Crossroads Systems Reports Fiscal Fourth Quarter and Year End 2018 Financial Results

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Dec 13, 2018, 08:00 ET

DALLAS, Dec. 13, 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 fourth quarter and year ended October 31, 2018.

Fiscal Q4 and Full Year 2018 Financial Results

Revenue for the fiscal fourth quarter of 2018 was $6.8 million and gross profit was $2.3 million or 34 percent of revenue. Property sales income for the quarter was $4.1 million or 60 percent of total revenues. Interest income was $2.7 million or 40 percent of revenue. Total revenue for the full reporting year was $28.4 million and gross profit was $9.5 million or 34 percent of revenue.

Fiscal fourth quarter results included $463,000 of one-time expenses, which were related to the wind down of the Crossroads legacy business. The company also recorded a one-time gain of $22.2 million resulting from the recording of its deferred tax asset. Fiscal fourth quarter net income was $22.1 million or $3.70 income per share. Net income for the full year was $24.3 million or $4.06 income per share. The adjusted earnings after one-time expenses was $0.82.

At October 31, 2018, cash and cash equivalents totaled $2.3 million.

Management Commentary

Eric A. Donnelly, Chief Executive Officer at Crossroads Systems, said, "We are thrilled at the successful assimilation of Capital Plus Financial into Crossroads over our first fiscal year as a consolidated entity. We continue to build long term value for our legacy and new Crossroads shareholders and look forward to a full fiscal year in 2019 of driving more impact and profitability."

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.

Investor Contact: Crossroads Systems [email protected]

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

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)


			October 31,
			2018
ASSETS

Current assets:
	Cash and cash equivalents		$ 2,324
	Restricted Cash		2,542
	Accounts receivable, net		732
	Current portion of mortgage notes receivable		1,142
	Inventories		7,488
	Prepaids and other current assets		336
		Total current assets	14,563

Mortgage Notes Receivable			107,881
Goodwill			18,567
Other assets			439
Deferred tax asset			21,665
		Total assets	$ 163,116

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
	Accounts payable		$ 56
	Accrued expenses		913
	Escrow liabilities		2,533
	Current portion of senior secured credit facilities		50,603
	Current portion of other note payable		168
	Current portion of acquisition note payable		2,843
		Total current liabilities	57,116

Senior secured credit facilities, net			44,579
Acquisition debt, net			14,464
		Total liabilities	116,160

Stockholders' equity			46,956
		Total liabilities and stockholders' equity	$ 163,116

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)

			For the three months ended	For the Year ended
			October 31, 2018	October 31, 2018


Revenue:
	Interest income		$ 2,690	$ 8,932
	Property sales		4,076	$ 19,300
	Other revenue		8	210
		Total revenue	6,774	28,442
				$ -
Cost of revenue:
	Interest expense		1,210	3,738
	Cost of properties sold		3,245	14,971
		Total cost of revenue	4,456	18,709

Gross profit			2,318	9,733

Operating expenses:
	General and administrative		486	2,396
	Salaries and wages		1,049	3,563
		Total operating expenses	1,535	5,958

Income (loss) from operations			783	3,775

Other income (expense):
	Interest (expense) income		(316)	(1,126)
	Other (expense) income		10	(18)

	Income before provision for income taxes		476	2,631

	Income tax provision		21,665	21,660

Net Income (loss)			$ 22,142	$ 24,291

CROSSROADS SYSTEMS, INC.
Supplemental Schedule - Consolidated Balance Sheet
As of October 31, 2018

				Crossroads	CPF	Elimination Entries	Consolidated
				October 31, 2018	October 31, 2018	October 31, 2018	October 31, 2018
ASSETS
	Current assets:
		Cash and cash equivalents		85,353	2,238,260	-	2,323,614
		Restricted cash		-	2,541,930	-	2,541,930
		Accounts receivable, net		-	731,507	-	731,507
		Inventories		-	7,488,271	-	7,488,271
		Intercompany receivable		3,143,910	12,237,369	(15,381,279)	(0)
		Prepaids and other current assets		239,046	44,133	-	283,179
		Earnest money deposits		-	52,890	-	52,890
		Mortgage notes receivable		-	109,022,512	-	109,022,512
			Total current assets	3,468,309	134,356,872	(15,381,279)	122,443,902

