STOCKHOLDERS' EQUITY | 6 Months Ended |
Apr. 30, 2014 |
Stockholders Equity Note [Abstract] | ' |
Stockholders' Equity Note Disclosure [Text Block] | ' |
8. STOCKHOLDERS’ EQUITY |
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2010 Private Placement |
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On October 23, 2010 the Company sold 3,125,000 shares of its common stock at $3.20 per share for gross proceeds to the Company of $ 10.0 million. In conjunction with this private placement, the Company also issued warrants to purchase an additional 1,074,212 shares of common stock with an exercise price of $3.20 per share. Fees in the amount of $0.8 million relating to the stock placement were netted against proceeds. The warrants were valued at $1.3 million using the Black-Scholes model. The Black-Scholes inputs used were: expected dividend rate of 0%, expected volatility of 63%, risk free interest rate of 1.47%, and expected term of 5 years. The warrants were exercisable immediately upon issue, and expire October 22, 2015. As of April 30, 2014, there were 949,034 warrants outstanding. |
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Iron Mountain Private Placement |
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On July 31, 2012, the Company issued and sold to Iron Mountain Incorporated (“IRM”) 582,524 shares of its common stock at $5.15 per share, for an aggregate purchase price of $3 million. The Company also entered in a registration rights agreement with IRM, pursuant to which the Company agreed to prepare and file a registration statement with the Securities and Exchange Commission (“SEC”) at IRM’s request, no later than sixty days following such request, and to keep it continuously effective until the shares covered by the registration statement have been sold or become eligible for sale pursuant to SEC Rule 144 without restriction on the volume of securities that may be sold in any single transaction, assuming for this purpose that the security holders are not affiliates of the Company. The shares were registered with the SEC in fiscal year 2013. |
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2013 Private Placement |
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On March 22, 2013, the Company entered into a securities purchase agreement with certain accredited investors for the issuance and sale in a private placement of 4,231,154 units at a purchase price of $2.0625 per unit, valued at $8.6 million, for net proceeds of approximately $7.9 million after related expenses. Each unit consists of one share of cumulative 5.0% Series F convertible preferred stock, par value $0.001 per share and a warrant to purchase one-half of a share of common stock equal per share of convertible preferred stock purchased, at an exercise price of $2.00 per whole share, subject to certain adjustments, resulting in the issuance of warrants to purchase an additional 2,282,754 shares of common stock with an exercise price of $2.00 per share. The convertible preferred stock ranks senior to the common stock and each other class or series of the Company’s capital stock, whether common, preferred or otherwise, with respect to distributions of dividends and distributions upon liquidation, dissolution or winding up of the Company. The warrants were initially valued using the Black-Scholes pricing model at approximately $2,284,000. The relative fair value of these warrants totaling $1,543,000 was initially allocated to additional paid in capital. The Black-Scholes inputs used were: expected dividend rate of 0 %, expected volatility of 63%, risk free interest rate of 0.82 %, and expected term of 5 years. This valuation resulted in a beneficial conversion feature on the convertible preferred stock of approximately $1,090,000. This amount was recorded, upon issuance, as a deemed dividend. Fees in the amount of $0.7 million relating to the stock placement were netted against proceeds. The warrants were exercisable immediately upon issue, and expire March 22, 2018. Stock dividends valued at $ 106,000 were issued in fiscal year 2013, by issuing 57,097 shares of common stock. During the three months ended January 31, 2014, the Company issued 150,703 dividend common shares valued at approximately $366,000. The next dividend is due June 30, 2014. |
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The warrants related to the Series F Preferred Shares were revalued at October 31, 2013 using the Black-Scholes pricing model at approximately $772,000. The dynamic Black-Scholes inputs used were: expected dividend rate of 0%, expected volatility of 65%, risk free interest rate of 1.10%, and expected term of 4.4 years. Upon the expiration of the ratchet, the warrant liability was $0. |
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The convertible preferred stock has the rights, qualifications, limitations and restrictions set forth in the Certificate of Designation (the “Certificate of Designation”) filed with the Secretary of State of the State of Delaware on March 28, 2013. The Certificate of Designation authorizes issuance of up to 4,500,000 shares of convertible preferred stock, with 3,750,000 shares designated as “Sub-Series F-1” and 750,000 shares designated as “Sub-Series F-2.” The right of holders of convertible preferred stock to convert the convertible preferred stock is subject to a 9.99% beneficial ownership limitation for holders of Sub-Series F-1 and a 4.99% beneficial ownership limitation for holders of Sub-Series F-2. Such beneficial ownership limitations may be increased or decreased by a holder of Sub-Series F-1 to any percentage not in excess of 19.99% after providing notice of such increase or decrease to the Company. For as long as at least 90% of the aggregate number of shares of Sub-Series F-1 issued on the Original Issue Date are outstanding, the holders of such Sub-Series F-1, voting as a single class, will be entitled to elect two directors of the Company. If less than 90%, but at least 20%, of such shares of Sub-Series F-1 are outstanding, such holders, voting as a single class, will be entitled to elect one director of the Company. As of the date hereof, less than 90% of the aggregate number of shares of Sub-Series F-1 are outstanding, as the remainder have been voluntarily converted into common stock at the option of the holders. Therefore, the holders of the Sub-Series F-1 shares are entitled to elect one director to the board of directors. The holders of Sub-Series F-2 will not be entitled to vote on the directors elected by the holders of Sub-Series F-1. The holders of shares of the convertible preferred stock are entitled to a liquidation preference equal to the original issuance price plus any unpaid dividends. |
