See accompanying notes to the condensed
consolidated financial statements.
See accompanying notes to the condensed
consolidated financial statements.
See accompanying notes to the condensed
consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated
financial statements include the accounts of Crossroads Systems, Inc. and its wholly-owned subsidiaries (“Crossroads”
or the “Company”). Headquartered in Austin, Texas, Crossroads, a Delaware corporation, is an intellectual property
licensing company. Founded in 1996 as a product solutions company, Crossroads created some of the storage industry’s most
fundamental patents and has licensed patents to more than 50 companies since 2000.
Principles of Consolidation and presentation
The consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.
The accompanying consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has accumulated significant losses as it has been developing its
current and next generation products. The Company believes that cash flow from operations, customer reimbursed expenses, and proceeds
from the sale of common and preferred stock will be sufficient to fund the anticipated operations for the next 12 months. These
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern
for a reasonable period of time.
The investment in
KIP CR P1 LP (which we refer to as the “partnership”), of which the Company is a limited partner and of which an affiliate
of Fortress Investment Group LLC (“Fortress”) is the general partner, is accounted for using the equity method. The
partnership holds the Company’s non’972 patent portfolio. The current investment balance is nominal at July 31, 2016.
Use of Estimates
The preparation of
the consolidated financial statements in conformity with generally accepted accounting principles (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates, and such differences may be material to the consolidated financial
statements.
Reclassification
Certain prior period
amounts have been reclassified to conform to the current period presentation. The reclassification includes assets, liabilities,
and certain expenses in sales and marketing, research and development, and general and administrative related to discontinued
operations. The amounts for the prior periods have been reclassified to be consistent with the current period presentation and
have no impact on previously reported financials.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents,
and restricted cash consist of cash on deposit and highly liquid investments with original maturities of 90 days or less at date
of purchase. While the Company’s cash and cash equivalents are on deposit with high quality FDIC and Association of German
Banks insured financial institutions, at times such deposits exceed insured limits. As of July 31, 2016, total uninsured deposits
were $4.7 million. The Company has not experienced any losses in such accounts.
Restricted cash amounted
to $2.2 million. The balance consists of cash held from the sale of a portion of the Company’s IP revenue stream.
IP Revenue Stream Sale
On October 30, 2015,
the Company entered into an agreement with TQ Zeta LLC, an affiliate of Techquity, and Intrepidus Holdings LLC (collectively,
“Techquity”), in which Techquity will share in the revenue generated from the ’972 patent litigation. For consideration
of $10.0 million received by the Company, Techquity received the rights to 52% of the first $20 million in licenses, settlements
or other awards related to the ’972 patents, 40% of the amounts between $20 and $100 million, and 12% of all amounts above
$100 million in aggregate licensing, settlements or other awards. Proceeds from the Techquity agreement are restricted to approved
legal expenditures as defined in the agreement. During the three and nine months ended July 31, 2016, the Company recognized $0.7
and $4.0 million in other income, respectively, $2.2 million is held in deferred revenue and restricted cash. The Company will
recognize other income from this transaction as the authorized expenditures are made with the unspent balance being reflected
as deferred revenue.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Computation of Net Loss Per Share
Basic loss per share
is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed by giving effect to all dilutive potential common shares that were outstanding
during the period. Basic earnings per share excludes the dilutive effect of common stock equivalents such as stock options and
warrants, while earnings per share, assuming dilution, includes such dilutive effects. Future weighted-average shares outstanding
calculations will be impacted by the following factors, among others: (i) the ongoing issuance of common stock associated with
stock option and warrant exercises; (ii) any fluctuations in the Company’s stock price, which could cause changes in the
number of common stock equivalents included in the earnings per share, assuming dilution computation; and (iii) the issuance of
common stock to effect business combinations should the Company enter into such transactions.
The Company has excluded
all outstanding common stock equivalents from the calculation of diluted net loss per share because all such common stock equivalents
are antidilutive for all periods presented. The total number of common stock equivalents excluded from the diluted net loss per
common share calculation was 3,160,161 and 3,561,652 for the nine months ended July 31, 2016 and 2015, respectively. The dilutive
common stock equivalents for the nine months ended July 31, 2016 include warrants to purchase 368,765 shares of common stock,
2,591,257 shares of preferred stock, which are excluded until converted to common shares (Note 6), and stock options to purchase
200,139 shares of common stock.
Net loss available
to common stockholders is calculated by deducting from net income, preferred dividends paid and accrued of $42,000 and $171,000
for the three and nine months ended July 31, 2016, respectively.
Recently Issued Accounting Pronouncements
The Company has implemented
all new accounting pronouncements that are in effect and that may impact its consolidated financial statements. The Company does
not believe that there are any new accounting pronouncements that have been issued that might have a material impact on its consolidated
financial position or results of operations.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. FAIR VALUE MEASUREMENT
Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy,
which prioritizes the inputs used in the valuation methodologies, is applied as follows:
Level 1 –
Valuations
based on quoted prices for identical assets and liabilities in active markets.
Level 2 –
Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or
other inputs that are observable or can be corroborated by observable market data.
Level 3
– Valuations
based on unobservable inputs reflecting management’s assumptions, consistent with reasonably available assumptions made
by other market participants. These valuations require significant judgment.
As of July 31, 2016,
the fair value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, approximates book value due to the short maturity of these instruments. Based upon borrowing
rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximates
fair value. As of July 31, 2016 and October 31, 2015, the Company held no investments.
