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FalconStor Software Announces Third Quarter 2018 Results

Including Operating Profitability for Five Consecutive Quarters

AUSTIN, Texas, Nov. 14, 2018 /PRNewswire/ -- FalconStor Software, Inc. (FALC), a market leader in software-defined storage and data management, today announced financial results for its third quarter ended September 30, 2018.

Key Financial Highlights for the Third Quarter of Fiscal 2018:

  • Achieved Non-GAAP Operating Income of $0.1 million, marking the fifth consecutive quarter of Non-GAAP Operating profitability.
  • Non-GAAP Gross Margin increased to 83% from 80% in the third quarter of 2017.
  • Cash and cash equivalents increased to $2.8 million from $1.0 million at December 31, 2017.

Key Product Highlights

  • Our RecoverTrac™ automated data recovery technology was awarded its third patent (United States Patent and Trademark Office, Patent No. 10,073,745).
  • Our Virtual Tape Library solution has been tested by Evaluator Group, an independent lab, and verified to achieve 39TB/hour single-node backup speeds without affecting application performance, making it the fastest solution on the market.
  • Our FreeStor solution is being renamed FalconStor Data Mastery Platform, and three cloud data management use cases are now supported for customers seeking to migrate and replicate data to and from the cloud.

I am pleased with the operating profitability which continued in the third quarter, and the commercial foundation we are building to begin driving growth" said Todd Brooks, CEO FalconStor. "While we are likely a quarter or two away from returning to growth across the globe, billings in our Americas region increased by 24 percent in the quarter as compared to Q3 of 2017. The efforts of our team to redefine our product vision, rebuild our marketing engine, and re-engage our partner base are clearly beginning to deliver results."

Additional Financial Highlights for the Third Quarter 2018

While our Non-GAAP Operating Income was $0.1 million for the quarter, we recorded a GAAP Net Loss for the three months ended September 30, 2018 of $0.7 million, as compared to GAAP Net Income of $1.2 million for the same period of the previous year, in part as a result of the impact of new revenue recognition guidance, in addition to other non cash restructuring charges incurred in connection with our cost reduction efforts. Excluding the effects of stock-based compensation, restructuring costs and the effects of our Series A redeemable convertible preferred stock, we delivered a GAAP Net Income of $0.0 million, as compared to GAAP Net Income of $1.2 million in the prior year period.

Overall, total revenue for the three months ended June 30, 2018 was $4.1 million as compared to $6.1 million in the prior year period. This decline in revenue was significantly impacted by our adoption of new revenue recognition accounting guidance under Topic 606 on January 1, 2018 using the modified retrospective transition method, which resulted in a $1.7 million decrease in revenue.

Net cash used by operations decreased by $1.2 million to $0.3 million for the nine months ended September 30, 2018, as compared to $1.6 million of net cash used by operations for the nine months ended September 30, 2017.

We ended the quarter with $2.8 million of cash and cash equivalents, as compared to $1.0 million at December 31, 2017.


Three Months Ended,


September 30,        


September 30,

(in millions except per share data)

2018

June 30, 2018

2017

Revenue

$                 4.1

$                 4.0

$                 6.1

Non-GAAP Expenses

$                 4.0

$                 3.9

$                 5.0

Non-GAAP Gross Margin

83%

84%

80%

Non-GAAP Operating Income

$                 0.1

$                 0.2

$                 1.1

Non-GAAP Net Income (Loss)

$                  —

$                (0.2)

$                 1.2

Non-GAAP Diluted EPS

$                  —

$                   —

$               0.02

Cash (used in) provided by operations

$               (0.3)

$                 0.7

$               (1.6)

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 September 30,

Change

(in millions except per share data)   

2018

2017

Period to Period








Total revenue

$        4.1

100 %

$       6.1

100%

$       (2.0)

(33)%

Total cost of revenue

$        0.7

17 %

$       1.2

20%

$       (0.5)

(43)%

Total operating expenses

$        3.6

89 %

$       3.6

59%

$         —

— %

GAAP operating income (loss)

$       (0.2)

(6)%

$       1.3

21%

$       (1.5)

*

GAAP net income (loss)

$       (0.7)

(17)%

$       1.2

20%

$       (1.9)

*

GAAP diluted EPS

$     (0.01)


$      0.02


$     (0.03)


 


Nine Months Ended September 30,

Change

(in millions except per share data)    

