SOURCE: FalconStor Software, Inc.

FalconStor Software, Inc.

April 27, 2016 16:05 ET

FalconStor Software Announces First Quarter 2016 Results

MELVILLE, NY--(Marketwired - April 27, 2016) - FalconStor Software ® Inc. (NASDAQ: FALC), a market leader in software-defined storage, today announced financial results for its first quarter ended March 31, 2016.

"As ongoing industry trends continue to dramatically change the storage landscape, we experienced legacy product sales which were softer than desired; however, our new business initiatives grew by over 38%. Companies continue to evaluate their long-term strategies in regards to which technological approach best suits their business needs," said Gary Quinn, President, and CEO of FalconStor. "That said, interest in FreeStor's innovative SDS capabilities are increasingly gaining momentum globally, and we are confident in the depth and breadth of the platform. In the first quarter alone, we have seen tremendous uptake among MSPs and significant enterprise customer bookings compared to prior periods. We are excited about the success our customers have had internally and externally using FreeStor® to transform their businesses to meet new data-driven challenges and expect that it will be a highly sought-after solution by those who can no longer afford to sit on the sidelines when it comes to managing their storage needs."

Business Highlights:

  • FreeStor MSP business increased 282% in Q1 2016 compared with FY 2015 MSP bookings results.
  • During Q1 2016 FreeStor achieved 49% of its total Enterprise customer subscription bookings for all of FY 2015.
  • The Company added an additional 33 new customers or conversion customers from the install base utilizing the FreeStor technology with traditional perpetual licenses, a 22% increase in Q1 2016 compare with FY 2015 customer counts with similar licensing.
  • The Company achieved 38% of its FY 2015 total FreeStor bookings number in Q1 2016.
  • The two China-based private-labeled OEM partners reached their annual commitments and look to continue to sell the FreeStor technology for another year. The third China-based private-labeled OEM partner is expected to reach its annual commitment during Q2 2016.
  • During FY 2015 and Q1 2016 the FreeStor product has won six Product of the Year awards throughout the globe and the Company has been runner-up "Company of the Year" two times.
  • During the quarter, the Company introduced Intelligent Predictive Analytics to its FreeStor platform that uniquely offers insight across heterogeneous storage environments. This enhancement empowers users with the ability to take action, both proactively and reactively as needed, to better manage and monitor business-critical data end to end. FreeStor's new Intelligent Predictive Analytics provides real-time and historical analytics across disparate storage systems to better manage capacity, performance, and availability. By combining Intelligent Abstraction with Predictive Analytics, users are now able to take intelligent action based on real-time information to optimize and maintain their storage environment from a single pane of glass, regardless of storage vendor or location.

"Enterprise transformation requires a new paradigm moving to the modern data center utilizing flash, scale-out, software-defined and cloud-enabled technologies," said Henry Baltazar, Research Director for the Storage channel at 451 Research. "With its comprehensive approach to manage data across the entire storage infrastructure, FalconStor is well positioned in the blossoming SDS market. FreeStor addresses challenges for those organizations looking to gain better control and insight into their disparate storage environments."

Financial Highlights:

  • Total revenue for the first quarter of 2016 was $7.4 million compared with $9.4 million in the fourth quarter of 2015 and compared with $8.7 million in the first quarter of 2015, which excludes $11.3 million of revenue recognized from a joint-development agreement.
  • Total bookings for the first quarter of 2016 were $7.4 million compared with $10.0 million in the fourth quarter of 2015, and compared with $11.7 million in the first quarter of 2015. 
  • In the first quarter of 2016 approximately 88% of our total bookings were ratable as compared with 90% in the first quarter of 2015. 
  • In both the first quarter of 2016 and 2015 approximately 72% of our total product bookings were ratable.
  • Our deferred revenue balance as of March 31, 2016 was flat compared with December 31, 2015 and decreased 3% compared with March 31, 2015. 
  • The Company closed the quarter with $11.4 million of cash, cash equivalents and marketable securities, compared with $13.4 million at December 31, 2015.
  • Non-GAAP expenses remained flat compared with the fourth quarter of 2015 and decreased 18% when compared with the first quarter of 2015. Non-GAAP expenses totaled $10.6 million in the first quarter of 2016, compared with non-GAAP expenses of $10.7 million in the fourth quarter of 2015 and non-GAAP expenses of $13.0 million in the first quarter of 2015.
  • Non-GAAP gross margins were 73% in the first quarter of 2016, compared with non-GAAP gross margins of 77% in the fourth quarter of 2015 and 72% in the first quarter of 2015, after excluding $11.3 million of revenue recognized from a joint development agreement.

