Court filing
Crossroads Systems OTC Annual Disclosure FY2020: Capital Plus Financial Pre-PPP Baseline
Filed January 1, 2021 in Crossroads Capital Plus Otc Filings; one of 12 filings from this case.
Record facts
| Filed | 2021-01-01 |
|---|
Full text
CROSSROADS SYSTEMS, INC
A Delaware Corporation
4514 Cole Avenue, Suite 1600
Dallas, TX 75205
(214) 999-0149
www.crossroads.com
SIC CODE: 6712
Annual Report
For the Period Ending: October 31, 2020
(the “Reporting Period”)
The number of shares outstanding of our Common Stock is 5,971,994 SHARES as of
OCTOBER 31, 2020.
The number of shares outstanding of our Common Stock was 5,971,994 SHARES as of
JULY 31, 2020 (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: OTCQX
Item 2) Address and principal executive offices
Crossroads Systems, Inc
4514 Cole Avenue, Suite 1600
Dallas, TX 75205
(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. (OTCQX: 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, 2020, 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, 2020
Total shares outstanding:
5,971,994
as of date: October 31, 2020
Number of shares in the Public Float1:
2,029,592
as of date: October 31, 2020
Total number of shareholders of record:
162
as of date: October 31, 2020
Total number of shareholders of record
(holding at least 100 shares):
57
as of date: October 31, 2020
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.
In November 2019, Crossroads announced it had 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.
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 the Company.
Outside of 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. (OTCQX: 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 that 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. Throughout 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 27 full-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 that 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 comply 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, 2020 was $151,200.
Bedford
Houston
Total
2021
109,800
41,400
151,200
2022
109,800
41,400
151,200
2023
18,300
6,900
25,200
$237,900
$ 89,700
$327,600
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, 2020.
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, 2020. 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 (Donnelly
2018 Trust
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 Person
746,142
12.5%
Common
Clark Webb (210/CRDS
Investments)
Dallas, TX
Director & Control
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%;
Managed by Farzana
Giga
557,225
9.3%
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 Alpert has served as Chairman of the Board since October 2017. He is the Chairman and Co-CEO of P10
Holdings, Inc. He is also the co-founder and principal of 210 Capital, LLC. Mr. Alpert is a director of Elah Holdings,
Inc., Collaborative Imaging, LLC. and Chairman of the Board of Redpoint Insurance Group, LLC. He is also the co-
founder of Homebuilder Capital Advisors, LLC. and the co-founder and managing member of Merfax Financial
Group, LP. Mr. Alpert previously served as the Chief Executive Officer and Chairman of the Board of GlobalSCAPE,
Inc. Prior to founding 210 Capital, Mr. Alpert was the founder and portfolio manager of Atlas Capital Management,
L.P.
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 has served as a director since October 2017. Mr. Webb is the Co-CEO and a Director of P10 Holdings,
Inc. He is also the co-founder and principal of 210 Capital, LLC. Additionally, Mr. Webb serves as the Chairman of
the Board of Elah Holdings, Inc. and Chairman of the Board of Collaborative Imaging LLC. Previously, Mr. Webb
was Founder and Managing Member of P10 Capital Management, Co-Portfolio Manager of the Lafayette Street Fund,
and a Partner at Select Equity Group, L.P. Mr. Webb holds a B.A. from Princeton University.
Board Compensation
The non-executive 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 an additional $900 per quarter and the Chairman of the Audit
Committee receives an additional $600 per quarter.
The following table discloses compensation received by the Company’s Chief Executive Officer and Chief Financial
Officer, for the fiscal year 2020.
Name and Principal
Position
Fiscal
Year
Salary
($)
Bonus
($)
Option Awards
(Fair Value $)
All Other
Compensation ($)
Total ($)
Eric Donnelly, Chief
Executive Officer
2020 $350,000
N/A
$405,900
N/A
$755,900
Farzana Giga, Chief
Financial Office
2020 $300,000
N/A
$405,900
N/A
$705,900
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.
Copy participations from audit upon completion
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, 2020
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,
2020 and October 31, 2019 (“Fiscal 2020”), and (“Fiscal 2019”):
•
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 2020 and Fiscal 2019 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%;
Managed by Farzana Giga
557,225
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:
Bridget M. Quin
Firm:
Baker Tilly Virchow Krause LLP
Address 1:
9 Wood Avenue South, Suite 801,
Address 2:
Iselin, NJ 08830-2734
Phone:
(848) 467-3909
Email:
info@bakertilly.com
Investor Relations Consultant
Name:
Tom Colton and Matt Glover
Firm:
Gateway Investor Relations
Address 1:
4685 MacArthur Court, Suite 400
Address 2:
Newport Beach, CA 92660
Phone:
(949) 574-3860
Email:
crss@gatewayir.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 2020 Financial Overview & Results of Operations
Operations
Total revenue from operations for the fiscal year ended October 31, 2020 was $36.6 million compared to $37.7 million
for the same period of 2019. The 2.8% decrease in revenue was the result of lower unit sales of homes during the
pandemic which had much of the state under a Shelter in Place order for the key spring selling months. Net operating
income before taxes and minority interest for the fiscal year ended October 31, 2020 was $5.0 million compared to
$4.4 million for the same period of 2019.
October 31,
2020
October 31,
2019
$
%
REVENUES
Interest income
12,633,818
$
11,986,113
$
647,705
$
5.4%
Property sales
23,461,898
25,330,557
(1,868,659)
-7.4%
Other revenue
538,876
387,264
151,612
39.1%
Total revenues
36,634,592
37,703,935
(1,069,343)
-2.8%
COSTS AND EXPENSES
Interest expense
5,712,138
6,343,947
(631,809)
-10.0%
Cost of properties sold
20,297,457
21,138,085
(840,628)
-4.0%
General and administrative
2,027,776
1,962,626
65,150
3.3%
Salaries and wages
2,839,113
2,788,032
51,081
1.8%
Total costs and expenses
30,876,484
32,232,690
(1,356,206)
-4.2%
Income from operations
5,758,108
5,471,245
286,863
5.2%
OTHER EXPENSES
Interest expense
(734,005)
(1,110,230)
376,225
-33.9%
Total other expenses
(734,005)
(1,110,230)
376,225
-33.9%
Income before income tax provision
5,024,103
4,361,015
663,088
15.2%
INCOME TAX PROVISION
(1,377,572)
(1,990,988)
613,416
-30.8%
NET INCOME
3,646,531
2,370,027
1,276,504
53.9%
Less: net income attributable to non-controlling interests
(630,000)
(617,582)
(12,418)
2.0%
NET INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS
3,016,531
$
1,752,445
$
1,264,086
$
72.1%
Earnings (loss) per share:
Cash income attributable to common shareholders
4,394,103
3,743,433
650,670
17.4%
Weighted average shaes outstanding
5,971,994
5,971,994
-
0.0%
Cash income per share
0.74
$
0.63
$
0.11
$
17.4%
For the Twelve Months Ended
Increase/(Decrease)
Net Earnings Per Share
Net earnings per share from operations before taxes and after minority interests for the year ended October 31, 2020
was $0.74 compared to $0.63 for the fiscal year ended October 31, 2019 representing an increase of 17.4% year over
year.
Gross Sales
Gross income from the sale of recently rehabilitated homes was $23.5 million for the year ended October 31, 2020
compared to $25.3 million for the year ended October 31, 2019. The decrease in gross sales was the result of lower
unit sales during the pandemic which were offset by higher sales prices for the fiscal year ended October 31, 2020.
Interest income generated from the Company’s mortgage note receivable portfolio increased to $12.6 million for the
year ended October 31, 2020 compared to $12.0 million for the year ended October 31, 2019. The increase was the
result of growth in the total mortgage note receivable portfolio during the year. The company also provided
forbearance agreements to 234 borrowers as a result of the pandemic which impacted interest income by
approximately $412,000.
Cost of Goods Sold
The cost of goods sold related to the sale of homes decreased by 4% to $20.3 million for the fiscal year ended October
31, 2020 from $21.1 million for the fiscal year ended October 31, 2019. The decrease was the result of fewer home
sales and costs on those homes during fiscal year 2020.
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.
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 $5.7 million for the year ended October 31, 2020 compared to
$6.3 million for the year ended October 31, 2019. The decrease in interest expense was the result of the Federal
Reserve Board lowering interest which translated to lower rates from the Company’s lenders on its debt portfolio.
Operating Expenses
Total operating expenses increased approximately $116,000 from $4.8 million from the fiscal year ended October 31,
2019 to $4.9 million for the year ended October 31, 2020. Operating expenses as a percentage of total revenues
increased from 12.6% for the fiscal year ended October 31, 2019 to 13.2% for the fiscal year ended October 31, 2020.
The increase in operating expenses was primarily due to the granting of stock options to the employees and legal fees
related to the FSB Rice Bankshares pending acquisition. The stock option expense is not a cash expense.
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 $376,000
from the October 31, 2019 fiscal year-end to the October 31, 2020 fiscal year-end due to a declining interest rate and
lower debt balance. The total debt repayment of the acquisition debt for the fiscal year was $1.8 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, 2020, Capital Plus Financial had lines of credit available with its current banking partners in excess
of $13 million. We continue to monitor our financings need ahead of our bank acquisition. In the event, our bank
acquisition is not completed, we will add additional liquidity.
The Company also offers a Preferred Equity instrument to its bank partners which is 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 a
more favorable CRA assessment from their regulators.
Working Capital
Mortgage Note Portfolio
The mortgage note portfolio consists of $128.8 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 back-end DTI ratio in our portfolio is 29.5%, 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 10.44% at October 31, 2020.
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, 2020.
As of October 31, 2020, the Company had a mortgage note receivable balance of $128.8 million compared to $116.9
million as of October 31, 2019.
Inventory
Inventory consists of properties that are currently undergoing remodeling or are being held for sale. Inventory includes
the initial costs of acquiring the property, remodeling costs, real estate taxes and other direct costs incurred while
remodeling the property. All indirect overheard costs, such as compensation of sales personnel, management and
advertising costs are charged to salaries and wages or other general and administrative expenses as incurred.
The initial direct costs to acquire properties and remodeling costs account for approximately 92% of cost of properties
sold in the consolidated statement of operations for the year ended October 31, 2020. As of October 31, 2020, 92
properties were being remodeled and 16 were completed and held for sale. Generally, the Company holds properties
in inventory from acquisition to resale for 3 to 4 months.
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, 2020, gross inventory was $10.5 million compared to $11.8 million as of October 31, 2019, a
decrease of $1.3 million or 11%. The decrease in inventory as of October 31, 2020 compared to October 31, 2019 is
the result of lower inventory on hand. However, the company is starting to increase inventory to get homes ready for
the upcoming Spring season of 2021.
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, 2020 was $7.2 million compared to $9.3 million at October
31, 2019. The decrease in outstanding balance is the result of decreasing inventories. In addition, the Company has
two lines totaling $3.0 million for new housing development projects. The outstanding balance on these facilities was
$1.7 million.