2018

2017

 Period to Period








Total revenue

$      13.1

100 %

$     18.9

100 %

$       (5.8)

(31)%

Total cost of revenue

$        2.1

16 %

$       4.5

24 %

$       (2.4)

(53)%

Total operating expenses

$      11.3

87 %

$     14.8

78 %

$       (3.5)

(23)%

GAAP operating income (loss)

$      (0.4)

(3)%

$      (0.4)

(2)%

$         —

(4)%

GAAP net income (loss)

$      (4.0)

(31)%

$      (1.0)

(5)%

$       (3.1)

321 %

GAAP diluted EPS

$     (0.05)


$      (0.02)


$     (0.04)


 

Conference Call and Webcast Information

The Company will host a conference call to discuss its financial results on Wednesday, November 14, 2018 at 3:30 p.m. CDT. To participate in the conference call, please dial:

Toll Free: 1-800-458-4121
International: +1-323-794-2093
Conference ID: 9172932

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://falconstor.com/FalconStor-Q3-2018-Earnings-Call

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

Toll Free: 1-888-203-1112
International: 1-719-457-0820
Passcode: 9172932

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 (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.

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



September 30,
2018

December 31,
2017


(unaudited)


Assets



Current assets:



Cash and cash equivalents

$       2,827,296

$      1,011,472

Accounts receivable, net

1,626,889

4,168,015

Prepaid expenses and other current assets

1,535,848

1,244,494

Contract assets, net

1,178,851

Total current assets

7,168,884

6,423,981

Property and equipment, net

443,145

636,112

Deferred tax assets, net

586,190

590,977

Software development costs, net

136,509

279,414

Other assets, net

965,932

992,760

Goodwill

4,150,339

4,150,339

Other intangible assets, net

105,375

141,631

Contract assets

939,930

Total assets

$ 14,496,304

$ 13,215,214

Liabilities and Stockholders' Deficit



Current liabilities:

Accounts payable

$          862,577

$      1,092,864

Accrued expenses

2,405,103

4,376,235

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

370,151

Deferred revenue, net

6,859,592

11,760,327

Total current liabilities

10,127,272

17,599,577

Other long-term liabilities

1,673,545

1,154,512

Notes payable, net

2,530,012

Warrant liability

Deferred tax liabilities, net

85,559

85,559

Deferred revenue, net

2,712,842

6,600,363

Total liabilities

17,129,230

25,440,011

Commitments and contingencies



Series A redeemable convertible preferred stock

9,394,412

9,000,000

Total stockholders' deficit

(12,027,338)

(21,224,797)

Total liabilities and stockholders' deficit

$ 14,496,304

$ 13,215,214

 

 

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



Three Months Ended
September 30,

Nine Months Ended
September 30,

2018

2017

2018

2017

Revenue:





Product revenue

$         1,007,915

$       2,129,125

$      3,925,504

$      6,549,832

Support and services revenue

3,052,246

3,976,308

9,140,187

12,329,042

Total revenue

4,060,161

6,105,433

13,065,691

18,878,874

Cost of revenue:





Product

62,742

118,880

128,632

669,564

Support and service

645,700

1,115,703

1,964,897

3,788,282

Total cost of revenue

708,442

1,234,583

2,093,529

4,457,846

Gross profit

$         3,351,719

$       4,870,850

$ 10,972,162

$ 14,421,028

Operating expenses:




Research and development costs

1,065,031

1,216,663

2,997,826

5,536,658

Selling and marketing

1,144,271

1,128,850

3,209,930

5,288,991

General and administrative

1,068,754

1,163,676

4,175,578

4,130,570

Restructuring costs (benefit)

315,283

76,705

951,265

(159,597)

Total operating expenses

3,593,339

3,585,894

11,334,599

14,796,622

Operating income (loss)

(241,620)

1,284,956

(362,437)

(375,594)

Interest and other income (loss), net

(187,667)

134,321

(501,087)

260,121

Income (loss) before income taxes

(429,287)

1,419,277

(863,524)

(115,473)

Income tax expense (benefit)

(96,858)

(9,896)

(33,868)

207,352

Net income (loss)

$          (332,429)

$       1,429,173

$        (829,656)

$        (322,825)

Less: Accrual of Series A redeemable convertible preferred stock
dividends

229,022

215,000

687,152

634,664

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

124,993

240,743

Net income (loss) attributable to common stockholders

$          (686,444)

