Court filing
Crossroads Systems OTC Q3 FY2021 Disclosure: $970.5M Nine-Month Revenue, $930M PPP Fees
Filed September 3, 2021 in Crossroads Capital Plus Otc Filings; one of 12 filings from this case.
Record facts
| Court | Crossroads Systems, Inc. (OTCQX: CRSS) |
|---|---|
| Filed | 2021-09-03 |
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
Quarterly Report
For the Period Ending: July 31, 2021
(the “Reporting Period”)
The number of shares outstanding of our Common Stock is 5,971,994 SHARES as of July
31, 2021.
The number of shares outstanding of our Common Stock was 5,971,994 SHARES as of
October 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) and the address of its principal executive officers
Crossroads Systems, Inc
Prior Symbol CRDS - Bankruptcy Plan
Effective October 3, 2017; Current CRSS
The address of the issuer’s 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 2 Shares Outstanding
COMMON STOCK
As of July 31,
2021
As of October
31, 2020
As of October
31, 2019
Number of Shares Authorized
75,000,000
75,000,000
75,000,000
Number of Shares outstanding
5,971,774
5,971,774
5,971,994
Number of Shares in Public Float
1,662,842
1,522,221
1,330,241
Total Number of Shareholders of record
136
162
157
Total Number of Shareholders holding at least 100
shares
43
57
52
List of securities offerings and shares issued for services in the past two years
None
Item 3 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 July 31,
2021, 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
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 4 Management’s Discussion and Analysis
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 Quarterly 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. The quarterly
reporting period is from May 1, 2021, to July 31, 2021. The comparative period is from May 1, 2020, to July
31, 2020
Fiscal 2021 Financial Overview & Results of Operations
Operations
Total revenue from operations for the nine months ended July 31, 2021, was $970.5 million compared to $27.5 million
for the same period of 2020. The increase in revenue was the result of the Company participating in the Payment
Protection Program (PPP) administered by the Small Business Administration (“SBA”). The Company earned fees
from the program totaling approximately $930.0 million. The Company has taken the full amount of fees earned
during the period from the program into income. The operating revenue for the period was $40.5 million compared
to $27.1 million for the same period of 2020. The increase was from increased home sales and portfolio growth. Net
operating income before taxes and non-controlling interest for the nine months ended July 31, 2021, was $320.2
million compared to $3.5 million for the same period of 2020.
Net Earnings Per Share
Net earnings per share from operations before taxes and after non-controlling interests for the nine months ended July
31, 2021, was $53.54 compared to $0.51 for the nine months ended July 31, 2020. The increase in the earnings per
share was primarily due to the Company’s participation in the PPP lending program.
Results of Operations
Comparison of the Three Months Ended July 31, 2021, to the Three Months Ended July 31, 2020
The following table sets forth selected consolidated operating results stated in dollars and percentage from the prior
year:
Total Revenues
Total property sales revenue from the sale of recently rehabilitated homes was $6.1 million for the quarter ended July
31, 2021, compared to $ 7.1 million for the quarter ended July 31, 2020. Sales during the third quarter of 2021 were
relatively flat compared to the quarter ended July 31, 2020, due to lower homes being available for sale during the
period.
Total interest income revenue generated from the Company’s mortgage note receivable portfolio and from the PPP
loan program was $14.9 million for the quarter ended July 31, 2021, compared to $3.1 million for the quarter ended
July 31, 2020. The increase was the result of growth in the total mortgage note receivable portfolio during the period
and the addition of PPP loans to the portfolio. The Company funded approximately $6.1 billion in PPP loans
generating an annual interest rate of 1%.
Other revenues include processing fees the company earned from originating PPP loans during the quarter ended July
31, 2021. The increase in revenues for processing fees was the result of the Company participation in the Payment
Protection Program (PPP) administered by the Small Business Administration (“SBA”). The Company earned fees
from the program totaling approximately $465.6 million for the quarter. The Company has taken the full amount of
July 31, 2021
July 31, 2020
$
%
REVENUES
Interest income
14,910,841
$
3,125,498
$
11,785,343
$
377.1%
Property sales
6,092,931
7,132,600
(1,039,669)
-14.6%
Other revenue
465,610,289
12,881
465,597,408
3614606.1%
Total revenues
486,614,061
10,270,979
476,343,082
4637.8%
COSTS AND EXPENSES
Interest expense
5,576,284
1,271,583
4,304,701
338.5%
Cost of properties sold
5,391,903
6,298,319
(906,416)
-14.4%
General and administrative
290,766,065
513,128
290,252,937
56565.4%
Salaries and wages
19,204,171
743,053
18,461,118
2484.5%
Total costs and expenses
320,938,423
8,826,083
312,112,340
3536.2%
Income from operations
165,675,638
1,444,896
164,230,742
11366.3%
OTHER EXPENSES
Interest expense
(111,250)
(155,626)
44,376
-28.5%
Total other expenses
(111,250)
(155,626)
44,376
-28.5%
Income before income tax provision
165,564,388
1,289,270
164,275,118
12741.7%
INCOME TAX PROVISION
(38,452,695)
(152,446)
(38,300,249)
25123.8%
NET INCOME
127,111,693
1,136,824
125,974,869
11081.3%
Less: net income attributable to non-controlling interests
(155,773)
(157,068)
1,295
-0.8%
NET INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS
126,955,920
$
979,756
$
125,976,164
$
12857.9%
Earnings (loss) per share:
Cash income attributable to common shareholders
126,955,920
1,132,202
125,823,718
11113.2%
Weighted average shaes outstanding
5,971,994
5,971,994
-
0.0%
Cash income per share
21.26
$
0.19
$
21.07
$
11113.2%
For the Three Months Ended
Increase/(Decrease)
fees earned during the period from the program into income. The Company funded approximately 400,000 loans
during the period. No such fees were earned during the quarter ended July 31, 2020.
