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FalconStor Software Announces Fourth Quarter and Full Year 2012 Results

FalconStor Software Announces Fourth Quarter and Full Year 2012 Results

MELVILLE, N.Y., March 18, 2013 (GLOBE NEWSWIRE) -- FalconStor Software, Inc.
(Nasdaq:FALC), a market leader in disk-based data protection, today announced
financial results for its fourth quarter and full year that ended December 31,
2012. FalconStor closed the year with over 30 percent sequential revenue
growth in the fourth quarter.

"Though 2012 was a challenging year for FalconStor, our year-long efforts paid
off with a strong fourth quarter, international recognition for product
innovation and great strides in product development that we expect will come
to fruition this year," said James P. McNiel, president and CEO of FalconStor
Software. "With the Company's major outstanding legal issues resolved,
FalconStor is moving forward aggressively with its suite of data protection
solutions designed to help businesses modernize backup, automate disaster
recovery, migrate data and optimize existing storage resources. We continue to
address a lucrative market opportunity with the right products at the right
time for an IT industry still adjusting to explosive data growth,
virtualization, round-the-clock demand for data center services and the advent
of Big Data and the cloud."

Financial and Business Highlights:

  *Fourth quarter total revenue increased more than 30 percent compared with
    the third quarter of 2012.
  *Positive cash flow from operations in the fourth quarter of $4.3 million.
  *Full year 2012 support and services revenue increased 2 percent compared
    with fiscal year 2011.
  *Full year 2012 total revenue declined 9 percent over fiscal year 2011.
  *The Company announced the settlement of government investigations in June
    2012, an agreement to settle a class action lawsuit in January 2013 and
    the dismissal of a derivative action lawsuit on March 5, 2013.
  *Product innovation in 2012 focused on deduplication with enhancements to
    the FalconStor^® Virtual Tape Library (VTL) solution, which was the Backup
    & Recovery Solution winner in the Network World Asia Information
    Management Awards.
  *Industry recognition for RecoverTrac™ technology as a Best of VMworld 2012
    award gold winner in the Business Continuity and Data Protection category
    demonstrates the importance of automating disaster recovery strategies and
    testing.
  *FalconStor^® Network Storage Server (NSS) VS Series HA Appliance received
    a silver medal in the Best Hardware: Appliance category in the 2012
    Windows IT Pro 2012 Editors' Best Awards, highlighting the product's
    strategic importance, value to customers and competitive advantage within
    the storage virtualization, data migration and data protection markets.

Financials

For the year ended December 31, 2012, revenues decreased to $75.4 million,
compared with $82.9 million for the same period a year ago. GAAP loss from
operations for 2012 was $13.7 million, compared with an operating loss of
$22.2 million for the same period a year ago. GAAP net loss for 2012 was $15.0
million, or $0.32 per share, compared with $23.4 million, or $0.50 per share,
in 2011. The 2012 operating results include a net reduction of $0.3 million of
investigation, litigation and settlement costs. The net reduction of $0.3
million resulted from the Company recording a receivable during 2012 for the
recovery of $4.9 million of costs, including any settlements associated with
the Class Action and Derivative suits and the reversal of previously accrued
costs related to the government investigations of $1.7 million. These amounts
were partially offset by $5.0 million for the settlement of the Class Action
and $1.3 million of overall legal fees not recoverable through insurance.
During the same period in 2011, the Company had recorded $10.3 million of
costs associated with the then outstanding government investigations and
related class actions, which was comprised of $2.8 million of legal fees and
an accrual of $7.5 million for certain costs associated with the then
outstanding resolution of the investigations.

Non-GAAP loss from operations in 2012 was $8.6 million, compared with a loss
from operations of $5.6 million in 2011. Non-GAAP net loss was $9.9 million,
or a loss of $0.21 per share, in 2012, compared with a net loss of $6.8
million, or $0.15 per share, in 2011. Non-GAAP results exclude the effects of
stock-based compensation, costs associated with the government investigations,
litigation and settlement related costs and restructuring cost, when
applicable.

Total revenues for the fourth quarter of 2012 were $22.5 million, a decrease
of 12 percent compared with $25.4 million in the same period a year ago. GAAP
loss from operations for the fourth quarter of 2012 was $1.7 million, compared
with an operating loss of $5.5 million for the fourth quarter of 2011. GAAP
net loss for the quarter was $2.3 million, or $0.05 per share, compared with a
net loss of $6.1 million, or $0.13 per share, for the same period a year ago.
Included in the operating results for the fourth quarter of 2012 and 2011 was
$1.5 million and $5.9 million, respectively, of investigation, litigation and
settlement costs.

Non-GAAP income from operations was $0.8 million in the fourth quarter of
2012, compared with non-GAAP income from operations of $1.9 million for the
same period a year ago. Non-GAAP net income was $0.1 million, or breakeven per
share, in the fourth quarter of 2012, compared with the non-GAAP net income of
$1.2 million, or $0.03 per share, in the fourth quarter of 2011. Non-GAAP
results exclude the effects of stock-based compensation and costs associated
with the Company's investigations, litigation and settlement related costs.

