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FalconStor Software (FALC) Risk Analysis
Risk Overview Q1, 2023
Source: the company's latest filing for the period ended Mar 31, 2023, filed May 10, 2023
Risk Change Over Time
- Natural and Human Disruptions - Risk 1Unknown Factors
Additional risks and uncertainties of which we are unaware or which currently we deem immaterial also may become important factors that affect us.
Risk Highlights Q1, 2023
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 48
- Share Price & Shareholder Rights - Risk 1The Protective Provision contained in our certificate of incorporation, which is intended to help preserve the value of certain income tax assets, primarily tax net operating loss carryforwards, may have unintended negative effects.
Pursuant to Code Sections 382 and 383, use of our NOLs may be limited by an "ownership change" as defined under Section 382 of the Code, and the Treasury Regulations thereunder. In order to protect our company's significant NOLs, we included a provision to protect our NOLs in our certificate of incorporation (the "Protective Provision"). The Protective Provision is designed to assist us in protecting the long-term value of our accumulated NOLs by limiting certain transfers of our common stock. The Protective Provision's transfer restrictions generally restrict any direct or indirect transfers (defined to exclude primary offerings of our common stock effected by the company) of the common stock if the effect would be to increase the direct or indirect ownership of our common stock by any person from less than 4.99% to 4.99% or more of our common stock, or increase the percentage of our common stock owned directly or indirectly by a person owning or deemed to own 4.99% or more of our common stock (with percentage ownership determined under applicable United States federal income tax rules). Any direct or indirect transfer attempted in violation of the Protective Provision will be void as of the date of the prohibited transfer as to the purported transferee. The Protective Provision may have an unintended "anti-takeover" effect because our board of directors may be able to prevent any future takeover. Similarly, any limits on the amount of stock that a shareholder may own could have the effect of making it more difficult for shareholders to replace current management. Additionally, because the Protective Provision may have the effect of restricting a shareholder's ability to dispose of or acquire our common stock, the liquidity and market value of our common stock might suffer.
- Share Price & Shareholder Rights - Risk 2Our agreements with the holders of our Series A Preferred Stock and the Amended and Restated Loan Agreement prevent us from undertaking certain transactions or incurring certain indebtedness without such holders' consent or unless the Series A Preferred Stock held by such holders is repurchased and/or the Term Loan is repaid. This could hurt our ability to sell underperforming assets or lines of business or to obtain financing.
Our agreements with the holders of our Series A Preferred Stock and the Amended and Restated Loan Agreement prevent us from undertaking certain transactions or incurring certain debt without such holders' consent or unless the Series A Preferred Stock held by such holders' is repurchased and/or the Term Loan is repaid. These transactions include, but are not limited to: - a merger with, or the sale of substantially all of our assets or capital stock, to a third party;- assumption of indebtedness in excess of 80% of our accounts receivable; and - the sale, license or other disposition of 10% or more of our tangible assets or capital stock. This could limit our ability to sell off underperforming assets or business lines. It could also prevent us from obtaining financing we may need to run or to grow our business.
- Share Price & Shareholder Rights - Risk 3Our agreements with the holders of our Series A Preferred Stock and/or the Amended and Restated Loan Agreement contain covenants that could limit our ability to obtain financing using our equity. In addition, if we engage in future financings, we may have to use the proceeds to redeem the preferred stock held by such holders. This could cause us to have difficulty in obtaining capital necessary to run our business.
Our agreements with the holders of our Series A Preferred Stock and the Amended and Restated Loan Agreement give such holders and lenders, as applicable, consent rights over certain future financings, Because of these covenants, if we determine that we are in need of additional capital, we will require the prior consent of the holders of our Series A Preferred Stock and the lenders party to the Amended and Restated Loan Agreement to do so. In addition, our agreements with the holders of the Series A Preferred Stock provide that if, at the time of certain future debt or equity financings, the proceeds of which exceed $5 million, the holders of the Series A Preferred Stock still have outstanding Series A Preferred Stock, then we must offer to repurchase their Series A Preferred Stock. The holders of the Series A Preferred Stock have the right to accept the offer or to retain their Series A Preferred Stock. If we do a financing, and the holders of the Series A Preferred Stock elect to have their Series A Preferred Stock repurchased, then the capital raised in excess of $5 million will go to repurchase the holders' Series A Preferred Stock, instead of being able to be used for our business.
- Share Price & Shareholder Rights - Risk 4If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, or if our actual results differ significantly from our guidance, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. In addition, from time to time, we may release earnings guidance or other forward-looking statements in our earnings releases, earnings conference calls or otherwise regarding our future performance that represent our management's estimates as of the date of release. Some or all of the assumptions of any future guidance that we furnish may not materialize or may vary significantly from actual future results. Any failure to meet guidance or analysts' expectations could have a material adverse effect on the trading price or volume of our stock.