Cost of Goods Sold
The cost of goods sold related to the sale of homes were at $5.4 million for the quarter ended July 31 2021, compared
to $ 6.3 million for the quarter ended July 31, 2020, as sales remained relatively flat for the comparative periods. The
Company experienced increased costs for labor and materials during the period resulting from supply shortages,
retailer supply chain disruptions and material inflation.
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 the cost of goods sold is the interest expense on the mortgage note receivable portfolio. The
interest expense related to the portfolio income was $5.6 million for the quarter ended July 31, 2021, compared to
$1.3 million for the quarter ended July 31, 2020. The interest expense was higher due to the Company’s participation
in the PPP program. The Company borrowed $6.4 billion from the Federal Reserve Bank of Cleveland to fund the
loans it had originated at 35 bps per annum. The Company accrued approximately $4.6 million in interest expenses
related to these borrowing. This was offset by lower debt costs on the mortgage note portfolio.
Operating Expenses
Operating expenses consist primarily of the following: compensation, sales and marketing, technology, legal,
professional fees, insurance, and other operating expenses.
Total operating expenses were $310.0 million for the quarter ended July 31, 2021, compared to $1.3 million for the
quarter ended July 31, 2020. Of these operating expenses, $289.4 million are related to the PPP loan program the
Company participated in. These expenses represent the fees paid to the loan servicer provider for the origination and
forgiveness of the PPP loans and were paid and accrued based on amounts earned during the quarter. In addition, the
company paid executive, board and employee bonuses in the amount of $18.7 million. Normal operating expenses as
a percentage of total revenues were at 8.6% for the quarter ended July 31, 2021 decreasing from 12.2% from the same
reporting period of 2020. The decrease was the result of increased interest income from the PPP loan program.
Other Income/Expense
The other interest expense relates to interest from acquisition debt. Total other interest expenses decreased by
approximately $44,000 from the quarter ended July 31, 2021, compared to the quarter ended July 31, 2020, due to the
principal reduction on this debt. The balance on the acquisition debt as of July 31, 2021, was $9.0 million compared
to $11.6M at July 31, 2020.
Comparison of the Nine Months Ended July 31, 2021, to the Nine Months Ended July 31, 2020
Total Revenues
Total property sales revenue from the sale of recently rehabilitated homes was $16.7 million for the nine months ended
July 31, 2021 compared to $17.7 million for the period ended July 31, 2020. Sales were flat during the period due to
the fewer completed homes being available for sale during the period given tight inventory levels in Texas making it
more difficult to find blighted homes to restore.
Total interest income revenue generated from the Company’s mortgage note receivable portfolio increased to $27.3
million for the nine months ended July 31, 2021, compared to $9.3 million for the nine months ended July 31, 2020.
The increase was the result of growth in the total mortgage note receivable portfolio during the period and the addition
of PPP loans to the portfolio. The Company funded approximately $6.1 billion in PPP loans generating an annual
interest rate of 1%.
Other revenues include processing fees the Company earned from participation in the Payment Protection Program
(PPP) administered by the Small Business Administration (“SBA”). Total fees earned during the nine month period
were $930.0 million. The Company did not generate such fees for the same period in 2020. The Company has taken
the full amount of fees earned during the period from the program into income. The Company funded approximately
400,000 loans during the period.
