FalconStor Software, Inc.

Gary Quinn - Chief Executive Officer, President and Director Louis J. Petrucelly - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

John Aniblo Zaro - Bourgeon Capital Management, LLC David Cohn

Thank you, operator. I will begin with a review of our third quarter performance and then turn it over to Lou Petrucelly, our CFO, who will provide a detail of our financial results.

After Lou, I will return with some information regarding FalconStor's business and will take you through some market opportunities for us in 2015. The 2014 calendar year has been an inflection point for FalconStor.

Throughout the year, we have stabilized our employees, partners and customers with updates of our products, discussions of new products on the horizon, and the launching of a new FalconStor image and message: #BEFREE. As we have indicated during the last 12 months, the path to profitability and growth will not be a straight line.

I am very pleased with our performance in EMEA, Asia and Japan, but not pleased with our Americas sales performance, where we had a significant decline quarter-over-quarter and year-over-year. We are putting in place new go-to-market strategies for the new products we intend to announce in Q1 of 2015.

We believe that improvements to our Americas sales performance will result from that improved go-to-market plan, and will complement the transitions we have made in EMEA, Asia and Japan. We remain optimistic for the long-term prospects for FalconStor.

Our business in EMEA continues to improve under the leadership of our General Manager who took over now almost 1 year ago today. Our Central region comprised of Germany, Switzerland and Holland, continues to exceed plan and expectations.

Our southern region comprised of France, Spain and Italy, as well as some outliers in Russia and Eastern European Union has significantly improved and is beginning to show signs of growth. If you remember, this territory was completed overturned this time last year in 2013.

Finally, our Northern region comprised of the U.K, Ireland and Scandinavia had an average performance and we had to change out our management in this territory, but we expect 2015 this region will bounce back and the U.K. tends to follow patterns from the U.S.

and we'll need to monitor this situation closely. Our Asia and Japan businesses had a change in management in April.

And we've been able to stabilize our Japan business which also saw a country managed change in April. Our approach to Japan going forward is changing to a service provider model, as well as looking at ways to utilize the public cloud in 2015.

Korea is performing consistent with last year's results and we need to break out of the government sector which has had its challenges over the last 12 months with the curtailed spending of the current administration but we have recently partnered with a few new integrators and a storage hardware provider to reach more of the commercial markets in that country. As for Southeast Asia consisting of Singapore, Malaysia and Indonesia, we have brought on a new regional sales manager and we were able to meet expectations last quarter, as well as for the year-to-date with the strong performance in Malaysia.

In our China business, we put in place the second half promotional incentive to respond to some of the increasing competitiveness in the de-duplication and back up space with our largest China partner. That change did not increase bookings in Q3, instead, it resulted in a reduced price per terabyte which meant we won more deals but at a lower price point.

We are optimistic about our Q4 performance with the partner for increased bookings and increased capacity. The FalconStor traditional China in-country business has shown some inconsistency since the appointment of our former China Country Manager, the Asian VP and General Manager but for the year so far the territory is meeting expectations.

Finishing with the Americas, I must repeat that I am not pleased with the performance which was turned in for Q3 in 2014. We had an acceptable performance in Q1 and Q2 but Q3 was a complete miss, which impacts the overall FalconStor performance.

We were unable to capitalize our federal investments which commenced in February 2014. Although our pipeline is strong, we could not obtain any end of year government fiscal business outside of our expected existing customers installed base.

We remain optimistic here and look to see some contributions by Q1 of 2015. We also invested additionally into Latin America above and beyond our existing coverage model prior to 2014 and that geography, too, shows a strong pipeline, but we've not been able to capitalize on those efforts yet.

The sales cycles in both of these new investments are in 12- to 18-month time frames. The U.S.

and Canada effort was totally unacceptable to me and the management team here at FalconStor. We have taken some short-term actions which related to new customer activity or the lack thereof, as well as we've seen some very positive reactions in the new product releases scheduled for Q1 2015, as well as our new solution platform, FreeStor 10, which is focused on the private hybrid cloud provider, as well as the Flash array manufacturers.

I'll talk more about that in a few minutes, but I'll now turn the call over to Lou who will discuss in more detail our financial results. Lou?

Thank you, Gary, and good evening, everyone. As we pointed out during our past several calls, we believe it’s most appropriate to measure our results on a sequential basis which will better highlight the progress we are making during this transition period of stabilizing our business, which commenced during the second half of last year.