- Share Price & Shareholder Rights - Risk 5Our stock price may be volatile.
The market price of our common stock has been volatile in the past and may be volatile in the future. For example, during the twelve months ended December 31, 2022, the closing market price of our common stock as quoted on the OTC MKTS fluctuated between $0.50 and $3.90 and recently the closing trading price has been $0.82. The market price of our common stock may be significantly affected by the following factors: - actual or anticipated fluctuations in our operating results, including changes in the timing of when we recognize revenue;- failure to meet financial estimates;- changes in market valuations of other technology companies, particularly those in the network storage software market;- the announcement of any strategic alternatives;- announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, strategic alternatives, joint ventures or capital commitments;- loss of one or more key customers;- the conversion or exercise into common stock of stock options, the vesting of restricted stock and the anticipated grant of equity to employees;- the issuance of additional shares of the Series A Preferred Stock pursuant to dividend rights; and - departures of key personnel. The stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our performance.
- Share Price & Shareholder Rights - Risk 6There may be a limited public market for our securities; we presently fail to qualify for listing on any national securities exchanges.
Trading in our common stock is conducted in the over-the-counter market. In addition, we currently fail to qualify for listing on either the NASDAQ Capital Market or the NYSE American. As a result, an investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of our common stock, and our common stock may be less attractive for margin loans, for investment by larger financial institutions, as consideration in possible future acquisition transactions or other purposes.
- Share Price & Shareholder Rights - Risk 7The conversion and exercise of our outstanding securities and the anticipated grant of restricted stock to our employees will dilute the then-existing stockholders' percentage ownership of our common stock.
As of December 31, 2022, we have outstanding options to purchase 4,615 shares of our common stock, an aggregate of 1,316,933 outstanding unvested restricted shares and outstanding Series A Preferred Stock convertible into 87,815 shares of our common stock. Additionally, as of December 31, 2022, we have 68,148 shares of common stock that are potentially issuable as accumulated dividends with respect to the Series A Preferred Stock. The exercise of all of the outstanding warrants, options and/or the vesting of all outstanding restricted shares, the conversion of our outstanding Series A Preferred Stock into common stock, the payment of dividends on our Series A Preferred Stock through the issuance of common stock and/or the grant and exercise of additional options and/or the grant and vesting of restricted stock and restricted stock units to our employees would dilute the then-existing stockholders' percentage ownership of common stock, and any sales in the public market of the common stock issuable upon such exercise could adversely affect prevailing market prices for the common stock. Moreover, the terms upon which we would be able to obtain additional equity capital could be adversely affected because the holders of such securities can be expected to exercise or convert them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable than those provided by such securities.
- Share Price & Shareholder Rights - Risk 8The likelihood of a change of control in our company could be impacted by the fact that we have a significant amount of authorized but unissued preferred stock, protective provisions in our charter, outstanding Series A Preferred Stock, a staggered board of directors and change of control agreements as well as certain provisions under Delaware law.
Our board of directors has the authority, without further action by our common stockholders, to issue up to an additional 1,100,000 shares of preferred stock on such terms and with such rights, preferences and designations, including, without limitation restricting dividends on our common stock, dilution of the voting power of our common stock and impairing the liquidation rights of the holders of our common stock, as the board may determine without any vote of our common stockholders. Issuance of such preferred stock, depending upon the rights, preferences and designations thereof may have the effect of delaying, deterring or preventing a change in control. Moreover, our outstanding Series A Preferred Stock provides the holders with certain rights in the event of a merger with a third party and if we are unable to redeem the Series A Preferred Stock prior to June 30, 2024 or if the holders of the Series A Preferred Stock elect to exercise their rights to require us to redeem the Series A Preferred Stock due to our failure to comply with the financial covenants covering the Series A Preferred Stock. As discussed above, our certificate of incorporation includes certain provisions that restrict transfers of our common stock in order to protect our NOLs if the effect of such transfers would be to increase the direct or indirect ownership of stockholders from less than 4.99% to 4.99% or more of our common stock, or increase the ownership percentage of stockholders owning 4.99% or more of our common stock. Certain "anti-takeover" provisions of the Delaware General Corporation Law, among other things, may also restrict the ability of our stockholders to authorize a merger, business combination or change of control. Further, we have a staggered board of directors and have entered into change of control agreements through employment agreements with certain executives. In addition, proceeds received upon a change of control will generally be used first to repay outstanding principal and interest on the Term Loan and then to the holders of the Series A Preferred Stock, prior to the holders of the common stock, in an amount equal to the amount of unpaid principal and interest on the Term Loan and 100% of the stated value plus accrued and unpaid dividends with respect to the Series A Preferred Stock. As a result of the foregoing, our stockholders may lose opportunities to dispose of their shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal, and the market price of our common stock and the voting and other rights of our stockholders may also be affected.
See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.