Court filing
Crossroads Systems OTC Annual Disclosure FY2019: Capital Plus Financial Revenue $37.7M
Filed January 30, 2020 in Crossroads Capital Plus Otc Filings; one of 12 filings from this case.
Record facts
| Filed | 2020-01-30 |
|---|
Full text
CROSSROADS SYSTEMS, INC
A Delaware Corporation
8214 Westchester Dr. Suite 950
Dallas, TX 75225
________________________________
(214) 999-0149
www.crossroads.com
SIC CODE: 6712
Annual Report
For the Period Ending: October 31, 2019
(the “Reporting Period”)
The number of shares outstanding of our Common Stock is 5,971,994 SHARES as of
OCTOBER 31, 2019.
The number of shares outstanding of our Common Stock was 5,971,994 SHARES as of
JULY 31, 2019 (end of previous reporting period)
Indicate by check mark whether the company is a shell company (as defined in Rule 405
of the Securities Act of 1933 and Rule 12b-2 of the Exchange Act of 1934):
Yes:
No:
(Double-click and select “Default Value” to check)
Indicate by check mark whether the company’s shell status has changed since the previous
reporting period:
Yes:
No:
Indicate by check mark whether a change in control of the company has occurred over this
reporting period:
Yes:
No:
Part A
General Company Information
Item 1) Name of the issuer and its predecessors (if any)
Crossroads Systems, Inc
Prior Symbol CRDS - Bankruptcy Plan Effective October 3, 2017; Current CRSS
Item 2) Address and principal executive offices
Crossroads Systems, Inc
8214 Westchester Dr. Suite 950
Dallas, TX 75225
(214) 999-0149
www.crossroads.com; www.capitalplusfin.com
ir@crossroads.com; info@capitalplusfin.com
Item 3) Jurisdiction and date of incorporation and organization
Delaware Corporation, Active
September 26, 1996
Has the issuer or any of its predecessors ever been in bankruptcy, receivership, or any similar proceeding in the past
five years?
Yes:
No:
Part B
Share Structure
Item 4) The exact title and class of securities outstanding
Trading symbol:
CRSS
Exact title and class of securities outstanding Common Shares
CUSIP:
22766K103
Par or stated value:
$0.001
Item 5) Par or state value and description of security
Crossroads Systems, Inc. (OTC Pink: CRSS), Amended and Restated Certificate of Incorporation
authorizes the Company to issue 75,000,000 shares of Common Stock, par value $0.001 per share.
As of October 31, 2019, there were 5,971,994 shares of Common Stock issued and outstanding.
A. Par or Stated Value.
Common Stock: $.001 per share
Common or Preferred Stock.
1. Common Stock dividend, voting and preemption rights: Each share of Common Stock has one
vote on each matter submitted to a vote of the stockholders of the Company. Subject to the
provisions of applicable law and the rights of the holders of the outstanding shares of preferred
stock, if any, the holders of shares of Common Stock are entitled to receive, when and as
declared by the Board of Directors of the Company, out of the assets of the Company legally
available therefor, dividends or other distributions, whether payable in cash, property or
securities of the Company.
2. Preferred Stock dividend, voting, conversion and liquidation rights as well as redemption or
sinking fund provisions: n/a
3. Other material rights of Common or Preferred Stockholders: n/a
4. Any provision in the issuer’s charter or by-laws that would delay, defer or prevent a change in
control of the issuer: The Company’s charter includes a tax benefits protection provision that
prohibits any transfer of the Company’s shares to the extent that, as a result of such transfer, a
person would become a 4.99% stockholder of the Company or the percentage stock ownership
of any current 4.99% stockholder would increase.
Item 6)
The number of shares or total amount of securities outstanding for each class of securities
authorized
Total shares authorized:
75,000,000
as of date: October 31, 2019
Total shares outstanding:
5,971,994
as of date: October 31, 2019
Number of shares in the Public Float1:
1,522,221
as of date: October 31, 2019
Total number of shareholders of record:
157
as of date: October 31, 2019
Total number of shareholders of record
(holding at least 100 shares):
52
as of date: October 31, 2019
Item 7)
Transfer Agent
Name: American Stock Transfer & Trust Company
Phone: (866) 703-9077
Email: TCajuste@astfinancial.com
Is the Transfer Agent registered under the Exchange Act?2 Yes:
No:
Part C
Business Information
Item 8) The nature of the issuer’s business.
A. Business Development.
Crossroads Systems, Inc. (OTC Pink: CRSS) was an intellectual property licensing company headquartered in Austin,
Texas. 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. CRSS’s fiscal year-end is October
31.
