UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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FALCONSTOR SOFTWARE, INC.
May 24, 202230, 2023
To Our Stockholders:
We invite you to attend our annual stockholders’ meeting on Thursday, June 23, 202229, 2023 at the offices of Olshan Frome Wolosky LLP, located at 1325 Avenue of the Americas, 15th Floor, New York, NY 10019, at 9:00 a.m. (EST).
This booklet includes a formal notice of the meeting and the proxy statement. The proxy statement tells you more about the agenda and procedures for the meeting. It also describes how our Board of Directors operates and gives personal information about our director nominees.
Only stockholders of record at the close of business on May 23, 202226, 2023 will be entitled to vote at the annual meeting. Even if you only own a few shares, we want your shares to be represented at the annual meeting. We urge you to complete, sign, date, and return your proxy card promptly in the enclosed envelope.
Sincerely yours, | |
/s/ Todd Brooks | |
Todd Brooks | |
President & Chief Executive Officer |
FALCONSTOR SOFTWARE, INC.701 Brazos Street,
501 Congress Avenue, Suite 400
150
Austin, Texas 78701_________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held June 23, 2022________________29, 2023
To Our Stockholders:
The 20222023 Annual Meeting of Stockholders (the “Annual Meeting”) of FalconStor Software, Inc. (the “Company”), a Delaware corporation, will be held at the offices of Olshan Frome Wolosky LLP, located at 1325 Avenue of the Americas, 15th Floor, New York, NY 10019, at 9:00 a.m. (EST) on Thursday, June 23, 2022,29, 2023, to consider and to vote on the following matters described in this notice and the accompanying proxy statement:
At the Annual Meeting, the Company intends to nominate Todd BrooksBarry A. Rudolph for election to the Board. Mr. BrooksRudolph is the Company’s Chief Executive Officer and currently a member of the Board. For more information concerning the nominees, please see the proxy statement.
The Board has fixed the close of business on May 23, 202226, 2023 as the record date for determination of stockholders entitled to vote at the Annual Meeting or any adjournment thereof, and only record holders of Common Stock at the close of business on that day, and holders of our Series A convertible preferred stock (the “Series A Preferred Stock”), will be entitled to vote. At the record date, 7,083,6927,122,199 shares of Common Stock were outstanding and the Series A Preferred Stock could vote an additional 87,815 shares. Each share of the Series A Preferred Stock is entitled to a number of votes per share equal to the number of shares of Common Stock issuable upon conversion of a share of Series A Preferred Stock, based on an assumed conversion price of $123.00 per share.
To assure representation at the Annual Meeting, stockholders are urged to return a proxy as promptly as possible. You may return the proxy by signing, dating and returning the enclosed proxy card in the enclosed postage-prepaid envelope, or online at www.proxyvote.com,, or by telephone. If returning your proxy by online vote or telephone, please follow the instructions on the Voting Information Form. Any stockholder attending the Annual Meeting may vote in person even if he or she previously returned a proxy.
If you plan to attend the Annual Meeting in person, we would appreciate your response by indicating so when returning the proxy.
