UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-30362
CROSSROADS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2846643
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8300 NORTH MOPAC EXPRESSWAY
AUSTIN, TEXAS 78759
(Address of Registrant's principal executive offices, including zip code.)
(512) 349-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) [ ] Yes [X] No
As of June 8, 2004 Registrant had outstanding 25,236,617 shares of common
stock, par value $0.001 per share.
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED APRIL 30, 2004
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of October 31, 2003 and
April 30, 2004................................................... 2
Condensed Consolidated Statements of Operations for the three and
six months ended April 30, 2003 and 2004......................... 3
Condensed Consolidated Statements of Cash Flows for the six months
ended April 30, 2003 and 2004.................................... 4
Notes to Condensed Consolidated Financial Statements............... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 32
Item 4. Controls and Procedures............................................ 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 33
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities................................................ 33
Item 3. Defaults Upon Senior Securities.................................... 33
Item 4. Submission of Matters to a Vote of Security Holders................ 33
Item 5. Other Information.................................................. 34
Item 6. Exhibits and Reports on Form 8-K................................... 34
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
OCTOBER 31, APRIL 30,
2003 2004
---- ----
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 14,707 $ 20,782
Short-term investments ................................................. 16,670 10,763
--------- ---------
Total cash, cash equivalents and short-term investments ........... 31,377 31,545
Accounts receivable, net of allowance for doubtful
accounts of $164 and $170, respectively ........................... 2,994 2,980
Inventories, net ....................................................... 1,633 1,631
Prepaids and other current assets ...................................... 1,274 610
--------- ---------
Total current assets .............................................. 37,278 36,766
Property and equipment, net .................................................. 3,299 2,621
Other assets ................................................................. 288 291
--------- ---------
Total assets ...................................................... $ 40,865 $ 39,678
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 1,953 $ 2,144
Accrued expenses ....................................................... 2,470 2,179
Accrued warranty costs ................................................. 802 779
Deferred revenue ....................................................... 382 358
--------- ---------
Total current liabilities ......................................... 5,607 5,460
Commitments and contingencies
Minority interest ............................................................ - 215
Stockholders' equity:
Common stock, $.001 par value, 175,000,000 shares authorized, 24,368,144
and 25,188,402 shares issued and outstanding, respectively ........ 24 25
Additional paid-in capital ............................................. 182,831 183,241
Deferred stock-based compensation ...................................... (126) (30)
Accumulated deficit .................................................... (147,471) (149,233)
--------- ---------
Total stockholders' equity ........................................ 35,258 34,003
--------- ---------
Total liabilities and stockholders' equity ........................ $ 40,865 $ 39,678
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
2
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------------- ----------------------------
2003 2004 2003 2004
---- ---- ---- ----
Revenue:
Product ................................. $ 8,142 $ 4,690 $ 17,703 $ 9,631
Royalty and other ....................... 437 2,735 548 4,919
------------ ------------ ------------ ------------
Total revenue ................. 8,579 7,425 18,251 14,550
Cost of revenue:
Product ................................. 5,139 2,150 11,470 4,629
Royalty and other ....................... 49 81 147 117
------------ ------------ ------------ ------------
Total cost of revenue ......... 5,188 2,231 11,617 4,746
------------ ------------ ------------ ------------
Gross profit .................................. 3,391 5,194 6,634 9,804
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ..................... 990 1,244 2,015 2,384
Research and development ................ 2,999 3,080 6,138 6,101
General and administrative .............. 1,503 1,318 3,147 2,700
NexQL research and development .......... - 451 - 721
Business restructuring .................. (140) (62) (140) (114)
Amortization of intangibles ............. - - 173 -
------------ ------------ ------------ ------------
Total operating expenses ...... 5,352 6,031 11,333 11,792
------------ ------------ ------------ ------------
Loss from operations .......................... (1,961) (837) (4,699) (1,988)
Other income, net ....................... 143 105 304 226
------------ ------------ ------------ ------------
Net loss ...................................... $ (1,818) $ (732) $ (4,395) $ (1,762)
============ ============ ============ ============
Basic and diluted net loss per share .......... $ (0.08) $ (0.03) $ (0.18) $ (0.07)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per share .............. 24,147,186 25,169,405 24,625,775 24,931,730
============ ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
APRIL 30,
--------------------
2003 2004
---- ----
Cash flows from operating activities:
Net loss ............................................................. $ (4,395) $ (1,762)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation ..................................................... 1,964 1,325
Business restructuring expenses .................................. - (114)
Amortization of intangibles ...................................... 173 -
Gain/loss on disposal of fixed assets ............................ 61 -
Impairment charge on investment in privately-held company ........ - 721
Stock-based compensation ......................................... 758 95
Provision for doubtful accounts receivable ....................... (58) 66
Provision for excess and obsolete inventory ...................... 248 80
Changes in assets and liabilities:
Accounts receivable .............................................. 2,371 167
Inventories ...................................................... (541) (78)
Prepaids and other current assets ................................ (319) 664
Accounts payable ................................................. 136 904
Accrued expenses and other ....................................... (902) (298)
-------- --------
Net cash provided by (used in) operating activities ......... (504) 1,770
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ................................... (581) (549)
Purchase of held-to-maturity investments ............................. (11,248) (8,065)
Maturity of held-to-maturity investments ............................. 15,676 13,973
Investment in privately-held company ................................. - (721)
Payment of note receivable from stockholders ......................... 126 -
-------- --------
Net cash provided by investing activities ................... 3,973 4,638
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................... 52 410
Change in book overdraft ............................................. - (806)
Purchase of common stock under open market stock purchase program .... (1,848) -
-------- --------
Net cash used in financing activities ....................... (1,796) (396)
-------- --------
Net increase in cash and cash equivalents .................................. 1,673 6,012
Cash and cash equivalents due to consolidation of NexQL .................... - 63
Cash and cash equivalents, beginning of period ............................. 14,723 14,707
-------- --------
Cash and cash equivalents, end of period ................................... $ 16,396 $ 20,782
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
4
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying Condensed Consolidated
Financial Statements of Crossroads Systems, Inc. (collectively with its
wholly-owned subsidiaries, Crossroads or the Company) include all adjustments,
consisting only of normal recurring items, necessary to present fairly its
financial position as of October 31, 2003 and April 30, 2004, its results of
operations for the three and six month periods ended April 30, 2003 and 2004 and
its cash flows for the six months ended April 30, 2003 and 2004. Certain
reclassifications have been made to prior year amounts in order to conform to
the current year presentation. The results of operations for the three and six
months ended April 30, 2004 are not necessarily indicative of results that may
be expected for any other interim period or for the full year. The Company
adopted new accounting guidance that required consolidation of the balance sheet
of NexQL as of April 30, 2004. The statement of operations and cash flows will
be consolidated commencing May 1, 2004.
The accompanying financial data as of April 30, 2004 and for the three and
six month periods ended April 30, 2003 and 2004, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the SEC). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
SEC's rules and regulations. These unaudited financial statements should be read
in conjunction with the audited financial statements and related notes for the
year ended October 31, 2003, included in our Annual Report on Form 10-K.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
Product revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or determinable,
collectibility is probable and the risk of loss has passed to the customer.
Revenue from product sales to customers that do not have rights of return,
including product sales to Original Equipment Manufacturers (OEMs) and certain
distributors, Value Added Resellers (VARs) and system integrators, are
recognized upon shipment or when title transfers. Sales and cost of sales
related to customers that have rights of return are deferred and subsequently
recognized upon sell-through to end-users.
Royalty and other revenue includes, revenue from the licensing of
intellectual property (IP), royalty payments from Hewlett-Packard (HP) and sales
of service contracts. IP licensing arrangements can differ, but typically
consist of upfront non-refundable fees including payments relating to past and
future sales of licensee products. Once a license agreement is signed, delivery
of the license has occurred and there are no remaining obligations outstanding,
the Company records revenue from upfront nonrefundable IP license arrangements.
Revenue from royalty payments from HP is recognized monthly based on reports
from HP and service revenue is recognized ratably over the service period.
NexQL Research and Development
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51"
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. VIEs created after January 31, 2003, but
prior to January 1, 2004, may be accounted for either based on the original
interpretation or the Revised Interpretations. However, the Revised
Interpretations must be applied no later than the second quarter of fiscal year
2004. VIEs created after January 1, 2004 must be accounted for under the Revised
Interpretations.
5
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has a minority equity interest in NexQL. In connection with
the adoption of the Revised Interpretations of FIN 46 (FIN 46R), the Company
concluded that NexQL is a VIE and that the Company is the primary beneficiary.
Pursuant to the provisions of FIN 46R, the Company consolidated the balance
sheet of NexQL as of April 30, 2004 and will consolidate the statements of
operations and cash flows effective May 1, 2004. Accordingly, NexQL operating
results were accounted for under the equity method of accounting for the three
and six months ended April 30, 2004.
Management believes that recognition of additional liabilities as a result
of consolidating NexQL does not result in any incremental increase in the level
of claims on the general assets of the Company and its other subsidiaries,
rather, the additional liabilities represent claims against the additional
assets recognized by the Company as a result of the consolidation. Conversely,
the additional assets recognized as a result of consolidating NexQL do not
represent additional assets of the Company that could be used to satisfy claims
by the creditors of the Company and its other subsidiaries.
During the first fiscal quarter of 2004, the Company entered into a
strategic relationship with NexQL. Pursuant to certain agreements with NexQL,
the Company may provide NexQL with up to $1.5 million under a loan facility,
over a discretionary time period, and will make an equity investment of $1.0
million. During the six months ended April 30, 2004, the Company had invested
$0.7 million in NexQL. The Company monitored its investment in NexQL for
impairment during the six months ended April 30, 2004 and made a reduction in
its carrying value and recorded an impairment charge based on the financial
condition and near-term prospects of NexQL. This impairment charge, including
the Company's percentage of losses, is included in the caption NexQL research
and development in the condensed consolidated statement of operations. The
Company's impairment charge, including percentage of losses, on its investment
in NexQL was approximately $0.5 million and $0.7 million for the three and six
months ended April 30, 2004, respectively. The investment in NexQL has inherent
risk as the markets for the technologies or products of NexQL are in the early
stages of development and may never materialize.
Stock-Based Compensation
As of April 30, 2004, the Company has one employee stock-based
compensation plan, which is described more fully in Note 9 of our Annual Report
on Form 10-K. Stock-based compensation is recognized using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair value of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock amortized over the vesting period.