On August 13, 2017, the Company filed for re-organization under Chapter 11 of the Federal Bankruptcy Code (the
“Plan”) which had been accepted by the holders of more than 2/3 of the preferred shares of the Company. In connection
with the filing, the Company entered into restructuring support agreements with 210/CRDS Investment LLC ("210")
and with certain holders of the Company's series F preferred stock. Subject to the terms and conditions of the Plan and
the restructuring support agreement with 210, Dallas-based 210 invested $4 million cash in the Company in exchange
for shares of the reorganized Company's common stock representing approximately 49.49% of the common stock of
the reorganized Company. In addition, 210 committed to provide up to $10 million of financing for the Company to
use (subject to the terms and conditions of the Plan and the 210 RSA) to implement its strategy of monetizing its
intellectual property assets and pursuing investments in companies that generate profit and positive cash flows, thus
creating long-term shareholder value. The Plan provided for the payment of all creditor claims in full, for holders of
preferred shares to receive their pro rata share of $2.7 million in cash plus 8% of the common stock of the reorganized
Company, and for holders of common stock to exchange their existing shares of common stock for an equivalent
number of new shares of the common stock of the reorganized Company, which shares would constitute approximately
42.51% of the outstanding shares of common stock of the reorganized Company. The Plan was approved by the Court
on September 18, 2017 and effective October 3, 2017, The Company was delisted from the Nasdaq exchange to the
Over-the-Counter (“OTC”) Pink Sheets on September 10, 2017, 10 days after the exchange filed its Form 25.
On December 18, 2017, Crossroads Systems, Inc. closed on the acquisition of 100% of the common equity of Capital
Plus Financial, LLC (“CPF”), a Texas based community development financial institution (“CDFI”), $30.8 million in
cash and 49.5% or 2,955,028 of newly issued common stock. This transaction did not trigger any Change of Control,
however did grant CPF owners/management two board seats.
As of the date of this report and the three preceding years, Crossroads has not been involved in any litigation. In 2018,
the Company settled two outstanding legal matters dating back to 2013 and prior management and business lines since
shuttered as part of the reorganization into a financial holding company. The matters were related to the Crossroads
patent business and royalties owed to Company.
Outside off the legal settlement above, Crossroads has not been in any default of a loan, lease or other indebtedness
or financing arrangement.
B. Business of Issuer.
Crossroads primary and secondary SIC Codes are 6712.
Crossroads Systems, Inc. (OTC Pink: CRSS), is a holding company focused on investing in businesses that promote
economic vitality and community development. Crossroads’ subsidiary, Capital Plus Financial (CPF), is a certified
Community Development Financial Institution (CDFI) and certified B-Corp which supports Hispanic homeownership
with a long term, fixed rate single family mortgage product. CPF was acquired on December 18, 2017 and CPF
management currently owns 2,955,028 shares or 49.5% of the outstanding stock.
Crossroads’ primary subsidiary is Capital Plus Financial. Capital Plus was originally formed in 1992 to provide
mortgage financing within the state of Texas. Over the span of its life, CPF has evolved to serve the Hispanic
population by providing credit that is otherwise unavailable.
CPF has injected over $250 million into under-served communities and populations in Texas. CPF is committed to
continuing to serve communities in which it has a history of 25 years, as well as expand its reach to serve its expanding
customer base.
The other integral part of the CPF's mission is to provide affordable housing. This is done through the substantial
rehabilitation of blighted homes in low to moderate income areas. Through this process, communities are improved
and housing that is safe and sustainable is provided to hundreds of people a year looking to make their way up the
socio-economic ladder.
The consolidated company currently has 28 full-time employees and 2 part-time employees between Dallas-Fort
Worth, Houston and San Antonio. The financial results of Crossroads are consolidated and include the operating
results of CPF.
The Company has not at any time been a “shell company” as defined in Rule 405 of the Securities Act of 1933, as
amended, and Rule 12b-2 of the Securities Exchange Act of 1934, as amended.
As with any operating company, we are subject to a growing number of local, national and international laws and
regulations. These laws are often complex and are frequently changing. Changing or growing regulation could impose
additional compliance burdens and costs on us and could subject us to significant liability for any failure to comply.
Item 9
The nature of the products or services offered
The nature of products or services offered.
Through our subsidiary, CPF’s core business is to provide mortgage financing to Hispanic homeowners within the
state of Texas. CPF achieves this via purchasing blighted, single-family homes in low to moderate income areas
within the state. It then renovates and refurbishes these properties and sells them to the Hispanic community. The
targeted homes are generally 900 to 1,400 sq. ft., 2-3 bedrooms, and range in value from $75,000 to $150,000 (after
renovations).
Typically, targeted properties meet some or all of the following criteria:
•
Outdated, especially the kitchens and bathrooms;
•
Little current curb appeal;
•
Atypical layouts or features that turn buyers away;
•
Not well maintained;
•
Sellers looking for a quick sale; and
•
Sellers seeking a cash buyer, who is not reliant upon financing contingencies.
While there is natural competition from community banks on the financing side of the business, there are multiple
factors which have kept this to a minimum, including but not limited to bank compliance regulation costs, borrower
distrust of the banking system, and small balance size of the mortgages provided.
CPF is, as are all regulated lending institutions, dependent on the continued regulatory approval of our loan offerings.
We are in compliance with the Texas Department of Savings and Mortgage Lending regulations as well as federal
lending guidelines. We subject ourselves to annual compliance, fair lending and servicing audits to ensure that our
procedures remain in compliance and are kept abreast of the latest regulatory changes.