The Company closed the year with $29.9 million in cash, cash equivalents and
marketable securities. Cash flow from operations for the fourth quarter of
2012 was $4.3 million, and for the full year 2012 cash flow from operations
was ($5.3) million. Deferred revenue at December 31, 2012, was $24.1 million,
a decrease of 11 percent compared with the same period a year ago.

Conference Call

FalconStor will host a conference call to discuss its financial results today,
March 18, 2013, at 4:30 p.m. EDT. To participate in the conference call,
please dial 1-877-941-0844 (toll free) or +1-480-629-9835 (international). To
view the presentation, visit
https://falconstor.webex.com/falconstor/j.php?ED=179176067&RG=1&UID=0 to
register for this meeting. Once you have registered for the meeting, you will
receive an email message confirming your registration.

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 Software

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 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 disaster
recovery automation. FalconStor solutions are available through a worldwide
network of partners, including solution providers, top-tier strategic
partners, and 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).

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The FalconStor Software, Inc. logo is available at
http://www.globenewswire.com/newsroom/prs/?pkgid=16578

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

Links to websites or pages controlled by parties other than FalconStor are
provided for the reader's convenience and information only. FalconStor does
not incorporate into this release the information found at those links nor
does FalconStor represent or warrant that any information found at those links
is complete or accurate.Use of information obtained by following these links
is at the reader's own risk.


FalconStor Software, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
                                                           
                                                           
                                          December31, 2012 December31, 2011
Assets                                     (unaudited)       
Current assets:                                             
Cash and cash equivalents                 $18,651,468     $16,257,694
Restricted cash                            750,000          --
Marketable securities                     10,530,942       20,894,328
Accounts receivable, net                  14,130,302       19,314,789
Prepaid expenses and other current assets 2,796,665        1,912,831
Inventory                                 642,819          1,769,007
Deferred tax assets, net                  464,031          177,798
Total current assets                      47,966,227       60,326,447
                                                           
Property and equipment, net               3,980,679        4,364,180
Long-term marketable securities           --              611,082
Deferred tax assets, net                  86,465           217,771
Software development costs, net           1,161,822        1,001,530
Other assets, net                         2,185,148        2,183,973
Goodwill                                  4,150,339        4,150,339
Other intangible assets, net              174,426          191,572
Total assets                              $59,705,106     $73,046,894
                                                           
Liabilities and Stockholders' Equity                        
Current liabilities:                                        
Accounts payable                          $2,801,372      $2,883,844
Accrued expenses                          16,720,582       17,609,766
Deferred revenue, net                     17,831,653       19,450,966
Total current liabilities                 37,353,607       39,944,576
                                                           
Other long-term liabilities               2,618,818        2,587,327
Deferred tax liabilities, net             167,875          --
Deferred revenue, net                     6,311,865        7,698,053
Total liabilities                         46,452,165       50,229,956
                                                           
Commitments and contingencies                               
Total stockholders' equity                13,252,941       22,816,938
Total liabilities and stockholders'        $59,705,106     $73,046,894
equity


FalconStor Software, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                                           
                                                           
                Three Months Ended            Twelve Months Ended
                December 31,                  December 31,
                                                           
                2012           2011           2012            2011
                                                           
                                                           
Revenues:                                                   
Product          $14,309,549  $16,425,089  $41,358,621   $49,470,139
revenues
Support and
services         8,178,134     9,001,853     34,052,348     33,400,463
revenues
Totalrevenues  22,487,683    25,426,942    75,410,969     82,870,602
                                                           
Cost of                                                     
revenues:
Product         2,845,121     2,930,678     8,215,152      8,386,864
Support and      2,875,952     3,252,789     12,446,921     13,130,045
service
Total cost of    5,721,073     6,183,467     20,662,073     21,516,909
revenues
                                                           
Gross profit    $16,766,610  $19,243,475  $54,748,896   $61,353,693
                                                           
                                                           
Operating                                                   
expenses
Research and
development      4,520,940     4,816,498     18,636,328     21,199,816
costs
Selling and      8,705,695     10,724,122    36,008,655     39,597,590
marketing
General and      3,743,566     3,232,750     13,334,475     11,696,512
administrative
Investigation,
litigation, and  1,466,960     5,926,090     (326,408)      10,257,388
settlement
related costs
Restructuring    --           --           770,749        822,320
costs
Total operating  18,437,161    24,699,460    68,423,799     83,573,626
expenses
                                                           
Operating loss  (1,670,551)   (5,455,985)   (13,674,903)   (22,219,933)
                                                           
Interest and
other (loss)     (380,206)     (319,708)     (523,011)      59,982
income, net
                                                           
Loss before      (2,050,757)   (5,775,693)   (14,197,914)   (22,159,951)
income taxes
                                                           
Provision for    295,519       339,111       786,407        1,208,332
income taxes
                                                           