By Order of the Board of Directors,
FALCONSTOR SOFTWARE, INC. 501 Congress Avenue, Suite Austin, Texas 78701 2023 PROXY STATEMENT This proxy statement contains information related to the ABOUT THE MEETING What is the Purpose of the Annual Meeting At the Company’s Annual Meeting, stockholders will hear an update on the Company’s operations, have a chance to meet some of its directors and executives and will act on the following matters: 1) To elect Barry A. Rudolph to the Board for a three-year term and until his successor is elected and qualified; 2) To approve a non-binding advisory resolution regarding the compensation of the Company’s named executive officers (the “Say on Pay Proposal”); 3) To consider a non-binding advisory vote on the frequency of the advisory vote on the compensation of our named executive officers; 4) To ratify the appointment of Marcum LLP as our independent registered public accounting firm for fiscal year 2023; and 5) Any other matters that properly come before the Annual Meeting. Who May Vote; Provision of Materials Stockholders of the Company as recorded in our stock register on May How to Vote You may vote in person at the Annual Meeting or by proxy. We recommend that you vote by proxy even if you plan to attend the Annual Meeting. You can always change your vote at the Annual Meeting. To vote by proxy, you can mail the enclosed card, you can call the phone number on the Voting Instruction Form you received, or you can vote at How Proxies Work Our Board is asking for your proxy. Giving us your proxy means you authorize us to vote your shares at the Annual Meeting in the manner you direct. You may vote for or against the proposals or abstain from voting. Proxies submitted will be voted by the individuals named on the proxy card in the manner you indicate. If you give us your proxy but do not specify how you want your shares voted, they will be voted in accordance with the Board recommendations, i.e., (i) in favor of our director nominee, (ii) in favor of the Say on Pay Proposal, (iii) non-binding advisory vote on the frequency of the advisory vote on the compensation of the Company's Named Executive Officers, and You may receive more than one proxy or voting card depending on how you hold your shares. If you hold shares through someone else, such as a stockbroker, you may get materials from them asking how you want to vote. The latest proxy card we receive from you will determine how we will vote your shares. Revoking a Proxy There are three ways to revoke your proxy. First, you may submit a new proxy with a later date up until the existing proxy is voted. Second, you may vote in person at the Annual Meeting. Last, you may notify our Chief Financial Officer in writing at Quorum In order to carry on the business of the Annual Meeting, we must have a quorum. This means at least a majority of the outstanding shares eligible to vote must be represented at the Annual Meeting, either by proxy or in person. Shares that we own are not voted and do not count for this purpose. Votes Needed Our director nominee will be elected to our Board upon receiving a plurality of the votes cast during the Annual Meeting. For the other proposals to be approved (other than the proposal relating to the frequency of the vote on the compensation of the Company's named executive officers), we require the favorable vote of a majority of the votes cast and only votes for or against a proposal count. With respect to the proposal relating to the frequency of the vote on the compensation of the Company's named executive officers, the option receiving the most votes among the choices will be deemed to have received the non-binding approval of the stockholders. Votes that are withheld from voting on a proposal will be excluded entirely and will have no effect in determining the quorum or the plurality or the majority of votes cast. Abstentions count for quorum purposes only and not for voting purposes. Broker non-votes occur when a broker returns a proxy but does not have the authority to vote on a particular proposal. Brokers that do not receive instructions are not entitled to vote on the election of the director or Appraisal Rights The Company’s stockholders do not have appraisal rights under Delaware law or under the governing documents of the Company with respect to the matters to be voted upon at the Annual Meeting. Attending in Person Only stockholders, their proxy holders, and our invited guests may attend the Annual Meeting. For security purposes, all persons attending the Annual Meeting must bring identification with photo. If you wish to attend the Annual Meeting in person but you hold your shares through someone else, such as a stockbroker, you must bring proof of your ownership to the Annual Meeting. For example, you could bring an account statement showing that you owned shares of the Company’s Common Stock as of the Record Date as acceptable proof of ownership. SECURITY OWNERSHIP OF CERTAIN The following table sets forth information concerning ownership of the Company’s Common Stock outstanding at May
*Less than one percent 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 the Record Date 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 the Record Date) 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 7,122,199 shares of common stock outstanding as of the Record Date. (3) Based on information contained in Forms 4 and 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, LLC (“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. (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, 2023. Consists of (i) 628,415 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 the Record Date. 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 the Record Date. 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 6, 2023. Consists of 531,190 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) 16,874 shares of common stock and (ii) 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 16,956 shares of common stock. (9) Based on information contained in Forms 3, 4 and 5 filed by Mr. Miller and certain other information. Consists of (i) 8,449 shares of common stock held by Mr. Miller and (ii) 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 87,146 shares of common stock. (11) Based on information contained in Forms 3 and 4 filed by Mr. Sita and certain other information. Consists of 2,830 shares of common stock. (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. 