Our earnings release distributed earlier today contains our year-over-year results and all the applicable disclosures in accordance with GAAP. As we navigate through this transition period, we anticipate that our quarters may continue to be lumpy and revenues may lag from a GAAP perspective depending on the mix of business we transact as we continue to offer our customers flexibility in their purchasing preferences.

Now I'd like to provide you with a brief update on some of the key metrics we used to measure the progress we have made during the quarter. For the third quarter of 2014, GAAP revenues totaled $11.2 million compared with $11.3 million in the previous quarter.

Total revenues in the Americas were off 16% as compared with the previous quarter, primarily driven by declines in new product license revenues, while maintenance revenues remained flat. Total revenues in our EMEA and Asia-Pacific markets increased 7% and 10%, respectively, as compared with the previous quarters.

From a bookings perspective, our Q3 bookings totaled $8.9 million compared with $13.3 million in the previous quarter. Geographically, bookings from our Americas were significantly below our internal expectations and the previous quarter's performance which was a major contributor behind our decline in sequential bookings during the quarter.

While we continue to see improved maintenance renewal rates from our installed base, the softness in our new customer acquisition and expansions within our installed base of new license sales were the primary contributors to the differences in our sequential bookings. Overall, our Asia-Pacific and EMEA regions each contributed 35% of the total Q3 bookings while the Americas contributed 30%.

Approximately 12% of our Q3 bookings were derived from new customers. Finally, we anticipate that we may continue to experience some bumps along the way as we continue to work closely with local partners and customers through this transition period in an effort to build a more robust and particular pipeline within each region.

Next, I will turn to our non-GAAP expenses which exclude restructuring charges, legal costs and stock-based compensation. As part of our rebalancing efforts, which reduced our overhead to level commensurate with our company size, and we aligned our operating expenses to the company's capital resources, we are pleased that we have maintained our coSingTel structure and during the quarter, our total non-GAAP expenses totaled $13.1 million, compared with $14.1 million in the previous quarter.

Our non-GAAP operating expenses were $10.6 million compared with $11.5 million in the previous quarter and our non-GAAP loss from operations have narrowed to $2 million as compared with $2.8 million in the previous quarter. The decline in our operating expenses of 8% as compared with the previous quarter was primarily related to timing of investments we've made back in the business during the first half of this year, specifically around our corporate rebranding and marketing efforts, as well as our ongoing cost structure optimization initiatives.

Our non-GAAP gross margins were 77% compared with 76% in the previous quarter, and we closed the quarter with 273 employees worldwide compared with 277 in Q2. As we have discussed on previous calls, we will continue to strategically reinvest back into our business, both from a sales and marketing and product development perspectives.

We anticipate that we may recognize incremental expenses in the coming quarters in support of our near-term objectives. However, we will continue to monitor our expense structure closely and continue to drive a bottom line culture across the entire company.

Turning to our balance sheet. As of September 30, we had $26.6 million in cash, cash equivalents and marketable securities compared with $28.8 million in the previous quarter.

Both our September 30 and June 30 cash balances included $1.5 million of milestone payments received from a joint development activity during each of the respective quarters. As of September 30, our deferred revenues totaled $34 million compared with $33.1 million at June 30, an increase of 3%.

If we exclude the impacts from our joint development agreement, our deferred revenue balance declined $600,000 compared to the previous quarter. It should be noted that over the past several years and as a result of the historical seasonality within the business, which was skewed towards the fourth quarter, our deferred revenue balances are typically the greatest in Q4 and in Q1.

We are pleased that we have been able to maintain our deferred revenue balances and continue to focus on securing bookings and improving our maintenance to support renewals. As of each September 30 and June 30, approximately 13% of our deferred revenue balances was related to product revenues.

For the quarter, our cash flow used in operations was $1.5 million compared with positive cash flow from operations of $1.1 million in the previous quarter. Finally, we are on the correct path to execute on our plan while there are still more work to be done over the next several quarters, we are excited and focused on executing on our objectives, and Gary and I look forward to updating you on our progress on the next call.

And now I'll return the call back over to Gary. Gary?

Thank you, Lou. So overall, I believe, FalconStor continues to make progress in many areas as a company and we should not throw out the baby with the bathwater at this point in time.