Net loss        $(2,346,276) $(6,114,804) $(14,984,321) $(23,368,283)
                                                           
Basic net loss   $(0.05)      $(0.13)      $(0.32)       $(0.50)
per share
                                                           
Diluted net loss $(0.05)      $(0.13)      $(0.32)       $(0.50)
per share
                                                           
Weighted average                                            
basic shares
outstanding     47,573,019    46,903,896    47,408,995     46,648,928
                                                           
Weighted average diluted shares                              
outstanding     47,573,019    46,903,896    47,408,995     46,648,928


FalconStor Software, Inc. and Subsidiaries
Reconciliation of GAAP to Non-GAAP Financial Measures
(Unaudited)
                                                           
                Three Months Ended            Twelve Months Ended
                December 31,                  December 31,
                                                           
                2012           2011           2012            2011
                                                           
GAAP loss from   $(1,670,551) $(5,455,985) $(13,674,903) $(22,219,933)
operations
Add: Non-cash
stock option     1,020,613     1,426,180     4,614,769      5,518,058
expense (1)
Legal related   1,466,960     5,926,090     (326,408)      10,257,388
costs (3)
Restructuring   --           --           770,749        822,320
costs (4)
Non-GAAP income
(loss) from      817,022       1,896,285     (8,615,793)    (5,622,167)
operations
                                                           
                                                           
GAAP net loss    $(2,346,276) $(6,114,804) $(14,984,321) $(23,368,283)
Add: Non-cash
stock option     1,020,613     1,426,180     4,614,769      5,518,058
expense, net of
income taxes (2)
Legal related   1,466,960     5,926,090     (326,408)      10,257,388
costs (3)
Restructuring   --           --           770,749        822,320
costs (4)
Non-GAAP net     141,297       1,237,466     (9,925,211)    (6,770,517)
income (loss)
                                                           
                                                           
GAAP gross       80%            82%            80%             83%
margin - Product
Add: Non-cash
stock option     0%             0%             0%              0%
expense (1)
Non-GAAP gross   80%            82%            80%             83%
margin - Product
                                                           
                                                           
GAAP gross
margin - Support 65%            64%            63%             61%
and Service
Add: Non-cash
stock option     1%             1%             1%              1%
expense (1)
Non-GAAP gross
margin - Support 66%            65%            64%             62%
and Service
                                                           
                                                           
GAAP operating   (7%)           (21%)          (18%)           (27%)
margin
Add: Non-cash
stock option     5%             6%             6%              7%
expense (1)
Legal related   7%             23%            (0%)            12%
costs (3)
Restructuring   0%             0%             1%              1%
costs (4)
Non-GAAP         4%             7%             (11%)           (7%)
operating margin
                                                           
                                                           
GAAP Basic EPS   $(0.05)      $(0.13)      $(0.32)       $(0.50)
Add: Non-cash
stock option     0.02          0.03          0.10           0.12
expense, net of
income taxes (2)
Legal related   0.03          0.13          (0.01)         0.22
costs (3)
Restructuring   --           --           0.02           0.02
costs (4)
Non-GAAP Basic   0.00          0.03          (0.21)         (0.15)
EPS
                                                           
                                                           
GAAP Diluted EPS $(0.05)      $(0.13)      $(0.32)       $(0.50)
Add: Non-cash
stock option     0.02          0.03          0.10           0.12
expense, net of
income taxes (2)
Legal related   0.03          0.13          (0.01)         0.22
costs (3)
Restructuring   --           --           0.02           0.02
costs (4)
Non-GAAP Diluted 0.00          0.03          (0.21)         (0.15)
EPS
                                                           
                                                           
Weighted average                                            
basic shares
outstanding
(GAAP and as     47,573,019    46,903,896    47,408,995     46,648,928
adjusted)
                                                           
Weighted average diluted shares                              
outstanding
(GAAP and as     47,573,019    47,199,799    47,408,995     46,648,928
adjusted)

Footnotes:

(1) Represents non-cash, stock-based compensation charges as follows:

                                                              
                          Three Months Ended        Twelve Months Ended
                          December 31,              December 31,
                                                              
                          2012         2011         2012         2011
                                                              
                                                              
Cost of revenues - Product $50        $319       $262       $2,960
Cost of revenues - Support 69,549      76,703      172,707     461,735
and Service
Research and development   155,656     257,936     727,826     1,302,129
costs
Selling and marketing      404,646     552,277     1,677,469   2,023,370
General and administrative 390,712     538,945     2,036,505   1,727,864
Total non-cash stock based $1,020,613 $1,426,180 $4,614,769 $5,518,058
compensation expense

(1) Represents the effects of non-cash stock-based compensation expense
recognized in accordance with the FASB Accounting Standards Codification,
Topic 718, net of related income tax effects. For the three and twelve months
ended December 31, 2012 and 2011, the tax expense for both GAAP and Non-GAAP
basis approximate the same amount.

(2) Legal related costs represent expenses in connection with the Company's
investigations, litigation and settlement related costs for each respective
period presented.

(3) 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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