As was announced on November 18, 2019, Crossroads has reached a definitive agreement to purchase Rice
Bankshares. The transaction will merge Capital Plus Financial and the First State Bank and create a CDFI Bank and
Minority Depository Institution and expand the products and services CPF has historically offered to more traditional
banking products such as deposit accounts for the underbanked and unbanked and small business loans. As of the
date of this report, the Company was working through the regulatory application process.
Item 10
The nature and extent of the issuer’s facilities.
The Company is obligated, as lessee, under non-cancelable operating lease agreements for office space located in
Bedford, Texas and Houston, Texas. The lease agreements require monthly payments totaling $12,600 through their
expiration in December 2022.
Future minimum payments required under non-cancelable operating lease agreements are as follows for the years
ending October 31:
Rent expense associated with non-cancelable operating leases for the year ended October 31, 2019 was $151,200.
Bedford
Houston
Total
2020
$ 109,800
$ 41,400
$ 151,200
2021
109,800
41,400
151,200
2022
109,800
41,400
151,200
2023
18,300
6,900
25,200
$ 347,700
$ 131,100
$ 478,800
Part D
Management Structure and Financial Information
Item 11
The name of the chief executive officer, members of the board of directors, as well as control
persons.
A. Officers, Directors and Control Persons.
The following table shows the number of shares of Common Stock beneficially owned by directors, executive officers,
and persons known by the Company to beneficially own more than five percent (5%) of the issued and outstanding
shares of Common Stock of the Company as of October 31, 2019.
Percentage of beneficial ownership is calculated assuming 5,971,994 shares of the Company’s Common Stock (net of
treasury shares) were outstanding as of October 31, 2019. Except as otherwise indicated, and subject to applicable
community property laws, to the Company’s knowledge, each person has sole voting and dispositive power with
respect to all shares of Common Stock beneficially shown as owned by that person.
Beneficial
Owner/Shareholder
Name
Business
Address
Affiliation with
Company (e.g.
Officer/Director
/Control Person)
Number
of Shares
%
Ownership
Class of
Shares
Eric Donnelly (EDUCM,
Inc.)
Dallas, TX
Executive Officer,
Director and Control
Person
532,838
8.9%
Common
Farzana Giga (Giga
Investments, LLC)
Frisco, TX
Executive Officer,
Director and Control
Person & Member of
Audit Committee
432,931
7.2%
Common
Robert Alpert
(210/CRDS Investments)
Dallas, TX
Chairman of the Board
& Control
746,142
12.5%
Common
Clark Webb (210/CRDS
Investments)
Dallas, TX
Director & Control
Person Person &
Member Audit
Committee
746,142
12.4%
Common
Claire Gogel
Dallas, TX
Independent Director
193,438
3.2%
Common
James Perez Foster
Boulder, CO
Independent Director
& Member Audit
Committee
601
0.01%
Common
Ray Kembel
Dallas, TX
Independent Director
& Member Audit
Committee
401
0.01%
Common
Mark Crockett
Fort Worth, TX
Officer and Owner of
more that 5%
466,233
7.8%
Common
Westchester Standard,
LLC (Farzana Giga)
Dallas, TX
Owner of more than
5%
557,225
9.3%
Common
Southwest Federated
Dallas, TX
Owner of more than
5%
399,629
6.7%
Common
Charles A Vose III
Dallas, TX
Owner of more than
5%
299,722
5.0%
Common
Robert H. Alpert - Chairman of the Board
Robert H. Alpert has served as a director since October 2017 and as Chairman of the Board since October 2017. He
is the co-founder and principal of 210 Capital, LLC and the founder and general partner of RHA, Inc. He is also the
Co-CEO and Chairman of the Board of P10 Holdings, Inc., an innovative alternative asset management investment
firm. Mr. Alpert is also the Chairman of the Board of Globalscape, Inc. and on the board of Collaborative Imaging,
LLC. Additionally, Mr. Alpert is a director of Elah Holdings, Inc., a company which seeks to generate long term
shareholder value through the continuation of its strategy of seeking profitable acquisitions and generate increased
free cash flow from the utilization of its tax assets. Prior to founding 210 Capital, Mr. Alpert was the founder and
portfolio manager of Atlas Capital Management, L.P., a long-short strategy investment adviser, from October 1995 to
September 2015. Mr. Alpert was responsible for the investments and operations of Atlas. Mr. Alpert is also the co-
founder of Homebuilder Capital Advisors, LLC, a real estate specialty finance company and a director of Redpoint
Insurance Group, LLC, a Texas property and casualty insurance company.
Eric Donnelly – Director and Officer
Eric Donnelly has served as a director and as Chief Executive Officer since December 2017. Mr. Donnelly has spent
his 20-year career focused on supporting small businesses and developing low to moderate income communities with
an emphasis on Hispanic homeownership. He has served as Capital Plus Financial LLC’s Chief Executive Officer
since 2014 after having been hired by the company’s founder in 2012 to scale the 25-year social enterprise. Mr.
