FalconStor Software Announces Second Quarter 2016 Results

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News Desk 2018

Jul 27, 2016 at 4:15 PM

MELVILLE, NY --(Marketwired - July 27, 2016) - FalconStor Software ^® Inc. ( NASDAQ : FALC ), a market leader in software-defined storage, today announced financial results for its second quarter ended June 30, 2016.

"The storage industry landscape continued its transformation during the second quarter of 2016. We saw a reasonable recovery in overall performance sequentially from Q1 2016 and we saw significant growth in our new business initiatives for FreeStor® subscription model which grew over 200% sequentially" said Gary Quinn, President and CEO. "That said, we saw improvements in all routes to market for OEM, MSPs, and new enterprise customers, as well as the beginning of some existing enterprise customer conversions to FreeStor. We remain committed to driving our new business initiatives with FreeStor through the rest of 2016 and are adjusting to the marketplace with fiscal responsibility."

Business Highlights:

FreeStor MSP subscription business increased over 400% for the first half of 2016 as compared with total FY 2015 bookings results.
FreeStor Enterprise subscription business increased over 500% in the first half of 2016 as compared with total FY 2015 bookings results.
FreeStor technology perpetual license business achieved over 40% of the total FY 2015 bookings results in the first half of 2016.
FreeStor technology OEMs achieved their first year annual commitments and achieved over 90% of the total FY 2015 bookings results for the first half of 2016.
The Company added an additional 13 new customers or conversion customers from the install base utilizing the FreeStor subscription model during Q2 2016. We added 35 new customers or conversion customers from the install base utilizing the traditional perpetual licenses during Q2 2016.
During the first half of 2016, the Company added 21 new FreeStor subscription customers and 68 new FreeStor technology customers utilizing the traditional perpetual license model.
The Company year-to-date 2016 achieved 96% of its total FY 2015 total FreeStor bookings results.

Financial Highlights:

Total revenue for the second quarter of 2016 was $8.1 million, compared with $7.4 million in the first quarter of 2016 and compared with $9.6 million in the second quarter of 2015.
Total bookings for the second quarter of 2016 were $8.8 million, compared with $7.4 million in the first quarter of 2016 and compared with $8.4 million in the second quarter of 2015.
In the second quarter of 2016 approximately 82% of our total bookings were ratable as compared with 77% in the second quarter of 2015.
In the second quarter of 2016 approximately 72% of our total product bookings were ratable compared with 58% in the second quarter of 2015.
Our deferred revenue balance as of June 30, 2016 decreased 1%, compared with December 31, 2015 and decreased 4% compared with June 30, 2015.
The Company closed the quarter with $9.4 million of cash, cash equivalents and marketable securities, compared with $13.4 million at December 31, 2015.
Non-GAAP expenses decreased 2%, compared with the first quarter of 2016 and decreased 15% when compared with the second quarter of 2015. Non-GAAP expenses totaled $10.5 million in the second quarter of 2016, compared with non-GAAP expenses of $10.6 million in the first quarter of 2016 and non-GAAP expenses of $12.3 million in the second quarter of 2015.
Non-GAAP gross margins were 72% in the second quarter of 2016, compared with non-GAAP gross margins of 73% in the first quarter of 2016 and 73% in the second quarter of 2015.

Financials

Total revenue for the three months ended June 30, 2016 was $8.1 million, compared with $9.6 million in the same period a year ago. GAAP loss from operations for the three months ended June 30, 2016 was $3.6 million, compared with $3.1 million in the same period a year ago. Included in our operating results for the three months ended June 30, 2016 and 2015 were $1.1 million and $0.4 million of share-based compensation expense, respectively. GAAP net loss for the three months ended June 30, 2016 was $3.5 million, compared with $2.7 million for the same period a year ago. Included in our net loss for the three months ended June 30, 2016 and 2015 was an income tax provision of $0.2 million and an income tax benefit of $0.4 million, respectively. GAAP net loss attributable to common stockholders for the three months ended June 30, 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 $3.9 million, or $0.09 per diluted share, compared with $3.0 million, or $0.07 per diluted share, for the same period a year ago.

Non-GAAP loss from operations was $2.4 million for the three months ended June 30, 2016, compared with $2.7 million for the same period a year ago. Non-GAAP net loss was $2.3 million, or $0.05 per diluted share, for the three months ended June 30, 2016, compared with $2.2 million, or $0.05 per diluted share, for the three months ended June 30, 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.

Total revenue for the six months ended June 30, 2016 was $15.5 million, compared with $29.5 million in the same period a year ago. Included in total revenue for the first six months of 2015 was $11.3 million of revenue from a joint-development agreement. GAAP loss from operations for the six months ended June 30, 2016 was $7.9 million, compared with income from operations of $3.2 million in the same period a year ago. Included in our operating results for the six months ended June 30, 2016 and 2015 were; (i) $2.1 million and $0.8 million of share-based compensation expense, respectively; and (ii) $0.2 million of restructuring costs in both periods. GAAP net loss for the six months ended June 30, 2016 was $7.8 million, compared with net income of $2.6 million for the same period a year ago. Included in our net loss for both the six months ended June 30, 2016 and 2015 was an income tax provision of $0.3 million. GAAP net loss attributable to common stockholders for the six months ended June 30, 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 $8.6 million, or $0.20 per diluted share, compared with income of $1.9 million, or $0.05 per diluted share, for the same period a year ago.

