Clark Liddell;Senior Director of Global Operations: Good afternoon, and thank you for joining us to discuss FalconStor Software's Q1 2021 Earnings. Todd Brooks, FalconStor's Chief Executive Officer; and Brad Wolfe, Chief Financial Officer, will discuss the company's results and activities, and we'll 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 FalconStor's website at www.falconstor.com under Investor Relations. After the close of business today, FalconStor released its Q1 2021 earnings. Copies of the earnings release and supplemental financial information are available on FalconStor's website at www.falconstor.com. I'm now pleased to turn the call over to Todd Brooks.

Robert

Brooks: All right. Well, thanks, Clark, and I appreciate that. And I'd like to thank each of you for taking your time to participate in our call today. We're excited by our progress in Q1 of 2021 by the market that we serve. And the value that our solutions deliver to our enterprise customers every day. We are a trusted protection -- data protection innovator, with over an exabyte of data under management. We enable the world's most demanding enterprises to modernize their data backup and archival operations across 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 data storage footprints by up to 95%.

Our solutions are utilized by enterprises and managed service providers across the globe and address 2 key areas of enterprise data protection. First, long-term data retention and recovery and business continuity -- and then second, business continuity-driven data protection. Long-term data retention and recovery is key because up to 80% of an enterprise's data is archived and retained for more than 90 days. In this area, data storage optimization, security and portability are key. Our customers use our solutions to dramatically improve data import or processing speeds; significantly reduce the amount of data to be stored, thus reducing storage costs; and take advantage of a wide array of storage options, including cloud-based options provided by AWS, Microsoft Azure and IBM.

Within business continuity-driven data replication and recovery, this is also important as data is typically stored for less than 90 days, and our customers need this data to be available for quick recovery to disasters, ransomware and other unplanned situations. And they need to intelligently manage cost to store this data. Our solutions excel in these crucial enterprise data protection segments. For fiscal year 2021, we've implemented 4 key strategic initiatives as we continue our work to reinvent FalconStor.

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 storage innovations that we believe will drive our growth over the next decade. Then second, on sharpening our commercial and R&D focus related to our business continuity-driven data replication products to ensure that we are focused on those use cases, which are important to our largest and most strategic enterprise customers. And then third, on beginning to generate growth via acquisitions or M&A. And then finally, continuing to deliver consistent profitability. These initiatives will build upon the progress that we have made over the last 4 quarters.

And this progress includes the following: First, we have returned to year-over-year revenue growth over the last 4 quarters with a 1.2% increase in total revenue over that period of time. Our quarterly results year-over-year revenue growth has not been consistent every single quarter, over the last 4 quarters. But we did generate 12% year-over-year revenue growth in Q3 of 2020, and then 20% year-over-year revenue growth in Q1 of 2021, our most recent quarter. So we're making good progress toward consistent revenue growth. Second, we improved our gross margins by 8.6% year-over-year by continuing to improve the efficiency of our customer support and professional services organizations. Third, we generated strong earnings growth with over $2.2 million in GAAP net income, which represented a 197% increase year-over-year.

As a result, we believe we've built a solid and profitable operating foundation from which we can continue to build. Finally, we increased free cash flow to $1.2 million over the last 4 quarters, and that's 154% increase year-over-year. So all in all, we are encouraged by the scalable foundation that we've built, and we believe we'll begin generating consistent year-over-year quarterly growth in the next several quarters, especially as the world returns slowly to a more stable and more normal state from the COVID-19 pandemic.

As you know, we began our reinvention efforts back in late 2017. We rebuilt our leadership team, and we set out to return FalconStor to an industry-leading position within our market. As a result, I think it's important for us to review our progress against a broader time line. Looking at a few metrics here, our net customer revenue retention, which excludes any hardware revenue, since we now treat hardware as a pass-through, increased from 65% in 2017 to 177% in Q1 of 2021. And our results from this past quarter in Q1 of 2021 were aided by 2 large existing customer expansions.

Then secondly, our gross margin percent has increased from 78% in 2017 to 83% in Q1 of 2021. Our adjusted EBITDA percent increased from 7% in 2017 to 21% last quarter, Q1 of 2021. Our free cash flow has increased from a $2.9 million annual cash burn to generating $100,000 in Q1 of 2021. And our R score, which is simply calculated by taking annual year-over-year revenue growth percentage plus annual EBITDA percentage, that increased from a negative 14 in 2017 to a positive 40 in Q1 of 2021. That's a 54 point increase, something that we are very pleased and proud of. And then finally, our percent of annual sales from noncore markets, such as China, has decreased from slightly over 23% of all revenue in 2017 to less than 2% last quarter in Q1 of 2021.

This shift is important as it allows us to be more focused in our core markets, markets that are efficient for us and in which we have demonstrated that we have competitive advantage. Today, we have over 600 active customers that manage over 1 exabyte of data using FalconStor technology that is protected by 47 patents and patent applications. The last 4 quarters have produced some material commercial highlights, including the launch of our newest long-term data retention and recovery product called StorSafe, which significantly improves the ability for our enterprise customers to optimize their data storage and reduce related data storage costs by easily leveraging AWS, Microsoft Azure, IBM Cloud or Wasabi public cloud storage.