July 31, 2021
July 31, 2020
$
%
REVENUES
Interest income
23,777,722
$
9,339,624
$
14,438,098
$
154.6%
Property sales
16,733,791
17,736,312
(1,002,521)
-5.7%
Other revenue
929,984,144
378,249
929,605,895
245765.6%
Total revenues
970,495,657
27,454,185
943,041,472
3435.0%
COSTS AND EXPENSES
Interest expense
9,134,509
4,356,322
4,778,187
109.7%
Cost of properties sold
14,468,546
15,425,606
(957,060)
-6.2%
General and administrative
609,024,279
1,487,181
607,537,098
40851.6%
Salaries and wages
20,731,003
2,103,878
18,627,125
885.4%
Total costs and expenses
653,358,337
23,372,987
629,985,350
2695.4%
Income from operations
317,137,320
4,081,198
313,056,122
7670.7%
OTHER EXPENSES
Interest expense
(372,859)
(550,947)
178,088
-32.3%
Other income/(expenses)
3,447,921
-
3,447,921
0%
Total other expenses
3,075,062
(550,947)
3,626,009
-658.1%
Income before income tax provision
320,212,382
3,530,251
316,682,131
8970.5%
INCOME TAX PROVISION
(69,991,591)
(448,398)
(69,543,193)
15509.3%
NET INCOME
250,220,791
3,081,853
247,138,938
8019.2%
Less: net income attributable to non-controlling interests
(469,910)
(472,931)
3,021
-0.6%
NET INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS
249,750,881
$
2,608,922
$
247,141,959
$
9473.0%
Earnings (loss) per share:
Cash income attributable to common shareholders
271,594,104
3,057,320
268,536,784
8783.4%
Weighted average shaes outstanding
5,971,994
5,971,994
-
0.0%
Cash income per share
45.48
$
0.51
$
44.97
$
8783.4%
For the Nine Months Ended
Increase/(Decrease)
Cost of Goods Sold
The cost of goods sold related to the sale of homes was $14.5 million for the nine months ended July 31, 2021,
compared to $15.6 million for the same period of 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 the cost of goods sold is the interest expense on the mortgage note receivable portfolio. The
interest expense related to the portfolio income was $9.1 million for the nine months ended July 31, 2021, compared
to $4.4 million for the nine months ended July 31, 2020. The interest expense was higher due to the Company’s
participation in the PPP program. The Company borrowed $6.4 billion from the Federal Reserve Board to fund the
loans it had originated at 35 bps per annum and the term of the advances matches exactly with the term of the PPP
loan issued to the company’s customers The Company accrued approximately $5.5 million in interest expenses related
to these borrowing. This was offset by lower debt costs on the mortgage note portfolio.
Operating Expenses
Operating expenses consist primarily of the following: compensation, sales and marketing, technology, legal,
professional fees, insurance, and other operating expenses.
Total operating expenses were $629.8 million for the nine months ended July 31, 2021, compared to $3.6 million for
the nine months ended July 31, 2020. Of these operating expenses, $606.4 million are related to the PPP loan program
the Company participated in. These expenses represent the fees paid to the loan servicer provider for the origination
and forgiveness of the PPP loans and were paid and accrued based on amounts earned during the period. In addition,
the Company paid executive, board and employee bonuses in the amount of $18.7 million during the period. Normal
operating expenses as a percentage of total revenues were at 11.6% for the nine months ended July 31, 2021 and
decreased from 13.5% from the same reporting period of 2020 as a result of increased interest income from the PPP
loan program in 2021.
Other Income/Expense
The other interest expense relates to interest from acquisition debt. Total other interest expenses decreased $178,000
for the nine months ended July 31, 2021, from the nine months ended July 31, 2020, due to the principal reduction on
the debt. The balance on the acquisition debt as of July 31, 2021was $9.0 million compared to $11.9 million at July
31, 2020. The company received a deferral of principal payments for three months starting in April 2020. This
principal amount will be due at the end of the loan period.
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 July 31, 2021, Capital Plus Financial had cash and lines of credit available with its current banking partners in
excess of $30.0 million.
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
more favorable CRA assessment from their regulators.
Working Capital
Mortgage Note Portfolio
The mortgage note portfolio consists of $132.7 million of long term fixed, amortizing single family residential
mortgages in the Dallas/Fort Worth, Houston, and San Antonio markets. The Company provides a mortgage for the
purchase of a property with an equity down payment from the potential buyer. Our mortgage portfolio is comprised
of first-time home buyers, and in over 60% of the cases, first time credit recipients. We believe the risk associated
with these borrowers is mitigated by their history of debt aversion. Plainly said, those who have shown the financial
discipline to operate without debt should be rewarded and not punished as is often the case with a zero-credit score
borrower attempting to qualify for a mortgage. Each borrower is manually underwritten, and all are given the
opportunity to demonstrably prove their ability to repay. A 43% debt to income (“DTI”) ratio is the maximum ratio
for approved mortgages, but the average DTI ratio in our portfolio is 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 10.36% at July 31, 2021.
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 July 31, 2021.
As of July 31, 2021, the Company had a mortgage note receivable balance of $132.7 million compared to $121.4
million as of July 31, 2020.
