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): April 28, 2011

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):

o 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 April 28, 2011, the Company issued a press release announcing its results of operations for the fiscal quarter ended March 31, 2011.

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 April 28, 2011.

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: April 28, 2011	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 First Quarter Financial Results

Revenue Increases 11% From Prior Year

MELVILLE, N.Y., April 28, 2011—FalconStor Software, Inc. (NASDAQ: FALC), the provider of disk-based data protection solutions, today announced financial results for its first quarter ended March 31, 2011.

Total revenues for the first quarter of 2011 were $19.0 million, an increase of 11% compared with $17.1 million in the same period a year ago.  GAAP loss from operations for the first quarter of 2011 was $5.7 million, compared with a loss from operations of $8.5 million for the same period a year ago. GAAP net loss for the quarter was $6.0 million, or $0.13 per share, compared with a net loss of $5.5 million, or $0.12 per share, for the same period a year ago. Included in the operating results for the first quarter of 2011 was $2.6 million of costs associated with the ongoing government investigations. The $2.6 million was comprised of $1.1 million in legal fees, and an accrual of $1.5 million for certain costs associated with the possible resolution of the government investigations.

Non-GAAP loss from operations was $4.4 million in the first quarter of 2011, compared with a loss from operations of $5.8 million for the same period a year ago.  Non-GAAP net loss was $4.7 million, or $0.10 per share, in the first quarter of 2011, compared with a net loss of $3.8 million, or $0.08 per share, in the first quarter of 2010. Non-GAAP results exclude the effects of stock-based compensation.

The Company closed the quarter with $42.4 million in cash, cash equivalents, and marketable securities, which is up from $40.5 million at the end of the first quarter of 2010. Cash flow from operations for the first quarter of 2011 was $5.6 million. Deferred revenue at March 31, 2011 was $25.5 million, an increase of 11% compared with the same period a year ago.

"We continue to improve our presence in the channel; the more than 30 percent increase in channel generated product revenue over last year is a positive indication of those efforts. With our newly established sales leadership and channel management team we fully expect to continue to build strong sales momentum,” said Jim McNiel, president and chief executive officer of FalconStor. “We are also focused on fostering our culture of quality and innovation.  We continue our development efforts to deliver the first service-oriented data protection solutions in the industry this year to respond to the growing demand by our customers for solutions that address new IT challenges including cloud computing and cloud storage."

The Company will host a conference call to discuss its financial results on Thursday, April 28, 2011 at 4:30 p.m. EDT. To participate in the conference call, please dial:

Toll Free: 1-888-549-7750

International: 1-480-629-9866

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=149909617&RG=1&UID

Meeting: FalconStor Q1 2011 Earnings

Meeting password: q1numbers

Meeting Number: 484 989 867

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 April 28 at 6:30 p.m. EDT through 11:59 p.m. EDT on May 3. To listen to the replay of the call, dial toll free: 1-800-406-7325 or International: +1-303-590-3030, passcode: 4435586, 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 noncash stock-based compensation charges, and any potential tax effects, for all periods presented. 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. 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

	March 31, 2011		December 31, 2010
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	21,070,321	$	17,842,555
Marketable securities		20,760,818		18,903,635
Accounts receivable, net		15,667,849		23,286,660
Prepaid expenses and other current assets		1,742,433		1,190,531
Income tax receivable		385,682		385,682
Inventory		1,466,825		1,409,659
Total current assets		61,093,928		63,018,722
Property and equipment, net		5,629,473		5,796,013
Long-term marketable securities		582,417		578,643
Deferred tax assets		220,285		235,197
Other assets, net		2,492,785		2,379,225
Goodwill		4,150,339		4,150,339
Other intangible assets, net		282,720		387,222
Total assets	$	74,451,947	$	76,545,361
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	1,686,557	$	1,455,013
Accrued expenses		9,150,238		9,109,424
Deferred revenue, net		17,990,587		16,979,455
Total current liabilities		28,827,382		27,543,892
Other long-term liabilities		2,533,407		2,507,169
Deferred revenue, net		7,486,818		6,555,437
Total liabilities		38,847,607		36,606,498
Commitments and Contingencies
Total stockholders' equity		35,604,340		39,938,863
Total liabilities and stockholders' equity	$	74,451,947	$	76,545,361