3. ACCRUED EXPENSES AND DEFERRED REVENUE
Accrued expenses consist
of the following (in thousands):
|
|
July 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Payroll related
|
|
$
|
147
|
|
|
$
|
837
|
|
Professional services
|
|
|
338
|
|
|
|
657
|
|
Deferred rent
|
|
|
-
|
|
|
|
184
|
|
Warranty reserve
|
|
|
-
|
|
|
|
5
|
|
Other
|
|
|
23
|
|
|
|
44
|
|
|
|
$
|
508
|
|
|
$
|
1,727
|
|
Included in payroll
related accrued expenses as of July 31, 2016 and October 31, 2015 was $0.1 and $0.4 million, respectively, related to bonus compensation.
Deferred revenue,
current portion, consists of the following (in thousands):
|
|
July 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$
|
88
|
|
|
$
|
135
|
|
Deferred revenue stream sale
|
|
|
2,192
|
|
|
|
6,208
|
|
|
|
$
|
2,280
|
|
|
$
|
6,343
|
|
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Deferred revenue stream
sale consists of the remaining amount of consideration received from the sale of a portion of the Company’s IP revenue stream.
The deferred revenue will be recognized upon the expenditure of approved legal costs related to the ongoing IP litigation described
in Note 4.
4. COMMITMENTS AND CONTINGENCIES
Leases
In accordance with
the terms of the March 22, 2016 sale of our product division, the Company’s office space and equipment lease obligations
have been assigned to the purchaser.
Intellectual Property Litigation
The Company has a
number of ongoing lawsuits and related proceedings as described below. In discussing these patent litigation proceedings, the
following terms will be used:
A “Markman hearing”
in a patent infringement case is a pre-trial hearing in U.S. District Court, in which the Court hears arguments regarding the
meanings of key words used in a disputed patent claim. The outcome of a Markman hearing can play a significant role in whether
findings of infringement and validity are made by the Court or by the jury at trial. Depending on the Court, a ruling could be
received quickly or could take months after the Markman hearing.
An “
Inter
Partes
Review,” or “IPR,” is a post-grant review of an issued patent in which the petitioner attempts to
challenge the validity of a patent on certain grounds (e.g. novelty and obviousness). If successful during i
nter partes
review, a petitioner could potentially invalidate some or all of the claims in the patents asserted against that petitioner in
related litigation, and an adverse ruling in any of these proceedings would result in invalidation or other limitations on the
Company’s patent rights.
Inter partes
review, if granted, is typically a twelve- to eighteen-month process from institution.
Crossroads v. Dot Hill
The Company filed
a lawsuit on September 11, 2013 against Dot Hill Systems Corp. (“Dot Hill”) styled Crossroads Systems, Inc. v. Dot
Hill Systems Corp., Civil Action No. 1:13-CV-800-SS alleging patent infringement of U.S. Patent No. 6,425,035 (the “035
patent”) and breach of the Amended Settlement and License Agreement dated June 27, 2006 between Crossroads and Dot Hill.
The action is pending. The Markman hearing was conducted October 6-7, 2014. Dot Hill moved to join two existing IPR proceedings
previously filed against Crossroads by other defendants (one filed by NetApp/Oracle/Huawei and one filed by Cisco/Quantum, each
as defined below) and to stay the pending litigation based on those IPR proceedings. On June 16, 2015, Judge Sparks entered the
Markman order (the “Markman Order”) construing the claims in a manner favorable to Crossroads and issued an order
staying the case pending resolution of the IPR proceedings. The United States Patent and Trademark Office (the “U.S. Patent
Office”) issued rulings in both of the IPR proceedings that Dot Hill had joined, ruling in one that the ’035 Patent
is not unpatentable in view of the prior art raised and in the other that the ’035 Patent is unpatentable in view of different
prior art. Crossroads believes the ruling of unpatentability was in error and has filed an appeal of that ruling with the Federal
Circuit Court of Appeals. That appeal is on-going. If the patent asserted against Dot Hill is found partially or entirely invalid
at the conclusion of the IPR proceedings, including appeal, Crossroads might be adversely impacted in the litigation proceeding
against Dot Hill, including potentially losing the ability to continue with its claims of infringement. In May 2016, Crossroads
filed a motion to lift the stay for limited purposes regarding Dot Hill’s failure to pay certain royalties and in July 2016
the Court denied the motion and the stay and this action remains in place.
Dot Hill owes the
Company approximately $1.2 million at July 31, 2016 related to an agreement between the companies. The Company believes these
amounts have been earned and collectability is probable at July 31, 2016. Nonetheless, Crossroads has, therefore, decided to reserve
a portion of past and future Dot Hill revenue of $115,000 and Cost of Sales of $28,750.
Crossroads v. Oracle, Huawei, Cisco,
NetApp, and Quantum
These related cases
were filed on October 7, 2013, November 26, 2013, and February 18, 2014 in the United States District Court for the Western District
of Texas alleging infringement by these parties of one or more patents in the ’972 patent family. The asserted patents (6,425,035,
7,934,041, 7,987,311 and 7,051,147) were subject to a re-examination of the patents conducted in 2005-2006 by the U.S. Patent
Office or were issued after the re-examination. On May 7, 2014, these cases and the Dot Hill case were consolidated for purposes
of discovery and a Markman hearing occurred on October 6 and 7, 2014. On June 16, 2015, Judge Sparks entered the Markman Order
construing the claims in a manner favorable to Crossroads and entered an order staying these actions in light of the IPR proceedings.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
During the time Crossroads
was pursuing the potential infringers of the ’972 patent family, the Company gave companies with potentially infringing
products the opportunity to license the Company’s proprietary technology. For example, NetApp was first given notice of
potential infringement in 2004. Cisco was first given notice of potential infringement in 2002. Quantum has been on notice of
its potential infringement since 2006. Oracle acquired several companies that were given notice of potential infringement at least
as early as 2009 and Oracle itself has been on notice since then. Despite repeated attempts by Crossroads throughout the years
to negotiate licenses to the ’972 patent family, these companies refused and left Crossroads with no alternatives but litigation.
