SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31. 2021.
OR
| ☐ | TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number 0-23970
FALCONSTOR SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
| delaware | 77-0216135 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 701 Brazos Street, Suite 400 | 78701 |
| Austin, Texas | (Zip code) |
| (Address of principal executive offices) |
Registrant’s telephone number, including area code: 631-777-5188
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☒ | Smaller Reporting Company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of Common Stock held by non-affiliates of the Registrant as of June 30, 2021 was $12,745,946 which value, solely for the purposes of this calculation, excludes shares held by Registrant's officers and directors. Such exclusion should not be deemed a determination by Registrant that all such individuals are, in fact, affiliates of the Registrant. The number of shares of Common Stock issued and outstanding as of March 31, 2022 was .
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K: None.
EXPLANATORY NOTE
On March 11, 2022, FalconStor Software, Inc., a Delaware corporation, filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “Original Filing”). Certain Part III information was omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K. General Instruction G(3) to Form 10-K provides that a registrant may incorporate by reference certain information from a definitive proxy statement which involves the election of directors, if such definitive proxy statement is filed with the Securities and Exchange Commission (the “Commission”) no later than 120 days after the end of the registrant’s fiscal year. Alternatively, the registrant may provide this information in an amendment to the Form 10-K, if such amendment is filed with the Commission no later than 120 days after the end of the registrant’s fiscal year. Accordingly, this Amendment No. 1 on Form 10-K/A (this “Amendment”) supplements the Original Filing by amending and restating Part III, Items 10 through 14 of the Original Filing.
Except as stated herein, this Amendment does not reflect events occurring after the filing of the Original Filing, and no attempt has been made in this Amendment to modify or update other disclosures as presented in the Original Filing.
Throughout this Amendment, unless indicated otherwise, we refer to FalconStor Software, Inc. and its subsidiaries as “we,” “us,” “our,” “FalconStor,” “FalconStor Software” and the “Company”.
MARCUM LLP
Costa Mesa, CA
688
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PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
Directors of the Company
The Company’s bylaws authorize its Board of Directors (or the “Board”) to fix the number of directors and provide that the directors shall be divided into three classes, with the classes of directors serving for staggered, three-year terms.
Pursuant to the Amended and Restated Certificate of Designations, Preferences and Rights for the Series A Preferred Stock (the “Certificate of Designations”), so long as at least 85% of the Series A Redeemable Convertible Preferred Stock of the Company (the “Series A Preferred Stock”) remains outstanding, the holders of a majority of the then outstanding shares of Series A Preferred Stock (the “Majority Holders”) have the right, voting separately as a class, to elect two directors. The Majority Holders have, as of the date hereof, elected two directors, Martin M. Hale, Jr. and Michael Kelly. Messrs. Rudolph and Miller were elected by the Board to fill vacancies created by the resignation of other directors. Mr. Brooks was appointed to the Board in February 2019. The Company currently has five directors.
The names of the directors are set forth below:
Name | Position | Age | Director Since | |||
| Martin M. Hale, Jr. | Director | 50 | 2013 | |||
| Michael P. Kelly | Director | 74 | 2014 | |||
| William D. Miller | Director | 61 | 2016 | |||
| Barry A. Rudolph | Director | 68 | 2016 | |||
| Todd Brooks | Director | 57 | 2019 |
Martin M. Hale, Jr. has served as the founder and CEO of Hale Capital Partners, LP, an investment firm that applies a private equity skill set and focus to investing in small and micro-cap public companies, since 2007. Mr. Hale has over 25 years of experience in venture capital and private equity as a board member and an investor helping public and private companies grow. Mr. Hale currently serves as a director of Culmen International LLC., Patch Media Corporation, thatDot Inc., QL2 Software and Galois Inc. Mr. Hale has also served as a director of publicly-traded technology companies including Lantronix Corporation, Adept Technology, Inc. (acquired by Omron Global), Analex Corporation (acquired by QinetiQ North America), Paradigm Holdings (acquired by CACI International, Inc.), Telanetix, Inc. (acquired by Intermedia), and Top Image Systems, Ltd. Before joining Hale Capital Partners, Mr. Hale was a Managing Director and member of the founding team of Pequot Ventures, an associate at Geocapital Partners, and an analyst with Broadview International. Mr. Hale received a B.A. from Yale University. Mr. Hale has been a director of the Company since September 2013.
Mr. Hale was elected as a director by the Majority Holders of the outstanding Series A Preferred Stock. Mr. Hale’s Board qualifications include extensive experience helping small public companies grow to become larger and more successful. Such experience is helpful in expanding the Company’s leadership and strategic growth initiatives.