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The Certificate of Designation contains customary anti-dilution protection for proportional adjustments (e.g. stock splits). The Series F convertible preferred stock previously included an anti-dilution provision that would adjust the conversion price of the Series F convertible preferred stock to the issue price of any equity securities the Company issued at a price less than $2.0625 per share, subject to certain exceptions. This type of provision is commonly referred to as a “full-ratchet” anti-dilution provision. This “full-ratchet” provision is no longer in effect as it was removed from the Certificate of Designation on March 14, 2014 by the requisite approval of the holders of shares of the Company’s common stock and Series F convertible preferred stock. |
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The full ratchet anti-dilution provisions in the Company’s convertible preferred stock and warrants issued in its March 2013 private placement (discussed above) were not in effect until those provisions were approved by a vote of the Company’s stockholders at its 2013 annual meeting held on June 21, 2013. Upon approval of these provisions the warrants were reclassified as a derivative liability and recorded at fair value. Also upon approval of the full ratchet anti-dilution provision the Series F convertible preferred stock were potentially convertible into more shares of common stock than currently authorized, therefore those shares were classified in temporary equity. Upon the expiration of the full ratchet anti-dilution provisions in March 2014, the Company reclassified the preferred stock and warrants to permanent stockholders' equity following the stockholders vote described in the preceding paragraph. |
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In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity as approved by shareholders, the convertible preferred shares were accounted for net outside of stockholders’ equity at $6.4 million with the warrants accounted for as liabilities at their fair value of $0.8 million as of October 31, 2013. The ratchet included with the warrants expired during the second quarter of 2014 and as a result the value of the derivative warrant liability was $0 as of April 30, 2014. |
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In the event the convertible preferred shares are redeemed, any redemption price in excess of the carrying amount of the convertible preferred stock would be treated as a dividend. During the six months ended April 30, 2014, there were 447,457 shares of Series F Preferred shares converted to common shares. |
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The Company filed a registration statement to register these securities on Form S-1 on May 10, 2013 with the Securities and Exchange Commission (“SEC”). |
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Dividends on the Series F convertible preferred stock will accrue at an annual rate of 5.0% of the original issue price and will be payable on a semi-annual basis. The convertible preferred ranks senior to the common stock and each other class or series of the Company’s capital stock, whether common, preferred or otherwise, with respect to distributions of dividends and distributions upon liquidation, dissolution or winding up of the Company. Pursuant to a registration rights agreement entered into with the purchasers of the Series F convertible preferred stock, in the event that a registration statement for the resale of the common stock underlying the convertible preferred stock and March 2013 warrants was not declared effective prior to July 26, 2013 (120 days from the closing of the March 2013 private placement), then the rate at which dividends accrued on the convertible preferred stock would be increased to an annual rate of 12.0% from that date until such time as a registration statement is declared effective, at which time the dividend rate reverts to an annual rate of 5.0%. The registration statement was not declared effective by July 26, 2013, and as a result the dividend rate on the convertible preferred stock increased to an annual rate of 12.0%, until September 19, 2013 when it was declared effective. The Company may elect to satisfy the obligation to pay semi-annual dividends in cash, by distribution of common stock or a combination thereof, in the Company’s discretion. |
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On February 28, 2013, in connection with the 2013 Private Placement, the Company issued convertible promissory notes to two investors, in the aggregate principal amount of $550,000. Pursuant to the terms of the notes, both note holders had the right to convert the outstanding amounts under their notes into Series F convertible preferred stock shares at a discount of 15% to the issue price of the Series F convertible preferred stock. This resulted in a beneficial conversion feature of $107,000. Each note holder exercised this right and received 188,235 Series F convertible preferred stock shares, in the case of the note holder converting $330,000 of promissory notes and interest, and 156,863 Series F convertible preferred stock shares, in the case of note holder converting $275,000 of promissory notes and interest. |