Crossroads believes these companies (and companies they have acquired) have been illegally using Crossroads’ proprietary
technology and that the potential compensatory damages could be in excess of $200 million, which does not include enhanced damages
or attorney fees. While the uncertainties and expense of litigation are great and the Company can provide no guarantees of success,
the Company believes the infringement by most of these companies has been prolonged and potentially willful.
In response to the
lawsuits brought by Crossroads, collectively these defendants filed nineteen
inter partes
review petitions with the U.S.
Patent Office to challenge the validity of the patents asserted by the Company in these lawsuits. The U.S. Patent Office instituted
review of six of the petitions, granted joinder in four of the petitions and denied review of the remaining nine petitions. The
first of the petitions were filed only months after Crossroads filed lawsuits against these parties and years after they were
made aware of their potential infringement. Crossroads continues to believe it has meritorious factual and legal defenses to the
challenges presented in these petitions and will vigorously defend the validity of the patents. The U.S. Patent Office issued
rulings in the IPR proceedings, ruling in one that the ’035 Patent is not unpatentable in view of the prior art raised and
ruling in the others that the ’035 Patent and Patent No. 7,051,147 (the “’147 Patent”) are unpatentable
in view of different prior art. Crossroads believes the rulings of unpatentability were in error and has appealed these rulings
to the Federal Circuit Court of Appeals. Those appeals are on-going. If these patents, which have been asserted against Oracle,
Cisco, NetApp, and Quantum, are found partially or entirely invalid at the conclusion of these IPR proceedings, including appeal,
Crossroads might be adversely impacted in the litigation proceedings against these companies, including potentially losing the
ability to continue with its claims of infringement.
The Company filed
a lawsuit on October 7, 2013 against Oracle Corporation (“Oracle”) alleging infringement of U.S. Patent Nos. 6,425,035,
7,051,147 and 7,934,041 (the case is styled Crossroads Systems, Inc. v. Oracle Corporation; Civil Action No. 1:13-cv-0895-SS (W.D.
Tex., Austin Division)). The action is pending. The Markman hearing was conducted October 6-7, 2014 and on June 16, 2015, Judge
Sparks entered the Markman Order construing the claims in a manner favorable to Crossroads. Oracle filed nine petitions for IPR
at the U.S. Patent Office challenging the validity of each of the patents Crossroads asserted in the lawsuit against Oracle. The
U.S. Patent Office granted six of those petitions. Based on the IPRs, Oracle filed a motion to stay the litigation pending the
outcome of the IPR proceedings, which was granted by the Court. The U.S. Patent Office issued rulings in the IPR proceedings involving
Oracle, ruling in one that the ’035 Patent is not unpatentable over the prior art and ruling in the other five that the
’035 Patent and ’147 Patent are unpatentable in view of different prior art. Crossroads believes the rulings of unpatentability
were in error and has appealed these rulings to the Federal Circuit Court of Appeals. Those appeals are on-going. If the patents
are found partially or entirely invalid during the IPR proceedings, including appeal, Crossroads might be adversely impacted in
the litigation proceeding against Oracle, including potentially losing the ability to continue with its claims of infringement.
The Company filed
a lawsuit on February 18, 2014 against Cisco Systems, Inc. (“Cisco”) alleging infringement of U.S. Patent Nos. 6,425,035
and 7,934,041 (the case is styled Crossroads Systems, Inc. v. Cisco Systems, Inc.; Civil Action No. 1:14-cv-00148-SS (W.D. Tex.,
Austin Division)). The action is pending. The Markman hearing was conducted October 6-7, 2014 and on June 16, 2015, Judge Sparks
entered the Markman Order construing the claims in a manner favorable to Crossroads. Cisco is a party to three petitions for IPR
filed at the U.S. Patent Office challenging the validity of each of the patents Crossroads asserted in the lawsuit against Cisco.
The U.S. Patent Office granted those petitions. Based on the IPRs, Cisco filed a motion to stay the litigation pending the outcome
of the IPR proceedings, which was granted by the Court. The U.S. Patent Office issued rulings in the IPR proceedings involving
Cisco, ruling that the ’035 Patent and ’147 Patents are unpatentable in view of the cited prior art. Crossroads believes
the rulings of unpatentability were in error and has appealed these rulings to the Federal Circuit Court of Appeals. Those appeals
are on-going. If the patents are found partially or entirely invalid during the IPR proceedings, including appeal, Crossroads
might be adversely impacted in the litigation proceeding against Cisco, including potentially losing the ability to continue with
its claims of infringement.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The Company filed
a lawsuit on February 18, 2014 against NetApp, Inc. (“NetApp”) alleging infringement of U.S. Patent Nos. 6,425,035,
7,934,041, 7,987,311 and 7,051,147 (the case is styled Crossroads Systems, Inc. v. Net App, Inc.; Civil Action No. 1:14-cv-00149-SS
(W.D. Tex., Austin Division)). The action is pending. The Markman hearing was conducted October 6-7, 2014 and on June 16, 2015,
Judge Sparks entered the Markman Order construing the claims in a manner favorable to Crossroads. NetApp filed seven petitions
for IPR filed at the U.S. Patent Office challenging the validity of each of the patents Crossroads asserted in the lawsuit against
NetApp. The U.S. Patent Office granted three of those petitions. Based on the IPRs, NetApp filed a motion to stay the litigation
pending the outcome of the IPR proceedings, which was granted by the Court. The U.S. Patent Office issued rulings in the IPR proceedings
involving NetApp, ruling in one that the ’035 Patent is not unpatentable over the prior art and ruling in the others that
the ’147 Patent is unpatentable in view of different prior art. Crossroads believes the rulings of unpatentability were
in error and has appealed these rulings to the Federal Circuit Court of Appeals. Those appeals are on-going. If the patents are
found partially or entirely invalid during the IPR proceedings, including appeal, Crossroads might be adversely impacted in the
litigation proceeding against NetApp, including potentially losing the ability to continue with its claims of infringement. On
March 4, 2016, after its IPR on the ‘311 Patent was denied, NetApp filed a Reexamination request with the U.S. Patent and
Trademark Office challenging the validity of the ‘311 Patent based on a subset of the prior art used in the IPR proceeding.