Michael P. Kelly served as a director at Adept Technology, Inc. from April 1997 to October 22, 2015 and also served as Chairman of the Board of Adept from November 2008 to October 22, 2015. Mr. Kelly has also served as Chief Executive Officer of investment bank, Kinsale Associates, Inc., since October 2005. From July 2005 to October 2005, he was the Chief Executive Officer of Cape Semiconductor Inc., a fabless semiconductor company. From 1994 to 2005, Mr. Kelly held the positions of Vice-Chairman and Senior Managing Director of Broadview International, LLC, an international merger and acquisitions advisory firm and a division of Jefferies Group, Inc. Additionally, he has served as a director of Epicor Software Corporation, a provider of enterprise business software solutions, since September 2005. Mr. Kelly received a B.A. in Accounting from Western Illinois University, a M.B.A. from St. Louis University, and is also a Certified Public Accountant. Mr. Kelly has been a director of the Company since October 2014 and our Chairman of the Board since March 2018.
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Mr. Kelly was selected as a director by the Majority Holders of the outstanding Series A Preferred Stock. Mr. Kelly’s qualifications to serve on the Board include his experience as an investment banker specializing in technology industries, which provides the Board and the Company with unique and relevant expertise in areas including capital markets, mergers and acquisitions and financing.
William D. Miller has served as Chairman and Chief Executive Officer of Axellio Inc., an edge computing systems company, since November 2018 and has been General Partner of FirstMile Ventures (previously Miller Investment Management), a venture capital fund manager making investments in early stage companies, since 2010. He previously served as CEO of X-IO Technologies, Inc., an enterprise storage company, from February 2015 to October 2018. Mr. Miller is a director of the following private entities: Axellio Inc., Violin Sytems LLC, Chromatic Technologies, Inc., New Planet Technologies, Inc., Wanamaker Corp., BurstIQ Inc., and Altia Inc. Mr. Miller was a cofounder and Chief Technology Officer of StorageNetworks. Mr. Miller holds a B.S. in Chemistry from the University of Illinois. Mr. Miller has been a director of the Company since December 2016 and is currently serving for a term which will expire at the Company’s 2024 Annual Meeting of Stockholders and until a successor is elected and qualified.
The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Miller should serve as a director: his professional background and experience; his current and previously held senior-executive level positions; his service on other public and private company boards; and his extensive experience in technology, software, storage and related industries.
Barry A. Rudolph has served as Chief Executive Officer of VelociData, Inc., a firm that specializes in high performance data transformation and process offload in large corporations, since July 2014, and as a director since December 2012. Mr. Rudolph has also served as a director of Spectra Logic Corporation, a computer data storage company, since December 2015. Previously, Mr. Rudolph served as a director of Dot Hill Systems Corp., a provider of high performance storage arrays, from February 2012 until its sale to Seagate Technology in October 2015. Mr. Rudolph began his career in January 1978 and held numerous senior level positions with IBM until his retirement in November 2010 in a variety of functional areas, including operations, engineering, product development, test and assurance, program management, field support and direct manufacturing. Most recently he was Vice President, System Networking, for IBM with responsibility for delivering overall networking product strategy, portfolio management and profit and loss management over each of the products in the group. Prior to this position, Mr. Rudolph was Vice President, Storage Strategy, responsible for the development and integration of the storage strategy for IBM including market segmentation and opportunity identification. Prior to that, Mr. Rudolph was Vice President, Stack Integration, responsible for the definition and execution of horizontal solutions and solution selling. Prior positions Mr. Rudolph held at IBM include Vice President and Business Executive, Disk Storage and Software Systems, where he was responsible for all aspects of disk storage and related software business within IBM. He also held an identical role with responsibility for IBM’s tape storage business. Mr. Rudolph holds a B.S. in Engineering and a Master of Science in Electrical Engineering from San Diego State University and an MBA from Santa Clara University. Mr. Rudolph has been a director of the Company since December 2016 and is currently serving for a term which will expire at the Company’s 2024 Annual Meeting of Stockholders and until a successor is elected and qualified.
The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Rudolph should serve as a director: his professional background and experience; his current and previously held senior-executive level positions; his service on other public and private company boards; and his extensive experience in technology, software, storage and related industries.
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Todd Brooks is the Company’s Chief Executive Officer. Prior to joining the Company, Mr. Brooks was the Chief Operating Officer at Aurea Software, and Chief Executive Officer of Update Software, a publicly traded company in Europe. Previously, Mr. Brooks was the Chief Operating Officer at Trilogy where he was responsible for the strategic and operational leadership of the firm’s Automotive, Financial Services and Telecom, and Technology & Media business units. Earlier in his career, Mr. Brooks co-founded and managed two technology consulting firms, including eFuel, an early innovator and leader in logistics optimization software for the automotive industry. In addition, Mr. Brooks held leadership roles at FedEx. Mr. Brooks earned a Bachelor’s of Science degree in Aerospace and Ocean Engineering from Virginia Tech, and currently serves on the Advisory Board at Virginia Tech’s Apex Center for Innovation and Entrepreneurship. Mr. Brooks is currently serving for a term which will expire at the Company’s 2022 Annual Meeting of Stockholders and until a successor is elected and qualified.
The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Brooks should serve as a director: his leadership role at the Company; his performance at the Company; and his past success in the technology field.