The Company allocates stock-based compensation to specific line items
within the condensed consolidated statements of operations based on the
classification of the employees who receive the benefit. Stock-based
compensation was recorded as follows (in thousands):
HREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------- -----------------
2003 2004 2003 2004
---- ---- ---- ----
Cost of revenue ........................ $ 8 $ 1 $ 20 $ 2
Sales and marketing .................... 33 - 110 -
Research and development ............... 78 15 172 36
General and administrative ............. 147 19 456 57
---- ---- ---- ----
Total stock-based compensation.... $266 $ 35 $758 $ 95
==== ==== ==== ====
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
6
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," to employee stock-based compensation
(in thousands, except share data):
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- --------------------
2003 2004 2003 2004
-------- -------- -------- --------
Net loss, as reported ......................... $ (1,818) $ (732) $ (4,395) $ (1,762)
Stock-based employee compensation
expense included in reported net loss.... 266 35 758 95
Stock-based employee compensation
expense determined under fair value
based method for all awards ............. (2,882) (1,655) (7,977) (5,267)
-------- -------- -------- --------
Pro forma net loss ............................ $ (4,434) $ (2,352) $(11,614) $ (6,934)
======== ======== ======== ========
Net loss per share:
Basic and diluted - as reported ......... $ (0.08) $ (0.03) $ (0.18) $ (0.07)
Basic and diluted - pro forma ........... $ (0.18) $ (0.09) $ (0.47) $ (0.28)
Warranty Costs
The Company provides for the estimated cost to repair or replace products
under warranty and technical support costs when the related product revenue is
recognized. The Company warrants products for a period from 12 to 39 months
following the sale of its products. A reserve for warranty costs is recorded
based upon the historical level of warranty claims and management's estimate of
future costs.
2. INVENTORIES
Inventories, net consist of the following (in thousands):
OCTOBER 31, APRIL 30,
2003 2004
----------- ---------
Raw materials .............................................. $ 1,219 $ 1,362
Work-in-process ............................................ - 7
Finished goods ............................................. 862 790
------- -------
2,081 2,159
Less: Allowance for excess and obsolete inventory.... (448) (528)
------- -------
$ 1,633 $ 1,631
======= =======
3. CONCENTRATIONS
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company invests only in high
credit quality short-term debt instruments.
The Company's sales are primarily concentrated in the United States and
are primarily derived from sales to OEMs in the computer storage and server
industry. Revenue is concentrated with several major customers. The loss of a
major customer, a change of suppliers or a significant technological change in
the industry could affect operating results adversely. The Company performs
credit evaluations of its customers and generally does not require
7
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
collateral on accounts receivable balances and provides allowances for potential
credit losses, product sales returns and other allowances. The Company has not
experienced material credit losses in any of the periods presented.
The Company relies on a limited number of contract manufacturers to
provide manufacturing services for its products. The inability of any contract
manufacturer or supplier to fulfill supply requirements could materially impact
future operating results. Additionally, the Company's supplier arrangement for
the production of certain vital components of its storage routers is
concentrated with a small number of key suppliers.
The percentage of sales to significant customers was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ----------------
2003 2004 2003 2004
------ ------ ------ ------
HP .......... 57.5% 47.5% 60.5% 46.9%
StorageTek... 29.3% 21.6% 24.8% 26.3%
EMC ......... - 20.4% - 17.6%
The level of sales to any customer may vary from quarter to quarter.
However, the Company expects that significant customer concentration,
particularly to our three major customers, will continue for the foreseeable
future. The loss of any one of these customers, or a decrease in the level of
sales to any one of these customers, could have a material adverse impact on the
Company's financial condition or results of operations.
4. BUSINESS RESTRUCTURING EXPENSES AND ASSET IMPAIRMENT
In May 2002, the Company completed a restructuring plan that reduced its
workforce by approximately 25%, or 40 people (primarily in the sales, marketing
and general and administrative areas), to scale down its infrastructure and to
consolidate operations.
Components of business restructuring expenses and the remaining
restructuring accruals as of April 30, 2004 are as follows (in thousands):
FACILITY LEASE
ABANDONMENT
--------------
Balance as of October 31, 2003 ... $ 964
Cash activity ................. (81)
Non-cash activity ............. (52)
--------
Balance as of January 31, 2004.... 831
--------
Cash activity ................. (81)
Non-cash activity ............. (62)
--------
Balance as of April 30, 2004 ..... $ 688
========
The entire accrual amount relates to remaining payments to be made for
lease abandonment losses. In March 2003, the Company entered into an agreement
to sublease a portion of its abandoned facilities. The anticipated rent payments
from this sublease are approximately $0.5 million through January 2006. A second
agreement to sublease a portion of its abandoned properties was signed in May
2003. The anticipated rent payments from the second sublease are approximately
$0.1 million through January 2006.
8
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In total, the Company has reduced its restructuring accrual by
approximately $0.1 million during the six months ended April 30, 2004,
principally for rent payments to be received over the next nine to twelve months
of the remaining sublease terms. The Company assesses recoverability of these
sublease payments on a quarterly basis.
The Company has substantially completed its restructuring efforts
initiated in conjunction with the restructuring announcement made during fiscal
2002; however, there can be no assurance that future restructuring efforts will
not be necessary.
5. LINE OF CREDIT
The Company carries a line of credit with its bank. The committed
revolving line provides for an advance of up to $3.0 million with a borrowing
base of 80% of eligible accounts receivable. The line of credit will mature on
June 14, 2004. As of October 31, 2003 and April 30, 2004, there were no
borrowings outstanding under this revolving line of credit.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and equipment under long-term operating
lease agreements that expire on various dates through April 15, 2006. In
conjunction with entering into a lease agreement for its headquarters, the
Company signed an unconditional, irrevocable letter of credit with a bank for
$100,000, which is secured by the $3.0 million line of credit. Future minimum
lease payments under all non-cancelable operating leases as of April 30, 2004
were approximately $4.0 million. In addition to base rent on its facilities
lease, many of the operating lease agreements require that the Company pay a
proportional share of the respective facilities' operating expenses.
GUARANTEES AND PRODUCT WARRANTIES
FIN 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," requires
that upon issuance of a guarantee, the guarantor must disclose and recognize a
liability for the fair value of the obligation it assumes under that guarantee.
The disclosure requirements of FIN 45 are applicable to the Company's
product warranty liability and certain guarantees issued before December 31,
2002. The Company's guarantees issued before December 31, 2002, which would have
been disclosed in accordance with the disclosure requirements of FIN 45, were
not material.
It is the Company's policy to repair or replace products that have been
authorized for repair or replacement by the Company's customers. The Company
maintains a reserve for the estimated costs of such repairs or replacements and
adjusts the reserve based on historical sales volumes as well as actual costs
incurred.
Activity in the accrued warranty costs during the six months ended April
30, 2003 and 2004 was as follows (in thousands):
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
Six months ended April 30, 2003
Warranty reserve .................. $615 $301 $(95) $821
==== ==== ==== ====
Six months ended April 30, 2004
Warranty reserve .................. $802 $ 53 $(76) $779
==== ==== ==== ====
9
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
LEGAL PROCEEDINGS
Intellectual Property Litigation
On October 17, 2003, the Company filed a lawsuit against Dot Hill Systems,
Inc. (Dot Hill) alleging that Dot Hill has infringed two of the Company's
patents, U.S. Patent No. 5,941,972 (the '972 patent) and U.S. Patent No.
6,425,035 (the '035 Patent), with some of Dot Hill's products. Subsequently, Dot
Hill filed an answer denying infringement and alleging the '972 and '035 Patents
are invalid and unenforceable. Dot Hill recently filed a third-party complaint
against FalconStor, Inc. (FalconStor), seeking indemnification for certain of
Dot Hill's products at issue in the litigation. In response, FalconStor has also
denied infringement and alleged the `972 and `035 Patents are invalid and
unenforceable. Crossroads plans to vigorously defend its patents against all
counterclaims.
Securities Class Action Litigation
The Company and several of its officers and directors were named as
defendants in several class action lawsuits filed in the United States District
Court for the Western District of Texas. The plaintiffs in the actions purport
to represent purchasers of the Company's common stock during various periods
ranging from January 25, 2000 through August 24, 2000. On February 24, 2003, the
Court entered a final judgment in the defendants' favor. Plaintiff's appealed to
the United States Court of Appeals for the Fifth Circuit. On April 14, 2004, the
Fifth Circuit issued an opinion, which affirmed in part and vacated in part the
district court's ruling. The remaining claims were remanded to the district
court. On May 12, 2004, the Fifth Circuit denied plaintiff's request for panel
rehearing. The Company continues to deny the remaining allegations in the
complaint and intends to defend itself vigorously. It is not possible at this
time to predict whether the Company will incur any liability or to estimate the
damages, or the range of damages, if any, that the Company might incur in
connection with this lawsuit.
Other
From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. Management believes that,
other than the matters described above, there are no claims or actions pending
or threatened against the Company, the ultimate disposition of which would have
a material impact on the Company's financial position, results of operations or
cash flows.
EMPLOYMENT CONTRACTS
The Company has entered into Employment Agreements with its President and
Chief Executive Officer and its Vice President and Chief Financial Officer. Both
executives are employed on an "at will" basis and may be terminated at any time,
with or without cause.
The Company has also entered into Severance Benefit Plans with some
executive officers. Pursuant to the terms of these plans, to the extent these
executive officers are terminated prior to a change of control involving the
Company (i) they will receive a cash payment equal to one month of salary for
each quarter of service they have provided to the Company, up to a maximum of
twelve months salary and (ii) the vesting of all options held by such executive
officer will accelerate by a period of one year.
NEXQL COMMITMENT
The Company entered into certain strategic agreements to provide a total
of up to $2.5 million in debt and equity financing to NexQL, a development stage
company. Under the terms of these agreements, the Company has an exclusive
right, but not an obligation, to purchase NexQL. If the Company chooses to
exercise this right, the purchase would be subject to various conditions.
Depending upon the structure of the purchase, one condition could be the need to
obtain stockholder approval. The exclusive right to purchase NexQL will lapse at
various times after NexQL completes certain milestones.
10
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. NET LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," basic and diluted
net loss per share is computed by dividing the loss to common stockholders by
the weighted average number of common shares outstanding for the period, less
shares subject to repurchase. Diluted loss per share is equivalent to basic loss
per share because all common stock equivalents are antidilutive for all periods
presented.
Common stock equivalents consist of outstanding stock options. The total
number of outstanding stock options excluded from the calculations of diluted
net loss per common share were 6,868,248 and 5,084,627 as of April 30, 2003 and
2004, respectively.
