Crossroads: Fiscal 3Q14 Financial Results

Net loss higher than revenue

This is a Press Release edited by StorageNewsletter.com on September 10, 2014 at 2:57 pm

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(in US$ million)	3Q13	3Q14	9 mo. 13	9 mo. 14
Revenues	2,8	2.1	9.1	8.5
*Growth*		-25%		*-6%*
Net income (loss)	(2.9)	(2.2)	(10.0)	(7.3)

Crossroads Systems, Inc. reported financial results for its fiscal third quarter ended July 31, 2014.

Revenue for fiscal Q3 2014 was $2.1 million, a decrease of 25% from $2.8 million in the same quarter a year ago.

The decrease is primarily attributable to a decrease in the company’s OEM SPHiNX business. StrongBox revenue also decreased compared to Q3 2013, which included one-time payments from both FujiFilm and Iron Mountain for custom development agreements.

Gross profit for fiscal Q3 2014 was $1.7 million, or 79% of total revenue, as compared to $2.1 million, or 75% of total revenue, in the same quarter a year ago.

Operating expenses for fiscal Q3 2014 totaled $3.4 million as compared to $5.7 million in the same period a year ago, a decrease of 41%, due to employee and operating expense reductions. The company has continued to closely monitor expenses resulting in an additional $0.3 million decrease from Q2 2014 to Q3 2014.

Net loss available to common stockholders for fiscal Q3 2014 totaled $2.4 million or $0.16 loss per share, compared to a net loss available to common stockholders of $4.1 million or $0.34 loss per share in the same quarter a year ago.

At July 31, 2014, cash and cash equivalents decreased $3.6 million to $7.1 million from $10.7 million in the previous quarter.

Payments to Fortress this quarter totaled $3.0 million, including an optional principal payment of $2.0 million.

Richard K. Coleman, Jr., president and CEO, Crossroads, said: “Crossroads completed pivotal product enhancements this quarter and StrongBox is now well positioned as a unique enterprise storage solution for virtually any storage environment. Despite declines in our legacy OEM product sales, we are confident that the future revenues from StrongBox, combined with our considerable IP licensing opportunity and protection from taxation by our $128 million NOL, will provide strong returns for our investors.”

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Abstracts of the earnings call transcript:

Rick Coleman, president and CEO:
"As expected, revenues from our legacy products, SPHiNX and RVA, have continued well below our fiscal year 2014 financial plan due to the significant HP OEM revenue setbacks we discussed last quarter. The HP OEM sales reduction was related to HP's change in direction and movement to a replacement product, and we now know the associated revenue reduction is permanent.
"Our 972 patent family lawsuits are progressing as anticipated and we are well into the analysis of our non-972 patents, which we believe impact the share of over $82 billion of storage industry revenue.
"In the last three months, we've trained 73 sales professionals and 66 solutions architects on how to position, sell, and install the StrongBox NAS. In the third quarter, we continued to win impressive StrongBox accounts particularly where we have been historically strong in higher education, research and media and entertainment.
"Notable sales in the quarter included Ithaca College, Massasoit Community College, Toyota's Calty Research Center, the Tennis Channel and Telethon Health, an Australian-based research institute sold in partnership with Hitachi Data Systems.
"We also landed new prestigious SPHiNX accounts, including Meritage Homes, the ninth largest public homebuilder in the United States and Bright House Networks, the sixth largest owner and operator of cable systems.
"At the beginning of the quarter, Crossroads had active lawsuits against seven defendants, Oracle, NetApp, Cisco, Quantum, Dell, Huawei and Dot Hill.
"In pre-trial discovery, we were able to affirm that the products sold by Dell were actually manufactured by NetApp and Quantum. So we dismissed the case against Dell. Naturally that product revenue will now be part of the infringement cases against NetApp and Quantum. As expected, all of the defendants are aggressively attempting to reduce their liability exposure through every means possible.
"In IP litigation, this includes trying to invalidate patents by requesting an inter partes review by the U.S. Patent and Trademark Office, trying to convince the presiding judge to construe the patent claims in favor of the defendants' non-infringement arguments at the Markman hearing, and finally trying to convince the jury at trial of non-infringement patent invalidity and limited damages. Our Markman hearing for all defendants is scheduled for October 6 and 7 and we hope to have the judge's ruling on claim construction before the end of the year.
"To-date, there have been seven requests by various combinations of Oracle, NetApp, Cisco, Quantum and Huawei for the USPTO's Patent Trial and Appeal Board to review Crossroads' patents in an inter partes review. It will likely be several months before the Board decides whether to hear those cases. You may recall that the 035 and other patents in the 972 patent family previously underwent reexamination before the U.S. Patent and Trademark Office in 2004.
"This isn't our first foray in the federal district court nor are we seeking our first set of companies to license these patents. Just as a reminder, these patents have generated over $61 million in revenue in settlements and out of court licenses. 51 companies have licensed patents from Crossroads. 17 of those companies licensed our patents without litigation. 34 companies have taken licenses as a result of successful litigation related settlements. We have brought 13 distinct lawsuits including the six current lawsuits against Oracle, NetApp, Cisco, Quantum, Huawei and Dot Hill. All of these suits have been filed in the Western District Court of Texas."

Jennifer Crane, CFO:
"HP OEM SPHiNX revenue declined $424,000 from the third quarter of 2013. As we mentioned last quarter, we expect our HP product revenues to continue to decline as HP transitions to their own virtual tape platform.
"We forecasted our HP OEM SPHiNX maintenance revenue, which was $766,000 this quarter, to decrease only modestly.
"The second factor negatively affecting our Q3 year-over-year revenue comparison is the absence of custom development revenue. In Q3 of 2013, Crossroads recognized $229,000 from FujiFilm and $158,000 from Iron Mountain.
"Quarter-over-quarter, the revenue decline was primarily attributable to a $149,000 decline in HP OEM SPHiNX revenue and the absence of custom development revenue that had contributed $200,000 in the previous quarter. These decreases were partially offset by $179,000 increase quarter-over-quarter in IP license revenue."