Crossroads Systems Reports Fiscal Third Quarter 2020 Financial Results

DALLAS, Sept. 3, 2020 /PRNewswire/ -- Crossroads Systems, Inc. CRSS ("Crossroads" or the "Company"), a holding company focused on investing in businesses that promote economic vitality and community development, reported financial results for its fiscal third quarter ended July 31, 2020.

Company Commentary

Despite the headwinds experienced early in the quarter as a result of the ongoing COVID-19 pandemic, Crossroads continued to drive profitable growth during the period and saw its mortgage portfolio largely stabilize and return to historical performance levels. Aided by the State of Texas' staggered reopening process, the Company recorded a substantial decrease in the number and velocity of forbearance requests, leading to a return to pre-pandemic performance levels and portending an improved finish to the fiscal year barring major changes.

After a condensed period of restructuring operations and building sufficient liquidity to withstand any potential COVID-related impacts, the Company is now refocusing efforts on its longer-term growth plans. To that end, Crossroads acquired a portfolio of 32 properties to add to its existing inventory through quarter end. 

The current work-from-home environment and uncertain global economic outlook have exacerbated the rising demand for affordable housing solutions, a need that Capital Plus Financial is uniquely situated to meet.  The Company expects to see continued demand through traditionally slow cycles, i.e. the fall and winter, based on the momentum in its markets witnessed to-date through the summer. Crossroads has seen positive initial sales momentum during the fiscal fourth quarter and is looking to build inventory to not only meet demand but also plan for renovated housing products to be ready for the spring 2021 sales season.

Fiscal Third Quarter 2020 Financial Highlights

• Total property sales income was $7.1 million for the quarter compared to $7.0 million for the same period in 2019. Despite an initial impact on sales volume related to the COVID-19 pandemic, the affordable market has been resilient, and the Company expects continued strong demand during the fiscal fourth quarter.
• Total interest income was $3.1 million, up from $3.0 million in the comparative 2019 period. The Company's mortgage portfolio grew to $126.0 million from $113.7 million for the comparative period in 2019.
• During the quarter, the Company completed 60-day forbearance agreements for 73 mortgage borrowers, resulting in $7.5 million in unpaid principal balance on the portfolio and an impact to interest income of approximately $202,000. Total forbearance agreements for fiscal 2020 reached 232 at quarter-end, totaling $23.5 million in unpaid balance. During the fiscal third quarter, there was a significant, sequential decline in the number and velocity of requests. Our borrowers who had requested forbearance are now starting to make their regular payments as they had prior to the COVID-19 pandemic.
• Operating income was $1.3 million compared to $1.3 million in the same period in 2019.
• Cash EPS (operating income less income to non-controlling interests) was $0.19 compared to $0.20 for the comparative period in 2019.
• Held 119 properties in inventory compared to 137 at the same point in 2019. The acquisition of new properties was delayed temporarily due to COVID-19, but the Company expects volumes to rise sharply over the next quarter; the Company acquired a pool of 32 properties during the period.
• Added $6.7 million in new single-family mortgages during the quarter.
• Book value as reported was $50.0 million, or $8.37 per share. Adjusted book value with $3.5 million of subordinated debt totaled $53.5 million, or $8.96 per share.
• As of July 31, 2020, the Company held a cash balance of $2.1 million compared to $834,000 as of July 31, 2019.

Fiscal Nine Months Ended July 31, 2020 Financial Highlights

• Total property sales income was $17.7 million for the nine months ended July 31, 2020 compared to $18.7 million for the same period in 2019. The decrease in sales volume during the period was a result of impacts related to the ongoing COVID-19 pandemic.
• Total interest income was $9.3 million, up from $8.8 million in the comparative period in 2019.
• Operating income was $3.5 million, up from $3.4 million in the comparative period in 2019.
• Cash EPS (operating income less income to non-controlling interests) was $0.51, which was an increase compared to $0.49 during the same period in 2019.

Management Commentary

"The proactive approach we took with our bank partners and our immediate response to build liquidity at the onset of the pandemic provided operational stability for our fiscal third quarter as we carefully monitored the gradual reopening in Texas," said Eric A. Donnelly, Chief Executive Officer of Crossroads Systems. "After an initial spike in forbearance requests during the prior quarter, we have seen an encouraging abatement in recent months as many of our borrowers are regaining financial stability and making on-time mortgage payments. Given the current pandemic backdrop, our portfolio performance has been highly encouraging. Furthermore, the demand for single-family housing in Texas is seemingly stronger than it was pre-COVID. Put together, even amid great uncertainty, we have effectively mitigated our portfolio risk and are well-positioned to generate sustainable growth over a long-term time horizon. At the same time, we remain committed to providing open and accessible financing to a traditionally underserved market. The struggle that communities across the nation face right now is immense, and CDFIs, like Capital Plus Financial, are on the front lines serving the most vulnerable."

About Crossroads Systems

Crossroads Systems, Inc. CRSS is a holding company focused on investing in businesses that promote economic vitality and community development. Crossroads' subsidiary, Capital Plus Financial (CPF), is a certified Community Development Financial Institution (CDFI) and certified B- Corp, which supports Hispanic homeownership with a long term, fixed-rate single-family mortgage product.