Donnelly has grown the company into one of the largest Community Development Financial Institutions in the country
and under his leadership has achieved its B Corp certification further reinforcing the company’s commitment to
community impact as well as shareholder value growth. In 2005 after many years in commercial banking, Mr.
Donnelly founded a national small balance commercial real estate finance company focused on delivering long term,
fixed rate options to small business owners. He is an active Hispanic entrepreneur and leader whose passion it is to
improve underserved and underbanked market segments. Mr. Donnelly is a graduate of Southern Methodist University
with a Bachelor of Arts in Economics. Mr. Donnelly is a director of InBankshares and International Bank, a
community bank located in New Mexico and Colorado. He is a on the board of Financial Mentors of America, Inc.
(FMA), an educational nonprofit which seeks to achieve social and economic transformation. He is a participant in
the BBVA Momentum program for Social Entrepreneurs, a 2017 graduate of the Stanford Latino Entrepreneur
Initiative.
James Pérez Foster – Independent Director & Member of Audit Committee
James Pérez Foster is a seasoned board member with national banking and Community Development Financial
Institution (CDFI) board experience. He is a technology executive and management consultant with more than 25
years of strategic growth, impact investment advisory and community engagement experience. A published expert on
U.S. underserved market segments for global financial services and banking institutions, he is the founder of
Bainbridge Advisors, LLC, a consulting and research firm that serves financial institutions and federal agencies. Pérez
Foster also founded Solera National Bancorp, a federally chartered bank holding company that is credited as one of
the first Hispanic-markets focused commercial banks in the country. He has a BA in International Relations from
Syracuse University’s Maxwell School of Citizenship and Public Affairs.
Farzana Giga – Director and Officer & Member of Audit Committee
Farzana Giga has served as Capital Plus Financial’s Chief Financial Officer since 2014. Ms. Giga’s background
includes extensive experience in private equity, financial reporting and analysis, investor reporting and treasury for
both private and public companies in Canada and the United States. Prior to CPF, Ms. Giga served as CFO for a
private equity firm focused on residential seller financing including acquisitions, mortgage origination and mortgage
servicing for a portfolio exceeding $100M. From 2007 to 2009, she worked as an Investment Manager at Quadrant
Capital Partners where she was responsible for loan acquisitions and financial analysis of residential and commercial
real estate. Prior to Quadrant, Ms. Giga served as an Assistant Vice President at INYX Canada where she was
responsible for all strategic and financial planning, budgeting/forecasting, cash flow analysis, mergers and acquisitions
analysis including quarterly and annual SEC filings. Prior to INYX, Ms. Giga served as Director, Treasury at RR
Donnelly responsible for managing a debt portfolio of $2B. Ms. Giga is a Certified Public Accountant, Certified
Management Accountant in Ontario, Canada and received her Bachelor of Arts, Economics (Management &
Accounting) from the University of Toronto.
Claire Gogel – Independent Director
Claire Gogel has served as a director since October 2017. Ms. Gogel was an Independent Director and member of the
finance and restructuring committee at SunEdison, Inc., and had served in that position since 2016 when she was
appointed as an independent director by Greenlight Capital. From 2009 to 2014, Ms. Gogel served as a partner and
analyst at Greenlight Capital, a hedge fund in New York. From 2001 to 2009, Ms. Gogel was founder and portfolio
manager of Perennial Advisors. Ms. Gogel’s professional experience also includes positions as a portfolio manager at
Discovery Partners and as a research associate at Cardinal Investment Company. Ms. Gogel is a Board member and
Chair of the Grant Committee for Capital for Kids, and has served in that position since 2005. Ms. Gogel is Board
member and Chair of the Investment Committee for Booker T. Washington School for the Performing and Visual
Arts, and has served in that position since 2015. Ms. Gogel earned a Bachelor of Arts degree with High Honors from
The University of Texas at Austin.
Ray Kembel – Independent Director & Member of Audit Committee
Ray Kembel is a tenured finance executive with a broad knowledge of real estate and credit finance. He is currently
an Executive Vice President with Oakwood Bank in Texas. Prior to joining Oakwood Bank, Ray helped develop the
Dallas commercial banking platform for Green Bancorp, Inc. (NASDAQ: GNBC). Ray previously spent 10 years with
Staubach Capital Partners, a private equity group under The Staubach Company umbrella, acquired by JLL (NYSE:
JLL). He began his career with Bank of America (NYSE: BAC). Ray holds a BBA degree from The University of
Texas at San Antonio and an MBA from The University of Dallas.
C. Clark Webb – Director & Member of Audit Committee
C. Clark Webb is Founder and Managing Member of Pl0 Capital Management, LLC. Prior to forming Pl0 Capital
Management, Clark was CoPortfolio Manager of the Lafayette Street Fund, a multi-billion dollar opportunistic equity
strategy, and a Partner at Select Equity Group, L.P., an asset manager with over $20 billion in assets under
management. Clark graduated from Princeton University and serves on the Board of Trustees of Christian Union.
