Executives: Todd Brooks – Chief Executive Officer Brad Wolfe – Chief Financial Officer

Analysts: Bill Dawkins – Burleson Dawkins Inc.

Operator: Good afternoon and thank you for joining us to discuss FalconStor Software’s Q2 2018 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 advice 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 also 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 Q2 2018 earnings. Copies of the earnings release and supplemental financial information are available on FalconStor’s website at www.falconstor.com. I am now pleased to turn the call over to Mr. Todd Brooks.

Todd Brooks: Thank you very much, and I would like to thank each of you for taking your time to participate in our call today. We’re excited about the financial stability that the FalconStor team has created over the past four quarters. Our operating performance during Q2 continues to provide clear support that FalconStor is positioned to excel and deliver long-term value to its customers and shareholder base. Our products and solutions play a key role in managing and protecting critical data within large, complex enterprise organizations around the world and had been so for the past 18 years. Our customers depend on our solutions to achieve mastery over their data, an organization’s most precious asset, so they can responsibly push the boundaries of what’s possible in the digital economy. Our products are pointed at a market reported in 2017 by IDC to be sized at approximately $7 billion and predicted to grow at a compound annual growth rate of 13% through 2021. This growth is being driven by exponential growth in the amount of data being generated by various digital technologies, whether it’s in the form of traditional e-mail, documents, application databases, digital audio and video or Internet connected devices, the so-called Internet of Things. The ever-expanding capacity of data captured is driving the need for enterprises to cost-effectively, securely and intelligently manage this data. So I’m excited about this market and even more excited about our ability to expand our presence and our reach within this space. During Q2, we focused on three key initiatives: 1) on continued delivery of operating consistency; 2) on expansion of key hardware and software certifications; and 3) on key partner reviews of our go-forward product vision. And for the balance of today’s call, we’ll elaborate on each of these key initiatives and then open the phone line for questions – for any questions that you may have. So, I’ll start with operating consistency. The restructuring that we completed in 2017 and the efforts to improve commercial discipline, pipeline management and partner relationships over the last 12 months have allowed the company to create dramatically improved operating consistency. As evidence, Q2 of 2018 marks the fourth consecutive quarter of profitable operating margin delivered by the team. These efforts have allowed the company to generate a non-GAAP net income of $159,000 during the quarter. This is a $578,000 improvement from the $419,000 loss we generated in Q2 of 2017. So, I’m very excited about this operating consistency. Moving on to key hardware and software certifications. Our software defined storage and data management software is built to work with a wide array of industry-standard hardware and software solutions. As such, there’s a period that we proactively maintained certifications and interoperability standards. During Q2, we achieved for updated certifications for over 20 key hardware and software solutions, including solutions from Dell, Hitachi, Huawei and VMware. We’ll continue the expansion of our key credentials and certifications in Q3 and Q4 to ensure our customers can seamlessly manage their data via their preferred technologies, including cloud-based offerings, such as those from Amazon and Microsoft, and also hyper-converged infrastructures or what is now known as HCI. Third, I mentioned that we have further defined our go-forward product vision. The financial stability that we have generated over the last four quarters has enabled us to begin placing increased attention and investment into our go-forward product strategy, and our efforts are actually being rewarded. So during the quarter, FalconStor was recognized by CRN in its 2018 Software-Defined Data Center 50 list, as the list – this is the list, which recognizes companies whose innovative offerings provide a hardware-agnostic approach to complex IT management, including centralized control of data storage and protection. FalconStor is unique, and our 18 years of technology innovation and current profitability is unmatched by newer entrants in our data protection and management space, and we will build upon this advantage. Our customers know that our solutions are powerful and comprehensive. Going forward, we’ll bias our advancements towards ease-of-use and speed or performance and interoperability with modern technologies like cloud offerings and hyper-converged infrastructure, or HCI. We’ll also continue to focus our solutions on large enterprises and their complex data management needs. During Q2, we formalized our product vision and began reviewing with key partners and customers across the globe. We are very encouraged by their initial feedback and we’ll continue these reviews throughout Q3. We expect to formally launch our go-forward product vision at the beginning of Q4. Finally, to help us execute on our long-term vision, we added Teresa de Onis as Senior Director of Marketing and Mark Delsman as VP of Engineering to our leadership team in Q2, both individuals are very well-regarded and have extensive experience within our space. So with that, I’m going to turn it over to Brad Wolfe to provide a more detailed overview of our Q2 financial results. Brad?