The U.S. Patent and Trademark Office granted the request for Reexamination and issued an office action rejecting the claims of
the ‘311 Patent. Crossroads believes this rejection of the claims of the ‘311 Patent to be in error just as we believe
the rulings on the IPRs are in error. On September 3, 2016, the Company conducted an interview with the patent examiners to explain
why we believe the ‘311 Patent to be valid over the cited prior art. This proceeding is ongoing and could be concluded in
2017. If the ‘311 Patent is found partially or entirely invalid during the Reexamination proceeding, the Company may be
adversely impacted in the litigation proceeding against NetApp, including potentially losing the ability to continue with our
claims of infringement.
The Company filed
a lawsuit on February 18, 2014 against Quantum Corporation (“Quantum”) alleging infringement of U.S. Patent Nos. 6,425,035
and 7,934,041 (the case is styled Crossroads Systems, Inc. v. Quantum Corporation; Civil Action No. 1:14-cv-00150-SS (W.D. Tex.,
Austin Division)). The action is pending. The Markman hearing was conducted October 6-7, 2014 and on June 16, 2015, Judge Sparks
entered the Markman Order construing the claims in a manner favorable to Crossroads. Quantum filed three petitions for IPR filed
at the U.S. Patent Office challenging the validity of each of the patents Crossroads asserted in the lawsuit against Quantum.
The U.S. Patent Office granted those petitions. Based on the IPRs, Quantum filed a motion to stay the litigation pending the outcome
of the IPR proceedings, which was granted by the Court. The U.S. Patent Office issued rulings in the three IPR proceedings involving
Quantum, ruling that the ’035 Patent and ’147 Patents are unpatentable in view of the cited prior art. Crossroads
believes the rulings of unpatentability were in error and has appealed those rulings to the Federal Circuit Court of Appeals.
Those appeals are on-going. If the patents are found partially or entirely invalid during the IPR proceedings, including appeal,
Crossroads might be adversely impacted in the litigation proceeding against Quantum, including potentially losing the ability
to continue with its claims of infringement.
Dot Hill v. Crossroads
On June 29, 2015,
Dot Hill filed a lawsuit in the U.S. District Court for the District of Colorado alleging that the Company’s StrongBox product
infringed a patent owned by Dot Hill. On April 22, 2016 the parties entered into a settlement agreement resolving the action and
on May 5, 2016, the case was dismissed.
5. DISCONTINUED OPERATIONS
On March 22, 2016,
the Company entered into a Purchase and Assignment Agreement (the “Purchase Agreement”) with StrongBox Data Solutions,
Inc. (“SDSI”), a Quebec corporation.
Under the Purchase
Agreement, the Company sold and transferred all of the assets related to the Company’s product and support services division
(the “Business”), including the Company’s StrongBox and SPHiNX storage solutions, to SDSI. SDSI also assumed
certain liabilities of the Company related to the Business, and absorbed the majority of Crossroads’ employees. As consideration
under the Purchase Agreement, SDSI paid the Company net proceeds equal to $1.9 million in cash on the closing date. Consideration
of $1.0 million was paid to the holders of the Company’s Series F Preferred Stock in exchange for a vote for approval of
the divestiture. The Board of Directors approved this payment, which has been reflected as a cost to sell the Business.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The assets and liabilities
transferred for consideration received were (in thousands, at book value, unaudited):
Cash Received
|
|
$
|
1,852
|
|
|
|
|
|
|
Cash paid to Series F Convertible Preferred shareholders
|
|
|
(1,000
|
)
|
Net cash received
|
|
|
852
|
|
|
|
|
|
|
Fixed Assets
|
|
|
(499
|
)
|
Inventory
|
|
|
(386
|
)
|
Other Comprehensive Income
|
|
|
(110
|
)
|
Expenses incurred
|
|
|
(79
|
)
|
Deferred Revenue
|
|
|
1,795
|
|
Other Assets and Liabilities
|
|
|
198
|
|
Net gain on sale of discontinued operations
|
|
$
|
1,771
|
|
Certain items were
reclassified as part of discontinued operations for comparative purposes. The table below presents the amounts by balance sheet
classification (in thousands):
|
|
July 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
-
|
|
|
$
|
976
|
|
Inventories
|
|
|
-
|
|
|
|
437
|
|
Prepaids expenses, and other current assets
|
|
|
-
|
|
|
|
131
|
|
Total current assets
|
|
|
-
|
|
|
|
1,544
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
533
|
|
Other assets
|
|
|
-
|
|
|
|
30
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
2,107
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
-
|
|
|
|
400
|
|
Accrued expenses
|
|
|
-
|
|
|
|
68
|
|
Deferred revenue
|
|
|
-
|
|
|
|
891
|
|
Total current liabilities
|
|
|
-
|
|
|
|
1,359
|
|
|
|
|
|
|
|
|
|
|
Long term deferred revenue
|
|
|
-
|
|
|
|
596
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,955
|
|
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The amounts in the
statement of operations that are part of the discontinued operations are summarized in the following table (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
-
|
|
|
$
|
516
|
|
|
$
|
859
|
|
|
$
|
1,962
|
|
IP License, royalty and other
|
|
|
-
|
|
|
|
1,183
|
|
|
|
923
|
|
|
|
3,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
-
|
|
|
|
1,699
|
|
|
|
1,782
|
|
|
|
5,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
-
|
|
|
|
150
|
|
|
|
309
|
|
|
|
652
|
|
IP License, royalty and other
|
|
|
-
|
|
|
|
214
|
|
|
|
275
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
-
|
|
|
|
364
|
|
|
|
584
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
1,335
|
|
|
|
1,198
|
|
|
|
3,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
