Item 1. Business
Our Direction and Strategy
Since its inception in 1996, Crossroads, a Delaware corporation, has been a prolific creator of intellectual property. As pioneers in data storage, our engineers created some of the industry’s most important breakthroughs, many of which are still utilized today by technology leaders. The patents we authored are the result of investing heavily in research and development. This strategic focus resulted in Crossroads gaining unique and extensive knowledge of data storage and data management technologies. Therefore, protecting our proprietary technology is vital to our business strategy. More than 50 companies have licensed our technology since 2000 and Crossroads has been paid more than $61 million for the right to use our inventions. We believe there are additional companies who would benefit from a license to our technology.
On March 22, 2016, we announced the sale of our 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. As part of the purchase agreement, 27 of Crossroads’ employees transitioned to SDSI, and 10 employees were terminated in a reduction in force (“RIF”). Included in the transfer were assignments of ongoing contracts. In the event SDSI failed to perform such contracts, or their other assumed obligations under the purchase agreement, parties to such contracts or obligations could seek damages from the Company under certain circumstances. Depending on the claim for damages, the Company could have a claim for indemnification against SDSI pursuant to the purchase agreement. Any such indemnification claim would be subject to the provisions of the purchase agreement, as well as SDSI’s ability to pay.
Technology Licensing
We generate revenue when companies using our technology agree to pay us either an upfront licensing fee, or a combination of upfront fees and ongoing licensing fees for the use of our intellectual property. Our licensing and litigation agreements sometimes include provisions to cross-license patents from other companies, further enhancing our intellectual property assets and product capabilities. The Company’s intellectual property assets are identified in two distinct categories. The first category, known as the ‘972 patent family, consists of 31 patents and pending patents that are primarily concentrated around access controls. The second category, known as the non-‘972 patents, consists of 140 patents and pending patents that are primarily directed to five product families: optimizing command processing, enabling interoperability, managing networks, enhancing tape libraries, and improving data systems. On March 22, 2016, we announced that Crossroads, in partnership with Fortress Investment Group LLC (“Fortress”), signed an agreement with AQUA Licensing (“AQUA”) to market and sell the non-‘972 patent portfolio. AQUA will receive a commission on any revenue realized from the non-‘972 patent portfolio. The Company can provide no assurance regarding the timing or value of a transaction, or even if one will occur.
The ‘972 Patent Family
The ‘972 patent family has been the focus of years of litigation and licensing campaigns. As of October 31, 2016, approximately 50 companies have licensed ‘972 patents from Crossroads. Of these, 17 companies licensed our patents without litigation and the remaining companies took licenses as a result of litigation-related settlements. All lawsuits initiated by Crossroads have been filed in the U.S. District Court for the Western District of Texas.
One of the litigated cases in the Western District Court of Texas went through a jury trial. The jury reached a verdict that the asserted patents were valid and infringed by the defendant. The jury awarded damages to Crossroads that consisted of 3% and 5% of product sales as reasonable royalties on two different infringing products made by the defendant. The case was appealed to the U.S. Court of Appeals for the Federal Circuit, and the jury’s verdict was affirmed. In another case, we received a default judgment against the defendant and were entitled to an award of royalties. Upon request in another case, the U.S. Patent and Trademark Office (the “U.S. Patent Office”) conducted a re-examination of certain patents within the ‘972 patent family. The U.S. Patent Office examined over two hundred prior art references and ultimately re-certified the patentability of the claims of those patents. In the course of our lawsuits to date, the U.S. District Court has construed the meaning of several terms within the claims of the ‘972 patent family and in each instance the rulings were in favor of Crossroads.
We 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, Techquity received the rights to 52% of the first $20 million in licenses, settlement, or award proceeds from the ‘972 patents, 40% of the proceeds between $20 and $100 million, and 12% of proceeds above $100 million.
The Non-‘972 Patent Family
Our non-‘972 patent family comprises five distinct patent categories:
· “Optimized Command Processing” relating to techniques for ensuring that data and messages flow smoothly through the network;
· “Enabling Interoperability” relating to facilitating communication between different protocols and networks;
· “Managing the Network” relating to methods for diagnosing and correcting network errors;
· “Enhancing Tape Libraries” relating to enhancing and optimizing operation of tape storage for Storage Area Networks (SANs); and
· “Improving Data Systems” relating to techniques for optimizing file systems and database usage in SANs.
In connection with a loan from CF DB EZ LLC, an affiliate of Fortress, the non-‘972 patents were assigned to a limited partnership controlled by Fortress, and are subject to a security interest granted to Fortress in connection with a secured credit agreement entered into with Fortress in July 2013. Certain terms in the Fortress agreement permit us to recover full control of the assets in return for the payment of a monetization call option of up to $2 million dollars. We are evaluating strategic alternatives related to the non-‘972 patent portfolio, including the possibility of exercising our rights in the agreement to regain full control of the patents. Crossroads fully paid off all debt obligations under the Fortress credit agreement on October 30, 2015.
In November 2013, the Company hired a third-party patent consulting firm to analyze the non-‘972 patents. The firm was paid a flat fee and tasked to provide an unbiased, fact-based professional opinion on the monetization potential of the portfolio. This firm determined that the 117 patent assets reviewed comprise 78 patent families and the average remaining life on these patents at that time exceeded 10 years. Certain of the non-‘972 patents likely apply to technology that complies with four industry standards. Because these industry standards are widely used, we believe that dozens of companies may have used, or may be using, the technology described in our patents without authority or properly beinglicensed. Crossroads can provide no assurances regarding the accuracy of the assumptions underlying this analysis, our ability to recover any royalties or licensing fees relating to these patents, or the timing for any such royalties or licensing fees.
In August 2014, the Company hired an intellectual property law firm to provide consulting services related to Crossroads’ non-‘972 patent portfolio. The firm was asked to validate key assumptions, propose a detailed monetization strategy and timeline, identify potentially infringing companies and products, develop detailed claims charts, and estimate revenue opportunities associated with each potentially infringing company. The firm’s work was completed in 2015.
Crossroads has not yet begun an active licensing program for the non-‘972 patent family. Because we have not developed a licensing strategy, nor identified which potentially infringing companies to pursue, we have not created a budget for litigation or monetization of our non-‘972 patent portfolio. In parallel with AQUA’s efforts to market and sell the non-‘972 patent portfolio, we will continue to evaluate alternative strategies. Various monetization alternatives available to us include the following:
·a sale of all or a portion of the patent family;
· pursuing litigation against companies we believe are infringing our rights under this patent family in order to encourage these companies to take a license to our technology (whether alone or in partnership with a law firm or firms that may take a contingent recovery);
· one or more strategic partnerships with a patent monetization company, in which case we would share a portion of the license revenues with the strategic partners taking responsibility for some or all expenses related to licensing (including litigation); or
· entering into arrangements with lenders or financial partners in order to fund litigation.
We are carefully reviewing these and other options to monetize the portfolio. Other options may become available to us and we will review those alternatives appropriately.
Employees
As of October 31, 2016, we had 5 general and administrative employees. None of our employees are represented by a labor union, and we consider current employee relations to be good.
Environmental Compliance
To date, we have not been the subject of any material investigation or enforcement action by either U.S. or foreign environmental regulatory authorities. Further, because we did not engage in primary manufacturing processes like those performed by our suppliers who are industrial manufacturers and currently do not have a product business, we believe that costs related to our compliance with environmental laws should not materially adversely affect us.
Competition
During the 19 years Crossroads has been in business, the competitive pressures have been great. We believe that several companies misappropriated our proprietary technology in the early formative years of the Company, thereby forcing Crossroads to engage in multiple capital raises and legal actions to enforce its intellectual property rights.
Legal Proceedings
The Company is and may become involved in various lawsuits as well as other certain legal proceedings that have not been fully resolved and arise in the ordinary course of business. These are proceedings to which we are a party in our own name or proceedings that have been brought against the Company. Information regarding certain material litigation proceedings is provided in Item 3 “Legal Proceedings” of this Annual Report on Form 10-K.
Properties
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 SDSI.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available on our website at www.crossroads.com, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (“SEC”). Additionally, our Standards of Professional Practice and Ethical Conduct, Code of Ethics for Senior Management and Financial Employees, Audit Committee Charter, Compensation Committee Charter and Nominating and Corporate Governance Committee Charter may be accessed through the website. Reports and other information we file with the SEC may also be viewed at the SEC’s website at www.sec.gov or viewed or obtained at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The Company’s website and the information contained therein or connected thereto shall not be deemed to be incorporated into this Annual Report on Form 10-K.
Item 1A.
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including our consolidated financial statements and related notes, before deciding whether to purchase any of our securities. Any of these risks may have a material adverse effect on our business, financial condition, results of operations and cash flows and our prospects could be harmed. In that event, the price of our securities could decline and you could lose part or all of your investment.
Litigation, Regulation and Business Risks Related to our Intellectual Property
We face current and potential adverse determinations in litigation stemming from our efforts to protect and enforce our patents and intellectual property rights and make other claims, which could broadly impact our intellectual property rights and our ability to conduct our business as currently operated, distract our management and cause substantial expenses and declines in our revenue and stock price.
Efforts to protect our intellectual property rights and to defend claims against us can increase our costs and will not always succeed; any failures could adversely affect revenues and profitability.
Intellectual property rights are crucial to our technology licensing programs. We endeavor to obtain and protect our intellectual property rights in the United States and in selected international markets. Our IP licensing revenue for the year ended October 31, 2016 and 2015 was $0.7 million and $1.0 million, respectively. If we experience a decline in revenue from our licensees, as a result of economic conditions, customers’ business performance, or otherwise, we could be materially and adversely affected. We may be unable to retain all of our intellectual property protection. Even if protection is obtained, competitors or others in the chain of commerce may raise legal challenges to our rights or illegally infringe on our rights, including through means that may be difficult to prevent or detect. For example, much of our proprietary technology resides in software that frequently is not publicly available and has prevented and may continue to prevent us from realizing the full value of our intellectual property. In addition, because of the rapid pace of technological change, and the confidentiality of patent applications in some jurisdictions, competitors may be issued patents from applications that were unknown to us prior to issuance. These patents could reduce the value of our intellectual property, to the extent they cover technologies on which we have unknowingly relied, require that we seek to obtain licenses or cease using the technology, no matter how valuable to our business. We cannot assure we would be able to obtain such a license on acceptable terms. The extent to which we succeed or fail in our efforts to protect our intellectual property will affect our costs, sales and other results of operations.
If we are unable to protect our intellectual property rights, our competitive position could be harmed, and we will be required to incur significant expenses to enforce our intellectual property rights.
We depend on our ability to protect our proprietary technology. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. Despite our efforts, the steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or infringement is uncertain, particularly in countries outside of the United States. Further, we do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims. Even issued patents may be contested, circumvented or invalidated. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future.
Protecting against the unauthorized use of our patents, trademarks and other proprietary rights is expensive, difficult and, in some cases, impossible. Additional litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of our own intellectual property and that of others. Such litigation could be costly and divert management resources, either of which could harm our business. We have also identified a number of companies that we believe may infringe our intellectual property, and there are likely others in our industry that infringe our intellectual property that we have not yet identified. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce and defend their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to successfully identify third-party infringement or prevent third parties from infringing upon or misappropriating our intellectual property, nor can we ensure that we will not be accused of infringement or misappropriation of the intellectual property rights of others.
Adverse outcomes in legal proceedings could subject us to substantial damages and adversely affect our results of operations and profitability.
We are involved in major lawsuits concerning intellectual property and other matters, which are time-consuming and the outcomes of which may be significant to results of operations in the period recognized or limit our ability to engage in our business activities. However, the outcome of legal proceedings and claims brought against the Company are subject to great uncertainty, and although we intend to vigorously pursue our claims, there are no guarantees that we can protect our intellectual property rights in our current litigation or related proceedings, settle any of the current litigation actions, prevail in any of the current litigation actions or related proceedings or prevent the unauthorized use of our technology now and in the future. Further, any favorable result we receive at the trial level or at the U.S. Patent Office may be appealed by the other party. Such appeals are expensive and time consuming, resulting in increased costs and, at a minimum, delay in receiving revenue. A successful appeal could overturn entirely any positive result for the company from a trial court or the U.S. Patent Office. Although we diligently pursue enforcement litigation, we cannot predict with significant reliability the decisions made by juries, trial courts, the U.S. Patent Office or an appellate court.
Additionally, unintended consequences of our litigation may adversely affect our business, including, without limitation, that we may have to devote significant time and financial resources to pursuing the litigation, that we have become subject to counterclaims or lawsuits and may become subject to additional counterclaims and lawsuits, that the parties we pursue claims against have filed actions, and may file additional actions, with the government (including inter partes review proceedings) to attempt to invalidate or render our patents unenforceable, and that the expenses of pursuing the litigation and related proceedings could increase based upon these counterclaims, lawsuits, inter partes review proceedings or new developments in the pending proceedings. In addition, if we do not prevail in our patent litigation or in the inter partes review proceedings, the consequences could include the circumvention or invalidation of our patents, which could have a material adverse effect on our ongoing licensing program, our ability to enforce our existing licenses, and the ability to recover damages based on infringement of our patents. Additionally, an adverse result in a counterclaim or lawsuit against us, or an inter partes review proceeding, could result in our not having the intellectual property rights necessary to practice our business as currently operated. These and other factors not currently known to or deemed material by management, could have a material and adverse impact on our business, prospects, liquidity, and results of operations.
We have transferred ownership of the non-‘972 patents to a limited partnership with an affiliate of Fortress that we do not fully control, and efforts by this limited partnership to generate revenues from the transferred patents and patent applications may not be successful.
As described above, in connection with a July 2013 secured loan transaction with Fortress, we transferred substantially all of our non-‘972 patents to a limited partnership of which an affiliate of Fortress is the general partner. Fortress generally has the power to manage, control and conduct the business and affairs of the partnership. While the limited partnership agreement gives us the right to consent to certain actions, as a limited partner we do not control the partnership and have a limited ability to direct any licensing and monetization activities without Fortress’s consent.
This partnership poses risks not otherwise present when we alone seek to license our technology. For example: Fortress may or may not take actions that we believe to be in our best interest; we may incur liabilities as a result of actions taken, or not taken, by the partnership; we may be required to devote significant management time to the requirements of and matters relating to the partnership, including litigation and licensing matters, as well management of the partnership relationship; any strategy or other disputes between us and Fortress may result in delays, expenses or operational impasses; and while we have retained a fully paid-up, royalty-free, worldwide, non-transferable, non-exclusive license to use the assigned patents, these patents are now owned by a third party not under our control, and will remain as such unless and until we are able to buy out Fortress’s interest in the partnership.
This partnership may attempt to pursue patent licensing and enforcement activity that may generate revenues for us. However, we cannot predict the success of those efforts or when revenues, if any, are generated. Any efforts to generate such revenues may require us to expend significant monetary resources. Until the Company has exercised its option to repurchase Fortress’s interest in the partnership, any revenues generated from a licensing program will be subject to the revenue sharing agreement defined in the limited partnership agreement. These limitations on our ability to monetize our non-‘972 patent family could negatively affect our financial condition and results of operations.
Our strategy to license and/or monetize the value of our intellectual property through enforcement or other strategies may not be successful.
As discussed elsewhere in this filing, we maintain an active licensing program related to our ‘972 patent family, and we are in the process of developing a campaign to monetize our non-‘972 patents.
Our strategy to monetize our non-‘972 patents is in the preliminary stage. At this time, with the assistance of third party consultants, we are developing a strategy to pursue one or more alternative methods of monetizing the non-‘972 patents, which may include one or more of the following strategies:
·a sale of all or a portion of the patent family;
· pursuing litigation against companies we believe are infringing our rights under this patent family in order to encourage these companies to take a license to our technology (whether alone or in partnership with a law firm or firms that may take a contingent recovery);
· one or more strategic partnerships with a patent monetization company, in which case we would share a portion of the license revenues with the strategic partners taking responsibility for some or all expenses related to licensing (including litigation); or
· entering into arrangements with lenders or financial partners in order to fund litigation.
Some of these strategies could be costly, and we cannot assure you that we will be able to fund such strategies ourselves nor be able to raise financing or enter into a partnership to provide for such funding. We cannot predict with certainty the time it would take to achieve any revenues from such strategies, and we cannot assure you such activities will, in fact, generate revenue. As stated above, there also are contractual limits on our ability to monetize our non-‘972 patents.
Risks Related to Capitalization Matters and Corporate Governance
The share price of our common stock has been and will likely continue to be volatile.
The trading price of our common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in these risk factors and elsewhere in our reports and other documents filed with the SEC, factors that may cause volatility in our share price include:
· our ability to meet our working capital needs;
· quarterly variations in operating results;
· changes in financial estimates by us or securities analysts who may cover our stock or by our failure to meet the estimates made by securities analysts;
· changes in market valuations of other similar companies;
· announcements by us or our competitors of new products or of significant technical innovations, contracts, acquisitions, divestitures, strategic relationships or joint ventures;
· additions or departures of key personnel;
· any deviations in net sales or in losses from levels expected by securities analysts;
· unfavorable legal or regulatory rulings associated with the enforcement of our IP rights;
· the realization of any of the risk factors presented in this annual report; and
· future sales of common stock.