Board Compensation
The nonexecutive members of the Board of Directors each receive $3,750 per quarter for their service on the Board
of Directors. The Chairman of the Board receives and additional $900 per quarter.
The following table discloses compensation received by the Company’s Chief Executive Officer and Chief Financial
Officer, for the fiscal year 2019.
Name and Principal
Position
Fiscal
Year
Salary
($)
Bonus
($)
Option
Awards ($)
All Other Compensation
($) (2) (3)
Total ($)
Eric Donnelly, Chief
Executive Officer
2019
$350,000
N/A
N/A
N/A
$350,000
Farzana Giga, Chief
Financial Office
2019
$300,000
N/A
N/A
N/A
$300,000
A. Legal/Disciplinary History.
None of the persons listed in Item 11.A above have, in the last five years, been the subject of: (1) a conviction
in a criminal proceeding or named as a defendant in a pending criminal proceeding (excluding traffic
violations and other minor offenses); (2) the entry of an order, judgment, or decree, not subsequently
reversed, suspended or vacated, by a court of competent jurisdiction that permanently or temporarily
enjoined, barred, suspended or otherwise limited such person’s involvement in any type of business,
securities, commodities, or banking activities; (3) a finding or judgment by a court of competent jurisdiction
(in a civil action), the Securities and Exchange Commission, the Commodity Futures Trading Commission,
or a state securities regulator of a violation of federal or state securities or commodities law, which finding
or judgment has not been reversed, suspended, or vacated; or (4) the entry of an order by a self-regulatory
organization that permanently or temporarily barred, suspended or otherwise limited such person’s
involvement in any type of business or securities activities
B. Disclosure of Family Relationships.
There are no family relationships among and between the issuer’s directors, officers, persons nominated or
chosen by the issuer to become directors or officers or beneficial owners of more than five percent (5%) of
any class of the issuer’s equity securities.
C. Disclosure of Related Party Transactions
The Company also leases office space in Dallas, Texas on a month to month basis from Southwest Federated,
Inc., a related party through common ownership for $4,500 per month.
D. Disclosure of Conflicts of Interest.
Not Applicable
Item 12
Financial information for the issuer’s most recent fiscal period.
The Company has provided the following financial statements for the most recent fiscal year ending October 31, 2019
which are attached hereto as Exhibit A and are hereby incorporated by reference:
•
Consolidated Balance Sheet
•
Consolidated Statement of Operations
•
Consolidated Statement of Changes in Equity
•
Consolidated Statement of Cash Flows
•
Notes to the Consolidated Financial Statements
Item 13
Similar financing information for such part of the two preceding fiscal years as the issuer or
its predecessor has been in existence.
The Company has provided the following financial statements for the two most recent fiscal years ending October 31,
2019 and October 31, 2018 (“Fiscal 2019”), and (“Fiscal 2018”):
•
Report of Independent Public Accounting Firm
•
Consolidated Balance Sheet
•
Consolidated Statement of Operations
•
Consolidated Statement of Changes in Equity
•
Consolidated Statement of Cash Flows
•
Notes to the Consolidated Financial Statements
These are published as Exhibit A to “Annual Reports” for each of Fiscal 2019 and Fiscal 2018 and filed through the
OTC Disclosure and News Service, available at www.otcmarkets.com, and are hereby incorporated by reference.
Item 14
Beneficial Owners and Control Person
Shareholder
Beneficial
Holder
Address
Affiliation with Company
(e.g. Officer/Director/Owner
of more than 5%)
Number of
Shares
Class of
Shares
EDUCM, Inc
Eric
Donnelly
Dallas, TX
CEO & Director
532,838
Common
Giga
Investments,
LLC
Farzana
Giga
Frisco, TX
CFO & Director
432,931
Common
210/CRDS
Investment
Robert
Alpert/Clark
Webb
Dallas, TX
Chairman of the Board
1,492,284
Common
Westchester
Standard, LLC
Farzana
Giga
Dallas, TX
Owner of more than 5%
557,225
Common
Southwest
Federated
Charles A.
Vose III
Dallas, TX
Owner of more than 5%
399,629
Common
Charles A Vose
III
Dallas, TX
Owner of more than 5%
299,722
Common
Mark Crockett
Fort
Worth, TX
Owner of more than 5%
466,233
Common
Item 15
The name, address, telephone number, and email address of each of the following outside
providers that advise the issuer on matters relating to operations, business development and disclosure:
Securities Counsel
Name:
Claudia Dubon
Firm:
Olshan Frome Wolosky LLP
Address 1:
1325 Avenue of the Americas
Address 2:
New York, NY 10019
Phone:
(212) 451-2300
Email:
info@olshanlaw.com
Auditor
Name:
Paul Greilich
Firm:
Baker Tilly Virchow Krause LLP
Address 1:
2500 Dallas Parkway Suite 300
Address 2:
Plano, TX 75093
Phone:
(972) 748-0300
Email:
info@bakertilly.com
Investor Relations Consultant
Name:
Matthew Zintel
Firm:
Zintel Public Relations
Address 1:
140 Cypress Station Dr. Suite 217
Address 2:
Houston, TX 77090
Phone:
(281) 444-1590
Email:
info@zintelpr.com
Item 16
Management’s Discussion and Analysis or Plan of Operation.
