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MELVILLE, NY -- (Marketwired) -- 07/29/15 -- FalconStor Software, Inc. (NASDAQ: FALC), a market leader in software-defined storage, today announced financial results for its second quarter ended June 30, 2015.

"During the second quarter of 2015, to further position the Company for future success, we completed our transition from relying solely on point solution transactions to our new 'pay-as-you-grow' subscription-based model based on capacity with our FreeStor™ software-defined storage and data services platform," said Gary Quinn, FalconStor President and CEO. "While this change in market strategy has impacted our business over the past twelve months, we feel that the long-term benefits associated with this quarter's launch of FreeStor will be well worth the efforts we have made thus far and place us in the strongest position of maintaining and growing organizational health. We strive to maintain the momentum of FreeStor's successful launch and continue to leverage that goodwill by signing additional customers, service providers and OEMs worldwide."

Financial and Business Highlights and Overview:

• REVENUE:
  • Q2 2015 revenue totaled $9.6 million compared with as adjusted revenue in Q1 2015 of $10.1 million and $11.3 million in Q2 2014. In Q1 2015 revenue totaled $19.9 million, which included $9.9 million relating to the acceleration of previously deferred revenue recognized as a result of the termination of ongoing maintenance services during the first quarter of 2015 associated with our joint-development agreement.
    

• BOOKINGS:
  • Q2 2015 total bookings were $8.3 million compared with $11.7 million in Q1 2015 and $13.3 million in Q2 2014.
    
  • In Q2 2015, approximately 58% of our total product bookings were ratable as compared with 46% in Q2 2014. For the first half of 2015, approximately 65% of our total product bookings were ratable as compared with 41% during the first half of 2014, all of which is a clear indicator of our business moving to over-time revenue recognition model.
    

• DEFERRED REVENUE:
  • Excluding the impact of our joint-development agreement, deferred revenue as of June 30, 2015 increased 3% and 5% compared with June 30, 2014 and December 31, 2014, respectively.
    

• CASH:
  • The Company closed the quarter with $18.8 million of cash, cash equivalents and marketable securities, compared with $21.8 million at December 31, 2014.
    
  • Cash used in operations was $1.4 million for the three months ended June 30, 2015, compared with cash provided by operations of $1.1 million for the three months ended June 30, 2014.
    

• Non-GAAP EXPENSES and MARGINS:
  • Non-GAAP expenses totaled $12.3 million in Q2 2015, compared with non-GAAP expenses of $13.0 million in Q1 2015 and non-GAAP expenses of $14.1 million in Q2 2014.
    
  • Non-GAAP gross margins were 73% in Q2 2015, compared with non-GAAP gross margins of 76% in Q1 2015 which excludes the accelerated revenue associated with our joint-development agreement recognized during Q1 2015, and 76% in Q2 2014.
    

• OTHER ITEMS
  • On May 7, 2015, we released for general availability a new and innovative solution which is agnostic to any server hardware or storage hardware manufacturer; a horizontal software-defined storage platform inclusive of converged data services called FreeStor™.
    
  • During the current quarter, the Company signed (i) three (3) OEM agreements with industry leading manufacturers located in North America, EMEA and Asia, and (ii) four (4) leading service providers located in North America, Latin America and Europe. In total for the first half of 2015 we have signed six (6) OEMs and four (4) service providers, all of which have chosen FalconStor's FreeStor technology in various go-to-market strategies to align with their present-day business goals.
    
  • During the quarter, the Company repurchased 92,161 shares of its common stock at an aggregate purchase price of $1.50 per share, under its stock buy-back program.