Brad Wolfe: Thank you, Todd. The second quarter of 2018 marked our fourth consecutive quarter of non-GAAP operating profitability. During the three months ended June 30, 2018, we delivered non-GAAP operating income of $159,000 as compared to a non-GAAP operating loss of $419,000 during the same period of the previous year. Our gross margin increased to 84% from 74% from the second quarter of 2017, and net cash provided by operations increased by $2.3 million to $700,000 for the three months ended June 30, 2018, as compared to $1.6 million of cash used by operations during the prior year period. Overall, total revenue for the current quarter decreased 40% to $4 million compared with $6.7 million in the prior year period. This decline in revenue was significantly impacted by our adoption of new revenue recognition accounting guidance on January 1, 2018, which resulted in $1.2 million decrease in revenue. The remaining decrease in revenue was driven by the volume of new product licenses and maintenance sales during the current-year period. As a result of our cost control and realignment initiatives, our non-GAAP operating expenses continued to trend lower at $3.9 million as compared to $7.2 million during the three months ended June 30, 2017, representing a decline of 46% over the same period of the previous year. Turning now to the balance sheet, we ended the quarter with cash of $4 million. Net working capital, excluding deferred revenue, contract receivables and the Hale Capital financing, we ended at $1.2 million, which is up by $600,000 over Q4 of 2017. We closed the quarter with accounts receivable of $2.1 million, accounts payable and accrued expenses of $2.1 million and deferred revenue of $11.7 million. The decline in deferred revenue as compared to the same period in the previous year was primarily related to the implementation of ASC 606 effective January 1, 2018, which is the new revenue recognition policy that I alluded to above. Todd, I’ll now turn it back to you for final comments.

Todd Brooks: All right, great. Thanks, Brad. Thanks for that summary, I appreciate that. So in summary, I’m very pleased with the progress that we continue to make and that we made in Q2, and we still have a significant amount of work ahead of us. But we do believe that the company’s performance over the last four quarters set up a very interesting opportunity for FalconStor. So 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 at FalconStor. So at this time, I’ll turn it back to our operator to begin the question-and-answer session.

Operator: Thank you, sir. [Operator Instructions]. The first question comes from Bill Dawkins with Burleson Dawkins Inc.

Bill Dawkins: Good morning, gentleman.

Todd Brooks: Bill, how are you?

Bill Dawkins: Good, Todd. I missed your opening comments, that the number on your press release for the conference call was not correct. So I missed about the first three or four minutes of your call. So if you covered any of this stuff, just tell me, but really, it’s a pretty basic question. When is the – when do you think there’s going to be an inflection point on these revenues moving back up? Now that you’ve got this company – I mean, this thing is streamlined. The leverage you’re going to have the other way is going to be awesome. When is that inflection point?

Todd Brooks: Yes. Great question. And our internal targets, Bill, have been to, as you well know, to get the company back – get back in a stable foundation. So we’ve set a product division, go back out to market with that vision and then begin the growth. And so we’re in that final stage now, going back out into the market and presenting our new vision, which is going very well. So our goal, our targets, our internal targets – well, we don’t typically provide guidance. Our typical – our internal guidance is that – our internal targets is that we will begin to show growth, year-over-year growth, in Q3 and Q4 of this year. So, that’s what we want to deliver in Q3 and Q4 as more billings in Q3 2018 than we did in 2017 and then more billings in Q4 2018 as compared to Q4 of 2017. That makes sense?

Bill Dawkins: Yes.

Brad Wolfe: Let me, Bill, just jump in here, too. Because we converted over to ASC 606 from ASC 605 from 2017 to 2018. And under that accounting provision, a big chunk of our deferred revenue, which would have come in this year, got pushed to the balance sheet. It doesn’t show up on the P&L. So it makes the year-over-year comparison on the revenue side really not meaningful. So what – we provide a year-over-year comparison of 606 versus the 606 in 2017. I think that would be more applicable. And I think what you’re going to see us because we had to watch through so much revenue through the balance sheet because of 606, that as that – as we get a full year under 606 under our belt, you’ll see some revenue uptick just simply because 606 will be completely implemented. So that’s why, I think, Todd was referencing billings as opposed to revenue.

Todd Brooks: Yes. That’s great point, Brad. And you’re right, Bill, that step one was streamlining the organization, all right, so that then we could focus on those areas and those product advancements that were going to allow us to grow again. And so we felt like we – I feel like we’d done a really good job of that. Now we’re kind of moving into this next phase in the company.

Bill Dawkins: Oh, I mean, I can’t argue the fact you have done a perfect job in streamlining this thing down. No doubt. It’s just the exciting part about this, Todd, is when you start showing growth, then we get to…

Todd Brooks: Exactly.

Bill Dawkins: Evolve all the work you have done. Anyway, great job. I appreciate the answers.

Todd Brooks: Great. Thank you, Bill.

Brad Wolfe: Thank you.

Operator: Thank you. [Operator Instructions]. And speakers, at this time, we have no questions in queue.

Todd Brooks: All right, very good. Well, once again, thank you, everyone, for joining. We really appreciate it. We are very excited about the evolution of FalconStor and look forward to same time next quarter. Thank you.

Brad Wolfe: Thank you.

Operator: Thank you ladies and gentlemen, this concludes today’s conference. You may now disconnect.