Overview:

After hours, Crossroads reported earnings of -$0.16 per share and revenue of $2.08M (-25.4% Y/Y). At face value, these results are negative.

I remain long the company for several reasons as the company continues to ramp up. The company is moving forward ramping up two key areas of its business (its sales force and its IP holdings). The company trained nearly 73 sales professionals and 66 solutions architects to sell StrongBox moving forward. As stated in my original thesis, I expected StrongBox to have an upward sloping adoption curve, nothing imminent.

Further, the company has taken on Markman Advisors, (a law firm and the original authors on CRDS's IP holdings) to evaluate the company's non-'972 patent portfolio that is targeting $82B in revenue and is currently in 6 lawsuits. Further, the company has contacted a dozen IP monetization firms to review the value of the non-'972 assets moving forward.

There are several other reasons why I am long the company. These reasons include:

• A $128M Net operating loss to shield future profits from taxes
• Strong insider buying, with Jeffery Eberwein (owner of Long Star Value Management and Director and Chairman of CRDS) owning 14.6% of the company. Full ownership can be found here
• $150K in strongbox revenue, purchase orders signed, to be recognized in the 4Q

StrongBox:

StrongBox has also been upgraded and improved and is no longer a niche appliance and is now disruptive in the marketplace. StrongBox files can now be augmented like any other NAS, and the July release of StrongBox data manager, files can be moved much easily. With 50 to 80% of organizations' data not being accessed more than once, makes keeping it on expense storage systems too expensive. Along with the growth of data, 76% data storage growth within organization isn the next 12-18 months.

Managers can move this data from expensive storage to StrongBox and reduce total costs by 50%, and reduce the need to backup files. Expensive third party applications are used to backup and retrieve files and means that users can not access files easily. Files on StrongBox are easily accessible and are already backed up on tape. The company has won several accounts such as Ithaca college and the Tennis channel. StrongBox's benefits are huge on a storage basis and on a lower total cost of ownership basis, and the company has been enhancing the system over the past several months.

• Recently, Qualstar, a leading manufacturer of tape library systems partnered with Crossroads to offer cost-effective archiving solutions. (ReadVerify Appliance)
• Meritage Homes, the eighth largest home building company partnered with CRDS for its SPHINX tape solution to provide complete data protection, consolidate backups and provided disaster recover protection.

Further information on the valuable benefits of StrongBox which the sales team will use as selling points moving forward can be found here. Information regarding the new features on StrongBox 2.3 can be found here.

On an '972 IP basis: (different from non-'972 portfolio)

• CRDS dismissed the case against Dell, and moved that product revenue to the IP cases against NetApp and Quantum (since the latter companies actually produced the products).
• Markman hearing for all defendants on October 6/7 to obtain claim construction
• Various IPR requests on CRDS' patents
• Re-exams in 2004 at USTPO examined over 200 prior art references and in 2006 affirmed certain patents without review.
• These patents have generated $62M in revenue from 50+ companies. 17 without litigation, 34 with litigation.
• Never lost a case.

On the non-'972 patents:

• Building on independent analysis of the portfolio targeting $82B in revenue, the company has hired Markman Advisors to develop a monetization roadmap.
• Patents led to industry standards in the storage space
• Many potential defendants
• Developing monetization with care due to the size of the portfolio
• Developing partnership alternatives with IP monetization firms, looking for reviews from over 12 firms on the value of the portfolio to choose the best path.

I believe CRDS will be worth significantly more than it currently is over the next year. I highly recommend listening to the company's conference call.