-
|
|
|
|
736
|
|
|
|
1,275
|
|
|
|
2,436
|
|
Research and development
|
|
|
-
|
|
|
|
1,102
|
|
|
|
1,735
|
|
|
|
3,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
-
|
|
|
|
1,838
|
|
|
|
3,010
|
|
|
|
5,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
-
|
|
|
$
|
(503
|
)
|
|
$
|
(1,812
|
)
|
|
$
|
(1,989
|
)
|
6. STOCKHOLDERS’ EQUITY
On May 25, 2016, the
Company’s stockholders approved an amendment to the Company’s Certificate of Incorporation to effect a reverse stock
split (the “Reverse Split”) of the outstanding shares of the Company’s common stock at a ratio of one-for-twenty
at the Company’s annual meeting of stockholders. The reverse stock split was effective on June 20, 2016. Upon the effectiveness
of the Reverse Split, every twenty (20) shares of the Company’s issued and outstanding common stock were automatically combined
and reclassified into one (1) share of the Company’s common stock. Stockholders who otherwise would have been entitled to
receive fractional shares as a result of the Reverse Split instead received a cash payment in lieu thereof equal to the product
obtained by multiplying (a) the number of shares of pre-split common stock held by the stockholder that would otherwise have been
exchanged for such fractional share interest by (b) the average of the last reported sales prices of the common stock as quoted
on Nasdaq for the twenty business days ending on the trading day that is the second day immediately prior to the effective date
of the Reverse Split. All share and per share data in the accompanying consolidated financial statements and notes have been adjusted
for the effects of the Reverse Split.
2013 Private Placement
On March 22, 2013,
the Company entered into a securities purchase agreement with certain accredited investors for the issuance and sale in a private
placement of 4,231,154 units at a purchase price of $2.0625 per unit, valued at $8.6 million, for net proceeds of approximately
$7.9 million after related expenses. Each unit consists of one share of cumulative 5.0% Series F convertible preferred stock
(“Series F Preferred Stock”), par value $0.001 per share, and a warrant to purchase one-half of a share of common
stock per share of Series F Preferred Stock purchased, at an exercise price of $2.00 per whole share, subject to certain adjustments,
resulting in the issuance of warrants to purchase an additional 114,138 shares of common stock, split adjusted, with an exercise
price of $40.00 per share, split adjusted. In connection with the 2015 Common Stock Rights Offering, defined below, an additional
0.2019 warrants were granted for every outstanding warrant on August 31, 2015. As of July 31, 2016, there were 121,979 warrants
outstanding. The Series F Preferred Stock ranks senior to the common stock and each other class or series of the Company’s
capital stock, whether common, preferred or otherwise, with respect to distributions of dividends and distributions upon liquidation,
dissolution or winding up of the Company. The warrants were initially valued using the Black-Scholes pricing model at approximately
$2,284,000. The relative fair value of these warrants totaling $1,543,000 was initially allocated to additional paid in
capital. The Black-Scholes inputs used were: expected dividend rate of 0 %, expected volatility of 63%, risk free
interest rate of 0.82%, and expected term of 5 years. This valuation resulted in a beneficial conversion feature on the
Series F Preferred Stock of approximately $1,090,000, which was recorded as a deemed dividend. Fees in the amount of $0.7
million relating to the stock placement were netted against proceeds. The warrants were exercisable immediately upon issue, and
expire March 22, 2018. During the nine months ended July 31, 2015, the Company issued 3,389 split adjusted dividend common
shares valued at approximately $169,000. During the nine months ended July 31, 2016, the Company issued a dividend of 6,346 split
adjusted common shares valued at approximately $302,000. Accrued and unpaid dividends were valued at approximately $42,000 as
of July 31, 2016.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The Series F Preferred
Stock has the rights, qualifications, limitations and restrictions set forth in the Certificate of Designation (the “Certificate
of Designation”) filed with the Secretary of State of the State of Delaware on March 28, 2013. The Certificate of Designation
authorizes issuance of up to 4,500,000 shares of Series F Preferred Stock, with 3,750,000 shares designated as “Sub-Series
F-1” and 750,000 shares designated as “Sub-Series F-2.” The right of holders of Series F Preferred Stock to
convert the Series F Preferred Stock is subject to a 9.99% beneficial ownership limitation for holders of Sub-Series F-1 and a
4.99% beneficial ownership limitation for holders of Sub-Series F-2. Such beneficial ownership limitations may be increased or
decreased by a holder of Sub-Series F-1 to any percentage not in excess of 19.99% after providing notice of such increase or decrease
to the Company. For as long as at least 90% of the aggregate number of shares of Sub-Series F-1 issued on the original issue date
are outstanding, the holders of such Sub-Series F-1, voting as a single class, will be entitled to elect two directors of the
Company. If less than 90%, but at least 20%, of such shares of Sub-Series F-1 are outstanding, such holders, voting as a single
class, will be entitled to elect one director of the Company. As of the date hereof, less than 78% of the aggregate number of
shares of Sub-Series F-1 are outstanding, as the remainder have been voluntarily converted into common stock at the option of
the holders. Therefore, the holders of the Sub-Series F-1 shares are entitled to elect one director to the Board of Directors.