Furthermore, the stock markets recently have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such as recessions, interest rate changes, international currency fluctuations or political unrest, may negatively impact the market price of our common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.
If securities or industry analysts do not publish research or reports about our business, our stock price and trading volume could decline.
The trading market for our common stock may depend on the research and reports that industry or securities analysts publish about us or our business. We do not have any control over research and reports these analysts publish or whether they will be published at all. If one or more of the analysts who decide to cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
If our common stock is delisted, the market value of, and your ability to transfer or sell, shares of our common stock may be materially and adversely affected.
In order to maintain the listing of our common stock on the Nasdaq Capital Market, we are required to meet specified financial requirements, including requirements that we maintain a minimum closing bid price of at least $1.00 per share for our common stock and that we maintain (i) a minimum stockholders’ equity of $2,500,000, (ii) a minimum market value of listed common stock of $35,000,000, or (iii) net income from continuing operations of at least $500,000 in the most recent fiscal year or two of the last three fiscal years.
We face a challenging liquidity environment and may require additional financing, which could be difficult to obtain on favorable terms or at all. Our failure to obtain necessary financing or doing so on unfavorable terms could adversely affect our results of operations.
We have historically relied on outside financing, cash flows from operations, and IP licensing and settlement revenue to fund our operations, capital expenditures and expansion. We currently face a difficult liquidity environment. We may require additional capital from equity or debt financings in the future to fund our operations, respond to competitive pressures or strategic opportunities or pursue our intellectual property monetization strategy.
We may not be able to secure timely additional financing arrangements on favorable terms, or at all. The terms of any additional financing may limit our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us if and when we require it, our ability to grow or support our business, to respond to business challenges and to pursue our intellectual property monetization strategy could be significantly limited.
Our system of internal controls may be inadequate.
We maintain a system of internal controls in order to ensure we are able to collect, process, summarize, and disclose the information required by the SEC within the time periods specified. Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Due to these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Additionally, public companies in the United States are required to review their internal controls under the Sarbanes-Oxley Act of 2002. If the internal controls put in place by us are not adequate or fail to perform as anticipated, errors could occur that would not be detected, which could require us to restate our consolidated financial statements, result in an adverse opinion on the effectiveness of our internal controls or require us to take other actions that will divert significant financial and managerial resources, as well as be subject to fines and/or other government enforcement actions. Furthermore, the price of our stock could be adversely affected and our investors could lose confidence in the accuracy and completeness of our financial reports.
We do not presently intend to repurchase any shares of our common stock and our ability to pay dividends is limited by law.
Holders of Series F Convertible Preferred Stock (the “Series F Preferred Stock”) have the right to receive dividends that accrue at a rate of 5.00% annually, are payable on June 30 and December 31 of each year, and are payable, at our option, in cash or common stock with reference to the volume-weighted-average price of our common stock on its principle trading market.
Except as required by the terms of our preferred stock, any payment of future dividends on our securities will be at the discretion of the Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends, and other considerations that our Board of Directors deems relevant. Cash dividend payments in the future may only be made out of legally available funds and, if we experience substantial losses, such funds may not be available.
Our convertible preferred stock contains covenants that may limit our business flexibility.
Our convertible preferred stock contains covenants preventing us from taking certain actions without the approval of the holders of a majority or a super-majority of the convertible preferred stock, depending on the action as described below. The need to obtain the approval of holders of our convertible preferred stock before taking these actions could impede our ability to take certain actions that management or our Board of Directors may consider to be in the best interests of our stockholders.
For as long as at least 20% of the shares of our convertible preferred stock issued in our March 2013 private placement are outstanding, we may not take any of the following actions, among others, without first obtaining the approval of the holders of at least a majority of the shares of convertible preferred stock then outstanding:
· create a new class or series of equity securities or any other security convertible into equity securities ranking senior or pari passu to the convertible preferred stock with respect to voting, dividends, or liquidation rights;
· amend, alter, or repeal any of our governing documents in a manner materially adverse to our convertible preferred stock;
· declare or pay a dividend or distribution on any securities, including our common stock, prior to the payment of the dividends required to be paid to holders of our convertible preferred stock; or
· repurchase or otherwise acquire more than a de minimis number of shares of any class of securities junior to the convertible preferred stock (which includes our common stock), except with respect to (1) shares of common stock issued upon the conversion of shares of our convertible preferred stock or the exercise of warrants issued in our March 2013 private placement, or (2) repurchases of certain securities held by our departing officers and directors up to an aggregate maximum of $100,000.
For as long as at least 20% of the shares of our convertible preferred stock issued in our March 2013 private placement are outstanding, we also may not take any of the following actions, among others, without first obtaining the approval of the holders of at least 70% of the shares of convertible preferred stock then outstanding:
· sell (outside the ordinary course) or hypothecate any of our current or future assets (other than for hypothecations pursuant to and consistent with our existing working capital arrangements); or
· incur any new debt (including redeemable preferred stock), other than pursuant to our existing working capital relationship and trade debt incurred in the ordinary course of business; provided , however, that the foregoing restrictions will not apply to:
· any assignment, conveyance, disposition, encumbrance, hypothecation, pledge, lease, sale, transfer or other disposition our intellectual property that (1) generates net proceeds of at least $3 million and (2) does not cause a material adverse effect on us or our current and anticipated operations, and
· license arrangements entered into in the ordinary course of business.
In March 2016, we received the requisite 70% approval for the sale of our product business.We cannot assure you that the holders of our convertible preferred stock would in the future approve any such restricted action, even where we believe such an action would be in the best interests of our stockholders. Any failure to obtain such approval could limit our business flexibility, harm our business and result in a decrease in the value of our common stock or convertible preferred stock.
If we lose key personnel or are unable to attract and retain qualified personnel on a cost-effective basis, our business would be harmed.
Our success is substantially dependent upon the performance of our senior management. Our management and employees can terminate their employment at any time, and the loss of the services of one or more of our executive officers or other key employees could harm our business. Competition for qualified personnel in our industry is intense, and we may not be successful in attracting and retaining such personnel on a timely basis, on competitive terms, or at all. If we were unable to attract and retain the necessary personnel on a cost-effective basis, our business would be harmed.
We do not have cumulative voting and a small number of existing stockholders exert significant control over our company, which could limit your ability to influence the outcome of stockholder votes.
Our stockholders do not have the right to cumulative votes in the election of our directors. Cumulative voting, in some cases, could allow a minority group to elect at least one director to our Board of Directors. Because there is no provision for cumulative voting, a minority group will not be able to elect any directors. Accordingly, the holders of a majority of the shares of common stock, present in person or by proxy, will be able to elect all of the members of our Board of Directors.
Our executive officers and directors, together with our largest stockholders, beneficially own a significant amount of our common stock as of January 20, 2017. As a result, these persons may be able to exercise significant influence over the outcome of stockholders votes, including votes concerning the election of directors, the adoption or amendment of provisions in our charter or bylaws and the approval of mergers and other significant corporate transactions.
From time to time we may make acquisitions. The failure to successfully integrate future acquisitions could harm our business, financial condition and operating results.
As a part of our business strategy, we have in the past and may make acquisitions in the future. We may also make significant investments in companies, products or technologies. If we fail to successfully integrate such acquisitions or significant investments, it could harm our business, financial condition, and operating results. Risks that we may face in our efforts to integrate any recent or future acquisitions include, among others:
· failure to realize anticipated savings and benefits from the acquisition;
· difficulties in assimilating and retaining employees;
· potential incompatibility of business cultures;
· coordinating geographically separate organizations;
· diversion of management’s attention from ongoing business concerns;
· coordinating infrastructure operations in a rapid and efficient manner;
· the potential inability to maximize our financial and strategic position through the successful incorporation of acquired technology and rights into our products and services;
· potential difficulties in monetizing or defending our intellectual property portfolio;
· failure of acquired technology or products to provide anticipated revenue or margin contribution;
· insufficient revenues to offset increased expenses associated with the acquisition;
· costs and delays in implementing or integrating common systems and procedures;
· reduction or loss of customer orders due to the potential for market confusion, hesitation and delay;
· impairment of existing customer, supplier and strategic relationships of either company;
· insufficient cash flows from operations to fund the working capital and investment requirements;
· difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
· the possibility that we may not receive a favorable return on our investment, the original investment may become impaired or we may incur losses from these investments;
· dissatisfaction or performance problems with the acquired company;
· the assumption of risks of the acquired company that are difficult to quantify, such as litigation;
· the cost associated with the acquisition; and
· assumption of unknown liabilities or other unanticipated adverse events or circumstances.
Acquisitions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of any transaction. We cannot provide assurance that we will be able to successfully integrate any business, products, technologies or personnel that we may acquire in the future, and our failure to do so could harm our business, financial condition, and operating results.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of the Nasdaq Capital Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. For example, in 2010, the President signed into law the Dodd-Frank Act. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us. However, as we continue to review and monitor this new law and its associated regulations, we expect to incur additional operating costs that could have a material adverse effect on our financial condition and results of operations.
These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as regulatory and governing bodies provide new guidance. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
As a public company that is subject to these rules and regulations, we may find that it is more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors and qualified executive officers.
We are subject to risks related to the provision of employee health care benefits and recent health care reform legislation.
In March 2010, comprehensive health care reform legislation under the Patient Protection and Affordable Care Act and the Health Care Education and Affordability Reconciliation Act was passed and signed into law. Provisions of the health reform legislation become effective at various dates over the next several years, and many of the regulations and guidance with respect to the health care reform legislation have not been implemented. Due to the breadth and complexity of the health reform legislation, the lack of implementing regulations and interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall impact of the health reform legislation on our business over the coming years. Our results of operations, financial position and cash flows could be materially adversely affected due to this health reform legislation.
Certain provisions in our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.
Our certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our Board of Directors. These provisions include:
· the rights of the holders of our convertible preferred stock to elect one director;
· the rights of the holders of our convertible preferred stock to approve certain transactions and corporate actions;
· no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
· the exclusive right of our Board of Directors to elect a director to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors;
· the ability of our Board of Directors to determine to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
· a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
· the requirement that a special meeting of stockholders may be called only by our Board of Directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
· advance notice procedures that stockholders must comply with in order to nominate candidates to our Board of Directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.
We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction.
We have a history of losses and we may not be able to sustain profitability in the future.
For the years ended October 31, 2016 and 2015, we recorded net losses of approximately $0.7 million and $9.0 million, respectively. We may incur additional losses in future periods. We may incur significant losses in the future for a number of reasons, including those discussed in other risk factors and factors that we cannot foresee.
Our ability to utilize our net operating loss carryforwards (“NOLs”) or recognize tax benefits on future domestic taxable income may be limited.
Our ability to fully utilize our existing NOLs could be limited or eliminated in various ways: (i) if we experience an “ownership change” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. An “ownership change” is generally defined as greater than a 50% change in equity ownership by value over a rolling three-year period. We may experience an “ownership change” in the future as a result of changes in our common stock ownership, which would result in a limitation on our ability to utilize our NOLs; (ii) due to changes in federal laws and regulations that could negatively impact our ability to recognize benefits from our NOLs; or (iii) should we not reach profitability or be only marginally profitable prior to the expiration of the NOLs. There can be no assurance that we will have sufficient taxable income to be able to utilize our NOLs prior to their expiration.
We adopted a tax benefits preservation plan, designed to preserve the value of certain income tax assets, primarily tax NOLs, which may discourage acquisition and sale of large blocks of our stock and may result in significant dilution for certain stockholders.
On May 23, 2014, we adopted a tax benefits preservation plan (the “Tax Benefit Preservation Plan”). The Tax Benefit Preservation Plan is designed to preserve stockholder value and the value of certain income tax assets primarily associated with NOLs by acting as a deterrent to any person acquiring beneficial ownership of 4.99% or more of our outstanding common stock (including shares of Series F Preferred Stock) without the approval of the Board of Directors. The Tax Benefit Preservation Plan may discourage existing 5% stockholders from selling their interest in a single block which may impact the liquidity of our common stock, may deter institutional investors from investing in our stock, and may deter potential acquirers from making premium offers to acquire us. These factors may depress the market price of our stock.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
None.
Item 3.
Item 3. Legal Proceedings
The Company is and may become involved in various lawsuits as well as other certain legal proceedings that have not been fully resolved and arise in the ordinary course of business. These are proceedings to which we are a party in our own name or proceedings that have been brought against the Company. Information regarding certain material proceedings is provided below and the possible effects on our business of proceedings we are defending is disclosed in Item 1A. “Risk Factors”, under the heading Litigation, Regulation, and Business Risks Related to our Intellectual Property, and is incorporated by reference herein.
Patent Litigation Proceedings
We have 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 a finding of infringement and validity are made by the Court or by the jury at trial.
· 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 our patent rights. An IPR, if granted, is typically a twelve-to eighteen-month process.
· An “Ex Parte Reexamination” (“Reexamination”) is a different post-grant review of an issued patent in which the requestor attempts 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 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
We 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. We believe the ruling of unpatentability was in error and have 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, we may 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, we 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.
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.
During the time we were pursuing the potential infringers of the ‘972 patent family, we gave companies with potentially infringing products the opportunity to license our 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 us with no alternatives but litigation. We believe these companies (and companies they have acquired) have been illegally using our 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 we can provide no guarantees of success, we believe the infringement by most of these companies has been prolonged and potentially willful.
In response to the lawsuits brought by us, collectively these defendants filed nineteen inter partes review petitions with the U.S. Patent Office to challenge the validity of the patents asserted by us 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 we filed lawsuits against these parties and years after they were made aware of their potential infringement. We continue to believe Crossroads 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. We believe the rulings of unpatentability were in error and has appealed these rulings to the Federal Circuit Court of Appeals. Those appeals are ongoing. 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, we may be adversely impacted in the litigation proceedings against these companies, including potentially losing the ability to continue with our claims of infringement.
We 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 us. Oracle filed nine petitions for IPR at the U.S. Patent Office challenging the validity of each of the patents we 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. We believe the rulings of unpatentability were in error and has appealed these rulings to the Federal Circuit Court of Appeals. Those appeals are ongoing. If the patents are found partially or entirely invalid during the IPR proceedings, including appeal, we may be adversely impacted in the litigation proceeding against Oracle, including potentially losing the ability to continue with our claims of infringement.
We 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 us. Cisco is a party to three petitions for IPR filed at the U.S. Patent Office challenging the validity of each of the patents we 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 ongoing. If the patents are found partially or entirely invalid during the IPR proceedings, including appeal, we may be adversely impacted in the litigation proceeding against Cisco, including potentially losing the ability to continue with our claims of infringement.
We 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 (the “‘311 Patent”) 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 us. NetApp filed seven petitions for IPR at the U.S. Patent Office challenging the validity of each of the patents we 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. We believe the rulings of unpatentability were in error and has appealed these rulings to the Federal Circuit Court of Appeals. Those appeals are ongoing. If the patents are found partially or entirely invalid during the IPR proceedings, including appeal, we may be adversely impacted in the litigation proceeding against NetApp, including potentially losing the ability to continue with our 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 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. We believe 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, we 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. If the ‘311 Patent is found partially or entirely invalid during the Reexamination proceeding, we may be adversely impacted in the litigation proceeding against NetApp, including potentially losing the ability to continue with our claims of infringement.
We 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 us. Quantum filed three petitions for IPR at the U.S. Patent Office challenging the validity of each of the patents we 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. We believes the rulings of unpatentability were in error and has appealed those rulings to the Federal Circuit Court of Appeals. Those appeals are ongoing. If the patents are found partially or entirely invalid during the IPR proceedings, including appeal, we may be adversely impacted in the litigation proceeding against Quantum, including potentially losing the ability to continue with our 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 our StrongBox product infringes 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.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The following table sets forth the high and low sales prices for our common stock, which has been listed on the Nasdaq Capital Market for all periods presented. The prices below have been adjusted to reflect the Company’s 1:20 reverse stock split effective as of June 20, 2016.
On January 17, 2017, the last reported sale price of our common stock on the Nasdaq Capital Market was $3.47 per share. As of January 17, 2017, there were 1,225,472 shares of our common stock outstanding held by 146 holders of record. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Securities Authorized for Issuance Under Equity Compensation Plans
Our Board of Directors and stockholders had previously approved our 1999 Stock Option/Stock Issuance Plan and our 2010 Stock Incentive Plan. Except as listed in the table below, we do not have any equity based plans, including individual compensation arrangements that have not been approved by our stockholders. The following table provides information as of October 31, 2016 with respect to our equity compensation plans:
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant.
Item 6.
Item 6. Selected Financial Data
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K for the fiscal year ended October 31, 2016. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section entitled “Risk Factors” included elsewhere in our filings with SEC.