The outstanding balance on the mortgage loan revolving credit facility was $37.5 million as of October 31, 2020,
compared to $45.4 million as of October 31, 2019. The Company transferred $10 million of loans from the revolving
line of credit to a new term facility to make capacity available on the revolving line credit facility for new loan
production.
Cash Flows Provided by Operations
Continuing Operations
Net cash used by operating activities during the year ended October 31, 2020 was $1.0 million compared to $14.3
million of net cash used for the year ended October 31, 2019. 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 provided by financing activities during the year ended October 31, 2020 was $1.9 million compared to
$13.7million for the year ended October 31, 2019.
There are no known trends, events, or uncertainties that have or are reasonably like to have a material impact on the
company’s short-term or long-term liquidity. The internal sources of liquidity are profits generated from the
company’s operating subsidiary, Capital Plus Financial, and its external sources of liquidity remain debt and equity
from banking institutions that assist in the institutions compliance with the Community Reinvestment Act (CRA). The
company has no material commitments for capital expenditures and the expected source of funds for such
expenditures. There are no known trends, events, or uncertainties that had had or that are reasonably expected to have
a material impact on the net sales or revenues or income from continuing operations. There are no significant elements
of income or loss that do not arise from the company’s continuing operations. There are also no causes for any material
changes from period to period in one or more line items on the company’s financial statements nor are the seasonal
aspects that had a material effect on the financial condition of the results of operations.
C. Off-Balance Sheet Arrangements.
NA
Part E
Issuance History
Item 17
List of securities offerings and shares issued for services in the past two years.
A. Changes to the Number of Outstanding Shares
Check this box to indicate there were no changes to the number of outstanding shares within the past two
completed fiscal years and any subsequent periods:
Number
of
Shares
outstanding as of
October 31, 2017
Opening Balance:
Common: 3,014,726
Preferred: 0
Date of
Transaction
Transaction
type (e.g. new
issuance,
cancellation,
shares
returned to
treasury)
Number of
Shares
Issued
Class of
Securities
Value of
shares
issued
($/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
Unrestricte
d as of this
filing?
Exemption or
Registration
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
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
$0.38
Y
Chad Cole
Acquisition of
Capital Plus
Restricted
Non
registered
June 2018
New Issuance
957
Common
3.92
N
Individual
Board
Compensation
Unrestricted
Non
registered
June 2018
New Issuance
1,283
Common
7.79
N
Individuals
Board
Compensation
Unrestricted
Non
registered
Shares
Outstanding on
October 31, 2020
Ending Balance:
Common: 5,971,994
Preferred: 0
B. List below and describe any issuance of Promissory Notes, Convertible Notes, or Convertible Debentures. In
responding to this item, please provide the date of execution of the Note or the Agreement, a description of the
reason for the issuance, the outstanding balance, and any interest accrued. Provide the maturity dates for each
Note or Agreement, their conversion terms, names of beneficial owners or holders and the exact class of security
such Notes or Agreement may be converted to. Also, specify if the Note is Secured or Unsecured and whether or
not it is in Default.
Date of
Note
Issuance
Outstanding
Balance ($)
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
$11,020,327
$22,000,000
$18,479
Dec 2024
N/A
Veritex Bank
Acquisition
Stock of
Crossroads not
already secured
See Status
Below (a)
Dec
2017
$2,199,377
$2,200,000
$1,714
Dec 2021
N/A
CrossFirst Bank
Acquisition
Cash secured
In
compliance
with all loan
covenants
(a) The Company is required to comply with certain financial and non-financial covenants under the
Veritex Note. The Company was not in compliance with the problem asset measurement ratio as of
October 31, 2020 due to COVID19 affecting various county government’s ability to process
foreclosures timely. The Problem Asset Measurement Ratio is the ratio of notes receivable past due 30
days plus initial inventory acquisition costs aged over 270 days to total notes receivable plus initial
inventory acquisition costs. The Company is required to maintain a quarterly Problem Asset
Measurement Ratio no greater than 5.00% with the ratio as of October 31, 2020 at 5.89%. The
Company has the capability of curing the non-compliance through the liquidation of the notes
receivable held up in the foreclosure process due to COVID-19, and accordingly, has determined that
the non-compliance is not representative of a continued default for financial reporting purposes.
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
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.
Eric Donnelly
Date: January 28, 2021
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.
Farzana Giga
Date: January 28, 2021
Chief Financial Officer
EXHIBIT A
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
OCTOBER 31, 2020
Baker Tilly US, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and
independent legal entities. © 2020 Baker Tilly US, LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Crossroads Systems, Inc. and Subsidiaries:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Crossroads Systems, Inc. and subsidiaries (the
“Company”) as of October 31, 2020, and the related consolidated statements of operations, changes in equity, and
cash flows for the year then ended, and the related notes (collectively referred to as the financial statements). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
October 31, 2020, and the results of its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing standards
generally accepted in the United States of America. 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,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal
control over financial reporting, 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.
Our audit includes performing procedures to assess the risk of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also
includes evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statement. We believe that our audit provides a reasonable basis
for our opinion.
Report on Supplementary Information
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole.
The consolidating information in Schedules I and II is presented for purposes of additional analysis of the
consolidated financial statements rather than to present the financial position and results of operations of the
individual companies, and it is not a required part of the consolidated financial statements. Such information has not
been subjected to the auditng procedures applied in the audit of the basic financial statements, and, accordingly, we
express no opinion on it.
BAKER TILLY US, LLP
We have served as the Company’s auditor since 2018
New York, NY
January 20, 2021
1
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 2020
ASSETS
CURRENT ASSETS
Cash and cash equivalents
2,127,059
$
Restricted cash
3,004,051
Interest receivable
930,871
Current portion of notes receivable
1,527,234
Current portion of other notes receivable
7,014
Inventory
10,544,236
Prepaid expenses and other current assets
411,645
Total current assets
18,552,110
NON-CURRENT ASSETS
Notes receivable, net of current maturities and allowance of $0
127,304,450
Other notes receivable, net of current maturities, participations and allowance of $0
1,583,761
Goodwill
18,566,966
Deferred tax asset
18,300,334
Total non-current assets
165,755,511
TOTAL ASSETS
184,307,621
$
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable
222,610
$
Accrued liabilities
353,901
Escrow liabilities
2,886,249
Current portion of credit facilities
75,694,845
Current portion of other note payable
191,337
Current portion of acquisition notes payable
2,495,172
Total current liabilities
81,844,114
NON-CURRENT LIABILITIES
Credit facilities, net of current maturities
39,481,435
Other note payable, net of current maturities
1,144,234
Acquisition notes payable, net of current maturities
10,582,769
Payroll protection program loan
376,800
Other long-term liabilities
407,091
Total non-current liabilities
51,992,329
TOTAL LIABILITIES
133,836,443
EQUITY
Common stock, $0.001 par value: 75,000,000 shares
authorized, 5,971,994 shares issued and outstanding
5,972
Additional paid in capital
242,471,412
Accumulated deficit
(210,057,986)
Controlling interests
32,419,398
Non-controlling interests
18,051,780
TOTAL EQUITY
50,471,178
TOTAL LIABILITIES AND EQUITY
184,307,621
$
The accompanying notes are an integral part of these consolidated financial statements.
2
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2020
REVENUES
Interest income
12,633,818
$
Property sales
23,461,898
Other revenue
538,876
Total revenues
36,634,592
COSTS AND EXPENSES
Interest expense
5,712,138
Cost of properties sold
20,297,457
Salaries and wages
2,839,113
Professional fees
708,139
Other general and administrative
1,319,637
Total costs and expenses
30,876,484
Income from operations
5,758,108
OTHER EXPENSES
Interest expense
(734,005)
Total other expenses
(734,005)
Income before income tax provision
5,024,103
INCOME TAX PROVISION
(1,377,572)
NET INCOME
3,646,531
Less: net income attributable to non-controlling interests
(630,000)
NET INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS
3,016,531
$
The accompanying notes are an integral part of these consolidated financial statements.
3
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED OCTOBER 31, 2020
Additional
Paid-In
Accumulated
Non-Controlling
Total
Shares
Amount
Capital
Deficit
Interests
Equity
BALANCE, NOVEMBER 1, 2019
5,971,994
5,972
$
242,358,843
$
(213,074,517)
$
18,053,506
$
47,343,804
$
Stock-based compensation:
Stock options
-
-
112,569
-
-
112,569
Dividend distributions to
non-controlling interests *
-
-
-
-
(631,726)
(631,726)
Net income
-
-
-
3,016,531
630,000
3,646,531
BALANCE, OCTOBER 31, 2020
5,971,994
5,972
$
242,471,412
$
(210,057,986)
$
18,051,780
$
50,471,178
$
* see Note 10 for additional information over dividend distributions to holders of non-controlling interests in preferred equity.
Common Stock
The accompanying notes are an integral part of these consolidated financial statements.
4
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
3,646,531
$
Adjustments to reconcile net income to net cash
used in operating activities:
Gain on derivative related activity
(105,702)
Stock based compensation
112,569
Amortization of deferred financing fees
35,986
Provision for income taxes
1,377,572
Changes in operating assets and liabilities:
Interest receivable
(37,528)
Notes receivable (mortgages and other)
(7,693,243)
Inventory
1,252,194
Prepaids and other assets
(57,583)
Accounts payable
(66,620)
Accrued liabilities
257,148
Escrow liabilities
239,668
Net cash used in operating activities
(1,039,008)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividend distribution to non-controlling interests
(631,726)
Paycheck Protection Program loan
376,800
Borrowings on credit facilities, net
36,701,455
Principal payments on credit facilities
(33,300,951)
Principal payments on other notes payable
(179,327)
Principal payments on acquisition note payable
(1,835,390)
Sale of participations in mortgage notes and other receivables
800,086
Net cash provided by financing activities
1,930,947
Net change in cash and cash equivalents and restricted cash
891,939
Cash and cash equivalents and restricted cash at beginning of period
4,239,171
Cash and cash equivalents and restricted cash at end of period
5,131,110
$
SUPPLEMENTAL INFORMATION
Cash paid for interest
6,625,303
$
The accompanying notes are an integral part of these consolidated financial statements.
5
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
1.
COMPANY PROFILE AND NATURE OF OPERATIONS
Crossroads Systems, Inc. (OTC Pink: CRSS) (the “Company”, “CRSS” or “Parent”) 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 licensed patents to more than 50 companies prior
to filing for reorganization under Chapter 11 of the Federal Bankruptcy Code on August 13, 2017.
On December 18, 2017, the Parent acquired 100% of the common equity of Capital Plus Financial, LLC (“CPF”), a
Texas based community development financial institution (“CDFI”). CPF’s mission is to make homeownership
available to the Hispanic market throughout Texas. CPF is also a certified B Corporation which is a group of for-
profit companies certified to meet rigorous standards of social and environmental performance, accountability and
transparency. CPF operates in Texas where it acquires, renovates, and sells single-family homes providing seller
financing through notes receivable.