Financials

Total revenue for the three months ended March 31, 2016 was $7.4 million compared with $19.9 million in the same period a year ago. Included in total revenue for the first quarter of 2015 was $11.3 million of revenue from a joint-development agreement. GAAP loss from operations for the three months ended March 31, 2016 was $4.3 million, compared with income from operations of $6.4 million in the same period a year ago. Included in our operating results for the three months ended March 31, 2016 and 2015 were; (i) $1.0 million and $0.4 million of share-based compensation expense, respectively; and (ii) $0.1 million of restructuring costs in both periods. GAAP net loss for the three months ended March 31, 2016 was $4.3 million compared with net income of $5.3 million for the same period a year ago. Included in our net loss for the three months ended March 31, 2016 and 2015 was an income tax provision of $0.1 million and $0.6 million, respectively. GAAP net loss attributable to common stockholders for the three months ended March 31, 2016, which includes the effects of the accretion to redemption value of the Series A redeemable convertible preferred stock and the accrual of Series A redeemable convertible preferred stock dividends, was $4.7 million, or $0.11 per diluted share, compared with income of $4.9 million, or $0.10 per diluted share, for the same period a year ago. 

Non-GAAP loss from operations was $3.2 million for the three months ended March 31, 2016, compared with income of $6.9 million for the same period a year ago. Non-GAAP net loss was $3.2 million, or $0.08 per diluted share, for the three months ended March 31, 2016, compared with income of $5.8 million, or $0.11 per diluted share, for the three months ended March 31, 2015. Non-GAAP results exclude the effects of stock-based compensation, costs associated with the Company's investigations, litigation and settlement related costs, restructuring costs and the effects of our Series A redeemable convertible preferred stock.

The Company closed the quarter with $11.4 million in cash, cash equivalents and marketable securities. Cash flow used in operations for the three months ended March 31, 2016 was $2.0 million compared with cash flow used in operations of $0.3 million during the same period in 2015. Deferred revenue at both March 31, 2016 and December 31, 2015 was $25.7 million

Conference Call

The Company will host a conference call to discuss its financial results on Wednesday, April 27, 2016 at 4:30 p.m. EDT. To participate in the conference call, please dial:

Toll Free: 1-888-208-1361

International: +1-913-312-0382

Conference ID: 7214493

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.webex.com/falconstor/j.php?RGID=r1b7ff88c535d96b87b101bd0d496bd91

Meeting: FalconStor Q1 2016 Earnings

Meeting password: Q1numbers16

Meeting Number: 796 312 897

If you are unable to register via the Internet, please contact Melissa Keir, Investor Relations at 631-773-4334 or melissa.keir@falconstor.com.

A conference call replay will be available beginning April 27, 2016 at 7:30 p.m. EDT through 7:30 p.m. EDT on May 4th. To listen to the replay of the call, dial toll free: 1-888-203-1112 or International: +1-719-457-0820, passcode: 7214493.

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) costs associated with the Company's class action and derivative lawsuits, government investigations, and related legal fees, (ii) restructuring costs, (iii) effects of our Series A redeemable convertible preferred stock, and (iv) 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. (NASDAQ: FALC) is a leading software-defined storage company offering a converged data services software platform that is hardware agnostic. Our open, integrated flagship solution FreeStor reduces vendor lock-in and gives enterprises the freedom to choose the applications and hardware components that make the best sense for their business. We empower organizations to modernize their data center with the right performance, in the right location, all while protecting existing investments. FalconStor's mission is to maximize data availability and system uptime to ensure nonstop business productivity while simplifying data management to reduce operational costs. Our award-winning solutions are available and supported worldwide by OEMs as well as leading service providers, system integrators, resellers and FalconStor. The Company is headquartered in Melville, N.Y. with offices throughout Europe and the Asia Pacific region. For more information, visit www.falconstor.com or call 1-866-NOW-FALC (866-669-3252).