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, BOARD OF DIRECTORS 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 Under the NASDAQ Standards, a director is considered independent In determining whether a director or nominee for director is independent, the Board considers all relevant facts and circumstances and may consider a director or nominee not to be independent even if none of the disqualifying factors listed above applies. However, if any of the above disqualifying factors apply, a director or nominee will not be considered independent. 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. 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. Attendance at Annual Meetings The Company’s policy is that, except for unusual circumstances, all Board members should attend the Company’s annual meetings of stockholders. All Board members serving on the Board at the time of the Diversity The Nominating and Corporate Governance Committee’s evaluation of director nominees takes into account their ability to contribute to the diversity of, background, experience and point of views represented on the Board, and the committee will review its effectiveness in balancing these considerations when assessing the composition of the Board. Role in Risk Management The Board oversees that the assets of the Company are properly safeguarded, that the appropriate financial and other controls are maintained, and that the Company’s business is conducted wisely and in compliance with applicable laws and regulations and proper governance. Included in these responsibilities is the Board’s oversight of the various risks facing the Company. In this regard, the Board seeks to understand and oversee critical business risks. The Board does not view risk in isolation. Risks are considered in virtually every business decision and as part of the Company’s business strategy. The Board recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful and appropriate risk-taking is essential for the Company to be competitive on a global basis. The Board has implemented a risk governance framework to:
1. understand critical risks in the Company’s business and strategy; 2. allocate responsibilities for risk oversight among the full Board and its committees; 3. evaluate the Company’s risk management processes and see they are functioning adequately; 4. facilitate open communication between management and directors; and 5. foster an appropriate culture of integrity and risk awareness. While the Board oversees risk management, Company management is charged with managing risk. The Company has robust internal processes and a strong internal control environment to identify and manage risks and to communicate with the Board. These include a Code of Business Conduct, regular training of salespeople on risks and appropriate conduct, and a comprehensive internal and external audit process. The Board and the Audit Committee monitor and evaluate the effectiveness of the internal controls and the risk management program at least annually. Management communicates routinely with the Board, Board committees and individual directors on the significant risks identified and how they are being managed. Directors are free to, and indeed often do, communicate directly with senior management. The Board implements its risk oversight function both as a whole and through committees. Much of the work is delegated to various committees, which meet regularly and report back to the full Board. All committees play significant roles in carrying out the risk oversight function. In particular: The Audit Committee oversees risks related to the Company’s financial statements, the financial reporting process, accounting and legal matters, currency fluctuation and hedging, and investments. The Audit Committee oversees the internal audit function and the Company’s ethics programs, including the Code of Business Conduct. The Audit Committee members meet separately with the independent auditing firm. The Compensation Committee evaluates the risks and rewards associated with the Company’s compensation philosophy and programs. Management discusses with the Compensation Committee the procedures that have been put in place to identify and mitigate potential risks in compensation. Meetings The Board met on Hedging and Pledging Policies We do not maintain a policy on insider trading that prohibits the Company’s directors, officers and employees from engaging in any hedging or monetization transactions. 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/ 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. The Audit Committee met 4 times during the fiscal year ended December 31, The Board has adopted, and annually reviews, an Audit Committee Charter and Guidelines for Pre-Approval of Independent Auditor Services. As indicated above, a copy of the Company’s Audit Committee Charter is available on the Company’s website at: www.falconstor.com/page/545/ 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. The Compensation Committee has determined and reviewed the value and forms of compensation for our Named Executive Officers and other officers based on the committee members’ knowledge and experience, competitive proxy and market compensation information and management recommendations. The Compensation Committee does not delegate its authority to review, determine and recommend, as applicable, the forms and values of the various elements of compensation for executive officers and directors. The Compensation Committee does delegate to Company management the implementation and record-keeping functions related to the various elements of compensation it has approved. The Compensation Committee met 4 times during the fiscal year ended December 31, 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. The Nominating and Corporate Governance Committee did not meet during the fiscal year ended December 31, Nominating Procedures and Director Qualifications The Nominating and Corporate Governance Committee has adopted the following policies regarding nominations and director qualifications: I. Consideration of Nominees Recommended by Stockholders The committee recognizes that qualified candidates for nomination for director can come from many different sources, including from the Company’s stockholders. The committee will therefore consider any nominee who meets the minimum qualifications set forth below. To propose a nominee, a stockholder must provide the following information: 1. The stockholder’s name and, if different, the name of the holder of record of the shares. 