Forward-Looking Statements
Various statements contained in or incorporated by reference into this annual report that express a belief, expectation, or intention, or that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Exchange Act. These forward-looking statements may include projections and estimates concerning capital expenditures, our liquidity and capital resources, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, elements of our business strategy and other statements concerning our operations, economic performance and financial condition. When used in this annual report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. In particular, the factors discussed below and in Item 1A “Risk Factors”, could affect our actual results and cause our actual results to differ materially from expectations, estimates, or assumptions expressed in, forecasted in, or implied in such forward-looking statements.
Forward-looking statements may include statements about our:
· ability to implement our business strategy, including the ability to monetize intellectual property through licensing or sale;
· anticipated trends and challenges in our business and the markets in which we operate;
· expected future financial performance;
· expectations regarding our operating expenses;
· ability to generate revenues from patent licensing and enforcement activity through our arrangement with Fortress or otherwise;
· timing of any licensing and enforcement activity;
· legal and other developments in litigation to which we may be a party, including litigation with respect to our ‘972 patents;
· ability to fully utilize our net operating loss tax benefit;
· ability to protect our confidential information and intellectual property rights;
· ability to successfully identify and manage any potential acquisitions;
· ability to maintain or broaden our business relationships and develop new relationships with strategic alliances, suppliers, customers, distributors or otherwise;
· ability to recruit and retain key personnel;
· ability to obtain additional financing; and
· ability to manage growth.
All forward-looking statements involve risks, assumptions and uncertainties. The occurrences of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. In light of these risks, uncertainties and assumptions, the forward-looking events might not occur.
Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other things contemplated by the forward-looking statements will not occur. Forward-looking statements in this Annual Report on Form 10-K are based on management’s beliefs and opinions at the time the statements are made. The forward-looking statements contained in this Annual Report on Form 10-K are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this Annual Report on Form 10-K are made as of the date of this Annual Report on Form 10-K and we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information, future events or otherwise, except as required by applicable securities laws.
Overview
The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Since its inception in 1996, Crossroads has been a prolific creator of intellectual property. As pioneers in data storage, our engineers created some of the industry’s most important breakthroughs, many of which are still utilized today by technology leaders. The patents we authored are the result of investing heavily in research and development. This strategic focus resulted in Crossroads gaining unique and extensive knowledge of data storage and data management technologies. Therefore, protecting our proprietary technology is vital to our business strategy. More than 50 companies have licensed our technology since 2000 and Crossroads has been paid more than $61 million for the right to use our inventions. We believe there are additional companies who would benefit from a license to our technology.
On March 22, 2016, we announced the sale of our product business and all related assets to Canadian-based 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. As part of the purchase agreement, 27 of Crossroads’ employees transitioned to SDSI, and 10 employees were terminated in a RIF. Included in the transfer were assignments of ongoing contracts. In the event SDSI fails to perform such contracts, or their other assumed obligations under the purchase agreement, parties to such contracts or obligations could seek damages from the Company under certain circumstances. Depending on the claim for damages, the Company could have a claim for indemnification against SDSI pursuant to the purchase agreement. Any such indemnification claim would be subject to the provisions of the purchase agreement, as well as SDSI’s ability to pay.
Technology Licensing
We generate revenue when companies using our technology agree to pay us either an upfront licensing fee, or a combination of upfront fees and ongoing licensing fees for the use of our intellectual property. Our licensing and litigation agreements sometimes include provisions to cross-license patents from other companies, further enhancing our intellectual property assets and product capabilities. The Company’s intellectual property assets are identified in two distinct categories. The first category, known as the ‘972 patent family, consists of 31 patents and pending patents that are primarily concentrated around access controls. The second category, known as the non-‘972 patents, consists of 140 patents and pending patents that are primarily directed to five product families: optimizing command processing, enabling interoperability, managing networks, enhancing tape libraries, and improving data systems.
In July 2013, we entered into a loan transaction with Fortress that was later assigned to CF DB EZ LLC, an affiliate of Fortress, which included the formation of a partnership controlled by Fortress to which we assigned all of our existing and issued patents and applications other than our patents in the ‘972 family. This partnership may seek to generate revenues through patent licensing and enforcement activity with respect to these patents, but we are unable to predict at this time when or if such efforts may commence or, if they do, whether they will be profitable. 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 up to $2 million dollars. We intend to periodically monitor and assess the viability and the value to us of such a buyout. Crossroads fully paid off all debt obligations under the Fortress credit agreement on October 30, 2015.
On October 30, 2015, we entered into an agreement with Techquity in which Techquity will share in the revenue generated from the ‘972 patent litigation. For consideration of $10.0 million received, 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 proceeds above $100 million. Under the terms of the agreement, our use of proceeds is restricted to payment of the Fortress debt and approved legal expenditures. During fiscal year 2016, the Company recognized $4.7 million in other income related to the transaction, and $1.5 million is held in deferred revenue and restricted cash.
On March 22, 2016, we announced that Crossroads, in partnership with Fortress, signed an agreement with AQUA to market and sell the non-‘972 patent portfolio. AQUA will receive a commission on any revenue realized from the non-‘972 patent portfolio. The Company can provide no assurance regarding the timing or value of a transaction, or even if one will occur.
Key Financial Definitions
Revenue. Revenue consists of royalties we earn for licenses of certain intellectual property.
Cost of Revenue. Cost of revenue consists of professional fees and services.
General and Administrative Expenses. General and administrative expenses consist primarily of compensation and related costs for personnel related to our executive, finance, human resource, and legal organizations, and fees for professional services. Professional services, excluding those IP costs included in cost of revenue, consist of outside legal, tax and audit costs.
Interest Expense. Interest expense consists of amounts charged by lenders related to interest on our line of credit and term loans, both that have been fully paid
Amortization of Debt Discount and Issuance Costs Expense. Amortization of debt discount and issuance costs expense consists of the effective interest amortization of debt, which includes the amortization of financing costs, and the fair value of the Fortress Warrants (as defined herein). It is separated from interest paid due to the material nature of both.
Other Income. Other income consists of amounts not able to be categorized elsewhere. A majority of the amounts recognized are from the partial sale of the Company’s IP revenue stream.
Discontinued Operations. Discontinued operations consist of revenue, cost of revenue, expenses, and the amounts recognized as a gain during the sale of our discontinued product and support services division.
Critical Accounting Policies and Estimates
Our discussion and analysis of the financial condition and results of operations is based on the accompanying consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these statements requires us to make significant estimates and judgments about future uncertainties that affect reported assets, liabilities, revenues and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. Our critical accounting estimates require the most difficult, subjective or complex judgments and are described below. An accounting estimate is considered critical if it requires estimates about the effect of matters that are inherently uncertain when the estimate is made, if different estimates reasonably could have been used or if changes in the estimate that are reasonably possible could materially impact the consolidated financial statements. We have discussed the development, selection and disclosure of our critical accounting policies with the Audit Committee of our Board of Directors. We believe the assumptions and estimates used and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
We license our patented technology to customers under licensing agreements that allow those customers to utilize our technology in specific products they offer. As consideration, licensees pay us a fee based on the amount of sales of their products that incorporate our patented technology. On a periodic and timely basis, the licensees provide us with reports listing their sales to end users for which they owe us license fees. Similarly, royalty revenue is estimated from licensee reports of units sold to end users subject to royalties under master contracts. In both cases, these reports are used to substantiate delivery and we recognize revenue based on the information in these reports.
Impairment of Long-lived Assets
We apply judgment when reviewing long-lived assets for impairment. We apply judgment when evaluating potential impairment indicators. Indicators we consider include adverse changes in the business climate that could affect the value of our long-lived assets, changed long-term economic outlook including downward revisions in our revenue projections, negative current events, decreases or slower than expected growth in sales of products and relative weakness in customer channels.
When an impairment indicator exists, we then evaluate long-lived assets for impairment as appropriate. Because we operate as a single reporting unit, we consider the company as a whole when evaluating our long-lived assets for impairment. If our business operations were to change and revenue streams related to long-lived assets were to become identifiable at a lower level, we would apply significant judgment to determine the appropriate grouping of these assets for impairment testing.
We use an undiscounted cash flow approach to evaluate our long-lived assets for recoverability when there are impairment indicators. Estimates of future cash flows require significant judgments about the future and include company forecasts and our expectations of future use of our long-lived assets, both of which may be impacted by market conditions. Other critical estimates include determining the asset group or groups within our long-lived assets, the primary asset of an asset group and the primary asset’s useful life.
Inherent in our development of cash flow projections for the income approach used in an impairment test are assumptions and estimates derived from a review of our operating results, approved business plans, expected growth, cost of capital and income tax rates. We also make certain assumptions about future economic conditions, applicable interest rates and other market data. Many of the factors used in assessing fair value are outside of our control. Future period results could differ from these estimates and assumptions, which could materially affect the determination of fair value of the company and future amounts of potential impairment.
Income Taxes
Deferred tax assets and liabilities are recognized for the effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. A number of estimates and judgments are necessary to determine deferred tax assets, deferred tax liabilities and valuation allowances.
We recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. The calculation of our tax liabilities requires judgment related to uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity.
We have provided a full valuation allowance against our U.S. net deferred tax assets due to our history of net losses, difficulty in predicting future results and our conclusion that we cannot rely on projections of future taxable income to realize the deferred tax assets. In addition, we have provided a full valuation allowance against certain of our international net deferred tax assets. Due to reorganizations in these jurisdictions, it is unclear whether we will be able to realize a benefit from these deferred tax assets. Also, certain changes in stock ownership could result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year. Should we undergo such a change in stock ownership, it would severely limit the usage of these carryover tax attributes against future income, resulting in additional tax charges.
Significant management judgment is required in determining our deferred tax assets and liabilities and valuation allowances for purposes of assessing our ability to realize any future benefit from our net deferred tax assets. We intend to maintain this valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Future income tax expense will be reduced to the extent that we have sufficient positive evidence to support a reversal or decrease in this allowance. We also have deferred tax assets and liabilities due to prior business acquisitions with corresponding valuation allowances after assessing our ability to realize any future benefit from these acquired net deferred tax assets.
Stock-Based Compensation
Stock-based compensation expense can be significant to our results of operations, even though no cash is used for such expense. In determining period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We use the Black-Scholes option pricing model to determine the fair value of the award. This model requires the input of highly subjective assumptions, including the expected volatility of our stock and the expected term the average employee will hold the option prior to the date of exercise. Expected volatility is based on historical volatility of Crossroads 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 estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as an adjustment in the period estimates are revised. Actual results may differ substantially from these estimates. The variables used in the Black-Scholes calculation are listed below for the respective periods:
Warrants
We have warrants to purchase common stock that are issued and outstanding and have been classified as either a liability or as equity in accordance with applicable accounting standards. The terms of these warrants, in particular their anti-dilution provisions, are evaluated on an on-going basis to determine which classification remains appropriate. If these equity warrants were classified as a liability obligation, then the warrants would be adjusted to fair value at each reporting period with the fair market adjustments being recorded to earnings.
Results of Operations
Year Ended October 31, 2016 Compared to the Year Ended October 31, 2015
Revenue. Revenue decreased $0.4 million, or 35.5%, to $0.7 million for the year ended October 31, 2016 from $1.0 million for the year ended October 31, 2015. The decrease is mainly the result of a royalty license signed in the fiscal year 2015 with Huawei Technologies Co. Ltd. (“Huawei”).
Cost of Revenue. Cost of revenue decreased $169,000, or 49.9%, to $170,000 for the year ended October 31, 2016 from $339,000 for the year ended October 31, 2015. The decrease is a result of lower cost of sales associated with the Huawei royalty license in fiscal year 2015.
General and Administrative. General and administrative expenses decreased $3.6 million, or 37.6%, to $5.9 million for the year ended October 31, 2016 from $9.5 million for the year ended October 31, 2015. The decrease was mainly due to decreases of $2.9 million in professional and legal services in connection with the decreased activity in patent and IP litigation ongoing throughout the year. The decrease was also due to decreased payroll and related expenses, including stock based compensation, of $0.6 million.
Interest expense. Interest expense was $0 for the year ended October 31, 2016 as compared to $0.4 million for the year ended October 31, 2015. The decrease was due to the payoff of the Fortress debt in fiscal year 2015.
Amortization of debt discount and issuance costs. Amortization of debt discount and issuance costs were $0 for the year ended October 31, 2016 as compared to $1.0 million for the year ended October 31, 2015. The amortization relates to the borrowings drawn from Fortress, and the decrease is due to the Fortress debt being paid off in October 2015.
Other Income. Other income was $4.7 million for the year ended October 31, 2016, and $3.8 million for the year ended October 31, 2015. The amounts reflect the amount recognized in connection with the partial IP revenue stream sale to Techquity (as described in “Liquidity and Capital Resources” below).
Liquidity and Capital Resources
Cash Flows
Our principal liquidity requirements are to meet our working capital needs. Subject to our operating performance, which, if significantly adversely affected, would adversely affect the availability of funds, we expect to finance our operations through cash and cash equivalents provided by IP licensing, proceeds from the sale of our common stock or preferred stock, debt instruments, the sale of all or part of our non-‘972 patents, and exercises of options or warrants. The Company had cash and cash equivalents of approximately $4.1 million at October 31, 2016, working capital of approximately $2.0 million and total equity of approximately $3.1 million. The Company’s management believes that it has adequate cash and cash equivalents on hand to finance its operations for at least 12 months. We may require additional capital from equity or debt financings to fund our operations or respond to strategic opportunities.
The following table summarizes our primary sources and uses of cash in the periods presented:
Net cash used in operating activities increased $9.5 million from cash provided of approximately $1.3 million in the year ended October 31, 2015 to cash used in operating activities of approximately $8.3 million in the year ended October 31, 2016. Net loss for the year ended October 31, 2016 decreased approximately $8.3 million from $9.0 million for the year ended October 31, 2015 to $0.7 million for the year ended October 31, 2016, due to lower expenses, being partially offset by other income of $4.7 million in fiscal year 2016 recorded from the partial sale of our IP revenue stream versus $3.8 million in fiscal year 2015. Cash provided by operating activities was also affected by a decrease in deferred revenue of $12.5 million as a result of the sale of the product and support business to SDSI. Included in the October 31, 2015 cash provided by operating activities was a non-cash adjustment for the amortization of debt discount of $1.0 million, which was $0 for the year ended October 31, 2016.
Cash flows from investing activities primarily relate to capital expenditures from our discontinued operations. Net cash used by investing activities was $226,000 in the year ended October 31, 2015 compared to $825,000 in cash provided by investing activities during the year ended October 31, 2016. In the year ended October 31, 2016 and 2015, the cash flows from investing activities related entirely to our discontinued operations.
Cash flows used in financing activities was $133,000 for the year ended October 31, 2016 versus cash provided by financing activities for the year ended October 31, 2015 of $5.8 million. For fiscal year 2016, cash used in financing activities related to the payment of dividends on the Series F Preferred Stock. For the fiscal year ended 2015, proceeds from the sale of common stock, and exercise of options amounted to approximately $11.1 million, offset by the repayment of debt of $5.3 million.
Financing Arrangements
In June 2016, we completed a 20:1 reverse stock split. Therefore, all common stock shares and share prices are shown post split.
Fortress Loan Transaction and Related Warrants. Effective July 22, 2013, we entered into a Credit Agreement (the “Credit Agreement”) with Fortress Credit Co LLC, an affiliate of Fortress Investment Group LLC (such affiliates collectively, “Fortress”) that provided for aggregate term loan commitments of up to $10.0 million, consisting of a term loan A (“Term Loan A”) in the principal amount of $5.0 million and a term loan B (“Term Loan B” and, together with Term Loan A, the “Term Loans”) in the principal amount of $5.0 million. We drew down the full $10.0 million of both Term Loans on July 24, 2013. The obligations under the Credit Agreement were secured by, among other things, substantially all of our assets. In connection with our entry into this loan transaction with Fortress, we transferred 109 pending or granted non-‘972 patents, which constitute substantially all of our patents other than those relating to our ‘972 patent family, to a limited partnership of which we are a limited partner and of which an affiliate of Fortress is the general partner. The limited partnership concurrently provided us with a non-exclusive license to the assigned non-‘972 patent rights for the life of such patents, subject to earlier termination if we undergo an insolvency event.
All obligations under the Fortress Credit Agreement were repaid on October 30, 2015.
As a condition to and in connection with the Credit Agreement, we issued a warrant (the “Fortress Warrant”), pursuant to which Fortress is entitled to purchase 87,410 shares of our common stock, split-adjusted. The Fortress Warrant is exercisable and will expire on the seventh anniversary of the effective date of the Fortress transactions. These warrants also previously contained what is commonly known as a “full-ratchet” anti-dilution provision, which provided that if we issued or were deemed to have issued additional shares of common stock without consideration or for a consideration per share less than the applicable exercise price of the Fortress Warrant, which was initially $41.20 per share, split-adjusted, then the exercise price of the Fortress Warrant will be reduced on a “full ratchet” basis, concurrently with the new issue, to the consideration per share we received for the new issue or deemed issue of the additional shares of common stock. In January 2014, the Company and Fortress agreed to amend the Fortress Warrant to remove this full-ratchet anti-dilution provision.
