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Overland Storage (NASDAQ:OVRL)

Q3 2013 Earnings Call

May 15, 2013 5:00 pm ET

Executives

Jim Byers - Senior Vice President

Eric L. Kelly - Chief Executive Officer, President, Independent Director and Member of Special Committee

Kurt L. Kalbfleisch - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Secretary

Analysts

Glenn Hanus - Needham & Company, LLC, Research Division

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Steve Emerson

James G. Kennedy - Marathon Capital Management, LLC

Evan Ratner

Wilson S. Jaeggli - Southwell Management, L.P.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Overland Storage Third Quarter Fiscal 2013 Financial Results Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, May 15, 2013.

I would now like to turn the conference over to Mr. Jim Byers of MKR Group. Please go ahead, sir.

Jim Byers

Thank you, operator, and thank you for joining us this afternoon to discuss Overland Storage's Fiscal 2013 Third Quarter Financial Results Conference Call for the period ended March 31, 2013.

Before we begin the call, I would like to note that management, during the course of our discussion today, including the Q&A section of this call, will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may discuss future plans and prospects for revenue, product introductions, market conditions, competitive conditions, gross profit margins, spending levels and other financial metrics.

We caution you that forward-looking statements relating to these and other subjects we may discuss involve risks, uncertainties and assumptions that are difficult to predict. They're not guarantees of performance, and the company's actual results could differ materially from those contained in such statements. There are many factors that could cause and contribute to such differences. We refer you to the risk factors and cautionary language contained in today's formal press release, announcing Overland's results, as well as the company's filings with the Securities and Exchange Commission, including the risk factors, management's discussion and analysis and other sections of the company's periodic reports currently on file with the SEC.

We remind you that our forward-looking statements are based on current expectations and speak only as of this date. The company undertakes no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this release and conference call.

Now with that said, at this time, I will turn the call over to Overland's CEO, Eric Kelly.

Eric L. Kelly

Good afternoon. Thank you for joining us for our fiscal 2013 third quarter conference call. After I provide a brief overview on our strategy and update of our quarter and new product offerings, I'll hand the call over to Kurt Kalbfleisch, our Chief Financial Officer, to review the financials in more detail. After Kurt's update, I'll have some closing remarks, and then we'll open the call for questions.

We believe Overland Storage's strategy to deliver world-class data storage solutions, both on premise and in the cloud that address businesses' requirements to manage, store, protect and archive their critical business data without adding complexity, continues to differentiate us. We also believe this strategy will enable us to achieve our goal of market leadership and profitability in 2013.

Before I dive into the details of the quarter, I feel that it's important to provide some context for a broader view of what's going on with the business as it relates to its potential strategic opportunities and the potential litigation.

As you're aware, we've had a strategy to grow the business and achieve profitability organically and through acquisition. This started with the acquisition of SnapServer product line in 2008, followed by the acquisition of the MaxiScale technology in 2010. The next piece of our growth strategy could involve a combination of Overland Storage and Tandberg Data. As disclosed in it's recent amendment to the 13D filed by Cyrus Capital with the SEC, we have been discussing with Cyrus the owner of Tandberg Data, a possible business combination between Overland and Tandberg. The terms of this potential transaction have not yet been finally agreed upon and remain subject to both our Board of Directors and our shareholders.

At this stage, we believe the transaction could create a stable foundation for increased revenue and profitability, as well as accelerating our strategy of becoming a global leader in the end-to-end data management and data protection marketplace. In its letter to me this morning, Cyrus is proposing the following:

Overland would acquire Tandberg on the basis of a merger of equals. Overland shareholders, on a fully diluted basis, would own 50% of the Overland after the combination and Tandberg shareholders would own the remaining 50%. In addition, it is anticipated that the transaction may include an opportunity for Overland shareholders to receive cash for a portion of their shareholdings in Overland. The letter has also noted that Tandberg's revenue for calendar 2012 was approximately $67 million on a U.S. GAAP basis and further highlighted the following potential synergies: substantial cost synergy to facilitate profitability and cash generation post integration and restructuring; the 2 companies' channels and route-to-market are complementary; both companies share a common target market, business users and complementary customer base; complementary products to drive greater relevance and share of customer purchases; opportunity for additional RDX removable hard disk license revenue; much larger sales teams with further greater -- with far greater geographical and account coverage.