I would now like to take you through a few slides on the opportunity ahead for FalconStor. These slides are just a few from a recent weekend QBR that we held with all of our field-based management staff in the areas of sales, technical sales, field marketing, regional technical support and their respective corporate functions.

So if you take a look at the first slide here, our value proposition to the marketplace is that FalconStor solutions give you the power seamlessly migrate, recover, protect and deduplicate data on or off the cloud, without tying your business to specific hardware, networks or protocols. FalconStor gives customers the power to be free by the freedom to choose the right storage infrastructure to match their business, operations and budget, free to innovate and focus on their business and free to do business in a way that makes sense for them, not dictated by their vendors.

So for those of you -- the next slide please. So for those of you not completely familiar with our solutions and history, it's important to know that we'll be celebrating our 15th birthday on February 19, 2015, and we'll be using that date to announce the availability of our new and upcoming product offerings.

After careful consideration and working with industry analysts who have not yet clearly defined exactly what software defined storage is, FalconStor with its new offerings in 2015 will be entering the software-defined-storage marketplace, due to the fact that we are completely agnostic to hardware and we are a pure software offering. We utilize an intelligent abstraction layer which allows to be completely server and storage hardware agnostic in both this traditional spindle marketplace, as well as the exciting new Flash array market for those hardware suppliers who do not possess a software stack of data services.

We are a pioneer and first in many data services as you can see here. We have approximately 3,000 active paying customers in 56 countries.

We currently have over 20 servers providers in both the public and private cloud space and the key growth areas for the company are enabling Flash-only storage hardware providers with a software stack of data services and providing our upcoming FreeStor 10 platform to those service providers who are looking for a complete horizontal offering across all types of storage, devices, Flash, spindles and last but not the least, tape, to achieve their customers service level agreements. Next slide, please.

The challenge today is that many small, medium, large and mega large enterprises are struggling with not only site-to-site requirements but they are now looking at site to cloud, as an opportunity to control capital cost with predictive future operating cost and finally, new companies who are currently going straight to the cloud are faced with challenges eventually when moving from cloud to cloud. We, at FalconStor, believe we have the capability to solve this problem because it's all about moving the data.

If you take a look at the traditional BC/DR space, the business continuity and disaster recovery space, it is occupied by many point solution providers, as well as hardware providers with their own software stacks on traditional spindle environments. FalconStor is a participant here, too, but with a less than 1% market share and in a marketplace that is growing under 3% CAGR in the enterprise storage subsystem space, as well as around 10% in the traditional BC/DR space, although we would welcome that 10% per annum growth rate.

It's crowded, confused and competing with hardware suppliers who are under extreme pressure with the result that is often software bundled with hardware for no additional cost although that is usually an optical approach. As you can see, we compete in all of these areas listed on the screen, between data protection, storage virtualization and deduplication for these traditional markets.

Next slide, please. If we look at the new and an exciting space of software defined storage, we do see some of the traditional players with so-called software defined offerings, but we see some more purest plays which are software only or combination of software and neutral hardware.

We believe the opportunity for FalconStor is to move its focus to this marketplace in 2015. When we look to define this marketplace, it is important to know where we play and where we do not.

FalconStor over the coming years, will focus its efforts on the traditional in-house, outsourced enterprises with its current portfolio of products, that address enterprise subsystems and software business continuity and disaster recovery, but we will begin to enter the in-house private cloud and hosted private cloud markets with our new FreeStor 10 offering into 2015. If you map the market segments we will be focused upon with the total available market spend and growth rates, you'll find that although the current size of market for solid-state disk and Flash, as well as hybrid storage, subsystems and private cloud are small today, those growth rates are over 100% per annum and approaching 200% in the private cloud space over the next 3 years.

We believe this is where FalconStor needs to focus. So instead of looking at a crowded and extremely competitive marketplace, growing at a blended 8% CAGR, we believe we need to move to the new markets and achieve a 20%-plus blended CAGR as those markets evolve.

We believe it gives FalconStor the opportunity to change its position in the marketplace as a 15-year-old legacy business continuity disaster recovery player to an experienced, innovative software defined storage player. We will introduce a new offering called FreeStor 10 in 2015, which will be focused on this new software defined marketplace that uses an intelligent abstraction layer to be completely hardware agnostic.

The result of that for those Flash array manufacturers with no software stack, we become an important partner. For those service providers looking to service customers with disparage storage, while they migrate them to a standardized platform, FalconStor can place a horizontal platform layer over those legacy devices as opposed to the continued use of vertical proprietary software from the hardware manufacturer.