2. The stockholder’s address and telephone number. 3. The name of the proposed nominee. 4. The address and phone number of the proposed nominee. 5. A listing of the proposed nominee’s qualifications. 6. A statement by the stockholder revealing whether the proposed nominee has assented to the submission of her/his name by the stockholder. 7. A statement from the stockholder describing any business or other relationship with the nominee. 8. A statement from the stockholder stating why the stockholder believes the nominee would be a valuable addition to the Company’s Board. The stockholder should submit the required information to: Nominating and Corporate Governance Committee FalconStor Software, Inc. 501 Congress Avenue, Suite Austin, TX 78701 With a copy to: Director Human Resources Austin, TX 78701 If any information is missing, the proposed nominee will not be considered. II. Qualifications for Candidates The committee believes that the Company and its stockholders are best served by having directors from diverse backgrounds who can bring different skills to the Company. It is therefore not possible to create a rigid list of qualifications for director candidates. However, absent unique circumstances, the committee expects that each candidate should have the following minimum qualifications: Substantial experience with technology companies. This experience may be the result of employment with a technology company or may be gained through other means, such as financial analysis of technology companies; The highest level of personal and professional ethics, integrity and values; An inquiring and independent mind; Practical wisdom and mature judgment; Expertise that is useful to the Company and complementary to the background and experience of other Board members, so that an optimal balance of Board members can be achieved and maintained; Willingness to devote the required time to carrying out the duties and responsibilities of Board membership; Commitment to serve on the Board for several years to develop knowledge about the Company’s business; Willingness to represent the best interests of all stockholders and to objectively appraise management performance; and Involvement only in activities or interests that do not conflict with the director’s responsibilities to the Company and its stockholders. At any time, the committee may be looking for director candidates with certain qualifications or skills to replace departing directors or to complement the skills of existing directors and to add to the value of the Board. III. Identification and Evaluation of Candidates Candidates for director may come from many different sources including, among others, recommendations from current directors, recommendations from management, third-party search organizations, and stockholders. In each instance, the committee will perform a thorough examination of the candidate. An initial screening will be performed to ensure that the candidate meets the minimum qualifications set forth above and has skills that would enhance the Board. Following the initial screening, if the candidate is still viewed as a potential nominee, the committee will perform additional evaluations including, among other things, some or all of the following: detailed resume review; personal interviews; interviews with employer(s); and interviews with peer(s). All candidates will be reviewed to determine whether they meet the independence standards of the NASDAQ Standards. Failure to meet the independence standards may be a disqualifying factor based on the Board’s composition at the time. Even if failure to meet the independence standards is not by itself disqualifying, it will be taken into account by the committee in determining whether the candidate would make a valuable contribution to the Board. Contacting the Board of Directors Stockholders and others may contact the Company’s Board by sending a letter to: Board of Directors FalconStor Software, Inc. 501 Congress Avenue, Suite Austin, TX 78701 or by clicking on the “Contact Us” link on the Company’s Corporate Governance home page at: www.falconstor.com/page/540/ Communications directed to the Board are screened by the Company’s Finance and/or Investor Relations departments. Routine requests for Company information are handled by the appropriate Company department. Other communications are reviewed to determine if forwarding to the Board is necessary or appropriate. The Board receives a quarterly summary of all communications that are not forwarded to the Board’s attention. All communications are kept on file for one year for any director who wishes to view them. PROPOSAL NO. 1 The Company’s bylaws authorize 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 Certificate of Designations so long as at least 85% of the originally issued 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 of this proxy statement, 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. Nominees
Unless authority is specifically withheld, proxies will be voted for the election of Mr.
products in the Company since December 2016. The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. Continuing Directors The
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 Michael P. Kellyserved as a director at Adept Technology, Inc. (“Adept”) 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. Mr. Kelly was selected as a director by the Majority
The following experience, qualifications, attributes and/or skills led the Board to conclude that Mr. 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 2025 Annual Meeting of Stockholders and until a successor is elected and qualified. Mr. Brooks has been a director of the Company since February 2019. 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. Recommendation of the Board of Directors THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES. 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 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.