8. RELATED PARTY TRANSACTIONS
In July 2000, the Company loaned an employee of the Company $50,000 for
personal reasons, not equity related, in exchange for a full recourse promissory
note due in full, with accrued interest, in 2 years or upon the date in which
the employee ceases to remain in service. The note accrues interest at 10.5% per
year, compounded semi-annually. The principal and accrued interest was due in
one lump sum on July 1, 2002. The terms on this note have been extended to July
1, 2004 and the balance of approximately $74,000 was reserved through a charge
to general and administrative expenses during the three months ended April 30,
2004 as collection of the note became uncertain.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than historical or current facts, including, without limitation,
statements about our business strategy, plans and objectives of management and
our future prospects, are forward-looking statements. Although we believe that
the expectations reflected in such forward-looking statements are reasonable,
such forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from these expectations. Such
risks and uncertainties include, without limitation, the following:
- our operating results are difficult to predict and are likely to vary
significantly from quarter to quarter in the future;
- we could be materially harmed in the event of a general economic
slowdown resulting in a reduction in information technology spending;
- we could be materially harmed if demand for our products is less than
we anticipate;
- we could be materially harmed if the market for our current and future
products fails to develop as we currently anticipate; and
- other risks indicated below under the caption "Risk Factors".
These risks and uncertainties are beyond our control and, in many cases,
we cannot predict the risks and uncertainties that could cause our actual
results to differ materially from those indicated by the forward-looking
statements. When used in this document, the words "believes," "plans,"
"expects," "anticipates," "intends," "continue," "may," "will," "could,"
"should," "future," "potential," "estimate," or the negative of such terms and
similar expressions as they relate to us or our management are intended to
identify forward-looking statements.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the condensed consolidated financial statements
and notes thereto included in Item 1 of this Quarterly Report and the condensed
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations in our Form 10-K
filed with the SEC on January 22, 2004. Historical results and percentage
relationships among any amounts in the financial statements are not necessarily
indicative of trends in operating results for any future periods.
OVERVIEW
We are a leading provider of enterprise data routing solutions for open
system storage area networks (SANs), based on our market share of storage
routers shipped. Our storage routers serve as the interconnect between SANs and
the other devices in a computer network and allow organizations to more
effectively and efficiently store, manage and ensure the integrity and
availability of their data. Specifically, when used in SANs, our storage
routers:
- improve data transfer speeds within a network;
- reduce the time required to back up and restore data;
- improve utilization of storage resources; and
- preserve and enhance existing server and storage system investments.
Last year, we transitioned our embedded router business with our largest
customer to a royalty model. This transition has resulted in higher gross margin
on lower revenue. During the six months ended April 30, 2004, we
12
realized a 48% year over year increase in gross margin to $9.8 million on
revenue of $14.6 million compared to gross margin of $6.6 million on revenue of
$18.3 million during the comparable period in fiscal 2003.
Our primary objective throughout 2004 is to transition from being
primarily a storage connectivity company to a business that provides more
complete, intelligent solutions for the end user. We will accomplish this by
developing new technology, products and solutions that will leverage our storage
routing expertise to solve a wide range of customer problems. We will continue
to provide first-in-class connectivity, while offering value-added software that
will help customers better utilize resources, lower overall costs and achieve
higher performance levels.
The key, measurable elements of our business strategy in 2004 are as
follows:
- grow our current market position by solving today's customer storage
issues;
- build on our core storage networking technologies to offer
intelligent networking solutions;
- expand our reach into other storage markets;
- increase our market leadership by investing in new technologies; and
- protect our intellectual property.
During the six months ended April 30, 2004, we made progress on achieving these
objectives as follows:
- New Partnerships.
- In December 2003, we announced a strategic relationship
with NexQL, a development stage company, for the joint
development of advanced data management solutions that
are expected to outperform other solutions by orders of
magnitude at a fraction of the cost. We believe our
strategic relationship with NexQL will allow us to
capitalize on adjacent markets and offer multiple
opportunities for the combination of Crossroads and
NexQL technologies.
- In March 2004, we announced a strategic relationship
with LeftHand Networks, the leading provider of
complete, integrated IP SAN solutions. By partnering
with LeftHand Networks, we will be able to bring a
robust network storage solution to the marketplace that
truly addresses the needs of the end user. This
relationship enables the joint development of technology
leveraging our core competencies in data routing and
network storage connectivity with LeftHand Networks'
expertise in distributed storage utilization.
- Building on Core Technologies.
- Our customers are asking for features such as better
performance, guaranteed back up completion, enhanced
recovery execution, maximized resource utilization and
ease of use. To meet these needs, we are now offering a
suite of software, promoted as "Intelligence at the
Edge," that focuses on the expansion of our existing
technology to bring multiple networking functionality
and capabilities to backup storage solutions.
- In April 2004, we announced the availability of the
Crossroads 6240 Storage Router. The Crossroads 6240
Storage router, along with our current suite of
products, serves as a platform for delivering
"Intelligence At The Edge," by improving the
understanding, utilization and management of
high-performance tape library resources.
- Customer Base Expansion. We delivered our latest generation products
to our existing customers as well as expanded our storage routing
customer base. Our customer base further expanded during the six
months ended April 30, 2004, as EMC became our third largest
customer, comprising 18% of our total revenue. We
13
have also started new channel programs in the fiscal second quarter
and are expanding our reach into Europe, North America and South
America through new sales partnerships.
- Intellectual Property Value. We have entered into various agreements
with Adaptec, ADIC, XIOtech, Hitachi and others to license our
technology. We have also strengthened our patent portfolio as we
now have 23 issued patents and 52 pending patents worldwide. In
November 2003, we filed a lawsuit against Dot Hill Systems, Inc.
alleging that Dot Hill has infringed two of our patents, U.S.
Patent No. 5,941,972 (the '972 patent) and U.S. Patent No.
6,425,035 (the '035 Patent), with some of Dot Hill's products.
Subsequently, Dot Hill filed an answer denying infringement and
alleging the '972 and '035 Patents are invalid and unenforceable.
We plan to vigorously defend our patents against these
counterclaims.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, deferred taxes, investment in privately-held
company, warranty obligations, excess and obsolete inventories, allowance for
doubtful accounts, facility lease abandonment losses associated with our
restructuring and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements:
- revenue recognition;
- deferred taxes;
- investment in privately-held company;
- warranty obligations;
- excess and obsolete inventories;
- allowance for doubtful accounts;
- facility lease abandonment losses; and
- litigation.
Revenue recognition. With respect to sales of our products to OEMs, we
recognize product revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable, collectibility is
probable and risk of loss has passed to the OEM. Product sales to distributors,
VARs and system integrators who do not have return rights are recognized upon
shipment. To the extent that we sell products to distributors, VARs and system
integrators that have rights of return, we defer revenue and the related cost of
revenue associated with such sales and recognize these amounts when that
customer sells our products to its customers. Judgments and estimates must be
made and used in connection with the revenue recognized in any given accounting
period. Material differences may result in the amount and timing of our revenue,
in any given accounting period, if our management alters the method by which
they derive such judgments or estimates.
Royalty and other revenue includes licensing of intellectual property
(IP), royalty payments and sales of service contracts. IP licensing arrangements
typically consist of upfront nonrefundable fees, including payments related to
past sales of licensed products or payments related to a paid-up license in
which the licensee makes a single payment
14
for a lifetime patent license. Once a license agreement is signed, delivery of
the license has occurred and there are no remaining obligations outstanding, we
record revenue from upfront nonrefundable IP license fees. Service revenue is
recognized ratably over the applicable service period.
Deferred taxes. In preparing our financial statements, we are required to
estimate our income tax obligations. This process involves estimating our actual
tax exposure together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within our
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. If we change
this valuation allowance in a period, we must include an expense or benefit
within the tax provision in our statement of operations.
Judgment is required in determining our deferred tax assets and
liabilities and our valuation allowance recorded against our net deferred tax
assets. In assessing the potential realization of deferred tax assets, we
consider whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon us attaining future taxable income during the period in
which our deferred tax assets are recoverable. Due to uncertainty surrounding
our ability to generate taxable income in the future, we have determined that it
is more likely than not that we will not be able to utilize any of the benefits
of our deferred tax assets, including net operating loss carry forwards, before
they expire. Therefore, we have provided a 100% valuation allowance on our
deferred tax assets, and our net deferred tax assets as of April 30, 2004 is
zero.
Investment in privately-held company. We assess the impairment of
investments whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors considered important which could
trigger an impairment review include: (i) inherent risk of investment due to
stage of development, (ii) underperformance relative to projected future
operating results, and (iii) changes in the strategy of business. When we
determine that the carrying value of an investment may not be recoverable, an
impairment charge is recorded.
Warranty obligations. We provide for the estimated cost of product
warranties at the time revenue is recognized. These estimates are developed
based on historical information. While we engage in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of our component suppliers, our warranty obligation is affected by product
failure rates, material usage and service delivery costs incurred in correcting
a product failure. Should actual product failure rates, material usage or
service delivery costs differ from our estimates, revisions to the estimated
warranty liability would be required.
Excess and obsolete inventory. We write-down our inventory for estimated
obsolescence or unmarketable inventory based on the difference between the cost
of inventory and the estimated market value derived by assumptions about future
demand and market conditions. If actual demand and/or market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.
Allowance for doubtful accounts. We assess the collectibility of
outstanding customer invoices and in doing such, we maintain an allowance for
estimated losses resulting from the non-collection of customer receivables. In
estimating this allowance, we consider factors such as:
- historical collection experience;
- a customer's current credit-worthiness;
- customer concentrations;
- age of the receivable balance, both individually and in the
aggregate; and
- general economic conditions that may affect a customer's ability to
pay.
Actual customer collections could differ from our estimates. For example,
if the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
15
Facility lease abandonment losses. We vacated excess leased facilities as
a result of the restructuring plan we completed during fiscal 2002. We estimated
costs of vacating these leased facilities, including estimated costs to
sublease, based on market information and trend analysis. Any sublease payments
received by us are recorded as a reduction to this accrual based on the
specified sublease terms. Actual results may differ from these estimates in the
near term, and such differences could be material to our financial statements.