Principals of Consolidation
The consolidated financial statements include the accounts of CRSS and CPF. Capital Mortgage Servicing, LLC
(“CMS”) is wholly owned by CPF. (collectively, “we”, “us”, or the “Company”). All significant intercompany
accounts and transactions have been eliminated in consolidation.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements are prepared using the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America (“U.S. GAAP”). The operations are for the
period from November 1, 2019 through October 31, 2020.
Cash and Cash Equivalents
The Company considers all currency on hand, money market accounts, and highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents. Restricted cash includes escrow accounts related
primarily to CMS’s mortgage servicing obligations.
Notes Receivable
The Company originates predominantly 30-year notes receivable through sales of rehabilitated homes or purchases
notes receivable that are secured by an assignment of a deed of trust. The Company intends to hold the notes for the
long-term as it has the ability to fund additional notes receivable through borrowings from lenders that are secured by
the notes receivable and properties. Notes receivable are stated at their unpaid principal balances less an allowance for
loan losses, if any. The average contractual interest rate per note was approximately 10.44% as of October 31, 2020.
Interest income is recognized monthly per the terms of the respective loan agreements. Notes receivable have maturities
that range from 4 to 30 years. All of the Company’s loans and underlying collateral are located in Texas.
The Company uses payment history to monitor the credit quality of the notes receivable on an ongoing basis. The
Company assesses the carrying value of its notes receivable for impairment when it determines that impairment
indicators are present. Notes are evaluated for impairment when it is probable the Company will be unable to collect
all amounts due for scheduled principal and interest payments, including notes in the process of repossession.
Impaired notes are generally measured based on the fair value of the collateral. Impaired notes, or portions thereof,
are charged off when deemed uncollectible. A specific reserve is created for impaired notes based on the fair value
of the underlying collateral. No specific impairment was deemed necessary as of October 31, 2020.
6
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Notes Receivable, Continued
The Company may also receive escrow payments for property taxes and insurance included in its note receivable
collections. The liabilities associated with these escrow collections totaled $2,886,249 as of October 31, 2020 and
are included in escrow liabilities on the consolidated balance sheet.
The Company purchased $2,706,314 in notes receivable from third-parties at face value, which approximated their
fair value, near the time they were originated during the year ended October 31, 2020. Notes receivable totaling
$1,634,504 were purchased with attached loan participations of between 15% and 20%. The loan participations do
not meet the criteria to be presented net of the notes receivable with a majority due to officers of the Company, and
accordingly, are presented in other long term liabilities on the consolidated balance sheet. The Company’s liability
for loan participations are paid as payments are received on the related notes receivable. The loan participation
liability totaled $407,091 as of October 31, 2020. The Company did not sell any notes receivable during the year
ended October 31, 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. As
permitted under Section 4013 of the CARES Act, the Company provided 234 borrowers experiencing financial
hardship caused by the COVID-19 Pandemic with a 60-day forbearance option that defers two loan payments to the
end of the loan term. The 60-day forbearance option is not considered a troubled-debt restructuring as the customers
were not experiencing financial difficulty prior to the COVID-19 Pandemic. The Company did not recognize interest
income of approximately $412,000 on these loans during the forbearance period. As of October 31, 2020, there were
no loans on forbearance.
Allowance for Loan Losses on Notes Receivable
The allowance for loan losses reflects management’s estimate of probable and inherent losses in the notes receivable
balances that may be uncollectible based upon review and evaluation of the loan portfolio as of the consolidated
balance sheet date. An allowance for loan losses is determined after giving consideration to, among other things, the
loan characteristics, including the financial condition of borrowers, the value and liquidity of collateral, delinquency
and historical loss experience.
In addition, the Company considers such factors as changes in the nature and volume of the portfolio, overall portfolio
quality, and current economic conditions. The Company applies multiple strategies to mitigate the risks associated
with delinquent loans, including foreclosures and subsequent rehabilitation and resales. As a result, the Company
historically has not experienced any significant losses and has determined that an allowance for probable and inherent
loan losses was not required as of October 31, 2020.
The Company’s policy is to place a note receivable on nonaccrual status when either principal or interest is past due
and remains unpaid for 90 days or more. Accrued interest receivable is reversed for notes placed on nonaccrual status.
Payments received on nonaccrual notes receivable are accounted for on a cash basis, first to interest and then to
principal, as long as the remaining book balance of the asset is deemed to be recoverable. The accrual of interest
resumes when the past due principal becomes current. The unpaid principal balance of notes receivable on nonaccrual
status was $2,344,390 at October 31, 2020.
The Company assesses the collectability of notes receivable on a note by note basis to determine if formal foreclosure
proceedings are necessary. The total principal balance of notes receivable for which the Company has begun formal
foreclosure proceedings totaled $1,741,580 as of October 31, 2020.
7
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Other Notes Receivable
From time to time, the Company will provide higher value financing for residential or commercial real estate. As of
October 31, 2020, the Company had an outstanding balance of $1.1 million in such financing on a residential property
and $726,000 for one commercial property. The interest rate on the financing for the residential property is 9.99% and
7.75% for the commercial property. The residential property requires monthly principal and interest payments based
on 30-year amortization schedule maturing in 2049. The commercial property requires at least monthly interest
payments and has a maturity of February 2022.
The Company sold a 20% loan participation in the $1.1 million residential property note receivable which is presented
net of the other note receivable balance on the consolidated balances sheet. The balance on the loan participation as of
October 31, 2020 was $215,193.
Due to their individually significant balances, the Company continually monitors other notes receivable for potential
losses and the need for an allowance for loan losses. As of October 31, 2020, all other notes receivable were current
and in good standing, and based on the borrowers’ history and values of the associated properties, the Company
determined no allowance for loan losses was required.
Inventory
Inventory consists of properties that are currently undergoing remodeling or are being held for sale. Inventory
includes the initial costs of acquiring the property, remodeling costs, real estate taxes and other direct costs incurred
while remodeling the property. All indirect overheard costs, such as compensation of sales personnel, management
and advertising costs are charged to salaries and wages or other general and administrative expenses as incurred.
The initial direct costs to acquire properties and remodeling costs account for approximately 92% of cost of properties
sold in the consolidated statement of operations for the year ended October 31, 2020. As of October 31, 2020, 92
properties were being remodeled and 16 were completed and held for sale. Generally, the Company holds properties
in inventory from acquisition to resale for 3 to 4 months.
Goodwill
Goodwill resulted from the acquisition of CPF on December 18, 2017. Goodwill is accounted for in accordance with
Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill. Management evaluates goodwill for
impairment at least annually or when circumstances indicate the estimated fair value may exceed the reporting unit’s
carrying value indicating potential impairment of goodwill. The emergence of COVID-19 as a global pandemic in
2020 had minimal effects on the Company’s operations or stock price. The Company determined that based on the
limited impact of COVID-19 and a continued growth in net income it was more likely than not goodwill was not
impaired as of October 31, 2020.
Revenue Recognition
Interest income on notes receivable and other notes receivable is recognized on the accrual basis when earned using
the effective interest method. Revenue from residential home sales is recognized when title passes to the purchaser
and collectability is reasonably assured. Revenue is recognized based on the contracted sales price.
8
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, notes receivable, other notes
receivable, credit facilities, other note payable and acquisition notes payable. The carrying amount of cash and cash
equivalents approximates its fair value because it is short-term in nature. The credit facilities, other note payable and
acquisition notes payable generally have short-term maturity dates or variable interest rates that reflect market rates
and the Company has determined that their fair value approximates their carrying value. The Company assessed the
fair value of notes receivable and other notes receivable based on the discounted value of the remaining principal and
interest cash flows. The Company determined the fair value of other notes receivable approximates their book values
and the fair value of notes receivable was approximately $134.6 million compared to the book value of $128.8 million
as of October 31, 2020.
Deferred Financing Fees
The Company incurred costs for deferred financing fees when obtaining the acquisition note payable to Veritex
Community Bank detailed in Note 6. The debt issuance costs are presented as a deduction against the corresponding
debt on the consolidated balance sheet. The deferred financing fees are amortized over the respective debt agreement
with amortization expense included in other interest expense in the accompanying consolidated statement of
operations. Amortization expense was $35,986 for the year ended October 31, 2020. Net deferred financing fees
were $141,763 as of October 31, 2020.
Stock-Based Compensation
The Company recognizes compensation expense related to stock options and restricted stock on a straight-line basis
over the requisite service period based on the estimated fair value of the awards on the date of grant. Compensation
cost associated with stock options granted is determined using a calculated option value. The calculated value of each
stock option grant is derived using the Black Scholes option-pricing model and is recognized over the vesting period
with a corresponding increase to additional paid-in-capital.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those estimates. Significant estimates that
could change in the near term and have a significant impact on the consolidated financial statements include the
deferred tax assets and allowance for loan losses.
Income Taxes
The Company accounts for income taxes using the liability method of accounting. Under the liability method,
deferred taxes are determined based on the differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not such assets
will not be realized. 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.
9
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Income Taxes, Continued
The Company recognizes the financial statement benefit of a tax position that does not meet the more-likely-than-not
threshold only after expiration of the statute of limitations of the relevant tax authority sustains our position following
an audit. For tax positions meeting the more likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate
settlement with the relevant tax authority. We recognize interest and penalties related to uncertain tax positions in
income tax expense. There were no identified tax benefits or liabilities that were considered uncertain positions at
October 31, 2020.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, cash equivalents,
and notes receivable. The notes receivable are secured by the residential homes that were financed through the loan.
The Company maintains deposits with major financial institutions, which from time-to-time, may exceed the federally
insured limits at each institution. The Company had cash and restricted cash in financial institutions that exceeded
federally insured limits of approximately $4.1 million. Management believes any potential credit risk is minimal.
Risks and Uncertainties
The Company's business is affected, directly and indirectly, by economic and political conditions and by
governmental monetary and fiscal policies. Conditions such as inflation, recession, real estate values, volatile interest
rates, governmental monetary policy and other factors beyond the Company's control may adversely affect the
Company's results of operations. Adverse economic conditions could result in an increase in notes receivable
delinquencies or foreclosures and a decrease in the value of property or other collateral which secures the Company's
loans.
The Company relies on various forms of revolving and long-term borrowings to finance its working capital
requirements and has historically demonstrated the ability to obtain additional financing or refinance maturing
obligations as needed to support the Company’s ongoing financing needs. As disclosed in Note 6 of these
consolidated financial statements, the Company has approximately $75.7 million in current debt obligations maturing
within one year prior.
The Company was and continues to be impacted by the COVID-19 pandemic which is having significant effects on
global markets, supply chains, businesses and communities. The Company continues to evaluate the effects or
potential effects of these events including possible disruptions with the availability of personnel or supplies and future
government regulations or shut-downs. The extent of the impact will depend on future developments including the
duration and spread of the outbreak, distribution of vaccines and government or other regulatory action. There have
been no adjustments to the consolidated financial statements related to this risk.
