FalconStor Software Reports Third Quarter Financial Results

  FalconStor Software Reports Third Quarter Financial Results

Business Wire

MELVILLE, N.Y. -- November 07, 2012

FalconStor Software, Inc. (NASDAQ: FALC), the provider of disk-based data
protection solutions, today announced financial results for its third quarter
ended September 30, 2012.

Overview

Total revenues for the third quarter of 2012 were $17.1 million, compared with
$18.9 million for the same period a year ago, a decline of 9%. Total revenues
for the third quarter of 2012 increased 4% compared with the second quarter of
2012.

The global macroeconomic weakness continues to factor in soft IT spending,
lower business confidence, and uncertainty in the marketplace, which has
resulted in lower than anticipated revenues for the quarter.

“While our revenues fell short of our expectations, we are pleased that we
were able to achieve sequential revenue growth during a difficult macro
environment,” said Jim McNiel, president and CEO of FalconStor. “The
uncertainty surrounding the global marketplace continues to cause disruptions
in our business, specifically with budget freezes, elongated sales cycles, or,
in some cases, lost deals due to competitive pricing and sales strategies.
Finally, we believe that the steps we took during the third quarter to reduce
our operating expenses in response to the current environment have left us
well-positioned to execute on our plan to invest in our existing and our new
product initiatives.”

Retention of Financial Advisor

FalconStor has retained the investment banking firm Wells Fargo Securities,
LLC as its exclusive financial advisor to assist the Company in exploring and
evaluating strategic alternatives to maximize stockholder value. The Company
intends to disclose developments regarding the process only when or if the
Board has approved a specific transaction.

Financials

GAAP loss from operations for the quarter was $3.6 million, compared with an
operating loss of $5.1 million for the same period a year ago. GAAP net loss
for the third quarter was $3.6 million, or $0.08 per share, compared with $5.4
million, or $0.12 per share in the third quarter of 2011. Included in the
operating results for the third quarter of 2012 was a net reduction of $1.4
million of investigation, litigation, and settlement costs. The net reduction
of $1.4 million resulted from the Company recording a receivable in the third
quarter for the recovery of $1.1 million of previously accrued legal fees and
$0.4 million of certain costs previously accrued associated with the class
action and derivative suits, as a result of a settlement reached with one of
our insurance carriers in October 2012. These amounts were partially offset by
$0.1 million of overall legal fees not recoverable through insurance. During
the same period in 2011, the Company had recorded $0.5 million of costs
associated with the then outstanding government investigations and related
class actions, which was comprised of overall legal fees.

Non-GAAP loss from operations was $3.1 million in the third quarter of 2012,
compared with a loss from operations of $2.3 million for the same period a
year ago. Non-GAAP net loss was $3.1 million, or a loss of $0.07 per share, in
the third quarter of 2012, compared with a net loss of $2.6 million, or $0.06
per share, in the third quarter of 2011. Non-GAAP results exclude the effects
of stock-based compensation, costs associated with the Company’s
investigations, litigation and settlement related costs, and restructuring
cost.

For the nine months ended September 30, 2012, total revenues were $52.9
million, compared with $57.4 million for the same period a year ago. GAAP loss
from operations for the nine month period was $12.0 million compared with a
loss of $16.8 million in 2011. GAAP net loss was $12.6 million, or $0.27 per
share, for the nine months ended September 30, 2012, compared with a loss of
$17.3 million, or $0.37 per share, in the same period a year ago.

Non-GAAP loss from operations was $9.4 million for the nine months ended
September 30, 2012, compared with a loss of $7.5 million in 2011. Non-GAAP net
loss was $10.1 million, or $0.21 per share, compared with a loss of $8.0
million, or $0.17 per share, in the same period a year ago.

The Company closed the quarter with $25.8 million in cash, cash equivalents,
and marketable securities. Deferred revenue at September 30, 2012 was $23.6
million, a decrease of 5% compared with the same period a year ago.