Independence
In accordance with the Company’s Corporate Governance Guidelines, and the NASDAQ Stock Market corporate governance listing standards (the “NASDAQ Standards”), a majority of the Company’s directors must be independent as determined by the Board. While the Company’s common stock is currently traded on the OTC markets, in making its independence determinations for directors, the Board looks to the NASDAQ Standards.
Under the NASDAQ Standards, a director is independent if: the director is neither employed, nor a family member of anyone employed, as an executive officer by the Company or any parent or subsidiary; the director is not, and does not have a family member who is, a partner of the Company’s outside auditor or a former partner or employee of the outside auditor who worked on the Company’s audit during the past three years; the director has not, and does not have a family member who has, accepted more than $120,000 during the current or past three fiscal years from the Company or any of its affiliates (other than compensation paid to a family member who is an employee of the Company (other than an executive officer of the Company)); the director is not, nor is any family member of the director, a partner in, or a controlling stockholder or an executive officer of, any organization to which the Company made, or from which the Company received, payments for property or services that exceed five percent of the recipient’s consolidated gross revenues or $200,000, whichever is more; and the director is not, and does not have any family member who is, an executive officer of another company where any of the Company’s executive officers serve on the other company’s compensation committee.
The Board currently consists of five directors, all of whom are independent except for Mr. Brooks.
Family Relationships
There are no family relationships among our executive officers and directors.
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Board Leadership Structure
Our governance documents provide the Board with flexibility to select the appropriate leadership structure for the Company.
The Company’s policy is to have the positions of Chairman of the Board and Chief Executive Officer split. Todd Brooks serves as Chief Executive Officer and Michael Kelly serves as Chairman of the Board.
Several factors ensure that we have a strong and independent Board. The Audit Committee of our Board is composed entirely of independent directors. In addition, the Nominating and Corporate Governance Committee and our Board have assembled a Board comprised of talented and dedicated directors with a wide range of expertise and skills. The Board regularly meets in executive session without management present.
Committees
The Board currently has three standing committees: the Audit Committee; the Compensation Committee; and the Nominating and Corporate Governance Committee. Each of these committees has a charter. These charters are available on the Company’s website at:
www.falconstor.com/page/545/board-committees.
Audit Committee
The Audit Committee consists of Messrs. Kelly (Chair), Rudolph and Miller. The Audit Committee is appointed by the Board to assist the Board in monitoring (i) the integrity of the financial statements of the Company, (ii) the qualifications and independence of the independent registered public accounting firm engaged to audit the Company’s consolidated financial statements, (iii) the performance of the Company’s internal audit function and independent auditors, (iv) the integrity of management and information systems and internal controls, and (v) the compliance by the Company with legal and regulatory requirements.
Each member of the Audit Committee is required to be “independent” as defined in the NASDAQ Standards and in Section 301 of the Sarbanes-Oxley Act of 2002 (the “Act”) and Rule 10A-3 of the Exchange Act. The Board has determined that each member of the Audit Committee is “independent” under these standards. In addition, the Board has determined that, as required by the NASDAQ Standards, each member of the Audit Committee was able to read and to understand financial statements at the time of his appointment to the Audit Committee.
The Board has further determined that Mr. Kelly meets the definition of “audit committee financial expert,” and therefore meets comparable NASDAQ Standard requirements, because he has an understanding of financial statements and GAAP; has the ability to assess GAAP in connection with the accounting for estimates, accruals, and reserves; has experience in analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements; has an understanding of internal controls and procedures for financial reporting; and has an understanding of audit committee functions. Mr. Kelly acquired these attributes through education and experience consistent with the requirements of the Act.
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Compensation Committee
The Compensation Committee currently consists of Messrs. Hale (Chair), Kelly and Rudolph. The Compensation Committee is appointed by the Board (i) to discharge the responsibilities of the Board relating to compensation of the Company’s executives, and (ii) to administer, and to approve awards under, the Company’s equity-based compensation plans for employees.
At the end of each fiscal year, the Compensation Committee meets to review the performance of executive officers and employee Board members under those programs and award bonuses thereunder. At that time, the Compensation Committee may also adjust base salary levels for executive officers and employee Board members. The Compensation Committee also meets when necessary to administer our stock incentive plan.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee consists of Messrs. Hale (Chair), Kelly, Rudolph and Miller. The Nominating and Corporate Governance Committee is appointed by the Board: (i) to identify individuals qualified to become Board members, (ii) to recommend to the Board director candidates for each annual meeting of stockholders or as necessary to fill vacancies and newly created directorships and (iii) to perform a leadership role in shaping the Company’s corporate governance policies, including developing and recommending to the Board a set of corporate governance principles.
MANAGEMENT
Executive Officers of the Company
The following table contains the names, positions and ages of the executive officers of the Company who are not directors.