In addition, the company carries higher value residential mortgage notes held for sale in its securities portfolio held to
provide needed liquidity. From time to time, the Company will also provide commercial real estate loans as part of its
community development mission. The outstanding balance of these loans at July 31, 2021, was $1.4 million compared
to $ 6.2 million at July 31, 2020.
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 overhead 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 86% of the cost of
properties sold in the consolidated statement of operations for the quarter ended July 31, 2021. As of July 31, 2021,
87 properties were being remodeled and 15 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 July 31, 2021.
As of July 31, 2021, gross inventory was $10.6 million compared to $10.5 million as of July 31, 2020.
Revolving Credit Facility
The Company has a revolving line of credit for the acquisition of properties and another for its mortgage loans. The
outstanding balance on the inventory line at July 31, 2021, was $7.7 million compared to $9.9 million at July 31, 2020.
The variance in the balance is a result of having few properties available for rehab.
The outstanding balance on the mortgage loan revolving credit facility was $42.1 million as of July 31, 2021, compared
to $ 44.9 million as of July 31, 2020. The decrease is the result of moving loans from the revolving credit facilities to
a term credit facility during the fourth quarter of 2020.
Cash Flows Provided by Operations
Continuing Operations
Net cash used by operating activities during the nine months ended July 31, 2021, was $5.6 billion compared to $3.0
million of net cash used for the nine months ended July 31, 2020. The primary reason for this increase was the
Company’s participation in the PPP loan program and its funding of $6.1 billion in loans.
Cash Flows Used in Investing and Financing Activities
Net cash provided by financing activities during the nine months ended July 31, 2021, was $6.2 billion compared to
$1.6 million for the nine months ended July 31, 2020. The primary reason for this increase was the Company’s
participation in the PPP loan program and its funding from the Federal Reserve of $6.4 billion to fund its PPP loans.
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.
Critical Accounting Policies and changes
N/A
Off-Balance Sheet Arrangements.
NA
Item 5 Legal Proceedings
Any current past, pending or threatened legal proceedings or administrative actions either by or against the issuer
that could have a material effect on the issuer’s business, financial condition, or operations and any current, past or
pending trading suspensions by a securities regulator.
None
Item 6 Defaults upon senior securities.
None
Item 7 Other Information.
None
Item 8 Exhibits.
EXHIBIT A
Financial Statements for the Period Ending July 31, 2021
Condensed Consolidated Balance Sheets as of July 31, 2021, and October 31, 2020
Condensed Consolidated Statements of Operations For the fiscal quarter ended July 31, 2021, and July 31, 2020;
and for the fiscal nine-month period ended July 31, 2021, and July 31 2020
Condensed Consolidated Statements of Cash Flows For the fiscal quarter ended July 31, 2021, and July 31, 2020
Notes to the Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
July 31
2021
October 31,
2020
CURRENT ASSETS
Cash and cash equivalents
291,475,025
$
2,127,059
$
Restricted cash
284,724,674
3,004,051
Interest and PPP loan fees receivable
15,201,285
930,871
Current portion of notes receivable
388,895
1,527,234
Current portion of other notes receivable
3,685
7,014
Inventory
10,606,419
10,544,236
Prepaid expenses and other current assets
305,195
411,645
Total current assets
602,705,178
18,552,110
NOTES RECEIVABLE, net of current maturities and allowance of $0
130,339,923
127,304,450
OTHER NOTES RECEIVABLE, net of current maturities, participations and allowance of $0
1,442,244
1,583,761
PPP LOAN RECEIVABLES
6,147,231,676
-
GOODWILL
18,566,966
18,566,966
DEFERRED TAX ASSET
-
18,300,334
OTHER NON-CURRENT ASSETS
132,673
-
TOTAL ASSETS
6,900,418,660
$
184,307,621
$
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable
249,095
$
222,610
$
Accrued liabilities
302,571,960
353,901
Escrow liabilities
2,490,500
2,886,249
-
Current portion of credit facilities
-
75,694,845
Current portion of other note payable (subordinated)
49,003
191,337
Current portion of acquisition notes payable
623,793
2,495,172
Total current liabilities
305,984,351
81,844,114
CREDIT FACILITIES, net of current maturities
99,975,526
39,481,435
OTHER NOTE PAYABLE, net of current maturities (subordinated)
1,144,235
1,144,234
ACQUISITION NOTES PAYABLE, net of current maturities
8,408,912
10,582,769
PAYROLL PROTECTION PROGRAM LOAN
376,800
376,800
FED PPPLF CREDIT FACILITY
6,422,368,421
-
OTHER LONG-TERM LIABILITIES
594,715
407,091
TOTAL LIABILITIES
6,838,852,960
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
3,816,349
242,471,412
Accumulated deficit
39,692,893
(210,057,986)
Crossroads Systems, Inc. stockholders' equity
43,515,214
32,419,398
Non-controlling interests
18,050,485
18,051,780
TOTAL EQUITY
61,565,699