Conference Call

The Company will host a conference call to discuss its financial results on
Wednesday November 7, 2012 at 4:30 p.m. EST. To participate in the conference
call, please dial:

Toll Free: 1-877-941-8631
International: +1-480-629-9821

To view the presentation, please copy and paste the following link into your
browser and register for this meeting. Once you have registered for the
meeting, you will receive an email message confirming your registration.

https://falconstor.webex.com/falconstor/j.php?ED=174468092&RG=1&UID

Meeting: FalconStor Q3 2012 Earnings
Meeting password: q3numbers
Meeting Number: 769 916 414

If you are unable to register via the Internet, please contact Joanne Ferrara,
Investor Relations at 631-773-5813 or joanne.ferrara@falconstor.com.

A conference call replay is scheduled to be available beginning November 7 at
6:30 p.m. EST through 11:59 p.m. EST on November 13. To listen to the replay
of the call, dial toll free: 1-800-406-7325 or International: +1-303-590-3030,
passcode: 4572048, or visit our website at www.falconstor.com/investors.

Non-GAAP Financial Measures

The non-GAAP financial measures used in this press release are not prepared in
accordance with generally accepted accounting principles and may be different
from non-GAAP financial measures used by other companies. The Company’s
management refers to these non-GAAP financial measures in making operating
decisions because they provide meaningful supplemental information regarding
the Company’s operating performance. In addition, these non-GAAP financial
measures facilitate management’s internal comparisons to the Company’s
historical operating results and comparisons to competitors’ operating
results. We include these non-GAAP financial measures (which should be viewed
as a supplement to, and not a substitute for, their comparable GAAP measures)
in this press release because we believe they are useful to investors in
allowing for greater transparency into the supplemental information used by
management in its financial and operational decision-making. The non-GAAP
financial measures exclude (i) costs associated with the Company’s class
action and derivative lawsuits, government investigations, and related legal
fees, (ii) noncash stock-based compensation charges and any potential tax
effects and (iii) restructuring costs, when applicable. For a reconciliation
of our GAAP and non-GAAP financial results, please refer to our Non-GAAP
Operating Data GAAP Reconciliation, presented in this release.

About FalconStor

FalconStor Software, Inc. (NASDAQ: FALC) is a market leader in disk-based data
protection. The company’s mission is to transform traditional backup and
disaster recovery (DR) into next-generation service-oriented data protection.
Built upon an award-winning platform, FalconStor solutions deliver disk-based
backup, continuous data protection, WAN-optimized replication and DR
automation. FalconStor solutions are available through a worldwide network of
partners, including solution providers, top-tier strategic partners and major
OEMs. Thousands of customers worldwide, from small businesses to Fortune 100
enterprises, entrust their data to FalconStor solutions. FalconStor maintains
headquarters in Melville, N.Y., and offices throughout Europe and the Asia
Pacific region. For more information, visit www.falconstor.com or call
1-866-NOW-FALC (866-669-3252).

This press release includes forward-looking statements that involve risk and
uncertainties that could cause actual results to differ materially from the
forward-looking statements. These risks and uncertainties include: delays in
product development; market acceptance of FalconStor’s products and services;
technological change in the data protection industry; competition in the data
protection market; results and costs associated with governmental
investigations; intellectual property issues; and other risk factors discussed
in FalconStor’s reports on Forms 10-K, 10-Q and other reports filed with the
Securities and Exchange Commission.

FalconStor and FalconStor Software are registered trademarks of FalconStor
Software, Inc. in the US and other countries. All other company and product
names contained herein may be trademarks of their respective holders.

FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS
                                                          
                                             September 30,   December 31,

                                             2012            2011
                                             (unaudited)
Assets
Current assets:
Cash and cash equivalents                    $  12,154,409   $ 16,257,694
Marketable securities                           13,201,701     20,894,328
Accounts receivable, net                        10,965,296     19,314,789
Prepaid expenses and other current assets       4,716,228      1,912,831
Inventory                                       721,827        1,769,007
Deferred tax assets, net                       175,624       177,798
Total current assets                           41,935,085    60,326,447
                                                             
Property and equipment, net                     4,387,606      4,364,180
Long-term marketable securities                 489,999        611,082
Deferred tax assets, net                        205,879        217,771
Software development costs, net                 1,243,885      1,001,530
Other assets, net                               2,207,272      2,183,973
Goodwill                                        4,150,339      4,150,339
Other intangible assets, net                   190,106       191,572
                                                             