Private Placements.
On March 22, 2013, we 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 5.0% 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 2,282,754 shares of common stock with an exercise price of $2.00 per share. The 1 for 20 stock split effective June 20, 2016 did affect the outstanding Series F Preferred Stock units, and the warrants were adjusted accordingly, with 121,979 outstanding at October 31, 2016, with an exercise price of $40.00 per warrant. The warrants were valued using the Black-Scholes pricing model at approximately $2,284,000 which resulted in a beneficial conversion feature on the Series F Preferred Stock of approximately $1,090,000. This amount was recorded as a deemed dividend.
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 for issuance up to 4,500,000 shares of Series F Preferred Stock, with 3,750,000 shares designated as “Sub-Series” and 750,000 shares designated as “Sub-Series.” 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 and a 4.99% beneficial ownership limitation for holders of Sub-Series. Such beneficial ownership limitations may be increased or decreased by a holder of Sub-Series to any percentage not in excess of 19.99% after providing notice of such increase or decrease to us. For as long as at least 90% of the aggregate number of shares of Sub-Series issued on the Original Issue Date (as defined in the Certificate of Designation) are outstanding, the holders of such Sub-Series, 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 are outstanding, such holders, voting as a single class, will be entitled to elect one director. As of the date hereof, 78% of the aggregate number of shares of Sub-Series are outstanding, as a remainder have been voluntarily converted into common stock at the option of the holders. Therefore, the holders of Sub-Series shares are entitled to elect one director to our Board of Directors. The holders of Sub-Series will not be entitled to vote on the directors elected by the holders of Sub-Series. The holders of shares of the Series F Preferred Stock are entitled to a liquidation preference equal to the original issuance price plus accrued and 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 we 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. This “full-ratchet” provision is no longer in effect as it was removed from the Certificate of Designation on March 14, 2014 by the requisite approval of the holders of shares of our common stock and Series F Preferred Stock. In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the Series F Preferred Stock shares are accounted for net, outside of stockholder’s equity and warrants may be accounted for as liabilities at their fair value during periods where the full ratchet anti-dilution provision is in effect, which could have a significant impact on our financial statements. Upon the expiration of the full ratchet anti-dilution provisions in March 2014, we reclassified the Series F Preferred Stock and warrants to permanent stockholders’ equity.
The Series F warrants are accounted for as a liability at their fair value of $0.8 million as of October 31, 2013. The value of the derivative warrant liability was re-measured at each reporting period with changes in fair value recorded as earnings. We engaged an independent company to value its derivative liability and perform re-measurements. To derive an estimate of the fair value of these warrants, a dynamic Black Scholes formula is utilized that computes the impact of share dilution upon the exercise of the warrant shares. This process relied 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. In the event the Series F Preferred Stock shares were redeemed, any redemption price in excess of the carrying amount of the Series F Preferred Stock would be treated as a dividend.
The warrants are exercisable six months after the closing date of the issuance, and expire March 22, 2018.
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 our capital stock, whether common, preferred or otherwise, with respect to distributions of dividends and distributions upon liquidation, dissolution or winding up of the Company. Pursuant to a registration rights agreement entered into with the purchasers of the Series F Preferred Stock, in the event that a registration statement for the resale of the common stock underlying the Series F Preferred Stock and March 2013 warrants is not declared effective prior to July 26, 2013 (120 days from the closing of the March 2013 private placement), then the rate at which dividends accrue on our Series F Preferred Stock will be increased to an annual rate of 12.0% from that date until such time as a registration statement is declared effective, at which time the dividend rate will revert to an annual rate of 5.0%. Our registration statement was not declared effective by July 26, 2013, and as a result the dividend rate on the Series F Preferred Stock at present increased to an annual rate of 12.0% until September 19, 2013, when that registration statement was declared effective. We may elect, at our discretion, to satisfy our obligation to pay semi-annual dividends in cash, by distribution of common stock or a combination thereof.
On March 31, 2014, we entered into a securities purchase agreement with certain accredited investors for the issuance and sale in a private placement of 99,331 units, at a purchase price of $45.13 per unit for net proceeds of approximately $4.5 million before expenses. Affiliates of Lone Star Value Management, LLC, of which our former Chairman of the Board of Directors serves as a managing member, purchased approximately $2.9 million of units. Roth Capital Partners acted as our financial advisor in the transaction, which was negotiated and approved by a special committee of the Board of Directors. We did not engage a placement agent in connection with the private placement, and therefore paid no commissions.
Each unit consists of one share of our common stock, par value $0.001 per share, and a warrant to purchase one-half of a share of common stock, at a weighted average exercise price of $49.00 per whole share, split adjusted.
2015 Common Stock Offering
On January 27, 2015 we sold 153,587 units at $46.00 per unit for gross proceeds 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 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 years. The warrants are exercisable upon the six-month anniversary of issue, and expire January 31, 2020.
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 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.
IP Revenue Stream Sale
On October 30, 2015, we entered into an agreement with Techquity, pursuant to which Techquity will share in the revenue generated from the ‘972 patent litigation. For consideration of $10.0 million received, 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 proceeds above $100 million received after the date of the sale agreement. Under the terms of the agreement, our use of proceeds is restricted to payment of the Fortress debt, approved legal expenditures, and certain general and administrative expenses. During fiscal year 2016, the Company recognized $4.7 million in other income, and $1.5 million is held in deferred revenue and restricted cash. We recognize other income from this transaction as the authorized expenditures are made with the unspent balance being reflected as deferred revenue.
Recent 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 within those annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
We do not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on our consolidated financial statements or disclosures.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, together with the report of independent registered public accounting firm are included elsewhere herein. Reference is made to Item 15, “Financial Statements, Financial Statement Schedules and Exhibits.”
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective (i) to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (ii) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of October 31, 2016.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting since rules of the SEC permit us to provide only management’s report on this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers and Directors
The following table sets forth certain information regarding our executive officers and directors as of January 20, 2017.
Name
Age
Position
Richard K. Coleman, Jr.
President, Chief Executive Officer and Director
Jennifer Ray Crane
Chief Financial Officer
Mark Hood
Executive Vice President of Corporate Development
Robert G. Pearse
Director, Chairman of the Board of Directors
Don Pearce
Director
Galen Vetter
Director
Hannah M. Bible
Director
Richard K. Coleman, Jr. has served as a director since April 2013 and as President and Chief Executive Officer since May 2013. Mr. Coleman is a private investor and technological advisor. His company, Rocky Mountain Venture Services has helped technology companies plan and launch new business ventures and restructuring initiatives since 1998. He has served in a variety of senior operational roles including CEO of Vroom Technologies, COO of MetroNet Communications, and President of US West Long Distance and has also held significant officer level positions with Frontier Communications, Centex Telemanagement, and Sprint Communications culminating in his appointment to lead its Technology Management Division. Mr. Coleman began his career as an Air Force Telecommunications Officer managing Department of Defense R & D projects. He has served as an Adjunct Professor for Regis University’s Graduate Management program and is a guest lecturer for Denver University, focusing on leadership and ethics. Mr. Coleman has served on a number of private, public, and non-profit boards and currently serves on the boards of directors of Ciber, Inc. (NYSE:CBR), a leading global information technology company, since April 2014, where he also serves on the Nominating/Corporate Governance, Compensation, and Audit Committees, and Hudson Global, Inc. (NASDAQ:HSON), a worldwide provider of highly specialized professional-level recruitment and related talent solutions, since May 2014, where he chairs the Compensation Committee and also serves on the Nominating/Corporate Governance and Strategic Planning Committees. In addition to his prior board experience with a variety on non-profit and private companies, Mr. Coleman previously served on the boards of NTS, Inc., a broadband services and telecommunications company (2012 until its sale in 2014); Aetrium Incorporated, a manufacturer of electromechanical equipment used in the handling and testing of semiconductor devices (2013 - 2014); and On Track Innovations Ltd., one of the pioneers of cashless payment technology (2012 - 2014). Mr. Coleman holds a B.S. Degree from the United States Air Force Academy, an M.B.A. from Golden Gate University, and is a graduate of the United States Air Force Communications Systems Officer School. We believe Mr. Coleman’s qualifications to serve on our Board of Directors include his successful leadership track record, particularly in start-up and turnaround situations, and his extensive expertise and experience in technology-related industries.
Jennifer Ray Crane has served as our Chief Financial Officer since November 2008. Ms. Crane joined Crossroads in 2003 as Financial Controller and currently leads our financial team. Prior to joining us, Ms. Crane held senior positions at Deloitte&Touche LLP and PriceWaterhouse Coopers LLP, as well as industry positions. Ms. Crane is a Certified Public Accountant licensed in the state of Texas. She is also an active member of the Financial Executive Institute (FEI) association as well as the American Institute of Certified Public Accountants (AICPA) and holds a Bachelor of Business Administration from the University of Texas at Austin.
Mark Hood has served as our Executive Vice President of Corporate Development since February 2015 and previously served as Executive Vice President of Corporate Communications from January 2013 to January 2015. From 2009 to 2013, Mark was founder and CEO of MCH Advisors, and helped early stage technology clients design and launch sales and marketing programs in high-growth markets. From 1995 to 2009, Mark was CEO of Network Consulting Services, a master sales agency he launched to integrate services from multiple telecommunications companies. Mark also held Series 7, 65, and 66 securities licenses and served as General Partner of two equity investment funds. Mark earned a BA in Marketing from Sam Houston State University and an MS in Technology Commercialization from The University of Texas at Austin, McCombs School of Business.
Robert G. Pearse has served as a director since April 2013, as the Chairman of our Board of Directors since our 2015 annual meeting of stockholders, and as Chairman of the Compensation Committee since 2013. Mr. Pearse has also served as a member of the Audit Committee and Nominating & Governance Committee since 2013. Mr. Pearse currently serves as a Managing Partner at Yucatan Rock Ventures, a firm he co-founded in 2004, where he specializes in technology investments and consulting. Mr. Pearse serves as a director for Ameri Holdings, Inc. (OTC:AMRH), Chairman of the Compensation Committee and member of the Audit Committee since 2015. Mr. Pearse serves as director for Novation Companies, Inc. (OTC:NOVC), Chairman of the Compensation and member of the Audit Committee since 2015. Mr. Pearse previously served as a director for Aviat networks, Inc. (NASDAQ:AVNW) and member of the Compensation Committee and Nominating & Governance Committee from January 2015 to November 2016. He also served as vice president of Strategy and Market Development at NetApp, Inc., a computer storage and data management Company, from September 2005 to August 2012. Before joining NetApp in 2005, Mr. Pearse co-founded Yucatan Rock Ventures and served as a managing partner from January 2004 to September 2005. Prior to that, Mr. Pearse spent approximately 17 years in leadership positions at Hewlett-Packard, most recently as the vice president of Strategy and Corporate Development from 2001 to 2004. His professional experience also includes positions at PriceWaterhouseCoopers LLP, Eastman Chemicals Company, and General Motors. Mr. Pearse earned a Master of Business Administration degree from the Stanford Graduate School of Business in 1986, and a Bachelor of Science degree in Mechanical Engineering from the Georgia Institute of Technology in 1982. We believe Mr. Pearse’s qualifications to serve on our Board of Directors include his extensive business development experience as an executive in the enterprise data management industry.
Don Pearce joined our Board of Directors in May 2009 and served as Chairman of the Board from May 2010 to November 2011. He also served as Vice President for the Texas division of Alliance Technology Group from April 2009 to January 2011 and before then served as a Regional Sales Manager for Sun Microsystems from October 2005 until June 2008. In addition, Mr. Pearce founded and has been the owner of Pearce Advisory Services since June 2008, a company specializing in consulting with technology companies in how to increase sales. Beginning his career with 12 years in systems and sales management at IBM, Mr. Pearce was employed in Sales and Sales Management at Amdahl Corp where his Division led the company in revenue 13 of 20 years. He then held executive Sales Management positions at Tarantella, StorageTek and Sun Microsystems. He has also served as a member of the Advisory Board for the Computer Science Engineering Department at Southern Methodist University since April 2002 and holds a B.S. in mathematics from SMU. He earned a M.S. in mathematics from Louisiana State University, where he also taught Mathematics for two years. We believe Mr. Pearce’s qualifications to serve on our Board of Directors include his extensive management experience in virtual tape and disk storage sales, including knowledge of and experience with certain large enterprise storage customers, competing vendors and potential strategic partners, as well as a global network of industry contacts. Mr. Pearce is also a recognized leader in business management with a significant track record of delivering revenue generating strategies within the high-tech sector.
Galen Vetter has served as a director since April 2014. In addition to serving as a director of Crossroads Systems, Inc., Mr. Vetter currently serves on the Board of Directors of Alerus Financial, Inc., ATRM Holdings, Inc., and Hill Capital Corporation. Mr. Vetter also serves as a member on the Advisory Board of Directors of Land O’Lakes Inc. Prior Board positions include Franklin Templeton France S.A., Franklin Templeton Asset Management S.A., Franklin Templeton International Services S.A., Franklin Templeton Management LVX S.A., Clearway Minnesota and ProfitSee Inc. During his career Mr. Vetter served as Global Chief Financial Officer and Senior Vice President of Franklin Templeton Investment Funds, Partner at RSM (formerly McGladrey) and President of Rust Consulting, Inc. Mr. Vetter is a licensed certified public accountant (inactive). He is a member of the National Association of Corporate Directors, including being Board Leadership Fellow certified. He received his Bachelor of Science degree from the University of Northern Iowa. We believe Mr. Vetter’s qualifications to serve on our Board of Directors include his diverse management experience, including financial, analytical, information management, strategy and team development. In addition, our board benefits from Mr. Vetter’s enterprise risk management and international business experience. Both by education and by professional experience, Mr. Vetter has had extensive exposure to analysis of financial statements and financial reporting matters and qualifies as an “audit committee financial expert” under Securities and Exchange Commission guidelines.
Hannah M. Bible has served as a director since May 2016. She is the director of operations and in-house counsel of Lone Star Value Management. Ms. Bible has over 9 years of combined legal and accounting experience across a variety of industries. Prior to joining Lone Star Value Management in June 2014, Ms. Bible was the Director of Finance/CFO at Trinity Church in Greenwich, CT. From October 2011 to December 2012, Ms. Bible served as a legal advisor to RRMS Advisors, a company providing advisory and due diligence services to banking and other institutions with high-risk assets. From June 2009 to December 2013, Ms. Bible advised family fund and institutional clients of International Consulting Group, Inc., and its affiliates within the Middle East on matters of security, corporate governance, and U.S. legal compliance. From 2006 to 2008, Ms. Bible served within the U.N. General Assembly as a diplomatic advisor to the Asian-African Legal Consultative Organization, a permanent observer mission to the United Nations. From 2007 until recently, Ms. Bible taught as an Adjunct Professor at Thomas Jefferson School of Law, within the International Tax and Financial Services program. Prior to this, Ms. Bible held various accounting positions with Samaritan’s Purse, a large $300MM+ 501(c)(3) organization dedicated to emergency relief and serving the poor worldwide. Ms. Bible earned an LLM in Taxation from New York University School of Law, a JD with honors from St. Thomas University School of Law, and a BBA in Accounting from Middle Tennessee State University.
Board of Directors
Board Composition and Election of Directors
We operate under the direction of our Board of Directors. Our Board of Directors is responsible for the management of our business and affairs. Our certificate of incorporation provides that the number of directors may be determined pursuant to our bylaws, which provide that such number may be determined from time to time by our Board of Directors. However, under our bylaws, the number of directors shall not be less than one. Our directors hold office until their successors have been elected and qualified or until their earlier death, resignation or removal. There are no family relationships among any of our directors or executive officers.
Independent Directors
Messrs. Pearce, Pearse and Vetter and Ms. Bible qualify as independent directors in accordance with the listing requirements of The NASDAQ Stock Market. The Nasdaq independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members has engaged in various types of business dealings with us. In addition, as further required by the Nasdaq rules, our Board of Directors has made a subjective determination as to each independent director that no relationships exist which, in the opinion of our Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our Board of Directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management. In addition, our Board of Directors has concluded that each of Messrs. Pearce, Pearse, and Vetter satisfies the heightened audit committee independence standards set forth in Rule 10A-3 promulgated under the Exchange Act, and each of Messrs. Pearce and Pearse and Ms. Bible satisfies Nasdaq listing rules relating to independence for purposes of compensation committee service.
Board Committees
Our Board of Directors has established an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The Audit Committee, Compensation Committee and Nominating and Corporate Governance Committees each operate under a charter approved by our Board of Directors. Copies of each committee’s charter are posted on the Corporate Governance section of our website, www.crossroads.com. Information provided on our website is not incorporated into this Annual Report and Form 10-K.
Audit Committee
The members of our Audit Committee are Messrs. Vetter, Pearce, and Pearse. Mr. Vetter chairs the Audit Committee. Mr. Vetter qualifies as an “audit committee financial expert” as defined in applicable SEC rules.