Name | Position | Age | ||
| Vincent Sita | Chief Financial Officer | 51 |
Vincent Sita is the Company’s Chief Financial Officer. Mr. Sita, brings more than 20 years of finance and business experience. Prior to joining the Company, Mr. Sita served as Vice President Finance & Administration at Ricova from January 2021 to February 2022. Prior to joining Ricova, Mr. Sita served as Chief Financial Officer of Rudsak from October 2018 to September 2020, provided business consulting services as the Principal of Alucria Consulting Inc. from August 2018 to February 2019, and served as Vice President Finance North America at ACN from April 2015 to July 2018. Before that, Mr. Sita served in consulting, office and executive finance roles for ACN Canada, iProsum Management Consulting, Bell Canada, Bell Conferencing Inc. and Bell Canada Enterprises. He holds an MBA degree from Universite du Quebec in Montreal and a Bachelor of Commerce degree from Concordia University.
Code of Ethics
The Company adopted a Code of Ethics that applies to the Company’s principal executive, financial and accounting officers. The Code of Ethics is available at:
http://www.falconstor.com/page/543/Code-of-ethics.
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Delinquent Section 16(a) Reports
Based upon a review of Forms 3, 4, and 5, and amendments thereto furnished to the Company during the fiscal year ended December 31, 2021, the Company is not aware of any director, officer, or beneficial owner of more than 10 percent of any class of Company equities who failed to file on a timely basis any reports required by Section 16(a) of the Exchange Act, during the fiscal year ended December 31, 2021.
| Item 11. | Executive Compensation |
This section discusses the compensation for our Chief Executive Officer and our Chief Financial Officer (each a “Named Executive Officer” or “NEO”). We had no other Named Executive Officers during the fiscal year ended December 31, 2021.
Summary Compensation Table
The following table sets forth certain compensation paid or accrued during the Company’s past two fiscal years for the Company’s (i) President and Chief Executive Officer, and (ii) Executive Vice President, Chief Financial Officer and Treasurer. “All Other Compensation” below consists of certain tax benefits paid by the Company on behalf of the NEOs.
Name | Year | Salary | Bonus | Stock Awards | Option Awards | All Other Compensation | Total | |||||||||||||||||||||
| Todd Brooks | 2021 | $ | 350,000 | $ | 110,900 | $ | — | $ | — | $ | — | $ | 460,900 | |||||||||||||||
| President and Chief Executive Officer (Principal Executive Officer) | 2020 | $ | 312,500 | $ | 85,000 | $ | — | $ | — | $ | — | $ | 397,500 | |||||||||||||||
| Brad Wolfe | 2021 | $ | 240,000 | $ | 50,310 | $ | — | $ | — | $ | — | $ | 290,310 | |||||||||||||||
| Former Executive Vice President, Chief Financial Officer and Treasurer | 2020 | $ | 233,750 | $ | 27,500 | $ | 7,360 | (1) | $ | — | $ | — | $ | 268,610 | ||||||||||||||
| (1) | On September 30, 2020, the Company granted 14,720 shares of restricted stock to Mr. Wolfe. The restricted stock vests as follows: 2.5% of the shares shall vest on the first anniversary of the grant date; 2.5% of the shares shall vest on the second anniversary of the grant date; 2.5% of the shares shall vest on the third anniversary of the grant date; 2.5% of the shares shall vest on the fourth anniversary of the grant date; 45% of the shares shall vest upon preferred investors receiving cash proceeds in return on their invested capital in the Company; and 45% of the shares shall vest upon a change of control of the Company. The dollar amounts in the table represent the total grant date fair value of the 14,720 shares granted in 2020 in accordance with the authoritative guidance issued by the FASB on stock compensation. |
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Narrative Discussion to Summary Compensation Table
Todd Brooks
In connection with Mr. Brooks’ appointment as Chief Executive Officer, the Board approved an offer letter to Mr. Brooks (the “Brooks Offer Letter”), which was executed on August 14, 2017. The Brooks Offer Letter provides that Mr. Brooks is entitled to receive an annualized base salary of $350,000, payable in regular installments in accordance with the Company’s general payroll practices. Mr. Brooks will also be eligible for a cash bonus of $17,500 for any quarter that is free cash flow positive on an operating basis and additional incentive compensation of an annual bonus of up to $200,000, subject to attainment of performance objectives to be mutually agreed upon and established.
Mr. Brooks’ employment can be terminated at will. If Mr. Brooks’ employment is terminated by the Company other than for cause, he is entitled to receive severance equal to twelve months of his base salary if (i) he has been employed by the Company for at least twelve months at the time of termination or (ii) a change of control has occurred within six months of Mr. Brooks’ employment. Except as set forth in the preceding sentence, Mr. Brooks is entitled to receive severance equal to six months of his base salary if he has been employed by the Company for less than six months and his employment was terminated by the Company without cause. Mr. Brooks is also entitled to vacation and other employee benefits in accordance with the Company’s policies as well as reimbursement for an apartment.
