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spk01: Good afternoon. Thank you for joining us to discuss Falcon Store Software's Q3 2021 earnings. Todd Brooks, Falcon Store's Chief Executive Officer, and Brad Wolf, Chief Financial Officer, will discuss the company's results and activities and will then open the call to your questions. The company would like to advise all participants that today's discussion may contain what some consider forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are discussed in FalconStor's reports, on forms 10-K, 10-Q, and other reports filed with the Securities and Exchange Commission and in the company's press release issued today. During today's call, there will be discussions that include non-GAAP results. A reconciliation of the non-GAAP results to GAAP has been posted on Falcon Store's website at www.falconstore.com under Investor Relations. After the close of business today, Falcon Store released its Q3 2021 earnings. Copies of the earnings release and supplemental financial information are available on Falcon Store's website at www.falconstore.com. I'm now pleased to turn the call over to Todd Brooks.
spk00: All right. Well, thank you, Clark. And I'd like to thank each of you for taking your time to participate in our earnings call today. You know, we certainly have a lot of work to do, but we are pleased with the progress that we're making and the market that we're serving and the value that our solutions deliver to our managed service provider partners and enterprise customers every day. We are a trusted data protection innovator with well over a thousand end-user customers and an extra byte of data under management. We enable the world's most demanding managed service providers and enterprises to modernize their data backup and archival operations for the hybrid cloud world, protecting data across on-premise data centers and public cloud environments, Our solutions then deliver increased data security and provide for quick data recovery, including recovery from ransomware attacks. And our solutions accomplish these while driving down long-term storage footprints by up to 95%. For the year, back in the beginning of 2021, We implemented four key strategic initiatives as we continue our work to reinvent Falcon Store. First, on generating consistent growth by expanding our industry-leading long-term data retention and recovery product line, and by creating new, flexible, and extensible data protection innovations that we believe will drive our growth over the next decade. Second, then on sharpening our commercial and R&D focus related to our business continuity data or driven data replication products to ensure that we're focused on those use cases which are most important to our strategic and largest enterprise customers. Then third, in beginning to generate growth via M&A. And then finally, in continuing and delivering consistent operating profitability. So how are we doing? We're three quarters in to 2021. First, let's talk about GAAP subscription revenue area that we've been highly focused on as we're moving perpetual, you know, older-fashioned perpetual license deals into a subscription recurring revenue model. For the quarter, we delivered a 35% year over year increase. Then for the first nine months of 2021, our subscription, our GAAP subscription-based revenue has actually increased 54%. So we're doing, we're making great progress in that area as we move our licenses from perpetual to subscription. Second then, our quarterly GAAP total revenue consistency continues to remain a key priority for us. And as you can see, we're not there yet. We're not driving consistent total revenue growth. In fact, in Q3, our total revenue GAAP total revenue was actually down year-over-year 26% here again as we're moving away from perpetual licenses and converting into subscription. but you know we are remain focused on that and certainly as we get more and more of our perpetual license converted we will be able to begin driving total revenue growth and it's not just a matter of converting perpetual into subscription then it's also generating new recurring revenue and we'll talk about what we're doing there here in a few minutes with our managed service providers third then you can see that we're continuing to tightly manage our operating expenses. Now this, in Q3, the reduction in our GAAP operating expenses was actually aided by a $633,000 gain that we were able to book because of a litigation settlement that we were very pleased to get behind us. But nonetheless, we're continuing to manage very tightly our operating expenses as we both maximize our legacy business and invest for growth. So bottom line then is net income has remained inconsistent also, despite the fact that we're increasing subscription revenue dramatically and tightly managing our operating expenses, mainly because of total revenue is still lumpy. So we've got work to do, obviously, but we are making really good progress in some of our key initiatives, especially in driving increased recurring revenue year over year. As most of you know, we began our reinventions of Falcon Store back in late 2017. So as we go forward, I think it's important at least for the time being, to keep a broader view of how we're trending over the longer period. And so this is a table that we have shown for the last several earnings releases, and we'll continue to do that for the next few. But let's just go review a few of these numbers. So for net customer revenue retention, which does exclude hardware because we no longer treat hardware, we just treat it as a pass through, I