SOURCE: FalconStor Software, Inc.

FalconStor Software, Inc.

August 10, 2017 16:05 ET

FalconStor Software Announces Second Quarter 2017 Results

MELVILLE, NY--(Marketwired - August 10, 2017) - FalconStor Software, Inc. (NASDAQ: FALC), a market leader in storage software, today announced financial results for its second quarter ended June 30, 2017.

"During Q2, the company has taken steps to realign our cost structure with our revenue outlook. In doing so, we have reduced our annualized costs by over $10 million on a proforma basis which helps us in our pursuit of profitability while simultaneously increasing our revenue sequentially. The company has also taken key steps to focus on its existing customers and ensure they are receiving all of the benefits available with the FreeStor® application," stated Todd Oseth, CEO of Falconstor. "We believe our software continues to lead the market in helping customers utilize public and private clouds for data protection in the most flexible and economical way possible," he continued.

Financial Overview:

    
  Three Months Ended June 30,   Change
Period to Period
(in millions except per share data) 2017   2016  
Total revenue $ 6.7     100 %   $ 8.1     100 %   $ (1.3 )   (17 )%
Total cost of revenue $ 1.8     26 %   $ 2.3     29 %   $ (0.5 )   (24 )%
Total operating expenses $ 5.5     81 %   $ 9.4     116 %   $ (3.9 )   (41 )%
Operating loss (GAAP) $ (0.5 )   (8 )%   $ (3.6 )   (45 )%   $ 3.1     (86 )%
Net loss (GAAP) $ (0.6 )   (10 )%   $ (3.5 )   (44 )%   $ 2.9     (82 )%
EPS GAAP $ (0.02 )       $ (0.09 )       $ 0.07      
                  

Included in operating results above for the three months ended June 30, 2017 and 2016 were $0.1 million and $1.1 million of share-based compensation expense, respectively, and $0.8 million and $0.6 million of severance expense, respectively. Included in net loss for the three months ended June 30, 2017 and 2016 was an income tax provision of $0.1 million and $0.2 million, respectively. Due to cost rationalization initiatives completed during 2016 and continued into 2017 we reduced our net loss by 82% for the three months ended June 30, 2017 as compared to the prior year period.

    
  Six Months Ended June 30,   Change
Period to Period
(in millions except per share data) 2017   2016  
Total revenue $ 12.8     100 %   $ 15.5     100 %   $ (2.7 )   (18 )%
Total cost of revenue $ 3.2     25 %   $ 4.3     28 %   $ (1.1 )   (25 )%
Total operating expenses $ 11.2     88 %   $ 19.1     123 %   $ (7.9 )   (41 )%
Operating loss (GAAP) $ (1.7 )   (13 )%   $ (7.9 )   (51 )%   $ 6.2     (79 )%
Net loss (GAAP) $ (1.8 )   (14 )%   $ (7.8 )   (51 )%   $ 6.1     (78 )%
EPS GAAP $ (0.05 )       $ (0.20 )       $ 0.15      
                  

Included in operating results above for the six months ended June 30, 2017 and 2016 were $0.5 million and $2.1 million of share-based compensation expense, respectively, and $0.8 million and $1.0 million of severance expense, respectively. Included in net loss for the six months ended June 30, 2017 and 2016 was an income tax provision of $0.2 million and $0.3 million, respectively. Due to cost rationalization initiatives completed during 2016 and continued into 2017 we to reduced our net loss by 78% for the six months ended June 30, 2017 as compared to the prior year period.

Deferred revenue at June 30, 2017 was $21.3 million, compared with $23.7 million at December 31, 2016. Our cash balance at June 30, 2017 was $1.6 million, compared with $3.4 million at December 31, 2016.