Financials

Total revenue for the second quarter of 2015 was $9.6 million compared with $11.3 million in the same period a year ago. GAAP loss from operations for the second quarter of 2015 was $3.1 million, compared with operating income of $1.4 million for the second quarter of 2014. Our operating income for the three months ended June 30, 2014, benefited from a litigation settlement of $5.3 million associated with our then outstanding lawsuit with the estate of our former Chief Executive Officer, as compared with a benefit of less than $0.1 million during the same period in 2015. Also included in the operating results for the three months ended June 30, 2015 and 2014 were; (i) $0.4 million of share-based compensation expense in both periods; and (ii) less than $0.1 million and $0.6 million, respectively, of restructuring costs. GAAP net loss for the quarter was $2.7 million compared with net income of $1.3 million for the same period a year ago. Included in our net (loss) income for the three months ended June 30, 2015 and 2014 was an income tax benefit of $0.4 million and a provision of $0.1 million, respectively. GAAP net loss attributable to common stockholders for the second quarter of 2015, which includes the effects of the accretion to redemption value of the Series A redeemable convertible preferred stock and the accrual of Series A redeemable convertible preferred stock dividends, was $3.0 million, or $0.07 per diluted share, compared with net income of $1.0 million, or $0.02 per diluted share, for the same period a year ago.

Non-GAAP loss from operations was $2.7 million for the second quarter of 2015, compared with $2.8 million for the same period a year ago. Non-GAAP net loss was $2.2 million, or $0.05 per diluted share, in the second quarter of 2015, compared with $3.0 million, or $0.06 per diluted share, in the second quarter of 2014. Non-GAAP results exclude the effects of stock-based compensation, costs associated with the Company's investigations, litigation and settlement related costs, restructuring costs and the effects of our Series A redeemable convertible preferred stock.

Total revenue for the six months ended June 30, 2015 was $29.5 million compared with $23.3 million in the same period a year ago. Included in total revenue for the six months ended June 30, 2015 was $11.3 million of revenue associated with our joint-development agreement, of which $9.9 million was accelerated during the six months ended June 30, 2015. GAAP income from operations for the six months ended June 30, 2015 was $3.2 million, compared with an operating loss of $1.2 million for the six months ended June 30, 2014. Our operating results for the six months ended June 30, 2014, benefited from a litigation settlement of $5.3 million associated with our then outstanding lawsuit with the estate of our former Chief Executive Officer, as compared with expense of less than $0.1 million during the same period in 2015. Also included in the operating results for the six months ended June 30, 2015 and 2014 were; (i) $0.8 million of share-based compensation expense for both periods; and (ii) $0.1 million and $0.8 million, respectively, of restructuring costs. GAAP net income for the six months ended June 30, 2015 was $2.6 million compared with a net loss of $1.5 million for the same period a year ago. Included in our net income (loss) for both the six months ended June 30, 2015 and 2014 was an income tax provision of $0.3 million. GAAP net income attributable to common stockholders for the six months ended June 30, 2015 and 2014 was $1.9 million, or $0.05 per diluted share, compared with a net loss of $2.1 million, or $0.04 per diluted share, for the same period a year ago.

Non-GAAP income from operations was $4.2 million for the six months ended June 30, 2015, compared with a non-GAAP loss from operations of $4.7 million for the same period a year ago. Non-GAAP net income was $3.6 million, or $0.08 per diluted share, for the six months ended June 30, 2015, compared with a non-GAAP net loss of $5.0 million, or $0.10 per diluted share, for the six months ended June 30, 2014.

The Company closed the quarter with $18.8 million in cash, cash equivalents and marketable securities. Cash flow used in operations for the six months ended June 30, 2015 was $1.6 million compared with cash provided by operations of $1.4 million during the same period in 2014. Deferred revenue at June 30, 2015 was $26.4 million, compared with $33.1 million at June 30, 2014.

Conference Call
The Company will host a conference call to discuss its financial results on Wednesday, July 29, 2015 at 4:30 p.m. EDT. To participate in the conference call, please dial:

Toll Free: 1-888-208-1427
International: +1-913-312-9308
Conference ID: 1728155

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?RGID=r5111738b4ca9399c5563f88d1fe0bf39

Meeting: FalconStor Q2 2015 Earnings
Meeting password: Q2numbers15
Meeting Number: 764 461 384

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 will be available beginning July 29 at 7:30 p.m. EDT through 7:30 p.m. EDT on August 5. To listen to the replay of the call, dial toll free: 1-888-203-1112 or International: +1-719-457-0820, passcode: 1728155.