10
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
3. NOTES RECEIVABLE
The principal balance outstanding on the notes receivable and the expected principal collections for the next five
years and thereafter are as follows for the years ending October 31:
2021
1,527,234
$
2022
1,704,754
2023
1,885,700
2024
2,032,144
2025
2,223,640
Thereafter
119,458,212
128,831,684
$
A detailed aging of notes receivable that are past due as of October 31, 2020 are as follows:
%
Total notes receivable
128,831,684
$
100.0
Past due notes receivable:
31-60 days past due
3,297,229
$
2.6
61-90 days past due
409,570
0.3
91-120 days past due
602,810
0.5
Greater than 120 days past due
1,741,580
1.4
Total past due notes receivable
6,051,189
$
4.8
4. OTHER NOTES RECEIVABLE
The principal balance outstanding on the other notes receivable and the expected principal collections for the next
five years and thereafter, excluding offsets for the $215,193 loan participation, are as follows for the years ending
October 31:
2021
7,014
$
2022
733,899
2023
8,574
2024
9,471
2025
10,462
Thereafter
1,036,548
1,805,968
$
All other notes receivable were current and in good standing as of October 31, 2020.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at October 31, 2020:
Interest payable
131,288
$
Salaries and wages
102,789
Professional fees
95,000
Other accrued liabilities
24,824
353,901
$
11
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
6. DEBT
Credit Facilities
The Company uses various types of credit facilities to finance notes receivable and inventories. The loans are secured
by notes receivable or inventories.
In connection with the credit facilities, the Company has agreed to comply with certain financial and non-financial
covenants provided for in the agreements. Management was not aware of any covenant violations for the year ended
October 31, 2020.
The Company had the following credit facilities as of October 31, 2020:
Lender
Interest Rate
Maturity Date
Balance
Texas Citizens Bank 9950
4.75%
9/20/2035 (a)
3,381,407
$
First National Bank of Ballinger
4.25%
6/1/2021
9,852,726
First National Bank of Ballinger
5.75% (b)
2/20/2022
528,337
Simmons Bank (formerly Bank SNB)
4.15%
3/29/2021
16,552,378
Happy State Bank Interim Construction (new)
6.00% (b)
10/1/2021 (c)
1,384,891
Happy State Bank Interim Construction (lot)
6.00% (b)
5/11/2021 (c)
354,511
Happy State Bank Interim 2
5.75% (b)
5/17/2021 (c)
5,167,303
Happy State Bank Interim Rental Line
5.00% (b)
7/28/2022
2,044,774
Happy State Bank Flood Line
6.50% (b)
7/28/2021 (c)
300,732
Happy State Bank Term
5.75%
9/18/2041
16,175,108
Happy State Bank Term 4
5.50%
10/1/2043
2,044,681
Oakwood Bank
5.25%
1/16/2025
9,857,529
Oakwood Bank Accordion with Spirit Bank
5.25%
1/16/2025
9,964,740
Veritex Bank (formerly Green Bank)
3.89% (b)
4/25/2021 (a,c)
12,523,798
Prosperity USA (formerly Legacy Bank Texas)
3.40% (b)
6/11/2021 (a,c)
24,946,843
Prosperity USA (formerly Legacy Bank Texas)
0.00%
6/29/2021
96,523
115,176,280
Less current portion of credit facilities
(75,694,845)
Credit facilities, net of current maturities
39,481,435
$
(a) These facilities are due on demand and presented as current.
(b) These facilities require only monthly interest payments through maturity.
(c) These facilities allow for incremental borrowings, each due within a 12 month period.
Future minimum principal payments for the credit facilities are as follows for the years ending October 31:
2021
75,694,845
$
2022
3,728,623
2023
1,178,462
2024
1,202,646
2025
18,795,869
Thereafter
14,575,834
115,176,280
$
12
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
6. DEBT, CONTINUED
Acquisition Notes Payable
To fund consideration in the December 18, 2017 acquisition of CPF, the Company entered into a $22,000,000 note
payable with Veritex Community Bank (the “Veritex Note”) and a $2,200,000 note payable to CrossFirst Bank (the
“CrossFirst Note”).
Veritex Note
The Veritex Note bears interest at the annual LIBOR rate plus an applicable margin of 4.50%, which was 4.64% at
October 31, 2020. The Veritex Note requires monthly principal payment of $207,931, plus interest, through maturity
on December 18, 2024, the date at which all unpaid principal and interest is due. The Veritex Note is collateralized
by certain operating assets of the Company not already collateralized by the credit facilities. As of October 31,
2020, the unpaid principal balance on the Veritex Note was $11,020,327. The Veritex Note is presented on
the consolidated balance sheet net of amortizing deferred financing fees of $141,763 at October 31, 2020.
The Company is required to comply with certain financial and non-financial covenants under the Veritex Note. The
Company was not in compliance with the problem asset measurement ratio as of October 31, 2020 due to COVID-
19 affecting various county government’s ability to process foreclosures timely. The Problem Asset Measurement
Ratio is the ratio of notes receivable past due 30 days plus initial inventory acquisition costs aged over 270 days to
total notes receivable plus initial inventory acquisition costs. The Company is required to maintain a quarterly
Problem Asset Measurement Ratio no greater than 5.00% with the ratio as of October 31, 2020 at 5.89%. The
Company has the capability of curing the non-compliance through the liquidation of the notes receivable held up in
the foreclosure process due to COVID-19, and accordingly, has determined that the non-compliance is not
representative of a continued default for financial reporting purposes.
CrossFirst Note
The CrossFirst Note was created to fund $2,200,000 of the purchase price in the acquisition of CPF to money market
accounts in the seller’s names at CrossFirst Bank to serve as collateral over the duration of the note. The CrossFirst
Note requires a monthly interest payment at the CrossFirst Bank money market account rate plus an applicable margin
of 1.00%, which was 1.65% at October 31, 2020. The CrossFirst Note will mature on December 14, 2021, when all
unpaid principal and interest will be due. The balance on the CrossFirst Note was $2,199,377 at October 31, 2020.
Future minimum principal payments for the acquisition notes payable are as follows for the years ending October 31:
2021
2,495,172
$
2022
4,694,549
2023
2,495,172
2024
2,495,172
2025
1,039,639
13,219,704
$
Other Note Payable
The Company assumed a note payable in the December 2017 acquisition of CPF with an outstanding principal balance
as of the date of the acquisition totaling $1,827,750 (the “Other Note”). The Other Note is subordinate to the other
debt obligations, accrues interest at 6.50% per annum, calls for monthly payments of principal and interest of $22,710,
and matures on December 31, 2026. The balance on the Other Note was $1,335,571 at October 31, 2020.
13
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
6. DEBT, CONTINUED
Other Note Payable, Continued
Future minimum principal payments for the Other Note is as follows for the years ending October 31:
2021
191,337
$
2022
204,151
2023
217,823
2024
232,411
2025
247,976
Thereafter
241,873
1,335,571
$
Paycheck Protection Program Loan
On April 20, 2020, the Company qualified for and received a loan pursuant to the Paycheck Protection Program
(“PPP”), a program implemented by the U.S. Small Business Administrative (“SBA”) under the Coronavirus Aid,
Relief, and Economic Security Act, from a qualified lender (the “PPP Lender”), for an aggregate principal amount of
$376,800. The PPP Loan bears interest at a rate of 1.0% per annum, with the first six months interest deferred, has a
term of two years, and is unsecured and guaranteed by the U.S. Small Business Administration. The principal amount
of the PPP Loan is subject to forgiveness under the Paycheck Protection Program upon the Company’s request to the
extent that the PPP Loan proceeds are used to pay expenses permitted by the Paycheck Protection Program, including
payroll costs, covered rent and mortgage obligations, and covered utility payments incurred by the Company. The
Company has applied for forgiveness of the PPP Loan with respect to these covered expenses. To the extent that all
or part of the PPP Loan is not forgiven, the Company will be required to pay interest on the PPP Loan at a rate of
1.0% per annum, and commencing in November 2020, principal and interest payments will be required through the
maturity date in April 2022. The terms of the PPP Loan provide for customary events of default including, among
other things, payment defaults, breach of representations and warranties, and insolvency events. The PPP Loan may
be accelerated upon the occurrence of an event of default.
7. OPERATING LEASES
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 of $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:
2021
151,200
$
2022
151,200
2023
25,200
327,600
$
Rent expense associated with non-cancelable operating leases for the year ended October 31, 2020 was $151,200,
and is included in general and administrative expenses in the consolidated statement of operations.
14
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
8. STOCKHOLDERS’ EQUITY
The Company is authorized to issue up to 75 million shares of $0.001 par value common stock and 25 million shares
of $0.001 par value preferred stock. As of October 31, 2020, 5,971,994 shares of common stock were issued and
outstanding and no shares of preferred stock were issued and outstanding.
9. STOCK BASED COMPENSATION
In June of 2018, the Company established the 2018 Stock Incentive Plan (“Stock Plan”) in which shares of common
stock are made available for grant to qualified officers, employees, directors and other key personnel of the Company.
The plan is authorized to issue up to 800,000 shares of the Company’s common stock.
The vesting of the options is determined by the Company with current options granted vesting over three years. The
Company recognizes compensation expense for the options granted using the straight-line method over the vesting
period. As of October 31, 2020, unrecognized stock based compensation expense was $789,474 and is expected to
be recognized over a weighted average period of 2.65 years.
A summary of option activity for the year ended October 31, 2020 is as follows:
The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for the June 2020 grants: a share price of $7.33, volatility of 67.8%, a weighted
average risk-free interest rate of 0.71%, and no dividends. The Company estimated the expected term of the options using
comparable market data since no historical data was available for stock option grants. The estimated expected term
averaged 6.45 years. The weighted average grant date fair value for options granted was $4.51 and $112,569 of stock-
based compensation expense was recorded for the year ended October 31, 2020.
The Black-Scholes option-pricing model requires the input of highly subjective assumptions. The Company continues to
assess the assumptions and methodologies used to calculate the established fair value of share-based compensation.
Circumstances may change and additional data may become available over time, which could result in changes to these
assumptions and methodologies, which could materially impact the fair value determinations.
Options outstanding and exercisable as of October 31, 2020 are as follows:
Options Outstanding
Options
Available for
Grant
Number of
Shares
Weighted
Average
Exercise Price
Balances, November 1, 2019
800,000
-
-
Granted
(199,990)
199,990 $
7.47
Exercised
- -
-
Forfeited
- -
-
Balances, October 31, 2020
600,010
199,990 $
7.47
Options Outstanding
Exercise
Price
Number of
Options
Weighted-Average
Remaining
Contractual Life
Number of
Options
Exercisable
$ 7.47
199,990
9.63 years
-
15
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
9. STOCK BASED COMPENSATION, CONTINUED
All non-vested stock options issued as of the date of the option holder’s termination will be forfeited. A summary of the
status of non-vested options for the year ended October 31, 2020 is as follows:
10. NON-CONTROLLING INTERESTS – CPF PREFERRED EQUITY
CPF has 36 preferred units at $500,000 per unit outstanding as of October 31, 2020.
The rights and privileges of preferred units are as follows:
Duration and Voting: preferred units have no maturity date and have no voting rights.
Dividends: Holders of preferred units are entitled to receive cumulative dividends at an annual rate of 3.50%
through June 2022 and reset to the prime rate on a quarterly basis thereafter for the remainder of the investment.