Brad Wolfe
In connection with Mr. Wolfe’s appointment as Executive Vice President, Chief Financial Officer and Treasurer, the Board approved an offer letter to Mr. Wolfe (the “Wolfe Offer Letter”), which was executed on April 4, 2018. The Wolfe Offer Letter provided that Mr. Wolfe was entitled to receive an annualized base salary of $240,000, payable in regular installments in accordance with the Company’s general payroll practices. Mr. Wolfe was also eligible for a cash bonus of $10,000 for any quarter for which the Company had net working capital cash in excess of $27,500, and additional incentive compensation of an annual bonus of up to $70,000, subject to attainment of performance objectives to be mutually agreed upon and established.
Mr. Wolfe’s employment could be terminated at will. If Mr. Wolfe’s employment was terminated by the Company other than for cause, he was entitled to receive severance equal to (i) six months of his base salary if he had been employed by the Company for at least twelve months at the time of termination or (ii) three months of his base salary if he had been employed by the Company for less than twelve months at the time of termination. Mr. Wolfe was also entitled to vacation and other employee benefits in accordance with the Company’s policies. Mr. Wolfe resigned from his position with the Company effective February 11, 2022.
Outstanding Equity Awards at Fiscal Year End 2021
The following table sets forth equity awards for each NEO outstanding as of December 31, 2021:
Name | Equity | Market value of shares or units of stock that have not vested | ||
| Todd Brooks | 680,775 (1) | $953,085 | ||
| President and Chief Executive Officer (Principal Executive Officer) | ||||
| Brad Wolfe | 14,352 (2)
| $20,093
| ||
| Executive Vice President, Chief Financial Officer and Treasurer | 68,077 (3) | $95,308 |
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| (1) | Mr. Brooks was awarded 735,973 shares of restricted stock units on May 31, 2019. The restricted stock vests as follows: 2.5% of the shares vested immediately upon grant on May 31, 2019, the grant date; 2.5% of the shares vested on the first anniversary of the grant date; 2.5% of the shares vested on the second anniversary of the grant date; 2.5% of the shares shall vest on the third anniversary of the grant date; 45% of the shares shall vest upon preferred investors receiving cash proceeds in return on their invested capital in the Company; and 45% of the shares shall vest upon a change of control of the Company. |
| (2) | Mr. Wolfe was awarded 14,720 shares of restricted stock units on September 30, 2020. 2.5% of the shares vested on the first anniversary of the grant date. |
| (3) | Mr. Wolfe was awarded 73,597 shares of restricted stock units on May 31, 2019. 2.5% of the shares vested immediately upon grant on May 31, 2019, the grant date; 2.5% of the shares vested on the first anniversary of the grant date; and 2.5% of the shares vested on the second anniversary of the grant date. |
Payments Upon Severance or Change in Control
Report on Repricing of Options.
None of the stock options granted under any of the Company’s plans were repriced in the fiscal year ended December 31, 2021.
Equity Compensation Plan Information
The Company currently does not have any equity compensation plans not approved by security holders.
| Plan Category | Number of securities to be issued upon exercise of outstanding options and restricted stock (1)(a) | Weighted-average exercise price of outstanding options and restricted stock (1)(b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (1)(c) | |||||||||
| Equity compensation plans approved by security holders – restricted stock | 1,513,380 | $ | 0 | 82,817 | ||||||||
| Equity compensation plans approved by security holders – stock options | 5,690 | $ | 110.10 | — | ||||||||
| Total | 1,519,070 | 82,817 | ||||||||||
(1) As of December 31, 2021 we had 82,817 shares of our common stock reserved for issuance under our stock plans with respect to options and warrants (or restricted stock or restricted stock units) that have not been granted. See Note (10) Share-Based Payment Arrangements to our consolidated financial statements for further information.
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Director Compensation
Directors who are also employees receive no compensation for serving on the Company’s Board. Non-employee directors are reimbursed for all travel and other expenses incurred in connection with attending Board and Committee meetings.
Messrs. Hale, Kelly, Miller and Rudolph received $48,500, $69,900, $43,775, and $48,400 in directors’ fees, respectively, in connection with their service as a director in 2021. The cash compensation includes a retainer for all directors plus additional amounts based on service on Board committees, and additional amounts payable to Mr. Kelly for serving as Chairman of the Board and Chairman of the Audit Committee. Based on this compensation plan and assuming continued service as a director in 2022 (including the fees from serving on a committee), Messrs. Hale, Kelly, Miller and Rudolph are entitled to quarterly fees of $12,125 (or $48,500 annually), $17,475 (or $69,900 annually), $10,975 (or $43,900 annually) and $12,100 (or $48,400 annually), respectively. Messrs. Miller and Rudolph received grants of 73,600 shares of restricted stock each on September 30, 2020 and Mr. Kelly received a grant of 44,158 shares of restricted stock on January 16, 2020 and 73,600 shares of restricted stock on September 30, 2020. The restricted shares that were granted on September 30, 2020 vest as follows: 2.5% of the shares vested on September 30, 2021; 2.5% of the shares shall vest on September 30, 2022; 2.5% of the shares shall vest on September 30, 2023; 2.5% of the shares shall vest on September 30, 2024; 45% of the shares shall vest upon preferred investors receiving cash proceeds in return on their invested capital in the Company; and 45% of the shares shall vest upon a change of control of the Company. The restricted shares that were granted on January 16, 2020 vest as follows: 2.5% of the shares vested immediately upon grant; 2.5% of the shares vested on May 31, 2020; 2.5% of the shares vested on May 31, 2021; 2.5% of the shares shall vest on May 31, 2022; 45% of the shares shall vest upon preferred investors receiving cash proceeds in return on their invested capital in the Company; and 45% of the shares shall vest upon a change of control of the Company.