Our Audit Committee’s responsibilities include:
· appointing, compensating, retaining and overseeing the work of any public accounting firm engaged by us for the purpose of preparing or issuing an audit report or performing other audit, review or attest services;
· reviewing and discussing with management and the external auditors our audited financial statements;
· considering the effectiveness of our internal control system;
· reviewing management’s compliance with our code of business conduct;
· discussing with management our financial risk management policies;
· establishing our policy regarding our hiring of employees or former employees of the external auditors and procedures for the receipt, retention and treatment of accounting related complaints and concerns;
· meeting independently with our external auditors and management;
· reviewing and approving related person transactions; and
· preparing the Audit Committee report required by the proxy rules of the SEC.
Our Audit Committee must approve all audit and non-audit services, other than de minimis non-audit services, to be provided to us by our external advisors.
Compensation Committee
The members of our Compensation Committee are Messrs. Pearce and Pearse and Ms. Bible. Mr. Pearse chairs the Compensation Committee.
Our Compensation Committee’s responsibilities include:
· providing guidance and periodic monitoring for all of our corporate compensation;
· considering the effectiveness of our employee equity programs;
· administering our stock incentive plans with respect to our executive officers and employee Board members, including the adjustment of base salary each year;
· implementing and administering our incentive compensation programs and the authorization of all awards under these incentive programs;
· administering our employee benefit plans; and
· approving all perquisites, equity incentive awards, special cash payments or loans made or paid to executive officers and employee board members and assisting the Board of Directors in succession planning for executive officers.
The Compensation Committee meets with our Chief Executive Officer prior to the start of each fiscal year to discuss the incentive compensation programs to be in effect for such fiscal year. At the end of each fiscal year, the Compensation Committee meets to review the performance of executive officers and employee Board members under those programs and award bonuses thereunder. At that time, the Compensation Committee may also adjust base salary levels for executive officers and employee Board members subject to the short-swing profit restrictions of Section 16 and review the overall performance of our employee benefit plans. The Compensation Committee also meets when necessary to administer our stock incentive plan.
The Compensation Committee has determined and reviewed the value and forms of compensation for our named executive officers and other officers based on the committee members’ knowledge and experience, competitive proxy and market compensation information and management recommendations. The Compensation Committee did not engage a compensation consulting firm in fiscal 2016. The Compensation Committee does not delegate its authority to review, determine and recommend, as applicable, the forms and values of the various elements of compensation for executive officers and directors. The Compensation Committee does delegate to Company management the implementation and record-keeping functions related to the various elements of compensation it has approved.
Nominating and Corporate Governance Committee
The members of our Nominating and Corporate Governance Committee are Messrs. Pearce, and Pearse and Ms. Bible. Mr. Pearce chairs the Nominating and Corporate Governance Committee.
Our Nominating and Corporate Governance Committee’s responsibilities include:
· reviewing, developing and making recommendations to our Board of Directors related to corporate governance guidelines and policies;
· reviewing and making recommendations to our Board of Directors regarding proposed changes to our certificate of incorporation and bylaws;
· formulating and overseeing procedures to facilitate stockholder communications with our Board of Directors;
· reviewing governance related stockholder proposals and recommending Board responses;
· overseeing compliance by our Board of Directors and its committees with applicable laws and regulations;
· evaluating the effectiveness of the committee and reporting the results of this evaluation to our Board of Directors;
· overseeing risks relating to management and Board of Directors succession planning, the independence of our Board of Directors and potential conflicts of interest, and stockholder responses to our business practices;
· overseeing our Board of Directors evaluation process including conducting periodic evaluations of the performance of our Board of Directors as a whole and each Board of Directors committee and evaluating the performance of Board of Directors members eligible for re-election;
· establishing criteria for the selection of new members to our Board of Directors;
· reviewing any stockholder nominations for directors and presenting to our Board of Directors a list of individuals recommended for nomination for election to our Board of Directors at the Annual Meeting of stockholders;
· assisting our Board of Directors in making a determination of each outside director’s “independence” in accordance with Nasdaq rules;
· formulating and recommending to our Board of Directors for adoption a policy regarding the consideration of nominees proposed by stockholders for election to our Board of Directors, and adopting procedures regarding the submission of stockholder nomination requests;
· reviewing the disclosure included in our proxy statement regarding our director nomination process;
· monitoring the orientation and any continuing education programs for directors;
· reviewing the composition of each Board of Directors committee and presenting recommendations for committee memberships to our Board of Directors as needed; and
· reviewing the charter and composition of each Board of Directors committee and making recommendations to our Board of Directors for the creation of additional Board of Directors committees or the change in mandate or dissolution of Board of Directors committees.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to our senior management and financial employees, including our principal executive officer and principal financial and accounting officer. A current copy of the code is posted on the Corporate Governance section of our website, www.crossroads.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our securities, to file reports of ownership and changes of ownership with the SEC and the NASDAQ Capital Market. Our officers, directors and 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms filed by them.
Based solely on review of copies of the forms received, we believe that, during the last fiscal year, all filings under Section 16(a) applicable to our officers, directors and 10% stockholders were timely.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table for Fiscal Year 2015 and 2016
The following table sets forth the total compensation awarded to, earned by, or paid to Mr. Richard K. Coleman, Jr., Mr. Mark Hood and Ms. Jennifer Crane, who are collectively referred to as our “named executive officers,” during the years ended October 31, 2015 and 2016. All equity award amounts have been adjusted to reflect the Company’s reverse stock split, effective on June 20, 2016:
(1) On December 15, 2014, we awarded a cash bonus of $117,500, and on June 15, 2015, we awarded a cash bonus of $120,000 to Mr. Coleman, reported in fiscal year 2015. On November 24, 2015, we awarded a cash bonus of $150,000, to Mr. Coleman, reported in fiscal year 2016.
(2) We granted options to purchase 13,522 shares of common stock on January 2, 2015 to Mr. Coleman, at a grant date fair value of $28.38 per share. This grant vests equally over 8 quarters, fully vesting on January 31, 2017. We granted options to purchase 16,250 shares of common stock on June 6, 2016 to Mr. Coleman, at a grant date fair value of $4.67 per share. This grant vests 50% on June 6, 2017, then equally over 4 quarters, fully vesting on June 6, 2018. We granted options to purchase 3,000 shares of common stock on September 17, 2015 to Mr. Hood and Ms. Crane, at a grant date fair value of $16.96 per share. These awards vested 50% on September 17, 2016, then equally over 4 quarters, fully vesting on September 17, 2017. We granted options to purchase 8,750 and 8,000 shares of common stock on June 6, 2016 to Mr. Hood and Ms. Crane, respectively, at a grant date fair value of $4.67 per share. These awards vested 50% on June 6, 2017, then equally over 4 quarters, fully vesting on June 6, 2018.
(3) On December 15, 2014, we awarded a cash bonus of $29,998 and $19,692 to Mr. Hood and Ms. Crane, respectively, reported in fiscal year 2015 under our Management Bonus Plan for fiscal 2015. On December 15, 2015, we awarded a cash bonus of $21,529 and $20,586, to Mr. Hood and Ms. Crane, respectively, and on June 15, 2016, we awarded a cash bonus of $5,741 and $5,482 to Mr. Hood and Ms. Crane, respectively, reported in fiscal year 2016 under our Management Bonus Plan for fiscal 2016 as described below.
(4) We granted 989 and 944 shares of restricted common stock on January 4, 2016 to Mr. Hood and Ms. Crane, respectively. These grants vested in 1 year from grant, on January 4, 2017. Prior to vesting, we bought the right to vesting from Mr. Hood and Ms Crane for $5,700 and $5,500, respectively, effectively forfeiting the shares for consideration received.
Management Bonus Program
Under the 2016 Management Bonus Program, Ms. Crane and Mr. Hood were eligible for a target bonus of 40% of each such executive officer’s salary paid in fiscal 2016.
Ms. Crane and Mr. Hood each received 50% of their target bonus under the 2016 Management Bonus Program based on the achievement of individual goals for each such executive officer. The management bonus objectives for each officer were based on specific, measurable goals that were met throughout the year.
The bonus payouts described above were paid in cash in fiscal year 2017.
Outstanding Equity Awards at Fiscal Year-End 2016
The following table sets forth information regarding unexercised options held by each of our named executive officers as of October 31, 2016. Options and option exercise prices have been split adjusted.
*All award amounts have been adjusted to reflect the Company’s reverse stock split, effective on June 20, 2016.
(1)This award was fully vested on July 31, 2013.
(2)This award was fully vested on September 16, 2013.
(3)This award was fully vested on October 31, 2013.
(4)This award was fully vested on October 31, 2015.
(5)This award was fully vested on January 2, 2017.
(6)Mr. Coleman, Mr. Hood, and Ms. Crane were awarded options to purchase 16,250, 8,750, and 7,000 shares of common stock on June 6, 2016, respectively. These awards vest 50.0% on June 6, 2017, 12.5% on September 6, 2017, 12.5% on December 6, 2017, 12.5% on March 6, 2018, and 12.5% on June 6, 2018. Unvested shares are valued at $150,000 as of October 31, 2016.
(7)These awards were fully vested as of January 12, 2012.
(8)Mr. Hood was awarded options to purchase 1,803 shares of common stock on January 31, 2013. This award vests 25.0% on January 31, 2014, and 6.25% quarterly beginning on April 30, 2014, becoming fully vested on January 31, 2017. Unvested shares are valued at $2,000 as of October 31, 2016.
(9)This award was fully vested as of June 13, 2015.
(10)Mr. Hood and Ms. Crane were awarded options to purchase 5,409 and 601 shares of common stock on October 1, 2014, respectively. These awards vest 25.0% on January 31, 2014, and 6.25% quarterly, beginning on January 1, 2016, becoming fully vested on October 1, 2018. Unvested shares are valued at $93,000 as of October 31, 2016.
(11)Mr. Hood and Ms. Crane each were awarded options to purchase 3,000 shares of common stock on September 17, 2015. These awards vest 50.0% on September 17, 2016, 12.5% on December 17, 2016, 12.5% on March 17, 2017, 12.5% on June 17, 2017, and 12.5% on September 17, 2017. Unvested shares are valued at $50,000 as of October 31, 2016.
(12)This award was fully vested as of January 31, 2011.
(13)This award was fully vested as of August 25, 2014.
(14)This award was fully vested as of October 17, 2015.
(15)Ms. Crane was awarded options to purchase 3,005 shares of common stock on January 17, 2014. This award vests 25.0% on January 17, 2015, and 6.25% quarterly, beginning on April 17, 2015, becoming fully vested on January 17, 2018. Unvested shares are valued at $28,000 as of October 31, 2016.
Employment Agreements
Richard K. Coleman, Jr. Employment Agreement. Richard K. Coleman, Jr. was appointed to serve as our Interim President and Chief Executive Officer (“CEO”) on May 8, 2013. On August 2, 2013, we entered into an at-will employment agreement with Mr. Coleman, effective from the date that he began serving as our interim President and CEO. On November 21, 2013, subsequent to the end of our 2013 fiscal year, we entered into an Amended and Restated Employment Agreement with Mr. Coleman that replaced the interim employment agreement. On August 5, 2016, we entered into an Amended and Restated Employment Agreement with Mr. Coleman effective as of August 1, 2016.
Mr. Coleman’s agreement has an initial term ending November 20, 2018, and its term is automatically renewed for successive one-year terms thereafter unless Mr. Coleman or we elect to terminate it.
Mr. Coleman currently receives an annual base salary of $300,000. His base salary may be increased in the discretion of the Board of Directors or its Compensation Committee.
Mr. Coleman will be eligible for semi-annual performance bonuses (the “Performance Bonus”) during the term of the employment agreement, which performance bonuses will have a target payout of $150,000 per fiscal half, and an intellectual property monetization incentive bonus (the “Monetization Incentive Bonus”) of the greater of (i) up to $150,000 per six month period ending on February 15 and August 15 of each year, or (ii) $300,000 within a twelve month period, calculated as follows: 6% of the Company’s Net Cash Proceeds (as defined in the employment agreement) of the Company’s ‘972 patents and non-‘972 patents. The amount paid to Mr. Coleman pursuant to the Performance Bonus payments will be based on the level of achievement, as determined by the Compensation Committee, of performance objectives that will be developed by the Compensation Committee in consultation with Mr. Coleman. The performance objectives are expected, but not required, to be based upon objectives such as (i) monetization of various parts of the Company’s intellectual property portfolio over specified time frames, (ii) cash position and/or cash flow, and/or (iii) net income, profit or other earnings and operating performance measures. If a Change in Control of the Company occurs during the term of the employment agreement, the Performance Bonus criteria for the current fiscal half and the next fiscal half will be deemed to have been achieved at the “target” value.
In connection with the entry into the employment agreement in 2013, Mr. Coleman received a grant of options to purchase 22,500 shares of the Company’s common stock. These options have an exercise price of $30.80 per share, such amount being the mean of the high and low sales prices of the Company’s common stock on November 21, 2013, as determined in accordance with the terms of the Company’s 2010 Stock Incentive Plan and split adjusted. These options are fully vested. Mr. Coleman may receive additional option grants in the discretion of the Board of Directors or its Compensation Committee.
In the event of Mr. Coleman’s termination without Cause or for Good Reason (each as defined in the employment agreement) within twelve (12) months of a Change of Control, the Company will pay to Mr. Coleman (i) 100% payout for Net Cash Proceeds for which Mr. Coleman has not yet been paid, or that are received in the first 90 days following the termination date, and (ii) 75% payout for Net Cash Proceeds received in the 91st through 180th days following the termination date.
In the event that Mr. Coleman’s employment is terminated by the Company in circumstances that do not constitute a Termination for Cause or if Mr. Coleman resigns in circumstances constituting Good Reason, then all of Mr. Coleman’s options will accelerate and vest in full (unless an award agreement relating to such options explicitly provides otherwise); and Mr. Coleman will receive accrued and unpaid salary through the termination date, expense reimbursement, one year of severance pay equal to his then-current annual salary, payable over a 12-month period, and a lump sum payment equal to (i) 100% of his Performance Bonus for the current and next fiscal halves, and (ii) any earned but unpaid Monetization Incentive Bonus (whether related to the current or any previous six month periods). In the event that the Company fails to renew Mr. Coleman’s employment before the expiration of the employment agreement on the same or substantially equivalent terms (“Non-Renewal”), then Mr. Coleman will receive accrued and unpaid salary through the termination date and payment of a percentage of the Monetization Incentive Bonus he would have received had he remained employed for an additional 12 months according to the following schedule: (i) 100% payout for Net Cash Proceeds received in the first 90 days following Non-Renewal, (ii) 75% payout for Net Cash Proceeds received in the 91st through 180th days following Non-Renewal, (iii) 50% payout for Net Cash Proceeds received in the 181st through 270th day following Non-Renewal, and (iv) 25% payout for Net Cash Proceeds received in the 271st through 365th day following Non-Renewal. There will be no payout for Net Cash Proceeds received later than the 365th day following Non-Renewal.
2010 Stock Incentive Plan
General
The purpose of the plan is to provide a means through which we may attract able persons to serve as our employees, directors, or consultants and to provide a means whereby those individuals upon whom the responsibilities of our successful administration and management rest, and whose present and potential contributions to our welfare are of importance, may acquire and maintain stock ownership, thereby strengthening their concern for our welfare. A further purpose of the plan is to provide such individuals with additional incentive and reward opportunities designed to enhance our profitable growth. Accordingly, the plan provides for granting incentive stock options, options that do not constitute incentive stock options, restricted stock awards, or any combination of the foregoing, as is best suited to the circumstances of the particular employee, consultant, or director as provided in the plan.
Administration
The plan is administered by a committee of, and appointed by, our Board of Directors. In the absence of such a committee to administer the plan, the Board of Directors will serve as the committee. From and after the date upon which we became a “publicly held corporation” (as defined in section 162(m) of the Internal Revenue Code (the “Code”) and applicable interpretive authority under the Code), the plan is administered by a committee of, and appointed by, our Board of Directors that is comprised solely of two or more “outside directors” within the meaning of used in section 162(m) of the Code and applicable interpretive authority under the Code and within the meaning of “Non-employee Director” as defined in Rule 16b-3 under the Exchange Act.
The committee has the authority, in its discretion, to determine which employees, consultants, or directors will receive an award, the time or times when an award will be made, whether an incentive stock option or non-statutory stock option will be granted, and the number of shares to be subject to each option or restricted stock award. In making such determinations, the committee will take into account the nature of the services rendered by the respective employees, consultants, or directors, their present and potential contribution to our success, and such other factors as it in its discretion will deem relevant.
Duration of the Plan
No further awards may be granted under the plan after ten years from the date of adoption of the plan. The plan will remain in effect until all options granted under the plan have been exercised, forfeited, assumed, substituted, satisfied or expired and all restricted stock awards granted under the plan have vested or been forfeited.