Item 16 Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides information and analysis of the Company’s results of operations and its liquidity
and capital resources, and should be read in conjunction with the Company’s Consolidated Financial Statements and
the other financial information included in Exhibit A and elsewhere in this Annual Report. This discussion contains
forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially
from those anticipated in these forward-looking statements as a result of any number of factors.
The Company’s operating and reporting period is on a fiscal year ending on October 31.
Fiscal 2019 Financial Overview & Results of Operations
Operations
Total revenue from operations for the fiscal year ended October 31, 2019 was $37.7 million compared to $28.4 million
for the same period of 2018. The 33% increase in revenue was the result of higher unit sales of homes and loan
portfolio growth. Net operating income before taxes for the fiscal year ended October 31, 2019 was $4.4 million
compared to $2.6 million for the same period of 2018.
Net Earnings Per Share
Net earnings per share from operations before taxes for the year ended October 31, 2019 was $0.63 compared to $0.36
for the fiscal year ended October 31, 2018.
Gross Sales
Gross income from the sale of recently rehabilitated homes was $25.3 million for the year ended October 31, 2019
compared to $19.3 million for the year ended October 31, 2018. The increase was the result of higher unit sales and
higher sales price for the fiscal year ended October 31, 2019.
Interest income generated from the Company’s mortgage note receivable portfolio increased to $12.0 million for the
year ended October 31, 2019 compared to $8.9 million for the year ended October 31, 2018. The increase was the
result of growth in the total mortgage note receivable portfolio during the year.
Cost of Goods Sold
The cost of goods sold related to the sale of homes increased 41% from $15.0 million for the fiscal year ended October
31, 2018 to $21.1 million for the fiscal year ended October 31, 2019. The increase was the result of more home sales
and increased costs on those homes during fiscal year 2019.
The second component of cost of goods sold is the interest expense on the mortgage note receivable portfolio. The
interest expense related to the portfolio income was $6.3 million for the year ended October 31, 2019 compared to
$3.8 million for the year ended October 31, 2018. The increase in interest expense was the result of the debt increasing
on the portfolio as it grew and increase in the average interest rate on the during the first half of fiscal 2019.
Cost of goods sold includes all the direct costs of the inventory sold as well as the costs related to the rehabilitation of
the homes sold. In addition, cost of goods sold includes carrying costs of all the properties sold and inventory on
hand.
Operating Expenses
Total operating expenses decreased approximately $1.2 million from $6.0 million from the fiscal year ended October
31, 2018 to $4.8 million for the year ended October 31, 2019. Operating expenses as a percentage of total revenues
decreased from 22% for the fiscal year ended October 31, 2018 to 12% for the fiscal year ended October 31, 2019.
The decrease in operating expenses was primarily due to streamlining operating expenses from the legacy business of
Crossroads Systems, Inc.
Operating expenses consist primarily of the following: compensation, sales and marketing, technology, legal,
professional fees, insurance and other operating expenses.
Other Income/Expense
The other interest expense relates to interest from acquisition debt. Total other interest expenses decreased $71,000
from the October 31, 2018 fiscal year end to the October 31, 2019 fiscal year end. The total debt repayment of the
acquisition debt for the fiscal year was $4.4 million.
Liquidity and Capital Resources
We define liquidity as our ability to generate sufficient cash to fund current loan demand at the subsidiary level and to
operate on an ongoing basis. Our liquidity requirements are met primarily through cash flow from operations, receipt of pre-
paid and maturing balances in our loan portfolios, debt financing and preferred equity investments.
As of October 31, 2019, Capital Plus Financial had lines of credit available with its current banking partners in excess
of $25 million.
The Company also offers a Preferred Equity instrument to its bank partners which is a considered a qualified
investment under the Community Reinvestment Act (“CRA”) investment test for banks. Banks purchase units of the
preferred investment which generates cash for the Company and provides banks with an “innovative” investment,
providing more favorable CRA assessment from their regulators.
Working Capital
Mortgage Note Portfolio
The mortgage note portfolio consists of $122 million of long term fixed, amortizing single family residential
mortgages in the Dallas/Fort Worth, Houston and San Antonio markets. The Company provides a mortgage for the
purchase of a property with an equity down payment from the potential buyer. Our mortgage portfolio is comprised
of first-time home buyers, and in over 60% of the cases, first time credit recipients. We believe the risk associated
with these borrowers is mitigated by their history of debt aversion. Plainly said, those who have shown the financial
discipline to operate without debt should be rewarded and not punished as is often the case with a zero credit score
borrower attempting to qualify for a mortgage. Each borrower is manually underwritten, and all are given the
opportunity to demonstrably prove their ability to repay. A 43% debt to income (“DTI”) ratio is the maximum ratio
for approved mortgages, but the average DTI ratio in our portfolio is 24%, further reinforcing the quality of our
borrowers. All mortgages are originated in house and are Qualified Mortgages (QM). Our weighted average rate on
the portfolio was 10.55% at October 31, 2019.
