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.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
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.
On March 22, 2016, the Company announced the
sale of its product business and all related assets to Canadian-based StrongBox Data Solutions, Inc. (“SDSI”) for gross
proceeds of $1.9 million in cash. Under the purchase agreement, the Company sold and transferred all of the assets related to the
Company’s product and support services division, including its StrongBox and SPHiNX products.
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 developed its past products. Our operations
are funded by cash and cash equivalents, as well as from revenue provided by IP licensing, royalties and other revenue. We may
also generate revenue from other sources as described in Liquidity and Capital Resources, including without limitation, through
obtaining a favorable judgment or settlement in our ongoing litigation concerning infringement of our intellectual property, successfully
monetizing all or a portion of the non-‘972 patents, or pursuing other strategic opportunities to generate revenue. If we
are not able to obtain additional sources of revenue through these or alternative means, the Company may not have sufficient funds
to continue to operate the business. These conditions raise substantial doubt about the Company’s ability to continue as
a going concern. 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 (“Fortress”) is the general partner, is accounted for using the equity method. The current investment balance
is nominal at April 30, 2017.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles 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 and Cash Equivalents, Restricted Cash
Cash and cash equivalents 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 April 30, 2017, total uninsured deposits were $2.1 million. The Company has
not experienced any losses in such accounts.
Restricted cash amounted to $0.6 million and
represents cash held from the sale of a portion of potential future revenue generated from the Company’s ‘972 patent
family.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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”),
pursuant to 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 license, settlement, or award
proceeds from the ‘972 patents, 40% of the proceeds between $20 and $100 million, and 12% of the proceeds above $100 million
received. Under the terms of the agreement, the Company’s use of proceeds is restricted to payment of the Fortress debt,
approved legal expenditures, and certain general and administrative expenses. During the six months ended April 30, 2017 and 2016,
the Company recognized $0.9 and $3.3 million in other income, respectively. $0.6 million is held in deferred revenue and restricted
cash at April 30, 2017. The Company will recognize other income from this transaction as the authorized expenditures are made with
the unspent balance being reflected as deferred revenue.
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 3,234,495 and 3,150,497 for the six months ended April 30, 2017 and 2016, respectively. The dilutive common stock equivalents
for the six months ended April 30, 2017 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 274,473 shares of common stock.
Net loss available to common stockholders is
calculated by deducting from net loss, preferred dividends paid and accrued of $136,000 and $129,000 for the six months ended April
30, 2017 and 2016, respectively.
Recently Issued Accounting Pronouncements
In August 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15 requiring management to evaluate whether
there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue
as a going concern, which is currently performed by the external auditors. Management will be required to perform this assessment
for both interim and annual reporting periods and must make certain disclosures if it concludes that substantial doubt exists.
This ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2016.
The adoption of this guidance is not expected to have a material effect on our financial statements.
In March 2016, the FASB issued ASU 2016-09
amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax deficiencies
to be recorded in the income statement when the awards vest or are settled, with prospective application required. The guidance
also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing activity
to an operating activity, with retrospective or prospective application allowed. Additionally, the guidance requires the classification
of employee taxes paid when an employer withholds shares for tax-withholding purposes as a financing activity on the statement
of cash flows, with retrospective application required. This ASU is effective for annual periods, and interim periods after those
annual periods, beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact
of the new guidance on its consolidated financial statements and related disclosures.
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.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of April 30, 2017, 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. As of April 30, 2017 and October 31, 2016, the Company
held no items which are reported at fair value.
3. ACCRUED EXPENSES AND DEFERRED REVENUE
Accrued expenses consist of the following (in
thousands):
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
329
|
|
|
$
|
398
|
|
Payroll related
|
|
|
96
|
|
|
|
218
|
|
Other
|
|
|
12
|
|
|
|
21
|
|
|
|
$
|
437
|
|
|
$
|
637
|
|
Deferred revenue, consists of the following
(in thousands):
|
|
April 30,
|
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
License
|
|
$
|
42
|
|
|
$
|
72
|
|
Deferred revenue stream sale
|
|
|
619
|
|
|
|
1,459
|
|
|
|
$
|
661
|
|
|
$
|
1,531
|
|
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 the Company’s product division, the Company’s office space and equipment lease obligations have been assigned
to the purchaser.