2021 Management Incentive Plan
For 2021, management is eligible to earn quarterly bonuses based on achieving targeted cash flow, billings, and retention results which exceed defined minimums.
For 2021, Mr. Brooks and Mr. Wolfe did not receive bonuses in connection with the 2021 Management Incentive Plan.
2022 Management Incentive Plan
For 2022, management is eligible to earn quarterly bonuses based on achieving targeted net working capital cash balance, renewal rate, billings, and other specified criteria which are achieved or exceed defined minimums.
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The following table sets forth information concerning ownership of the Company’s common stock outstanding at March 31, 2022, by (i) each person known by the Company to be the beneficial owner of more than five percent of its common stock, (ii) each director and nominee for director, (iii) each of the Named Executive Officers identified in the summary compensation table, and (iv) all directors, nominees for director and executive officers of the Company as a group.
| Name and Address of Beneficial Owner (1) | Shares Beneficially Owned | Percentage of Class (2) | ||||||
| Martin Hale, Hale Fund Management, LLC Hale Capital Management, LP, Hale Capital Partners, LP, HCP-FVA, LLC (3) | 3,653,377 | 51.2 | % | |||||
| Nantahala Capital Management, LLC (4) | 651,553 | 9.2 | % | |||||
| ESW Capital, LLC (5) | 1,308,068 | 18.4 | % | |||||
| Bard Associates, Inc.(6) | 517,950 | 7.3 | % | |||||
| Michael P. Kelly (7) | 15,171 | * | ||||||
| Barry Rudolph (8) | 6,616 | * | ||||||
| William Miller (9) | 6,609 | * | ||||||
| Todd Brooks (10) | 75,446 | 1.1 | % | |||||
| Vincent Sita (11) | 1,415 | * | ||||||
| All Directors, Nominees for Director and Executive Officers as a Group (12) (6 persons) | 3,758,635 | 52.5 | % | |||||
*Less than one percent
| (1) | A person is deemed to be the beneficial owner of voting securities over which the person has voting power or that can be acquired by such person within 60 days after March 31, 2022 upon the exercise of options or convertible securities, or upon the lapse or the removal of all restrictions on shares of restricted stock. Each beneficial owner’s percentage ownership is determined by assuming that options or convertible securities that are held by such person (but not those held by any other person) and that are currently exercisable (i.e., that are exercisable within 60 days from March 31, 2022) have been exercised. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them. |
| (2) | Based upon 7,082,276 shares of common stock outstanding as of March 31, 2022. |
| (3) | Based on information contained in Forms 4, a report on Schedule 13D/A filed by Mr. Hale, Hale Fund Management, LLC (“Fund Management”), Hale Capital Management, LP (“Capital Management”), Hale Capital Partners, LP (“Hale Capital”), and HCP-FVA on May 22, 2019 and December 31, 2018. Consists of (i) 3,598,932 shares of common stock held by Hale Capital and HCP-FVA, (ii) 708 shares held by Mr. Hale for the benefit of Hale Capital, and (iii) 558,000 shares of Series A Preferred Stock held by HCP-FVA, which equates to 54,445 shares of common stock on an as-converted basis (without giving effect to the 9.99% blocker contained in the Certificate of Designations), held by HCP-FVA. Each of Mr. Hale, Fund Management, Capital Management and Hale Capital disclaims beneficial ownership of such shares of common stock except to the extent of his or its pecuniary interest. The address of Mr. Hale, Fund Management, Capital Management, Hale Capital and HCP-FVA is 17 State Street, Suite 3230, New York, NY 10004. |
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| (4) | Based on information contained in a report on Schedule 13G/A filed by Nantahala Capital Management, LLC (“Nantahala”), Wilmot B. Harkey and Daniel Mack on February 14, 2022. Consists of (i) 641,817 shares of common stock and (ii) 99,807 shares of Series A Preferred Stock that may be converted for 9,736 shares of common stock within 60 days of March 31, 2022. Messrs. Harkey and Mack are the managing members of Nantahala and disclaim beneficial ownership of such shares of common stock except to the extent of their pecuniary interest. The address of Messrs. Harkey and Mack and Nantahala is 19 Old Kings Highway S, Suite 200, Darien, CT 06820. |
| (5) | Based on information contained in a report on Schedule 13D/A filed by ESW Capital, LLC and Joseph A. Liemandt on December 31, 2018. Consists of (i) 1,286,135 shares of common stock and (ii) 224,786 shares of Series A Preferred Stock that may be converted for 21,933 shares of common stock within 60 days of March 31, 2022. ESW Capital, LLC and Mr. Liemandt disclaim Section 13(d) beneficial ownership with respect to 21,933 shares of common stock issuable upon conversion of Series A Preferred Stock as a result of the application of the 9.99% blocker contained in the Certificate of Designations. Mr. Liemandt is the sole voting member of ESW Capital, LLC and disclaims beneficial ownership of such shares of common stock except to the extent of his pecuniary interest. The address of Mr. Liemandt and ESW Capital, LLC is 401 Congress Ave., Suite 2650, Austin, TX 78701. |
| (6) | Based on information contained in a report on Schedule 13G filed by Bard Associates, Inc. on February 14, 2022. Consists of 517,950 shares of common stock. The address of Bard Associates, Inc. is 135 South LaSalle Street, Suite 3700, Chicago, IL 60603. |
