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FalconStor Software Announces Third Quarter 2013 Results

FalconStor Software Announces Third Quarter 2013 Results

MELVILLE, N.Y., Oct. 29, 2013 (GLOBE NEWSWIRE) -- FalconStor Software, Inc.
(Nasdaq:FALC), a market leader in data protection and migration, today
announced financial results for its third quarter ended September 30, 2013.

"FalconStor continued its stabilization and rebalancing efforts during the
past quarter. We entered into a joint-development agreement to build our next
generation product, we completed a preferred equity placement and we
rebalanced our assets and our resources to align with the future focus of the
company," said Gary Quinn, president and CEO of FalconStor. "Our efforts this
quarter met our internal objectives, but we are always striving to improve as
we move forward."

Financial and Business Highlights and Overview:

  oTotal revenues increased 5% compared with the previous quarter; non-GAAP
    operating loss improved to $1.6 million, compared with $4.2 million
    non-GAAP operating loss in the previous quarter.
  oClosed the quarter with $29.5 million of cash, cash equivalents and
    marketable securities, compared with $21.9 million at June 30^th.
  oClosed an equity investment of $9.0 million from Hale Capital Partners,
    LP, on September 16, 2013.
  oIn connection with the investment by Hale Capital Partners, LP, Martin
    Hale Jr., was elected to the Company's Board of Directors on September 16,
    2013.
  oCommenced a company-wide "rebalancing" during the quarter to rationalize
    all of the costs of our business. Based on these efforts, we have
    eliminated costs, or identified costs to be eliminated in the coming
    months, totaling approximately $15 million to $18 million on an annualized
    basis across all regions and functions of the business. These costs
    consist of both personnel and non-personnel expenses which we identified
    as not being core to our going forward business plan. We anticipate that
    we will continue to wind down certain costs during the fourth quarter and
    that we will incur additional restructuring costs during the fourth
    quarter.

Financials

Total revenues for the third quarter of 2013 were $14.7 million, a decrease of
14 percent from $17.1 million in the same period a year ago. GAAP loss from
operations for the third quarter of 2013 was $4.2 million, compared with an
operating loss of $3.6 million for the third quarter of 2012. GAAP net loss
for the quarter was $2.2 million compared with a net loss of $3.6 million for
the same period a year ago. Net loss attributable to common stockholders for
the quarter, which includes the effects of the accretion to redemption value
of the Series A preferred stock and the accrual of preferred stock dividends,
was $2.3 million, or $0.05 per share, compared with $3.6 million, or $0.08 per
share, for the same period a year ago. Included in the operating results for
the third quarter of 2013 and 2012 were expenses of $2.3 million and $0.8
million, respectively, related to restructuring charges, and $0.1 million and
a benefit of $1.4 million, respectively, of investigation, litigation and
settlement related costs. In addition, included in net loss for the third
quarter of 2013 was an income tax benefit of $2.1 million related to the
reversal of uncertain tax positions as a result of the expiration of
applicable statutes of limitation.

Non-GAAP loss from operations was $1.6 million for the third quarter of 2013,
compared with non-GAAP loss from operations of $3.1 million for the same
period a year ago. Non-GAAP net loss was $1.8 million, or $0.04 per share, in
the third quarter of 2013, compared with a non-GAAP net loss of $3.1 million,
or $0.07 per share, in the third quarter of 2012. Non-GAAP results exclude the
effects of stock-based compensation, costs associated with the Company's
investigations, litigation and settlement related costs, restructuring costs,
certain tax items and the effects of preferred stock.

For the nine months ended September 30, 2013, total revenues were $44.0
million, a decline of 17% from $52.9 million for the same period a year ago.
GAAP loss from operations for the nine months ended September 30, 2013 was
$12.6 million compared with a GAAP loss of $12.0 million for the nine months
ended September 30, 2012. GAAP net loss was $11.8 million for the nine months
ended September 30, 2013, compared with a loss of $12.6 million in the same
period a year ago. Net loss attributable to common stockholders for the nine
months was $11.9 million, or $0.25 per share, compared with $12.6 million, or
$0.27 per share, for the same period a year ago.

Non-GAAP loss from operations was $8.7 million for the nine months ended
September 30, 2013, compared with a loss of $9.4 million in 2012. Non-GAAP net
loss was $10.0 million, or $0.21 per share, compared with a loss of $10.1
million, or $0.21 per share, in the same period a year ago.

The Company closed the quarter with $29.5 million in cash, cash equivalents
and marketable securities. Deferred revenue at September 30, 2013 was $25.3
million, compared with $24.1 million at December 31, 2012.

Conference Call

The Company will host a conference call to discuss its financial results on
Tuesday, October 29, 2013 at 4:30 p.m. EDT. To participate in the conference
call, please dial:

Toll Free: 1-877-941-6009
International: +1-480-629-9819

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=191929162&RG=1&UID

Meeting: FalconStor Q3 2013 Earnings
Meeting password: q3numbers
Meeting Number: 766495581

If you are unable to register via the Internet, please contact Melissa Keir,
Investor Relations at 631-773-4334 or melissa.keir@falconstor.com.

