redeemable convertible                                                                                                                         2,269,042
    preferred stock




              Net loss attributable to common stockholders                                 $
              (273,095)                          $
         (439,352)                           $
          (3,299,527)    $
          (4,465,945)




              Basic net loss per share attributable to common stockholders                    $
              (0.05)                             $
         (0.30)                                $
          (0.56)         $
          (4.79)




              Diluted net loss per share attributable to common                               $
              (0.05)                             $
         (0.30)                                $
          (0.56)         $
          (4.79)
    stockholders




              Weighted average basic shares outstanding                        5,918,733                                        1,452,162                       5,900,621                           933,301




              Weighted average diluted shares outstanding                      5,918,733                                        1,452,162                       5,900,621                           933,301


                                                                               
              
                FalconStor Software, Inc. and Subsidiaries
                                                                               
                Reconciliation of GAAP to Non-GAAP Financial Measures
                                                                                                    
                (Unaudited)




                                                                                                               Three Months Ended                      
             
               Twelve Months Ended

                                                                                          
              
                December 31,                             
             
               December 31,


                                                                                       2019                                               2018                    2019                                    2018




              GAAP income (loss) from operations                                               $
              561,289                                  $
             315,059                                           $
              (654,982)                 $
              (47,378)



              Non-cash stock option expense (1)                                      3,698                                               29,024                                          $
           32,280                                  $
     64,672



              Restructuring costs (benefit) (3)                                    359,117                                              310,313                              1,104,318                                        1,261,578




              Non-GAAP income (loss) from operations                                           $
              924,104                                  $
             654,396                                             $
              481,616                 $
              1,278,872






              GAAP net income (loss) attributable to common stockholders                     $
              (273,095)                               $
             (439,352)                                         $
             (3,299,527)                $
            (4,465,945)



              Non-cash stock option expense, net of income taxes (2)                 3,698                                               29,024                                 32,280                                           64,672



              Restructuring costs (benefit) (3)                                    359,117                                              310,313                              1,104,318                                        1,261,578



              Effects of Series A redeemable convertible preferred stock (4)       374,685                                              362,294                              1,547,573                                        3,559,231




              Non-GAAP net income (loss) attributable to common stockholders                   $
              464,405                                  $
             262,279                                           $
              (615,356)                  $
              419,536






              GAAP gross margin                                               95
            %                                        81
            %                          82
            %                                    83
            %



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




              Non-GAAP gross margin                                           95
            %                                        81
            %                          82
            %                                    83
            %






              GAAP gross margin - Product                                    119
            %                                        84
            %                          89
            %                                    93
            %



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




              Non-GAAP gross margin - Product                                119
            %                                        84
            %                          89
            %                                    93
            %






              GAAP gross margin - Support and Service                         75
            %                                        80
            %                          78
            %                                    79
            %



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




              Non-GAAP gross margin - Support and Service                     75
            %                                        80
            %                          78
            %                                    79
            %






              GAAP operating margin                                           14
            %                                         7
            %                         (4)
            %                                                    %



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



              Restructuring costs (3)                                          9
            %                                         7
            %                           7
            %                                     7
            %




              Non-GAAP operating margin                                       23
            %                                        15
            %                           3
            %                                     7
            %






              GAAP Basic EPS                                                                    $
              (0.05)                                  $
             (0.30)                                             $
              (0.56)                   $
              (4.79)



              Non-cash stock option expense, net of income taxes (2)                  0.00                                                 0.02                                   0.01                                             0.07



              Restructuring costs (3)                                                 0.06                                                 0.21                                   0.19                                             1.35



              Effects of Series A redeemable convertible preferred stock (4)          0.07                                                 0.25                                   0.26                                             3.82




              Non-GAAP Basic EPS                                                                  $
              0.08                                     $
             0.18                                              $
              (0.10)                     $
              0.45






              GAAP Diluted EPS                                                                  $
              (0.05)                                  $
             (0.30)                                             $
              (0.56)                   $
              (4.79)



              Non-cash stock option expense, net of income taxes (2)                  0.00                                                 0.02                                   0.01                                             0.07



              Restructuring costs (3)                                                 0.06                                                 0.21                                   0.19                                             1.35



              Effects of Series A redeemable convertible preferred stock (4)          0.06                                                 0.25                                   0.26                                             3.81



              Effects of increase in Non-GAAP diluted shares outstanding (5)                      $
              0.00                                   $
             (0.10)                                               $
              0.00                    $
              (0.33)




              Non-GAAP Diluted EPS                                                                $
              0.07                                     $
             0.08                                              $
              (0.10)                     $
              0.11






              Weighted average basic shares outstanding (GAAP and Non-GAAP)      5,918,733                                            1,452,162                              5,900,621                                          933,301




              Weighted average diluted shares outstanding (GAAP)                 5,918,733                                            1,452,162                              5,900,621                                          933,301




              Weighted average diluted shares outstanding (Non-GAAP)             7,065,735                                            3,271,180                              5,900,621                                        3,817,053






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


                                                               Three Months Ended                    Twelve Months Ended

                                                                   December 31,          
        
          December 31,


                                                       2019                       2018           2019                   2018




     Cost of revenue - Support and Service             104                        6,314                    2,250                 26,203



     Research and development costs                    371                       17,883                    6,348                 77,116



     Selling and marketing                             186                        3,579                    4,030                 19,615



     General and administrative                      3,037                        1,248                   19,652               (58,262)




     Total non-cash stock based compensation expense       $
     3,698                       $
       29,024                       $
      32,280  $
     64,672


     (2) 
              Represents the effects of non-cash stock-based compensation expense recognized, net of related income tax effects. For
           the twelve months ended months ended December 31, 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.





     (5) 
              Represents the impact of an increase in diluted shares outstanding resulting from Non-GAAP adjustments to a GAAP net
           loss.

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SOURCE FalconStor Software, Inc.