| (7) | Based on information contained in Forms 3 and 4 filed by Mr. Kelly and certain other information. Consists of (i) 13,930 shares of common stock, and (ii) 1,104 shares of restricted stock units expected to vest within 60 days of March 31, 2022 (does not include 111,502 shares of restricted stock units that are not expected to vest within 60 days of March 31, 2022) and (iii) 1,405 shares of Series A Preferred Stock held by Mr. Kelly, which equates to 137 shares of common stock on an as-converted basis (without giving effect to the 9.99% blocker contained in the Certificate of Designations), held by Mr. Kelly. |
| (8) | Based on information contained in Forms 3, 4 and 5 filed by Mr. Rudolph and certain other information. Consists of 5,512 shares of common stock and 1,104 shares of restricted stock units that are expected to vest within 60 days of March 31, 2022 held by Mr. Rudolph (does not include 111,503 shares of restricted stock units that are not expected to vest within 60 days of March 31, 2022). |
| (9) | Based on information contained in Forms 3, 4 and 5 filed by Mr. Miller and certain other information. Consists of (i) 5,505 shares of common stock held by Mr. Miller, (ii) 1,104 shares of restricted stock units expected to vest within 60 days of March 31, 2022 (does not include 111,503 shares of restricted stock units that are not expected to vest within 60 days of March 31, 2022), and (iii) 26 shares of common stock held by PV Strategies LLC, a hedge fund managed by Miller Investment Management LLC, a registered investment adviser of which Mr. Miller is a principal. Mr. Miller, as a principal of Miller Investment Management LLC, may be deemed the beneficial owner of shares owned by PV Strategies LLC. Mr. Miller disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. |
| (10) | Based on information contained in Forms 3, 4 and 5 filed by Mr. Brooks and certain other information. Consists of 57,047 shares of common stock and 18,399 shares of restricted stock units expected to vest within 60 days of March 31, 2022 held by Brooks (does not include 662,376 shares of restricted stock units that are not expected to vest within 60 days of March 31, 2022). |
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| (11) | Based on information contained in Forms 3 and 4 filed by Mr. Sita and certain other information. Consists of 1,415 shares of restricted stock units expected to vest within 60 days of March 31, 2022 held by Sita (does not include 55,200 shares of restricted stock units that are not expected to vest within 60 days of March 31, 2022). |
| (12) | Consists of shares of common stock held by all directors and executive officers as a group and 3,598,932 shares held by HCP-FVA. |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The Company’s Board has recognized that related party transactions present a heightened risk of conflicts of interest and/or improper valuation (or the perception thereof). The Board therefore adopted a policy to be followed in connection with all related party transactions involving the Company.
A. Identification of Related Transactions
Under the policy, any “Related Party Transaction” shall be consummated or shall continue only if:
| 1. | the Audit Committee approves or ratifies such transaction in accordance with the guidelines set forth in the policy and if the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party; or |
| 2. | the transaction is approved by the disinterested members of the Board; or |
| 3. | the transaction involves compensation approved by the Company’s Compensation Committee. |
For purposes of the policy, a “Related Party” is:
| 1. | a senior officer (which includes at a minimum each executive officer) or director of the Company; or |
| 2. | a shareholder owning in excess of five percent of the Company (or its controlled affiliates); or |
| 3. | a person who is an immediate family member of a senior officer or director; or |
| 4. | an entity which is owned or controlled by someone listed in 1, 2 or 3 above, or an entity in which someone listed in 1, 2 or 3 above has a substantial ownership interest or control of such entity. |
For purposes of the policy, a “Related Party Transaction” is a transaction between the Company and any Related Party (including any transactions requiring disclosure under Item 404 of Regulation S-K under the Exchange Act), other than:
| 1. | transactions available to all employees generally; and |
| 2. | transactions involving less than $5,000 when aggregated with all similar transactions. |
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B. Audit Committee Approval
The Board determined that the Audit Committee of the Board is best suited to review and approve Related Party Transactions. Accordingly, at each calendar year’s first regularly scheduled Audit Committee meeting, management recommends Related Party Transactions to be entered into by the Company for that calendar year, including the proposed aggregate value of such transactions if applicable. After review, the Audit Committee approves or disapproves such transactions and at each subsequently scheduled meeting, management updates the Audit Committee as to any material change to those proposed transactions.