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) effects of our Series A redeemable convertible preferred stock, and (iv) non-cash 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 leading software-defined storage company offering a converged data services software platform that is hardware agnostic. Our open, integrated flagship solution FreeStor™ reduces vendor lock-in and gives enterprises the freedom to choose the applications and hardware components that make the best sense for their business. We empower organizations to modernize their data center with the right performance, in the right location, all while protecting existing investments. FalconStor's mission is to maximize data availability and system uptime to ensure nonstop business productivity while simplifying data management to reduce operational costs. Our award-winning solutions are available and supported worldwide by OEMs as well as leading service providers, system integrators, resellers and FalconStor. The Company 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 (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, FalconStor Software and FreeStor 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

                                                               December 31,
                                              June 30, 2015        2014
                                             --------------- ---------------
                                               (unaudited)
Assets
Current assets:
  Cash and cash equivalents                       $8,307,549     $10,873,891
  Marketable securities                           10,523,821      10,900,722
  Accounts receivable, net                         6,224,034       8,898,680
  Prepaid expenses and other current assets        1,750,218       1,596,916
  Inventory                                          150,236         352,493
  Deferred tax assets, net                           296,360         316,586
                                             --------------- ---------------
    Total current assets                          27,252,218      32,939,288
Property and equipment, net                        1,911,145       2,147,188
Deferred tax assets, net                               7,503           7,503
Software development costs, net                    1,260,289       1,508,517
Other assets, net                                  1,162,524       1,373,964
Goodwill                                           4,150,339       4,150,339
Other intangible assets, net                         262,333         196,037
                                             --------------- ---------------
    Total assets                                 $36,006,351     $42,322,836
                                             =============== ===============
Liabilities and Stockholders' Deficit
Current liabilities:
  Accounts payable                                $1,145,944     $ 1,266,504
  Accrued expenses                                 7,779,298       6,939,198
  Deferred tax liabilities, net                       23,307          23,307
  Deferred revenue, net                           17,190,326      23,380,012
                                             --------------- ---------------
    Total current liabilities                     26,138,875      31,609,021
Other long-term liabilities                          746,897         630,444
Deferred tax liabilities, net                        245,903         226,443
Deferred revenue, net                              9,213,624      13,097,215
                                             --------------- ---------------
    Total liabilities                             36,345,299      45,563,123
                                             --------------- ---------------
Commitments and contingencies
Series A redeemable convertible preferred
 stock                                             7,511,915       7,230,941
    Total stockholders' deficit                  (7,850,863)    (10,471,228)
                                             --------------- ---------------
    Total liabilities and stockholders'
     deficit                                     $36,006,351     $42,322,836
                                             =============== ===============



                 FalconStor Software, Inc. and Subsidiaries
              CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                (Unaudited)

