FalconStor Software Reports Third Quarter Results

October 28, 2009 4:05 PM EDT

Revenues Increase 10% from Prior Year

Generates Third Quarter Operating Cash Flow of $9.6 Million

MELVILLE, N.Y.--(BUSINESS WIRE)-- FalconStor Software, Inc. (NASDAQ: FALC), the provider of TOTALLY Open(TM) data protection solutions, today announced financial results for its third quarter ended September 30, 2009.

Revenues for the third quarter of 2009 increased 10% to $21.5 million, compared with $19.6 million for the same period a year ago. GAAP loss from operations for the quarter was $2.5 million, compared with a loss of $1.4 million in the third quarter of 2008. GAAP net loss for the quarter was $2.0 million, or $0.05 per share, compared with a loss of $1.6 million, or $0.03 per share, in the third quarter of 2008. Stock-based compensation expense was $2.2 million in the third quarter of 2009 and $1.6 million in the third quarter of 2008.

Non-GAAP loss from operations was $0.2 million in the third quarter of 2009, compared with operating income of $0.3 million in the third quarter of 2008. Non-GAAP net income was $0.1 million in the third quarter of 2009, or breakeven on a per share basis, compared with $0.4 million, or $0.01 per diluted share, in the third quarter of 2008. Non-GAAP results exclude the effects of stock-based compensation expense net of the related income taxes.

For the nine months ended September 30, 2009, revenues increased 5% to $67.0 million, compared with $63.6 million for the same period a year ago. GAAP loss from operations for the nine month period was $3.0 million compared with income from operations of $1.2 million in 2008. GAAP net loss was $1.6 million, or $0.04 per share for the nine months ended September 30, 2009, compared with net income of $0.6 million, or $0.01 per diluted share, in the same period a year ago. Stock-based compensation expense was $6.7 million in 2009 and $6.6 million in 2008.

Non-GAAP income from operations was $3.7 million for the nine months ended September 30, 2009, compared with $7.8 million in 2008. Non-GAAP net income was $3.6 million, or $0.08 per diluted share, compared with $5.8 million, or $0.11 per diluted share in the same period a year ago. Non-GAAP results exclude the effects of stock-based compensation expense net of the related income taxes.

The Company generated $9.6 million in cash flow from operations in the third quarter and closed the quarter with $46.9 million in cash, cash equivalents and marketable securities. Deferred revenue at the end of the quarter was $20.2 million.

"The increasing level of field activities with industry and channel partners is a recognition of our ability to reduce operating costs for our customers and to optimize business continuity with Totally Open data protection solutions," said ReiJane Huai, chairman and CEO of FalconStor Software. "We will continue to invest in sales, marketing and support infrastructure to bolster our brand and to accelerate business momentum through the channel."

The Company will host a conference call on Wednesday, October 28, 2009, at 4:30 p.m. ET to discuss the results. To participate in the conference call, please dial:

Toll Free: 1-877-941-9205

International: +1-480-629-9835

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=128344097&RG=1&UID

Meeting: FalconStor Q3 2009 Earnings

Meeting password: q3numbers

Meeting Number: 480 662 291

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 October 28, 2009 at 6:30 p.m. ET through 11:59 p.m. ET on November 2, 2009. To listen to the replay of the call, dial toll free: 1-800-406-7325 or International: +1-303-590-3030, passcode: 4172522, 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. 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 the market leader in disk-based data protection. FalconStor delivers proven, comprehensive data protection solutions that facilitate the continuous availability of business-critical data with speed, integrity, and simplicity. The Company's TOTALLY Open(TM) technology solutions, built upon the award-winning IPStor(R) platform, include the industry leading Virtual Tape Library (VTL) with deduplication, Continuous Data Protector (CDP), File-interface Deduplication System (FDS), and Network Storage Server (NSS), each enabled with WAN-optimized replication for disaster recovery and remote office protection. FalconStor products are available from major OEMs and solution providers including 3Com, Acer, COPAN Systems, Data Direct Networks, Dynamic Solutions International, EMC, IBM, Pillar Data Systems, Spectra Logic, and Sun and are deployed by thousands of customers worldwide, from small businesses to Fortune 1000 enterprises.

FalconStor is headquartered in Melville, N.Y., with offices throughout Europe and the Asia Pacific region. For more information, visit www.falconstor.com or call 1-866-NOW-FALC (1-866-669-3252).

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 storage and networking industries; competition in the network storage software market; the potential failure of FalconStor's OEM partners to introduce or to market products incorporating FalconStor's products; 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 IPStor are registered trademarks, and TOTALLY Open is a trademark 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,

                                            2009           2008

                                            (unaudited)

Assets

Current assets:

Cash and cash equivalents                   $ 23,238,901   $ 22,364,235

Marketable securities                       22,487,961       19,279,010

Accounts receivable, net                    20,897,995       25,015,848

Prepaid expenses and other current assets   2,346,378        2,468,632

Deferred tax assets, net                    4,920,204        4,296,297

Total current assets                        73,891,439       73,424,022

Property and equipment, net                 7,310,715        7,963,019

Long-term marketable securities             1,144,202        1,166,945

Deferred tax assets, net                    6,648,202        5,739,195

Other assets, net                           3,234,224        2,544,545

Goodwill                                    4,150,339        4,150,339

Other intangible assets, net                939,421          1,375,695

Total assets                                $ 97,318,542   $ 96,363,760

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable                            $ 993,969      $ 738,140