  
  Three Months Ended,
(in millions except per share data) June 30, 2017   March 31, 2017   June 30, 2016
Revenue $ 6.7     $ 6.0     $ 8.1  
Bookings $ 3.9     $ 5.5     $ 8.8  
Non-GAAP Expenses $ 7.2     $ 7.0     $ 10.5  
Non-GAAP Gross Margin  74 %    77 %    72 %
Non-GAAP Operating Loss $ (0.4 )   $ (0.9 )   $ (2.4 )
Non-GAAP Net Loss $ (0.5 )   $ (0.9 )   $ (2.3 )
Non-GAAP EPS $ (0.01 )   $ (0.02 )   $ (0.05 )
Cash (used in) provided by operations $ (1.6 )   $ 0.1     $ (3.8 )
            
  • We now have over 380 customers using our FreeStor platform, not including the customers of our MSP and OEM partners.
  • Revenue from our FreeStor platform increased 71% to $1.9 million for the second quarter of 2017, compared with the second quarter of 2016.
  • In June 2017, our Board of Directors, approved a comprehensive plan to increase operating performance (the "2017 Plan"). The 2017 Plan will result in a realignment and reduction in workforce and a change in the leadership of the Company. The 2017 Plan was substantially completed as of June 30, 2017 and we ended the quarter with 97 employees worldwide. These actions are anticipated to result in an annualized cost savings of approximately $10.0 million. In connection with the 2017 Plan, we incurred severance expense of $0.8 million. In making these changes, we prioritized customer support and development while consolidating operations and cutting direct sales resources, therefore allowing us to focus on our install base and develop more efficient market channels.
  • During 2017, we continued to innovate and further enhance our FreeStor product. The latest enhancements were delivered in May 2017; including Quality of Service (QoS) capability, chargeback support, improved levels of robustness and performance in I/O Cluster and I/O Multi-Cluster failover, additional client agent management and monitoring, and the integration of Optimized Backup and Deduplication capability into FreeStor, allowing more efficient use of storage.

Non-GAAP results 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. See the press release filed on May 4, 2017 for a reconciliation between GAAP and non-GAAP information for the three months ended March 31, 2017.

Conference Call

The Company will host a conference call to discuss its financial results on Thursday, August 10, 2017 at 4:30 p.m. EDT. To participate in the conference call, please dial:

Toll Free: 1-800-533-7619
International: +1-785-830-1923
Conference ID: 4337744

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=r936834b6041ceae2ea610692154886ae

Meeting: FalconStor Q2 2017 Earnings
Meeting Password: Q2numbers17
Meeting Number: 797 034 145

If you are unable to register via the Internet, please contact Gavin McLaughlin, Investor, Press and Analyst Relations at +1 719-352-3217 or gavin@aoeglobal.com.

A conference call replay will be available beginning August 10, 2017 at 7:30 p.m. EDT through 7:30 p.m. EDT on August 17th. To listen to the replay of the call, dial: Toll Free: 1-888-203-1112; International: +1 719-457-0820; Passcode: 4337744

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. (NASDAQ: FALC) is a leading storage software 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 http://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
     
    June 30, 2017   December 31, 2016
    (unaudited)    
Assets          
Current assets:          
 Cash and cash equivalents   $ 1,647,695     $ 3,391,528  
 Accounts receivable, net    2,986,927      5,003,972  
 Prepaid expenses and other current assets    875,598      1,245,085  
 Inventory    6,181      6,181  
  Total current assets    5,516,401      9,646,766  
Property and equipment, net    858,978      1,174,942  
Deferred tax assets, net    580,395      577,735  
Software development costs, net    396,630      547,558  
Other assets, net    1,010,247      973,949  
Goodwill    4,150,339      4,150,339  
Other intangible assets, net    174,200      209,456  
  Total assets   $ 12,687,190     $ 17,280,745  
Liabilities and Stockholders' Deficit          
Current liabilities:          
 Accounts payable   $ 685,384     $ 419,877  
 Accrued expenses    3,783,381      4,471,010  
 Deferred revenue, net    13,998,843      15,236,123  
  Total current liabilities    18,467,608      20,127,010  
Other long-term liabilities    1,217,275      1,170,844  
Deferred tax liabilities, net    267,174      254,776  
Deferred revenue, net    7,272,609      8,430,692  
  Total liabilities    27,224,666      29,983,322  
Commitments and contingencies          
Series A redeemable convertible preferred stock    9,000,000      9,000,000  
  Total stockholders' deficit    (23,537,476 )    (21,702,577 )
  Total liabilities and stockholders' deficit   $ 12,687,190     $ 17,280,745  
           