Litigation. We evaluate contingent liabilities, including pending or
threatened litigation in accordance with SFAS No. 5, "Accounting for
Contingencies" and record accruals when the outcome of these matters is deemed
probable and the liability is reasonably estimable. We make these assessments
based upon the facts and circumstances, and in some instances based in part upon
the advice of outside legal counsel. As of April 30, 2004, we have not accrued
any material costs associated with any pending or threatened litigation as no
amounts have been deemed probable or reasonably estimable. However, any changes
in the pending or threatened litigation could result in revisions to our
estimates of the potential liability and could materially impact our results of
operations and financial position.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, a
year-over-year comparison of the key components of our revenue, costs of revenue
and gross profit:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
--------------------- ----------------------
2003 2004 2003 2004
------- ------- ------- -------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
TOTAL REVENUE .................. $ 8,579 $ 7,425 $18,251 $14,550
Product .................... $ 8,142 $ 4,690 $17,703 $ 9,631
Royalty and other .......... $ 437 $ 2,735 $ 548 $ 4,919
TOTAL COST OF REVENUE .......... $ 5,188 $ 2,231 $11,617 $ 4,746
Product .................... $ 5,139 $ 2,150 $11,470 $ 4,629
Royalty and other .......... $ 49 $ 81 $ 147 $ 117
TOTAL GROSS PROFIT ............. $ 3,391 $ 5,194 $ 6,634 $ 9,804
Product .................... $ 3,003 $ 2,540 $ 6,233 $ 5,002
Royalty and other .......... $ 388 $ 2,654 $ 401 $ 4,802
TOTAL GROSS PROFIT PERCENTAGE... 40% 70% 36% 67%
Product .................... 37% 54% 35% 52%
Royalty and other .......... 89% 97% 73% 98%
Total revenue
Total revenue is broken out between product revenue and royalty revenue.
Last year, we transitioned our embedded router business with HP to a royalty
model whereby they would manufacture the products and pay us a specified royalty
on each unit shipped. Under this model, our product revenue declined, as
expected, because we have outsourced the manufacturing of our embedded routers
to HP and the royalty revenue we receive is now classified under royalty and
other revenue.
A significant portion of our revenue is concentrated among a relatively
small number of OEM customers. For the three months ended April 30, 2004, three
customers each represented greater than ten percent of our total revenues for
combined totals of 89% of total revenues. We expect that a significant portion
of our future revenue will continue to come from sales of products to a
relatively small number of customers. Therefore, the loss of, or a decrease in
the level of sales to, any one of these customers, could seriously harm our
financial condition and results of operations.
Product revenue
Product revenue consists of sales of our storage router and ServerAttach
lines of products. Our product revenue is primarily generated from our OEM
partners. Product revenue decreased 42% and 46% for the three and six months
ended April 30, 2004, respectively, as compared to the comparable periods in
fiscal 2003. The decreases in product revenue in both periods were primarily the
result of our successful transition to a royalty model for embedded products
with HP.
16
Royalty and Other Revenue
Royalty and other revenue consists of revenue from the licensing of IP,
royalty payments from HP and sales of service contracts. IP licensing
arrangements typically consist of upfront nonrefundable fees. These fees are
collected as consideration for either past or future sales of licensee products.
When a license agreement is signed, delivery of the license has occurred and
there are no remaining obligations outstanding, we record revenue from upfront
nonrefundable IP licensing arrangements. Royalty revenue is recognized monthly
based on reports received from HP and service revenue is recognized ratably over
the service period.
Royalty and other revenue for the three and six months ended April 30,
2004 increased primarily due to the accelerated shift in the product mix towards
royalty products. In addition, revenue from an IP license was included the three
and six months ended April 30, 2004.
Given the nature of patent license agreements, the timing of license
revenue is difficult to forecast and therefore is expected to cause fluctuations
in royalty and other revenue. Our potential to generate patent license revenue
in the future will be largely dependent upon our ability to identify and pursue
additional, potential licensees.
Gross Profit
Total gross profit increased 53% for the three months ended April 30, 2004
and 48% for the six months ended April 30, 2004 as compared to the comparable
periods last year. The increases in total gross profit and gross profit
percentage reflect the positive effect of the royalty model with HP, increased
sales of our higher margin products as well as IP license margin. Cost of
product revenue consists primarily of contract manufacturing costs, material
costs, manufacturing overhead, third party software licenses, warranty costs and
stock-based compensation. Cost of product revenue decreased 58% from the three
months ended April 30, 2003 to the three months ended April 30, 2004. Cost of
product revenue decreased 60% for the six months ended April 30, 2003 to the six
months ended April 30, 2004.
The decrease in cost of product revenue was expected with the transition
to the royalty model with HP. Under this model, HP manufactures our embedded
products, which has resulted in lower manufacturing costs to us. In addition,
product costs relative to product revenue decreased primarily due to lower
manufacturing costs and higher margin product mix. The cost of product revenue
may fluctuate based on the introduction of new products and changes in product
mix.
We expect to introduce new products in the latter part of fiscal year
2004. As new or enhanced products are introduced, we must successfully manage
the transition from older products to avoid excessive levels of older product
inventories, and ensure that sufficient supplies of new products can be
delivered to meet customer demands. Our revenue and gross profit margin will be
adversely affected if we fail to successfully manage the introductions of these
new products.
17
SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of salaries, commissions,
travel, tradeshow and advertising programs, other promotional activities and
stock-based compensation expenses. The following table sets forth, for the
periods indicated, a year-over-year comparison of the key components of our
sales and marketing expenses:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------- ----------------------
2003 2004 2003 2004
---- ---- ---- ----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
TOTAL SALES & MARKETING ..................... $ 990 $1,244 $ 2,015 $2,384
Stock-based compensation ................. $ 33 $ - $ 110 $ -
Final Headcount .......................... 15 17 15 17
Sales and marketing expenses increased during the three and six months
ended April 30, 2004, as compared to the same periods in fiscal 2003, primarily
due to additional compensation expense. In addition, we participated in several
tradeshows during the three months ended April 30, 2004 including Storage
Networking World. We anticipate that sales and marketing expenses may fluctuate
as we launch new products.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and other
personnel-related costs, product development costs and stock-based compensation
expenses. The following sets forth, for the periods indicated, a year-over-year
comparison of the key components of our research and development expenses:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------------ ------------------------
2003 2004 2003 2004
---- ---- ---- ----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
TOTAL RESEARCH AND DEVELOPMENT ..................... $ 2,999 $ 3,080 $ 6,138 $ 6,101
Stock-based compensation ...................... $ 78 $ 15 $ 172 $ 36
Final Headcount ............................... 68 65 68 65
In general, research and development expenses have remained relatively
flat for both the three and six months ended April 30, 2004, as compared to the
same periods in fiscal 2003, as the decrease in depreciation expense was offset
by increased spending in outside services for the development of new products.
We anticipate that research and development expenses may increase as we further
the development of our technologies and expand our product offerings.
18
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of salaries and
other personnel-related costs, costs of our administrative, executive and
information technology departments, as well as legal and accounting, insurance
and stock-based compensation expenses. The following table sets forth, for the
periods indicated, a year-over-year comparison of the key components of our
general and administrative expenses:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------------ ------------------------
2003 2004 2003 2004
---- ---- ---- ----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
TOTAL GENERAL AND ADMINISTRATIVE ............ $ 1,503 $ 1,318 $ 3,147 $ 2,700
Stock-based compensation ................ $ 147 $ 19 $ 456 $ 57
Final Headcount ......................... 20 19 20 19
The decrease in general and administrative expenses for both the three and
six months ended April 30, 2004, as compared to the same periods in fiscal 2003,
was primarily due to decreases in insurance, depreciation and stock-based
compensation expense. We anticipate that general and administrative expenses may
begin to increase throughout fiscal 2004 due to additional costs associated with
the Sarbanes-Oxley Act of 2002 and other related legislative and regulatory
changes.
NEXQL RESEARCH AND DEVELOPMENT EXPENSES
During the first fiscal quarter of 2004, we entered into a strategic
relationship with NexQL, a privately-held development stage company. Pursuant to
certain agreements with NexQL, we may provide NexQL with up to $1.5 million
under a loan facility, over a discretionary time period, and will make an equity
investment of $1.0 million. During the six months ended April 30, 2004, we had
invested $0.7 million in NexQL. We have an exclusive right, but not an
obligation, to purchase NexQL. If we choose to exercise this right, the purchase
would be subject to various conditions. Depending upon the structure of the
purchase, one condition could be the need for us to obtain stockholder approval.
The exclusive right to purchase NexQL will lapse at various times after NexQL
completes certain milestones. In accordance with FIN 46R, we consolidated the
balance sheet of NexQL as of April 30, 2004 and will consolidate the statements
of operations and cash flows effective May 1, 2004. We monitored our investment
in NexQL for impairment during the three and six months ended April 30, 2004 and
made an appropriate reduction in its carrying value and recorded an impairment
charge based on the financial condition and near-term prospects of NexQL. This
impairment charge is included in the caption, NexQL research and development, in
the consolidated statement of operations. The impairment charge, including our
percentage of losses, on our investment in NexQL was approximately $0.5 million
and $0.7 million for the three and six months ended April 30, 2004,
respectively. The investment in NexQL has inherent risk as the markets for the
technologies or products of NexQL are in the early stages of development and may
never materialize.
BUSINESS RESTRUCTURING EXPENSES AND ASSET IMPAIRMENT
In May 2002, we completed a restructuring plan that reduced our workforce
by approximately 25%, or 40 people (primarily in the sales, marketing and
general and administrative areas), to scale down our infrastructure and to
consolidate our operations.
19
Components of business restructuring expenses and the remaining
restructuring accruals as of April 30, 2004 are as follows (in thousands):
FACILITY LEASE
ABANDONMENT
--------------
Balance as of October 31, 2003 ......... $ 964
Cash activity ...................... (81)
Non-cash activity .................. (52)
-----
Balance as of January 31, 2004 ......... 831
-----
Cash activity ...................... (81)
Non-cash activity .................. (62)
-----
Balance as of April 30, 2004 ........... $ 688
=====
In March 2003, we entered into an agreement to sublease a portion of our
abandoned facilities. The anticipated rent payments from this sublease are
approximately $0.5 million through January 2006. In addition, we signed another
agreement to sublease a portion of our abandoned facilities during the third
fiscal quarter of 2003. The anticipated rent payments from this sublease are
approximately $0.1 million through January 2006.
In total, we reduced our restructuring accrual by approximately $0.1
million during the six months ended April 30, 2004, principally for rent
payments to be received over the next nine to twelve months of both sublease
terms. We assess recoverability of these sublease payments on a quarterly basis.
We have substantially completed our restructuring efforts initiated in
conjunction with the restructuring announcement made during fiscal 2002;
however, there can be no assurance that future restructuring efforts will not be
necessary.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents selected financial statistics and information
related to our liquidity and capital resources (dollars in thousands):
OCTOBER 31, APRIL 30,
2003 2004
----------- -----------
Cash and cash equivalents............................ $ 14,707 $ 20,782
Short-term investments............................... $ 16,670 $ 10,763
Working capital...................................... $ 31,671 $ 31,306
Current ratio........................................ 6.6:1 6.7:1
Days sales outstanding............................... 30 34
Our principal sources of liquidity at April 30, 2004 consisted of $20.8
million in cash and cash equivalents and $10.8 million in short-term
investments.