	Property and equipment, net			-	24,540	-	24,540
	Investment in subsidiaries			13,419,888	-	(13,419,888)	-
	Goodwill			18,566,966	-	-	18,566,966
	Other assets			-	414,912	-	414,912
	Deferred tax asset			21,665,286	-	-	21,665,286
			Total assets	$ 57,120,449	$ 134,796,324	$ (28,801,167)	$ 163,115,606
				-
LIABILITIES AND STOCKHOLDERS' EQUITY
	Current liabilities:
		Accounts payable		204	55,939	-	56,143
		Accrued and other current liabilities		540,294	287,298	-	827,592
		Escrow liabilities		-	2,533,348	-	2,533,348
		Due to subsidiaries		12,237,369	-	(12,237,369)	(0)
		Revolving line of credit, inventory		-	7,429,923	-	7,429,923
		Revolving line of credit, mortgage notes (current maturities)		-	38,533,993	4,639,056	43,173,049
		Current portion of other note payable				168,071	168,071
		Current portion of acquisition note payable				2,843,046	2,843,046
		Payroll liabilities		-	85,307	-	85,307
							-
			Total current liabilities	12,777,867	48,925,808	(4,587,196)	57,116,479

	Senior secured term notes (long-term)			-	49,218,291	(4,639,056)	44,579,235
	Acquisition debt (long-term)			17,307,309	-	(2,843,046)	14,464,263
			Total liabilities	30,085,176	98,144,099	(12,069,298)	116,159,977

	Stockholders' equity:
	Total participating payables			-	157,428	-	157,428
	Total preferred equity investment			-	15,012,685	-	15,012,685
	Total subordinated debt			2,199,377	1,682,969	(168,071)	3,714,274
		Members equity in CPF		-	13,629,428	-	13,629,428
		Common stock		5,972	-	-	5,972
		Additional paid-in capital		242,325,128	-	(13,385,638)	228,939,491
		(Accumulated deficit)/Retained Earnings		(235,483,713)	-	(3,178,160)	(238,661,873)
		Current year net (loss) income		17,988,508	6,169,717	-	24,158,225
			Total stockholders' equity (deficit)	27,035,273	36,652,226	(16,731,869)	46,955,629
							-
			Total liabilities and stockholders' equity (deficit)	$ 57,120,449	$ 134,796,324	$ (28,801,167)	$ 163,115,606

CROSSROADS SYSTEMS, INC.
Supplemental Schedule - Consolidated Income Statement
For the Year Ended October 31, 2018

				Crossroads	CPF	Consolidated
				October 31, 2018	October 31, 2018	October 31, 2018
	Revenue:
		Interest income		$ -	$ 8,932,162	$ 8,932,162
		Property sales		-	19,299,984	19,299,984
		Other revenue		-	210,115	210,115
			Total revenue	-	28,442,261	28,442,261

	Cost of revenue:
		Interest expense		-	3,738,080	3,738,080
		Cost of properties sold		-	14,971,067	14,971,067
			Total cost of revenue	-	18,709,147	18,709,147

	Gross Profit			-	9,733,114	9,733,114

	Operating expenses:
		General and administrative		1,321,642	1,073,935	2,395,577
		Salaries and wages		1,229,468	2,333,305	3,562,773
			Total operating expenses	2,551,109	3,407,240	5,958,350

	Income (Loss) from operations			(2,551,109)	6,325,874	3,774,765

	Other income (expense):
		Interest (expense) income		(1,125,711)	-	(1,125,711)
		Other (expense) income		43.47	(17,892)	(17,849)
	Total other income (expense)			(1,125,668)	(17,892)	(1,143,560)

	Income before provision for income taxes			(3,676,777)	6,307,982	2,631,204

		Income tax provision		21,665,286	(5,190)	21,660,096
	Net Income (Loss)			$ 17,988,509	$ 6,302,792	$ 24,291,300