The holders of Sub-Series F-2 will not be entitled to vote on the directors elected by the holders of Sub-Series F-1. The holders
of shares of the Series F Preferred Stock are entitled to a liquidation preference equal to the original issuance price plus any
unpaid dividends.
The Certificate of
Designation contains customary anti-dilution protection for proportional adjustments (e.g. stock splits). The Series F Preferred
Stock previously included an anti-dilution provision that would adjust the conversion price of the Series F Preferred Stock to
the issue price of any equity securities the Company issued at a price less than $2.0625 per share, subject to certain exceptions.
This type of provision is commonly referred to as a “full-ratchet” anti-dilution provision.
Upon approval of the
full ratchet anti-dilution provisions on June 21, 2013, the warrants were reclassified as a derivative liability and recorded
at fair value. This created a scenario for which the shares of Series F Preferred Stock were potentially convertible into more
shares of common stock than authorized. Therefore, the Series F Preferred Stock was classified in temporary equity. Upon the expiration
of the full ratchet anti-dilution provisions in March 2014, the Company reclassified the Series F Preferred Stock and warrants
to permanent stockholders’ equity following the stockholders vote.
During the nine months
ended July 31, 2016, 200,000 shares of Series F Preferred Stock were converted to common shares.
Dividends on the Series
F Preferred Stock accrue at an annual rate of 5.0% of the original issue price and are payable on a semi-annual basis. The Series
F Preferred Stock ranks senior to the common stock and each other class or series of the Company’s capital stock, whether
common, preferred or otherwise, with respect to distributions of dividends and distributions upon liquidation, dissolution or
winding up of the Company. The Company may elect to satisfy the obligation to pay semi-annual dividends in cash, by distribution
of common stock or a combination thereof, in the Company’s discretion.
2013 Fortress Credit Agreement
On July 22, 2013 the
Company issued warrants to purchase 72,727 shares of its split adjusted common stock to Fortress at $41.25 per share, split adjusted
(the “Fortress Warrants”). To derive an estimate of the fair value of these warrants, the Company utilized a dynamic
Black-Scholes formula that computes the impact of share dilution upon the exercise of the warrant shares. This process relies
upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust
the payoff of the warrants in the presence of the dilution effect. The Fortress Warrants were recorded at a fair value
of $1,374,000 or $18.89, split adjusted, per underlying warrant share. In connection with the Offering (as defined below), an
additional 0.2019 warrants were granted for every outstanding warrant on August 31, 2015, with the strike price remaining at $41.25.
As of July 31, 2016, there were 87,410 warrants outstanding.
The Fortress Warrants
will expire on the seventh anniversary of the effective date of the Fortress transactions.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2014 Private Placement
On March 31, 2014,
the Company sold 99,331 units at $45.13 per unit, split adjusted, for gross proceeds to the Company of $4.5 million. Each unit
consists of one share of common stock and a warrant to purchase one-half of a share of common stock. The warrants to
purchase 49,666 shares of common stock have a weighted average exercise price of $49.00 per share. Fees in the amount
of $0.2 million relating to the stock placement were netted against proceeds. The warrants were valued at $1.1 million
using the Black-Scholes model. The Black-Scholes inputs used were: expected dividend rate of 0%, expected
volatility of 74%, risk free interest rate of 1.64%, and expected term of 2.5 years. The warrants were exercisable
upon the six-month anniversary of issue, and expire March 31, 2019. In connection with the Offering, an additional 0.2019 warrants
were granted for every outstanding warrant on August 31, 2015, with the strike price remaining at $49.00, split adjusted. As of
July 31, 2016, there were 59,693 split adjusted warrants outstanding.
2015 Common Stock Offering
On January 27, 2015,
the Company sold 153,587 units at $46.00 per unit, split adjusted, for gross proceeds to the Company of $7.1 million. Each unit
consists of one share of common stock and a warrant to purchase one-half of a share of common stock. The warrants to
purchase 82,938 shares of common stock have an exercise price of $55.20 per share, split adjusted. Fees in the
amount of $1.1 million relating to the stock placement were netted against proceeds. The warrants were valued at $1.9
million using the Black-Scholes model. The Black-Scholes inputs used were: expected dividend rate of 0%,
expected volatility of 75%, risk free interest rate of 1.55%, and expected term of 4.0 years. The warrants will be
exercisable upon the six-month anniversary of issue, and expire January 31, 2020. In connection with the Offering an additional
0.2019 warrants were granted for every outstanding warrant on August 31, 2015, with the strike price remaining at $55.20. As of
July 31, 2016, there were 99,683 split adjusted warrants outstanding.
2015 Common Stock Rights Offering
On July 28, 2015,
the Company completed a subscription rights offering for shares of the Company’s common stock (the “Rights Offering”).
Under the terms of the Rights Offering, the Company distributed to its common and preferred stock holders one subscription right
for each share of the Company’s common or preferred stock owned as of the record date, which entitled the holder to purchase
0.50 shares of common stock, at the subscription price of $25.00 per share, split adjusted, subject to certain protection mechanics
in place to preserve the Company’s ability to utilize its net operating loss carryforwards (“NOLs”).
The Company accepted
subscriptions for 196,694 shares, split adjusted, resulting in aggregate gross proceeds of approximately $4.9 million. Expenses
incurred to complete the Rights Offering amounted to approximately $0.4 million.
