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FalconStor struggles on as antsy backers whine 'C'mon, let's sell'

New investor on board, new Violin deal – don't write them off yet

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After losing its CEO a few weeks ago, standalone storage software shipper FalconStor has duly reported poor results. Since then it has got into bed with a new VC to shore up its balance sheet, ended an investment banking deal with Wells Fargo, and teamed up with Violin Memory to develop new products.

The interim president and CEO is Gary Quinn, promoted from COO. Prior to that he was veep for sales in North America and marketing. Former CEO Jim McNiel tried to turn the company round after its charismatic founder ReiJane Huai died in 2011.

But FalconStor's software – continuous data protection, IP SAN software (NSS) and a virtual tape library - is proving hard to update for the cloudy and flash-focussed storage era we are entering. The company appointed Wells Fargo to advise on strategic alternatives in late 2012.

Eventually the board, led by Eli Oxenhorn, decided Jim McNiel wasn't the man to take the company forward and off he went in July with a payoff of $420,000. It was then down to Quinn to report the second quarter results which everyone expected to be dire. They weren't disappointed.

The numbers

In the three months ended 30 June revenues at were $13.9m, 15 per cent less than a year ago and 8 per cent down on the first quarter. The first quarter loss of $4.3m deepened to $5.2m. Every quarter since the start of 2010 has been loss-making. At least the latest loss is less than the $6.6m recorded a year ago.

CFO Lou Petrucelly said in the earnings call: "Total revenues fell well below our internal expectations, while total revenues from each of our regions have declined on a year-over-year basis. The declines in product revenues, specifically from how our North America and EMEA regions, as well as decreases in maintenance revenues were the primary drivers of the soft revenue performance in Q2."

He said competitors were not helping: "Our competitors have encouraged customers to question the company's declining cash balances and to raise concerns about the company's direction over the past 12 months."

Now, as well as parting company with McNiel, the board is making friends with a restructuring-type VC, Hale Capital Partners, which is investing between $7.5m and $15m in the company. Hale describes itself as investing in:

under-appreciated, under-followed, or under-capitalised businesses … restructurings, or simply good companies in out-of-favor industries. In every investment we work closely and patiently with management to help transform businesses into larger and more successful operations.

The earnings call revealed that Hale's final investment amount will be "based upon, among other conditions, a rebalancing plan for the company." The rebalancing plan will include revenue, cash flow, and operating income.

The company is selling its interest in a joint venture in China, Tianjin Zhongke Blue Whale Technologies Co. Ltd., for $3m, having originally invested $1m in 2008. It's also agreed, in principle, to settle a class-action lawsuit for $5m. Together with giving Wells Fargo the investment banking boot, these three moves look like elements of a deck-clearing exercise. But for what? A company sale or company development?

Violin Memory

Then there was the flashy surprise of:

A joint development agreement with Violin Memory, a leader in solid-state disk market, also known as flash memory, to deliver a next-generation product for the flash memory platform based upon our current NSS technology. The license and development services will produce up to $12m for FalconStor over the next 12 to 18 months.
Don Basile CEO of Violin Memory

Violin Memory CEO Don Basile

Petrucelly expanded on this, saying: "We are partnering with Violin Memory on a joint development for our next-generation products. Violin will provide the expertise in solid state drives or flash memory, which we believe will provide us with the next-generation of products optimising flash memory. We anticipate that this joint development will position the company as the leader in the market for flash memory and traditional hard disk drives, cloud storage and data protection services."

There is a cash installment of $3m due from Violin by the end of the month.

Sounds like its products will embrace flash memory in the form of all-flash arrays and, possibly, hybrid flash/disk drive arrays. The cloud storage angle suggests multi-tenancy features will be added and, perhaps, quality of service functionality.

With Violin paying FalconStor cash for this development, it strongly implies that Violin will see the resulting software, presumably with its arrays. But FalconStor could also sell it, not having given up any rights to the resulting product technology.

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