Total assets                                 $  54,810,171   $ 73,046,894
                                                             
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable                             $  1,514,250    $ 2,883,844
Accrued expenses                                11,063,649     17,609,766
Deferred revenue, net                          17,526,719    19,450,966
                                                             
Total current liabilities                       30,104,618     39,944,576
                                                             
Other long-term liabilities                     4,433,219      2,587,327
Deferred revenue, net                          6,098,952     7,698,053
                                                             
Total liabilities                              40,636,789    50,229,956
                                                             
Commitments and Contingencies
                                                             
Total stockholders' equity                     14,173,382    22,816,938
                                                             
Total liabilities and stockholders' equity   $  54,810,171   $ 73,046,894

FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
                                                                
                 Three Months Ended                Nine Months Ended

                 September 30,                     September 30,
                 2012             2011             2012              2011
                                                                     
Revenues:
Product          $ 8,550,551      $ 10,176,275     $ 27,049,072      $ 33,045,050
revenues
Support and
services          8,538,462      8,680,115      25,874,214      24,398,610  
revenues
                   17,089,013       18,856,390       52,923,286        57,443,660
Cost of
revenues:
Product            1,562,359        1,467,141        5,370,031         5,456,186
Support and       3,318,558      3,339,448      9,570,969       9,877,256   
service
Total cost of     4,880,917      4,806,589      14,941,000      15,333,442  
revenues
                                                                                   
Gross profit     $ 12,208,096     $ 14,049,801     $ 37,982,286      $ 42,110,218
                                                                                   
Operating
expenses:
Research and
development        4,643,102        5,033,211        14,115,388        16,383,318
costs
Selling and        8,272,973        9,878,069        27,302,960        28,873,468
marketing
General and        3,461,880        2,904,767        9,590,909         8,463,762
administrative
Investigation,
litigation and     (1,353,571 )     531,507          (1,793,368  )     4,331,298
settlement
related costs
Restructuring     770,749        822,320        770,749         822,320     
costs
Total
operating         15,795,133     19,169,874     49,986,638      58,874,166  
expenses
                                                                                   
Operating loss
                  (3,587,037 )    (5,120,073 )    (12,004,352 )    (16,763,948 )

                                                                                   
Interest and
other income      102,059        (71,266    )    (142,805    )    379,690     
(loss), net
                                                                     
Loss before       (3,484,978 )    (5,191,339 )    (12,147,157 )    (16,384,258 )
income taxes
                                                                     
Provision for     83,073         206,837        490,888         869,221     
income taxes
                                                                     
Net loss         $ (3,568,051 )   $ (5,398,176 )   $ (12,638,045 )   $ (17,253,479 )
                                                                     
                                                                     
Basic net loss   $ (0.08      )   $ (0.12      )   $ (0.27       )   $ (0.37       )
per share
                                                                     
Diluted net      $ (0.08      )   $ (0.12      )   $ (0.27       )   $ (0.37       )
loss per share
                                                                     
Weighted
average basic     47,542,304     46,779,040     47,353,922      46,563,004  
shares
outstanding
Weighted
average           47,542,304     46,779,040     47,353,922      46,563,004  
diluted shares
outstanding

FalconStor Software, Inc. and Subsidiaries

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited)
                                                                  
                Three Months Ended                  Nine Months Ended

                September 30,                       September 30,
                2012              2011              2012               2011
                                                                       
GAAP loss
from            $ (3,587,037 )    $ (5,120,073 )    $ (12,004,352 )    $ (16,763,948 )
operations
Add: Non-cash
stock option      1,055,778         1,436,578         3,594,156          4,091,878
expense (1)
Legal related     (1,353,571 )      531,507           (1,793,368  )      4,331,298
costs (3)
Restructuring    770,749         822,320         770,749          822,320     
costs (4)
Non-GAAP loss
from             (3,114,081 )     (2,329,668 )     (9,432,815  )     (7,518,452  )
operations