A conference call replay is scheduled to be available beginning October 29 at
6:30 p.m. EDT through 11:59 p.m. EST on November 5. To listen to the replay of
the call, dial toll free: 1-800-406-7325 or International: +1-303-590-3030,
passcode: 4641577, 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) restructuring costs, (iii) impact of the tax benefits realized from
the reversal of uncertain tax positions due to the expiration of applicable
statutes of limitations, (iv) effects of our Series A Preferred Stock and (v)
noncash stock-based compensation charges and any potential tax effects. 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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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 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
                                                           
                                         September 30, 2013 December 31, 2012
                                         (unaudited)        
Assets                                                      
Current assets:                                             
Cash and cash equivalents                 $22,950,643      $18,651,468
Restricted cash                           750,000           750,000
Marketable securities                     5,764,839         10,530,942
Accounts receivable, net                  8,683,369         14,130,302
Prepaid expenses and other current assets 2,123,561         2,796,665
Inventory                                 752,440           642,819
Deferred tax assets, net                  410,440           464,031
Total current assets                      41,435,292        47,966,227
                                                           
Property and equipment, net               3,384,709         3,980,679
Deferred tax assets, net                  86,465            86,465
Software development costs, net           1,745,934         1,161,822
Other assets, net                         2,475,753         2,185,148
Goodwill                                  4,150,339         4,150,339
Other intangible assets, net              183,645           174,426
Total assets                              $53,462,137      $59,705,106
                                                           
Liabilities and Stockholders' Equity                        
Current liabilities:                                        
Accounts payable                          $1,727,307       $2,801,372
Accrued expenses                          13,512,497        16,720,582
Deferred revenue, net                     16,947,868        17,831,653
Total current liabilities                 32,187,672        37,353,607
                                                           
Other long-term liabilities               766,869           2,618,818
Deferred tax liabilities, net             179,612           167,875
Deferred revenue, net                     8,345,416         6,311,865
Total liabilities                         41,479,569        46,452,165
                                                           
Commitments and contingencies                               
Series A redeemable convertible preferred 6,627,136         --
stock
                                                           
Total stockholders' equity                5,355,432         13,252,941
Total liabilities and stockholders'       $53,462,137      $59,705,106
equity




FalconStor Software, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                                              
                   Three Months Ended            Nine Months Ended
                   September 30,                 September 30,
                   2013           2012           2013            2012
                                                              
Revenues:                                                      
Product revenues    $6,584,876   $8,550,551   $20,886,761   $27,049,072
Support and         8,145,162     8,538,462     23,102,233     25,874,214
services revenues
Totalrevenues      14,730,038    17,089,013    43,988,994     52,923,286
                                                              
Cost of revenues:                                              
Product             1,202,489     1,562,359     3,465,245      5,370,031
Support and service 2,566,471     3,318,558     8,436,866      9,570,969
Total cost of       3,768,960     4,880,917     11,902,111     14,941,000
revenues
                                                              
Gross profit        $10,961,078  $12,208,096  $32,086,883   $37,982,286
                                                              
Operating expenses                                             
Research and        3,645,283     4,722,658     12,689,715     14,350,333
development costs
Selling and         6,070,697     8,193,417     19,790,583     27,068,015
marketing
General and         3,018,091     3,461,880     9,627,039      9,590,909
administrative
Investigation,
litigation, and     99,316        (1,353,571)   275,774        (1,793,368)
settlement related
costs
Restructuring costs 2,290,831     770,749       2,290,831      770,749
Total operating     15,124,218    15,795,133    44,673,942     49,986,638
expenses
                                                              
Operating loss      (4,163,140)   (3,587,037)   (12,587,059)   (12,004,352)
                                                              
Interest and other  (3,212)       102,059       (821,178)      (142,805)
(loss) income, net
                                                              
Loss before income  (4,166,352)   (3,484,978)   (13,408,237)   (12,147,157)
taxes
                                                              
(Benefit)/Provision (1,946,689)   83,073        (1,600,836)    490,888
for income taxes
                                                              
Net loss            $(2,219,663) $(3,568,051) $(11,807,401) $(12,638,045)
                                                              
Accrual of
Preferred stock     28,875        --           28,875         --
dividends
Accretion to
redemption value of 17,061        --           17,061         --
Series A preferred
stock
                                                              
Net loss
attributable to     $(2,265,599) $(3,568,051) $(11,853,337) $(12,638,045)
common stockholders
                                                              
Basic net loss per  $(0.05)      $(0.08)      $(0.25)       $(0.27)
share
                                                              
Diluted net loss    $(0.05)      $(0.08)      $(0.25)       $(0.27)
per share
                                                              
Weighted average
basic shares        48,024,916    47,542,304    47,961,853     47,353,922
outstanding
                                                              
Weighted average
diluted shares      48,024,916    47,542,304    47,961,853     47,353,922
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,
                2013           2012           2013            2012
                                                           