50,471,178
TOTAL LIABILITIES AND EQUITY
6,900,418,660
$
184,307,621
$
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
July 31, 2021
July 31, 2020
REVENUES
Interest income
23,777,722
$
9,339,624
$
Property sales
16,733,791
17,736,312
Other revenue
929,984,144
378,249
Total revenues
970,495,657
27,454,185
COSTS AND EXPENSES
Interest expense
9,134,509
4,356,322
Cost of properties sold
14,468,546
15,425,606
General and administrative
609,024,279
1,487,181
Salaries and wages
20,731,003
2,103,878
Total costs and expenses
653,358,337
23,372,987
Income from operations
317,137,320
4,081,198
OTHER EXPENSES
Interest expense
(372,859)
(550,947)
Other income/(expenses)
3,447,921
-
Total other expenses
3,075,062
(550,947)
Income before income tax provision
320,212,382
3,530,251
INCOME TAX PROVISION
(69,991,591)
(448,398)
NET INCOME
250,220,791
3,081,853
Less: net income attributable to non-controlling interests
(469,910)
(472,931)
NET INCOME ATTRIBUTABLE TO CONTROLLING INTERESTS
249,750,881
$
2,608,922
$
Earnings (loss) per share:
Cash income attributable to common shareholders
271,594,104
3,057,320
Weighted average shaes outstanding
5,971,994
5,971,994
Cash income per share
45.48
$
0.51
$
For the Nine Months Ended
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
As of July 31,
2021
As of July 31,
2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
250,220,790
$
3,081,853
$
Adjustments to reconcile net income to net cash
used in operating activities:
Loss on derivative related activity
(105,702)
(105,702)
Stock based compensation
224,697
42,496
Amortization of deferred financing fees
(132,673)
22,993
Provision for income taxes
18,300,334
448,398
Changes in operating assets and liabilities:
Account & Interest receivable
(14,270,414)
181
Notes receivable (Mortgages, other and PPP)
(6,148,983,964)
(5,292,267)
Inventory
(62,183)
852,188
Prepaids and other assets
106,450
27,158
Accounts payable
26,485
70,931
Accrued liabilities
302,511,385
(13,445)
Escrow liabilities
(395,749)
(872,724)
Net cash used in operating activities
(5,592,560,544)
(1,737,940)
CASH FLOWS FROM FINANCING ACTIVITIES
Preferred equity contributions
-
2,500,000
Preferred equity dividend distributions
(471,206)
(472,931)
Common equity distributions
(238,879,760)
-
Paycheck Protection Program loan
-
376,800
Borrowings on credit facilities, net
2,752,674
19,157,858
Principal payments on credit facilities
(17,953,429)
(16,911,620)
Principal payments on other notes payable
(142,333)
(133,399)
Principal payments on acquisition note payable
(4,045,236)
(1,224,684)
Principal payments on participations in mortgage notes and other receivables
-
800,085
Proceeds from the federal reserve PPP credit facility
6,422,368,421
-
Net cash provided by financing activities
6,163,629,132
4,092,109
Net change in cash and cash equivalents and restricted cash
571,068,589
421,781
Cash and cash equivalents and restricted cash at beginning of period
5,131,110
1,656,114
Cash and cash equivalents and restricted cash at end of period
576,199,699
$
2,077,895
$
SUPPLEMENTAL INFORMATION
Cash paid for interest
4,289,921
$
5,087,850
$
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
1. COMPANY PROFILE AND NATURE OF OPERATIONS
Crossroads Systems, Inc. (OTCQX: 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, 2020, to July 31, 2021.
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 receivables are stated at their unpaid principal balances less an allowance for loan losses
if any. The average contractual interest rate per note was approximately 10.36% as of July 31, 2021. Interest income is
recognized monthly per the terms of the respective loan agreements. Notes receivable have maturities that range from
20 months 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 July 31, 2021.
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, 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 $2,763,555 as of July 31, 2021 and are
included in escrow liabilities on the consolidated balance sheet.
The Company has 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 $381,903 as of
July 31, 2021.
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 considering, 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 July 31, 2021.
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 $1,061,224 at July 31, 2021.
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 $1,061,224 as of July 31, 2021.
Other Notes Receivable
From time to time, the Company will provide higher value financing for residential or commercial real estate. As of July
31, 2021, the Company had an outstanding balance of $1.1 million in such financing on a residential property and $87,000
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 a 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 has a Convertible Note Receivable to Verdigris Holdings, Inc (a Delaware Financial Services Company)
for $50,000. The note accrues interest at 8% per annum and will mature on September 27, 2024. The Note has conversion
rights based on additional equity financing required by the company
The Company also has a note receivable in the amount of $200,000 from Common Catalyst (a Colorado Corporation).