     
FalconStor Software, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
     
    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   2017   2016
Revenue:                    
 Product revenue   $ 2,499,655     $ 2,939,594     $ 4,420,707     $ 5,220,452  
 Support and services revenue    4,234,671      5,128,357      8,352,734      10,279,830  
  Total revenue    6,734,326      8,067,951      12,773,441      15,500,282  
Cost of revenue:                    
 Product    351,969      319,974      550,684      564,247  
 Support and service    1,418,663      1,999,125      2,672,579      3,761,345  
  Total cost of revenue    1,770,632      2,319,099      3,223,263      4,325,592  
Gross profit   $ 4,963,694     $ 5,748,852     $ 9,550,178     $ 11,174,690  
Operating expenses:                    
 Research and development costs    2,025,132      3,304,079      4,319,995      6,960,856  
 Selling and marketing    2,109,599      4,124,350      4,160,141      8,393,150  
 General and administrative    1,345,343      1,833,479      2,966,894      3,539,404  
 Restructuring    -      93,405      (236,302 )    177,389  
  Total operating expenses    5,480,074      9,355,313      11,210,728      19,070,799  
  Operating loss    (516,380 )    (3,606,461 )    (1,660,550 )    (7,896,109 )
Interest and other (loss) income, net    (29,121 )    237,251      125,800      355,434  
  Loss before income taxes    (545,501 )    (3,369,210 )    (1,534,750 )    (7,540,675 )
Provision for income taxes    94,300      165,672      217,248      290,819  
  Net loss   $ (639,801 )   $ (3,534,882 )   $ (1,751,998 )   $ (7,831,494 )
Less: Accrual of Series A redeemable convertible preferred stock dividends    215,089      195,366      419,664      387,974  
Less: Accretion to redemption value of Series A redeemable convertible preferred stock    -      170,981      -      334,650  
  Net loss attributable to common stockholders   $ (854,890 )   $ (3,901,229 )   $ (2,171,662 )   $ (8,554,118 )
Basic net loss per share attributable to common stockholders   $ (0.02 )   $ (0.09 )   $ (0.05 )   $ (0.20 )
Diluted net loss per share attributable to common stockholders   $ (0.02 )   $ (0.09 )   $ (0.05 )   $ (0.20 )
Weighted average basic shares outstanding    44,440,751      43,159,285      44,265,525      42,521,018  
Weighted average diluted shares outstanding    44,440,751      43,159,285      44,265,525      42,521,018  
                 
     
FalconStor Software, Inc. and Subsidiaries
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited)
     
    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   2017   2016
GAAP loss from operations   $ (516,380 )   $ (3,606,461 )   $ (1,660,550 )   $ (7,896,109 )
 Non-cash stock option expense (1)    97,155      1,127,346     $ 542,569     $ 2,117,956  
 Restructuring costs (3)    -      93,405      (236,302 )    177,389  
Non-GAAP loss from operations   $ (419,225 )   $ (2,385,710 )   $ (1,354,283 )   $ (5,600,764 )
                     
GAAP net loss attributable to common stockholders   $ (854,890 )   $ (3,901,229 )   $ (2,171,662 )   $ (8,554,118 )
 Non-cash stock option expense, net of income taxes (2)    97,155      1,127,346      542,569      2,117,956  
 Restructuring costs (3)    -      93,405      (236,302 )    177,389  
 Effects of Series A redeemable convertible preferred stock (4)    215,089      366,347      419,664      722,624  
Non-GAAP net loss   $ (542,646 )   $ (2,314,131 )   $ (1,445,731 )   $ (5,536,149 )
                     