	Fully diluted outstanding shares					5,976,994

	Earnings per share, net income					$ 4.06

CROSSROADS SYSTEMS, INC.
Supplemental Schedule - Consolidated Income Statement
For the Quarter Ended October 31, 2018

				Crossroads	CPF	Consolidated
				October 31, 2018	October 31, 2018	October 31, 2018
	Revenue:
		Interest income		$ -	$ 2,689,860	$ 2,689,860
		Property sales		-	4,076,000	4,076,000
		Other revenue			7,894	7,894
			Total revenue	-	6,773,754	6,773,754

	Cost of revenue:
		Interest expense		-	1,210,311	1,210,311
		Cost of properties sold		-	3,245,438	3,245,438
			Total cost of revenue	-	4,455,749	4,455,749

	Gross Profit			-	2,318,005	2,318,005

	Operating expenses:
		General and administrative		260,247	225,366	485,613
		Salaries and wages		372,921	676,505	1,049,426
			Total operating expenses	633,167	901,871	1,535,038

	Income (Loss) from operations			(633,167)	1,416,134	782,967

	Other income (expense):
		Interest (expense) income		(316,090)	-	(316,090)
		Other (expense) income		-	9,516	9,516
	Total other income (expense)			(316,090)	9,516	(306,573)

	Income before provision for income taxes			(949,257)	1,425,650	476,394

		Income tax provision		21,665,286	-	21,665,286
	Net Income (Loss)			$ 20,716,029	$ 1,425,650	$ 22,141,680


	Fully diluted outstanding shares					5,976,994

	Earnings per share, net income					$ 3.70

Shareholder Report for
the Fiscal Year Ended
October 31, 2018

Crossroads Systems, Inc.

Delaware	74-284664
(State of Incorporation)	(IRS Employer Identification No.)

8214 Westchester Drive
Suite 950
Dallas, TX 75225
(Address of principal executive office)

(214) 999-0149
(Company's telephone number)

Common Stock
$0.001 Par Value
Trading Symbol: CRSS
Trading Market: OTC Pink Open Market

75,000,000 Common Shares Authorized

5,969,754 Shares Issued and Outstanding as of December 19, 2017

Dear Shareholder:

We have culminated the first fiscal year of the Crossroads and Capital Plus Financial ("CPF") relationship. As indicated in prior quarters, our goal was to wind down all legacy expenses of the former iteration of Crossroads which we are proud to say has been achieved. The fiscal year ending results contain one time and transactional expenses, but we expect 2019 to be a full fiscal year end with Capital Plus Financials' results exclusively driving profitability and delivering shareholder value.

CPF is a Certified Community Development Financial Institution ("CDFI") that serves low to moderate-income Hispanic populations in Texas. We help make help the dream of homeownership a reality. The company has two key revenue streams. The first is from the sale of homes it has purchased for rehabilitation. CPF buys a home and then invests in improvements. Ultimately, CPF sells a newly rehabilitated home within a three to six month period at an affordable price. This creates the "Property Sales" on our income statement. The second revenue source is from our long term, fixed mortgage portfolio. Typically when we sell a rehabilitated home, our buyer will provide an equity down-payment and CPF will provide a mortgage for the purchase. This generates our "Interest Income" revenue. We are mindful of the importance of delivering an affordable house in densely urban areas close to where our borrowers work. We are happy to report that the average sales price of our homes continues to be under $150,000. Our mortgage portfolio is comprised of first-time home buyers, and in over 60% of the cases, first time credit recipients. We believe the risk associated with these borrowers is mitigated by their history of debt aversion. Plainly said, those who have shown the financial discipline to operate without debt should be rewarded and not punished as is often the case with a zero credit score borrower attempting to qualify for a mortgage. Each borrower is manually underwritten, and all are given the opportunity to demonstrably prove their ability to repay. A 43% debt to income ("DTI") ratio is the maximum ratio for approved mortgages, but the average DTI ratio in our portfolio is 24%, further reinforcing the quality of our borrowers. All mortgages are originated in house and are Qualified Mortgages (QM).