Legal Proceedings
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,”
“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
inter 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 SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
An “
Ex Parte
Reexamination,”
“Reexamination” is a different post-grant review of an issued patent in which the requestor attempts to challenge the
validity of a patent on certain grounds (e.g. novelty and obviousness). In a Reexamination proceeding, a panel of three
senior examiners from the U.S. Patent and Trademark Office (the “U.S. Patent Office”) will review the issued patent
against prior art in a manner similar to the original examination. An adverse ruling in a Reexamination proceeding involving
any patent asserted against any defendant in district court litigation would result in invalidation or other limitations on our
patent rights. A Reexamination is typically about an eighteen-month process.
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 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.
The Company has recorded revenue of approximately
$1.3 million at April 30, 2017 related to an agreement between the companies. The Company believes these amounts have been earned
and collectability is probable at April 30, 2017. Nonetheless, Crossroads has reserved a portion of Dot Hill revenue
in the amount of $134,000 and cost of sales in the amount of $34,000 during the quarter ended April 30, 2017.
Effective November 1, 2016, the Company has discontinued recognition of revenue (and related cost of sales) for these Dot Hill
royalties. Had the Company accrued the revenue for the period ended April 30, 2017, the revenue recognized for the quarter would
have been $182,000, and costs of sales of $46,000 would have been accrued.
Revenue for the six months ended April 30,
2016 and the accounts receivable balance at April 30, 2017 and October 31, 2016 are concentrated with Dot Hill. In 2015, Seagate
Technologies (“Seagate”) purchased Dot Hill. The loss or bankruptcy of Seagate could adversely affect operating
results. The Company has not experienced material credit losses in any of the periods presented. The level of sales to any
customer may vary from quarter to quarter. However, the Company expects that significant customer concentrations will continue
for the foreseeable future.
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
(the “‘311 Patent”) 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.
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, Inc. (“NetApp”) was first given notice
of potential infringement in 2004. Cisco Systems, Inc. (“Cisco”)was first given notice of potential infringement in
2002. Quantum Corporation (“Quantum”) has been on notice of its potential infringement since 2006. Oracle Corporation
(“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.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company filed a lawsuit on October 7, 2013
against 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 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.
The Company filed a lawsuit on February 18,
2014 against 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
The Company filed a lawsuit on February 18,
2014 against 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.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On January 23, 2017, the United
States Court of Appeals for the Federal Circuit notified the Company that the oral argument date for the Company’s
appeal was on March 7, 2017. The appeals before the Federal Circuit relate to the Final Written Decisions issued by the
Patent Trial and Appeal Board of the U.S. Patent Office regarding IPR proceedings 2014-01207, 2014-01209, 2014-01226,
2014-01463, 2014-01544, and the IPRs joined to certain of those proceedings (IPRs 2015-00825, 2015-00854, and 2015-00852). No
ruling has been made relating to the appeal and the Company is awaiting the decision.
5. DISCONTINUED OPERATIONS
On March 22, 2016, the Company entered into
a Purchase and Assignment Agreement (the “Purchase Agreement”) with SDSI.
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 5.0% Series F Convertible Preferred Stock (the “Series F Preferred Stock”) in exchange
for a vote to approve the divestiture. The Board of Directors approved this payment, which has been reflected as a cost to sell
the Business.
The assets and liabilities transferred for
consideration received in the second fiscal quarter of 2016 were (in thousands, at book value):
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
|
|
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
|
|
|
Six Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
859
|
|
IP License, royalty and other
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
1,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
309
|
|
IP License, royalty and other
|
|
|
-
|
|
|
|
41
|
|
|
|
-
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
-
|
|
|
|
41
|
|
|
|
-
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
-
|
|
|
|
(104
|
)
|
|
|
-
|
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
-
|
|
|
|
452
|
|
|
|
-
|
|
|
|
1,275
|
|
Research and development
|
|
|
-
|
|
|
|
638
|
|
|
|
-
|
|
|
|
1,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
-
|
|
|
|
1,090
|
|
|
|
-
|
|
|
|
3,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
$
|
-
|
|
|
$
|
(1,194
|
)
|
|
$
|
-
|
|
|
$
|
(1,812
|
)
|
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 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 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 April 30, 2017, 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 exercisable immediately
upon issue, and expire March 22, 2018. During the twelve months ended October 31, 2016, the Company issued a dividend of
6,346 split adjusted common shares valued at approximately $138,000, and cash dividends of approximately $133,000. During the six
months ended April 30 2017, the Company issued a cash dividend of approximately $136,000. Accrued and unpaid dividends were valued
at approximately $88,000 as of April 30, 2017.