Next, we expanded our global partnership with Hitachi Vantara to deliver a new hybrid cloud data protection architecture powered by StorSafe and Hitachi's HCP object storage platform. Next, we deepened our integration with AWS cloud data storage tiers to further enable storage cost reduction for our customers. Next, we gained market share by accelerating replacements of the end-of-life IBM ProtecTIER solution.

Next, we continue to demonstrate the ability of our data protection solutions to scale with several expansions of multi-petabyte deployments across multiple data centers for large enterprises and government institutions. And then finally, we expanded our solution functionality for MSP customers or managed service provider, customers like Blue Chip, a leading IBM-focused U.K.-based MSP, which now serves over 300 customers and 70 petabytes of data under management.

As I mentioned during the beginning of the call, we are excited by the large and growing markets that we've traditionally served, and we're even more excited by the addition of the cloud data storage optimization focus that we've added over the last 4 quarters. Cloud data storage is here to stay. In fact, it's predicted to grow by 22% annually through 2024.

Going forward, we will focus in key 6 areas: first, on increasing our subscription-based recurring revenue base; second, on generating consistent quarterly year-over-year revenue growth; third, on continuing to innovate with our long-term data retention and recovery solutions; fourth, on expanding our business continuity-driven data replication and recovery solutions to meet the needs of our most strategic customers; fifth, on implementing a disciplined M&A strategy; and then finally, on continuing to improve our capital structure and liquidity profile. So at this point, I'm going to turn it over to Brad to provide a more detailed overview of our Q1 2020 financial results. Brad?

Brad Wolfe: Thank you, Todd. As Todd mentioned, Q1 2021 was a very good quarter for FalconStor. Billings, bookings, revenue, gross profit, ending cash and net working capital cash improved from Q1 of 2020. We closed the 3 months ended March 31, 2021, with $3.8 million in GAAP revenue compared to $3.2 million for the same period of the previous year, an increase of 20%. GAAP total gross profit for the quarter was $3.2 million compared to $2.6 million for the previous year, an increase of 21%. GAAP total operating expenses were $3.2 million compared to $3 million for the first quarter of 2020. The increase was due to higher commission -- sales commissions. We generated GAAP operating loss of $17,000 in Q1 of 2021 compared to a loss of $403,000 in Q1 of 2020, an improvement of 96%. And a GAAP net income of $425,000 for the quarter compared to a loss of $720,000 in Q1 of 2020, an improvement of 159%.

Turning now to the balance sheet. We ended the quarter with a cash balance of $2 million compared to $1.9 million on December 31, 2020, and $976,000 at March 31, 2020. An improvement of $100,000 from Q4 2020 and an improvement of over $1 million from Q1 2020. Net working capital, excluding deferred revenue, contract receivables, but including the redemption value of our term notes, ended at $402,000, an improvement of $0.7 million from Q4 2020, and an improvement of $3.1 million from Q1 of 2020. Q1 marks the third quarter in a row that we were cash positive for the quarter.

As we mentioned last quarter, we applied for the Payroll Protection Plan loan from the Small Business Administration and received $754,000 in May of 2020. We applied for forgiveness of the full amount in October of 2020 with the Small Business Administration and the loan was forgiven on March 30, 2021. We closed the quarter with $2 million in cash and cash equivalents, accounts receivable gross spending reserves of $3.1 million, accounts payable on accrued expenses of $3.3 million and deferred revenue of $6.5 million.

We also continue to restructure the company, reducing nonoperational costs and streamlining our cost structure. We've been working toward becoming a primarily virtual company for several years, but COVID-19 accelerated things as we abandoned large legacy leases from around the world. As of April 30, 2021, our lease in Melville, New York of approximately 60,000 square feet ended, and we have not renewed it. The monthly cost of this legacy lease was approximately $135,000 per month. Although some of the $1.6 million annual lease cost had been offset with sublet rent, we anticipate approximately $1.1 million of gross savings in 2021 and $1.6 million in 2022 and beyond. We are deploying much of the savings into growth.

SMB has weathered COVID-19 disruptions well so far, and I believe we have created a stable operating foundation from which we can build on in 2021 and beyond. Todd, I'll now turn it back over to you for final comments.

Robert

Brooks: All right. Great. Well, thank you for that, Brad. Thank you for that review. And in summary, we are excited, as I mentioned, to open by the quarter and the progress that we've made over the last several years. And at this time, let me turn it back over to Clark and to begin the question-and-answer session. Clark?

Clark Liddell;Senior Director of Global Operations: Great. Thanks, Todd. [Operator Instructions] Okay, Todd, I'm not seeing a question yet. So you may have -- we may have no questions today.

Robert

Brooks: Okay. All right. Very good. Thank you, Clark. Thank you, Brad. I appreciate that. And once again, thank you, everyone, for taking your time to attend our call today or to listen to the recording later. With that, we will sign off, and we'll talk to everybody next time. Thank you.