Crossroads Systems Inc. (CRDS), the IP monetization company run by CEO Richard Coleman Jr., said it raised $7 million in a registered direct offering of common stock and warrants.
The Austin, Texas-based provider of data storage solutions, had been trying to raise $11.88 million in part to repay debt issued to Fortress Investment Group (FIG) that has interfered with its ability to monetize some patents.
In the registered direct, Crossroads is issuing 3.07 million units consisting of a common share and half a warrant to purchase a common share. Each unit is priced at $2.30 cents, reflecting a discount of 8.3% based on yesterday’s closing price of $2.51.
Investors who were not disclosed are receiving 5-year warrants to purchase 1.54 million shares at $2.76.
Shares of Crossroads fell 22 cents, or 8.8%, to $2.29 in early morning trading on the Nasdaq after the financing was announced.
The offering was arranged by Roth Capital Partners and Northland Securities.
Mark Hood, a Crossroads representative, declined to comment on why the company wasn’t able to raise as much as it previously said it planned to do.
On Nov. 6 Crossroads filed an S1/A with the Securities and Exchange Commission in which it said it planned to raise $11.5 million for an undisclosed number of Series H preferred shares and $382,500 for an undisclosed number of common shares.
The company had said it intended to use the net proceeds of the offering to continue to fund its efforts related to the monetization of its intellectual property portfolio, including the costs of ongoing litigation and other proceedings.
“We also may use a portion of our net proceeds to enhance liquidity and operational flexibility, including removing certain limitations placed on our non-’972 patents by repaying all or a portion of our existing indebtedness and certain other obligations under our agreements with Fortress, including the monetization call option payment required in order to relieve our obligations to Fortress to pay it a portion of proceeds from monetization of our non-’972 patents.”
In August, Crossroads engaged the intellectual property law firm of Kroub, Silbersher & Kolmykov PLLC, the principals of Markman Advisors LLC, to provide consulting services related to Crossroads' non-972 patent portfolio, consisting of 121 patents and pending patents developed over 16 years.
The company has said it is building on independent analysis of the non 972 patent portfolio, which concerns technology related to computer storage, targeting $82 billion in potential revenue.
The company’s 972 patents cover technology that is fundamental to secure and efficient access to network storage systems. Since 2001, Crossroads has licensed the '972 Patent family to more than 40 companies and received more than $60 million in license and settlement revenue.
Crossroads said its outstanding debt under its July 2013 credit agreement with Fortress consists of two term loans each in the amount of $5 million. One term loan matures on February 1, 2016 and the other on July 22, 2016.
The interest rate on these term loans is 10%. As of August 31, 2014, Crossroads had an outstanding principal balance of $5.94 million.
In July 2013, Crossroads also issued warrants to purchase an aggregate of 1,454,545 shares of its common stock to accredited investor CF DB EZ LLC, an affiliate of Fortress Credit Co LLC. These warrants, which were issued in connection with the loan transaction with Fortress Credit Co LLC, have an exercise price of $2.06 per share, subject to adjustment.
In order to obtain Fortress’ consent to issue effect the offering and issue the preferred stock, Crossroads agreed to maintain a minimum of $1.75 million of unrestricted cash at each month end, and a portion of these proceeds may be used to fulfill that covenant.
Crossroads had cash and cash equivalents of $7.08 million as of July 31, 2014. The company said Nov. 6 it expected to post a loss from operations of $5.7 million to $5.9 million on revenue of $11 million to $11.1 million in the year ended Oct. 31, 2014.
The financing from Fortress came several months after Crossroads CEO Robert Sims left the company and Chairman Steven Ledger and director Joseph Hartnett decided not to stand for re-election to the board.
This isn’t the only time that financing from Fortress has coincided with the departure of directors at a patent monetizer.
Two directors of Netlist Inc. (NLST) stepped down from the IP monetizer earlier this year around the same time the company announced a $10 million debt financing from Fortress.
Coleman was named interim president and CEO of Crossroads in May 2013 and in November 2013 became president, CEO and director. At the same time, Jeffrey Eberwein was named chairman.
Coleman had been a private investor and technological advisor. His company, Rocky Mountain Venture Services, had helped technology companies plan and launch new business ventures and restructuring initiatives since 1998.
He had been CEO of Vroom Technologies, chief operating officer of Metronet Communications, and president of US West Long Distance. He also had held significant officer-level positions with Frontier Communications, Centex Telemanagement, and Sprint Communications culminating in his appointment to lead its Technology Management Division.
Eberwein is the founder and CEO of Lone Star Value Investors LLC, an investment firm, that owns a 19.4% stake in Crossroads.
Prior to founding Lone Star, Eberwein was a portfolio manager for 11 years, most recently at Soros Fund Management and prior to that at Viking Global Investors and Cumberland Associates.
He also is chairman of Digirad Corp. and serves on the board of The Goldfield Corp., NTS, Inc., On Track Innovations Ltd and Aetrium Inc.
Other major shareholders of Crossroads include ACT Capital Management and Diker Capital Management, who each had 9.9% stakes before the latest financing, Thomas Wallace, who had a 6.1% stake, and Coleman with a 2.3% stake.
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