The not matures on December 31, 2021 and accrues interest at a rate of 1% per year.
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17
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
July 31, 2021, was $212,812.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 July 31, 2021, 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 overhead 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 86% of the cost of
properties sold in the consolidated statement of operations for the period ended July 31, 2021. As of July 31, 2021,
87 properties were being remodeled and 15 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
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
continued growth in net income it was more likely than not goodwill was not impaired as of July 31, 2021.
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 of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, notes receivable, other notes
receivable, credit facilities, other notes 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 July 31, 2021.
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
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18
operations. Amortization expense was $25,516 for the period ended July 31, 2021. Net deferred financing fees were
$116,245 as of July 31, 2021.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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 July
31, 2021.
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 $573.8 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 the 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
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19
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 $27.4 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 shutdowns. 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.
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:
A detailed aging of notes receivable that are past due as of July 31, 2021, are as follows:
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 $212,812 loan participation, are as follows for the years ending October
31:
2021
388,894
$
2022
1,821,608
2023
2,011,643
2024
2,173,710
2025
2,389,160
Thereafter
123,962,624
132,747,639
$
Total notes receivable
132,747,639
$
100.0
Past due notes receivable:
31-60 days past due
3,322,313
$
2.5
61-90 days past due
1,230,835
0.9
91-120 days past due
352,546
0.3
Greater than 120 days past due
708,678
0.5
Total past due notes receivable
5,614,372
$
4.2
2021
3,685
$
2022
129,783
2023
8,854
2024
9,780
2025
10,803
Thereafter
1,033,024
1,195,929
$
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20
All other notes receivable were current and in good standing as of July 31, 2021.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at July 31, 2021:
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 period ended
July 31, 2021.
The Company had the following credit facilities as of July 31, 2021:
Board Compensation
20,250
$
Interest payable
5,481,409
Professional Fees
40,000
PPP loan servicing fees
238,736,965
PPP loan fogiveness fees
10,000,000
Salaries and wages
50,000
254,328,624
$
Lender
Interest Rate
Maturity Date
Balance
Texas Citizens Bank 9950
4.75%
9/20/35 (a)
3,263,998
$
First National Bank of Ballinger
0.05%
6/1/23
9,632,115
Happy State Bank Interim Construction (new)
5.00% (b)
10/9/21 (c)
787,416
Happy State Bank Interim Construction (lot)
6.00% (b)
5/11/22 (c)
292,469
Happy State Bank Interim 2
4.50% (b)
12/31/21 (c)
4,410,928
Happy State Bank Interim Rental Line
5.00% (b)
7/28/22
961,365
Happy State Bank Interim Rental Line 2
5.00%
5/11/23
856,920
Happy State Bank Flood Line
4.50% (b)
7/28/21 (c)
395,090
Happy State Bank Term
5.50%
9/18/41
15,858,591
Happy State Bank Term 4
5.50%
10/1/43
2,010,846
Oakwood Bank
3.75%
1/16/25
9,682,511
Oakwood Bank Accordian with Spirit Bank
3.75%
1/16/25
9,767,205
Veritex Bank (fromerly Green Bank)
3.84% (b)
4/25/22 (a,c)
17,199,055
Prosperity USA (formerly Legacy Bank Texas)
3.34% (b)
9/11/20 (a,c)
24,857,019
Veritex Community Bank - CRSS
4.59%
12/17/24
9,148,957
109,124,483
Less current portion of credit facilities
(27,317,453)
Credit facilities, net of current maturities
81,807,030
$
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
6. DEBT CONTINUED
Future minimum principal payments for the credit facilities are as follows for the years ending October 31:
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 4.59% at
July 31, 2021. The Veritex Note requires a 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 July 31, 2021, the
unpaid principal balance on the Veritex Note was $9,032,705. The Veritex Note is presented on the consolidated
balance sheet net of amortizing deferred financing fees of $116,245 at July 31, 2021.
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 July 31, 2021, due to COVID-19
affecting various county government’s ability to process foreclosures timely. The Company has the capability of
curing the non-compliance and the lender has provided a temporary waiver related to the non-compliance.
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 for the note. The CrossFirst was paid in full
during the period ended July 31, 2021.
Future minimum principal payments for the acquisition notes payable are as follows for the years ending October 31:
2021
27,317,453
$
2022
26,196,604
2023
13,265,408
2024
3,103,564
2025
19,588,538
Thereafter
19,652,916
109,124,483
$
2021
623,793
$
2022
2,495,172
2023
2,495,172
2024
2,495,172
2025
1,039,648
9,148,957
$
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22
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 $1,193,238 at July 31, 2021.
