FalconStor Software (FALC) 8-K FalconStor Software Reports Third Quarter Financial Results

Exhibit 99.1

Contact:	Joanne Ferrara, Investor Relations
	631-773-5813
	joanne.ferrara@falconstor.com

FalconStor Software Reports Third Quarter Financial Results

MELVILLE, N.Y., November 7, 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, 2012		December 31, 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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenues:
Product revenues	$	8,550,551		$	10,176,275		$	27,049,072		$	33,045,050
Support and services revenues		8,538,462			8,680,115			25,874,214			24,398,610
		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 service		3,318,558			3,339,448			9,570,969			9,877,256
Total cost of revenues		4,880,917			4,806,589			14,941,000			15,333,442
Gross profit	$	12,208,096		$	14,049,801		$	37,982,286		$	42,110,218
Operating expenses:
Research and development costs		4,643,102			5,033,211			14,115,388			16,383,318
Selling and marketing		8,272,973			9,878,069			27,302,960			28,873,468
General and administrative		3,461,880			2,904,767			9,590,909			8,463,762
Investigation, litigation and  settlement related costs		(1,353,571	)		531,507			(1,793,368	)		4,331,298
Restructuring costs		770,749			822,320			770,749			822,320
Total operating expenses		15,795,133			19,169,874			49,986,638			58,874,166
Operating loss		(3,587,037	)		(5,120,073	)		(12,004,352	)		(16,763,948	)
Interest and other income (loss), net		102,059			(71,266	)		(142,805	)		379,690
Loss before income taxes		(3,484,978	)		(5,191,339	)		(12,147,157	)		(16,384,258	)
Provision for income taxes		83,073			206,837			490,888			869,221
Net loss	$	(3,568,051	)	$	(5,398,176	)	$	(12,638,045	)	$	(17,253,479	)
Basic net loss per share	$	(0.08	)	$	(0.12	)	$	(0.27	)	$	(0.37	)
Diluted net loss per share	$	(0.08	)	$	(0.12	)	$	(0.27	)	$	(0.37	)
Weighted average basic shares outstanding		47,542,304			46,779,040			47,353,922			46,563,004
Weighted average diluted shares outstanding		47,542,304			46,779,040			47,353,922			46,563,004

FalconStor Software, Inc. and Subsidiaries

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
GAAP loss from operations	$	(3,587,037	)	$	(5,120,073	)	$	(12,004,352	)	$	(16,763,948	)
Add:   Non-cash stock option expense (1)		1,055,778			1,436,578			3,594,156			4,091,878
Legal related costs (3)		(1,353,571	)		531,507			(1,793,368	)		4,331,298
Restructuring costs (4)		770,749			822,320			770,749			822,320
Non-GAAP loss from operations		(3,114,081	)		(2,329,668	)		(9,432,815	)		(7,518,452	)
GAAP net loss	$	(3,568,051	)	$	(5,398,176	)	$	(12,638,045	)	$	(17,253,479	)
Add:   Non-cash stock option expense,
net of income taxes (2)		1,055,778			1,436,578			3,594,156			4,091,878
Legal related costs (3)		(1,353,571	)		531,507			(1,793,368	)		4,331,298
Restructuring costs (4)		770,749			822,320			770,749			822,320
Non-GAAP net loss		(3,095,095	)		(2,607,771	)		(10,066,508	)		(8,007,983	)
GAAP gross margin – Product		82	%		86	%		80	%		84	%
Add: Non-cash stock option expense (1)		0	%		0	%		0	%		0	%
Non-GAAP gross margin - Product		82	%		86	%		80	%		84	%
GAAP gross margin – Support  and Service		61	%		62	%		63	%		60	%
Add: Non-cash stock option expense (1)		1	%		1	%		0	%		2	%
Non-GAAP gross margin – Support  and Service		62	%		63	%		63	%		61	%
GAAP operating margin		(21	%)		(27	%)		(23	%)		(29	%)
Add:   Non-cash stock option expense (1)		6	%		8	%		7	%		7	%
Legal related costs (3)		(8	%)		3	%		(3	%)		8	%
Restructuring costs (4)		5	%		4	%		1	%		1	%
Non-GAAP operating margin		(18	%)		(12	%)		(18	%)		(13	%)
GAAP Basic EPS	$	(0.08	)	$	(0.12	)	$	(0.27	)	$	(0.37	)
Add:   Non-cash stock option expense,
net of income taxes (2)		0.02			0.03			0.08			0.09
Legal related costs (3)		(0.03	)		0.01			(0.04	)		0.09
Restructuring costs (4)		0.02			0.02			0.02			0.02
Non-GAAP Basic EPS		(0.07	)		(0.06	)		(0.21	)		(0.17	)
GAAP Diluted EPS	$	(0.08	)	$	(0.12	)	$	(0.27	)	$	(0.37	)
Add:   Non-cash stock option expense,
net of income taxes (2)		0.02			0.03			0.08			0.09
Legal related costs (3)		(0.03	)		0.01			(0.04	)		0.09
Restructuring costs (4)		0.02			0.02			0.02			0.02
Non-GAAP Diluted EPS		(0.07	)		(0.06	)		(0.21	)		(0.17	)
Weighted average basic shares  Outstanding (GAAP and as adjusted)		47,542,304			46,779,040			47,353,922			46,563,004
Weighted average diluted shares Outstanding (GAAP and as adjusted)		47,542,304			46,779,040			47,353,922			46,563,004

Footnotes:

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

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

(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, 2012 and 2011, the tax expense for both GAAP and Non-GAAP basis approximate the same amount.

(3) Legal related costs represent amounts 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.