Conversion and Redemption: preferred units are not convertible into common units or any other equity of CPF
or the Company and are redeemable at the Company’s option after the fifth anniversary of the date of issuance.
Liquidation preference: holders of preferred units are entitled to a liquidation preference equal to all dividends
in arrears plus the initial capital contribution.
During the year ended October 31, 2020, CPF paid preferred dividends totaling $631,726 and had an accrued balance
of $51,780 at October 31, 2020. Accrued dividends are included as a component of total ending equity for non-
controlling interests at October 31, 2020.
11. RELATED PARTY ACTIVITIES
The Company leases office space in Dallas, Texas on a month to month basis from Southwest Federated, Inc., a
related party through common ownership. Monthly payments under the lease were $4,500 and total rental payments
for the year ended October 31, 2020 were $54,000.
The Company acquired 13 loans from third parties during the year ended October 31, 2020 that had loan participations
associated with them of between 10% and 20%. Two officers of the Company subsequently acquired these loan
participations from the third-parties. As of October 31, 2020, the liability due to the officers of the Company totaled
$278,878 and are included in other long-term liabilities on the consolidated balance sheet.
12. CONTINGENCIES
The Company is party to certain legal proceedings in the ordinary course of business. Common legal proceedings
include, among other things, breach of contract and unlawful eviction. Although litigation is inherently uncertain,
based on past experience and the information currently available, management does not believe that such claims will
have a material adverse effect on the Company's financial position, liquidity, or results of operations.
Number of
Options
Weighted Average
Grant Date Fair
Value per Share
Non-vested options, November 1, 2019
-
-
Granted
199,990
$ 4.51
Exercised
-
-
Forfeited
-
-
Non-vested options, October 31, 2020
199,990
$ 4.51
16
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
13. INCOME TAXES
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to reverse. A reconciliation of the provision for income
taxes is as follows for the year ended October 31, 2020:
Current
(2,418)
$
Deferred
1,379,990
1,377,572
$
Income tax expense is computed by applying the Federal corporate tax rate of 21% for the year ended October 31,
2020 and is reconciled to the provision for income taxes as follows:
Federal income taxes
926,360
$
Changes in valuation allowance - federal
(5,978,468)
State taxes, net of federal
128,609
Expiration of NOLs & credit carryovers
6,107,422
Other
193,649
1,377,572
$
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
our deferred taxes as of October 31, 2020 were as follows:
Deferred tax assets:
Net operating loss carryforward
21,814,777
$
Research & experimentation credits
4,717,857
State credits
1,042,612
Other
276,490
Total deferred tax assets
27,851,736
Valuation allowance
(8,666,064)
Total net deferred tax assets
19,185,672
$
Deferred tax liabilities:
Goodwill
(740,275)
$
State credits - federal
(145,063)
Total deferred tax liabilities
(885,338)
$
Total net deferred tax assets
18,300,334
$
As of October 31, 2020, the Company had federal net operating loss carry-forwards (“NOL's”) and research and
experimentation credits (“R&E Credits”) available to reduce future taxable income of approximately $103.9 million
and $4.7 million, respectively. Such deferred tax assets expire as follows:
2021 - 2023
35,500,000
$
2024 - 2028
19,900,000
2029 - 2033
34,900,000
2034 - 2037
18,300,000
108,600,000
$
17
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2020
13. INCOME TAXES, CONTINUED
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable
income will be generated to permit use of the existing deferred tax assets. While the Company projects annual taxable
income to increase steadily into the future, future profitability depends heavily on the Company’s ability to borrow
at rates averaging those incurred during the year ended October 31, 2020. Positive or negative changes in average
borrowing rates greater than 0.50% could materially affect estimates of future taxable income and any related
valuation allowances.
As of October 31, 2020, a valuation allowance of $8.7 million was recorded against the deferred tax asset so that only
the portion of the deferred tax asset that is more likely than not to be realized remains at October 31, 2020. The
valuation allowance is due primarily to the significant amount of deferred tax assets expiring over the next two years.
The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable
income during the carryforward period are reduced or increased.
14. SUBSEQUENT EVENTS
In accordance with ASC 855, Subsequent Events, the Company evaluated all material events or transactions that
occurred after October 31, 2020, the consolidated balance sheet date, and through January 20, 2021, the date the
consolidated financial statements were available to be issued, noting the following transaction for disclosure as a
subsequent event.
The Company has partnered with an outside party to participate as a lender in the second round of the PPP loan
program implemented by the SBA which opened for non-bank financial institutions on January 13, 2020.
18
SUPPLEMENTAL INFORMATION
19
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE I: CONSOLIDATED BALANCE SHEET
FOR THE YEAR ENDED OCTOBER 31, 2020
UNAUDITED
Crossroads
Capital Plus
Systems, Inc.
Financial, LLC
Eliminations
Total
ASSETS
CURRENT ASSETS
Cash and cash equivalents
20,649
$
2,106,410
$
-
$
2,127,059
$
Restricted cash
-
3,004,051
-
3,004,051
Interest receivable
-
930,871
-
930,871
Current portion of notes receivable
-
1,527,234
-
1,527,234
Current portion of other notes receivable
-
7,014
-
7,014
Intercompany receivables
-
21,553,266
(21,553,266)
-
Inventory
-
10,544,236
-
10,544,236
Prepaid expenses and other current assets
147,392
264,253
-
411,645
Total current assets
168,041
39,937,335
(21,553,266)
18,552,110
NON-CURRENT ASSETS
Notes receivable, net of current maturities and allowance of $0
-
127,304,450
-
127,304,450
Other notes receivable, net of current maturities,
participations and allowance of $0
-
1,583,761
-
1,583,761
Goodwill
18,566,966
-
-
18,566,966
Deferred tax asset
18,300,334
-
-
18,300,334
Investment in subsidiary
30,055,705
-
(30,055,705)
-
Total non-current assets
66,923,005
128,888,211
(30,055,705)
165,755,511
TOTAL ASSETS
67,091,046
$
168,825,546
$
(51,608,971)
$
184,307,621
$
CURRENT LIABILITIES
Accounts payable
-
$
222,610
$
-
$
222,610
$
Accrued liabilities
40,441
313,460
-
353,901
Escrow liabilities
-
2,886,249
-
2,886,249
Intercompany payables
21,553,266
-
(21,553,266)
-
Current portion of credit facilities
-
75,694,845
-
75,694,845
Current portion of other note payable
-
191,337
-
191,337
Current portion of acquisition notes payable
2,495,172
-
-
2,495,172
Total current liabilities
24,088,879
79,308,501
(21,553,266)
81,844,114
NON-CURRENT LIABILITIES
Credit facilities, net of current maturities
-
39,481,435
-
39,481,435
Other note payable, net of current maturities
-
1,144,234
-
1,144,234
Acquisition notes payable, net of current maturities
10,582,769
-
-
10,582,769
Payroll protection program loan
-
376,800
-
376,800
Other long-term liabilities
-
407,091
-
407,091
Total non-current liabilities
10,582,769
41,409,560
-
51,992,329
TOTAL LIABILITIES
34,671,648
120,718,061
(21,553,266)
133,836,443
EQUITY
Common stock, $0.001 par value: 75,000,000 shares
authorized, 5,971,994 shares issued and outstanding
5,972
-
-
5,972
Additional paid in capital
242,471,412
13,351,925
(13,351,925)
242,471,412
Accumulated earnings (deficit)
(210,057,986)
16,703,780
(16,703,780)
(210,057,986)
Controlling interests
32,419,398
30,055,705
(30,055,705)
32,419,398
Non-controlling interests
-
18,051,780
-
18,051,780
TOTAL EQUITY
32,419,398
48,107,485
(30,055,705)
50,471,178
TOTAL LIABILITIES AND EQUITY
67,091,046
$
168,825,546
$
(51,608,971)
$
184,307,621
$
LIABILITIES AND EQUITY
See report of independent registered public accounting firm regarding supplemental information.
20
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE II: CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2020
UNAUDITED
Crossroads
Capital Plus
Systems, Inc.
Financial, LLC
Eliminations
Total
REVENUES
Interest income
-
$
12,633,818
$
-
$
12,633,818
$
Property sales
-
23,461,898
-
23,461,898
Other revenue
-
538,876
-
538,876
Total revenues
-
36,634,592
-
36,634,592
COSTS AND EXPENSES
Interest expense
-
5,712,138
-
5,712,138
Cost of properties sold
-
20,297,457
-
20,297,457
Salaries and wages
114,449
2,724,664
-
2,839,113
Professional fees
-
708,139
-
708,139
Other general and administrative
305,446
1,014,191
-
1,319,637
Total costs and expenses
419,895
30,456,589
-
30,876,484
Income (loss) from operations
(419,895)
6,178,003
-
5,758,108
OTHER EXPENSES
Interest expense
(734,005)
-
-
(734,005)
Total other expenses
(734,005)
-
-
(734,005)
Income (loss) before income tax provision
(1,153,900)
6,178,003
-
5,024,103
INCOME TAX PROVISION
(1,377,572)
-
-
(1,377,572)
NET INCOME (LOSS)
(2,531,472)
6,178,003
-
3,646,531
Less: net income attributable to non-controlling interests
-
(630,000)
-
(630,000)
NET INCOME (LOSS) ATTRIBUTABLE TO
CONTROLLING INTERESTS
(2,531,472)
$
5,548,003
$
-
$
3,016,531
$
See report of independent registered public accounting firm regarding supplemental information.
21
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
OCTOBER 31, 2019
Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are
separate and independent legal entities. © 2018 Baker Tilly Virchow Krause, LLP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Crossroads Systems, Inc. and Subsidiaries:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Crossroads Systems, Inc. and subsidiaries (the
“Company”) as of October 31, 2019, and the related consolidated statements of operations, changes in equity, and
cash flows for the year then ended, and the related notes (collectively referred to as the financial statements). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
October 31, 2019, and the results of its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB and in accordance with auditing standards
generally accepted in the United States of America. 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,
whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal
control over financial reporting, 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.
Our audit includes performing procedures to assess the risk of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also
includes evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statement. We believe that our audit provides a reasonable basis
for our opinion.
Report on Supplementary Information
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole.
The consolidating information in Schedules I and II is presented for purposes of additional analysis of the
consolidated financial statements rather than to present the financial position and results of operations of the
individual companies, and it is not a required part of the consolidated financial statements. Such information has not
been subjected to the auditng procedures applied in the audit of the basic financial statements, and, accordingly, we
express no opinion on it.