GAAP loss from   $(4,163,140) $(3,587,037) $(12,587,059) $(12,004,352)
operations
Add: Non-cash
stock option     163,412       1,055,778     1,294,942      3,594,156
expense (1)
Legal related    99,316        (1,353,571)   275,774        (1,793,368)
costs (3)
Restructuring    2,290,831     770,749       2,290,831      770,749
costs (4)
Non-GAAP loss    (1,609,581)   (3,114,081)   (8,725,512)    (9,432,815)
from operations
                                                           
GAAP net loss
attributable to  $(2,265,599) $(3,568,051) $(11,853,337) $(12,638,045)
common
stockholders
Add: Non-cash
stock option     163,412       1,055,778     1,294,942      3,594,156
expense, net of
income taxes (2)
Legal related    99,316        (1,353,571)   275,774        (1,793,368)
costs (3)
Restructuring    2,290,831     770,749       2,290,831      770,749
costs (4)
Income Taxes (5) (2,091,573)   --           (2,091,573)    --
Effects of
preferred stock  45,936        --           45,936         --
(6)
Non-GAAP net     (1,757,677)   (3,095,095)   (10,037,427)   (10,066,508)
loss
                                                           
GAAP gross       82%            82%            83%             80%
margin - Product
Add: Non-cash
stock option     0%             0%             0%              0%
expense (1)
Non-GAAP gross   82%            82%            83%             80%
margin - Product
                                                           
GAAP gross
margin - Support 68%            61%            63%             63%
and Service
Add: Non-cash
stock option     0%             1%             0%              0%
expense (1)
Non-GAAP gross
margin - Support 69%            62%            64%             63%
and Service
                                                           
GAAP operating   (28%)          (21%)          (29%)           (23%)
margin
Add: Non-cash
stock option     1%             6%             3%              7%
expense (1)
Legal related    1%             (8%)           1%              (3%)
costs (3)
Restructuring    16%            5%             5%              1%
costs (4)
Non-GAAP         (11%)          (18%)          (20%)           (18%)
operating margin
                                                           
GAAP Basic EPS   $(0.05)      $(0.08)      $(0.25)       $(0.27)
Add: Non-cash
stock option     0.00          0.02          0.03           0.08
expense, net of
income taxes (2)
Legal related    0.00          (0.03)        0.01           (0.04)
costs (3)
Restructuring    0.05          0.02          0.05           0.02
costs (4)
Income Taxes (5) (0.04)        --           (0.04)         --
Effects of
preferred stock  0.00          --           0.00           --
(6)
Non-GAAP Basic   (0.04)        (0.07)        (0.21)         (0.21)
EPS
                                                           
GAAP Diluted EPS $(0.05)      $(0.08)      $(0.25)       $(0.27)
Add: Non-cash
stock option     0.00          0.02          0.03           0.08
expense, net of
income taxes (2)
Legal related    0.00          (0.03)        0.01           (0.04)
costs (3)
Restructuring    0.05          0.02          0.05           0.02
costs (4)
Income Taxes (5) (0.04)        --           (0.04)         --
Effects of
preferred stock  0.00          --           0.00           --
(6)
Non-GAAP Diluted (0.04)        (0.07)        (0.21)         (0.21)
EPS
                                                           
Weighted average
basic shares
outstanding      48,024,916    47,542,304    47,961,853     47,353,922
(GAAP and as
adjusted)
                                                           
Weighted average
diluted shares
outstanding      48,024,916    47,542,304    47,961,853     47,353,922
(GAAP and as
adjusted)

                                                             
                                                             
Footnotes:                                                    
(1) Represents non-cash, stock-based compensation charges as follows:
                                                             
                      Three Months Ended          Nine Months Ended
                      September 30,               September 30,
                      2013          2012          2013          2012
                                                             
Cost of revenues -     $82         $113        $181        $212
Product
Cost of revenues -     7,990        53,314       112,182      103,158
Support and Service
Research and           69,542       127,982      291,480      572,170
development costs
Selling and marketing  (56,838)     388,167      215,352      1,272,823
General and            142,636      486,202      675,747      1,645,793
administrative
                                                             
Total non-cash stock
based compensation     $163,412    $1,055,778  $1,294,942  $3,594,156
expense
                                                             
(2) 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 nine months
ended September 30, 2013 and 2012, the tax expense for both GAAP and Non-GAAP
basis approximate the same amount.
                                                             
(3) Legal related costs represent expenses in connection with the Company's
investigations, litigation and settlement related costs for each respective
period presented.
                                                             
(4) Represents restructuring costs which were incurred during each respective
period presented.
                                                             
(5) Represents the reversal of uncertain tax positions due to the expiration
of applicable statutes of limitation.
                                                             
(6) Represents the effects of the accretion to redemption value of the Series
A preferred stock and accrual of preferred stock dividends.

CONTACT: FalconStor Software, Inc.
         Melissa Keir, Investor Relations
         631-773-4334
         melissa.keir@falconstor.com

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