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2013 Fortress Credit Agreement |
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As discussed in Note 6, on July 22, 2013 the Company issued warrants to purchase 1,454,545 shares of its common stock to Fortress at $2.0625 per share. To derive an estimate of the fair value of these warrants, the Company utilized a dynamic Black Scholes Merton formula that computes the impact of share dilution upon the exercise of the warrant shares. This process relies upon inputs such as shares outstanding, estimated stock prices, strike price and volatility assumptions to dynamically adjust the payoff of the warrants in the presence of the dilution effect. The Fortress Warrant was recorded at a fair value of $1,374,000 or $ 1.0625 per underlying warrant share. |
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The Fortress Warrant is exercisable on or after October 22, 2013 and will expire on the seventh anniversary of the effective date of the Fortress Transactions. If the Fortress Warrant is exercisable and there is no effective Registration Statement registering, or no current prospectus available for, the resale of the shares of common stock issuable upon exercise of the Fortress Warrant, then the Fortress Warrant may also be exercised at such time by means of a “cashless exercise,” determined according to the terms of the Fortress Warrant. |
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The Fortress Warrants included what is commonly referred to as “full-ratchet” anti-dilution protection, which provision would only have gone into effect if approved by the Company’s stockholders at its 2014 annual meeting of stockholders. Subject to stockholder approval, if, prior to the earlier to occur of (A) twelve months following the warrant, issuance date of July 22, 2013 and (B) the date on which the Company indicates a positive earnings per share in its public disclosure, the Company issued or was deemed to have issued additional shares of Common Stock without consideration or for a consideration per share less than the applicable exercise price, which is initially $2.0625 per share, then the exercise price of the Fortress Warrant would have been reduced, concurrently with such issue, to the consideration per share received by the Company for such issue or deemed issue of the additional shares of common stock. |
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On January 23, 2014, Crossroads Systems, Inc. entered into an Amendment to the Fortress Warrants with CF DB EZ LLC, which is an affiliate of Fortress. The sole purpose of this amendment was to remove the “full-ratchet” anti-dilution provision of the warrant that Crossroads issued to Fortress. |
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2014 Private Placement |
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On March 31, 2014 the Company sold 1,986,622 units at $2.2565 per unit for gross proceeds to the Company of $ 4.5 million. Each unit consists of one share of common stock and a warrant to purchase one-half of a share of common stock. The warrants to purchase 993,311 shares of common stock have a weighted average exercise price of $2.45 per share. Fees in the amount of $0.2 million relating to the stock placement were netted against proceeds. The warrants were valued at $1.1 million using the Black-Scholes model. The Black-Scholes inputs used were: expected dividend rate of 0%, expected volatility of 74%, risk free interest rate of 1.64%, and expected term of 2.5 years. The warrants were exercisable upon the six-month anniversary of issue, and expire March 31, 2019. As of April 30, 2014, there were 993,311 warrants outstanding. |
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As a result of credit, common stock and preferred stock transactions, the Company has the following common stock warrants outstanding at April 30, 2014: |
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Warrants Outstanding | | | | | | | | | | | | | | | | | | | |
Warrant Transaction | | Warrants | | Weighted | | | | | | | | | | | | | |
Outstanding | Average Exercise | | | | | | | | | | | | |
| Price | | | | | | | | | | | | |
2010 Private Placement | | | 949,034 | | $ | 3.2 | | | | | | | | | | | | | |
2013 Private Placement | | | 2,129,774 | | $ | 2 | | | | | | | | | | | | | |
2013 Fortress Credit Agreement | | | 1,454,545 | | $ | 2.06 | | | | | | | | | | | | | |
2014 Private Placement | | | 993,311 | | $ | 2.45 | | | | | | | | | | | | | |
Total Warrants | | | 5,526,664 | | | | | | | | | | | | | | | | |
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A rollforward of activity in stockholders equity is presented in the following table as of April 30, 2014 (in thousands, unaudited): |
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| | | | | | | | Additional | | | | | Accumulated | | Total | |
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Other Comprehensive | | Stockholders' | |
| | Amount | | Amount | | Capital | | Deficit | | Loss | | Equity (Deficit) | |
Balance at October 31, 2013 | | $ | - | | $ | 12 | | $ | 208,702 | | $ | -216,578 | | $ | -51 | | $ | -7,915 | |
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Transfer preferred stock from temporary equity | | | 4 | | | - | | | 6,390 | | | - | | | - | | | 6,394 | |
Stock based compensation, options and warants | | | - | | | 1 | | | 1,977 | | | - | | | - | | | 1,978 | |
Expiration of derivative liability | | | - | | | - | | | 3,322 | | | - | | | - | | | 3,322 | |
Common stock dividends issued to preferred shareholders | | | - | | | - | | | 366 | | | -366 | | | - | | | - | |
Sale of common stock | | | - | | | 2 | | | 4,334 | | | - | | | - | | | 4,336 | |
Foreign currency translation adjustment | | | - | | | - | | | - | | | - | | | 3 | | | 3 | |
Net loss | | | - | | | - | | | - | | | -5,073 | | | - | | | -5,073 | |
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Balance at April 30, 2014 | | $ | 4 | | $ | 15 | | $ | 225,091 | | $ | -222,017 | | $ | -48 | | $ | 3,045 | |
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