Shares Subject to the Plan
The aggregate number of shares of our common stock that may be issued under the plan will not exceed 5,250,000 shares. Shares will be deemed to have been issued under the plan only to the extent actually issued and delivered pursuant to an award or to the extent an award is settled in cash. To the extent that an award lapses or the rights of its holder terminate, any shares of common stock subject to such award will again be available for the grant of an award. From and after the date upon which we become a publicly held corporation, the limitation set forth in the preceding sentences will be applied in a manner that will permit compensation generated under the plan to constitute “performance-based” compensation for purposes of section 162(m) of the Code, including, without limitation, counting against such maximum number of shares, to the extent required under section 162(m) of the Code and applicable interpretative authority under the Code, any shares subject to options that are canceled or re-priced.
Eligibility
Awards may be granted only to persons who, at the time of grant, are employees, consultants, or directors.
Stock Options
The term of each option will be as specified by the committee at the date of grant.
An option will be vested or exercisable in whole or in part and at such times as determined by the committee and set forth in the notice of grant and option agreement. The holder will be entitled to all the privileges and rights of a stockholder only with respect to such shares of common stock as have been purchased under the option and for which certificates of stock have been registered in the holder’s name. The committee in its discretion may provide that an option will be vested or exercisable upon the attainment of one or more performance goals or targets established by the committee, which are based on:
· the price of a share of common stock,
· our earnings per share,
· our market share,
· the market share of a business unit designated by the committee,
· our sales,
· the sales of a business unit designated by the committee,
· our net income or the net income of a business unit designated by the committee,
· our cash flow return on investment or of any business unit designated by the committee,
· our earnings before or after interest, taxes, depreciation, or amortization or of any business unit designated by the committee,
· the economic value added, or
· the return on stockholders’ equity;
· the holder’s continued employment as an employee with us or continued service as a consultant or director for a specified period of time;
· the occurrence of any event or the satisfaction of any other condition specified by the committee in its sole discretion; or
· a combination of any of the foregoing.
Each option may, in the discretion of the committee, have different provisions with respect to vesting or exercise of the option. An incentive stock option may be granted only to an individual who is an employee at the time the option is granted. No incentive stock option will be granted to an individual if, at the time the option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of our stock or of our parent or subsidiary corporation, within the meaning of section 422(b)(6) of the Code, unless (1) at the time such option is granted the option price is at least 110% of the fair market value of the common stock subject to the option and (2) such option by its terms is not exercisable after the expiration of five years from the date of grant.
If an option is designated as an incentive stock option in the notice of grant, to the extent that such option (together with all incentive stock options granted to the optionee under the plan and all other of our stock option plans and our parent and subsidiaries) becomes exercisable for the first time during any calendar year for shares having a fair market value greater than $100,000, the portion of each such incentive stock option that exceeds such amount will be treated as a non-statutory stock option. If the Code is amended to provide for a different limitation from that described in this paragraph, the different limitation will be deemed incorporated in the plan effective as of the date required or permitted by such amendment to the Code. If the option is treated as an incentive stock option in part and as a non-statutory stock option in part by reason of the limitation described in this paragraph, the optionee may designate which portion of such option the optionee is exercising. In the absence of such designation, the optionee will be deemed to have exercised the incentive stock option portion of the option first. An incentive stock option will not be transferable otherwise than by will or the laws of descent and distribution and will be exercisable during the holder’s lifetime only by such holder or his guardian or legal representative. The price at which a share of common stock may be purchased upon exercise of an incentive stock option will not be less than 100% of the fair market value of a share of common stock on the date such option is granted.
Except with respect to limitations on incentive stock options described above, the price at which a share of common stock may be purchased upon exercise of an option will be determined by the committee, but in no event will the price be less than 100% of the fair market value of a share of common stock on the date such option is granted.
Restricted Stock Awards
Shares of common stock that are the subject of a restricted stock award will be subject to restrictions on disposition by the holder and an obligation of the holder to forfeit and surrender the shares to us under certain circumstances. The committee will determine the forfeiture restrictions in its sole discretion, and the committee may provide that the forfeiture restrictions will lapse upon the attainment of one or more performance goals or targets established by the committee, which are based on:
· the price of a share of common stock,
· our earnings per share,
· our market share,
· the market share of a business unit designated by the committee,
· our sales,
· the sales of a business unit designated by the committee,
· our net income or the net income of a business unit designated by the committee,
· our cash flow return on investment or of any business unit designated by the committee,
· our earnings before or after interest, taxes, depreciation, or amortization or of any business unit designated by the committee,
· the economic value added, or
· the return on stockholders’ equity;
· the holder’s continued employment as an employee with us or continued service as a consultant or director for a specified period of time;
· the occurrence of any event or the satisfaction of any other condition specified by the committee in its sole discretion; or
· a combination of any of the foregoing.
Each restricted stock award may, in the discretion of the committee, have different forfeiture restrictions.
The committee may, in its discretion and as of a date determined by the committee, fully vest any or all common stock awarded to a holder pursuant to a restricted stock award, and, upon such vesting, all restrictions applicable to such restricted stock award will lapse as of such date. Any action by the committee pursuant to this Section may vary among individual holders and may vary among the restricted stock awards held by any individual holder. However, from and after the date upon which we become a “publicly held corporation,” the committee may not take any such action with respect to a restricted stock award that has been granted after such date to a “covered employee” (within the meaning of Treasury Regulation section 1.162-27(c)(2)) if such award has been designed to meet the exception for performance-based compensation under section 162(m) of the Code.
The committee will determine the amount and form of any payment for common stock received pursuant to a restricted stock award, provided that, in the absence of such a determination, a holder will not be required to make any payment for common stock received pursuant to a restricted stock award, except to the extent otherwise required by law.
Recapitalization or Reorganization
The existence of the plan and the awards granted under the plan will not affect in any way the right or power of our Board of Directors or stockholders to make or authorize:
· any adjustment, recapitalization, reorganization, or other change in our capital structure or business,
· any merger, share exchange, or consolidation of us or any subsidiary,
· any issue of debt or equity securities ranking senior to or affecting common stock or the rights of common stock,
· the dissolution or liquidation of us or of any subsidiary,
· any sale, lease, exchange, or other disposition of all or any part of our assets or business, or
· any other corporate act or proceeding.
If we recapitalize, reclassify our capital stock, or otherwise change our capital structure, the number and class of shares of common stock covered by an outstanding option will be adjusted so that the option will thereafter cover the number and class of shares of stock and securities to which the holder would have been entitled pursuant to the terms of the recapitalization if, immediately prior to the recapitalization, the holder had been the holder of record of the number of shares of common stock then covered by such option.
The shares with respect to which options may be granted are shares of common stock as presently constituted, but if, and whenever, prior to the expiration of an option theretofore granted, we effect a subdivision or consolidation of shares of common stock or the payment of a stock dividend on common stock without receipt of consideration by us, the number of shares of common stock with respect to which such option may thereafter be exercised:
· in the event of an increase in the number of outstanding shares, will be proportionately increased, and the purchase price per share will be proportionately reduced, and
· in the event of a reduction in the number of outstanding shares, will be proportionately reduced, and the purchase price per share will be proportionately increased, without changing the aggregate purchase price or value as to which outstanding awards remain exercisable or subject to restrictions.
If a “corporate change,” as defined below, occurs, then no later than:
· 10 days after the approval by our stockholders of the corporate change, other than a corporate change resulting from a person or entity acquiring or gaining ownership or control of more than 50% of the outstanding shares of our voting stock, or
· 30 days after a corporate change resulting from a person or entity acquiring or gaining ownership or control of more than 50% of the outstanding shares of our voting stock,
The committee, acting in its sole discretion and without the consent or approval of any holder, will effect one or more of the following alternatives, which may vary among individual holders and which may vary among options held by any individual holder:
· accelerate the vesting of any options then outstanding;
· accelerate the time at which some or all of the options then outstanding may be exercised so that such options, or any portion of such options, may be exercised for a limited period of time on or before a specified date, after which specified date all unexercised options and all rights of holders under such options will terminate;
· require the mandatory surrender to us by selected holders of some or all of the outstanding options held by such holders;
· make such adjustments to options then outstanding as the committee deems appropriate to reflect such corporate change; or
· provide that the number and class of shares of common stock covered by an outstanding option will be adjusted so that such option will thereafter cover the number and class of shares of stock or other securities or property to which the holder would have been entitled pursuant to the terms of the agreement of merger, consolidation, or sale of assets or dissolution if, immediately prior to such merger, consolidation, or sale of assets or dissolution, the holder had been the holder of record of the number of shares of common stock then covered by such option.
A “corporate change” means either:
· we will not be the surviving entity in any merger, share exchange, or consolidation or survive only as a subsidiary of an entity;
· we sell, lease, or exchange, or agree to sell, lease, or exchange, all or substantially all of our assets to any other person or entity;
· we are to be dissolved and liquidated;
· any person or entity, including a “group” as contemplated by Section 13(d)(3) of the Exchange Act, acquires or gains ownership or control of more than 50% of the outstanding shares of our voting stock; or
· at such time as we become a reporting Company under the Exchange Act as a result of or in connection with a contested election of directors, the persons who were directors before such election will cease to constitute a majority of our Board of Directors.
Amendment and Termination
Our Board of Directors in its discretion may terminate the plan at any time with respect to any shares of common stock for which awards have not theretofore been granted.
Our Board of Directors has the right to alter or amend the plan or any part of the plan from time to time; provided that no change in any award theretofore granted may be made that would impair the rights of the holder without the consent of the holder. However, our Board of Directors may not, without approval of the stockholders, amend the plan to increase the maximum aggregate number of shares that may be issued under the plan, change the class of individuals eligible to receive awards under the plan, or otherwise modify the plan in a manner that would require shareholder approval under applicable exchange rules.
2016 Director Compensation
The following table sets forth the compensation awarded to, earned by, or paid to each person who served as a director during the year ended October 31, 2016, other than a director who also served as an executive officer.
(1)Mr. Eberwein served as a director from April of 2013 until May 25, 2016. He received quarterly payments of $6,250 in cash for the fiscal first quarter and second quarter and pro-rated amount of $3,500 for the fiscal third quarter. The board elected to forego option grants for fiscal Q1 and Q2 of 2016. We granted restricted stock of 409 shares on the 60th day following the end of our third fiscal quarter, September 30, 2016, pro-rated as required, at an exercise price of $4.28. The restricted stock vests in one year.
(2)Mr. Pearse became a board member in July of 2013, and Chairman of the Board in May of 2016. He receives quarterly payments of $6,250 in cash and another $1,500 per quarter as Chairman of the Board, pro-rated, and $6,250 worth of restricted stock based on the average closing price of Crossroads’ stock on the five days prior to the grant date, rounded downward. We granted restricted stock of 1,460 shares at $4.28 on the 60th day following the end of the third fiscal quarter of 2016. The restricted stock vests in one year.
(3)Mr. Pearce became a board member in May of 2009. He receives quarterly payments of $6,250 in cash and $6,250 worth of restricted stock based on the average closing price of Crossroads’ stock on the five days prior to the grant date, rounded downward. We granted restricted stock of 1,460 shares at $4.28 on the 60th day following the end of the third fiscal quarter of 2016. The restricted stock vests in one year.
(4)Mr. Vetter became a board member in May of 2014. He receives quarterly payments of $6,250 in cash and another $1,000 per quarter for being Chairman of the Audit Committee and $6,250 worth of restricted stock based on the average closing price of Crossroads’ stock on the five days prior to the grant date, rounded downward. We granted restricted stock of 1,460 shares at $4.28 on the 60th day following the end of the third fiscal quarter of 2016. The restricted stock vests in one year.
(5)Ms. Bible became a board member in May of 2016. She receives quarterly payments of $6,250 in cash and $6,250 worth of restricted stock, based on the average closing price of Crossroads’ stock on the five days prior to the grant date, rounded downward. We granted restricted stock to purchase 1,051 shares of common stock on the 60th day following the end of our third fiscal quarter, September 30, 2016, pro-rated as required, at an exercise price of $4.28. The restricted stock vests in one year.
(6)The current Board of Directors Compensation Policy for Non-employee Directors was adopted effective February 1, 2016. No options or restricted stock were awarded for the fiscal first and second quarters of 2016.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table provides information concerning beneficial ownership of our capital stock as of January 20, 2017 by:
· each stockholder, or group of affiliated stockholders, that we know owns more than 5% of our outstanding capital stock;
· each of our named executive officers;
· each of our directors; and
· all of our directors and executive officers as a group.
The following table lists the applicable percentage beneficial ownership based on 1,225,472 shares of common stock outstanding as of January 20, 2017. All numbers have been adjusted to reflect the Company’s reverse stock split effective as of June 20, 2016. Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power or investment power with respect to the securities held. Shares of common stock subject to options currently exercisable or exercisable within 60 days of January 20, 2017 are deemed outstanding and beneficially owned by the person holding such options for purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table, and subject to applicable community property laws, the persons or entities named have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them.
Unless otherwise indicated, the principal address of each of the stockholders below is c/o Crossroads Systems, Inc., 11000 North Mo-Pac Expressway, #150, Austin, Texas 78759.
* Less than 1%.
(1) According to Schedule 13D/A filed on June 23, 2016 and updated information based on Form 4 filings. Includes 228,978 shares of our common stock beneficially owned directly by Lone Star Value Investors, LP (“Lone Star Value LP”), 20,000 shares of common stock held in a certain account managed by Lone Star Value Management, LLC (“Lone Star Value Management”), and 1,707 shares of common stock held by Lone Star Value Co-Invest I, LP (“Lone Star Value Co-Invest”). Also includes warrants to purchase 32,209 shares of our common stock issued in connection with our March 2014 private placement, warrants to purchase 8,750 shares of our common stock issued in connection with our January 2015 secondary offering, and warrants to purchase 8,269 shares of our common stock issued by the Company in consideration of the common stock outstanding increasing. These warrants are subject to a 19.99% blocking provision, meaning that they can be exercised only to the extent that such exercise would not cause the holder’s beneficial ownership of our common stock to exceed 19.99%. Lone Star Value Investors GP, LLC (“Lone Star Value GP”) is the general partner of, and controls, each of Lone Star Value LP and Lone Star Value Co-Invest. Lone Star Value Management exercises contractual voting and investment control over securities held by each of Lone Star Value LP and Lone Star Value Co-Invest. Jeffrey E. Eberwein is the managing member of Lone Star Value Management and exercises indirect voting and investment control over these securities. By reason of these relationships, each of Lone Star Value LP, Lone Star Value GP, Lone Star Value Management and Mr. Eberwein may be deemed to share the power to vote or direct the vote and to dispose or direct the disposition of the shares directly beneficially owned by Lone Share Value LP as indicated above. The address for each of the Lone Star Value entities is 53 Forest Avenue, 1st Floor, Old Greenwich, Connecticut 06870.
(2) According to Schedule 13G/A filed January 10, 2017 and updated information based upon the Company’s issuance of additional warrants and common stock dividends. Consists of (a) 9,487 shares of common stock, (b) 310 shares of common stock issuable upon exercise of warrants, (c) warrants to purchase 3,637 shares of our common stock issued by the Company in consideration of the common stock outstanding increasing. Also includes 35,412 shares of Series F Convertible Preferred Stock and warrants to purchase 17,706 shares of common stock issued in our March 2013 private placement. The convertible preferred stock and associated warrants are subject to a 9.99% blocking provision, meaning that they can be exercised only to the extent that such exercise would not cause the holder’s beneficial ownership of our common stock to exceed 9.99%. Amir L. Ecker and Carol G. Frankenfield are the General Partners of ACT Capital Management, LLLP. Investment decisions made on behalf of ACT Capital Management, LLLP are made primarily by its General Partners. The address for ACT Capital Management, LLLP is 2 Radnor Corporate Center, Suite 111, Radnor, Pennsylvania 19087.
(3) According to Schedule 13G filed December 7, 2016 and updated information from the Company. Consists of 86,002 shares of our common stock. Mr. Miller’s address is 3300 South Dixie Highway, Suite 1-365, West Palm Beach, Florida 33405.
(4) According to Schedule 13G filed August 2, 2013 and updated information based upon the Company’s issuance of additional warrants. Consists of 72,727 shares subject to warrants held by CF DB EZ LLC and warrants to purchase 14,684 shares of our common stock. Drawbridge Special Opportunities Fund LP owns 95% of CF DB EZ LLC. Drawbridge Special Opportunities GP LLC is the general partner of Drawbridge Special Opportunities Fund LP. Fortress Principal Investment Holdings IV LLC (“FPIH IV”) is the sole managing member of Drawbridge Special Opportunities GP LLC. Drawbridge Special Opportunities Advisors LLC (“DSOA”) is the investment advisor of Drawbridge Special Opportunities Fund LP. FIG LLC is the sole managing member of DSOA, and Fortress Operating Entity I LP (“FOE I”) is the sole managing member of FIG LLC and FPIH IV. FIG Corp. is the general partner of FOE I, and FIG Corp. is wholly-owned by Fortress Investment Group LLC. Peter L. Briger, Jr. and Constantine M. Dakolias are co-Chief Investment Officers of Fortress Investment Group LLC’s Credit business, which includes CF DB EZ LLC, and have the power to vote and dispose of these shares. The address for each of the Fortress persons and entities is c/o Fortress Investment Group LLC, 1345 Avenue of the Americas, 46th Floor, New York, New York 10105, Attention: Chief Compliance Officer.