Accrued expenses                            7,549,960        8,288,732

Deferred revenue, net                       14,955,986       16,068,370

Total current liabilities                   23,499,915       25,095,242

Other long-term liabilities                 524,003          199,323

Deferred revenue, net                       5,202,653        5,992,843

Total liabilities                           29,226,571       31,287,408

Commitments and Contingencies

Total stockholders' equity.                   68,091,971     65,076,352

Total liabilities and stockholders' equity  $ 97,318,542   $ 96,363,760

FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

                    Three Months Ended              Nine Months Ended

                    September 30,                   September 30,

                    2009            2008            2009            2008

Revenues:

Software license      13,615,625      12,260,527      44,346,747      42,597,810
revenue

Maintenance         $ 6,469,942     $ 6,190,467     $ 18,823,718    $ 16,826,595
revenue

Software services     1,454,602       1,160,499       3,859,409       4,220,694
and other revenue

                      21,540,169      19,611,493      67,029,874      63,645,099

Operating
expenses:

Amortization of
purchase and          180,127         106,369         538,623         184,107
capitalized
software

Cost of
maintenance,          4,093,317       3,352,938       11,495,731      10,175,092
software services
and other revenue

Software              6,949,552       6,246,839       20,005,304      18,359,721
development costs

Selling and           10,391,931      9,164,599       31,023,224      27,677,889
marketing

General and           2,388,860       2,090,952       6,996,357       6,077,703
administrative

                      24,003,787      20,961,697      70,059,239      62,474,512

Operating (loss)      (2,463,618 )    (1,350,204 )    (3,029,365 )    1,170,587
income

Interest and other    239,516         251,955         18,811          1,234,659
income, net

(Loss) income
before income         (2,224,102 )    (1,098,249 )    (3,010,554 )    2,405,246
taxes

(Benefit)
provision for         (192,697   )    463,995         (1,394,902 )    1,840,522
income taxes

Net (loss) income   $ (2,031,405 )  $ (1,562,244 )  $ (1,615,652 )  $ 564,724

Basic net (loss)    $ ( 0.05     )  $ (0.03      )  $ ( 0.04     )  $ 0.01
income per share

Diluted net (loss)  $ (0.05      )  $ (0.03      )  $ (0.04      )  $ 0.01
income per share

Weighted average
basic shares          44,803,379      47,522,085      44,812,807      48,389,670
outstanding

Weighted average
diluted shares        44,803,379      47,522,085      44,812,807      50,377,370
outstanding

FalconStor Software, Inc. and Subsidiaries

Non-GAAP Operating Data

GAAP Reconciliation

(Unaudited)

               Three Months Ended                Nine Months Ended

               September 30,                     September 30,

               2009             2008             2009             2008

GAAP (loss)
income from    $ (2,463,618 )   $ (1,350,204 )   $ (3,029,365 )   $ 1,170,587
operations

Add: non-cash
stock option     2,241,792        1,607,173        6,712,549        6,580,520
expense (1)

Non-GAAP
(loss) income
from             (221,826   )     256,969          3,683,184        7,751,107

operations

GAAP net       $ (2,031,405 )   $ (1,562,244 )   $ (1,615,652 )   $ 564,724
(loss) income

Add: non-cash
stock option
expense, net     2,149,332        1,936,120        5,187,743        5,200,360
of income
taxes (2)

Non-GAAP net     117,927          373,876          3,572,091        5,765,084
income

GAAP
operating        (11        %)    (7         %)    (5         %)    2          %
margins

Add: non-cash
stock option     10         %     8          %     10         %     10         %
expense (1)

Non-GAAP
operating        (1         %)    1          %     5          %     12         %
margins

GAAP Basic     $ (0.05      )   $ (0.03      )   $ (0.04      )   $ 0.01
EPS

Add: non-cash
stock option
expense, net     0.05             0.04             0.12             0.11
of income
taxes (2)

Non-GAAP         0.00             0.01             0.08             0.12
Basic EPS

GAAP Diluted   $ (0.05      )   $ (0.03      )   $ (0.04      )   $ 0.01
EPS

Add: non-cash
stock option
expense, net     0.05             0.04             0.11             0.10
of income
taxes (2)

Non-GAAP         0.00             0.01             0.08             0.11
Diluted EPS

Weighted
average basic
shares

Outstanding
(GAAP and as     44,803,379       47,522,085       44,812,807       48,389,670
adjusted)

Weighted
average
diluted
shares

Outstanding
(GAAP and as     46,823,133       49,201,574       46,041,703       50,377,370
adjusted)

Footnotes:

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

                Three Months Ended September  Nine Months Ended September 30,
                30,

                2009         2008             2009         2008

Cost of
maintenance,
software        $ 397,414    $ 335,033        $ 1,149,568  $ 1,008,742
services and
other revenue

Software
development       821,015      565,481          2,302,777    2,323,072
costs

Selling and       731,571      585,866          2,425,043    2,618,594
marketing

General and       291,792      120,793          835,161      630,112
administrative

Total non-cash
stock-based     $ 2,241,792  $ 1,607,173      $ 6,712,549  $ 6,580,520
compensation
expense

(2) Represents the effects of non-cash stock-based compensation expense
recognized in accordance with the FASB Accounting Standards Codification,
Topic 718, for the three and nine months ended September 30, 2009 and 2008,
net of related income tax effects.

    Source: FalconStor Software, Inc.

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