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. The information on the Company’s website or linked to or from the Company’s website is not incorporated by reference into, and does not constitute a part of, this report or any other documents the Company files with, or furnishes to, the SEC. 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, 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)
(1) On February 11, 2022, the Company granted 56,615 shares of restricted stock to Mr. Sita. The restricted stock vests as follows: 2.5% of the shares vested immediately upon grant on February 11, 2022, the grant date; 2.5% of the shares vested 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; 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 56,615 shares granted in 2022 in accordance with the authoritative guidance issued by the FASB on stock compensation. 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.
In connection with Mr.
Outstanding Equity Awards at Fiscal Year End The following table sets forth equity awards for each NEO outstanding as of December 31,
(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 vested 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. Sita was awarded 56,615 shares of restricted stock units on February 11, 2022. The restricted stock vests as follows: 2.5% of the shares vested immediately upon grant on February 11, 2022, the grant date; 2.5% of the shares vested 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; 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. Pay versus Performance As required by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(v) of Regulation S-K, we are providing the following information about the relationship between executive compensation and certain financial performance of our Company. The disclosure included in this section is prescribed by SEC rules and does not necessarily align with how the Company or its Compensation Committee view the link between the Company’s performance and the pay of its NEOs. The table below presents information on the compensation of our chief executive officer and our other NEOs in comparison to certain performance metrics for 2022 and 2021. The metrics are not those that our Compensation Committee uses when setting executive compensation. The use of the term “compensation actually paid” (“CAP”) is required by the SEC’s rules. Neither CAP nor the total amount reported in the Summary Compensation Table (“SCT”) reflect the amount of compensation actually paid, earned or received during the applicable year. Per SEC rules, CAP was calculated by adjusting the SCT Total values for the applicable year as described in the footnotes to the table.
(1) For 2022, the CEO was Todd Brooks and the other NEO was Vincent Sita. (2) For 2021, the CEO was Todd Brooks and the other NEO was Brad Wolfe. (3) Amounts in this column represent the “Total” column set forth in the SCT. See the footnotes to the SCT for further detail regarding the amounts in these columns. (4) The dollar amounts reported in these columns represent the amounts of “compensation actually paid”. The amounts are computed in accordance with Item 402(v) of Regulation S-K by deducting and adding the following amounts from the “Total” column of the SCT (pursuant to SEC rules, fair value at each measurement date is computed in a manner consistent with the fair value methodology used to account for share-based payments in our financial statements under GAAP):
(5) Total shareholder return assumes that $100 was invested on December 31, 2020 in our Company and that dividends were reinvested when and as paid. Graphical Representation of Compensation Actually Paid (CAP) and Performance The following graph illustrates the relationship of the CAP for our PEO and other NEOs, as calculated pursuant to SEC rules, to our TSR over the two years presented in the Pay Versus Performance table.
The following graph illustrates the relationship of the CAP for our PEO and other NEOs, as calculated pursuant to SEC rules, to our net loss over the two years presented in the Pay Versus Performance Table.
Payments Upon Severance or Change in Control Vesting of Restricted Stock Each of our Named Executive Officers has received awards of restricted stock, as further described elsewhere in this proxy statement. Upon a change of control of the Company, 45% of the restricted shares granted pursuant to each such award shall vest. 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, Equity Compensation Plan Information The Company currently does not have any equity compensation plans not approved by security holders.
(1) As of December 31, Employment Agreements In connection with Mr. Sita’s appointment as Chief Financial Officer, the Board approved an Independent Contractor Services Agreement with Alucria Consulting, Inc. (“Alucria”), an entity owned by Mr. Sita (the “Sita Agreement”), which was executed on February 11, 2022. The Sita Agreement provides that Alucria is entitled to receive a fee of $20,000 per month. Alucria will also be eligible for an additional payment of up to $60,000 annually, based upon the achievement of goals determined by the Company, to be paid quarterly in accordance with standard Company policies. Mr. Sita will also receive a grant of shares of the Company’s common stock, to be governed by the Company’s 2018 Stock Incentive Plan and subject to specific vesting conditions. The term of the Sita Agreement expires on July 1, 2023, unless earlier terminated by either party in accordance with the terms of the Sita Agreement. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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: 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. 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.