In June 2003, we renegotiated our line of credit with Silicon Valley Bank.
The committed revolving line is an advance of up to $3.0 million with a
borrowing base of 80% of eligible accounts receivable. The line of credit
contains provisions that prohibit the payment of cash dividends and require the
maintenance of specified levels of tangible net worth and certain financial
performance covenants measured on a monthly basis. The line of credit
20
matures in June 2004. As of April 30, 2004, there were no borrowings outstanding
under the revolving line of credit and no term loans outstanding.
Cash provided by operating activities for the six months ended April 30,
2004 was approximately $1.8 million as a result of a lower net loss due to
higher gross margin and continued control over operating expenditures.
Cash provided by investing activities was approximately $4.6 million
during the six months ended April 30, 2004 primarily due to the timing of
short-term investment transactions and reflects the maturity of held-to-maturity
investments, net of purchases. Our investment policy, related to debt
instruments, places greater emphasis on the safeguarding of cash and requires
investment in high quality short-term securities. The cash impact of investing
approximately $0.7 million in NexQL is also reflected in our investing
activities. Capital expenditures were approximately $0.6 million and reflect our
investments in computer equipment and software, test equipment, software
development tools and leasehold improvements, all of which were required to
support our ongoing research and development in our technologies and expanding
our product offerings. We anticipate moderate additional capital expenditures
during the remainder of fiscal 2004, primarily to support our ongoing product
development efforts.
Cash utilized by financing activities was approximately $0.4 million for
the six months ended April 30, 2004 as a result of a decrease in our book
overdrafts of approximately $0.8 million, due to the timing of vendor payments.
We have funded our operations to date primarily through product sales,
sales of preferred stock and our initial public offering, resulting in aggregate
gross proceeds to us of $98.2 million.
At April 30, 2004, we had no long-term debt. We believe our existing cash
balances and our credit facilities will be sufficient to meet our capital
requirements beyond the next 12 months. However, we could be required or could
elect to seek additional funding prior to that time. Our future capital
requirements will depend on many factors, including the rate of revenue growth,
the timing and extent of spending to support product development efforts, the
timing of introductions of new products and enhancements to existing products,
the amount of cash used to fund our stock repurchase program, and market
acceptance of our products. During the first fiscal quarter of 2004, we entered
into a strategic relationship with NexQL for the joint development of advanced
data management solutions. During the term of this and other agreements with
NexQL, we will provide funding up to $2.5 million to NexQL. Moreover, we may
enter into additional strategic arrangements or acquisitions in the future that
could require us to seek equity or debt financing. We cannot assure that
additional equity or debt financing, if required, will be available to us on
acceptable terms, or at all.
STOCK REPURCHASE PROGRAM
In September 2001, our board of directors authorized a stock repurchase
program pursuant to which we were authorized to repurchase up to $5.0 million of
our common stock in the open market. From September 2001 to April 2002, we
repurchased 661,300 shares of our common stock at an aggregate purchase price of
$2.1 million. In May 2002, our board of directors authorized the extension of
our stock repurchase program and authorized the repurchase up to an additional
$5.0 million worth of our common stock, for an aggregate amount of up to $7.1
million. From May 2002 through October 31, 2002, we repurchased 1,714,465 shares
of our common stock at an aggregate purchase price of $1.7 million. In October
2002, our board of directors authorized the further extension of our stock
repurchase program through the end of 2003. From November 2002 to October 31,
2003, we repurchased 1,772,300 shares of our common stock at an aggregate
purchase price of $2.0 million. As of October 31, 2003, we had repurchased an
aggregate of 4,148,065 shares of our common stock for an aggregate purchase
price of $5.7 million under our stock repurchase program representing a total of
approximately 15% of the Company based on shares of our common stock outstanding
at the commencement of the repurchase program. We did not repurchase any shares
of our common stock during the six months ended April 30, 2004.
Under future repurchase programs approved by the board of directors, the
stock would be purchased in the open market or privately negotiated transactions
from time to time in compliance with the SEC's Rule 10b-18, subject to market
conditions, applicable legal requirements and other factors. The timing and
amounts of any purchases will be as determined by our management from time to
time or may be suspended at any time without prior notice,
21
depending on market conditions and other factors they deem relevant. The timing
and size of any future stock repurchases are subject to market conditions, stock
prices, cash position and other cash requirements.
CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS
We lease office space and equipment under long-term operating lease
agreements that expire on various dates through April 15, 2006. In April 2000,
we relocated our headquarters in accordance with an agreement to lease
approximately 63,500 square feet of administrative office space in Austin,
Texas. The term of the lease agreement is approximately six years, from April 1,
2000 through April 15, 2006, and represents a lease commitment of approximately
$1.8 million per year through the lease term. In conjunction with entering into
the lease agreement, we signed an unconditional, irrevocable letter of credit
with a bank for $100,000, which is secured by a $3.0 million line of credit.
The following summarizes our contractual cash obligations as of April 30,
2004 (in thousands):
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----- ------ --------- --------- -------
Operating leases ...... $ 4,038 $ 2,200 $ 1,837 $ 1 $ -
NexQL investment ...... 300 300 - - -
NexQL loan facility*... 1,500 1,500 - - -
Subleases ............. (502) (231) (271) - -
-------- -------- -------- -------- ------
Operating leases, net.. $ 5,336 $ 3,769 $ 1,566 $ 1 $ -
======== ======== ======== ======== ======
* Pursuant to our agreements with NexQL, we may provide up to $1.5 million of
the loan facility over a discretionary time period.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,
which addresses consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. VIEs created after January 31, 2003, but
prior to January 1, 2004, may be accounted for either based on the original
interpretation or the Revised Interpretations. However, the Revised
Interpretations must be applied no later than the second quarter of fiscal year
2004. VIEs created after January 1, 2004 must be accounted for under the Revised
Interpretations.
Crossroads has a minority equity interest in NexQL. In connection with the
adoption of the Revised Interpretations of FIN 46 (FIN 46R), we concluded that
NexQL is a VIE and that we are the primary beneficiary. Pursuant to the
provisions of FIN 46R, we consolidated the balance sheet of NexQL as of April
30, 2004 and will consolidate the operations and cash flow statements effective
May 1, 2004. Accordingly, NexQL operating results were accounted for under the
equity method of accounting for the three and six months ended April 30, 2004.
22
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Form 10-Q, the following
factors should be considered in evaluating Crossroads and our business. These
factors include, but are not limited to the factors listed below. Additional
risks and uncertainties that we are unaware of or that we currently deem
immaterial also may become important factors that affect us. This document is
qualified in its entirety by these risk factors.
If any of the following risks actually occur, they could materially harm
our business, financial condition or results of operations. In that case, the
market price of our common stock could decline.
WE HAVE INCURRED SIGNIFICANT LOSSES AND NEGATIVE CASH FLOW, WE EXPECT FUTURE
LOSSES AND WE MAY NEVER BE PROFITABLE OR MAINTAIN A CONSISTENT POSITIVE CASH
FLOW POSITION.
We have incurred significant losses in every fiscal quarter since fiscal
1996 and expect to continue to incur losses in the future. As of April 30, 2004,
we had an accumulated deficit of $149.2 million. We cannot be certain that we
will be able to generate sufficient revenue to achieve profitability or become
consistently cash flow positive. Although we restructured our organization in
2002, which significantly reduced our expense structure, we still expect to
incur significant sales and marketing, research and development and general and
administrative expenses and, as a result, we expect to continue to incur losses.
We were cash flow positive for the three and six months ended April 30, 2004,
but may not be cash flow positive in the third fiscal quarter of 2004. We expect
fluctuations in our cash flow position to continue in future quarters throughout
fiscal 2004.
WE HAVE EXPERIENCED AND EXPECT TO CONTINUE TO EXPERIENCE SIGNIFICANT
PERIOD-TO-PERIOD FLUCTUATIONS IN OUR REVENUE AND OPERATING RESULTS, WHICH MAY
RESULT IN VOLATILITY IN OUR STOCK PRICE.
We have experienced and expect to continue to experience significant
period-to-period fluctuations in our revenue and operating results due to a
number of factors, and any such variations and factors may cause our stock price
to fluctuate. Accordingly, you should not rely on the results of any past
quarterly or annual periods as an indication of our future performance. It is
likely that in some future period our operating results will be below the
expectations of public market analysts or investors. If this occurs, our stock
price may drop, perhaps significantly.
A number of factors, some of which are beyond our control, may
particularly contribute to fluctuations in our revenue and operating results,
including:
- changes in general economic conditions and specific economic
conditions in the computer, storage, and networking
industries;
- timing and amount of intellectual property licenses;
- the timing of orders from, and product integration by, our
customers, particularly our original equipment manufacturer
(OEM) customers, and the tendency of these customers to change
their order requirements frequently with little or no advance
notice to us;
- the rate of adoption of storage area networks (SANs) as an
alternative to existing data storage and management systems;
- the ongoing need for storage routing products in storage area
network architectures;
- the deferrals of customer orders in anticipation of new
products, services or product enhancements from us or our
competitors or from other providers of storage area network
products;
- the rate at which new markets emerge for products we are
currently developing;
- the deferrals of customer orders based on budgetary
restrictions;
- the successful launch and customer acceptance of our new
products;
23
- disruptions or downturns in general economic activity
resulting from terrorist activity and armed conflict;
- increases in prices of components used in the manufacture of
our products; and
- variations in the mix of our products sold and the mix of
distribution channels through which they are sold.
In addition, potential and existing OEM customers often place initial
orders for our products for purposes of qualification and testing. As a result,
we may report an increase in sales or a commencement of sales of a product in a
quarter that will not be followed by similar sales in subsequent quarters as
OEMs conduct qualification and testing. This order pattern could lead to
fluctuations in quarterly revenue and gross profits.
GLOBAL ECONOMIC CONDITIONS MAY CONTINUE TO NEGATIVELY IMPACT US AND THE PRICE OF
OUR COMMON STOCK.
The macroeconomic environment and capital spending on information
technology in the past two fiscal years resulted in continued uncertainty in our
revenue expectations. The operating results of our business depend on the
overall demand for storage area network products. Because our sales are
primarily to major corporate customers whose businesses fluctuate with general
economic and business conditions, continued soft demand for storage area network
products caused by budgetary constraints has resulted in decreased revenue. We
may be especially prone to this as a result of the relatively high percentage of
revenue we have historically derived from the high-tech industry, which has been
more adversely impacted by the economic environment. In particular, continuing
economic uncertainty has resulted in a general reduction in information
technology spending. This reduction in information technology spending has led
to a decline in our growth rates compared to historical trends. Customers may
continue to defer or reconsider purchasing products if they continue to
experience a lack of growth in their business or if the general economy fails to
significantly improve, resulting in a continued decrease in our product revenue.
