FalconStor Software, Inc.

Thank you, Cody. And good afternoon to everyone.

I'd like to thank each of you for taking your time to participate in our call today. I'm excited by the progress that the FalconStor team has made during Q4 as we strive to empower IT professionals and enterprises across the globe achieve mastery over their data, because we believe data is an organization's most precious asset, and when mastered, enables that organization to responsibly push the boundaries of what's possible in the digital economy in which they operate.

FalconStor’s products are pointed at a market reported in 2018 by IDC to be sized at approximately $10.7 billion and predicted to grow at a compounded annual growth rate of 14.7% through 2022. This growth is being driven by two factors: First, an explosion in the amount of data generated by various digital technologies whether it's in the form of traditional email, documents, application databases, digital audio and video or Internet connected devices.

And then secondly, a dramatic increase in data storage options, whether they be located in a traditional data center, private cloud, or public cloud. The ever expanding capacity of data captured and stored is driving the need for enterprises to cost effectively, securely, and intelligently manage this data.

I'm excited about this market and the business value that FalconStor delivers to its complex enterprise customers. During Q4, we focused on three key initiatives: First, on continued delivery of operating profitability.

Second, on generating year-over-year billings growth. And then finally, on key product expansion.

For the balance of today's call, we’ll elaborate on each of these three key initiatives, provide a detail review of Q4 financial results, and then open the phone line for any questions that you may have. Throughout 2018, we continued to improve operational efficiency and focused on consistent commercial discipline.

These efforts have allowed the company to create consistent operating profitability. As evidenced, Q4 marks the sixth consecutive quarter of profitable operating margin delivered by the team.

These efforts allowed the company to generate a non-GAAP operating income of $654,000 during the quarter, despite new growth investments we made to drive new product development, general marketing, and commercial team expansion. We also finalized the final tranche of our previously announced financing which resulted in the company receiving an additional $1 million of gross proceeds from new investors.

Our cash and cash equivalents increased to $3.1 million at the end of Q4 from $1 million at the end of 2017. In addition, we continued to shift our subscription-based licenses during the quarter and increased billings days annual recurring revenue or ARR to 70% at the end of Q4 as compared to 61% in Q4 the prior year.

I'm excited by the operational consistency and profitability the team continues to deliver. I'm also excited by the billings growth the team is now delivering especially in our Americas and EMEA regions.

In Q4, we were able to generate 21% year-over-year growth in our Americas region, and 40% billings growth in our EMEA region. These results are direct outcomes of rebuilding the commercial teams, increasing focus on key existing and new partners and improving our go-to market messaging in each region.

The dramatic growth delivered in the Americas and EMEA largely offsets the Q4 billings decline we continued to experience in APAC, especially within the country of China. Throughout 2019, we expect to ship additional resources to our Americas and EMEA regions, while strategically aligning our APAC focus to the most productive countries within that region.

The financial stability we have generated over the last six quarters has enabled us to place increased investment into our go-to-market product strategy and go-to-market efforts. Our data protection products delivered tremendous business value across three key solution categories: backup and archive orchestration, disaster recovery and high availability.

The backup and archive orchestration category is targeted at modernization and optimization of existing backup and archive operations. This category is the foundation of daily routine data protection strategies for our complex enterprise customers.

The disaster recovery category is targeted at delivering superior application-aware protection via advanced continuous data snapshot and journal-based replication, and then finally by automated data recovery. And then high availability category delivers superior business continuity via continuous, active-active availability of mission critical production data.

Each of these solution categories is built upon the foundation of hardware and cloud vendor-agnostic technology, which allows our customers to leverage existing hardware investments and intelligently utilize the best target storage environments for each of their specific data protection use cases. It also enables them to eliminate vendor lock-in and the need to rip and replace hardware.

Our full spectrum data protection solutions enable our complex enterprise customers to virtually eliminate potential data loss. During Q4, we continued to expand our data protection product suite.