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. Related Party Transactions Reviewed During Martin M. Hale, Jr., a member of the 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, 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 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. On December 27, 2019, the Company entered into the Amended and Restated Term Loan Credit Agreement, dated as of February 23, 2018, as amended December 27, 2019, by and between the Company and HCP-FVA, (the “Amended and Restated Loan Agreement”) to provide for, among other things, a new $2,500,000 term loan facility to the Company. On June 23, 2021, the Company issued and sold an aggregate of 811,750 shares of its common stock at $4.10 per share in a public offering underwritten by Roth Capital Partners, LLC (“Roth”), which included the sale of 86,750 shares of common stock pursuant to the partial exercise of Roth’s over-allotment option (the “June Offering”). In connection with the June Offering, the Company entered into a letter agreement with PROPOSAL NO. 2 ADVISORY VOTE ON EXECUTIVE COMPENSATION The Board is committed to excellence in governance and is aware of the significant interest in executive compensation matters by investors and the general public. The Company has designed its executive compensation programs to attract, motivate, reward and retain the senior management talent required to achieve our corporate objectives and increase stockholder value. We believe that our compensation programs are centered on pay-for-performance principles and are strongly aligned with the long-term interests of our stockholders. See the discussion of the compensation of our executive officers in the section entitled “Executive Compensation” beginning on page 15. We are asking our stockholders to indicate their support for our Named Executive Officer compensation disclosed in the executive compensation tables and narrative discussion of this proxy statement. The Say-on-Pay vote is not intended to address any specific item of compensation, but rather the overall compensation of our Named Executive Officers and related philosophy, policies and practices. Accordingly, we are asking our stockholders to vote “FOR” the following resolution at the Annual Meeting:
described in the executive compensation tables and accompanying narrative discussion in the Proxy Statement.” This Say-on-Pay vote is advisory, and therefore is not binding on the Company, the Compensation Committee or the Board of Directors. However, the Compensation Committee and the Board value the opinions of our stockholders and will consider the outcome of the Say-on-Pay vote when making future compensation decisions. Recommendation of the Board of Directors THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE EXECUTIVE COMPENSATION PROGRAM FOR THE COMPANY’S NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THE EXECUTIVE COMPENSATION TABLES AND NARRATIVE DISCUSSION OF THIS PROXY STATEMENT. PROPOSAL NO. 3 ADVISORY VOTE ON THE FREQUENCY OF SOLICITATION OF ADVISORY STOCKHOLDER APPROVAL OF EXECUTIVE COMPENSATION We are asking shareholders to advise us as to how frequently they wish to cast an advisory vote on the compensation of our named executive officers: once every year, once every two years, or once every three years. This vote is required by rules under Section 14A of the Securities Exchange Act of 1934, which were adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and is an advisory vote, which means that this proposal is not binding on us. The Board of Directors is not required to, nor is it, making a recommendation regarding the frequency that shareholders should approve. Rather, each shareholder will make his or her own choice among a vote once every year, every two years or every three years. You may also abstain from voting on this item. Although the vote is non-binding, the Board will take into account the outcome of the vote when making future decisions about the frequency for holding an advisory vote on executive compensation and currently intends to implement the frequency which receives the greatest level of support from our shareholders. PROPOSAL NO. 4 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The accounting firm of Marcum LLP (“Marcum”) has been selected as the independent registered public accounting firm to audit the Company’s consolidated financial statements for the fiscal year ending December 31, Principal Accountant Fees and Services Fees for services rendered by Marcum LLP (“Marcum”) for the years 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, Audit Related Fees: None. Tax Fees: Fees billed for tax-related services for certain Company subsidiaries rendered by (i) Marcum in 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:
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. Recommendation of the Board of Directors THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE APPOINTMENT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. Audit Committee Pre-Approval Procedures. The Audit Committee has adopted the following guidelines regarding the engagement of the Company’s independent registered public accounting firm to perform services for the Company: For audit services (including statutory audit engagements as required under local country laws), the independent registered public accounting firm will provide the Audit Committee with an engagement letter during the first quarter of each year outlining the scope of the audit services proposed to be performed during the fiscal year. If agreed to by the Audit Committee, this engagement letter will be formally