The Company has a default rate below 3% per year and when it does take a property back into inventory, it is able to
put it back into its rehab cycle and resell it. Given its ability to rehab and resell the properties at a profit, the Company
has determined a reserve for delinquent and defaulted mortgages is not necessary as of October 31, 2019.
As of October 31, 2019, the Company had a mortgage note receivable balance of $122 million compared to $109
million as of October 31, 2018.
Inventory
Inventory consists of properties that are currently undergoing remodeling or are being held for sale. Inventory is stated
at the lower of its cost or net realizable value using the specific identification method. Repair costs, commissions,
closing costs, interest and other costs associated with individual properties are included in the cost of the property and
are expensed as part of the cost of sales when the property is sold.
The Company regularly evaluates inventories that are slow-moving or incurring costs in excess of budgeted costs. The
Company determined a reserve for slow-moving inventory was not necessary as of October 31, 2019.
As of October 31, 2019, gross inventory was $11.8 million compared to $7.5 million as of October 31, 2018, an
increase of $4.3 million or 58%. The increase in inventory as of October 31, 2019 compared to October 31, 2018
resulted from the Company’s strategic decision to start increasing inventory earlier in the fall to allow for increased
home sales for Spring 2020.
Revolving Credit Facility
The Company has a revolving line of credit for the acquisition of properties and another for its mortgage loans. The
outstanding balance on the inventory line at October 31, 2019 was $9.2 million compared to $7.4 million at October
31, 2018. The increase in outstanding balance is the result of increasing inventories for the upcoming sales season.
The outstanding balance on the mortgage loan revolving credit facility was $42.2 million as of October 31, 2019,
compared to $31.7 million as of October 31, 2018. The increase was the result of adding new loans to the credit
facility.
Cash Flows Provided by Operations
Continuing Operations
Net cash used by operating activities during the year ended October 31, 2019 was $14.3 million compared to $14.8
million of net cash used for the year ended October 31, 2018. The main driver of cash usage was the generation of
new loans and increased inventories.
Cash Flows Used in Investing and Financing Activities
Net cash used by investing activities during the year ended October 31, 2019 was $0 compared to $20 million of net
cash used for the year ended October 31, 2018. The company acquired Capital Plus Financial in 2018 resulting in the
cash usage.
Net cash provided by financing activities during the year ended October 31, 2019 was $13.7 million compared to
$35.8 million for the year ended October 31, 2018. This was primarily due to the acquisition of CPF and the financing
of the transaction.
There are no known trends, events or uncertainties that have or are reasonably like to have a material impact on the
company’s short-term or long-term liquidity. The internal sources of liquidity are profits generated from the
company’s operating subsidiary, Capital Plus Financial, and its external sources of liquidity remain debt and equity
from banking institutions that assist in the institutions compliance with the Community Reinvestment Act (CRA). The
company has no material commitments for capital expenditures and the expected source of funds for such
expenditures. There are no known trends, events, or uncertainties that had had or that are reasonably expected to have
a material impact on the net sales or revenues or income from continuing operations. There are no significant elements
of income or loss that do not arise from the company’s continuing operations. There are also no causes for any material
changes from period to period in one or more line items on the company’s financial statements nor are the seasonal
aspects that had a material effect on the financial condition of the results of operations.
C. Off-Balance Sheet Arrangements.
NA
Part E
Issuance History
Item 17
List of securities offerings and shares issued for services in the past two years.
A. Changes to the Number of Outstanding Shares
Check this box to indicate there were no changes to the number of outstanding shares within the past two
completed fiscal years and any subsequent periods:
Number
of
Shares
outstanding as
of
October
31,
2017
Opening Balance:
Common: 3,014,726
Preferred: 0
*Right-click the rows below and select “Insert” to add rows as needed.
Date of
Transaction
Transaction
type (e.g.
new
issuance,
cancellation,
shares
returned to
treasury)
Number
of Shares
Issued (or
cancelled)
Class of
Securities
Value of
shares
issued
($/per
share) at
Issuance
Were
the
shares
issued at
a
discount
to
market
price at
the time
of
issuance
?
(Yes/No)
Individual/
Entity
Shares were
issued to
(entities
must have
individual
with voting
/ investment
control
disclosed).
Reason for
share
issuance
(e.g. for
cash or
debt
conversion)
OR Nature
of Services
Provided (if
applicable)
Restricted
or
Unrestrict
ed as of
this filing?
Exemption
or
Registratio
n Type?
Dec 2017
New
Issuance
532,838
Common
$0.38
Y
EDUCM,
Inc (Eric
Donnelly)
Acquisition
of
Capital
Plus
Restricted
Non
registered
Dec 2017
New
Issuance
432,931
Common
$0.38
Y
Giga
Investments,
LLC
(Farzana
Giga)
Acquisition
of
Capital
Plus
Restricted
Non
registered
Dec 2017
New
Issuance
399,629
Common
$0.38
Y
Southwest
Federated(
Charles A.