Important Cautions Regarding Forward-Looking Statements

This press release includes forward-looking statements that relate to the business and expected future events or future performance of Crossroads Systems, Inc. and Capital Plus Financial and involve known and unknown risks, uncertainties and other factors that may cause its actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, "believe," "expect," "anticipate," "estimate," "intend," "plan," "targets," "likely," "will," "would," "could," and similar expressions or phrases identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about Crossroads Systems' and Capital Plus Financial's ability to implement their business strategy, and their ability to achieve or maintain profitability. The future performance of Crossroads Systems and Capital Plus Financial may be adversely affected by the following risks and uncertainties: economic changes affecting homeownership in the geographies where Capital Plus Financial conducts business, developments in lending markets that may not align with Capital Plus Financial's expectations and that may affect Capital Plus Financial's plans to grow its portfolio, variations in quarterly results, developments in litigation to which we may be a party, technological change in the industry, future capital requirements, regulatory actions or delays and other factors that may cause actual results to be materially different from those described or anticipated by these forward-looking statements. For a more detailed discussion of these factors and risks, investors should review Crossroads Systems' annual and quarterly reports. Forward-looking statements in this press release are based on management's beliefs and opinions at the time the statements are made. All forward-looking statements are qualified in their entirety by this cautionary statement, and Crossroads Systems undertakes no duty to update this information to reflect future events, information or circumstances.

©2020 Crossroads Systems, Inc., Crossroads and Crossroads Systems are registered trademarks of Crossroads Systems, Inc. All trademarks are the property of their respective owners.

Company Contact:

Crossroads Systems

ir@crossroads.com 

Investor Relations Contact:

Gateway Investor Relations

Matt Glover and Tom Colton

CRSS@gatewayir.com

(949) 574-3860

Dear Shareholder:

We trust that this letter finds you and your families safe and healthy. Our office was not immune from the outbreak in Texas this quarter and, unfortunately, we had a small number of employees who tested positive for the virus. Thankfully, all those infected were quick to recover. Additionally, as a result of our rapid transition to a remote work environment at the onset of COVID as well as our proactive office deep cleaning, we were able to mitigate any potential risk of spreading.

We remain in daily contact with our customers and are assisting them with their needs as the virus continues to disrupt the lives of so many of our fellow citizens. The good news is that we are neither seeing any alarming trends in delinquencies nor anecdotal evidence of high unemployment from our borrowers. Unlike the Great Recession, during which housing and construction were severely impacted, the Texas housing economy and construction industry—which far and away accounts for most of the jobs our borrowers have—is quite healthy. Between developers who can't find enough land, builders clamoring for more developed lots to meet their housing demand, or companies like ours looking for housing to purchase for resale, the supply lines are tight. The only negative in this regard is the inflation to inputs – the cost of housing before rehab, material, and labor costs. While the easy answer is to pass this cost on the consumer, we, as a social enterprise, must always be mindful of our mission and the communities we serve, striking a balance between affordability and the profitability needed to sustain that side of the business.

During the quarter, we continued to build sufficient liquidity to withstand the disruption from COVID and reap the benefits of interest rates cuts on our debt costs. Though we've been able to temporarily absorb the increases in the costs of delivering homes to our communities, we are shifting our focus to stabilizing our margins by reducing miscellaneous spending and mitigating risks where possible. To that end, we were able to purchase a pool of single-family homes at quarter-end at 60% of appraised value. We are also looking for additional pools to increase inventory levels and prepare for the upcoming increase in demand that we tend to see during the Spring season.

Moving out of the macroeconomic uncertainty that clouded our fiscal second quarter, we have been encouraged by the sales inquiries throughout our markets for our affordable homes. On a personal level, buying a home is a monumental decision to make, especially during uncertain times, and we've been amazed by the increased sales activity with each passing month, especially given the historically low sales volumes seen in Texas summers.

Heading into the end of the fiscal year, we feel very protected and supported by both our liquidity and capital position. While our deferral of income during the pandemic stabilized our borrowers, this decision also resulted in a direct hit to our bottom line. Nonetheless, it was the right thing to do for our borrowers, which we believe will also contribute to the long-term trust, growth, and ultimate success of our Company. To have been there to support our incredible borrowers through this unprecedented time is a testament to the strength of CDFIs like ours, and we are proud to stay true to our mission.

Finalizing the acquisition of First State Bank continues to be one of our top priorities. Just last week, we announced a joint venture with BrightFi, an innovative FinTech solutions provider whose mission of serving the unbanked and underbanked aligns perfectly with our vision for Capital Plus. Our collaboration with BrightFi will help us quickly bring the best to our customers – beginning with attainable financing and now through low-cost, reliable, digital banking. The BrightFi platform will also help reduce our operating costs at a time when that is a critical factor for all banks. Rarely do missions meld so well and even more rarely do executive teams see the world as similarly as we do. We are excited about the partnership and look forward to presenting the rollout as the platform is built over the coming months.

Once again, our quarter exceeded our conservative pandemic-adjusted forecasts and expectations. CPF's  outstanding mortgage loan portfolio balance at the end of the quarter was $128.0 million, which included $2.0 million in its other higher-value residential mortgages. For the third quarter, CPF generated $3.1 million in interest income and $7.1 million in sales from the sale of properties in low to moderate-income census tracts. The consolidated operating income for the quarter was approximately $1.3 million before income attributable to non-controlling interests of $157,000 and accruing for a non-cash tax provision of $152,000. The Company measures the business operations on a cash earnings basis and offsets its tax provision against its deferred tax asset of $19.5 million. The Company doesn't expect to pay income taxes in the short run.  The net income after the provision and before income attributable to non-controlling interest was $980,000 compared to $1.1 million for the same period of 2019.  At July 31, 2020, CPF's unadjusted leverage was 2.44x and the consolidated cash coverage ratio, adjusted for one-time and transaction expenses, was 1.78x.

The current trends in national housing starts, tight inventory supplies, and mortgage generation give us great optimism for the future, but we are remaining vigilant for potential disruptions, ensuring that we're positioned for continued long-term, profitable growth. We are proud of our borrowers and know that our team is capable of withstanding whatever comes our way.

Saludos Cordiales,

Robert H. Alpert & Eric A. Donnelly

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SOURCE Crossroads Systems