Investors buying in as FalconStor hatches risky plan

Happy days: Team FalconStor rang Nasdaq's bell back in 2015 -- now, with a risky plan to avoid de-listing in play, investors are ringing in, too.

Investors are doubling down on a Melville software company with a tarnished financial record and a sterling data-storage product.

Texas-based private equity firm ESW Capital LLC has purchased nearly 1.4 million additional shares of FalconStor Software, according to a U.S. Securities and Exchange Commission filing disclosed Monday. The transaction, which closed Aug. 23, was made at 37 cents per share, for a total value of $511,667.08.

The deal gives ESW Capital more than 6.3 million total shares of FalconStor – a 14.4 percent stake valued at roughly $2.3 million.

It also solidifies ESW Capital’s standing as the largest investor in FalconStor, a data protection and storage virtualization software firm co-founded in 2000 by Computer Associates (now CA Technologies) veterans ReiJane Huai and Wayne Lam. The 6 million-plus shares in ESW’s portfolio more than double the 2.8 million shares owned by the second-largest stakeholder, Connecticut-based Nantahala Capital Management LLC.

The transaction steadies the ship, somewhat, after a tumultuous run for FalconStor, including the lingering specter of potential delisting from the Nasdaq Capital Market and the July 1 resignation of President and CEO Gary Quinn, succeeded in both positions on an interim basis by Todd Oseth.

On Aug. 17, the company announced that Todd Brooks was taking the CEO reins – with Oseth sliding into a “strategic industry advisor role” – and Chief Financial Officer Dan Murale was resigning, to be replaced by Patrick McClain.

The company also announced that Nasdaq directors had accepted FalconStor’s plan to avoid delisting – including a reverse stock split, staff reductions and other cost-cutting moves – and given FalconStor until Nov. 20 to execute it.

FalconStor received a delisting notice in November 2016 after its stock price closed below $1 for 30 consecutive days. It was notified a month later that it was in violation of other Nasdaq-listing requirements, including failing to maintain a minimum $35 million market value.

FalconStor (Nasdaq: FALC) was trading at around 30 cents per share Tuesday afternoon.

Although ESW Capital has extended its lead, it’s not the only investor group buying into the highly innovative, if financially troubled, software firm. New York City-based Virtu KCG Holdings LLC, which formed in July when Virtu Financial completed its $1.4 billion acquisition of KCG Holdings, recently raise its own FalconStor stake by over 1,000 percent, acquiring more than 372,000 shares for a total stake eclipsing 408,000 shares.