8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 28, 2009

FALCONSTOR SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware	0-23970	77-0216135
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)
2 Huntington Quadrangle, Melville, New York		11747
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 631-777-5188

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition

On October 28, 2009, the Company issued a press release announcing its results of operations for the fiscal quarter ended September 30, 2009.

The text of a press release issued by the Company is furnished as Exhibit 99.1 and is incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits

(c) Exhibits

Exhibit Number	Description
99.1	Press release of the Company dated October 28, 2009.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	FALCONSTOR SOFTWARE, INC.
Dated: October 28, 2009	By:	/s/ James Weber
	Name:	James Weber
	Title:	Chief Financial Officer and Vice President

EX-99.1

Exhibit 99.1

Contact:           Joanne Ferrara, Investor Relations

631-773-5813

joanne.ferrara@falconstor.com

FalconStor Software Reports Third Quarter Results

Revenues Increase 10% from Prior Year

Generates Third Quarter Operating Cash Flow of $9.6 Million

MELVILLE, N.Y., October 28, 2009—FalconStor Software, Inc. (NASDAQ: FALC), the provider of TOTALLY Open™ 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.

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"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: 1-800-406-7325or 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™ technology solutions, built upon the award-winning IPStor® 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.

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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).

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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 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.

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FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2009		December 31, 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

 

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FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Revenues:
Software license revenue	$	13,615,625		$	12,260,527		$	44,346,747		$	42,597,810
Maintenance revenue		6,469,942			6,190,467			18,823,718			16,826,595
Software services and other revenue		1,454,602			1,160,499			3,859,409			4,220,694
		21,540,169			19,611,493			67,029,874			63,645,099
Operating expenses:
Amortization of purchase and capitalized software		180,127			106,369			538,623			184,107
Cost of maintenance, software   services and other revenue		4,093,317			3,352,938			11,495,731			10,175,092
Software development costs		6,949,552			6,246,839			20,005,304			18,359,721
Selling and marketing		10,391,931			9,164,599			31,023,224			27,677,889
General and administrative		2,388,860			2,090,952			6,996,357			6,077,703
		24,003,787			20,961,697			70,059,239			62,474,512
Operating (loss) income		(2,463,618	)		(1,350,204	)		(3,029,365	)		1,170,587
Interest and other income, net		239,516			251,955			18,811			1,234,659
(Loss) income before income taxes		(2,224,102	)		(1,098,249	)		(3,010,554	)		2,405,246
(Benefit) provision for income taxes		(192,697	)		463,995			(1,394,902	)		1,840,522
Net (loss) income	$	(2,031,405	)	$	(1,562,244	)	$	(1,615,652	)	$	564,724
Basic net (loss) income per share	$	( 0.05	)	$	(0.03	)	$	( 0.04	)	$	0.01
Diluted net (loss) income per share	$	(0.05	)	$	(0.03	)	$	(0.04	)	$	0.01
Weighted average basic shares outstanding		44,803,379			47,522,085			44,812,807			48,389,670
Weighted average diluted shares outstanding		44,803,379			47,522,085			44,812,807			50,377,370

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FalconStor Software, Inc. and Subsidiaries

Non-GAAP Operating Data

GAAP Reconciliation

(Unaudited)

	Three Months Ended  September 30,						Nine Months Ended  September 30,
	2009			2008			2009			2008
GAAP (loss) income from operations	$	(2,463,618	)	$	(1,350,204	)	$	(3,029,365	)	$	1,170,587
Add: non-cash stock option expense (1)		2,241,792			1,607,173			6,712,549			6,580,520
Non-GAAP  (loss) income from operations		(221,826	)		256,969			3,683,184			7,751,107
GAAP net (loss) income	$	(2,031,405	)	$	(1,562,244	)	$	(1,615,652	)	$	564,724
Add: non-cash stock option expense, net of income taxes (2)		2,149,332			1,936,120			5,187,743			5,187,743
Non-GAAP net income		117,927			373,876			3,572,091			5,765,084
GAAP operating margins		(11	%)		(7	%)		(5	%)		2	%
Add: non-cash stock option expense (1)		10	%		8	%		10	%		10	%
Non-GAAP operating margins		(1	%)		1	%		5	%		12	%
GAAP Basic EPS	$	(0.05	)	$	(0.03	)	$	(0.04	)	$	0.01
Add: non-cash stock option expense, net of income taxes (2)		0.05			0.04			0.12			0.11
Non-GAAP Basic EPS		0.00			0.01			0.08			0.12
GAAP Diluted EPS	$	(0.05	)	$	(0.03	)	$	(0.04	)	$	0.01
Add: non-cash stock option expense, net of income taxes (2)		0.05			0.04			0.11			0.10
Non-GAAP Diluted EPS		0.00			0.01			0.08			0.11
Weighted average basic shares   Outstanding (GAAP and as adjusted)		44,803,379			47,522,085			44,812,807			48,389,670
Weighted average diluted shares  Outstanding (GAAP and as adjusted)		46,823,133			49,201,574			46,041,703			50,377,370

Footnotes:

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Cost of maintenance, software services and other revenue	$	397,414	$	335,033	$	1,149,568	$	1,008,742
Software development costs		821,015		565,481		2,302,777		2,323,072
Selling and marketing		731,571		585,866		2,425,043		2,618,594
General and administrative		291,792		120,793		835,161		630,112
Total non-cash stock-based compensation expense	$	2,241,792	$	1,607,173	$	6,712,549	$	6,580,520

(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.

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