BAKER TILLY VIRCHOW KRAUSE, LLP
We have served as the Company’s auditor since 2018
Plano, Texas
January 28, 2020
1
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents
1,656,114
$
Restricted cash
2,583,057
Interest receivable
893,343
Current portion of notes receivable
1,447,842
Current portion of other notes receivable
339,429
Inventory
11,796,430
Prepaid expenses and other current assets
351,547
Total current assets
19,067,762
NOTES RECEIVABLE, net of current maturities and allowance of $0
115,435,031
OTHER NOTES RECEIVABLE, net of current maturities and allowance of $0
6,463,049
GOODWILL
18,566,966
DEFERRED TAX ASSET
19,680,324
OTHER NON-CURRENT ASSETS
36,083
TOTAL ASSETS
179,249,215
$
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable
289,230
$
Accrued liabilities
609,546
Escrow liabilities
2,646,581
Current portion of credit facilities
66,167,346
Current portion of other note payable
179,327
Current portion of acquisition notes payable
2,495,168
Total current liabilities
72,387,198
CREDIT FACILITIES, net of current maturities
45,608,430
OTHER NOTE PAYABLE, net of current maturities
1,335,571
ACQUISITION NOTES PAYABLE, net of current maturities
12,418,163
OTHER LONG-TERM LIABILITIES
156,049
TOTAL LIABILITIES
131,905,411
EQUITY
Common stock, $0.001 par value: 75,000,000 shares
authorized, 5,971,994 shares issued and outstanding
5,972
Additional paid in capital
242,358,843
Accumulated deficit
(213,074,517)
Crossroads Systems, Inc. stockholders' equity
29,290,298
Non-controlling interests
18,053,506
TOTAL EQUITY
47,343,804
TOTAL LIABILITIES AND EQUITY
179,249,215
$
The accompanying notes are an integral part of these consolidated financial statements.
2
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2019
REVENUES
Interest income
11,986,113
$
Property sales
25,330,557
Other revenue
387,265
Total revenues
37,703,935
COSTS AND EXPENSES
Interest expense
6,343,947
Cost of properties sold
21,138,085
General and administrative
1,962,626
Salaries and wages
2,788,032
Total costs and expenses
32,232,690
Income from operations
5,471,245
OTHER EXPENSES
Interest expense
(1,110,230)
Total other expenses
(1,110,230)
Income before income tax provision
4,361,015
INCOME TAX PROVISION
1,990,988
NET INCOME
2,370,027
Less: net income attributable to non-controlling interests
617,582
NET INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS
1,752,445
$
The accompanying notes are an integral part of these consolidated financial statements.
3
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED OCTOBER 31, 2019
Additional
Paid-In
Accumulated
Non-Controlling
Total
Shares
Amount
Capital
Deficit
Interests
Equity
BALANCE, OCTOBER 31, 2018
5,971,994
5,972
$
242,358,843
$
(214,826,962)
$
15,546,075
$
43,083,928
$
Preferred equity issuance
-
-
-
-
2,500,000
2,500,000
Preferred dividend distributions
-
-
-
-
(610,151)
(610,151)
Net income
-
-
-
1,752,445
617,582
2,370,027
BALANCE, OCTOBER 31, 2019
5,971,994
5,972
$
242,358,843
$
(213,074,517)
$
18,053,506
$
47,343,804
$
Common Stock
The accompanying notes are an integral part of these consolidated financial statements.
4
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
2,370,027
$
Adjustments to reconcile net income to net cash
used in operating activities:
Loss on derivative related activity
403,369
Amortization of deferred financing fees
45,800
Provision for income taxes
1,984,962
Changes in operating assets and liabilities:
Interest receivable
(161,836)
Notes receivable
(14,662,839)
Inventory
(4,308,159)
Prepaids and other assets
(15,478)
Accounts payable
233,088
Accrued liabilities
(304,732)
Escrow liabilities
113,233
Net cash used in operating activities
(14,302,565)
CASH FLOWS FROM FINANCING ACTIVITIES
Preferred equity contributions
2,500,000
Preferred equity dividend distributions
(610,151)
Borrowings on credit facilities, net
35,922,085
Principal payments on credit facilities
(19,328,516)
Principal payments on other notes payable
(168,071)
Principal payments on acquisition note payable
(4,639,155)
Net cash provided by financing activities
13,676,192
Net change in cash and cash equivalents and restricted cash
(626,373)
Cash and cash equivalents and restricted cash at beginning of period
4,865,544
Cash and cash equivalents and restricted cash at end of period
4,239,171
$
SUPPLEMENTAL INFORMATION
Cash paid for interest
7,398,591
$
Cash paid for income taxes
6,026
$
The accompanying notes are an integral part of these consolidated financial statements.
5
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
1. COMPANY PROFILE AND NATURE OF OPERATIONS
Crossroads Systems, Inc. (OTC Pink: CRSS) (the “Company”, “CRSS” or “Parent”) 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 licensed patents to more than 50 companies prior
to filing for re-organization under Chapter 11 of the Federal Bankruptcy Code on August 13, 2017.
On December 18, 2017, the Parent closed on the acquisition of 100% of the common equity of Capital Plus Financial,
LLC (“CPF”), a Texas based community development financial institution (“CDFI”). CPF’s mission is to make
homeownership available to the Hispanic market throughout Texas. CPF is also a certified B Corporation which is
a group of for-profit companies certified to meet rigorous standards of social and environmental performance,
accountability and transparency. CPF operates in Texas where it acquires, renovates, and sells single family homes
providing seller financing through notes receivable.
Principals of Consolidation
The consolidated financial statements include the accounts of CRSS and CPF. Capital Mortgage Servicing, LLC
(“CMS”) is wholly owned by CPF. (collectively, “we”, “us”, or the “Company”). All significant intercompany
accounts and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements are prepared using the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America. The operations are for the period from
November 1, 2018 through October 31, 2019.
Cash and Cash Equivalents
The Company considers all currency on hand, money market accounts, and highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents. Restricted cash includes escrow accounts related
primarily to CMS’s mortgage servicing obligations.
Notes Receivable
The Company originates predominantly 30 year notes receivable through sales of rehabilitated homes or purchases notes
receivable that are secured by an assignment of a deed of trust. The Company intends to hold the notes for the long-
term as it has the ability to fund the notes receivable through borrowings from lenders that are secured by the notes
receivable and properties. Notes receivable are stated at their unpaid principal balances less an allowance for loan losses.
The average contractual interest rate per note was approximately 10.55% as of October 31, 2019. Interest income is
recognized monthly per the terms of the respective loan agreements. Notes receivable have maturities that range from
4 to 30 years. All of the Company’s loans and underlying collateral are located in Texas.
The Company uses payment history to monitor the credit quality of the notes receivable on an ongoing basis. The
Company assesses the carrying value of its notes receivable for impairment when it determines that impairment
indicators are present. Notes are evaluated for impairment when it is probable the Company will be unable to collect
all amounts due for scheduled principal and interest payments, including notes in the process of repossession.
Impaired notes are generally measured based on the fair value of the collateral. Impaired notes, or portions thereof,
are charged off when deemed uncollectible. A specific reserve is created for impaired notes based on the fair value
of the underlying collateral. No specific impairment was deemed necessary as of October 31, 2019.
6
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Notes Receivable, Continued
The Company may also receive escrow payments for property taxes and insurance included in its note receivable
collections. The liabilities associated with these escrow collections totaled $2,646,581 as of October 31, 2019 and
are included in escrow liabilities on the consolidated balance sheet.
The Company purchased $2,677,288 in notes receivable from third-parties at face value near the time they were
originated during the year ended October 31, 2019. The Company did not sell any notes during the year ended October
31, 2019.
Allowance for Loan Losses on Notes Receivable
The allowance for loan losses reflects management’s estimate of probable and inherent losses in the notes receivable
balances that may be uncollectible based upon review and evaluation of the loan portfolio as of the consolidated
balance sheet date. An allowance for loan losses is determined after giving consideration to, among other things, the
loan characteristics, including the financial condition of borrowers, the value and liquidity of collateral, delinquency
and historical loss experience.
In addition, the Company considers such factors as changes in the nature and volume of the portfolio, overall portfolio
quality, and current economic conditions. The Company applies multiple strategies to mitigate the risks associated
with delinquent loans, including foreclosures and subsequent rehabilitation and resales. As a result, the Company
historically has not experienced any significant losses and has determined that an allowance for probable and inherent
loan losses was not required as of October 31, 2019.
The Company’s policy is to place a note receivable on nonaccrual status when either principal or interest is past due
and remains unpaid for 90 days or more. Accrued interest receivable is reversed for notes placed on nonaccrual status.
Payments received on nonaccrual notes receivable are accounted for on a cash basis, first to interest and then to
principal, as long as the remaining book balance of the asset is deemed to be recoverable. The accrual of interest
resumes when the past due principal becomes current. The unpaid principal balance of notes receivable on nonaccrual
status was $1,111,229 at October 31, 2019.
The Company assesses the collectability of notes receivable on a note by note basis to determine if formal foreclosure
proceedings are necessary. The total principal balance of notes receivable for which the Company has begun formal
foreclosure proceedings totaled $310,641 as of October 31, 2019.
Other Notes Receivable
From time to time, the Company will provide higher value financing for residential or commercial real estate. As of
October 31, 2019, the Company had an outstanding balance of $4.96 million in such financing on three residential
properties and $1.85 million for two commercial properties. The average rate on the financings for residential and
commercial properties as of October 31, 2019 was 10.2% and 7.75%, respectively. The residential properties require
monthly principal and interest payments based on 30-year amortization schedules maturing between 2047 and 2049.
The commercial properties require at least monthly interest payments and have maturity dates ranging from November
2020 through February 2022.
Due to their individually significant balances, the Company continually monitors other notes receivable for potential
losses and the need for an allowance for loan losses. As of October 31, 2019, all other notes receivable were current
and in good standing, and based on the borrowers’ history and values of the associated properties, the Company
determined no allowance for loan losses was required.
7
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
Goodwill
Goodwill resulted from the acquisition of CPF on December 18, 2017. Goodwill is accounted for in accordance with
Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill. Management evaluates goodwill for
impairment annually or when circumstances indicate the estimated fair value exceeds the reporting unit’s carrying
value indicating potential impairment of goodwill. The Company determined that goodwill was not impaired at
October 31, 2019.
Revenue Recognition
Interest income on notes receivable and other notes receivable is recognized on the accrual basis when earned using
the effective interest method. Revenue from residential home sales is recognized when title passes to the purchaser
and collectability is reasonably assured. Revenue is recognized based on the contracted sales price.
Fair Value Measurement
The Company accounts for its derivative instruments in accordance with ASC 820-10, Fair Value Measurement,
which among other things provides the framework for measuring fair value. That framework provides a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level I measurement)
and the lowest priority to unobservable inputs (level III measurements). The three levels of fair value hierarchy under
ASC 820-10 are as follows:
Level I
Quoted prices are available in active markets for identical investments as of the reporting date. The
type of investments included in Level I include listed equities and listed derivatives.
Level II
Significant observable inputs other than quoted prices in active markets for which inputs to the valuation
methodology include: (1) Quoted prices for similar assets or liabilities in active markets; (2) Quoted
prices for identical or similar assets or liabilities in inactive markets; (3) Inputs other than quoted
prices that are observable for the asset or liability; (4) Inputs that are derived principally from or
corroborated by observable market data by correlation or other means. If the asset or liability has a
specified (contractual) term, the level 2 input must be observable for substantially the full term of
the asset or liability.
