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FalconStor Software Announces Third Quarter of 2021 Results

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Managed Service Provider Adoption and Hybrid Cloud Momentum Fuel Subscription Revenue Growth Partially Offsetting Declines in Legacy Business

  • Delivered a 35% year-over-year increase in software subscription revenue for Q3 and a 54% year-over-year increase for the first nine months of 2021

  • Added two new managed service provider (MSP) partners for our StorSafe secure backup-as-a-service solution under new disruptive monthly recurring pricing model launched in Q3

  • Generated GAAP EPS of $0.01 per share during the quarter and GAAP EPS of ($0.11) per share for the first nine months of 2021

AUSTIN, Texas, November 10, 2021--(BUSINESS WIRE)--FalconStor Software, Inc. (OTCQB: FALC), the trusted data protection software leader modernizing disaster recovery and backup operations for the hybrid cloud world, today announced financial results for its third quarter, which ended on September 30, 2021, delivering a 35% year-over-year increase in subscription revenue fueled by the growth in managed service provider business and market adoption of hybrid cloud data protection solutions.

"We continue to make solid progress against our strategic plans to reinvent FalconStor and enable secure hybrid cloud backup and data protection," said Todd Brooks, FalconStor CEO. "Driven by continued adoption of the FalconStor StorSafe long-term data protection solution, we accelerated our strategic focus on a recurring revenue model better aligned with today’s market. As part of this focus, we introduced a new and disruptive recurring monthly pricing model for our managed service providers, and continued migrating our installed based to a subscription revenue model. As a result, total subscription revenue increased 35% compared to Q3 of 2020, and 54% for the first nine months of 2021 compared to the same period last year.

"While we are encouraged by our subscription revenue growth, we are continuing to work toward our goal of consistent total revenue growth, as total revenue decreased by 26% year-over-year during the quarter and is down 7% for the first nine months of 2021 compared to the same period in 2020. As the recurring percentage of total revenue continues to increase over the next several quarters, and the reduction in perpetual license sales decreases, we are committed to driving more predictable total revenue growth, delivering profitability, and generating cash from operations, as we invest to grow.

"Migration to the cloud, data center rationalization, and increased leverage of outsourced managed services are top priorities for enterprise CIOs in the post-pandemic world, and FalconStor plays a vital role in each," added Brooks. "We are excited by our hybrid cloud focus, the efficient routes to market that we are building through our managed service provider partners, and trust our shareholders have placed in our team to deliver customer and shareholder value."

Third Quarter 2021 Financial Results

  • Subscription Revenue: 35% increase to $0.8 million, compared to $0.6 million in the third quarter of fiscal year 2020

  • Subscription Revenue % of Total Revenue: 23%, compared to 13% in the third quarter of fiscal year 2020

  • Total Revenue: $3.3 million, compared to $4.4 million in the third quarter of fiscal year 2020

  • Total Cost of Revenue: $0.4 million, compared to $0.4 million in the third quarter of fiscal year 2020

  • Total Operating Expenses: $2.4 million, compared to $2.3 million in the third quarter of fiscal year 2020

  • GAAP Net Income: $0.4 million, compared to $1.5 million in the third quarter of fiscal year 2020

  • Ending Cash: $3.5 million, compared to $0.9 million in the third quarter of fiscal year 2020

Nine Months Ended 2021 Financial Results

  • Subscription Revenue: 54% increase to $2.6 million, compared to $1.7 million in the first nine months of 2020

  • Subscription Revenue % of Total Revenue: 25%, compared to 15% in the first nine months of 2020

  • Total Revenue: $10.4 million, compared to $11.1 million in the first nine months of 2020

  • Total Cost of Revenue: $1.5 million, compared to $1.4 million in the first nine months of 2020

  • Total Operating Expenses: $8.6 million, compared to $7.9 million in the first nine months of 2020

  • GAAP Net Income: $0.4 million, compared to $1.2 million in the first nine months of 2020

  • Ending Cash: $3.5 million, compared to $0.9 million in the first nine months of 2020

Guidance

Given our less than anticipated year-to-date total revenue, we are revising the 2021 guidance we have previously provided.