The Company has the
following common stock warrants outstanding at July 31, 2016:
Warrant Transaction
|
|
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
2013 Private Placement
|
|
|
121,979
|
|
|
$
|
40.00
|
|
2013 Fortress Credit Agreement
|
|
|
87,410
|
|
|
$
|
41.20
|
|
2014 Private Placement
|
|
|
59,693
|
|
|
$
|
49.00
|
|
2015 Common Stock Offering
|
|
|
99,683
|
|
|
$
|
55.20
|
|
Total Warrants
|
|
|
368,765
|
|
|
|
|
|
7. STOCK OPTIONS AND STOCK BASED COMPENSATION
The Company has a
stock-based compensation plan available to grant incentive stock options, non-qualified stock options and restricted stock to
employees and non-employee members of the Board of Directors and advisors.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The Company’s
2010 Stock Incentive Plan (the “2010 Plan”) succeeded the 1999 Stock Option/Stock Issuance Plan (the “1999 Plan”).
As of July 31, 2016, options to purchase 11,739 shares of common stock were outstanding under the 1999 Plan, and no further grants
can be made under the 1999 Plan.
The 2010 Plan was
approved by the Board of Directors on May 26, 2010 and became effective on August 13, 2010, upon approval by stockholders,
and was subsequently amended by the Board of Directors on March 12, 2015 and approved by stockholders on April 24, 2015.
A maximum of 262,500 shares of Crossroads common stock may be awarded. As of July 31, 2016, options to purchase 297,238
shares of common stock were granted from the 2010 Plan, of which 188,399 were outstanding. During the nine months ended July 31,
2016 and 2015, 0 and 5,879 common stock shares were granted from the 2010 Plan, respectively.
As of July 31, 2016,
options to purchase an aggregate of 200,139 shares of common stock were outstanding under the 1999 Plan and the 2010 Plan, of
which 145,083 were vested. Under the 2010 Plan, 27,048 shares of common stock were available for future grants as of July 31,
2016. The shares of common stock reserved for future grant are reduced by 26,344 options previously exercised under the
2010 Plan, and 20,709 shares of stock granted under the 2010 Plan. The Compensation Committee of the Board of Directors
determines the exercise price, term and other conditions applicable to each stock option granted under the 2010 Plan. The exercise
price of stock options is set on the grant date and may not be less than the fair market value per share of the Company’s
stock on that date (at market close). The 2010 Plan options generally become exercisable over a four-year period (vesting 25%
after one year, the remaining 75% vesting quarterly thereafter) and expire after ten years. The majority of the employee incentive
stock option grants vest on a schedule of 25% at the end of six months and 12.5% thereafter until fully vested. Stock option exercises
are fulfilled with new shares of common stock.
The Company realized
stock-based compensation expense for all awards issued under the Company’s stock plans in the following line items in the
consolidated statements of operations:
|
|
Nine months ended July
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
454
|
|
|
$
|
501
|
|
Discontinued operations
|
|
|
103
|
|
|
|
242
|
|
Total stock-based compensation
|
|
$
|
557
|
|
|
$
|
743
|
|
The fair value of
each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based
on historical volatility of the Company’s common stock. The expected term represents an estimate of the time options are
expected to remain outstanding based upon historical analysis. The risk-free rate for periods within the contractual life of the
option is based on the U.S. treasury yield curve in effect at the time of grant. The variables used in the Black-Scholes calculation
are listed below for the respective periods, no options were granted during the nine months ended July 31, 2016:
|
|
Nine
months ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
108
|
%
|
|
|
74 - 76
|
%
|
Risk-free interest rate
|
|
|
1.2
|
%
|
|
|
1.4 - 1.6
|
%
|
Expected term (years)
|
|
|
4 - 5
|
|
|
|
4 - 5
|
|
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The following table
summarizes information about stock option activity for the nine months ended July 31, 2016:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
(years)
|
|
|
Aggregate
Intrinsic
Value ($M)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest at
October 31, 2015
|
|
|
205,588
|
|
|
$
|
37.14
|
|
|
|
7.26
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
32,000
|
|
|
$
|
5.90
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(37,449
|
)
|
|
$
|
47.39
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest at July 31, 2016
|
|
|
200,139
|
|
|
$
|
30.23
|
|
|
|
5.24
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 31, 2016
|
|
|
145,083
|
|
|
$
|
35.05
|
|
|
|
4.07
|
|
|
$
|
-
|
|
The weighted average
fair value per option granted during the nine months ended July 31, 2016 and 2015 was $4.67 and $1.56, respectively. The total
intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date
of exercise) exercised during the nine months ended July 31, 2016 and 2015 was $0 and $36,000, respectively. During the nine months
ended July 31, 2016 and 2015, the amount of cash received from the exercise of stock options was $0 and $52,000, respectively.
The Company granted
no options to non-employees during the nine months ended July 31, 2016 and 2015.
At July 31, 2016,
there was approximately $0.2 million of total unrecognized compensation cost related to non-vested stock option awards which is
expected to be recognized over a weighted-average period of 0.9 years. There were 22,915 and 47,790 options that became vested
during the nine months ended July 31, 2016 and 2015, respectively, with the total fair value of these awards of approximately
$0.4 million and $1.3 million, respectively.