The company uses credit facilities to finance its inventory and mortgage portfolio. We are fortunate to have supportive banking relationships with community banks who partner with us to deliver Community Reinvestment Act ("CRA") solutions. Through long term borrowings, the balance sheet is managed carefully to reduce interest rate exposure. The Hispanic demographic continues to grow as does the demand for affordable housing. We feel uniquely qualified, with decades of experience and a Latino led staff, to serve this growth and demand.

Run by a former banker, the operations of the company reflect a bank-like discipline to underwriting, financial and performance ratios and REO management. Foreclosures rates have averaged approximately 2.25% over the last three years. Unlike traditional financial institutions, Capital Plus Financial has expertise in managing and repositioning REO. Because of this, the company has historically not experienced any losses as a result of defaulted mortgages. Outside of normal regulatory examinations, the company undergoes self-imposed annual compliance and loan reviews by a bank auditing firm as well as annual fair lending and servicing audits.

Although the fourth quarter brought strong loan portfolio growth, we are not immune to the macro housing conditions, and the company experienced lower than expected sales growth. We are also aware of the impact a rising rate environment will have to our balance sheet. While we understand the challenges on the REO and finance company sides, we also see both as opportunities. For years, the company has had to compete with the ubiquitous distressed home purchase-to-rent strategies in our markets, which has put pricing pressure on our front end home purchases. We are seeing those competitors leave the market, stabilizing our inventory purchase prices. Additionally, we historically have experienced higher levels of activity from mortgage companies soliciting our borrowers to refinance. More recently, mortgage firms focused on refinancing have begun to exit the markets in which we operate, which should preserve our portfolio balances. As we enter Q1 2019, we are focused on building inventory to have ready for sale during our second and third quarters, the busy Spring sales season.

For the fiscal year ended October 31, 2018, the company reported net income of $24.3 million or $4.06 per share. This increase in income was primarily related to the deferred tax gain of $21.7 million recorded in the year due to our ability to show profitability. We are confident that this tax asset will be accretive to earnings for many years to come. On an adjusted basis, net income is $4.9 million resulting from the wind down legacy patent business which incurred operating expenses of approximately $2.2 million. These are all non-recurring expenses for 2018. Outside of interest expense at Crossroads for the CPF acquisition, the operating expenses at the holding company are related to audit and tax preparation as well as expenses associated with being public. On a consolidated basis, but almost exclusively from CPF on a go forward basis, normalized adjusted earnings for the fiscal year ended October 31, 2018 were $.82 per share. A table of the adjustments and one-time items is shown below.

Normalized adjusted earnings for the year ended October 31, 2018	$	EPS
Net income as reported	$ 24,291,301	$ 4.06
Less back: Deferred tax gain	(21,665,286)	( 3.62)
Add back:
Transaction costs	590,753	0.10
Severance costs	1,229,668	0.21
Crossroads related charge-offs	439,593	0.07
Adjusted Net operating income	$ 4,886,029	$ 0.82

With the company's stronger earnings, both Crossroads and CPF demonstrate strong leverage and cash coverage ratios which are of particular emphasis to its lenders. At October 31, 2018, CPF's debt service coverage (leverage) ratio was 4.02 and its cash coverage ratio, adjusted for one-time and transaction expenses, was 3.12.

Looking to the future, Crossroads and CPF look to grow the mortgage portfolio organically by $20-$25 million per year in our existing markets of Dallas, Fort Worth, Houston and San Antonio. We are also exploring new markets to enter as well as potential acquisitions. As mentioned in our last quarterly letter, CPF is also exploring methods to lower its cost of capital through various programs available to CDFI's.

Finally, we invite you to visit our website, http://www.crossroads.com , for a formal presentation of the business. Shareholders should take comfort knowing that management and insiders own 77.5% of the outstanding shares and are aligned in building long term value. We continue to look for ways to positively impact our communities. In closing, thank you for your support of Crossroads.

Saludos Cordiales,

Robert H. Alpert & Eric A. Donnelly

SOURCE Crossroads Systems

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