Revised 2021 Guidance

Guidance (in $ millions)

Low

High

Total Revenue

$

14.1

$

15.1

Adjusted EBITDA*

$

3.5

$

4.5

%

25%

30%

Net Income

$

0.6

$

1.7

%

4%

11%

Rule of 40 (Revenue Growth % + Adjusted EBITDA %)

20

33

*Adjusted EBITDA adds back Non-Operating and Other Expenses and Income

Conference Call and Webcast Information

WHO: Todd Brooks, Chief Executive Officer, FalconStor and Brad Wolfe, Chief Financial Officer, FalconStor

WHEN: Wednesday, November 10, 2021, 4:00 P.M. Central Time

To register for our earnings call, please click the following link:

FALCONSTOR THIRD QUARTER 2021 FINANCIAL TELECONFERENCE AND PRESENTATION

As an alternative, you can copy and paste the following link into your web browser to register:

https://register.gotowebinar.com/register/4614368145758035469

Conference Call:
Please dial the following if you would like to interact with and ask questions to FalconStor hosts:
Toll Free: 1-877-309-2074
Access Code: 342-776-416

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 reconciliation of GAAP to Non-GAAP financial measures presented in this release.

About FalconStor Software

FalconStor is the trusted data protection software leader modernizing disaster recovery and backup operations for the hybrid cloud world. The Company enables enterprise customers and managed service providers to secure, migrate, and protect their data while reducing data storage and long-term retention costs by up to 95%. More than 1,000 organizations and managed service providers worldwide standardize on FalconStor as the foundation for their cloud first data protection future. Our products are offered through and supported by a worldwide network of leading managed service providers ("MSPs"), systems integrators, resellers, and original equipment manufacturers ("OEMs").

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.

FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2021

December 31, 2020

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

3,474,784

$

1,920,656

Accounts receivable, net

2,285,117

2,836,571

Prepaid expenses and other current assets

1,537,267

1,837,596

Contract assets, net

169,835

254,483

Inventory

15,421

15,275

Total current assets

7,482,424

6,864,581

Property and equipment, net

193,028

197,020

Operating lease right-of-use assets

140,238

536,272

Deferred tax assets, net

310,755

330,552

Software development costs, net

14,345

19,278

Other assets, net

114,828

863,964

Goodwill

4,150,339

4,150,339

Other intangible assets, net

64,295

100,134

Contract assets

192,286

343,934

Total assets

$

12,662,538

$

13,406,074

Liabilities and Stockholders' Deficit

Current liabilities:

Accounts payable

$

335,092

$

453,791

Accrued expenses

1,018,878

2,293,765

Operating lease liabilities

87,381

665,074

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

3,320,863

Deferred revenue, net

3,709,005

4,603,270

Total current liabilities

5,150,356

11,336,763

Other long-term liabilities

637,099

703,889

Notes payable, net

2,150,574

754,000

Operating lease liabilities

53,430

Deferred tax liabilities, net

525,512

513,027

Deferred revenue, net

1,569,813

1,765,859

Total liabilities

10,086,784

15,073,538

Commitments and contingencies

Series A redeemable convertible preferred stock

14,075,434

12,940,722

Total stockholders' deficit

(11,499,680)

(14,608,186)

Total liabilities and stockholders' deficit

$

12,662,538

$

13,406,074

FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

Revenue:

Product revenue

$

1,547,013

$

2,521,695

$

5,288,747

$

5,202,713

Support and services revenue

1,736,456

1,914,705

5,081,795

5,913,486

Total revenue

3,283,469

4,436,400

10,370,542

11,116,199

Cost of revenue:

Product

41,351

48,895

298,966

250,185

Support and service

400,934

367,063

1,233,067

1,109,379

Total cost of revenue

442,285

415,958

1,532,033

1,359,564

Gross profit

$

2,841,184

$

4,020,442

$

8,838,509

$

9,756,635

Operating expenses:

Research and development costs

711,273

600,430

2,032,360

1,809,354

Selling and marketing

1,610,635

1,026,241

4,267,010

3,027,372

General and administrative

633,954

358,701

2,129,921

2,297,451

Gain on litigation settlement

(632,600)

(632,600)

Restructuring costs

68,704

317,595

792,754

758,740

Total operating expenses

2,391,966

2,302,967

8,589,445

7,892,917

Operating income (loss)

449,218

1,717,475

249,064

1,863,718

Gain on debt extinguishment

754,000

Interest and other expense

(58,257)

(159,994)

(489,264)

(586,082)

Income (loss) before income taxes

390,961

1,557,481

513,800

1,277,636

Income tax expense (benefit)

16,529

11,272

63,804

44,709

Net income (loss)

$

374,432

$

1,546,209

$

449,996

$

1,232,927

Less: Accrual of Series A redeemable convertible preferred stock dividends

288,802

266,007

848,898

812,362

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

13,517

175,335

285,814

366,566

Net income (loss) attributable to common stockholders

$

72,113

$

1,104,867

$

(684,716)

$

53,999

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

$

0.01

$

0.19

$

(0.11)

$

0.01

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

$

0.01

$

0.19

$

(0.11)