In addition, the platform can deliver the right SLA, or service level agreement, for the right price at the right location. So the next coming slides, as you can see from these slides, the intelligent abstraction layer allows for the 4 major use cases of enterprises to be achieved in a single offering.

Data migration, continuous availability, protection and recovery, optimize backup and dedupe by simply turning on or off the data services required. So FreeStor is the next-generation of FalconStor technology completely modernize for today's enterprise, cloud service provider and Flash environments.

In addition, in OpEx selling model of pay-as-you-grow will be the preferred way to sell and purchase within these new markets. The offering will come with either a FalconStor-branded interface, a private labeled interface or no management console at all, totally flexible for the OEM and cloud service provider markets.

It can also be executed on any web browser, tablet or Apple and Android smartphone. I hope you can see the excitement building within the FalconStor today and the opportunity ahead of us in 2015.

We will be announcing these new products and offerings on February 19, 2015, our 15th birthday, and we'll be providing more details about all the capabilities, pricing and addressable markets during those announcements. Thank you, and now, operator, can you compile the Q&A roster?

Is this a new plan for 2015 and we're sort of changing where we were and we're heading in a whole new direction? Or is this just we're getting rid of some of the old legacy stuff and trying to narrow our focus?

Well, we're actually moving in a different direction. I mean, the focus of the company is to move into a new market that is more attractive, less confusing and allows FalconStor technology to get its fair opportunity in the marketplace.

So if you look at that, one of those original slides, John, there are many, many, many people with point solutions in the business continuity and disaster recovery space from software-only players to hardware software combined players and the idea of moving more to the platform approach to allow us to compete in the cloud, private cloud environment, as well as offer a solution for those Flash array manufacturers with no software data services stack, it opens up opportunities for FalconStor to OEM its technology in the Flash market. It allows us, opens up opportunities for us to embed our software now into a cloud service provider offering.

In the private cloud, not in the public cloud, and we believe that our technology, now that it's been modernized, update, become more flexible, we can basically succeed in that space because some of the traditional incumbents in the old spindle marketplace, their model doesn't work in the new software defined cloud market space. It's become an OpEx model.

It's become more cost competitive and the hardware itself is being commoditized. So the software is really where the power is and where the money is and we have determined that through the work that we've done over the last 12 months, internally and engineering, that we can take our products to that new market.

So are we walking away from some of our existing customers? Or are we just adding to what they have with these new products?

We're actually moving into a new market of customers. The existing customer marketplace where we've sold point solutions like NSS, CDP and VTL will continue on and there is a roadmap for those products.

And they will be continued to be sold through value added resellers, exactly the way we do it today, but all of our new engineering work and our new investment in engineering and go-to-market is going to be around cloud and Flash manufacturers. So we're opening up a new segment.

We're not abandoning the old one, but the thrust of our engineering efforts will be around moving into that market. In the next 5 years, people are going to be buying from those service providers, not buying point solutions to deploy in their individual data centers anymore.

Got it. So I'm going to use my words and not any of your words.

At one point, my understanding was we were going to try and fix what we had, and sort of update things and move into a different direction. And as it was more difficult to gain traction and we were having trouble getting new customers, we were sort of going to decide whether we could actually go forward for the next couple of quarters or whether we should try a change of direction and again, my words, not yours, potentially even selling the company because you just couldn't go forward.

That's not going to happen anymore because there's a third option which is we're moving the company into a completely new direction and we think that we have good traction from the new products that we've developed to take us into this fast-growing area and we're going to create a new runway.

Yes. So I think you would agree and if you look at the other software competitors and other hardware manufacturers, the traditional space of enterprise storage, enterprise storage subsystems...

Is having a problem...

Is growing at 3.8% per year and many of the usual suspects out there are having misses in that space, a lot of struggle in that space and it's very crowded. So what we have -- we've been doing a lot of engineering work, as you know, with our partners to do joint development which Lou mentioned.

We have completed all the 4 milestones on both sides of the SOW [ph] with our joint development partner. Okay?

We are finished and completed. We have determined that, that was a great thing to learn a lot about the Flash marketplace.

At the same time, the engineering work that we did for ourselves internally allowed us to compartmentalize our technology, make it more flexible and allow it to be deployed in different ways that would address markets such as OEM-ing [ph] on Flash and embedded services for cloud service providers. The fact that we were able to do that at the same time and not continue just kind of putting a new dress on an old girl, allow us to now move into these markets where you saw these players on that slide.