Level III
Pricing inputs are unobservable for the investment and include situations where there is little, if any,
market activity for the investment. The inputs into the determination of fair value require significant
management judgment or estimation.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement.
8
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, notes receivable, other notes
receivable, credit facilities, other note payable and acquisition notes payable. The carrying amount of cash and cash
equivalents approximates its fair value because it is short-term in nature. This is considered a Level I valuation
technique. The credit facilities, other note payable and acquisition notes payable generally have short-term maturity
dates or variable interest rates that reflect market rates and the Company has determined that their fair value
approximates their carrying value. This is considered a Level II valuation technique. The Company assessed the fair
value of notes receivable and other notes receivable and determined their fair value approximates their book value
based on anticipated cash flows for principal and interest and relatively immaterial interest rate fluctuations, net of
other factors.
Deferred Financing Fees
The Company incurred costs for deferred financing fees when obtaining the acquisition note payable to Veritex
Community Bank detailed in Note 6. The debt issuance costs are presented as a deduction against the corresponding
debt on the consolidated balance sheet. The deferred financing fees are amortized over the respective debt agreement
with amortization expense included in other interest expense in the accompanying consolidated statement of
operations. Amortization expense was $45,800 for the year ended October 31, 2019. Net deferred financing fees
were $177,749 as of October 31, 2019.
Stock-Based Compensation
The Company recognizes compensation expense related to stock options and restricted stock on a straight-line basis
over the requisite service period based on the estimated fair value of the awards on the date of grant. Compensation
cost associated with stock options granted is determined using a calculated option value. The calculated value of each
stock option grant was derived using the Black Scholes option-pricing model based on significant inputs including
the Company’s common stock price on the grant date, risk-free interest rate, expected option life, and expected
volatility. The Company used the contractual life as the expected option life since no historical data exists. The
Company used historical common stock data to estimate expected volatility for valuation of the stock options.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates that could change in the near term and have a significant
impact on the consolidated financial statements include the deferred tax assets and allowance for loan losses.
Income Taxes
The Company accounts for income taxes using the liability method of accounting. Under the liability method,
deferred taxes are determined based on the differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not such assets
will not be realized. 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.
9
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Income Taxes, Continued
The Company recognizes the financial statement benefit of a tax position that does not meet the more-likely-than-not
threshold only after expiration of the statute of limitations of the relevant tax authority sustains our position following
an audit. For tax positions meeting the more likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon the ultimate
settlement with the relevant tax authority. We recognize interest and penalties related to uncertain tax positions in
income tax expense. There were no identified tax benefits or liabilities that were considered uncertain positions at
October 31, 2019.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, cash equivalents,
and notes receivable. The notes receivable are secured by the residential homes that were financed through the loan.
The Company maintains deposits with major financial institutions, which from time-to-time, may exceed the federally
insured limits at each institution. The Company had cash and restricted cash in financial institutions that exceeded
federally insured limits of approximately $3.4 million. Management believes any potential credit risk is minimal.
Risks and Uncertainties
The Company's business is affected, directly and indirectly, by domestic and international economic and political
conditions and by governmental monetary and fiscal policies. Conditions such as inflation, recession, real estate
values, volatile interest rates, governmental monetary policy and other factors beyond the Company's control may
adversely affect the Company's results of operations. Adverse economic conditions could result in an increase in
notes receivable delinquencies, foreclosures and non-performing assets and a decrease in the value of property or
other collateral which secures the Company's loans.
The Company relies on various forms of revolving and long-term borrowings to finance its working capital
requirements and has historically demonstrated the ability to obtain additional financing or refinance maturing
obligations as needed to support the Company’s ongoing financing needs. As disclosed in Note 6 of these
consolidated financial statements, the Company had approximately $73.8 million in current debt obligations maturing
within one year prior to refinancing the Oakwood Bank debt on January 21, 2020, which extended the maturity date
to January 25, 2025 and reduced the current debt obligations on the consolidated balance sheet as of October 31, 2019
to approximately $66.2 million.
3. NOTES RECEIVABLE
The principal balance outstanding on the notes receivable and the expected principal collections for the next five
years and thereafter are as follows for the years ending October 31:
2020
1,447,842
$
2021
1,416,905
2022
1,560,569
2023
1,718,041
2024
1,849,025
Thereafter
108,890,491
116,882,873
$
10
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
3. NOTES RECEIVABLE, CONTINUED
A detailed aging of notes receivable that are past due as of October 31, 2019 are as follows:
%
Total notes receivable
116,882,873
$
100.0
Past due notes receivable:
31-60 days past due
3,414,668
$
2.9
61-90 days past due
384,014
0.3
91-120 days past due
274,135
0.2
Greater than 120 days past due
837,094
0.7
Total past due notes receivable
4,909,911
$
4.1
4. OTHER NOTES RECEIVABLE
The principal balance outstanding on the other notes receivable and the expected principal collections for the next
five years and thereafter are as follows for the years ending October 31:
2020
339,429
$
2021
780,912
2022
828,626
2023
41,391
2024
45,776
Thereafter
4,766,344
6,802,478
$
All other notes receivable were current and in good standing as of October 31, 2019.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at October 31, 2019:
Interest payable
346,434
$
Professional fees
110,000
Salaries and wages
97,622
Other accrued liabilities
55,490
609,546
$
6. DEBT
Credit Facilities
The Company uses various types of credit facilities to finance notes receivable and inventories. The loans are secured
by notes receivable or inventories. Loans with Happy State bank and Oakwood bank were guaranteed by certain
owners of the Company prior to the expiration of the guarantees in December 2019 and January 2020, respectively.
In connection with the credit facilities, the Company has agreed to comply with certain financial and non-financial
covenants provided for in the agreements. Management was not aware of any covenant violations for the year ended
October 31, 2019.
11
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
6. DEBT, CONTINUED
Credit Facilities, Continued
On January 21, 2020, the Oakwood Bank debt was refinanced, extending the maturity date to January 25, 2025 and
increasing available funds to $10 million. The refinancing is reflected in the following schedules.
The Company had the following credit facilities as of October 31, 2019:
Lender
Interest Rate
Maturity Date
Balance
Texas Citizens Bank 9950
5.00%
9/20/2035 (a)
3,599,134
$
First National Bank of Ballinger
4.25%
6/2/2020
9,957,777
First National Bank of Ballinger
5.75% (b)
2/20/2022
1,495,635
Bank SNB Term
4.35%
9/30/2020
16,805,736
Happy State Bank Interim Construction
5.75% - 6.00% (b)
FY 2020
884,325
Happy State Bank Interim Lot
6.00% (b)
4/15/2020
531,818
Happy State Bank Interim 2
6.50% (b)
5/17/2021 (c)
9,261,694
Happy State Bank Term
6.25%
9/18/2041
16,580,543
Happy State Bank Term 4
5.50%
10/1/2043
2,161,683
Oakwood Bank
5.25%
1/25/2025
5,081,208
Green Bank
5.76% (b)
4/25/2020 (a)
24,301,888
Legacy Bank Texas
5.28% (b)
6/11/2021
21,114,335
111,775,776
Less current portion of credit facilities
(66,167,346)
Credit facilities, net of current maturities
45,608,430
$
(a) These facilities are due on demand and presented as current.
(b) These facilities require only monthly interest payments through maturity.
(c) This facility allows for incramental borrowings, each due within a 12 month period.
Future minimum principal payments for the credit facilities are as follows for the years ending October 31:
2020
66,167,346
$
2021
21,969,118
2022
2,356,070
2023
866,391
2024
872,668
Thereafter
19,544,183
111,775,776
$
Acquisition Notes Payable
To fund consideration in the December 18, 2017 acquisition of CPF, the Company entered into a $22,000,000 note
payable with Veritex Community Bank (the “Veritex Note”) and a $2,200,000 note payable to CrossFirst Bank (the
“CrossFirst Note”).
12
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
6. DEBT, CONTINUED
Acquisition Notes Payable, Continued
Veritex Note
The Veritex Note bears interest at the annual LIBOR rate plus an applicable margin of 4.50%, which was 6.35% at
October 31, 2019. The Veritex Note requires monthly principal payment of $207,931, plus interest, through maturity
on December 18, 2024, the date at which all unpaid principal and interest is due. The Veritex Note is collateralized
by certain operating assets of the Company not already collateralized by the credit facilities. The balance on the
Veritex Note, net of amortizing deferred financing fees of $177,749, was $12,891,703 at October 31, 2019.
CrossFirst Note
The CrossFirst Note was created to fund $2,200,000 of the purchase price in the acquisition of CPF to money market
accounts in the seller’s names at CrossFirst Bank to serve as collateral over the duration of the note. The CrossFirst
Note requires a monthly interest payment at the CrossFirst Bank money market account rate plus an applicable margin
of 1.00%, which was 2.49% at October 31, 2019. The CrossFirst Note was set to mature on December 14, 2019 but
was amended effective December 14, 2019, subsequent to the consolidated balance sheet date, extending the
CrossFirst Note maturity to December 14, 2021, when all unpaid principal and interest will be due. The balance on
the CrossFirst Note was $2,199,377 at October 31, 2019.
Future minimum principal payments for the acquisition notes payable are as follows for the years ending October 31:
2020
2,495,168
$
2021
2,495,168
2022
4,694,545
2023
2,495,168
2024
2,495,168
Thereafter
415,863
15,091,080
$
Other Note Payable
The Company assumed a note payable in the December 2017 acquisition of CPF with an outstanding principal balance
as of the date of the acquisition totaling $1,827,750 (the “Other Note”). The Other Note is subordinate to the other
debt obligations, accrues interest at 6.50% per annum, calls for monthly payments of principal and interest of $22,710,
and matures on December 31, 2026. The balance on the Other Note was $1,514,898 at October 31, 2019.
Future minimum principal payments for the Other Note is as follows for the years ending October 31:
2020
179,327
$
2021
191,337
2022
204,151
2023
217,823
2024
232,411
Thereafter
489,849
1,514,898
$
13
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
7. DERIVATIVES
The Company uses derivatives to manage risks related to changing interest rates. The Company does not enter into
derivative contracts for speculative purposes. The Company is obligated under a master interest rate swap agreement
with Bank SNB to fix the variable interest rate portion of the Bank SNB term note, which is based on the daily prime
rate, to a fixed rate of 4.07%. The maturity date of this agreement is September 30, 2020. The swap agreement was
not designated as a cash flow hedge and therefore, gains or losses on the swap agreement, as well as the other
offsetting gains or losses on the hedged items attributable to the hedged risk, are recognized in current operations.
ASC 815-10, Derivatives and Hedging, requires derivative instruments to be measured at fair value and recorded in
the consolidated balance sheet as either assets or liabilities. The interest rate swap agreement is considered a Level II
investment. The Company recognized a loss of $403,369 for the year ended October 31, 2019 which was included
with interest expense in costs and expenses in the consolidated statement of operations. The fair value of the derivative
instrument is included in other non-current assets and was $11,543 at October 31, 2019.