THE STORAGE TECHNOLOGY MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL EVOLUTION,
AND OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW PRODUCTS.
The market for our products is characterized by rapidly changing
technology and evolving industry standards and is highly competitive with
respect to timely innovation. The introduction of new products embodying new or
alternative technology or the emergence of new industry standards could render
our existing products obsolete or unmarketable. Our future success will depend
in part on our ability to anticipate changes in technology, to gain access to
such technology for incorporation into our products and to develop new and
enhanced products on a timely and cost-effective basis. Risks inherent in the
development and introduction of new products include:
- delays in our initial shipment of new products;
- the difficulty of forecasting customer demand accurately;
- our inability to expand production capacity fast enough to meet
customer demand;
- the possibility that new products may erode demand for our current
products;
- the possibility that we release new products with undetected errors;
- competitors' responses to our introduction of new products; and
- the desire by customers to evaluate new products for longer periods
of time before making a purchase decision.
We have also recently entered into a strategic relationship with NexQL for
the joint development of advanced data management solutions. This relationship
may not result in additional products that obtain market acceptance.
24
In addition, we must be able to maintain the compatibility of our products
with future device technologies, and we must rely on producers of new device
technologies to achieve and sustain market acceptance of those technologies.
Development schedules for high-technology products are subject to uncertainty,
and we may not meet our product development schedules. If we are unable, for
technological or other reasons, to develop products in a timely manner or if the
products or product enhancements that we develop do not achieve market
acceptance, our business will be harmed.
FAILURE TO MANAGE OUR BUSINESS EFFECTIVELY COULD SERIOUSLY HARM OUR BUSINESS,
FINANCIAL CONDITION AND PROSPECTS.
Our ability to successfully implement our business plan, develop and offer
products, and manage our business in a rapidly evolving market requires a
comprehensive and effective planning and management process. We continue to
change the scope of our operations, including managing our headcount
appropriately. Changes in our business, headcount, organizational structure and
relationships with customers and other third parties has placed, and will
continue to place, a significant strain on our management systems and resources.
Our failure to continue to improve upon our operational, managerial and
financial controls, reporting systems, and internal control procedures, and our
failure to continue to train and manage our work force, could seriously harm our
business and financial results.
AN ADVERSE DECISION IN THE VARIOUS SECURITIES CLASS ACTION LAWSUITS FILED
AGAINST US MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL
PERFORMANCE.
We and several of our officers and directors, were named as defendants in
several class action lawsuits filed in the United States District Court for the
Western District of Texas. The plaintiffs in the actions purport to represent
purchasers of our common stock during various periods ranging from January 25,
2000 through August 24, 2000. On February 24, 2003, the Court entered a final
judgment in the defendant's favor. Plaintiff's appealed to the United States
Court of Appeals for the Fifth Circuit. On April 14, 2004, the Fifth Circuit
issued an opinion, which affirmed in part and vacated in part the district
court's ruling. The remaining claims were remanded to the district court. On May
12, 2004, the Fifth Circuit denied plaintiff's request for panel rehearing. We
continue to deny the remaining allegations in the complaint and intend to defend
ourselves vigorously. It is not possible at this time to predict whether we will
incur any liability or to estimate the damages, or the range of damages, if any,
that we might incur in connection with this lawsuit.
OUR BUSINESS IS DEPENDENT ON THE STORAGE AREA NETWORK MARKET, WHICH IS
UNPREDICTABLE, AND IF THIS MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE,
OUR BUSINESS WILL SUFFER.
Substantially all of our products are used exclusively in SANs and,
therefore, our business is dependent on the SAN market. Accordingly, the
widespread adoption of SANs for use in organizations' computing systems is
critical to our future success. Most of the organizations that would be likely
to purchase our products have invested substantial resources in their existing
computing and data storage systems and, as a result, may be reluctant or slow to
adopt a new approach like SANs, particularly in the current economic
environment. SANs are often implemented in connection with the deployment of new
storage systems and servers. Therefore, our future success is also substantially
dependent on the market for new storage systems and servers. Furthermore, the
ability of the different components used in a SAN to function effectively, or
interoperate, with each other when placed in a computing system has not yet been
achieved on a widespread basis. Until greater interoperability is achieved,
customers may be reluctant to deploy SANs. Our success in generating revenue in
the emerging SAN market will depend on, among other things, our ability to:
- educate potential OEM customers, distributors, system integrators,
storage service providers and end-user organizations about the
benefits of SANs and storage router technology, including, in
particular, the ability to use storage routers with SANs to improve
system back up and recovery processes;
- maintain and enhance our relationships with OEM customers,
distributors, system integrators, storage system providers and
end-user organizations;
- predict and base our products on standards which ultimately become
industry standards; and
25
- achieve interoperability between our products and other SAN
components from diverse vendors.
WE HAVE LIMITED PRODUCT OFFERINGS AND OUR SUCCESS DEPENDS ON OUR ABILITY TO
DEVELOP IN A TIMELY MANNER NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.
We currently have a limited number of products that we sell in commercial
quantities. Our future growth and competitiveness will depend greatly on the
market acceptance of our product lines, including the storage routers and the
ServerAttach line of products. We have received revenue from the sale of our
storage routers and ServerAttach lines of products; however, the market
acceptance of our ServerAttach line of products sold through the channel remains
uncertain. If the ServerAttach line of products does not achieve sufficient
market acceptance, our future growth prospects could be seriously harmed.
Moreover, even if we are able to develop and commercially introduce new products
and enhancements, these new products or enhancements may not achieve market
acceptance.
Factors that may affect the market acceptance of our products, some of
which are beyond our control, include the following:
- growth of the SAN market;
- changing requirements of customers within the SAN market;
- performance, quality, price and total cost of ownership of our
products;
- availability, performance, quality and price of competing products
and technologies;
- our customer service and support capabilities and responsiveness;
and
- successful development of our relationships with existing and
potential OEM, distributor, system integrator and storage system
provider customers.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR THE VAST MAJORITY OF OUR REVENUE.
THE LOSS OF OR SIGNIFICANT REDUCTION IN ORDERS FROM ANY KEY CUSTOMERS WOULD
SIGNIFICANTLY REDUCE OUR REVENUE AND WOULD SUBSTANTIALLY HARM OUR FUTURE RESULTS
OF OPERATIONS.
In fiscal 2001, 2002, and 2003, 51%, 75% and 75% of our total revenue,
respectively, was derived from two OEM customers (information for 2001 and 2002
assumes the subsequent merger of HP and Compaq). In fiscal 2003, HP and
StorageTek represented 54% and 21% of our total revenue, respectively. In May
2002, the merger of HP and Compaq significantly increased our customer
concentration as both HP and Compaq had been significant customers to that
point. Even though we were able to add EMC to our list of significant OEM
customers for the six months ended April 30, 2004, our operating results in the
foreseeable future will continue to depend on sales to a relatively small number
of OEM customers. Therefore, the loss of any of our key OEM customers, or a
significant reduction in sales to any one of them, would significantly reduce
our revenue.
OUR OEM CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE
QUALIFICATION PROCESS THAT DOES NOT ASSURE PRODUCT SALES.
Prior to offering our products for sale, our OEM customers require that
each of our products undergo an extensive qualification process, which involves
interoperability testing of our product in the OEM's system as well as rigorous
reliability testing. This qualification process may continue for a year or
longer. However, qualification of a product by an OEM does not assure any sales
of the product to the OEM. Despite this uncertainty, we devote substantial
resources, including sales, marketing and management efforts, toward qualifying
our products with OEMs in anticipation of future sales opportunities. If we are
unsuccessful or delayed in qualifying any products with an OEM, such failure or
delay would preclude or delay sales of that product to the OEM, which may impede
our ability to grow our business.
26
DEMAND FOR OUR CURRENT PRODUCTS DEPENDS SIGNIFICANTLY UPON THE NEED TO
INTERCONNECT SMALL COMPUTER SYSTEM INTERFACE (SCSI) TAPE STORAGE SYSTEMS WITH
FIBRE CHANNEL SANS, AND WE EXPECT TO FACE COMPETITION FROM MANUFACTURERS OF TAPE
STORAGE SYSTEMS THAT INCORPORATE FIBRE CHANNEL INTERFACES INTO THEIR PRODUCTS.
In traditional computer networks, system back up is accomplished by
transferring data from applications and databases over the servers used in the
network to tape drives or other media where the data is safely stored. Tape
storage devices generally rely on a SCSI connection to interface with the
network in receiving and transmitting data. Our routers enable these SCSI-based
storage devices to interface with the Fibre Channel-based components of the SAN.
Because our routers allow communication between SCSI storage devices and a Fibre
Channel SAN, organizations are able to affect their back up processes over the
SAN rather than through the computer network, enabling the servers of the
network to remain available for other computing purposes. We currently derive
the majority of our revenue from sales of storage routers that are used to
connect SCSI-based tape storage systems with SANs. The introduction of tape
storage systems that incorporate Fibre Channel interfaces would enable tape
storage devices to communicate directly with SANs, without using storage
routers. We are aware that a number of manufacturers of storage systems,
including several of our current customers, are developing tape storage systems
with embedded Fibre Channel interfaces, with products expected to be introduced
to market in the near future. If these or other manufacturers are successful in
introducing Fibre Channel-based storage systems, demand for our current storage
router products would be materially reduced and our revenue would decline.
OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON UTILIZING EMERGING
TECHNOLOGIES AND STANDARDS AND ANY DELAY OR ABANDONMENT OF EFFORTS TO DEVELOP
THESE TECHNOLOGIES OR STANDARDS, BY INDUSTRY PARTICIPANTS, OR FAILURE OF THESE
TECHNOLOGIES OR STANDARDS TO ACHIEVE MARKET ACCEPTANCE, COULD COMPROMISE OUR
COMPETITIVE POSITION.
Our products are intended to complement other SAN products to improve the
performance of computer networks by addressing the input/output bottlenecks that
have emerged between the storage systems and the servers within a computing
system. We have devoted and expect to continue to devote significant resources
to developing products based on emerging technologies and standards that reduce
input/output bottlenecks, such as internet SCSI (iSCSI). A number of large
companies in the computer hardware and software industries are actively involved
in the development of new technologies and standards that we expect to
incorporate in our new products. Should any of these companies delay or abandon
their efforts to develop commercially available products based on these new
technologies and standards, our research and development efforts with respect to
such technologies and standards likely would have no appreciable value. In
addition, if we do not correctly anticipate new technologies and standards, or
if our products based on these new technologies and standards fail to achieve
market acceptance, our competitors may be better able to address market demand
than would we. Furthermore, if markets for these new technologies and standards
develop later than we anticipate, or do not develop at all, demand for our
products that are currently in development would suffer, resulting in less
revenue for these products than we currently anticipate.