Future minimum principal payments for the Other Note are as follows for the years ending October 31:
Paycheck Protection Program Loan
On April 20, 2020, the Company qualified for and received a loan under 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 nine 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 for 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.
The Company applied for forgiveness in November of 2020 and is awaiting a response from the SBA.
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:
Rent expense associated with non-cancelable operating leases for the period ended July 31, 2021, was $113,400 and
is included in general and administrative expenses in the consolidated statement of operations.
2021
49,003
$
2022
204,151
2023
217,823
2024
232,411
Thereafter
489,850
1,193,238
$
2021
37,800
$
2022
151,200
2023
25,200
214,200
$
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23
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 July 31, 2021, 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 July 31, 2021, the unrecognized stock-based compensation expense was $566,758 and is expected to be
recognized over a weighted average period of 2.65 years.
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 $224,697 of stock-
based compensation expense was recorded for the period ended July 31, 2021.
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.
10. NON-CONTROLLING INTERESTS – CPF PREFERRED EQUITY
CPF has 36 preferred units at $500,000 per unit outstanding as of July 31, 2021.
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 quarterly 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 period ended July 31, 2021, CPF paid preferred dividends totaling $155,773 and had an accrued balance
of $50,485 at July 31, 2021. Accrued dividends are included as a component of total ending equity for non-controlling
interests at July 31, 2021.
11. RELATED PARTY ACTIVITIES
The Company leased 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
nine months ended July 31, 2021, were $31,500. The lease was cancelled effective June 1, 2021.
CROSSROADS SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
The Company leased office space in Dallas, Texas on a month to month basis from 210 Capital., a related party through
common ownership. Monthly payments under the lease were $1,700 and total rental payments for the nine months
ended July 31, 2021, were $6,800.
The Company holds 13 loans 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 July 31, 2021, the
liability due to the officers of the Company totaled $267,091 and is included in other long-term liabilities on the
consolidated balance sheet.
12. CONTINGENCIES
The Company is a 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 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.
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 nine months ended July 31, 2021:
As of October 31, 2020, the Company had federal net operating loss carryforwards (“NOL's”) and research and
experimentation credits (“R&E Credits”) available to reduce the future taxable income of approximately $103.9
million and $4.7 million, respectively. Such deferred tax assets expire as follows:
14. SUBSEQUENT EVENTS
In accordance with ASC 855, Subsequent Events, the Company evaluated all material events or transactions that
occurred after July 31, 2021, the consolidated balance sheet date, and through September 14, 2021, the date the
consolidated financial statements were available to be issued, noting the following transaction for disclosure as a
subsequent event.
Current
48,243,336
$
Deferred
21,748,255
69,991,591
$
2021 - 2023
35,500,000
$
2024 - 2028
19,900,000
2029 - 2033
34,900,000
2034 - 2037
18,300,000
108,600,000
$
25
SUPPLEMENTAL INFORMATION
26
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE I:
CONSOLIDATED BALANCE SHEET
AS OF JULY 31, 2021
Crossroads
Capital Plus
Systems, Inc.
Financial, LLC
Eliminations
Total
ASSETS
CURRENT ASSETS
Cash and cash equivalents
7,011,736
$
284,463,289
$
-
$
291,475,025
$
Restricted cash
-
284,724,674
-
284,724,674
Interest receivable
-
15,201,285
-
15,201,285
Accounts receivable
Current portion of notes receivable
-
388,895
-
388,895
Current portion of other notes receivable
-
3,685
-
3,685
Intercompany receivables
3,143,910
290,289,928
(293,433,838)
-
Inventory
-
10,606,419
-
10,606,419
Prepaid expenses and other current assets
108,355
196,840
-
305,195
Total current assets
10,264,001
885,875,015
(293,433,838)
602,705,178
NOTES RECEIVABLE, net of current
-
130,339,923
-
130,339,923
maturities and allowance of $0
-
-
-
OTHER NOTES RECEIVABLE, net of current
-
1,442,244
-
1,442,244
PPP LOAN RECEIVABLES
-
6,147,231,676
-
6,147,231,676
GOODWILL