By combining the complementary NAS technology and product portfolio from both companies, more markets will be covered, allowing a significant increase in revenue; geographic expansion for the Overland product set; potentially new opportunities with global OEM accounts; stronger marketing organization and provide much greater efficiency and drive demand; stronger R&D capability to protect and grow existing business as well as develop innovative products for the future.

Tandberg tape automation engineers can provide continuity to the automation business for both companies. This should also protect and enhance the significant service revenue that Overland has created over the years.

Tandberg has a world-class manufacturing integration facility in China. Greater scale and market presence will provide an opportunity to compete more effectively.

We are seriously considering this proposal and the potential synergies described above, and we are evaluating whether it represents the best alternative for our shareholders.

Related to our pending litigation against BDT. The ITC has agreed and has granted our petition to review the Administrative Law Judge's initial findings regarding our patent lawsuit. It has been and continues to be our position that BDT FlexStor II product do infringe on our patents. So what does this mean? If the commission reverses the LJ's initial findings, we expect the commission to enter an exclusion order instructing the U.S. Customs Department to stop the libraries from being imported into the United States. The current date for the ruling from the commission is on or before June 25, 2013.

Related to the quarter of fiscal Q3 2013, net revenue was $11.6 million compared to $12.6 million for the second quarter of fiscal 2013. We saw an increase in SnapServer disk-based sales of 7.3% and a decrease in overall branded tape revenue of 18.3%. This is primarily driven by a downturn of sales in our EMEA region. I would go into more detail for both product lines in just a minute.

As we've discussed before, our focus has been on building a robust brand of product portfolio that addresses primary, nearline and archival storage requirements that are not just cost-effective but easy to deploy and simple to manage. We continue to evolve this strategy with the introduction of SnapSAN and SnapScale product lines in the last few quarters, in addition to these products to our portfolio, allowing us to reach a significantly larger addressable market than we've had in the past, increased average deal size and improved margins.

Now I'd like to give more detail on the sales of each of the regions and product categories. We continue to see increased market traction in our Network Attached Storage products, specifically with our SnapServer DX Series product line. On a year-over-year basis, revenue of SnapServer DX Series grew 28%, led by the growth of our midrange SnapServer DX2 NAS product, which grew 54% quarter-over-quarter and drove an 18% increase of our average sales price.

Our SAN product line, SnapSAN, also saw continued sequential growth this quarter of 24%, reflecting continued benefits from our recently launched S3000 and S5000 product lines. These products are being deployed by large enterprises, which includes banking institutions, government agencies, pharmaceutical companies, and offer enterprise-class features that we have not previously been able to offer before in this market segment.

While overall library revenue was relatively flat, we had a decrease in overall tape revenue of 18.3% sequentially. This is driven by a 29% decline in the EMEA region compared to the previous quarter and a decrease in add-on drive. We believe the add-on drive decline was primarily caused by the industry transition from LTO-5 to LTO-6, which has doubled the capacity of tape drives, resulting in fewer units being installed for the same capacity.

Overall, we remain cautiously optimistic about market conditions in 2013, as global storage needs continue to grow and companies not only face exponential data growth but also the regulatory requirements related to the protection and retention of their data. However, we continue to be mindful of macroeconomic issues occurring in Europe and reduced spending in the U.S. channel, specifically, in the government and educational segments, which historically represented 23% to 25% of our North America business.