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).
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, the Company reclassified the Series F Preferred Stock and warrants to permanent stockholders’ equity
following the stockholders vote.
During the six months ended April 30, 2017,
no 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 common stock to Fortress at $41.25 per share, split adjusted. In connection with the 2015 Common
Stock Rights Offering, as defined and described below, an additional 0.2019 warrants were granted for every outstanding warrant
on August 31, 2015, with the strike price remaining $41.25. Certain terms in the Fortress agreement permit us to buy out the Fortress
partnership interest and return all of the rights to the assigned non-‘972 patent rights to ourselves in return for the payment
of a monetization call option of $2 million dollars. As of April 30, 2017, there were 87,410 split adjusted warrants outstanding.
The Fortress warrants will expire on the seventh
anniversary of the effective date of the Fortress transactions.
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, split adjusted. Fees in the amount of
$0.2 million relating to the stock placement were netted against proceeds. The warrants were exercisable upon the six-month
anniversary of issue, and expire March 31, 2019. In connection with the 2015 Common Stock Rights Offering, an additional 0.2019
warrants were granted for every outstanding warrant on August 31, 2015, with the strike price remaining $49.00. As of April 30,
2017, 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. Fees in the amount of $1.1 million
relating to the stock placement were netted against proceeds. The warrants were exercisable upon the six-month
anniversary of issue, and expire January 31, 2020. In connection with the 2015 Common Stock Rights Offering an
additional 0.2019 warrants were granted for every outstanding warrant on August 31, 2015, with the strike price of $55.20. As
of April 30, 2017, there were 99,683 split adjusted warrants outstanding.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2015 Common Stock Rights Offering
On July 28, 2015, the Company closed a subscription
rights offering for the Company’s common stock (the “2015 Common Stock Rights Offering”). Under the terms of
the 2015 Common Stock Rights Offering, the Company distributed to its common and preferred stockholders 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
2015 Common Stock Rights Offering amounted to approximately $0.4 million.
The Company
has the following common stock warrants outstanding at April 30, 2017:
|
|
|
|
|
Weighted
|
|
|
|
Warrants
|
|
|
Average Exercise
|
|
Warrant Transaction
|
|
Outstanding
|
|
|
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.
The Company’s 2010 Stock Incentive Plan
(the “2010 Plan”), succeeded the 1999 Stock Option/Stock Issuance Plan (the “1999 Plan”). As of April
30, 2017, options to purchase 2,023 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 683,064 shares,
adjusted for the Reverse Split of Crossroads common stock may be awarded. As of April 30, 2017, options to purchase 467,690
shares of common stock were granted from the 2010 Plan, of which 272,449 were outstanding. During the six months ended April 30,
2017 and 2016, no common stock shares were granted from the 2010 Plan, respectively.
As of April 30, 2017, options to purchase
an aggregate of 274,473 shares of common stock were outstanding under the 1999 Plan and the 2010 Plan, of which 88,038 were
vested. Under the 2010 Plan, 343,111 shares of common stock were available for future grants as of April 30, 2017. 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 one year. 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:
|
|
April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
120
|
|
|
$
|
348
|
|
Discontinued operations
|
|
|
-
|
|
|
|
103
|
|
Total stock-based compensation
|
|
$
|
120
|
|
|
$
|
451
|
|
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 six months ended April 30, 2016:
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
Six Months Ended April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
-
|
|
Expected volatility
|
|
|
106
|
%
|
|
|
-
|
|
Risk-free interest rate
|
|
|
1.9
|
%
|
|
|
-
|
|
Expected term (years)
|
|
|
5
|
|
|
|
-
|
|
The following table summarizes information
about stock option activity for the six months ended April 30, 2017:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(years)
|
|
|
Value ($M)
|
|
Outstanding and expected to vest at October 31, 2016
|
|
|
198,700
|
|
|
$
|
30.16
|
|
|
|
5.02
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
150,000
|
|
|
$
|
2.81
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(74,227
|
)
|
|
$
|
35.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest at April 30, 2017
|
|
|
274,473
|
|
|
$
|
13.74
|
|
|
|
8.73
|
|
|
$
|
0.1
|
|
Exercisable at April 30, 2017
|
|
|
88,038
|
|
|
$
|
33.93
|
|
|
|
6.62
|
|
|
$
|
-
|
|
The weighted average fair value per option
granted during the six months ended April 30, 2017 and 2016 was $2.86 and $0 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 six months ended April 30, 2017 was $0. During the six months ended April 30, 2017 the amount of cash received from the exercise
of stock options was $0.