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This press release includes forward-looking statements that involve risk and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties include: delays in product development; market acceptance of FalconStor's products and services; technological change in the data protection industry; competition in the data protection market; results and costs associated with governmental investigations; intellectual property issues; and other risk factors discussed in FalconStor's reports on Forms 10-K, 10-Q and other reports filed with the Securities and Exchange Commission.

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

         
    March 31, 2016   December 31, 2015
    (unaudited)    
Assets            
Current assets:            
  Cash and cash equivalents   $ 8,332,909     $ 6,013,382  
  Marketable securities     3,090,791       7,420,042  
  Accounts receivable, net     5,201,908       6,635,262  
  Prepaid expenses and other current assets     1,509,641       1,742,668  
  Inventory     30,029       70,534  
  Deferred tax assets, net     213,140       205,816  
    Total current assets     18,378,418       22,087,704  
Property and equipment, net     1,456,242       1,565,932  
Deferred tax assets, net     117,067       110,060  
Software development costs, net     866,323       1,116,816  
Other assets, net     1,030,568       1,139,377  
Goodwill     4,150,339       4,150,339  
Other intangible assets, net     235,339       256,137  
    Total assets   $ 26,234,296     $ 30,426,365  
Liabilities and Stockholders' Deficit            
Current liabilities:            
  Accounts payable   $ 1,104,108     $ 1,005,944  
  Accrued expenses     5,790,053       6,783,514  
  Deferred tax liabilities, net     89,491       89,343  
  Deferred revenue, net     16,747,873       16,553,519  
    Total current liabilities     23,731,525       24,432,320  
Other long-term liabilities     895,208       735,089  
Deferred tax liabilities, net     34,054       27,069  
Deferred revenue, net     8,993,916       9,122,289  
    Total liabilities     33,654,703       34,316,767  
Commitments and contingencies            
Series A redeemable convertible preferred stock     7,982,223       7,818,554  
    Total stockholders' deficit     (15,402,630 )     (11,708,956 )
    Total liabilities and stockholders' deficit   $ 26,234,296     $ 30,426,365  
                     

FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

     
    Three Months Ended March 31,
    2016   2015
Revenue:        
  Product revenue   $ 2,280,858     $ 13,970,367  
  Support and services revenue     5,151,473       5,969,509  
    Total revenue     7,432,331       19,939,876  
Cost of revenue:            
  Product     244,273       390,224  
  Support and service     1,762,220       2,020,018  
    Total cost of revenue     2,006,493       2,410,242  
Gross profit   $ 5,425,838     $ 17,529,634  
Operating expenses:            
  Research and development costs     3,656,777       3,205,867  
  Selling and marketing     4,268,800       5,305,362  
  General and administrative     1,705,925       2,492,941  
  Investigation, litigation, and settlement related costs     -       17,028  
  Restructuring costs     83,984       134,476  
    Total operating expenses     9,715,486       11,155,674  
    Operating (loss) income     (4,289,648 )     6,373,960  
Interest and other income (loss), net     118,183       (464,076 )
  (Loss) income before income taxes     (4,171,465 )     5,909,884  
Provision for income taxes     125,147       647,505  
  Net (loss) income   $ (4,296,612 )   $ 5,262,379  
Less: Accrual of Series A redeemable convertible preferred stock dividends     192,608       190,786  
Less: Accretion to redemption value of Series A redeemable convertible preferred stock     163,669       137,417  
  Net (loss) income attributable to common stockholders   $ (4,652,889 )   $ 4,934,176  
Basic net (loss) income per share attributable to common stockholders   $ (0.11 )   $ 0.12  
Diluted net (loss) income per share attributable to common stockholders   $ (0.11 )   $ 0.10  
Weighted average basic shares outstanding     41,882,232       40,935,380  
Weighted average diluted shares outstanding     41,882,232       51,264,247  
                 