should say. In 2017, our net customer revenue retention was 65%. Year to date, 2021, we're at 97%. Our gross margin in 2017 was 78%. And then year to date so far this year, it's 85%. Our adjusted EBITDA in 2017 was 7%. Year to date, 28%. Free cash flow. We're making good progress. We're still not every single year delivering a positive free cash flow yet, but we're making good progress. We burned 2.9 million in 17. We did generate cash in 2020. So far this year, we have burned 800,000, but we're making progress there. And then as it relates to rule of 40, which is simply annual year over year revenue growth percentage plus annual EBITDA percent, that was a negative 14 in 2017. And so far, this year is a positive 21. That's an increase of 35 points on real 40. And then finally, this metric is stabilized significantly. But early on, we made some decisions to pull out of some markets that we considered not to be core anymore to us. As an example, China. In 2017, our total percent of sales from those non-core markets was 23%. So far year to date in 2021, it's just a hair over 4%. I expect that that will continue to go down slowly as we continue to focus in our core markets instead. And speaking of markets, I mentioned earlier that we are really excited about these markets that we are focused on as we look uh to grow falcon story these three markets are these data protection as a service in 2019 there's a 12 billion dollar market predicted to grow at a rate of 31 a year to 104 billion in 2027 the hybrid cloud market stands at 56 billion in 2020, predicted to grow at a rate of 20% to 204 through 2027. And then finally, the managed IT services market or MSP market. This year is predicted to be 243 billion, growing at an 8% rate to 355 billion in 2026. these are fantastic markets for us to be focused in and we have technologies that play extremely well within these markets so today you know we falcon store have over 100 000 organizations and msps that then have over an exabyte of data under management using Falcon Store technology. And that technology is protected by 45 patents or patent applications. In the last four quarters, we've been able to accomplish some really important commercial items. Let me kind of go through those. So first of all, we launched a multi-tenant version of StoreSafe. with integration into many of the cloud providers. And this is very important. And it has enabled us to open a very efficient new route to market with managed service providers, or MSP partners, who then serve, in many cases, hundreds of different enterprises with data protection services. For those managed service providers, we have launched a new, and we just launched this in Q3, by the way, we've launched a new and disruptive per tenant or per MSP customer per month pricing model. And that model then aligns very well with the managed service providers monthly OpEx business model. And we've already seen good response to that. In fact, toward the end of Q3, signed two new MSP partners under that new pricing model. So that's very encouraging for us, and we think that we've found a really good, efficient go-to-market for growth in the form of partnering with MSPs. Third, then, we partnered with Hitachi Venterra to deliver a new hybrid cloud data protection architecture architecture powered by StoreSafe and Hitachi's HCP object storage. And although it's not referenced on this slide, we're also in the process of, and I saw an announcement today, so I'll go ahead and announce it here on the call, but we've also partnered with Hitachi on pairing our StoreGuard data replication technology with their mid-range storage devices. And so that will be launching here later in Q4 or early in Q1. So excited about some of the things that we're doing with Hitachi Vantara. And then fourth, we've optimized our integration with AWS archival storage services, and particularly their various cloud data storage tiers. Next, then we've gained market share by accelerating replacements of the end-of-life IBM Protect tier solution. And then finally, we continue to demonstrate the ability of our data protection solutions to scale with several large expansions of multi-petabyte deployments across multiple data centers for large enterprises and government installations. And so there's been a lot of work going on behind the scenes here at Falcon Store and with our partners and in some new growth markets that we believe are setting us up very well for 2022. Okay, next, as we look forward to 2022 and we look forward and we focus on growth, we'll be focused in five key areas. First, on continuing to increase our subscription-based recurring revenue licenses, including the MSP monthly recurring revenue that we just talked about with our new pricing model with MSPs. We'll continue to invest in data protection solutions and efficient routes to market aligned with hybrid data use cases. Third, we'll continue to focus on generating consistent quarterly revenue growth, not just subscription growth, which is doing great, but total revenue growth while maintaining strong profitability, which will allow us to reach an R score of at least 40. Fourth, we will continue to seek very targeted M&A opportunities while remaining focused on positive cash flow and operating performance. And then finally, we'll continue to look to improve our capital structure and liquidity profile. And as most of you know, we've made some good strides in that area also throughout 2021. So with that, I'm going to pause and I'm going to turn it over to Brad to provide a more detailed overview of our Q3 and year to date financial results. Brad.