(5) According to Schedule 13G/A filed February 16, 2016. Consists of 65,998 shares of common stock held by Piton Capital Partners LLC (“Piton”), a Delaware limited liability company and investment entity that is a family client of Kokino LLC. The address for Piton is c/o North Bay Associates, 14000 Quail Springs Parkway, Suite 2200, Oklahoma City, Oklahoma 73134.
(6) Consists of 815 shares of common stock, 327 shares of common stock issuable upon exercise of warrants exercisable within 60 days of January 20, 2017, and 49,210 shares of common stock issuable upon exercise of options exercisable within 60 days of January 20, 2017. The shares of common stock and the warrants to purchase shares of common stock are held of record by RKC Investments, LLC. Mr. Coleman may be deemed to exercise indirect voting and investment control over these securities. Mr. Coleman disclaims beneficial ownership of the shares of common stock held by RKC Investments, LLC except to the extent of any pecuniary interest therein.
(7) Consists of 3,138 shares of common stock, 73 shares of Series F Preferred Stock, 6,345 shares of common stock issuable upon exercise of options exercisable within 60 days of January 20, 2017 and 44 shares of common stock issuable upon exercise of warrants exercisable within 60 days of January 20, 2017.
(8) Consists of 2,980 shares of common stock, 10,702 shares of common stock issuable upon exercise of options exercisable within 60 days of January 20, 2017 and 327 shares of common stock issuable upon exercise of warrants exercisable within 60 days of January 20, 2017. Of the shares of common stock, 544 are held of record by MCH Advisors, Inc. (“MCH”). Mr. Hood, who together with his spouse is the sole shareholder of MCH, shares voting and dispositive power over the shares held by MCH. Mr. Hood disclaims beneficial ownership of the shares of common stock held by MCH except to the extent of any pecuniary interest therein.
(9) Consists of 1,875 shares of common stock and 7,129 shares of common stock issuable upon exercise of options exercisable within 60 days of January 20, 2017.
(10) Consists of 505 shares of common stock and 3,988 shares of common stock issuable upon exercise of options exercisable within 60 days of January 20, 2017.
(11) Consists of 2,517 shares of common stock issuable upon exercise of options exercisable within 60 days of January 20, 2017.
(12) Consists of 9,313 shares of common stock, 73 shares of Series F Preferred Stock, 79,891 shares of common stock issuable upon exercise of options exercisable within 60 days of January 20, 2017 and 698 shares of common stock issuable upon exercise of warrants exercisable within 60 days of January 20, 2017.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Except as described below, since November 1, 2015, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeded or exceeds the lesser of $120,000 or 1% of our total assets and in which any of our directors, executive officers, holders of more than 5% of any class of our voting securities or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest, other than compensation arrangements with directors and executive officers, which are described in Item 11 of this annual report and the transactions described or referred to below. The audit committee of our Board of Directors is responsible for reviewing and approving any related person transactions.
On March 31, 2014, we completed a private placement of 94,331 units at a purchase price of $45.13 per unit, split adjusted, for net proceeds of approximately $4.3 million before expenses. Affiliates of Lone Star Value Management, LLC, of which our former Chairman Jeffrey E. Eberwein serves as a managing member, purchased approximately $2.9 million of units. Additionally, affiliates of Diker Management, LLC, a former holder of greater than 5% of our common stock, purchased $350,000 of units. We also entered into a registration rights agreement with the purchasers obligating us to register the resale of these securities.
Each unit consisted of one share of the Company’s common stock, and warrants to purchase one-half of a share of common stock, at an exercise price of $49.20 per whole share, split adjusted.
The terms of the private placement were negotiated and approved on our behalf by a Special Committee of our Board of Directors consisting of Messrs. Pearce and Pearse.
On January 27, 2015, we entered into placement agency agreements with certain accredited investors for the issuance and sale in a private placement of an aggregate of 153,587 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 LP, controlled by Jeffrey E. Eberwein, our former Chairman of the Board of Directors, acquired 350,000 units in the placement for approximately $0.8 million.
On July 29, 2015, we closed a subscription rights offering for the Company’s common stock, selling 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, our former Chairman of the Board of Directors, acquired 76,895 shares in the offering for approximately $1.9 million.
Information regarding director independence is contained in Item 10 of this Annual Report on Form 10-K.
Item 14.
Item 14. Principal Accountant Fees and Services
Audit Fees
All services rendered by our registered public accounting firm, PMB Helin Donovan, LLP, are pre-approved by the Audit Committee. PMB Helin Donovan, LLP has provided or is expected to provide services to us in the following categories and amounts:
(1) Audit fees - These are fees for professional services performed by PMB Helin Donovan, LLP for the audit of our annual consolidated financial statements and review of interim financial statements included in our Form 10-Q filings, and services that are normally provided in connection with statutory regulatory filings or engagements.
(2) Audit-related fees - These are fees for assurance and related services performed by PMB Helin Donovan, LLP that are reasonably related to the performance of the audit or review of our financial statements. For 2016 and 2015, this amount primarily includes a review of our reports on Form 10-Q and Form 10-K.
(3) Tax fees - These are fees for professional services performed by PMB Helin Donovan, LLP with respect to tax compliance, tax advice and tax planning. This includes preparation or review of original and amended tax returns for the Company and the Company’s consolidated subsidiaries; refund claims; payment planning; tax audit assistance; and tax work stemming from “Audit-Related” items.
(4) All other fees - These are fees for other permissible work performed by PMB Helin Donovan, LLP that does not meet the above category descriptions.
Pre-Approval Policy
Our Audit Committee must provide advance approval for all audit and non-audit services, other than de minimis non-audit services.
PART IV
Item 15.
Item 15. Financial Statements, Financial Statement Schedules and Exhibits
1. Financial Statements.
The response to this portion of Item 15 is submitted as a separate section of this report. See “Index to Financial Statements and Schedules” at page.
2. Financial Statement Schedules.
Schedule II - Valuation and Qualifying Accounts
3. Exhibits.
EXHIBIT INDEX
4.7
Form of Warrant by Crossroads Systems, Inc. in favor of the placement agents in the January 2015 registered direct offering
8-K
001-15331
4.2
1/30/15
4.8
Tax Benefit Preservation Plan, dated as of May 23, 2014, by and between Crossroads Systems, Inc. and American Stock Transfer & Trust Company, LLC
8-K
001-15331
4.1
5/23/14
10.1
Crossroads Systems, Inc. 2010 Stock Incentive Plan
S-1
333-172792
10.1
3/11/11
10.1.1
Amended Crossroads Systems, Inc. 2010 Stock Incentive Plan
8-K
001-15331
10.1
4/28/15
10.5
Severance Benefit Plan, dated October 21, 2004, between Crossroads Systems, Inc. and Brian Bianchi
S-1
333-172792
10.4
3/11/11
10.6
Severance Benefit Plan, dated April 15, 2009, between Crossroads Systems, Inc. and David Cerf
S-1
333-172792
10.5
3/11/11
10.7
Severance Benefit Plan, dated April 15, 2009, between Crossroads Systems, Inc. and Jennifer Crane
S-1
333-172792
10.6
3/11/11
10.8
Severance Benefit Plan, dated January 9, 2013, between Crossroads Systems, Inc. and Mark Hood
S-1
333-204094
10.7
5/12/15
10.9
Form of Indemnity Agreement between Crossroads Systems, Inc. and each of the directors and executive officers thereof
8-K
001-15331
10.1
7/16/13
10.10
Amended and Restated Employment Agreement, dated November 21, 2013, by and between Crossroads Systems, Inc. and Richard K. Coleman, Jr.
8-K
001-15331
10.1
11/25/13
10.11
Amended and Restated Employment Agreement, dated as of August 1, 2016, by and between Crossroads Systems, Inc. and Richard K. Coleman, Jr.
10-Q
001-15331
10.1
9/14/16
10.12
Securities Purchase Agreement, dated as of October 23, 2010, by and between Crossroads Systems, Inc. and the purchasers party thereto
S-1
333-172792
10.9
3/11/11
10.13
Registration Rights Agreement, dated as of October 23, 2010, by and between Crossroads Systems, Inc. and the purchasers party thereto
S-1
333-172792
10.10
3/11/11
10.14†
Software License and Distribution Agreement, dated January 20, 2009, by and between Hewlett-Packard Company and Crossroads Systems, Inc.
S-1
333-172792
10.11
5/18/11
10.15.1
Commercial Industrial Lease Agreement, dated October 31, 2005, by Principal Life Insurance Company and Crossroads Systems, Inc.
S-1
333-172792
10.12.1
5/18/11
10.15.2
First Amendment to Lease, dated December 15, 2009, by and between Principal Life Insurance Company and Crossroads Systems, Inc.
S-1
333-172792
10.12.2
5/18/11
10.16
Professional Agreement, dated July 31, 2012, between Crossroads Systems, Inc. and Iron Mountain Information Management, Inc.
8-K
001-15331
10.1
8/2/12
10.17
Securities Purchase Agreement, dated July 31, 2012, by and between Crossroads Systems, Inc. and Iron Mountain Incorporated
8-K
001-15331
10.2
8/2/12
10.18
Registration Rights Agreement, dated July 31, 2012, by and between Crossroads Systems, Inc. and Iron Mountain Incorporated
8-K
001-15331
10.2
8/2/12
10.19
Securities Purchase Agreement, dated March 22, 2013, by and among Crossroads Systems, Inc. and the Buyers party thereto
8-K
001-15331
10.1
3/25/13
10.20
Registration Rights Agreement, dated as of March 28, 2013, by and among Crossroads Systems, Inc. and the Investors party thereto
8-K
001-15331
10.1
3/25/13
10.20.1
Amendment to Registration Rights Agreement, dated July 3, 2013, by and among Crossroads Systems, Inc. and the Investors party thereto
S-1/A
333-188549
10.17.1
7/8/13
10.21
Retention Agreement dated June 4, 2013, by and between Crossroads Systems, Inc. and Brian Bianchi
8-K
001-15331
10.1
6/10/13
10.22
Retention Agreement dated June 4, 2013, by and between Crossroads Systems, Inc. and David Cerf
8-K
001-15331
10.2
6/10/13
10.23
Amended and Restated Agreement of Limited Partnership of KIP CR P1 LP
8-K
001-15331
10.1
7/24/13
10.24
Credit Agreement, dated July 22, 2013, by and between Crossroads Systems, Inc. and Fortress Credit Co LLC
8-K
001-15331
10.2
7/24/13
10.24.1
Amendment to Credit Agreement, dated June 22, 2015, by and between Crossroads Systems, Inc. and CF DB EZ LLC
8-K
001-15331
10.1
6/23/15
10.25
Guaranty and Security Agreement, dated July 22, 2013, by KIP CR P1 LP in favor of Fortress Credit Co LLC
8-K
001-15331
10.3
7/24/13
10.26
Guaranty and Security Agreement, dated July 22, 2013, by Crossroads Systems (Texas), Inc. in favor of Fortress Credit Co LLC
8-K
001-15331
10.4
7/24/13
10.27
Pledge and Security Agreement, dated July 22, 2013, between Crossroads Systems, Inc. and Fortress Credit Co LLC relating to KIP CR P1 LP
8-K
001-15331
10.5
7/24/13
10.28
Pledge and Security Agreement, dated July 22, 2013, between Crossroads Systems, Inc. and Fortress Credit Co LLC relating to Crossroads Systems (Texas), Inc.
8-K
001-15331
10.6
7/24/13
10.29
Assignment of Patent Rights, dated July 22, 2013, by Crossroads Systems, Inc. in favor of KIP CR P1 LP
8-K
001-15331
10.7
7/24/13
10.30
Non-Exclusive License Agreement, dated July 22, 2013, by and between Crossroads Systems, Inc. and KIP CR P1 LP
8-K
001-15331
10.8
7/24/13
10.31
Registration Rights Agreement, dated July 22, 2013, by and between Crossroads Systems, Inc. and Fortress Credit Co LLC
8-K
001-15331
10.9
7/24/13
10.32
Agreement Regarding Issue Price dated July 22, 2013, by and between Crossroads Systems, Inc. and Fortress Credit Co LLC
S-1/A
333-188549
10.30
8/22/13
10.33
Compromise, Settlement and Mutual Release Agreement, effective as of December 19, 2013, by and between Crossroads Systems, Inc. and Iron Mountain Information Management, LLC.
8-K
001-15331
10.1
12/20/13
10.34
Securities Purchase Agreement, dated March 31, 2014, by and between Crossroads Systems, Inc. and the purchasers party thereto
8-K
001-15331
10.1
3/31/14
10.35
Securities Purchase Agreement, dated April 4, 2014, by and between Crossroads Systems, Inc. and the purchasers party thereto
8-K
001-15331
10.1
4/8/14
10.36
Amended and Restated Registration Rights Agreement, dated April 4, 2014, by and between Crossroads Systems, Inc. and the purchasers party thereto
8-K
001-15331
10.2
4/8/14
10.37
Form of Unit Subscription Agreement, by and among Crossroads Systems, Inc. and the investors party thereto
8-K
001-15331
10.1
1/30/15
10.38†
Investment Agreement, by and among Crossroads Systems, Inc., TQ Zeta LLC and the investors party thereto
10-K
001-15331
10.37
1/13/16
21.1
List of Subsidiaries
X
23.1
Consent of PMB Helin Donovan, LLP.
X
31.1
Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended
X
31.2
Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended
X
32.1
Certification of Principal Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350
X
32.2
Certification of Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Schema Linkbase Document
X
101.CAL
XBRL Taxonomy Calculation Linkbase Document
X
101.DEF
XBRL Taxonomy Definition Linkbase Document
X
101.LAB
XBRL Taxonomy Labels Linkbase Document
X
101.PRE
XBRL Taxonomy Presentation Linkbase Document
X
† Confidential materials redacted and filed separately with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CROSSROADS SYSTEMS, INC.
By: /s/ Richard K. Coleman, Jr.
Richard K. Coleman, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Dated: January 20, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Richard K. Coleman, Jr.
President, Chief Executive Officer and Director
January 20, 2017
(Richard K. Coleman, Jr.)
(Principal Executive Officer)
/s/ Jennifer Ray Crane
Chief Financial Officer
January 20, 2017
(Jennifer Ray Crane)
(Principal Financial and Accounting Officer)
/s/ Robert G. Pearse
Director
January 20, 2017
(Robert G. Pearse)
/s/ Galen Vetter
Director
January 20, 2017
(Galen Vetter)
/s/ Don Pearce
Director
January 20, 2017
(Don Pearce)
/s/ Hannah M. Bible
Director
January 20, 2017
( Hannah M. Bible )
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Crossroads Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Crossroads Systems, Inc. and subsidiaries (the “Company”) as of October 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for the fiscal years then ended. Our audits also included the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of October 31, 2016 and 2015, and the results of its operations and its cash flows for the fiscal years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule presents fairly, in all material respects, the information set forth therein when considered in relation to the basic consolidated financial statements.
/s/ PMB HELIN DONOVAN, LLP
Austin, Texas
January 20, 2017
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
See accompanying notes to the condensed consolidated financial statements.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
See accompanying notes to the condensed consolidated financial statements.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
See accompanying notes to the condensed consolidated financial statements.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)
See accompanying notes to the condensed consolidated financial statements.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to the consolidated financial statements.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO 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, we announced the sale of our 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. The Company believes that cash flow from operations, and proceeds from the sale of common and preferred stock will be sufficient to fund the anticipated operations for fiscal 2017. 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.
KIP CR P1 LP (which we refer to as the “partnership” (see Note 6)), of which the Company is a limited partner and of which an affiliate of Fortress is the general partner, the investment in KIP CR P1 LP is accounted for using the equity method. The current investment balance is nominal at October 31, 2016.
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 October 31, 2016, total uninsured deposits were $3.8 million. The Company has not experienced any losses in such accounts.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted cash amounted to $1.5 million and represents 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”), pursuant to which Techquity will share in the revenue generated from the ‘972 patent litigation. For consideration of $10.0 million received, 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 proceeds above $100 million received after the date of the sale agreement. Under the terms of the agreement, our use of proceeds is restricted to payment of the Fortress debt, approved legal expenditures, and certain general and administrative expenses. During the twelve months ended October 31, 2016 and 2015, the Company recognized $4.7 and $3.8 million in other income, respectively, $1.5 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.
IP License Revenue
The Company licenses patented technology to customers under licensing agreements that allow those customers to utilize the technology in specific products they offer. The timing and amount of revenue recognized from IP license agreements depends upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations. Such agreements are reviewed for multiple elements. Multiple elements can include amounts related to initial non-refundable license fees for the use of the Company’s patents in the customer’s past shipments, patent licensing royalties on covered products sold going forward, cross-licensing terms between the Company and other parties, and settlement of patent litigation. Through October 31, 2016, no amounts have been allocated to the cross-licensing or the settlement of patent litigation elements.