GAAP net loss   $ (3,568,051 )    $ (5,398,176 )    $ (12,638,045 )    $ (17,253,479 )
Add: Non-cash
stock option
expense,
net of income     1,055,778         1,436,578         3,594,156          4,091,878
taxes (2)
Legal related     (1,353,571 )      531,507           (1,793,368  )      4,331,298
costs (3)
Restructuring    770,749         822,320         770,749          822,320     
costs (4)
Non-GAAP net     (3,095,095 )     (2,607,771 )     (10,066,508 )     (8,007,983  )
loss
                                                                       
GAAP gross
margin –          82         %      86         %      80          %      84          %
Product
Add: Non-cash
stock option     0          %     0          %     0           %     0           %
expense (1)
Non-GAAP
gross margin     82         %     86         %     80          %     84          %
- Product
                                                                       
GAAP gross
margin –
Support
and Service       61         %      62         %      63          %      60          %
Add: Non-cash
stock option     1          %     1          %     0           %     2           %
expense (1)
Non-GAAP
gross margin
– Support
and Service      62         %     63         %     63          %     61          %
                                                                       
GAAP
operating         (21        %)     (27        %)     (23         %)     (29         %)
margin
Add: Non-cash
stock option      6          %      8          %      7           %      7           %
expense (1)
Legal related     (8         %)     3          %      (3          %)     8           %
costs (3)
Restructuring    5          %     4          %     1           %     1           %
costs (4)
Non-GAAP
operating        (18        %)    (12        %)    (18         %)    (13         %)
margin

GAAP Basic      $ (0.08      )    $ (0.12      )    $ (0.27       )    $ (0.37       )
EPS
Add: Non-cash
stock option
expense,
net of income     0.02              0.03              0.08               0.09
taxes (2)
Legal related     (0.03      )      0.01              (0.04       )      0.09
costs (3)
Restructuring    0.02            0.02            0.02             0.02        
costs (4)
Non-GAAP         (0.07      )     (0.06      )     (0.21       )     (0.17       )
Basic EPS

GAAP Diluted    $ (0.08      )    $ (0.12      )    $ (0.27       )    $ (0.37       )
EPS
Add: Non-cash
stock option
expense,
net of income     0.02              0.03              0.08               0.09
taxes (2)
Legal related     (0.03      )      0.01              (0.04       )      0.09
costs (3)
Restructuring    0.02            0.02            0.02             0.02        
costs (4)
Non-GAAP         (0.07      )     (0.06      )     (0.21       )     (0.17       )
Diluted EPS

Weighted
average basic
shares
Outstanding
(GAAP and as     47,542,304      46,779,040      47,353,922       46,563,004  
adjusted)
                                                                                     
Weighted
average
diluted
shares
Outstanding
(GAAP and as     47,542,304      46,779,040      47,353,922       46,563,004  
adjusted)

Footnotes:
(1) Represents non-cash, stock-based compensation charges as follows:
                                                  
                         Three Months Ended          Nine Months Ended

                         September 30,               September 30,
                         2012         2011          2012         2011
                                       
Cost of revenues -       $ 113         $ 1,169       $ 212         $ 2,641
Product
Cost of revenues –         53,314        111,830       103,158       385,032
Support and Service
Research and               127,982       235,782       572,170       1,044,193
development costs
Selling and marketing      388,167       585,814       1,272,823     1,471,093
General and               486,202      501,983      1,645,793    1,188,919
administrative
                                                                   
Total non-cash
stock-based              $ 1,055,778   $ 1,436,578   $ 3,594,156   $ 4,091,878
compensation expense

      Represents the effects of non-cash stock-based compensation expense
      recognized in accordance with the FASB Accounting Standards
(2)  Codification, Topic 718, net of related income tax effects. For the
      three and nine months ended September 30, 2012 and 2011, the tax expense
      for both GAAP and Non-GAAP basis approximate the same amount.
      
      Legal related costs represent amounts in connection with the Company’s
(3)   investigations, litigation and settlement related costs for each
      respective period presented.
      
(4)   Represents restructuring costs which were incurred during each
      respective period presented.

Contact:

FalconStor Software, Inc.
Joanne Ferrara, Investor Relations
631-773-5813
joanne.ferrara@falconstor.com
 
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