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FalconStor raises $3 million in ‘dilutive’ deal with fund

FalconStor Software in Melville, Nov. 8, 2011.

FalconStor Software in Melville, Nov. 8, 2011. Credit: Steve Pfost

Shares of FalconStor Software Inc. slid lower Tuesday, a day after the maker of storage and data management software announced it had closed on a $3 million financing deal that would give an affiliate of a Manhattan private equity fund and its managers an ownership stake of as much as 73 percent.

The deal “will have a substantial dilutive effect on all existing stockholders,” the company said in a release Monday.

Shares of Melville-based FalconStor fell 2.9 percent Tuesday to 17 cents after declining 5.6 percent in trading Monday following the announcement. The stock has fallen about 72 percent in the past 12 months.

The company said in a news release it had closed on a deal to sell HCP-FVA LLC, an affiliate of Manhattan-based Hale Capital Partners LP, up to $3 million in debt, warrants and preferred stock.

“The continued support and trust demonstrated by Hale Capital’s additional financing is imperative to our long-term plans,” Todd Brooks, FalconStor chief executive, said in a statement.

Brooks did not respond to telephone and email messages seeking further comment.

Hale Capital founder and chief executive Martin M. Hale Jr. is a FalconStor director and shareholder. He recused himself when the board was considering the financing deal.

FalconStor will give accredited investors who owned its shares as of Nov. 17 the opportunity to buy some of the offering units from Hale Capital.

Hale’s stake in FalconStor, assuming the exercise of warrants and convertible shares, would range from about 22 percent to about 73 percent of the company’s common stock, based on Hale Capital’s current ownership and depending on the level of demand for units by other investors, according to Monday’s news release.

In the quarter ended Sept. 30, FalconStor’s revenue declined to $6.1 million from $7.3 million in the year-earlier period. But the company swung to net income of $1.4 million from a net loss of $2 million. Cash and cash equivalents fell to $1.8 million from $3.4 million in the preceding quarter.

FalconStor’s stock trades on the OTC Markets Group Inc.’s OTCQB Venture Market after being delisted from the Nasdaq Capital Market in September.

FalconStor, which had 226 full-time and part-time employees on Dec. 31, 2015, had 83 as of Sept. 30 after instituting a cost-cutting program.

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