In the event management recommends any further Related Party Transactions subsequent to the first calendar year meeting, such transactions may be presented to the Audit Committee for approval or preliminarily entered into by management subject to ratification by the Audit Committee; provided that if ratification is not forthcoming, management shall make all reasonable efforts to cancel or annul such transaction.
C. Corporate Opportunity
The Board recognizes that situations may exist where a significant opportunity may be presented to management or a member of the Board that may equally be available to the Company, either directly or via referral. Before such opportunity may be consummated by a Related Party (other than an otherwise unaffiliated 5% stockholder), such opportunity shall be presented to the Board of the Company for consideration.
D. Disclosure
All Related Party Transactions are to be disclosed in the Company’s applicable filings as required by the Securities Act of 1933 and the Exchange Act and related rules. Furthermore, all Related Party Transactions shall be disclosed to the Audit Committee of the Board and any material Related Party Transaction shall be disclosed to the full Board.
E. Other Agreements
Management assures that all Related Party Transactions are approved in accordance with any requirements of the Company’s financing agreements. Please see “Item 10. – Directors, Executive Officers and Corporate Governance” for a discussion of Director independence.
Related Party Transactions Reviewed During 2020 and 2021
Martin M. Hale, Jr., a member of the Company's Board, is a general partner of HCP-FVA, the holder in excess of 50% of the Company’s Series A Preferred Stock. The Series A Preferred Stock was purchased by Hale Capital Partners, LP, of which Mr. Hale is a general partner, pursuant to a September 16, 2013 stock purchase agreement with the Company at a time when Mr. Hale was not a director of the Company. Hale Capital Partners, LP subsequently assigned all of its rights in the Series A Preferred Stock to HCP-FVA. Under the terms of the Certificate of Designations, the holders of the Series A Preferred Stock are entitled, as a group, to nominate and to elect up to two directors so long as at least 85% of the Company's Series A Preferred Stock is outstanding. HCP-FVA, the sole holder of the Series A Preferred Stock at the time, nominated and elected Mr. Hale in September 2013 and Michael P. Kelly on October 29, 2014, to the Company’s Board of Directors.
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As described further in Note (7) Notes Payable, on December 27, 2019, the Company entered into the Amended and Restated Loan Agreement to provide for, among other things, a new $2,500,000 term loan facility to the Company. In connection with the June Offering, we entered into the Loan Extension Letter Agreement on June 2, 2021 which provided for an extension of the maturity date on Hale Capital’s portion of the outstanding indebtedness owed under the Amended and Restated Loan Agreement to June 30, 2023. The amount extended constituted approximately $2,176,621 of the $3,510,679 principal amount outstanding as of June 2, 2021. The remaining $1,334,058 of the outstanding principal, which was owed to other lenders, was repaid in full on June 30, 2021.
| Item 14. | Principal Accounting Fees and Services |
Principal Accountant Fees and Services
Fees for services rendered by Marcum LLP (“Marcum”) for the years 2021 and 2020 are as follows:
Audit Fees: Fees billed for professional services rendered by Marcum for the audit of the Company’s consolidated financial statements as of and for the fiscal years ended December 31, 2021 and 2020 and the reviews of the interim condensed consolidated financial statements included in the Company’s Form 10-Qs during such fiscal year. These fees also include (i) statutory audits of certain Company subsidiaries, (ii) audit of internal control over financial reporting, required under Section 404 of the Act, and (iii) consent fees.
Audit Related Fees: None.
Tax Fees: Fees billed for tax-related services for certain Company subsidiaries rendered by (i) Marcum in 2021 and 2020 to the Company.
All Other Fees: Fees billed for professional services rendered by Marcum related to comfort reviews for two equity raises in 2021.
The approximate fees for each category were as follows:
Years Ended December 31, | ||||||||
Description | 2021 | 2020 | ||||||
| Audit Fees | $ | 180,030 | $ | 138,020 | ||||
| Audit Related Fees | $ | — | $ | — | ||||
| Tax Fees | $ | — | $ | — | ||||
| All Other Fees | $ | 59,740 | $ | — | ||||
The Audit Committee has considered whether the provision by Marcum of the services covered by the fees other than the audit fees was compatible with maintaining Marcum’s independence and believes that it was compatible.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
See accompanying Index to Exhibits.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FalconStor Software, Inc. | ||
| By | /s/ Todd Brooks | |
Todd Brooks President and Chief Executive Officer (principal executive officer) | ||
Date: May 2, 2022
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INDEX TO EXHIBITS
The Index to Exhibits previously filed in the Original Filing remains in effect with the exception of the addition of the following exhibits, filed herewith:
Exhibit No. | Exhibit | |
| 31.3* | Certification of the Chief Executive Officer | |
| 31.4* | Certification of the Chief Financial Officer |
| * | Filed herewith. |