$

0.01

Weighted average basic shares outstanding

6,990,723

5,919,837

6,324,370

5,919,773

Weighted average diluted shares outstanding

7,039,421

5,959,385

6,324,370

5,943,794

FalconStor Software, Inc. and Subsidiaries

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

GAAP income (loss) from operations

$

449,218

$

1,717,475

$

249,064

$

1,863,718

Non-cash stock option expense (1)

4,916

3,822

$

14,084

$

11,392

Restructuring costs (3)

68,704

317,595

792,754

758,740

Gain on litigation settlement (5)

$

(632,600)

$

$

(632,600)

$

Non-GAAP income (loss) from operations

$

(109,762)

$

2,038,892

$

423,302

$

2,633,850

GAAP net income (loss) attributable to common stockholders

$

72,113

$

1,104,867

$

(684,716)

$

53,999

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

4,916

3,822

14,084

11,392

Restructuring costs (3)

68,704

317,595

792,754

758,740

Gain on litigation settlement

(632,600)

(632,600)

Gain on debt extinguishment

(754,000)

Effects of Series A redeemable convertible preferred stock (4)

302,319

441,342

1,134,712

1,178,928

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

$

(184,548)

$

1,867,626

$

(129,766)

$

2,003,059

GAAP gross margin

87

%

91

%

85

%

88

%

Non-cash stock option expense (1)

0

%

0

%

0

%

0

%

Non-GAAP gross margin

87

%

91

%

85

%

88

%

GAAP gross margin - Product

97

%

98

%

94

%

95

%

Non-cash stock option expense (1)

0

%

0

%

0

%

0

%

Non-GAAP gross margin - Product

97

%

98

%

94

%

95

%

GAAP gross margin - Support and Service

77

%

81

%

76

%

81

%

Non-cash stock option expense (1)

0

%

0

%

0

%

0

%

Non-GAAP gross margin - Support and Service

77

%

81

%

76

%

81

%

GAAP operating margin

14

%

39

%

2

%

17

%

Non-cash stock option expense (1)

%

%

%

%

Restructuring costs (3)

2

%

7

%

8

%

7

%

Non-GAAP operating margin

16

%

46

%

10

%

24

%

GAAP Basic EPS

$

0.01

$

0.19

$

(0.11)

$

0.01

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

0.00

0.00

0.00

0.00

Restructuring costs (3)

0.01

0.05

0.13

0.13

Gain on litigation settlement (5)

(0.09)

0.00

(0.10)

0.00

Gain on debt extinguishment (6)

0.00

0.00

(0.12)

0.00

Effects of Series A redeemable convertible preferred stock (4)

0.04

0.08

0.18

0.20

Non-GAAP Basic EPS

$

(0.03)

$

0.32

$

(0.02)

$

0.34

GAAP Diluted EPS

$

0.01

$

0.19

$

(0.11)

$

0.01

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

0.00

0.00

0.00

0.00

Restructuring costs (3)

0.01

0.05

0.13

0.13

Gain on litigation settlement (5)

(0.09)

0.00

(0.10)

0.00

Gain on debt extinguishment (6)

0.00

0.00

(0.12)

0.00

Effects of Series A redeemable convertible preferred stock (4)

0.04

0.07

0.18

0.20

Non-GAAP Diluted EPS

$

(0.03)

$

0.31

$

(0.02)

$

0.34

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

6,990,723

5,919,837

6,324,370

5,919,773

Weighted average diluted shares outstanding (GAAP)

7,039,421

5,959,385

6,324,370

5,943,794

Weighted average diluted shares outstanding (Non-GAAP)

6,990,723

5,959,385

6,324,370

5,943,794

Footnotes:

(1)

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

Cost of revenue - Product

$

232

$

$

688

$

Cost of revenue - Support and Service

185

104

549

310

Research and development costs

167

433

167

1,289

Selling and marketing

2,915

186

8,475

554

General and administrative

1,417

3,099

4,205

9,239

Total non-cash stock based compensation expense

$

4,916

$

3,822

$

14,084

$

11,392

(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, 2021 and 2020, 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 a gain for the legal settlement of a contractual dispute with a marketing/sales firm.

(6)

Represents the gain recorded when the Company's loan with the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act was forgiven on March 30, 2021.

View source version on businesswire.com: https://www.businesswire.com/news/home/20211110005644/en/

Contacts

Brad Wolfe
Chief Financial Officer
FalconStor Software Inc.
investorrelations@falconstor.com

CONTACT US AROUND THE GLOBE

Corporate Headquarters
501 Congress Avenue
Suite 150
Austin, Texas 78701
Tel: +1.631.777.5188
salesinfo@falconstor.com

Europe Headquarters
Landsberger Strasse 302
Munich, Germany
Tel: +49 (0) 89.41615321.10
salesemea@falconstor.com