accepted by the Audit Committee at a meeting of the Audit Committee. The independent registered public accounting firm will submit to the Audit Committee for approval an audit services fee proposal after acceptance of the engagement letter. For non-audit services, Company management will submit to the Audit Committee for approval (during the second quarter of each fiscal year) the list of non-audit services that it recommends the Audit Committee engage the independent registered public accounting firm to provide for the fiscal year. Company management and the independent registered public accounting firm will each confirm to the Audit Committee that each non-audit service on the list is permissible under all applicable legal requirements. In addition to the list of planned non-audit services, a budget estimating non-audit service spending for the fiscal year will be provided. The Audit Committee will approve both the list of permissible non-audit services and the budget for such services. The Audit Committee will be informed routinely as to the non-audit services actually provided by the independent registered public accounting firm pursuant to this pre-approval process. To ensure prompt handling of unexpected matters, the Audit Committee delegates to the Chair the authority to amend or modify the list of approved permissible non-audit services and fees. The Chair will report action taken to the Audit Committee at the next Audit Committee meeting. The independent registered public accounting firm must ensure that all audit and non-audit services provided to the Company have been approved by the Audit Committee. The Company Controller will be responsible for tracking all independent registered public accounting firm fees against the budget for such services and report at least annually to the Audit Committee. Audit Committee Report The Board of Directors appoints an Audit Committee each year to review the Company’s financial matters. Please see the Audit Committee discussion in the “Board of Directors” section, above, for a discussion of the Audit Committee. The Audit Committee met with Marcum (the Company’s independent registered public accounting firm) and reviewed the scope of their audit, report and recommendations. The Audit Committee members reviewed and discussed the audited consolidated financial statements as of and for the fiscal year ended December 31, Based on their review and the discussions described above, the Audit Committee recommended to the Board that the Company’s audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, Audit Committee Michael Kelly (Chair) Barry A. Rudolph William D. Miller SOLICITATION STATEMENT The Company will bear all expenses in connection with the solicitation of proxies. In addition to the use of the mail, solicitations may be made by the Company’s regular employees, by telephone, telegraph or personal contact, without additional compensation. The Company will, upon their request, reimburse brokerage houses and persons holding shares of Common Stock in the names of the Company’s nominees for their reasonable expenses in sending solicited material to their principals. STOCKHOLDER PROPOSALS In order to be considered for inclusion in the proxy materials to be distributed in connection with the next annual meeting of stockholders of the Company, stockholder proposals for such meeting must be submitted to the Company no later than January On May 21, 1998 the SEC adopted an amendment to Rule 14a-4, as promulgated under the Exchange Act. The amendment to Rule 14a-4(c)(1) governs the Company’s use of its discretionary proxy voting authority with respect to a stockholder proposal, which is not addressed in the Company’s proxy statement. The amendment provides that if the Company does not receive notice of the proposal at least 45 days prior to the first anniversary of the date of mailing of the prior year’s proxy statement (April 9, 2023), then the Company will be permitted to use its discretionary voting authority when the proposal is raised at the annual meeting, without any discussion of the matter in the proxy statement. The Company’s bylaws include separate advance notice provisions applicable to stockholders desiring to bring nominations for directors before a meeting of stockholders called for the election of directors, in whole or in part. These advance notice provisions require that, among other things, stockholders give timely written notice to the Secretary of the Company regarding such nomination and provide the information and satisfy the other requirements set forth in the Company’s bylaws. In order to be timely, such nominations must be submitted to the Company no later than January 31, 2024. In addition to satisfying the foregoing requirements under the Company’s bylaws, to comply with the universal proxy rules (once they become effective), shareholders who intend to solicit proxies in support of director nominees other than the Company’s nominees must provide notice that sets forth the information required by Rule 14a-19 under the Exchange Act no later than April OTHER MATTERS So far as now known, there is no business other than that described above to be presented for action by the stockholders at the Annual Meeting, but it is intended that the proxies will be voted upon any other matters and proposals that may legally come before the Annual Meeting or any adjournment thereof, in accordance with the discretion of the persons named therein. ANNUAL REPORT The Company has sent, or is concurrently sending, to all of its stockholders of record as of May
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