Revenue is only recognized after all of the following criteria are met: (1) written agreements have been executed; (2) delivery of technology or intellectual property rights has occurred; (3) fees are fixed or determinable; and (4) collectability of fees is reasonably assured.
Under these IP license agreements, one or a combination of the following forms of payment is received as consideration for permitting customers to use the Company’s patents in their applications and products:
Consideration for Past Sales: Consideration related to a customer’s product sales from prior periods results from a negotiated agreement with a customer that utilized the Company’s patented technologies prior to signing an IP license agreement with the Company. The Company negotiates an amount with the customer based on a report provided by the customer detailing their past shipments utilizing the Company’s patented technology. The Company may use publicly filed financial statements, research reports and other sources to determine the reasonableness of this shipment report. To determine the amount of consideration owed to the Company, the amount of past shipments is then multiplied by a standard royalty rate historically received by the Company in similar arrangements. The consideration is recorded as revenue when a signed agreement has been obtained, a determinable price has been identified based on past shipments, and payment is determined to be collectable and reasonably assured.
Recurring Royalty Payments: These are royalty payments covering a customer’s obligations to pay royalties relating to its sales of covered products shipped in the current reporting period. The rate used for recurring royalty payments is the same as that used to determine the consideration for past shipments. Customers that owe the Company recurring royalty payments are obligated to provide quarterly royalty reports that summarize their sales of covered products and their related royalty obligations. These royalty reports are typically received subsequent to the period in which the customers’ underlying sales occurred. Upon initially signing an agreement, the Company recognizes revenue during the period in which the royalty report and payment are received. Once history has been established with a customer, the Company estimates revenue based on prior quarterly royalty reports received. When the actual results are received, the recorded revenue is adjusted to actual results, if necessary. To date, such adjustments have not been material.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company has provided a full valuation allowance against its deferred tax assets because the realization of the related tax benefits is not considered more likely than not.
The Company recognizes the tax benefit from an uncertain tax position only if it meets the “more likely than not” threshold that the position will be sustained upon examination by the taxing authority, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company includes interest and penalties related to its uncertain tax positions, if any, as part of income tax expense within its consolidated statement of operations (Note 11).
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 3,158,722 and 3,365,618 for the years ended October 31, 2016 and 2015, respectively. The dilutive common stock equivalents for the year ended October 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 198,700 shares of common stock.
Net loss available to common stockholders is calculated by deducting from net income, preferred dividends paid and accrued of $0.3 million.
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising costs for the years ended October 31, 2016 and 2015 were not material.
Stock-based Compensation
Stock-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period), net of estimated forfeitures. The Company estimates the fair value of stock-based payments using the Black-Scholes option-pricing model, which requires a number of assumptions to determine the model inputs. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. Additionally, the fair value of stock-based awards to non-employees are expensed over the period in which the related services are rendered. All stock-based awards are expected to be fulfilled with new shares of common stock.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Pronouncements
In August 2014, the FASB issued 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 within those annual periods, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our 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.
As of October 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 October 31, 2016 and October 31, 2015, the Company held no investments.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACCRUED EXPENSES AND DEFERRED REVENUE
Accrued expenses consist of the following (in thousands):
Deferred revenue, current portion, consists of the following (in thousands):
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.
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,” 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 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 CONSOLIDATED FINANCIAL STATEMENTS
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 $1.3 million at October 31, 2016 related to an agreement between the companies. The Company believes these amounts have been earned and collectability is probable at October 31, 2016. Nonetheless, Crossroads has, therefore, reserved a portion of past and future Dot Hill revenue of $133,000 and Cost of Sales of $33,000.
Revenue for the presented periods are concentrated with Dot Hill. The loss or bankruptcy of Dot Hill 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 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 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.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The assets and liabilities transferred for consideration received were (in thousands, at book value):
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain items were reclassified as part of discontinued operations for comparative purposes. The table below presents the amounts by balance sheet classification (in thousands):
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO 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):
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 October 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 twelve months ended October 31, 2015, the Company issued 3,389 split adjusted dividend common shares valued at approximately $296,000. 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 $133,000. Accrued and unpaid dividends were valued at approximately $42,000 as of October 31, 2016.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO 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” and 750,000 shares designated as “Sub-Series.” 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 and a 4.99% beneficial ownership limitation for holders of Sub-Series. Such beneficial ownership limitations may be increased or decreased by a holder of Sub-Series 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 issued on the original issue date are outstanding, the holders of such Sub-Series, 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 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 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 shares are entitled to elect one director to the Board of Directors. The holders of Sub-Series will not be entitled to vote on the directors elected by the holders of Sub-Series. 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 twelve months ended October 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.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 $21.25 per underlying warrant share, split adjusted. In connection to the 2015 Common Stock Rights Offering, as described below, an additional 0.2019 warrants were granted for every outstanding warrant on August 31, 2015, with the strike price remaining $41.25. As of October 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.
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 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 to 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 October 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. 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 to 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 October 31, 2016, there were 99,683 split adjusted warrants outstanding.
2015 Common Stock Rights Offering
On July 28, 2015, the company closed a subscription rights offering for 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.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has the following common stock warrants outstanding at October 31, 2016:
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 October 31, 2016, options to purchase 11,228 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 split of outstanding options on May 25, 2016, the date of the Company’s 1-for-20 split, of Crossroads common stock may be awarded. As of October 31, 2016, options to purchase 297,344 shares of common stock were granted from the 2010 Plan, of which 187,471 were outstanding. During the year ended October 31, 2016 and 2015, 32,000 and 65,670 common stock shares were granted from the 2010 Plan, respectively.
As of October 31, 2016, options to purchase an aggregate of 198,700 shares of common stock were outstanding under the 1999 Plan and the 2010 Plan, of which 153,876 were vested. Under the 2010 Plan, 442,700 shares of common stock were available for future grants as of October 31, 2016. The shares of common stock reserved for future grant are reduced by 26,344 options previously exercised under the 2010 Plan, and 26,549 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% quarterly 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:
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
The following table summarizes information about stock option activity for the years ended October 31, 2016 and 2015:
The weighted average fair value per option granted during the years ended October 31, 2016 and 2015 was $4.67 and $20.22, 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 years ended October 31, 2016 and 2015 was $0 and $51,000, respectively. During the years ended October 31, 2016 and 2015, the amount of cash received from the exercise of stock options was $0 and $146,000, respectively.
The Company granted no options to non-employees during the years ended October 31, 2016 and 2015.
At October 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 0.8 years. There were 35,212 and 72,101 options that became vested during the years ended October 31, 2016 and 2015, respectively, with the total fair value of these awards of approximately $0.7 million and $1.7 million, respectively.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows information about outstanding stock options at October 31, 2016:
8. INCOME TAXES
There was no recorded income tax benefit related to the losses of fiscal years 2016 or 2015 due to the uncertainty of the Company generating taxable income to utilize its net operating loss carry-forwards. The provision for income taxes due to continuing operations differs from the amount computed by applying the federal statutory rate of 35% to the loss before income taxes as follows (in thousands):
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes at October 31, 2016 and 2015 are as follows (in thousands):
In assessing the usefulness of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At the end of the fiscal years ended October 31, 2016 and 2015, a full valuation allowance has been provided due to uncertainties regarding the future realization of the net deferred tax assets.
The Company had federal net operating loss carry-forwards available to reduce future taxable income of approximately $139.7 million and $132 million for the fiscal years ended October 31, 2016 and 2015, respectively. The Company had federal research and experimentation credits available to reduce future tax of approximately $5.3 million and $5.2 million for the fiscal years ended October 31, 2016 and 2015, respectively. The valuation allowance increased by approximately $0.4 million during the fiscal year ended October 31, 2016 as a result of changes in the net operating losses and research and experimentation credits and increased by approximately $2.8 million during the fiscal year ended October 31, 2015 as a result of changes in the net operating losses. The Company also had foreign net operating loss carry-forwards available to reduce future foreign income of approximately $3.6 million and $3.9 million for fiscal years ended October 31, 2016 and 2015, respectively.
The valuation allowance on German net operating loss carry-forwards is approximately $1 million. The Company may reduce the valuation allowance and realize the benefit of those losses in future periods once the plan for the foreign operation is determined, which is uncertain at this time.
The federal net operating loss carry-forwards and research and experimentation credit carry-forwards expire from 2018 to 2036, if not utilized prior to that time. Utilization of the federal net operating losses and tax credits may be subject to substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. Any annual limitation may result in the expiration of net operating losses and research and experimentation credits before utilization.
The Company has recorded no liabilities related to uncertain tax benefits. The major jurisdictions in which the Company files income tax returns include the U.S. and Germany. The Company’s income tax returns are not currently under examination by the Internal Revenue Service or other tax authorities. As of October 31, 2016, the earliest year that the Company was subject to examination in these jurisdictions was 2010. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense, if any.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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 $101,000 and $184,000 during the years ended October 31, 2016 and 2015, respectively.
10. 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 a warrant 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 LP, controlled by Jeffrey E. Eberwein, Crossroads’ former Chairman of the Board of Directors, acquired 17,500 units in the placement for approximately $0.8 million.
2015 Common Stock Rights Offering
On July 29, 2015, the Company closed a Rights Offering for the Company’s common stock, accepting subscriptions for 196,694 shares of common stock, at $25.00 per share, spit adjusted, for aggregate gross proceeds of approximately $4.9 million. Lone Star Value LP, controlled by Jeffrey E. Eberwein, Crossroads’ former Chairman of the Board of Directors, 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 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.
11. 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) 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 October 31, 2016. There is no impact to the Company’s financial results as a result of the adoption of the rights plan for the years ended October 31, 2016 or 2015.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
EXHIBIT INDEX
10.5
Severance Benefit Plan, dated October 21, 2004, between Crossroads Systems, Inc. and Brian Bianchi
S-1
333-172792
10.4
3/11/11
10.6
Severance Benefit Plan, dated April 15, 2009, between Crossroads Systems, Inc. and David Cerf
S-1
333-172792
10.5
3/11/11
10.7
Severance Benefit Plan, dated April 15, 2009, between Crossroads Systems, Inc. and Jennifer Crane
S-1
333-172792
10.6
3/11/11
10.8
Severance Benefit Plan, dated January 9, 2013, between Crossroads Systems, Inc. and Mark Hood
S-1
333-204094
10.7
5/12/15
10.9
Form of Indemnity Agreement between Crossroads Systems, Inc. and each of the directors and executive officers thereof
8-K
001-15331
10.1
7/16/13
10.10
Amended and Restated Employment Agreement, dated November 21, 2013, by and between Crossroads Systems, Inc. and Richard K. Coleman, Jr.
8-K
001-15331
10.1
11/25/13
10.11
Amended and Restated Employment Agreement, dated as of August 1, 2016, by and between Crossroads Systems, Inc. and Richard K. Coleman, Jr.
10-Q
001-15331
10.1
9/14/16
10.12
Securities Purchase Agreement, dated as of October 23, 2010, by and between Crossroads Systems, Inc. and the purchasers party thereto
S-1
333-172792
10.9
3/11/11
10.13
Registration Rights Agreement, dated as of October 23, 2010, by and between Crossroads Systems, Inc. and the purchasers party thereto
S-1
333-172792
10.10
3/11/11
10.14†
Software License and Distribution Agreement, dated January 20, 2009, by and between Hewlett-Packard Company and Crossroads Systems, Inc.
S-1
333-172792
10.11
5/18/11
10.15.1
Commercial Industrial Lease Agreement, dated October 31, 2005, by Principal Life Insurance Company and Crossroads Systems, Inc.
S-1
333-172792
10.12.1
5/18/11
10.15.2
First Amendment to Lease, dated December 15, 2009, by and between Principal Life Insurance Company and Crossroads Systems, Inc.
S-1
333-172792
10.12.2
5/18/11
10.16
Professional Agreement, dated July 31, 2012, between Crossroads Systems, Inc. and Iron Mountain Information Management, Inc.
8-K
001-15331
10.1
8/2/12
10.17
Securities Purchase Agreement, dated July 31, 2012, by and between Crossroads Systems, Inc. and Iron Mountain Incorporated
8-K
001-15331
10.2
8/2/12
10.18
Registration Rights Agreement, dated July 31, 2012, by and between Crossroads Systems, Inc. and Iron Mountain Incorporated
8-K
001-15331
10.2
8/2/12
10.19
Securities Purchase Agreement, dated March 22, 2013, by and among Crossroads Systems, Inc. and the Buyers party thereto
8-K
001-15331
10.1
3/25/13
10.20
Registration Rights Agreement, dated as of March 28, 2013, by and among Crossroads Systems, Inc. and the Investors party thereto
8-K
001-15331
10.1
3/25/13
10.20.1
Amendment to Registration Rights Agreement, dated July 3, 2013, by and among Crossroads Systems, Inc. and the Investors party thereto
S-1/A
333-188549
10.17.1
7/8/13
10.21
Retention Agreement dated June 4, 2013, by and between Crossroads Systems, Inc. and Brian Bianchi
8-K
001-15331
10.1
6/10/13
10.22
Retention Agreement dated June 4, 2013, by and between Crossroads Systems, Inc. and David Cerf
8-K
001-15331
10.2
6/10/13
10.23
Amended and Restated Agreement of Limited Partnership of KIP CR P1 LP
8-K
001-15331
10.1
7/24/13
10.24
Credit Agreement, dated July 22, 2013, by and between Crossroads Systems, Inc. and Fortress Credit Co LLC
8-K
001-15331
10.2
7/24/13
10.24.1
Amendment to Credit Agreement, dated June 22, 2015, by and between Crossroads Systems, Inc. and CF DB EZ LLC
8-K
001-15331
10.1
6/23/15
10.25
Guaranty and Security Agreement, dated July 22, 2013, by KIP CR P1 LP in favor of Fortress Credit Co LLC
8-K
001-15331
10.3
7/24/13
10.26
Guaranty and Security Agreement, dated July 22, 2013, by Crossroads Systems (Texas), Inc. in favor of Fortress Credit Co LLC
8-K
001-15331
10.4
7/24/13
10.27
Pledge and Security Agreement, dated July 22, 2013, between Crossroads Systems, Inc. and Fortress Credit Co LLC relating to KIP CR P1 LP
8-K
001-15331
10.5
7/24/13
10.28
Pledge and Security Agreement, dated July 22, 2013, between Crossroads Systems, Inc. and Fortress Credit Co LLC relating to Crossroads Systems (Texas), Inc.
8-K
001-15331
10.6
7/24/13
10.29
Assignment of Patent Rights, dated July 22, 2013, by Crossroads Systems, Inc. in favor of KIP CR P1 LP
8-K
001-15331
10.7
7/24/13
10.30
Non-Exclusive License Agreement, dated July 22, 2013, by and between Crossroads Systems, Inc. and KIP CR P1 LP
8-K
001-15331
10.8
7/24/13
10.31
Registration Rights Agreement, dated July 22, 2013, by and between Crossroads Systems, Inc. and Fortress Credit Co LLC
8-K
001-15331
10.9
7/24/13
10.32
Agreement Regarding Issue Price dated July 22, 2013, by and between Crossroads Systems, Inc. and Fortress Credit Co LLC
S-1/A
333-188549
10.30
8/22/13
10.33
Compromise, Settlement and Mutual Release Agreement, effective as of December 19, 2013, by and between Crossroads Systems, Inc. and Iron Mountain Information Management, LLC.
8-K
001-15331
10.1
12/20/13
10.34
Securities Purchase Agreement, dated March 31, 2014, by and between Crossroads Systems, Inc. and the purchasers party thereto
8-K
001-15331
10.1
3/31/14
10.35
Securities Purchase Agreement, dated April 4, 2014, by and between Crossroads Systems, Inc. and the purchasers party thereto
8-K
001-15331
10.1
4/8/14
10.36
Amended and Restated Registration Rights Agreement, dated April 4, 2014, by and between Crossroads Systems, Inc. and the purchasers party thereto
8-K
001-15331
10.2
4/8/14
10.37
Form of Unit Subscription Agreement, by and among Crossroads Systems, Inc. and the investors party thereto
8-K
001-15331
10.1
1/30/15
10.38†
Investment Agreement, by and among Crossroads Systems, Inc., TQ Zeta LLC and the investors party thereto
10-K
001-15331
10.37
1/13/16
21.1
List of Subsidiaries
X
23.1
Consent of PMB Helin Donovan, LLP.
X
31.1
Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended
X
31.2
Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended
X
32.1
Certification of Principal Executive Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350
X
32.2
Certification of Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Schema Linkbase Document
X
101.CAL
XBRL Taxonomy Calculation Linkbase Document
X
101.DEF
XBRL Taxonomy Definition Linkbase Document
X
101.LAB
XBRL Taxonomy Labels Linkbase Document
X
101.PRE
XBRL Taxonomy Presentation Linkbase Document
X
† Confidential materials redacted and filed separately with the Securities and Exchange Commission.