                               Three Months Ended       Six Months Ended
                                    June 30,                June 30,
                            ----------------------- -----------------------
                                2015        2014        2015        2014
                            ----------- ----------- ----------- -----------
Revenue:
  Product revenue           $ 3,650,504 $ 4,252,486 $17,620,871 $ 9,215,545
  Support and services
   revenue                    5,902,085   7,050,181  11,871,594  14,088,621
                            ----------- ----------- ----------- -----------
  Total revenue               9,552,589  11,302,667  29,492,465  23,304,166
                            ----------- ----------- ----------- -----------
Cost of revenue:
  Product                       718,057     698,222   1,108,281   1,273,346
  Support and service         1,940,729   2,009,441   3,960,747   4,108,692
                            ----------- ----------- ----------- -----------
  Total cost of revenue       2,658,786   2,707,663   5,069,028   5,382,038
                            ----------- ----------- ----------- -----------
Gross profit                $ 6,893,803 $ 8,595,004 $24,423,437 $17,922,128
Operating expenses:
  Research and development
   costs                      3,067,732   3,143,224   6,273,599   6,492,019
  Selling and marketing       4,371,513   6,351,947   9,676,875  12,240,413
  General and administrative  2,583,893   2,364,380   5,076,834   4,755,790
  Investigation, litigation,
   and settlement related
   (benefits) costs              (8,186) (5,275,920)      8,842  (5,164,209)
  Restructuring costs            23,495     562,913     157,971     786,486
                            ----------- ----------- ----------- -----------
  Total operating expenses   10,038,447   7,146,544  21,194,121  19,110,499
                            ----------- ----------- ----------- -----------
Operating (loss) income      (3,144,644)  1,448,460   3,229,316  (1,188,371)
                            ----------- ----------- ----------- -----------
Interest and other income
 (loss), net                     98,411     (30,982)   (365,665)     19,126
                            ----------- ----------- ----------- -----------
    (Loss) income before
     income taxes            (3,046,233)  1,417,478   2,863,651  (1,169,245)
(Benefit) provision for
 income taxes                  (378,049)     86,531     269,456     301,606
                            ----------- ----------- ----------- -----------
    Net (loss) income       $(2,668,184)$ 1,330,947 $ 2,594,195 $(1,470,851)
                            =========== =========== =========== ===========
Less: Accrual of Series A
 redeemable convertible
 preferred stock dividends      186,904     186,904     377,690     373,808
Less: Accretion to
 redemption value of Series
 A redeemable convertible
 preferred stock                143,557     120,531     280,974     235,907
                            ----------- ----------- ----------- -----------
    Net (loss) income
     attributable to common
     stockholders           $(2,998,645)$ 1,023,512 $ 1,935,531 $(2,080,566)
                            =========== =========== =========== ===========
Basic net (loss) income per
 share attributable to
 common stockholders        $     (0.07)$      0.02 $      0.05 $     (0.04)
                            =========== =========== =========== ===========
Diluted net (loss) income
 per share attributable to
 common stockholders        $     (0.07)$      0.02 $      0.05 $     (0.04)
                            =========== =========== =========== ===========
Weighted average basic
 shares outstanding          40,964,160  47,919,318  40,949,849  47,975,217
                            =========== =========== =========== ===========
Weighted average diluted
 shares outstanding          40,964,160  48,780,606  42,492,677  47,975,217
                            =========== =========== =========== ===========



                FalconStor Software, Inc. and Subsidiaries
           Reconciliation of GAAP to Non-GAAP Financial Measures
                                (Unaudited)

                            Three Months Ended         Six Months Ended
                                 June 30,                  June 30,
                         ------------------------  -----------------------
                             2015         2014         2015        2014
                         -----------  -----------  ----------- -----------
GAAP (loss) income from
 operations              $(3,144,644) $ 1,448,460  $ 3,229,316 $(1,188,371)
  Non-cash stock option
   expense (1)               425,968      422,054      800,774     834,715
  Legal related
   (benefits) costs (3)       (8,186)  (5,275,920)       8,842  (5,164,209)
  Restructuring costs (4)     23,495      562,913      157,971     786,486
                         -----------  -----------  ----------- -----------
Non-GAAP (loss) income
 from operations         $(2,703,367) $(2,842,493) $ 4,196,903 $(4,731,379)
                         -----------  -----------  ----------- -----------

GAAP net (loss) income
 attributable to common
 stockholders            $(2,998,645) $ 1,023,512  $ 1,935,531 $(2,080,566)
  Non-cash stock option
   expense, net of income
   taxes (2)                 425,968      422,054      800,774     834,715
  Legal related
   (benefits) costs (3)       (8,186)  (5,275,920)       8,842  (5,164,209)
  Restructuring costs (4)     23,495      562,913      157,971     786,486
  Effects of Series A
   redeemable convertible
   preferred stock (5)       330,461      307,435      658,664     609,715
                         -----------  -----------  ----------- -----------
Non-GAAP net (loss)
 income                  $(2,226,907) $(2,960,006) $ 3,561,782 $(5,013,859)
                         -----------  -----------  ----------- -----------