UNCERTAINTIES INVOLVING SALES AND DEMAND FORECASTS FOR OUR PRODUCTS COULD
NEGATIVELY AFFECT OUR BUSINESS.
We have limited ability to forecast the demand for our products. In
preparing sales and demand forecasts, we rely largely on input from our
distribution partners. If our distribution partners are unable to accurately
forecast demand, or we fail to effectively communicate with our distribution
partners about end-user demand or other time sensitive information, sales and
demand forecasts may not reflect the most accurate, up-to-date information.
Because we make business decisions based on our sales and demand forecasts, if
these forecasts are inaccurate, our business and financial results could be
negatively impacted. Furthermore, we may not be able to identify these forecast
differences until late in our fiscal quarter. Consequently, we may not be able
to make adjustments to our business model without negatively impacting our
business and results of operations.
WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE MANUFACTURE
PRODUCTS IN ADVANCE OF BINDING COMMITMENTS FROM OUR CUSTOMERS TO PURCHASE OUR
PRODUCTS.
In order to assure availability of our products for some of our largest
OEM customers, we manufacture products in advance of purchase orders from these
customers based on forecasts provided by them. However, these forecasts do not
represent binding purchase commitments and we do not recognize revenue for such
products until the product is shipped and risk of loss has passed to the OEM. As
a result, we incur inventory and manufacturing costs in advance
27
of anticipated revenue. Because demand for our products may not materialize,
this product delivery method subjects us to increased risks of high inventory
carrying costs and increased obsolescence and may increase our operating costs.
THE LOSS OF OUR PRIMARY CONTRACT MANUFACTURERS, OR THE FAILURE TO FORECAST
DEMAND ACCURATELY FOR OUR PRODUCTS OR TO MANAGE OUR RELATIONSHIP WITH OUR
PRIMARY CONTRACT MANUFACTURERS SUCCESSFULLY, WOULD NEGATIVELY IMPACT OUR ABILITY
TO MANUFACTURE AND SELL OUR PRODUCTS.
We rely on a limited number of contract manufacturers, primarily Solectron
and Celestica, to assemble the printed circuit board for our current shipping
programs, including our 6000 and 10000 and ServerAttach line of products. We
generally place orders for products with Solectron and Celestica approximately
four months prior to the anticipated delivery date, with order volumes based on
forecasts of demand from our customers. Accordingly, if we inaccurately forecast
demand for our products, we may be unable to obtain adequate manufacturing
capacity from Solectron or Celestica to meet our customers' delivery
requirements, or we may accumulate excess inventories. We have on occasion in
the past been unable to adequately respond to unexpected increases in customer
purchase orders, and therefore were unable to benefit from this incremental
demand. Solectron and Celestica have not provided assurance to us that adequate
capacity will be available to us within the time required to meet additional
demand for our products.
OUR PLANS TO INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS TO MARKET REQUIRE
COORDINATION ACROSS OUR SUPPLIERS AND MANUFACTURERS, WHICH EXPOSES US TO RISKS
OF DELAY OR POOR EXECUTION FROM A VARIETY OF SOURCES.
We have recently introduced new products and product enhancements, which
requires that we coordinate our efforts with those of our component suppliers
and our contract manufacturers to rapidly achieve volume production. In
addition, we transitioned the manufacturing of our embedded router products to
HP. If we should fail to effectively manage our relationships with our component
suppliers, our contract manufacturers and other manufacturers of our products or
if any of our suppliers or our manufacturers experience delays, disruptions,
capacity constraints or quality control problems in their manufacturing
operations, our ability to ship products to our customers could be delayed, and
our competitive position and reputation could be harmed. Qualifying a new
component supplier or contract manufacturer and commencing volume production can
be expensive and time consuming. If we are required to change or choose to
change suppliers, we may lose revenue and damage our customer relationships.
WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR CERTAIN KEY
COMPONENTS, AND IF WE ARE UNABLE TO BUY THESE COMPONENTS ON A TIMELY BASIS, OUR
DELAYED ABILITY TO DELIVER OUR PRODUCTS TO OUR CUSTOMERS MAY RESULT IN REDUCED
REVENUE AND LOST SALES.
We currently purchase Fibre Channel application specific integrated
circuits and other key components for our products from sole or limited sources.
To date, most of our component purchases have been made in relatively small
volumes. As a result, if our suppliers receive excess demand for their products,
we likely will receive a low priority for order fulfillment, as large volume
customers will use our suppliers' available capacity. If we are delayed in
acquiring components for our products, the manufacture and shipment of our
products will also be delayed, which will reduce our revenue and may result in
lost sales. We generally use a rolling nine-month forecast of our future product
sales to determine our component requirements. Lead times for ordering materials
and components vary significantly and depend on factors such as specific
supplier requirements, contract terms and current market demand for such
components. If we overestimate our component requirements, we may have excess
inventory which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory that would delay our
manufacturing and render us unable to deliver products to customers on a
scheduled delivery date. We also may experience shortages of certain components
from time to time, which also could delay our manufacturing. Manufacturing
delays could negatively impact our ability to sell our products and damage our
customer relationships.
COMPETITION WITHIN OUR MARKETS MAY REDUCE SALES OF OUR PRODUCTS AND REDUCE OUR
MARKET SHARE.
The market for SAN products generally, and storage routers in particular,
is increasingly competitive. We anticipate that the market for our products will
continually evolve and will be subject to rapid technological change. We
currently face direct competition primarily from ADIC, ATTO and Chaparral
Network Storage. In addition,
28
other OEM customers could develop products or technologies internally, or by
entering into strategic relationships with or acquiring other existing SAN
product providers that would replace their need for our products and would
become a source of competition. We may face competition in the future from OEMs,
including our customers and potential customers, local area network router
manufacturers, storage system industry suppliers, including manufacturers and
vendors of other SAN products or entire SAN systems, and innovative start-up
companies. For example, manufacturers of Fibre Channel switches or directors
could seek to include router functionality within their SAN products that would
obviate the need for our storage routers. As the market for SAN products grows,
we also may face competition from traditional networking companies and other
manufacturers of networking products. These networking companies may enter the
storage router market by introducing their own products or by entering into
strategic relationships with or acquiring other existing SAN product providers.
This could introduce additional competition in our markets, especially, if one
of our OEMs begins to manufacture our higher end storage routers. While we do
not currently face significant direct competition for our ServerAttach products,
we anticipate we will see increased competition as this market develops.
WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF OUR
CURRENT AND POTENTIAL COMPETITORS.
Some of our current and potential competitors have longer operating
histories, significantly greater resources, broader name recognition and a
larger installed base of customers than Crossroads. As a result, these
competitors may have greater credibility with our existing and potential
customers. They also may be able to adopt more aggressive pricing policies and
devote greater resources to the development, promotion and sale of their
products than we can to ours, which would allow them to respond more quickly
than us to new or emerging technologies or changes in customer requirements. In
addition, some of our current and potential competitors have already established
supplier or joint development relationships with decision makers at our current
or potential customers. These competitors may be able to leverage their existing
relationships to discourage these customers from purchasing products from us or
to persuade them to replace our products with their products. Increased
competition could decrease our prices, reduce our sales, lower our margin, or
decrease our market share. These and other competitive pressures may prevent us
from competing successfully against current or future competitors, and may
materially harm our business.
WE HAVE LICENSED OUR STORAGE ROUTER TECHNOLOGY TO A KEY CUSTOMER, WHICH MAY
ENABLE THIS CUSTOMER TO COMPETE WITH US.
In November 2002, we amended our existing licensing agreement with HP.
Pursuant to this amendment we have outsourced the manufacturing of our embedded
routers to HP. As a result, we do not incur the inventory and overhead costs of
the hardware, and we will receive a royalty from HP for licensing our
technology, which will result in less aggregate revenue for us. However, even
though total revenue from the sale of our embedded routers will be less in the
future, our arrangement will have a positive impact on gross margin. We believe
this agreement will allow us to leverage the strengths of both companies,
including HP's economies of scale in manufacturing and systems integration
expertise and our software, value-added applications and intellectual property.
We have been working under this new agreement since the fiscal second quarter of
2003. HP has vastly greater resources and distribution capabilities than we do,
and therefore, it could establish market acceptance in a relatively short time
frame for any competitive products that it may introduce using our licensed
technologies, which, in turn, would reduce demand for our products from HP and
could reduce demand for our products from other customers.
UNIT PRICES OF SOME OF OUR PRODUCTS HAVE DECREASED OVER TIME, AND IF WE CANNOT
INCREASE OUR SALES VOLUMES, OUR REVENUE WILL DECLINE.
As storage networking continues to mature as an industry, we have seen a
trend towards simplification of devices. The impact of this trend on our
business has been the push for, and subsequent ramp of embedded routers being
shipped with tape libraries. These embedded routers are lower cost than the
stand-alone box routers and this lower cost is passed on to our OEM customers.
As our mix shifts from box routers to embedded routers, we will see a reduction
in average price per unit and revenue will decline if volume does not increase.
To date, some of our agreements with OEM customers, including our largest
customer, provide for quarterly reductions in pricing on a product-by-product
basis, with the actual discount determined according to the volume potential
expected from the customer, the OEM's customer base, the credibility the OEM may
bring to our solution, additional technology the
29
OEM may help us incorporate with our product, and other Crossroads products the
OEM supports. Notwithstanding, the decreases in our average selling prices of
our older generation products generally have been partially offset by higher
average selling prices for our newer products, as well as sales to distributors
and system integrators where price decreases are not generally required.
Nonetheless, we could experience declines in our average unit selling prices for
our products in the future, especially if our newer products do not receive
broad market acceptance. In addition, declines in our average selling prices may
be more pronounced should we encounter significant pricing pressures from
increased competition within the storage router market.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS
THAT COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR REVENUE.
Networking products such as ours may contain undetected software or
hardware errors when first introduced or as new versions are released. Our
products are complex and errors have been found in the past and may be found
from time to time in the future. In addition, our products include components
from a number of third-party vendors. We rely on the quality testing of these
vendors to ensure the adequate operation of their products. Because our products
are manufactured with a number of components supplied by various third-party
sources, should problems occur in the operation or performance of our products,
it may be difficult to identify the source. In addition, our products are
deployed within SANs from a variety of vendors. Therefore, the occurrence of
hardware and software errors, whether caused by our or another vendor's SAN
products, could adversely affect sales of our products. Furthermore, defects may
not be discovered until our products are already deployed in the SAN. These
errors also could cause us to incur significant warranty, diagnostic and repair
costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations and business
reputation problems.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE
ADDITIONAL PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED.