I mean if you take out the traditional incumbents and hardware guys, those are all high-flying hot companies not with a lot of revenue, but with a lot of visibility and a lot of share and they're getting a lot of traction. So the world is evolving, and I think we've kind of got a chance to make a first impression twice.

Now with these new -- with the new products that you developed with your partner and then you're -- you've created a new product for yourself. The speed on those products were pretty exceptional.

Is that correct?

Yes. I mean, we certainly delivered against the metrics required as part of that joint development agreement and through further effort and work, we've been able to improve that even more.

Like I said, we took the results of that effort. We have then done additional work to create a brand-new product called FreeStor, and we've been able to enhance that product more with other capabilities to even exceed what was achieved during the SOW [ph].

Okay. And does this require you guys to have sort of a whole new, for lack of a better, internal business financial plan?

Because you're not tremendously flush with money to head off into a new direction.

Actually, I don't think so. I think what you're going to find is that the marketplace that we're going into is probably less resource intensive from a sales focus because you're not doing transaction by transaction with a partner or with an enterprise customer.

You're selling in a one-too-many-type mode. It's matter of getting those relationships done, doing some customized work for those particular partners around the hardware or the service and then getting paid as they sell those services or that hardware to the end-user and that's kind of a lightweight cost model for [indiscernible]...

Okay. So from a financial standpoint, you actually feel in some ways almost better than where you were before because...

Yes, I mean, I think our cash position is strong and I think we have enough funding to accomplish the goals that we want with the resources that we have or we put in place over the last quarter or two.

Okay. And your confidence level from the standpoint of being able to go in this new direction is much higher because it's sort of you got a single focus.

I mean...

I agree 100%. I mean, I think that, that's -- the thing that I think is a benefit for us there is that we have 15 years of experience and we've delivered that 15 years with the innovation that you see from some of these upstarts in California.

Okay. And then I have just 2 more.

The sort of lack of traction of getting new customers, in general, and just -- the difficulty in the U.S., is that size the company, the marketplace, just technology in general? Or I mean -- or do you think it's more specifically that people are still sitting and waiting for FalconStor to...

Can you say that again?

Well, in other words, is the performance of Americas, because everyone's having problems in Americas or is it because of missed execution because we don't have the right products or people are worried about FalconStor like they were before and they're not executing?

I think after some pretty intense analysis of 9 months’ worth of effort in every geography and country around the world, we found that in the Americas, primarily the U.S. and Canada, our new customer acquisition was very small.

I mean -- I believe, if you want to run a software company, your annual maintenance should be approximately 40% of your revenue. You should be able to take your available maintenance pool of customers and increased those customers by 25% to 30% capacity on an annual basis and your revenue -- of new customers should equal about 35% of your overall number.

At the moment, our U.S. new customer acquisition is in the single digits.

Our Western European new customer acquisition is probably around 12% and we're in the high 20s out in Asia. Now I think some of that has to do with the existing technology that FalconStor has on the market today is probably a little bit long in the tooth.

It hasn't had a full modernization although we've done quarterly releases which has helped our installed base renew and expand over the last 12 months. But you know what?

Our existing product portfolio, John, is not something that everybody is writing about and saying is the next new coming of technology. I think what people are going to find when that FreeStor gets released and what we've done in the case of addressing the Flash market and the flexibility to address the cloud market, I think people are going to say, wow, that's pretty amazing innovation going on over there and that will result in net new customer and the net new customer market there could be a large enterprise.

It's got to be a large complex enterprise, which we have today and people have seen the product and they're beta testing the product and they like it. In other cases, it's really more for the one-to-many.

So whether you don't a software stack on your hardware today, which a number of these guys don't, probably will have in the next 36 months, so we know it's important for us to capitalize quickly on those markets. In the case of service providers, they're looking for a horizontal approach that can control a very disparate portfolio of storage from their customers that they're bringing on to accept their services.

So I think at the moment, the new customer acquisition has been challenging, primarily because of the fact that our products, they've got some years on them. And at the moment, I don't want to kind of go with the market.

There's a lot of guys missing out there. We're not that well-oiled machine yet.

So I don't really want to go down the path and say it was a poor execution. If the Americas is not step at a hole, this quarter, I would -- we'd be having a completely different conversation at the moment.