Vose)
Acquisition
of
Capital
Plus
Restricted
Non
registered
Dec 2017
New
Issuance
299,722
Common
$0.38
Y
Charles A.
Vose)
Acquisition
of
Capital
Plus
Restricted
Non
registered
Dec 2017
New
Issuance
557,255
Common
$0.38
Y
Westchester
Standard,
LLC,
(Farzana
Giga)
Acquisition
of
Capital
Plus
Restricted
Non
registered
B. List below and describe any issuance of Promissory Notes, Convertible Notes, or Convertible Debentures. In
responding to this item, please provide the date of execution of the Note or the Agreement, a description of the
reason for the issuance, the outstanding balance and any interest accrued. Provide the maturity dates for each Note
or Agreement, their conversion terms, names of beneficial owners or holders and the exact class of security such
Notes or Agreement may be converted to. Also, specify if the Note is Secured or Unsecured and whether or not
it is in Default.
Date of
Note
Issuance
Outstanding
Balance ($)
Principal
Amount at
Issuance ($)
Interest
Accrued ($)
Maturity
Date
Conversion
Terms
Name of
Noteholder
Reason for
Issuance (e.g.
Loan, Services,
etc.)
Security
Pledged
Default
Status
Dec
2017
$12,891,703
$22,000,000
$33,049
Dec 2024
N/A
Veritex Bank
Acquisition
Stock of
Crossroads not
already secured
In
compliance
with all loan
covenants
Dec
2017
$2,200,000
$2,200,000
$2,593
Dec 2019
N/A
CrossFirst Bank
Acquisition
Cash secured
In
compliance
with all loan
covenants
Part F Exhibits
The following exhibits must be either described in or attached to the disclosure statement:
Item 18 Material Contracts.
A. Every material contract, not made in the ordinary course of business, that will be performed after
the disclosure statement is posted through www.OTCIQ.com or was entered into not more than two
years before such posting. Also include the following contracts:
NA
Dec 2017
New
Issuance
466,233
Common
$0.38
Y
Mark
Crockett
Acquisition
of
Capital
Plus
Restricted
Non
registered
Dec 2017
New
Issuance
177,702
Common
$0.38
Y
CC
Texas
Realty (Neil
Clements)
Acquisition
of
Capital
Plus
Restricted
Non
registered
Dec 2017
New
Issuance
44,359
Common
$0.38
Y
Luke
Hammond
Acquisition
of
Capital
Plus
Restricted
Non
registered
Dec 2017
New
Issuance
44,359
Common
$0.38
Y
Chad Cole
Acquisition
of
Capital
Plus
Restricted
Non
registered
June 2018
New
Issuance
957
Common
3.92
N
Individual
Board
Compensati
on
Unrestricte
d
Non
registered
June 2018
New
Issuance
1,283
Common
7.79
N
Individuals
Board
Compensati
on
Unrestricte
d
Non
registered
Shares
Outstanding on
October
31,
2019
Ending Balance:
Common: 5,971,994
Preferred: 0
Item 19 Articles of Incorporation and Bylaws.
A. A complete copy of the issuer’s articles of incorporation or in the event that the issuer is not a corporation, the
issuer’s certificate of organization. Whenever amendments to the articles of incorporation or certificate of organization
are filed, a complete copy of the articles of incorporation or certificate of organization as amended shall be filed.
B. A complete copy of the issuer’s bylaws. Whenever amendments to the bylaws are filed, a complete copy of the
bylaws as amended shall be filed.
Refer to the website.
Item 20
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
A. In the following tabular format, provide the information specified in paragraph (B) of this Item 20 with
respect to any purchase made by or on behalf of the issuer or any "Affiliated Purchaser” (as defined in
paragraph (C) of this Item 20) of shares or other units of any class of the issuer's equity securities.
NA
Item 21
Issuer’s Certifications.
10)
Issuer Certification
Principal Executive Officer:
The issuer shall include certifications by the chief executive officer and chief financial officer of the issuer (or any
other persons with different titles but having the same responsibilities).
The certifications shall follow the format below:
I, Eric Donnelly, certify that:
1. I have reviewed this Annual Disclosure Statement of Crossroads Systems, Inc.;
2. Based on my knowledge, this disclosure statement does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this disclosure
statement; and
3. Based on my knowledge, the financial statements, and other financial information included or incorporated
by reference in this disclosure statement, fairly present in all material respects the financial condition, results
of operations and cash flows of the issuer as of, and for, the periods presented in this disclosure statement.
January 30, 2020
Signature:
Title: Chief Executive Officer
Principal Financial Officer:
I, Farzana Giga, certify that:
1. I have reviewed this Annual Disclosure Statement of Crossroads Systems, Inc.;
2. Based on my knowledge, this disclosure statement does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this disclosure
statement; and
3. Based on my knowledge, the financial statements, and other financial information included or incorporated
by reference in this disclosure statement, fairly present in all material respects the financial condition, results
of operations and cash flows of the issuer as of, and for, the periods presented in this disclosure statement.
January 30, 2020
Signature:
Title: Chief Financial OfficerFile and source
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