We believe our future success will depend in large part upon our ability
to attract and retain highly skilled managerial, engineering and sales and
marketing personnel. Moreover, we maintain a relatively small staff of executive
management. The loss of the services of any of our key employees or key
management would harm our business. Additionally, our inability to attract or
retain qualified personnel in the future or any delays in hiring required
personnel, particularly engineers and sales personnel, could delay the
development and introduction of, and negatively impact our ability to sell, our
products.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE.
Our products rely on our proprietary technology, and we expect that future
technological advancements made by us will be critical to sustain market
acceptance of our products. Therefore, we believe that the protection of our
intellectual property rights is and will continue to be important to the success
of our business. We rely on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect our intellectual
property rights. We also enter into confidentiality or license agreements with
our employees, consultants and business partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite these efforts, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of our
products is difficult, and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in foreign
countries where applicable laws may not protect our proprietary rights as fully
as in the United States.
OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY CAUSE US TO BECOME INVOLVED
IN COSTLY AND LENGTHY LITIGATION, WHICH COULD SERIOUSLY HARM OUR BUSINESS.
In recent years, there has been significant litigation in the United
States involving patents, trademarks and other intellectual property rights.
Legal proceedings could subject us to significant liability for damages or
invalidate our intellectual property rights. Any litigation, regardless of its
outcome, would likely be time consuming and expensive to resolve and would
divert management's time and attention. Any potential intellectual property
litigation against us could force us to take specific actions, including:
30
- cease selling our products that use the challenged intellectual
property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology or trademark, which
license may not be available on reasonable terms, or at all; or
- redesign those products that use infringing intellectual property or
cease to use an infringing trademark.
As we have discussed elsewhere in this report, we have engaged in lengthy
and costly litigation regarding various patents. While we have prevailed to date
in these cases, we cannot assure you that we would prevail in any future effort
to enforce our rights in our patents.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
As part of our growth strategy, we intend to review opportunities to acquire
other businesses or technologies that would complement our current products,
expand the breadth of our markets or enhance our technical capabilities. For
example, we recently entered into certain strategic agreements with NexQL, a
development stage company. Under the terms of these agreements, we have an
exclusive right, but not an obligation, to purchase NexQL. Any acquisitions,
including any potential acquisition of NexQL, would entail a number of risks
that could materially and adversely affect our business and operating results,
including:
- problems integrating the acquired operations, technologies or
products with our existing business and products;
- diversion of management's time and attention from our core business;
- difficulties in retaining business relationships with suppliers and
customers of the acquired company;
- risks associated with entering markets in which we lack prior
experience; and
- potential loss of key employees of the acquired company.
OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS IN ORDER TO BE ACCEPTED BY
CUSTOMERS IN OUR MARKET.
Our products comprise only a part of a SAN. All components of a SAN must
uniformly comply with the same industry standards in order to operate
efficiently together. We depend on companies that provide other components of
the SAN to support prevailing industry standards. Many of these companies are
significantly larger and more influential in effecting industry standards than
we are. Some industry standards may not be widely adopted or implemented
uniformly, and competing standards may emerge that may be preferred by OEM
customers or end users. If larger companies do not support the same industry
standards that we do, or if competing standards emerge, our products may not
achieve market acceptance, which would adversely affect our business.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR
IMPEDE A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions of our certificate of incorporation and bylaws could have the
effect of discouraging, delaying or preventing a merger or acquisition that a
stockholder may consider favorable. We also are subject to the anti-takeover
laws of the State of Delaware that may discourage, delay or prevent someone from
acquiring or merging with us, which may adversely affect the market price of our
common stock. Further, in August 2002, our Board of Directors approved, adopted
and entered into a Stockholder Rights Plan which also may have the effect of
discouraging, delaying or preventing an acquisition which stockholders otherwise
may desire to support.
OUR STOCK PRICE IS VOLATILE.
The market price of our common stock has been volatile in the past and may
be volatile in the future. For example, since November 1, 2002, the intra-day
market price of our common stock as quoted on The NASDAQ
31
Stock Market fluctuated between $0.50 and $3.81. The market price of our common
stock may be significantly affected by the following factors:
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates by securities analysts or our failure
to perform in line with such estimates;
- changes in market valuations of other technology companies,
particularly those that sell products used in SANs;
- announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint ventures or
capital commitments;
- sale of or distribution by Austin Ventures of our common stock to
their limited partners or substantial sales by other significant
stockholders;
- introduction of technologies or product enhancements that reduce the
need for storage routers;
- the loss of one or more key OEM customers; and
- departures of key personnel.
The stock market has experienced extreme volatility that often has been
unrelated to the performance of particular companies. These market fluctuations
may cause our stock price to fall regardless of our performance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a description of the Company's market risks, see "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. We carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that as of April 30, 2004, the end of the
period covered by this report, our disclosure controls and procedures were
effective at the reasonable assurance level in timely alerting them to material
information relating to Crossroads (including its consolidated subsidiaries)
required to be included in our Exchange Act filings.
(b) Changes in internal control over financial reporting. During the quarter
ended April 30, 2004, there have been no significant changes in our internal
control over financial reporting that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
32
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities Class Action Litigation. We and several of our officers and
directors, were named as defendants in several class action lawsuits filed in
the United States District Court for the Western District of Texas. The
plaintiffs in the actions purport to represent purchasers of our common stock
during various periods ranging from January 25, 2000 through August 24, 2000. On
February 24, 2003, the Court entered a final judgment in the defendant's favor.
Plaintiff's appealed to the United States Court of Appeals for the Fifth
Circuit. On April 14, 2004, the Fifth Circuit issued an opinion, which affirmed
in part and vacated in part the district court's ruling. The remaining claims
were remanded to the district court. On May 12, 2004, the Fifth Circuit denied
plaintiff's request for panel rehearing. We continue to deny the remaining
allegations in the complaint and intend to defend ourselves vigorously. It is
not possible at this time to predict whether we will incur any liability or to
estimate the damages, or the range of damages, if any, that the Company might
incur in connection with this lawsuit.
Intellectual Property Litigation. On October 17, 2003, the Company filed a
lawsuit against Dot Hill Systems, Inc. (Dot Hill) alleging that Dot Hill has
infringed two of the Company's patents, U.S. Patent No. 5,941,972 (the '972
patent) and U.S. Patent No. 6,425,035 (the '035 Patent), with some of Dot Hill's
products. Subsequently, Dot Hill filed an answer denying infringement and
alleging the '972 and '035 Patents are invalid and unenforceable. Dot Hill
recently filed a third-party complaint against FalconStor, Inc. (FalconStor),
seeking indemnification for certain of Dot Hill's products at issue in the
litigation. In response, FalconStor has also denied infringement and alleged the
`972 and `035 Patents are invalid and unenforceable. Crossroads plans to
vigorously defend its patents against all counterclaims.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The Securities and Exchange Commission on October 19, 1999 declared
effective our registration statement on Form S-1 (File No. 333-85505) relating
to the initial public offering of our common stock. As of April 30, 2004, we
have used all of the net offering proceeds for the purchase of temporary
investments, consisting of cash, cash equivalents, and short-term investments.
We currently intend to use the net proceeds of the offering for working capital
and general corporate purposes, including financing accounts receivable and
capital expenditures made in the ordinary course of business. We also may apply
a portion of the proceeds of the offering to acquire businesses, products and
technologies, or enter into joint venture arrangements such as our joint
development agreement with NexQL, that are complementary to our business and
product offerings. We also may apply a portion of the proceeds to the payment of
cash dividends or for additional stock repurchases or other similar
transactions.
We did not repurchase any shares of our common stock during the first or
second quarter of fiscal 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held on March 4, 2004, our
stockholders voted on the following matters:
(1) The election of two Class III directors to serve until our 2007
annual meeting of stockholders, or until their successors have been
elected and qualified.
NAME OF NOMINEE NUMBER OF VOTES FOR NUMBER OF VOTES WITHHELD
- --------------- ------------------- ------------------------
Paul S. Zito 19,389,018 858,788
Rob Sims 18,825,950 1,601,856
33
(2) The amendments of our 1999 Employee Stock Purchase Plan.
NUMBER OF VOTES FOR NUMBER OF VOTES AGAINST NUMBER OF VOTES ABSTAINED
- ------------------- ----------------------- -------------------------
6,894,379 399,085 34,542
(3) The approval of the appointment of KPMG LLP as independent auditors
for the fiscal year ending October 31, 2004.
NUMBER OF VOTES FOR NUMBER OF VOTES AGAINST NUMBER OF VOTES ABSTAINED
- ------------------- ----------------------- -------------------------
20,301,704 104,456 21,646
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amendment of Crossroads Systems, Inc. 1999 Employee Stock
Purchase Plan.
31.1 Certification of Rob Sims, President and Chief Executive Officer of
the Company, as adopted pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
31.2 Certification of Andrea Wenholz, Vice President and Chief Financial
Officer of the Company, as adopted pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification of Rob Sims, President and Chief Executive Officer of
the Company, as adopted pursuant to Section 906 of Sarbanes-Oxley
Act of 2002.
32.2 Certification of Andrea Wenholz, Vice President and Chief Financial
Officer of the Company, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the second quarter ended April 30, 2004, we furnished one Current
Report on Form 8-K. Information regarding each item reported on is listed
below.
DATE FILED OR
FURNISHED ITEM NO. DESCRIPTION
--------- -------- -----------
February 24, 2004 Item 12 On February 24, 2004, we announced our results of operations for our first
quarter of fiscal 2004.*
- ---------------
* This furnished Form 8-K is not to be deemed filed or incorporated by
reference into any filing.
34
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROSSROADS SYSTEMS, INC.
June 8, 2004 /s/ Rob Sims
------------ --------------------------------------------
(Date) Rob Sims
Chief Executive Officer
(Principal Executive Officer)
June 8, 2004 /s/ Andrea Wenholz
------------ --------------------------------------------
(Date) Andrea Wenholz
Chief Financial Officer
(Principal Financial and Accounting Officer)
35
EXHIBIT INDEX
EXHIBIT
- -------
10.1 First Amendment of Crossroads Systems, Inc. 1999 Employee Stock Purchase
Plan.
31.1 Certification of Rob Sims, President and Chief Executive Officer of the
Company, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Andrea Wenholz, Vice President and Chief Financial
Officer of the Company, as adopted pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification of Rob Sims, President and Chief Executive Officer of the
Company, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32.2 Certification of Andrea Wenholz, Vice President and Chief Financial
Officer of the Company, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
36