Non-GAAP loss from operations was $5.6 million for the six months ended June 30, 2016, compared with income of $4.2 million for the same period a year ago. Non-GAAP net loss was $5.5 million, or $0.13 per diluted share, for the six months ended June 30, 2016, compared with income of $3.6 million, or $0.08 per diluted share, for the six months ended June 30, 2015.

The Company closed the quarter with $9.4 million in cash, cash equivalents and marketable securities. Cash flow used in operations for the six months ended June 30, 2016 was $3.8 million, compared with cash flow used in operations of $1.6 million during the same period in 2015. Deferred revenue at June 30, 2016 was $25.4 million, compared with $25.7 million at December 31, 2015.

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

Toll Free: 1-888-230-5549 International: +1-913-312-0711 Conference ID: 4192154

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...e6744db408

Meeting: FalconStor Q2 2016 Earnings Meeting password: Q2numbers16 Meeting Number: 799 018 974

If you are unable to register via the Internet, please contact Timothy Sheets, Investor Relations at 631-773-4357 or timothy.sheets@falconstor.com .

A conference call replay will be available beginning July 27, 2016 at 7:30 p.m. EDT through 7:30 p.m. EDT on August 3rd. To listen to the replay of the call, dial toll free: 1-888-203-1112 or International: +1-719-457-0820, passcode: 4192154.

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).

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, 2016			December 31, 2015
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	7,925,334		$	6,013,382
	Marketable securities			1,500,235			7,420,042
	Accounts receivable, net			4,641,500			6,635,262
	Prepaid expenses and other current assets			1,396,389			1,742,668
	Inventory			6,181			70,534
	Deferred tax assets, net			526,391			205,816
		Total current assets		15,996,030			22,087,704
Property and equipment, net				1,257,917			1,565,932
Deferred tax assets, net				127,015			110,060
Software development costs, net				736,453			1,116,816
Other assets, net				1,045,956			1,139,377
Goodwill				4,150,339			4,150,339
Other intangible assets, net				235,408			256,137
		Total assets	$	23,549,118		$	30,426,365
Liabilities and Stockholders' Deficit
Current liabilities:
	Accounts payable		$	973,739		$	1,005,944
	Accrued expenses			6,186,181			6,783,514
	Deferred tax liabilities, net			89,474			89,343
	Deferred revenue, net			15,969,741			16,553,519
		Total current liabilities		23,219,135			24,432,320
Other long-term liabilities				991,781			735,089
Deferred tax liabilities, net				40,637			27,069
Deferred revenue, net				9,462,032			9,122,289
		Total liabilities		33,713,585			34,316,767
Commitments and contingencies
Series A redeemable convertible preferred stock				8,153,204			7,818,554
		Total stockholders' deficit		(18,317,671	)		(11,708,956	)
		Total liabilities and stockholders' deficit	$	23,549,118		$	30,426,365

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

			Three Months Ended June 30,						Six Months Ended June 30,
			2016			2015			2016			2015
Revenue:
	Product revenue		$	2,939,594		$	3,650,504		$	5,220,452		$	17,620,871
	Support and services revenue			5,128,357			5,902,085			10,279,830			11,871,594
		Total revenue		8,067,951			9,552,589			15,500,282			29,492,465
Cost of revenue:
	Product			319,974			718,057			564,247			1,108,281
	Support and service			1,999,125			1,940,729			3,761,345			3,960,747
		Total cost of revenue		2,319,099			2,658,786			4,325,592			5,069,028
Gross profit			$	5,748,852		$	6,893,803		$	11,174,690		$	24,423,437
Operating expenses:
	Research and development costs			3,304,079			3,067,732			6,960,856			6,273,599
	Selling and marketing			4,124,350			4,371,513			8,393,150			9,676,875
	General and administrative			1,833,479			2,583,893			3,539,404			5,076,834
	Investigation, litigation, and settlement related (benefits) costs			-			(8,186	)		-			8,842
	Restructuring costs			93,405			23,495			177,389			157,971
		Total operating expenses		9,355,313			10,038,447			19,070,799			21,194,121
		Operating (loss) income		(3,606,461	)		(3,144,644	)		(7,896,109	)		3,229,316
Interest and other income (loss), net				237,251			98,411			355,434			(365,665	)
		(Loss) income before income taxes		(3,369,210	)		(3,046,233	)		(7,540,675	)		2,863,651
Provision (benefit) for income taxes				165,672			(378,049	)		290,819			269,456
		Net (loss) income	$	(3,534,882	)	$	(2,668,184	)	$	(7,831,494	)	$	2,594,195
Less: Accrual of Series A redeemable convertible preferred stock dividends				195,366			186,904			387,974			377,690
Less: Accretion to redemption value of Series A redeemable convertible preferred stock				170,981			143,557			334,650			280,974
		Net (loss) income attributable to common stockholders	$	(3,901,229	)	$	(2,998,645	)	$	(8,554,118	)	$	1,935,531
Basic net (loss) income per share attributable to common stockholders			$	(0.09	)	$	(0.07	)	$	(0.20	)	$	0.05
Diluted net (loss) income per share attributable to common stockholders			$	(0.09	)	$	(0.07	)	$	(0.20	)	$	0.05
Weighted average basic shares outstanding				43,159,285			40,964,160			42,521,018			40,949,849
Weighted average diluted shares outstanding				43,159,285			40,964,160			42,521,018			42,492,677