FalconStor Software, Inc. and Subsidiaries

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited)

     
    Three Months Ended March 31,
    2016   2015
GAAP (loss) income from operations   $ (4,289,648 )   $ 6,373,960  
  Non-cash stock option expense (1)     990,610       374,806  
  Legal related costs (3)     -       17,028  
  Restructuring costs (4)     83,984       134,476  
Non-GAAP (loss) income from operations   $ (3,215,054 )   $ 6,900,270  
             
GAAP net (loss) income attributable to common stockholders   $ (4,652,889 )   $ 4,934,176  
  Non-cash stock option expense, net of income taxes (2)     990,610       374,806  
  Legal related costs (3)     -       17,028  
  Restructuring costs (4)     83,984       134,476  
  Effects of Series A redeemable convertible preferred stock (5)     356,277       328,203  
Non-GAAP net (loss) income   $ (3,222,018 )   $ 5,788,689  
             
GAAP gross margin     73 %     88 %
  Non-cash stock option expense (1)     0 %     0 %
Non-GAAP gross margin     73 %     88 %
             
GAAP gross margin - Product     89 %     97 %
  Non-cash stock option expense (1)     0 %     0 %
Non-GAAP gross margin - Product     89 %     97 %
             
GAAP gross margin - Support and Service     66 %     66 %
  Non-cash stock option expense (1)     0 %     0 %
Non-GAAP gross margin - Support and Service     66 %     66 %
             
GAAP operating margin     (58 %)     32 %
  Non-cash stock option expense (1)     13 %     2 %
  Legal related costs (3)     0 %     0 %
  Restructuring costs (4)     1 %     1 %
Non-GAAP operating margin     (43 %)     35 %
             
GAAP Basic EPS   $ (0.11 )   $ 0.12  
  Non-cash stock option expense, net of income taxes (2)     0.02       0.01  
  Legal related costs (3)     0.00       0.00  
  Restructuring costs (4)     0.00       0.00  
  Effects of Series A redeemable convertible preferred stock (5)     0.01       0.01  
Non-GAAP Basic EPS   $ (0.08 )   $ 0.14  
             
GAAP Diluted EPS   $ (0.11 )   $ 0.10  
  Non-cash stock option expense, net of income taxes (2)     0.02       0.01  
  Legal related costs (3)     0.00       0.00  
  Restructuring costs (4)     0.00       0.00  
  Effects of Series A redeemable convertible preferred stock (5)     0.01       0.01  
Non-GAAP Diluted EPS   $ (0.08 )   $ 0.11  
             
Weighted average basic shares outstanding (GAAP and as adjusted)     41,882,232       40,935,380  
Weighted average diluted shares outstanding (GAAP and as adjusted)     41,882,232       51,264,247  
                 

Footnotes:

  1. Represents non-cash, stock-based compensation charges as follows:
     
    Three Months Ended March 31,
    2016   2015
Cost of revenue - Product   $ -     $ -  
Cost of revenue - Support and Service     24,771       18,810  
Research and development costs     746,162       73,020  
Selling and marketing     67,730       88,070  
General and administrative     151,947       194,906  
  Total non-cash stock based compensation expense   $ 990,610     $ 374,806  
                   
  1. Represents the effects of non-cash stock-based compensation expense recognized, net of related income tax effects. For the three months ended March 31, 2016 and 2015, the tax expense for both GAAP and Non-GAAP basis approximate the same amount. Included in share-based compensation expense for the three months ended March 31, 2016 was $0.7 million related to costs associated with our exclusive source code license and development agreement which were paid through the issuance of our common stock.
  2. Legal related costs represent expenses in connection with the Company's investigations, litigation and settlement related costs for each respective period presented.
  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 and accrual of Series A redeemable convertible preferred stock dividends.

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