At April 30, 2017, there was approximately
$0.4 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 0.8 years. There were 4,611 and 10,145 options that became vested during the six months ended
April 30, 2017 and 2016, respectively with the total fair value of these awards of approximately $0.1 and $0.3 million, respectively.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows information about
outstanding stock options at April 30, 2017:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
Shares
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise Prices
|
|
|
Outstanding
|
|
|
Contractual Term
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
$
|
-
|
|
|
$
|
2.81
|
|
|
|
150,000
|
|
|
|
9.92
|
|
|
$
|
2.81
|
|
|
|
-
|
|
|
$
|
-
|
|
$
|
5.90
|
|
|
$
|
5.90
|
|
|
|
32,000
|
|
|
|
9.10
|
|
|
$
|
5.90
|
|
|
|
-
|
|
|
$
|
-
|
|
$
|
11.98
|
|
|
$
|
25.62
|
|
|
|
39,939
|
|
|
|
6.51
|
|
|
$
|
23.42
|
|
|
|
39,939
|
|
|
$
|
23.42
|
|
$
|
25.96
|
|
|
$
|
42.60
|
|
|
|
34,627
|
|
|
|
7.11
|
|
|
$
|
36.13
|
|
|
|
33,047
|
|
|
$
|
36.56
|
|
$
|
45.59
|
|
|
$
|
83.19
|
|
|
|
17,213
|
|
|
|
6.23
|
|
|
$
|
52.61
|
|
|
|
14,358
|
|
|
$
|
53.98
|
|
$
|
84.53
|
|
|
$
|
84.53
|
|
|
|
148
|
|
|
|
4.50
|
|
|
$
|
84.53
|
|
|
|
148
|
|
|
$
|
84.53
|
|
$
|
91.85
|
|
|
$
|
91.85
|
|
|
|
136
|
|
|
|
4.00
|
|
|
$
|
91.85
|
|
|
|
136
|
|
|
$
|
91.85
|
|
$
|
98.50
|
|
|
$
|
98.50
|
|
|
|
126
|
|
|
|
5.00
|
|
|
$
|
98.50
|
|
|
|
126
|
|
|
$
|
98.50
|
|
$
|
99.83
|
|
|
$
|
99.83
|
|
|
|
180
|
|
|
|
4.76
|
|
|
$
|
99.83
|
|
|
|
180
|
|
|
$
|
99.83
|
|
$
|
119.80
|
|
|
$
|
119.80
|
|
|
|
104
|
|
|
|
4.25
|
|
|
$
|
119.80
|
|
|
|
104
|
|
|
$
|
119.80
|
|
$
|
2.81
|
|
|
$
|
119.80
|
|
|
|
274,473
|
|
|
|
8.73
|
|
|
$
|
13.74
|
|
|
|
88,038
|
|
|
$
|
33.93
|
|
8. EMPLOYEE BENEFITS
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. Under the Savings
Plan, participating United States employees may defer up to 100% of their pretax salary, but not more than statutory limits. Our
matching contributions vest immediately to employees up to four percent of their pretax salary. The Company made matching
contributions of $16,000 and $82,000 during the six months ended April 30, 2017 and 2016, respectively.
9. RELATED PARTY TRANSACTIONS
During the year ended October 31, 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 net operating loss carryforwards 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 of Directors) 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 April 30, 2017.
There is no impact to the Company's financial results as a result of the adoption of the Plan for the six months ended April 30,
2017 or 2016.