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

		Three Months Ended June 30,						Six Months Ended June 30,
		2016			2015			2016			2015
GAAP (loss) income from operations		$	(3,606,461	)	$	(3,144,644	)	$	(7,896,109	)	$	3,229,316
	Non-cash stock option expense (1)		1,127,346			425,968			2,117,956			800,774
	Legal related costs (3)		-			(8,186	)		-			8,842
	Restructuring costs (4)		93,405			23,495			177,389			157,971
Non-GAAP (loss) income from operations		$	(2,385,710	)	$	(2,703,367	)	$	(5,600,764	)	$	4,196,903

GAAP net (loss) income attributable to common stockholders		$	(3,901,229	)	$	(2,998,645	)	$	(8,554,118	)	$	1,935,531
	Non-cash stock option expense, net of income taxes (2)		1,127,346			425,968			2,117,956			800,774
	Legal related costs (3)		-			(8,186	)		-			8,842
	Restructuring costs (4)		93,405			23,495			177,389			157,971
	Effects of Series A redeemable convertible preferred stock (5)		366,347			330,461			722,624			658,664
Non-GAAP net (loss) income		$	(2,314,131	)	$	(2,226,907	)	$	(5,536,149	)	$	3,561,782

GAAP gross margin			71	%		72	%		72	%		83	%
	Non-cash stock option expense (1)		1	%		0	%		0	%		0	%
Non-GAAP gross margin			72	%		73	%		73	%		83	%

GAAP gross margin - Product			89	%		80	%		89	%		94	%
	Non-cash stock option expense (1)		0	%		0	%		0	%		0	%
Non-GAAP gross margin - Product			89	%		80	%		89	%		94	%

GAAP gross margin - Support and Service			61	%		67	%		63	%		67	%
	Non-cash stock option expense (1)		1	%		1	%		1	%		0	%
Non-GAAP gross margin - Support and Service			62	%		68	%		64	%		67	%

GAAP operating margin			(45	%)		(33	%)		(51	%)		11	%
	Non-cash stock option expense (1)		14	%		4	%		14	%		3	%
	Legal related costs (3)		0	%		0	%		0	%		0	%
	Restructuring costs (4)		1	%		0	%		1	%		1	%
Non-GAAP operating margin			(30	%)		(28	%)		(36	%)		14	%

GAAP Basic EPS		$	(0.09	)	$	(0.07	)	$	(0.20	)	$	0.05
	Non-cash stock option expense, net of income taxes (2)		0.03			0.01			0.05			0.02
	Legal related costs (3)		0.00			0.00			0.00			0.00
	Restructuring costs (4)		0.00			0.00			0.00			0.00
	Effects of Series A redeemable convertible preferred stock (5)		0.01			0.01			0.02			0.02
Non-GAAP Basic EPS		$	(0.05	)	$	(0.05	)	$	(0.13	)	$	0.09

GAAP Diluted EPS		$	(0.09	)	$	(0.07	)	$	(0.20	)	$	0.05
	Non-cash stock option expense, net of income taxes (2)		0.03			0.01			0.05			0.02
	Legal related costs (3)		0.00			0.00			0.00			0.00
	Restructuring costs (4)		0.00			0.00			0.00			0.00
	Effects of Series A redeemable convertible preferred stock (5)		0.01			0.01			0.02			0.02
Non-GAAP Diluted EPS		$	(0.05	)	$	(0.05	)	$	(0.13	)	$	0.08

Weighted average basic shares outstanding (GAAP and as adjusted)			43,159,285			40,964,160			42,521,018			40,949,849
Weighted average diluted shares outstanding (GAAP and as adjusted)			43,159,285			40,964,160			42,521,018			42,492,677

Footnotes:

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

		Three Months Ended June 30,				Six Months Ended June 30,
		2016		2015		2016		2015
Cost of revenue - Product		$	-	$	-	$	-	$	-
Cost of revenue - Support and Service			44,066		34,894		68,837		53,704
Research and development costs			825,635		98,495		1,571,797		171,515
Selling and marketing			75,342		63,510		143,072		151,580
General and administrative			182,303		229,069		334,250		423,975
	Total non-cash stock based compensation expense	$	1,127,346	$	425,968	$	2,117,956	$	800,774

(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, 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 and six months ended June 30, 2016, was $0.8 million and $1.5 million, respectively, related to costs associated with our exclusive source code license and development agreement which were paid through the issuance of our common stock.

(3)	Legal related costs represent expenses in connection with the Company's investigations, litigation and settlement related costs for each respective period presented.

(4)	Represents restructuring costs which were incurred during each respective period presented.

(5)	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.