GAAP gross margin                 72%          76%          83%         77%
  Non-cash stock option
   expense (1)                     0%           0%           0%          0%
                         -----------  -----------  ----------- -----------
Non-GAAP gross margin             73%          76%          83%         77%
                         -----------  -----------  ----------- -----------

GAAP gross margin -
 Product                          80%          84%          94%         86%
  Non-cash stock option
   expense (1)                     0%           0%           0%          0%
                         -----------  -----------  ----------- -----------
Non-GAAP gross margin -
 Product                          80%          84%          94%         86%
                         -----------  -----------  ----------- -----------

GAAP gross margin -
 Support and Service              67%          71%          67%         71%
  Non-cash stock option
   expense (1)                     1%           0%           0%          -%
                         -----------  -----------  ----------- -----------
Non-GAAP gross margin -
 Support and Service              68%          72%          67%         71%
                         -----------  -----------  ----------- -----------

GAAP operating margin            (33%)         13%          11%         (5%)
  Non-cash stock option
   expense (1)                     4%           4%           3%          4%
  Legal related
   (benefits) costs (3)            0%         (47%)          0%        (22%)
  Restructuring costs (4)          0%           5%           1%          3%
                         -----------  -----------  ----------- -----------
Non-GAAP operating margin        (28%)        (25%)         14%        (20%)
                         -----------  -----------  ----------- -----------

GAAP Basic EPS           $     (0.07) $      0.02  $      0.05 $     (0.04)
  Non-cash stock option
   expense, net of income
   taxes (2)                    0.01         0.01         0.02        0.02
  Legal related
   (benefits) costs (3)         0.00        (0.11)        0.00       (0.11)
  Restructuring costs (4)       0.00         0.01         0.00        0.02
  Effects of Series A
   redeemable convertible
   preferred stock (5)          0.01         0.01         0.02        0.01
                         -----------  -----------  ----------- -----------
Non-GAAP Basic EPS       $     (0.05) $     (0.06) $      0.09 $     (0.10)
                         -----------  -----------  ----------- -----------

GAAP Diluted EPS         $     (0.07) $      0.02  $      0.05 $     (0.04)
  Non-cash stock option
   expense, net of income
   taxes (2)                    0.01         0.01         0.02        0.02
  Legal related
   (benefits) costs (3)         0.00        (0.11)        0.00       (0.11)
  Restructuring costs (4)       0.00         0.01         0.00        0.02
  Effects of Series A
   redeemable convertible
   preferred stock (5)          0.01         0.01         0.02        0.01
                         -----------  -----------  ----------- -----------
Non-GAAP Diluted EPS     $     (0.05) $     (0.06) $      0.08 $     (0.10)
                         -----------  -----------  ----------- -----------

Weighted average basic
 shares outstanding (GAAP
 and as adjusted)         40,964,160   47,919,318   40,949,849  47,975,217
                         ===========  ===========  =========== ===========
Weighted average diluted
 shares outstanding (GAAP
 and as adjusted)         40,964,160   48,780,606   42,492,677  47,975,217
                         ===========  ===========  =========== ===========

Footnotes:

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

                                   Three Months Ended     Six Months Ended
                                        June 30,              June 30,
                                 ---------------------  --------------------
                                    2015        2014       2015       2014
                                 ---------   ---------  ---------  ---------
Cost of revenues - Product       $       -   $       -  $       -  $       -
Cost of revenues - Support and
 Service                            34,894      32,454     53,704     54,337
Research and development costs      98,495      86,608    171,515    175,407
Selling and marketing               63,510      50,787    151,580    212,974
General and administrative         229,069     252,205    423,975    391,997
                                 ---------   ---------  ---------  ---------
  Total non-cash stock based
   compensation expense          $ 425,968   $ 422,054  $ 800,774  $ 834,715
                                 =========   =========  =========  =========

(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 six months ended June 30, 2015 and 2014, the tax expense for both GAAP and Non-GAAP basis approximate the same amount.

(3) Legal related costs represent expenses/gains 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 effects of the accretion to redemption value of the Series A redeemable convertible preferred stock and accrual of Series A redeemable convertible preferred stock dividends.