First, we repositioned our FreeStor offering as the FalconStor Data Mastery Platform to more accurately reflect the product’s full value proposition to our large complex enterprise customers. The initial release of the platform also includes native cloud functionality, including the ability to utilize public cloud platforms such as AWS for data protection storage targets.

Second, we expanded our core backup and archive orchestration product called FalconStor VTL to enable customers to migrate virtual tape backups to AWS S3 object storage to achieve low cost, tape archive in the cloud. In addition, data ingest performance benchmark testing was completed on our VTL solution and generated 25% better results than our nearest competitor.

FalconStor’s unique all 18 years of technology innovation is unmatched by newer entrants in the data protection space. And we will continue to build upon this advantage.

Our customers know that our solutions are powerful and comprehensive. With that, I will turn it over to Brad to provide a more detailed overview of our Q4 financial results.

Brad?

Thank you, Todd. Fourth quarter of 2018 marked our sixth consecutive quarter of non-GAAP operating profitability.

During the three months ended December 31, 2018, we delivered non-GAAP operating income of $654,000 as compared to non-GAAP operating income of $1.5 million during the same period of the previous year. Our results for the current quarter were significantly impacted by adoption of new revenue recognition accounting guidance as of January 1, 2018, which resulted in $1.2 million decrease in revenue.

Net cash used by operations decreased by $1.1 million to $1.5 million for the year ended December 31, 2018, as compared to $2.6 million of net cash used by operations during the prior year period. As a result of improving operational efficiencies; the closing of the commitment from Hale Capital private placement providing $3 million in financing, the commitment; and $1 million in gross proceeds received in connection with our previously announced private placement and approximately $500,000 we received from our warrants exercised in connection with these events, we ended the quarter with $3.1 million in cash and cash equivalents as compared to $1 million of December 31, 2017.

Overall, total revenue for the current quarter decreased 24% to $4.8 million compared to $6.2 million in the prior year period. Remember $1.2 million of this decline resulted from our adoption of new revenue guidance on January 1, 2018 as previously discussed.

The remaining decrease in revenue was driven by the volume of new product licenses and maintenance sales during the current period, but only totaled $200,000. As a result of our cost control and realignment initiatives, our non-GAAP operating expenses continued to trend lower at $3.2 million as compared to $3.7 million during the three months ended December 31, 2017, representing a decline of 12% over the same period of previous year.

Turing now to the balance sheet, we ended the quarter with cash balance of $3.1 million. Net working capital excluding deferred revenue and contracts receivable but including the face value of the note receivable ended at $1.2 million.

We closed the quarter with accounts receivable of $3.6 million, accounts payable and accrued expenses of $3.4 million and deferred revenue of $9.4 million. The decline in deferred revenue as compared to the same period in the previous year was primarily related to implementation of ASC 606 effective January 1, 2018, which is the revenue recognition policy as previously mentioned.

As many of you already know, on October 9th, we closed the final tranche of our previously announced private placement. In connection with this event, we received an additional $1 million of gross proceeds from investors which is an addition to the $3 million of gross proceeds previously received through Hale Capital over the previous 12 months.

Todd, I'll now turn it back over to you for final comments.

Thanks a lot, Brad. I appreciate it.

In summary, we are pleased, as I mentioned earlier by the progress that we've made in Q4. We obviously have significant amount of work in front of us.

But we do believe the company's performance over the last six quarters including growth in our Americas and EMEA regions have created strong momentum for FalconStor going into 2019. To our shareholders and loyal partners and customers who have joined this call today or that will listen to its recording, we are committed to delivering value and we look forward to even more exciting days here at FalconStor.

At this time, I'll ask Cody to begin the question-and-answer session. Cody?

Alright. Thank you, Cody.

Alright, well, once again, thanks to everyone for joining. We are very excited as we go into 2019 and we look forward to the next earnings call.

Thank you very much.