spk02: Thank you, Todd. We closed the three months ended September 30th, 2021 with 3.3 million in GAAP revenue compared to 4.4 million for the same period of the previous year, a decrease of 26%. GAAP total gross profit for the quarter was 2.8 million, compared to $4 million for the previous year, a decrease of 29%. GAAP total operating expenses were $2.4 million and benefited from a $633,000 litigation settlement credit compared to $2.3 million for the third quarter of 2020, an increase of 4%. We generated GAAP operating income of $449,000 in Q3 2021 compared to GAAP operating income of $1.7 million in Q3 2020, a decline of 74%. and GAAP net income of $374,000 for the quarter compared to GAAP net income of $1.5 million in Q3 2020, a decline of 76%. We closed Q3 year-to-date 2021 with $10.4 million GAAP revenue compared to $11.1 million for the same period of the previous year, a decrease of 7%. GAAP total gross profit for Q3 year-to-date 2021 was $8.8 million compared to $9.8 million for the previous year, a decrease of 9%. GAAP total operating expenses were $8.6 million compared to $7.9 million for Q3 year to date 2020, an increase of 9%. GAAP operating income for Q3 year to date 2021 was $249,000 compared to GAAP operating income of $1.9 million for Q3 year to date 2020, a decline of 87%. And GAAP net income of $450,000 for Q3 year to date 2021 compared to gap net income of $1.2 million for Q3 year-to-date 2020, a decrease of 64%. Turning now to the balance sheet, we ended the quarter with a cash balance of $3.5 million compared to $3.7 million on June 30, 2021, and $0.9 million at September 30, 2020, a reduction of $0.3 million from Q2 2021, and an improvement over Q3 2020 of $2.6 million. In Q2 and Q3 2021, we raised 4.5 million gross proceeds and two public offerings for a common stock at a price of $4.10. We also paid at the end of Q2 1.3 million toward our notes payable balance. Networking capital, excluding deferred revenue, contracts receivable, but including redemption value of our term notes, ended at 3.8 million, an improvement of 0.7 million from Q2 2021, and an improvement of 4.3 million from Q3 2020. We've generated $232,000 free cash flow for the last four quarters. We closed the quarter with $3.5 million of cash and cash equivalents, accounts receivable gross revenue reserves of $2.4 million, accounts payable and accrued expenses of $1.4 million, and deferred revenue of $5.3 million. On July 27, 2021, we closed a follow-on equity offering, raising $1.2 million of gross proceeds and a public offering of our common stock at $4.10. The support and access to the public markets reaffirms the valuation and market approach we have been pursuing for several years and allows us to pursue more aggressive organic growth and potential M&A. Given our less than anticipated year-to-date total revenue, we are revising the 21 guidance we had previously provided down. Our new guidance will be total revenue of $14.1 to $15.1 million, adjusted EBITDA of $3.5 to $4.5 million, net income of $0.6 to $1.7 million, And our rule of 40 score will be between 20 and 33. Todd, I'll turn it back over to you for final comments.
spk00: Thank you, Brad. And, you know, as I said in summary, you know, there's some really good things that are going on at Falcon Store. We're clearly steering a re-advention phase, but the progress that we've made in converting a lot of our old-fashioned perpetual licenses into subscription licenses and our new go-to-market path with MSPs and the new pricing model there is really encouraging. So we've got a lot of work to do to be able to show year-over-year growth in every single metric. But the team's working hard and we are showing good results and we're excited, really excited once again about these markets that we're serving and the response that we're getting, especially from our MSP partners. So with that, let me go back to Clark and let's open up for any questions that anyone may have.
spk01: Yeah, thank you, Todd. If anyone has any questions, they can type them in a little question pane to the right. And if you can't see the question pane, you may just see like a big red arrow facing to the right. If you click on that, it'll open up a panel and then you can find the question pane or You can actually hit the little button to raise your hand. But either way, if you have a question, please let us know. And we'll wait a few seconds and see if we get any. Okay, Todd, I'm not seeing any questions today, so maybe we should just close it out.
spk00: All right, great. Well, once again, thanks everybody for taking your time. We'll look forward to getting together again here in a few months and wrapping up 2020 or I should say 2021. So hope everybody stays well and thank you again for attending our call. Thank you.
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