Crossroads Systems Reports Fiscal First Quarter 2018 Financial Results

DALLAS, March 8, 2018 /PRNewswire/ -- Crossroads Systems, Inc. (OTC Pink: CRSS), a holding company focused on investing in businesses that promote economic vitality and community development, reported financial results for its fiscal first quarter ended January 31, 2018.

On December 18, 2017, Crossroads acquired Capital Plus Financial LLC (CPF), a certified Community Development Financial Institution and certified B-Corp, which supports Hispanic homeownership with a long term, fixed rate single family mortgage product and provides affordable housing throughout Texas. Consolidated results for the fiscal first quarter reflect CPF's operations from December 19, 2017 to January 31, 2018.

Concurrent with the transaction, CPF purchased 87 single family residential properties from CP Originations (CPO), a minority shareholder for $7.0 million which represented CPO's basis in the properties. The purchase was financed by an assumption of CPO's debt related to these properties. 

Fiscal Q1 2018 Financial Results
Revenue for the fiscal first quarter of 2018 was $3.28 million and gross profit was $1.34 million or 41 percent of revenue. Interest income was $1.21 million or 37 percent of revenue. Fiscal first quarter results included $741,000 of one-time expenses, of which $483,000 were related to the acquisition of CPF. Fiscal first quarter net loss was $(344,000) or $(0.06) loss per share. 

At January 31, 2018, cash and cash equivalents totaled $3.6 million.

Management Commentary
Eric A. Donnelly, Chief Executive Officer at Crossroads Systems, said, "The acquisition of Capital Plus Financial and its immediate positive impact to earnings along with the continued wind down of Crossroads' legacy expenses, position the company for growth and creation of shareholder value."

About Crossroads Systems
Crossroads Systems, Inc. (OTC Pink: CRSS), is a holding company focused on investing in businesses that promote economic vitality and community development. Crossroads' subsidiary, Capital Plus Financial (CPF), is a certified Community Development Financial Institution (CDFI) and certified B-Corp which supports Hispanic homeownership with a long term, fixed rate single family mortgage product. 

Important Cautions Regarding Forward-Looking Statements
This press release includes forward-looking statements that relate to the business and expected future events or future performance of Crossroads Systems, Inc. and Capital Plus Financial and involve known and unknown risks, uncertainties and other factors that may cause its actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, "believe," "expect," "anticipate," "estimate," "intend," "plan," "targets," "likely," "will," "would," "could," and similar expressions or phrases identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about Crossroads Systems' and Capital Plus Financial's ability to implement their business strategy, and their ability to achieve or maintain profitability. The future performance of Crossroads Systems and Capital Plus Financial may be adversely affected by the following risks and uncertainties: economic changes affecting homeownership in the geographies where Capital Plus Financial conducts business, developments in lending markets that may not align with Capital Plus Financial's expectations and that may affect Capital Plus Financial's plans to grow its portfolio, variations in quarterly results, developments in litigation to which we may be a party, technological change in the industry, future capital requirements, regulatory actions or delays and other factors that may cause actual results to be materially different from those described or anticipated by these forward-looking statements. For a more detailed discussion of these factors and risks, investors should review Crossroads Systems' annual and quarterly reports. Forward-looking statements in this press release are based on management's beliefs and opinions at the time the statements are made. All forward-looking statements are qualified in their entirety by this cautionary statement, and Crossroads Systems undertakes no duty to update this information to reflect future events, information or circumstances.

©2018 Crossroads Systems, Inc., Crossroads and Crossroads Systems are registered trademarks of Crossroads Systems, Inc. All trademarks are the property of their respective owners.

Investor Contact:
Mark Hood
Crossroads Systems
[email protected]

Press Contact:
Matthew Zintel
Zintel Public Relations
[email protected]

Dear Shareholder:

We made significant progress towards creating value for the company in the fiscal first quarter of 2018. Several key strategic actions provide the foundation for delivering shareholder value.

On December 18, 2017, Crossroads acquired Capital Plus Financial LLC (CPF). As part of the transaction, CPF stockholders received $30.8 million in cash and an aggregate of 2,955,028 newly issued shares of Crossroads stock, representing 49.5% of Crossroads' outstanding shares after closing. The cash portion of the purchase price was funded with $24.2 million of new Crossroads debt plus $6.6 million of CPF cash on hand. Concurrent with the transaction, CPF purchased 87 single family residential properties from CP Originations (CPO), a minority shareholder for $7.0 million which represented CPO's basis in the properties. The purchase was financed by an assumption of CPO's debt related to these properties.  CPF's Chief Executive Officer, Eric Donnelly, and Chief Financial Officer, Farzana Giga, replaced Richard K. Coleman, Jr. and Robert G. Pearse on Crossroads' board of directors. Mr. Donnelly was also appointed Crossroads' Chief Executive Officer.