FalconStor Software, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
	2011			2010
Revenues:
Product revenues	$	11,259,015		$	9,818,197
Support and services revenues		7,700,247			7,301,459
Total revenues		18,959,262			17,119,656
Cost of revenues:
Product		1,723,006			1,508,685
Support and service		3,367,913			3,612,697
Total cost of revenues		5,090,919			5,121,382
Gross profit	$	13,868,343		$	11,998,274
Operating expenses:
Research and development costs		5,856,294			7,126,835
Selling and marketing		8,474,093			11,014,500
General and administrative		2,601,535			2,359,950
Investigation costs		2,611,120			-
Total operating expenses		19,543,042			20,501,285
Operating loss		(5,674,699	)		(8,503,011	)
Interest and other income (loss), net		300,950			(109,940	)
Loss before income taxes		(5,373,749	)		(8,612,951	)
Provision (benefit) for income taxes		592,516			(3,082,885	)
Net loss	$	(5,966,265	)	$	(5,530,066	)
Basic net loss per share	$	(0.13	)	$	(0.12	)
Diluted net loss per share	$	(0.13	)	$	(0.12	)
Weighted average basic shares outstanding		46,261,472			44,700,033
Weighted average diluted shares outstanding		46,261,472			44,700,033

FalconStor Software, Inc. and Subsidiaries

Reconciliation of GAAP to Non-GAAP Financial Measures

(Unaudited)

	Three Months Ended March 31,
	2011			2010
GAAP loss from operations	$	(5,674,699	)	$	(8,503,011	)
Add: non-cash stock option expense (1)		1,314,947			2,702,325
Non-GAAP  loss from operations		(4,359,752	)		(5,800,686	)
GAAP net loss	$	(5,966,265	)	$	(5,530,066	)
Add: non-cash stock option expense, net of income taxes (2)		1,314,947			1,754,939
Non-GAAP net loss…		(4,651,318	)		(3,775,127	)
GAAP gross margin – Product		85	%		85	%
Add: non-cash stock option expense (1)		0	%		0	%
Non-GAAP gross margin - Product		85	%		85	%
GAAP gross margin – Support and Service		56	%		51	%
Add: non-cash stock option expense (1)		2	%		4	%
Non-GAAP gross margin – Support and Service		58	%		55	%
GAAP operating margin		(30	%)		(50	%)
Add: non-cash stock option expense (1)		7	%		16	%
Non-GAAP operating margin		(23	%)		(34	%)
GAAP Basic EPS	$	(0.13	)	$	(0.12	)
Add: non-cash stock option expense, net of income taxes (2)		0.03			0.04
Non-GAAP Basic EPS		(0.10	)		(0.8	)
GAAP Diluted EPS	$	(0.13	)	$	(0.12	)
Add: non-cash stock option expense, net of income taxes (2)		0.03			0.04
Non-GAAP Diluted EPS		(0.10	)		(0.08	)
Weighted average basic shares Outstanding (GAAP and as adjusted)		46,261,472			44,700,033
Weighted average diluted shares Outstanding (GAAP and as adjusted)		46,261,472			44,700,033

Footnotes:

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

	Three Months Ended March 31,
	2011		2010
Cost of revenues – Product	$	732	$	6,932
Cost of revenues – Support and service		143,487		319,946
Research and development costs		479,042		1,039,972
Selling and marketing		422,724		1,020,769
General and administrative		268,962		314,706
Total non-cash stock-based compensation expense	$	1,314,947	$	2,702,325

(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 months ended March 31, 2010, net of related income tax effects. As of the three months ended March 31, 2011, the full year projected tax expense on both a GAAP and Non-GAAP basis approximate the same amount.