GAAP gross margin    74 %    71 %    75 %    72 %
 Non-cash stock option expense (1)    0 %    1 %    1 %    0 %
Non-GAAP gross margin    74 %    72 %    75 %    73 %
                     
GAAP gross margin - Product    86 %    89 %    88 %    89 %
 Non-cash stock option expense (1)    0 %    0 %    0 %    0 %
Non-GAAP gross margin - Product    86 %    89 %    88 %    89 %
                     
GAAP gross margin - Support and Service    66 %    61 %    68 %    63 %
 Non-cash stock option expense (1)    0 %    1 %    1 %    1 %
Non-GAAP gross margin - Support and Service    67 %    62 %    69 %    64 %
                     
GAAP operating margin    (8 %)    (45 %)    (13 %)    (51 %)
 Non-cash stock option expense (1)    1 %    14 %    4 %    14 %
 Restructuring costs (3)    0 %    1 %    (2 %)    1 %
Non-GAAP operating margin    (6 %)    (30 %)    (11 %)    (36 %)
                     
GAAP Basic EPS   $ (0.02 )   $ (0.09 )   $ (0.05 )   $ (0.20 )
 Non-cash stock option expense, net of income taxes (2)    0.00      0.03      0.01      0.05  
 Restructuring costs (3)    0.00      0.00      (0.01 )    0.00  
 Effects of Series A redeemable convertible preferred stock (4)    0.00      0.01      0.01      0.02  
Non-GAAP Basic EPS   $ (0.01 )   $ (0.05 )   $ (0.03 )   $ (0.13 )
                     
GAAP Diluted EPS   $ (0.02 )   $ (0.09 )   $ (0.05 )   $ (0.20 )
 Non-cash stock option expense, net of income taxes (2)    0.00      0.03      0.01      0.05  
 Restructuring costs (3)    0.00      0.00      (0.01 )    0.00  
 Effects of Series A redeemable convertible preferred stock (4)    0.00      0.01      0.01      0.02  
Non-GAAP Diluted EPS   $ (0.01 )   $ (0.05 )   $ (0.03 )   $ (0.13 )
                     
Weighted average basic shares outstanding (GAAP and as adjusted)    44,440,751      43,159,285      44,265,525      42,521,018  
Weighted average diluted shares outstanding (GAAP and as adjusted)    44,440,751      43,159,285      44,265,525      42,521,018  
                 

Footnotes:

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

    Three Months Ended June 30,   Six Months Ended June 30,
    2017   2016   2017   2016
Cost of revenue - Product   $ -     $ -     $ -     $ -  
Cost of revenue - Support and Service    8,834      44,066      65,285      68,837  
Research and development costs    54,813      825,635      184,528      1,571,797  
Selling and marketing    7,198      75,342      63,738      143,072  
General and administrative    26,310      182,303      229,018      334,250  
 Total non-cash stock based compensation expense   $ 97,155     $ 1,127,346     $ 542,569     $ 2,117,956  

(2) Represents the effects of non-cash stock-based compensation expense recognized, net of related income tax effects. For the three and six months ended June 30, 2017 and 2016, the tax expense for both GAAP and Non-GAAP basis approximate the same amount. Included in share-based compensation expense for the three and six months ended June 30, 2016, was $0.8 million and $1.5 million, related to costs associated with our exclusive source code license and development agreement which were paid through the issuance of our common stock.

(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.

Contact Information

  • For more information, contact:
    FalconStor Software, Inc.
    Gavin McLaughlin
    An Outside Edge
    Investor, Press and Analyst Relations
    +1 719 352 3217 / +44 7973 264246
    Email contact