The following table
shows information about outstanding stock options at July 31, 2016:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
Shares
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise Prices
|
|
|
Outstanding
|
|
|
Contractual Term
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
$
|
-
|
|
|
$
|
5.90
|
|
|
|
32,000
|
|
|
|
9.85
|
|
|
$
|
5.90
|
|
|
|
-
|
|
|
$
|
-
|
|
$
|
11.98
|
|
|
$
|
24.63
|
|
|
|
20,156
|
|
|
|
4.81
|
|
|
$
|
18.80
|
|
|
|
20,156
|
|
|
$
|
18.80
|
|
$
|
25.62
|
|
|
$
|
25.62
|
|
|
|
27,045
|
|
|
|
7.31
|
|
|
$
|
25.62
|
|
|
|
27,045
|
|
|
$
|
25.62
|
|
$
|
25.96
|
|
|
$
|
26.80
|
|
|
|
24,863
|
|
|
|
3.13
|
|
|
$
|
26.38
|
|
|
|
12,788
|
|
|
$
|
25.98
|
|
$
|
28.20
|
|
|
$
|
33.94
|
|
|
|
4,715
|
|
|
|
3.83
|
|
|
$
|
29.27
|
|
|
|
2,872
|
|
|
$
|
29.95
|
|
$
|
34.94
|
|
|
$
|
34.94
|
|
|
|
43,453
|
|
|
|
1.12
|
|
|
$
|
34.94
|
|
|
|
43,453
|
|
|
$
|
34.94
|
|
$
|
35.27
|
|
|
$
|
45.59
|
|
|
|
25,913
|
|
|
|
7.30
|
|
|
$
|
41.78
|
|
|
|
20,155
|
|
|
$
|
41.50
|
|
$
|
45.76
|
|
|
$
|
119.80
|
|
|
|
21,994
|
|
|
|
4.76
|
|
|
$
|
63.40
|
|
|
|
18,614
|
|
|
$
|
66.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
119.80
|
|
|
|
200,139
|
|
|
|
5.24
|
|
|
$
|
30.23
|
|
|
|
145,083
|
|
|
$
|
35.05
|
|
8. EMPLOYEE BENEFITS
In 1996, the Company
established the Crossroads Systems, Inc. 401(k) Savings Plan (the “Savings Plan”), which is a qualified plan under
section 401(k) of the Internal Revenue Code. All employees who have attained 18 years of age are eligible to enroll in the
Savings Plan. The Company may make matching contributions to those employees participating in the Savings Plan based upon
Company productivity and profitability. Company contributions vest over a period of six years. In October 2000, the Company
adopted a new 401(k) Savings Plan that meets all of the criteria set forth above in the savings plan. The Company made matching
contributions of $92,000 and $143,000 during the nine months ended July 31, 2016 and 2015, respectively.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
9.
RELATED PARTY TRANSACTIONS
2015 Private Placement
On January 27, 2015,
the Company entered into placement agency agreements with certain accredited investors for the issuance and sale in a private
placement (the “2015 Private Placement”) of an aggregate of 153,587 split adjusted units, at a purchase price of $46.00
per unit, split adjusted, for net aggregate proceeds of approximately $7.1 million before expenses. Each unit consisted of one
share of common stock and warrants to purchase one-half of a share of common stock at an exercise price of $55.20 per whole share,
split adjusted. Lone Star Value Investors, LP (“Lone Star Value LP”), controlled by Jeffrey E. Eberwein, Crossroads’
Chairman of the Board of Directors at the time, acquired 17,500 units in the placement for approximately $0.8 million.
2015 Common Stock Rights Offering
On July 29, 2015,
the Company completed a Rights Offering for the Company’s common stock, accepting subscriptions for 196,694 shares of common
stock at $25.00 per share, split adjusted, for aggregate gross proceeds of approximately $4.9 million. Lone Star Value LP, controlled
by Jeffrey E. Eberwein, Crossroads’ Chairman of the Board of Directors at the time, acquired 76,895 shares in the Rights
Offering for approximately $1.9 million pursuant to the terms of the Rights Offering.
Discontinued operations consideration
paid
During the three
months ended April 30, 2016, the Company’s Board of Directors approved a payment to the Series F Preferred stockholders
of the greater of 50% of the net proceeds from the sale of the Business or $1.0 million. The sale of the Business required a 70%
approval of the Series F Preferred stockholders. The $1.0 million payment was recognized as an expense of selling the Business.
10.
PREFERRED STOCK RIGHTS
On May 23, 2014, the
Company’s Board of Directors adopted a tax benefit preservation plan (the “Plan”). The Plan is intended to diminish
the risk that the Company’s ability to use NOLs to reduce future federal income tax obligations may become substantially
limited due to an “ownership change,” as defined in Section 382 of the Internal Revenue Code. The Board of Directors
authorized and declared a dividend distribution of one right for each outstanding share of common stock, par value $0.001 per
share, and Series F Preferred Stock, par value $0.001 per share, of the Company to stockholders of record as of the close of business
on June 4, 2014. Each right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series
G Participating Preferred Stock, par value $0.001 per share, of the Company at an exercise price of $14.00 per one one-thousandth
of a share of Series G Participating Preferred Stock, subject to adjustment.
The rights will become
exercisable following (i) the 10th business day (or such later date as may be determined by the Board of Directors) after the
public announcement that an acquiring person has acquired beneficial ownership of 4.99% or more of the common stock (calculated
pursuant to the Plan) or (ii) the 10th business day (or such later date as may be determined by the board) after a person or group
announces a tender or exchange offer that would result in ownership by a person or group of 4.99% or more of the common stock
(calculated pursuant to the Plan).
In addition, upon
the occurrence of certain events, the exercise price of the rights would be adjusted and holders of the rights (other than rights
owned by an acquiring person or group) would be entitled to purchase common stock at approximately half of market value. Given
the potential adjustment of the exercise price of the rights, the rights could cause substantial dilution to a person or group
that acquires 4.99% or more of the Company’s common stock on terms not approved by the Company’s Board of Directors.
No rights were exercisable
at July 31, 2016. There is no impact to the Company’s financial results as a result of the adoption of the Plan for the
nine months ended July 31, 2016 or 2015.