Right now, I don't want to...

Should we expect to see new customers coming through in the next quarter? Or is this going to take the whole new thing?

I think you'll see those numbers increasing as we move into the new year and we'll start to report out on them because those are important metrics to us.

Okay. And then one last thing.

And I know that you'll say, oh gosh, those are such great questions until you asked me this one. Do you have any comment on this whole -- on what's going on with your shares out there?

And any buybacks or things like that? Can we put that to bed one way or another?

What specifically, John, is your question?

I think I asked one of you by e-mail if the company is buying back shares. And if under the agreement that you had with the family that you can actually buy back shares.

Okay. So the company does have an authorized buyback program but the buyback program is subject to the approval of the preferred stockholders.

If the company was buying back shares, we would report it in our 10-Q filings on a quarterly basis. Your question regarding the estate was can we buy from them?

Is that [indiscernible]...

Well, under the terms of the -- I mean, obviously, under the estate -- under the agreement that you had with the estate, if anybody presents anything to you, then you have the ability to turn it down or say it's correct. Approve it or disapprove it?

Yes, that's right. Well, we have the ability to -- a right of first refusal for the company itself or we can assign our rights to another third-party.

Right. So if you bought it back yourself, if the company decided to exercise their right to buy it, they would have to announce that they were doing it.

Correct or not correct?

Not necessarily. I mean, it would at some point, I mean like I said, if we bought it back -- if the company bought it depending on the size of the buyback, we would then -- if we're required a disclosure, we would.

Otherwise, it would be disclosed in the quarterly filing of our 10-Q.

So if it happens in this quarter, it would be filed in the next Q?

Right, unless it's material in nature on the individual transaction.

Okay. And material would be spending 20% of our cash?

I would assume something like that...

Materiality is determined on a transaction-by-transaction basis, John, depending on the position of the company assigned...

And if you assigned it to someone else...

That's not. That's not reportable ...

That's not reportable.

That's correct.

Any 10% customers in the quarter?

No, David. There's no 10% customers in the quarter.

Average deal size in the quarter?

We have not disclosed that, but it was probably somewhere in the neighborhood of 25,000 to 30,000.

Sequentially higher or lower?

About the same.

The remaining cash due for Violin Memory?

$3 million.

Expected in the current quarter?

We expected to be paid by the end of the year. Correct.

Okay. So the cash balance, today was $26.6 million?

That's right.

And is it your intention to maintain that cash balance going into 2015?

Yes, I mean, our objective is not to burn cash or unless something comes up that we think is strategic enough to make an investment, we will do so but we're not looking to burn cash just on an operations side.

Okay. And then with respect to some of John's questions on the estate [ph] and how you would handle potential purchase agreement.

Will you make an announcement if you receive a purchase agreement?

No.

No?

No.

And you will, in fact, file but you won't file until the quarter unless the transaction was material? So for purposes of our discussion, what is material?

Can we define that?

No, we can't. We don't speculate what's a material event.

Again, we've taken a transaction-by-transaction basis. If something were to come in, we would then look at that in-house.

We'll confer with our legal counsel to make sure if it's a requirement to make a public disclosure on that.

So there's not a dollar amount that you can tell me today is, in fact, material?

No.

Michael Kelly is not related. It's...

Materiality is not just dollar amount, John. It depends on different factors...

This is David.

I'm sorry, David. I apologize.

So materiality is what, pardon me?

Materiality is not just dependent on dollar size. There's other facts or circumstances that we'll go into determining if something material or not.

If in fact you received a purchase agreement and you elect to exercise your offer, and you assigned the transaction to someone else, would you make that known in your Q?

No. In the Q, if it goes through, yes.

At some point, we'll say we assigned our rights. We'll just simply say we assigned our rights to a third-party but that's basically all we will do.

Would that [indiscernible] be a case-by-case basis or would the assignment be a case-by-case basis or would it be possible for you to repurchase some of the shares corporately in the event that you had an opportunity? Or would they all go to or would they all be assigned?

So essentially, the question I'm asking...

Anytime we get an agreement, the company will determine whether or not they want to participate in that or if they want to participate in a portion or assign their rights.

Okay. The Securities and Exchange filings you made today with respect to the inquiry from the SEC.

Have you gone to Hitachi and made certain that they have not sold product to Cuba or Sudan or Syria?