8. OPERATING LEASES
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 of $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:
2020
151,200
$
2021
151,200
2022
151,200
2023
25,200
478,800
$
Rent expense associated with non-cancelable operating leases for the year ended October 31, 2019 was $151,200.
9. STOCKHOLDERS’ EQUITY
The Company is authorized to issue up to 75 million shares of $0.001 par value common stock and 25 million shares
of $0.001 par value preferred stock. As of October 31, 2019, 5,971,994 shares of common stock were issued and
outstanding and no shares of preferred stock were issued and outstanding.
10. STOCK BASED COMPENSATION
The Company has granted incentive stock options (“ISOs”) through the 2018 Stock Incentive Plan (“Stock Plan”).
As of October 31, 2019, there were 797,760 shares authorized for issuance under the Stock Plan.
Stock option awards granted under the Stock Plan generally vest 100% three years from the grant date. Vested options
do not expire while the recipient is an employee of the Company but are forfeited upon resignation or termination.
Outstanding options were granted at an exercise price equal to the average of the Company’s stock price over the 30
day period prior to the grant date. The exercise of stock options are fulfilled through the issuance of previously
authorized but unissued common stock shares. During the year ended October 31, 2019, 5,000 stock options
previously awarded to an employee at an exercise price of $7.47 were forfeited upon the employee’s resignation.
There were no outstanding stock options as of October 31, 2019.
14
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
11. NON-CONTROLLING INTERESTS – CPF PREFERRED EQUITY
CPF has 36 preferred units at $500,000 per unit outstanding as of October 31, 2019 with 5 new preferred units issued
for $2.5 million during the year then ended.
The rights and privileges of preferred units are as follows:
Duration and Voting: preferred units have no maturity date and have no voting rights.
Dividends: Holders of preferred units are entitled to receive cumulative dividends at an annual rate of 3.50%
through June 2022 and reset to the prime rate on a quarterly bases thereafter for the remainder of the investment.
Conversion and Redemption: preferred units are not convertible into common units or any other equity of CPF
or the Company and are redeemable at the Company’s option after the fifth anniversary of the date of issuance.
Liquidation preference: holders of preferred units are entitled to a liquidation preference equal to all dividends
in arrears plus the initial capital contribution.
During the year ended October 31, 2019, CPF paid preferred dividends totaling $610,151 and had an accrued balance
of $53,506 at October 31, 2019.
12. RELATED PARTY ACTIVITIES
The Company leases office space in Dallas, Texas on a month to month basis from Southwest Federated, Inc., a
related party through common ownership. Monthly payments under the lease were $4,500 and total rental payments
for the year ended October 31, 2019 were $54,000.
13. CONTINGENCIES
The Company is party to certain legal proceedings in the ordinary course of business. Common legal proceedings
include, among other things, breach of contract and unlawful eviction. Although litigation is inherently uncertain,
based on past experience and the information currently available, management does not believe that such claims will
have a material adverse effect on the Company's financial position, liquidity, or results of operations.
14. INCOME TAXES
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to reverse. A reconciliation of the provision for income
taxes is as follows for the year ended October 31, 2019:
Current
6,026
$
Deferred
1,984,962
1,990,988
$
Income tax expense is computed by applying the Federal corporate tax rate of 21% for the year ended October 31,
2019 and is reconciled to the provision for income taxes as follows:
Federal income taxes
786,121
$
Changes in valuation allowance - federal
1,707,339
State taxes, net of federal
(674,321)
Expiration of NOLs & credit carryovers
360,026
Other
(188,177)
1,990,988
$
15
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
14. INCOME TAXES, CONTINUED
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
our deferred taxes as of October 31, 2019 were as follows:
Deferred tax assets:
Net operating loss carryforward
28,340,683
$
Research & experimentation credits
5,078,587
State credits
1,259,649
Other
346,184
Total deferred tax assets
35,025,103
Valuation allowance
(14,698,773)
Total net deferred tax assets
20,326,330
$
Deferred tax liabilities:
Goodwill
(464,151)
$
State credits - federal
(179,250)
Other
(2,605)
Total deferred tax liabilities
(646,006)
$
Total net deferred tax assets
19,680,324
$
As of October 31, 2019, the Company had federal net operating loss carry-forwards (“NOL's”) and research and
experimentation credits (“R&E Credits”) available to reduce future taxable income of approximately $135.0 million
and $5.1 million, respectively. Such deferred tax assets expire as follows:
2020 - 2022
60,500,000
$
2023 - 2027
25,700,000
2028 - 2032
22,100,000
2033 - 2037
31,800,000
140,100,000
$
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable
income will be generated to permit use of the existing deferred tax assets. While the Company projects annual taxable
income to increase steadily into the future, future profitability depends heavily on the Company’s ability to borrow
at rates averaging those incurred during the year ended October 31, 2019. Positive or negative changes in average
borrowing rates greater than 0.50% could materially affect estimates of future taxable income and any related
valuation allowances.
On the basis of this evaluation, as of October 31, 2019, a valuation allowance of $14.7 million has been recorded to
recognize only the portion of the deferred tax asset that is more likely than not to be realized, which is due primarily
to the significant amount of deferred tax assets expiring over the next three years. The amount of the deferred tax
asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward
period are reduced or increased.
16
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2019
15. SUBSEQUENT EVENTS
In accordance with ASC 855, Subsequent Events, the Company evaluated all material events or transactions that
occurred after October 31, 2019, the consolidated balance sheet date, and through January 28, 2020, the date the
consolidated financial statements were issued, noting the following transaction for disclosure as a subsequent event.
On November 18, 2019, the Company announced it had reached a definitive agreement to acquire Rice Bancshares,
Inc. ("RBI"), a registered bank holding company and owner of The First State Bank, a Texas Banking Association.
The transaction is subject to regulatory approval.
RBI, through The First State Bank, operates four full service banking locations in low to moderate income tracts in
Dallas, Texas. As of September 30, 2019, The First State Bank had a reported $150 million in assets and total equity
capital of $20.1 million. The Company intends to merge the financial mortgage assets of CPF into The First State
Bank so the Company's affordable housing platform is contained in a wholly owned community development
corporation (“CDC”) subsidiary of the bank. The Company intends for The First State Bank to become a CDFI Bank
and Minority Depository Institution once all required regulatory applications are filed.
17
SUPPLEMENTAL INFORMATION
18
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE I: CONSOLIDATED BALANCE SHEET
OCTOBER 31, 2019
UNAUDITED
Crossroads
Capital Plus
Systems, Inc.
Financial, LLC
Eliminations
Total
ASSETS
CURRENT ASSETS
Cash and cash equivalents
34,030
$
1,622,084
$
-
$
1,656,114
$
Restricted cash
-
2,583,057
-
2,583,057
Interest receivable
-
893,343
-
893,343
Current portion of notes receivable
-
1,447,842
-
1,447,842
Current portion of other notes receivable
-
339,429
-
339,429
Intercompany receivables
-
18,579,160
(18,579,160)
-
Inventory
-
11,796,430
-
11,796,430
Prepaid expenses and other current assets
203,385
148,162
-
351,547
Total current assets
237,415
37,409,507
(18,579,160)
19,067,762
NOTES RECEIVABLE, net of current
maturities and allowance of $0
-
115,435,031
-
115,435,031
OTHER NOTES RECEIVABLE, net of current
maturities and allowance of $0
-
6,463,049
-
6,463,049
GOODWILL
18,566,966
-
-
18,566,966
DEFERRED TAX ASSET
19,680,324
-
-
19,680,324
INVESTMENT IN SUBSIDIARY
24,507,703
-
(24,507,703)
-
OTHER NON-CURRENT ASSETS
-
36,083
-
36,083
TOTAL ASSETS
62,992,408
$
159,343,670
$
(43,086,863)
$
179,249,215
$
CURRENT LIABILITIES
Accounts payable
10,162
$
279,068
$
-
$
289,230
$
Accrued liabilities
199,457
410,089
-
609,546
Escrow liabilities
-
2,646,581
-
2,646,581
Intercompany payables
18,579,160
-
(18,579,160)
-
Current portion of credit facilities
-
66,167,346
-
66,167,346
Current portion of other note payable
-
179,327
-
179,327
Current portion of acquisition notes payable
2,495,168
-
-
2,495,168
Total current liabilities
21,283,947
69,682,411
(18,579,160)
72,387,198
CREDIT FACILITIES, net of current maturities
-
45,608,430
-
45,608,430
OTHER NOTE PAYABLE, net of current maturities
-
1,335,571
-
1,335,571
ACQUISITION NOTES PAYABLE, net of current maturities
12,418,163
-
-
12,418,163
OTHER LONG-TERM LIABILITIES
-
156,049
-
156,049
TOTAL LIABILITIES
33,702,110
116,782,461
(18,579,160)
131,905,411
EQUITY
Common stock, $0.001 par value: 75,000,000 shares
authorized, 5,971,994 shares issued and outstanding
5,972
-
-
5,972
Additional paid in capital
242,358,843
13,351,925
(13,351,925)
242,358,843
Accumulated earnings (deficit)
(213,074,517)
11,155,778
(11,155,778)
(213,074,517)
Crossroads Systems, Inc. stockholders' equity
29,290,298
24,507,703
(24,507,703)
29,290,298
Non-controlling interests
-
18,053,506
-
18,053,506
TOTAL EQUITY
29,290,298
42,561,209
(24,507,703)
47,343,804
TOTAL LIABILITIES AND EQUITY
62,992,408
$
159,343,670
$
(43,086,863)
$
179,249,215
$
LIABILITIES AND EQUITY
See report of independent registered public accounting firm regarding supplemental information.
19
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE II: CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2019
UNAUDITED
Crossroads
Capital Plus
Systems, Inc.
Financial, LLC
Eliminations
Total
REVENUES
Interest income
-
$
11,986,113
$
-
$
11,986,113
$
Property sales
-
25,330,557
-
25,330,557
Other revenue
-
387,265
-
387,265
Total revenues
-
37,703,935
-
37,703,935
COSTS AND EXPENSES
Interest expense
-
6,343,947
-
6,343,947
Cost of properties sold
-
21,138,085
-
21,138,085
General and administrative
427,742
1,534,884
-
1,962,626
Salaries and wages
27,970
2,760,062
-
2,788,032
Total costs and expenses
455,712
31,776,978
-
32,232,690
Income (loss) from operations
(455,712)
5,926,957
-
5,471,245
OTHER EXPENSES
Interest expense
(1,110,230)
-
-
(1,110,230)
Total other expenses
(1,110,230)
-
-
(1,110,230)
Income (loss) before income tax provision
(1,565,942)
5,926,957
-
4,361,015
INCOME TAX PROVISION
1,990,988
-
-
1,990,988
NET INCOME (LOSS)
(3,556,930)
5,926,957
-
2,370,027
Less: net income attributable to non-controlling interests
-
617,582
-
617,582
NET INCOME (LOSS) ATTRIBUTABLE TO
CONTROLLING INTERESTS
(3,556,930)
$
5,309,375
$
-
$
1,752,445
$
See report of independent registered public accounting firm regarding supplemental information.
20File and source
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- 2,385,165 bytes
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