Based in Dallas, Texas, CPF is a certified Community Development Financial Institution (CDFI) and certified B-Corp, which supports Hispanic homeownership with a long term, fixed rate single family mortgage product. Hispanic demand is driving the U.S. housing market. Statistics reported in the most recent Hispanic Wealth Report provide a clear picture of growth.  In 2017, 7,472,000 Hispanic households owned their homes, a 167,000 increase from 2016. Since 2000, Hispanics have been responsible for 46.5% of net U.S. homeownership gains. In 2017, the Hispanic population reached a new high of 58.6 million, an increase of 1.1 million from 2016. CPF's service offerings are tailored to this rapidly growing market. Many of our customers are first time homebuyers who require guidance understanding the complexities of a home purchase, but also simply want to realize the American dream and pride of homeownership. With over 2,000 completed transactions, the company has a deep understanding of the Hispanic market and believes this positions the company well for future growth.  To meet anticipated demand, the company plans to open additional sales offices in key Hispanic markets across Texas and the United States. Furthermore, the company plans to expand its lending capacity by seeking additional sources of private and public debt. The company intends to pursue loan programs offered to CDFIs by the federal government.  CPF enjoys the support of many financial institutions as a solution for their Community Reinvestment Act needs on investment, lending and services.

As a wholly owned subsidiary of Crossroads, the financials are presented on a consolidated basis (supplementary schedules are included for reference). The fiscal first quarter includes CPF's financials from December 19, 2017 to January 31, 2018.

CPF has two streams of income, which together fulfill its primary mission of supporting Hispanic homeownership.  First, the company purchases blighted homes primarily in low to moderate income census tract neighborhoods, then remodels the homes and sells them. For the reporting period, CPF generated $2.0 million of sales on the sale of 16 properties. CPF's second income stream comes from providing a mortgage to the purchasers of its homes.  The mortgages are no-closing cost, conventional fixed rate mortgages with a typical term of 30 years.  These borrowers are fully underwritten based on mortgage origination regulations.    For the period ending January 31, 2018, CPF had an unpaid mortgage note portfolio balance of $92.8 million on its 1,038 mortgages which generated $1.2 million in mortgage interest income.   CPF's annual growth rate has averaged 17% over the last three years.  Historically, CPF has not encountered losses from defaults due to its ability to resell homes quickly. This is attributable in large part to the company's commitment to provide affordable housing in the markets it serves.

These mortgage note receivables are secured by an assignment of a deed of trust.  The company holds and services the notes utilizing funding provided by its senior secured credit facilities.  CPF's leverage and cash coverage ratios are two important metrics that demonstrate the financial strength of the business. At January 31, 2018, CPF's leverage ratio (net of intercompany accounts) was 3.6x and its cash coverage ratio, adjusted for one-time and transaction expenses of $741,000, was 4.1x. As a part of the Crossroads acquisition, Crossroads and Capital Plus Financial jointly entered into a loan agreement with Veritex Community Bank for $22 million. The cash coverage ratio of the consolidated entity is at 1.8x.  CPF's growth plan involves deleveraging of the balance sheet through various CRA eligible products including the issuance of preferred equity units and subordinated debt.

The net asset value of CPF at the date of the acquisition was approximately $26.9 million after the reclassification of $8.9 million related to discounts CPF had accumulated on the purchase of its mortgage notes receivable.  The mortgage notes receivable had a fair value equal to the unpaid principal balance of $91.6 million at the date of the acquisition.   The initial accounting for the acquisition of CPF is currently in process; accordingly, the purchase price allocation contains balances that could differ from the balances reported upon completion.  For the period ended January 31, 2018, CPF had stockholder's equity of $29.7 million; however due to purchase accounting and the consolidation of CPF into Crossroads, the stockholder's equity balance is $7.6 million on the consolidated balance sheet. The supplemental schedule will illustrate these entries.

We are excited about the CPF acquisition and the transition from the Crossroads technology business.   A Fortress affiliate took over patent monetization efforts with respect to both the '972 and non-'972 patents and the two companies will share the proceeds from such efforts equally (after deducting expenses and a $1.5 million monetization hurdle). This transaction with the Fortress affiliate allows Crossroads to retain potential upside from the patent portfolio while reducing on-going out of pocket expenses.

Finally, we added two members to our board of directors. James Pérez Foster is a seasoned Hispanic board member with national CDFI board experience. He is a management consultant with more than 25 years of strategic growth and impact investment advisory experience. Pérez Foster says, "as a dynamic Hispanic leader who helped scale a successful social enterprise serving the needs of the Hispanic community, I can think of no one better than Eric Donnelly to lead Crossroads into its exciting future and I'm thrilled to contribute to the board."

Ray Kembel is a proven finance professional with a depth of knowledge of both real estate transactions and commercial credit. He has been actively involved in more than $5 billion of real estate and commercial credit transactions since 1993.

The CPF acquisition gives Crossroads new direction.  Not only is the company a leader in a growing market, but also a business delivering impact to communities often overlooked by traditional financial service offerings. As a for-profit social enterprise, CPF is uniquely positioned to serve the needs of low to moderate income Hispanic homebuyers. In closing, thank you for your ownership of Crossroads stock.

Un cordial saludo,

Robert H. Alpert & Eric A. Donnelly

SOURCE Crossroads Systems

Related Links

http://www.crossroads.com