Yes, it's actually if you look closely to our response. Actually, we probably say they were submitted back on September 30 within the 10-day requirement period to respond to the terminate [ph] letter.

The SEC just posted on their site at some point later on if we did file it today. But to answer your question, our agreement with Hitachi and all other partners and distributors is that they apply it with the U.S.

Customs -- Department of Commerce export laws. So we -- let's say, every one of our agreements and both companies agree to that.

For the SEC to pull that data out of your 10-K and to have called you on it is somewhat concerning. It means to me that they're watching business very, very, very closely, and that somewhat concern...

I think that's probably just more of a -- they're watching all business at that point. I think, obviously that's a hot area right now in part of the world.

I think it's probably looking at everything of companies doing those types of businesses. So...

Could you point me to another instance where the SEC has sent the company a similar letter?

No, John. I don't scour the SEC response letters to...

It's David.

I'm sorry. We don't -- I don't scour the SEC site looking for comment letters or who they're writing to.

For 2015, your expectation that the launch of the new products will generate incrementally higher revenues?

I mean, I think, that's obviously our goal. Again, if we take it as we work to 2015, we'll build our internal forecast and expectations and work towards those goals.

And previously, when you diluted the shareholders at all-time lows in the stock you suggested that, going forward, you would do everything you could to run the business cash flow breakeven and maintain those cash balances. You suggested in the call today that you are likely to see some incremental expenses.

So does that mean you have abandoned the -- running the business with cash flow breakeven going forward?

No, absolutely not. In fact, to-date, for the 9 months, we have burned through about $1.5 million in cash compared to year end.

On a cash flow from operations perspective, we're essentially breakeven. My point to that was as we have done in the first half, we will continue to, especially with the launch of the new products coming up next year, we will make strategic investments back, if we think it meets the proper return on investment and if it means we spend some cash, we will do that but obviously, from an operation side of the house we are doing everything to maintain a bottom line culture as I talked about in my opening comments.

Excellent. The addition of the new board member satisfied the agreement that you had with Hale that he was able to assign another board member.

I assume that is his assignment?

That's correct.

Okay. And I'm assuming that Michael Kelly is not related to Sage [ph]?

I [indiscernible], John...

That's supposed to a joke and it's still David. All right.

And then lastly, what do you see as the opportunity for the Violin Memory product? There are stories around on the street that whatever the benchmark was for the speed that you had negotiated in that agreement that you are able to crush that speed which is actually very good.

Can you tell me what you see as your opportunity with that product going forward?

So David, the opportunity, pretty much was is that when we did this joint work with Violin, that work would be distributed by Violin to their opportunity to marketplace. Our opportunity to marketplace is everyone outside of Violin, in the Violin Flash space.

So we have not quantified that yet. We are working through some additional analysis.

You saw a couple of highlights slides that show growth in that space. The SSD storage subsystem space is growing over 100% per annum.

The hybrid, which is typically around the nimble guys with both Flash and spindles in the same box, that's growing close to 150% per year. And finally, the private cloud space is growing close to 200%.

So we have not locked down the market share that we wished to capture inside of each of those particular segments. But given the fact that even if we could achieve a 1% market share considering we're under 1% today in the traditional enterprise storage subsystem space with spindles, and software for BCDR, we think we have a pretty good opportunity.

So we will talk more about that as we get closer to the announcement date of what that total addressable market is. We are working diligently to acquire the necessary, let's say, a minimum certification requirement with a number of flash manufacturers today, and we hope that we can develop those into other relationships from a selling perspective.

Can you quantify the opportunity in the marketplace in terms of dollars?

I don't have that slide up. It's an IDC slide that I have.

I can get you that slide, okay, and I can give you the size of the market. The question is whether or not -- how much of that market can we achieve or gain going forward.

Like I said, these numbers are kind of small today compared to the overall enterprise storage subsystem market.

So is it a $10 million market opportunity for 2015?

At the moment, I don't think we're really ready to put a stake in the ground on that because we have a little bit more work to do, depending on some relationships that we can get underway.

All right. Thank you very much, operator.

Since we have no more questions, in closing, FalconStor continues to improve on all of our metrics as a business. As I said before, and Lou has echoed this on his previous calls as well as today, the path to profitability and growth will not be a straight line.

We'll make improvements and succeed in the United States, as well as around the globe, and I still remain very optimistic on the future for FalconStor. Thank you, and good night.