18,566,966
-
-
18,566,966
DEFERRED TAX ASSET
-
132,673
-
132,673
INVESTMENT IN SUBSIDIARY
13,386,175
-
(13,386,175)
(0)
OTHER NON-CURRENT ASSETS
-
-
-
-
TOTAL ASSETS
42,217,142
$
7,165,021,531
$
(306,820,013)
$
6,900,418,660
$
(0)
CURRENT LIABILITIES
Accounts payable
-
$
249,095
$
-
$
249,095
$
Accrued liabilities
35,250
254,293,374
-
254,328,624
Escrow liabilities
-
2,490,500
2,490,500
Income taxes payable
48,243,336
48,243,336
Intercompany payables
290,289,928
-
(290,289,928)
-
Current portion of credit facilities
-
1,836,641
1,836,641
Current portion of other note payable (subordinated debt)
-
49,003
-
49,003
Current portion of acquisition notes payable
623,793
-
623,793
Total current liabilities
339,192,307
258,918,613
(290,289,928)
307,820,992
CREDIT FACILITIES, net of current maturities
-
98,138,885
98,138,885
OTHER NOTE PAYABLE, net of current maturities (subordinated)
-
1,144,235
-
1,144,235
ACQUISITION NOTES PAYABLE, net of current maturities
8,408,912
-
-
8,408,912
FEDERAL RESERVE PPPLF CREDIT FACILITY
6,422,368,421
6,422,368,421
PAYCHECK PROTECTION PROGRAM LOAN
376,800
-
376,800
OTHER LONG-TERM LIABILITIES
-
594,715
-
594,715
TOTAL LIABILITIES
347,601,219
6,781,541,669
(290,289,928)
6,838,852,960
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
3,816,347
-
-
3,816,347
Accumulated earnings (deficit)
(309,206,397)
365,429,378
(16,530,085)
39,692,896
Crossroads Systems, Inc. stockholders' equity
(305,384,078)
365,429,378
(16,530,085)
43,515,215
Non-controlling interests
-
18,050,485
-
18,050,485
TOTAL EQUITY
(305,384,078)
383,479,863
(16,530,085)
61,565,700
TOTAL LIABILITIES AND EQUITY
42,217,141
$
7,165,021,532
$
(306,820,013)
$
6,900,418,660
$
LIABILITIES AND EQUITY
27
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE II: CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 2021
Crossroads
Capital Plus
Systems, Inc.
Financial, LLC
Total
REVENUES
Interest income
-
$
23,777,722
$
23,777,722
$
Property sales
-
16,733,791
16,733,791
Other revenue
-
929,984,144
929,984,144
Total revenues
-
970,495,657
970,495,657
COSTS AND EXPENSES
Interest expense
-
9,134,509
9,134,509
Cost of properties sold
-
14,468,546
14,468,546
General and administrative
682,616
608,341,663
609,024,279
Salaries and wages
18,023,645
2,707,358
20,731,003
Total costs and expenses
18,706,261
634,652,076
653,358,337
Income (loss) from operations
(18,706,261)
335,843,581
317,137,320
OTHER EXPENSES
Interest expense
(372,859)
-
(372,859)
Other income (expense)
3,447,921
-
3,447,921
Total other expenses
3,075,062
-
3,075,062
Income (loss) before income tax provision
(15,631,199)
335,843,581
320,212,382
INCOME TAX PROVISION
(69,991,591)
-
(69,991,591)
NET INCOME (LOSS)
(85,622,790)
335,843,581
250,220,791
Less: net income attributable to non-controlling interests
-
(469,910)
(469,910)
NET INCOME (LOSS) ATTRIBUTABLE TO
CONTROLLING INTERESTS
(85,622,790)
335,373,671
249,750,881
28
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULE II: CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JULY 31, 2021
Crossroads
Capital Plus
Systems, Inc.
Financial, LLC
Total
REVENUES
Interest income
-
$
14,910,841
$
14,910,841
$
Property sales
-
6,092,931
6,092,931
Other revenue
-
465,610,289
465,610,289
Total revenues
-
486,614,061
486,614,061
COSTS AND EXPENSES
Interest expense
-
5,576,284
5,576,284
Cost of properties sold
-
5,391,903
5,391,903
General and administrative
437,142
290,328,924
290,766,066
Salaries and wages
17,873,703
1,330,468
19,204,171
Total costs and expenses
18,310,845
302,627,579
320,938,424
Income (loss) from operations
(18,310,845)
183,986,482
165,675,637
OTHER EXPENSES
Interest expense
(111,250)
-
(111,250)
Total other expenses
(111,250)
-
(111,250)
Income (loss) before income tax provision
(18,422,095)
183,986,482
165,564,387
INCOME TAX PROVISION
(38,452,695)
-
(38,452,695)
NET INCOME (LOSS)
(56,874,790)
183,986,482
127,111,692
Less: net income attributable to non-controlling interests
-
(155,773)
(155,773)
NET INCOME (LOSS) ATTRIBUTABLE TO
CONTROLLING INTERESTS
(56,874,790)
$
183,830,709
$
126,955,919
$
29
Item 9 Certifications
10)
Issuer Certification
I, Eric Donnelly, certify that:
I have reviewed this quarterly disclosure statement of Crossroads Systems, Inc.
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
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.
Date: Sept 14, 2021
Eric Donnelly
Chief Executive Officer
I, Farzana Giga, certify that:
I have reviewed this quarterly disclosure statement of Crossroads Systems, Inc.
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
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.
Date: Sept 14, 2021
Farzana Giga
Chief Financial OfficerFile and source
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