$       1,214,173

$     (4,026,593)

$        (957,489)

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

$                (0.01)

$                0.03

$              (0.05)

$              (0.02)

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

$                (0.01)

$                0.02

$              (0.05)

$              (0.02)

Weighted average basic shares outstanding

97,935,348

44,552,892

75,844,719

44,362,367

Weighted average diluted shares outstanding

97,935,348

54,235,876

75,844,719

44,362,367

 

 

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

(Unaudited)



Three Months Ended
September 30,

Nine Months Ended

September 30,


2018

2017

2018

2017

GAAP income (loss) from operations

$       (241,620)

$ 1,284,956

$ (362,437)

$ (375,594)

Non-cash stock option expense (1)

29,024

(260,577)

$        35,648

$      281,992

Restructuring costs (benefit) (3)

315,283

76,705

951,265

(159,597)

Non-GAAP income (loss) from operations

$        102,687

$ 1,101,084

$      624,476

$ (253,199)






GAAP net income (loss) attributable to common stockholders

$       (686,444)

$ 1,214,173

$ (4,026,593)

$ (957,489)

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

29,024

(260,577)

35,648

281,992

Restructuring costs (benefit) (3)

315,283

76,705

951,265

(159,597)

Effects of Series A redeemable convertible preferred stock (4)

354,015

215,000

3,196,937

634,664

Non-GAAP net income (loss) attributable to common stockholders

$          11,878

$ 1,245,301

$      157,257

$ (200,430)






GAAP gross margin

83 %

80 %

84 %

76 %

Non-cash stock option expense (1)

0 %

0 %

0 %

0 %

Non-GAAP gross margin

83 %

80 %

84 %

76 %






GAAP gross margin - Product

94 %

94 %

97 %

90 %

Non-cash stock option expense (1)

0 %

0 %

0 %

0 %

Non-GAAP gross margin - Product

94 %

94 %

97 %

90 %






GAAP gross margin - Support and Service

79 %

72 %

79 %

69 %

Non-cash stock option expense (1)

0 %

0 %

0 %

0 %

Non-GAAP gross margin - Support and Service

79 %

72 %

79 %

69 %






GAAP operating margin

(6%)

21%

(3%)

(2%)

Non-cash stock option expense (1)

1%

(4%)

—%

1%

Restructuring costs (3)

8%

1%

7%

(1%)

Non-GAAP operating margin

3%

18%

4%

(2%)






GAAP Basic EPS

$             (0.01)

$            0.03

$          (0.05)

$          (0.02)

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

0.00

(0.01)

0.00

0.01

Restructuring costs (3)

0.00

0.00

0.01

0.00

Effects of Series A redeemable convertible preferred stock (4)

0.01

0.00

0.04

0.01

Non-GAAP Basic EPS

$              0.00

$            0.03

$            0.00

$               —






GAAP Diluted EPS

$             (0.01)

$            0.02

$          (0.05)

$          (0.02)

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

0.00

0.00

0.00

0.01

Restructuring costs (3)

0.00

0.00

0.01

0.00

Effects of Series A redeemable convertible preferred stock (4)

0.01

0.00

0.04

0.01

Non-GAAP Diluted EPS

$              0.00

$            0.02

$            0.00

$            0.00






Weighted average basic shares outstanding (GAAP and as adjusted)

97,935,348

44,552,892

75,844,719

44,362,367

Weighted average diluted shares outstanding (GAAP)

97,935,348

54,235,876

75,844,719

44,362,367

Weighted average diluted shares outstanding (Non-GAAP)

461,907,739

54,235,876

399,710,964

44,362,367

 

 

Footnotes:

(1)

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




Three Months Ended
September 30,

Nine Months Ended
September 30,


2018

2017

2018

2017

Cost of revenue - Support and Service

6,314

(9,752)

19,889

55,533

Research and development costs

17,883

28,382

59,233

212,910

Selling and marketing

3,579

(23,560)

16,036

40,178

General and administrative

1,248

(255,647)

(59,510)

(26,629)

Total non-cash stock based compensation expense

$             29,024

$         (260,577)

$           35,648

$         281,992



(2)

Represents the effects of non-cash stock-based compensation expense recognized, net of related income tax effects. For the three and nine months ended September 30, 2018 and 2017, 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.

 

Cision

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