So just specifically to that, slower spending in Europe impacted our total revenue in the third quarter. Overall fiscal Q3 sales in Europe were down 15% sequentially and significantly affected our total revenue in the third quarter. This is predominantly related to the sale of our tape products, as well as lower add-on sales disk -- add-on disk drive sales across Europe as a whole. However, our strategy of entering the growth segment of the storage market continues to show positive results. The SnapServer sales grew 19.1% sequentially in EMEA.

In North America, where we typically see a seasonal downturn in the third fiscal quarter, sales were relatively flat quarter-over-quarter in spite of the lower-than-expected sales in the government sector where customers continue to delay spending.

In APAC, we saw a strong revenue traction, as we increased our commitment and investment in this region.

Our business pipeline remains strong and growing, as we continue to build market acceptance and adoption of our disk-based product lines. Our overall pipeline is approximately $60 million, of which $10 million is our newly launched SnapScale clustered NAS product, which represents a significant and growing portion of our overall pipeline.

Now let me update you on SnapScale. Just to remind you, SnapScale is our enterprise-class clustered NAS solution built for the midrange enterprise market. SnapScale continues to represent a significant opportunity for Overland, and we remain on track with our expectations for building market awareness. And I'm happy to report that SnapScale has recently been named a finalist as Data Center Product of the Year. SnapScale is also in consideration to win Network Computing's New Product of the Year Award, Network Product Guide's Best Storage Solution and the American Business Awards New Product of the Year.

As we've noted, SnapScale is not only a substantial product market opportunity for Overland but also represents the paradigm shift for our business. SnapScale is creating opportunities for both on premise and in the cloud that are significantly larger opportunities than we have seen in the past. And we believe that the positive market reception and the increasing interests we are seeing reflect the substantial value proposition that SnapScale provides.

While we're excited about the opportunity that SnapScale presents, it's important to remember that while we've launched this product in mid-October last year, we only began building the global business pipeline for SnapScale this past January.

In the last 4 months, we've grown the pipeline significantly. However, given where SnapScale fits in the IT infrastructure, it has a much longer sales cycle, closer to 9 months. Given this, our belief is that we will expect to begin to generate meaningful revenue from SnapScale in the fourth calendar quarter of 2013.

In addition, as part of our strategic product roadmap, we need to stay ahead of the ever-changing storage market environment. We will continue to seek and add innovative and competitive new products and further expand our portfolio and open additional market opportunities.

In conversations with our partners and our customers globally, it is clear that the cloud continues to present a large market opportunity. As we finalize our cloud strategy, we are working to position ourselves to support both the physical infrastructure as well as the cloud, which will further our leadership position in the enterprise storage market.

I will have final comments at the end of the call. But now, I would like to turn the call over to Kurt, our Chief Financial Officer, to review the financials.

Kurt L. Kalbfleisch

Thank you, Eric. Let me provide some further detail on our fiscal third quarter results. Total revenue for the third quarter of fiscal 2013 was $11.6 million compared to $15.2 million in the same quarter of fiscal 2012 and $12.6 million in the immediately preceding quarter.

Total branded product revenue in the third quarter, including service and warranty, was $11.5 million compared to $14.4 million in the same quarter of fiscal 2012 and $12 million in the immediately preceding quarter. Warranty and service revenue totaled $4.8 million or 41% of total revenue in the third fiscal quarter compared to $6.2 million or 41% of revenue in the same quarter last year and $4.8 million or 38% of revenue in the immediately preceding quarter.

We remain cautious about the uncertain market environment in Europe, as during the quarter, we continued to see evidence of difficult macroeconomic conditions, which resulted in reductions of 7.2% in the EMEA revenue as compared to the same quarter last year and 15% when compared to the immediately preceding quarter.

During the third fiscal quarter, we experienced growth in the SnapServer family of products of 7.3% worldwide when compared to the immediately preceding quarter and a decline of 3.5% compared to same quarter of fiscal 2012. The increase this quarter as compared to the second fiscal quarter was driven primarily by substantial increases in sales of the SnapServer DX Series 2U platform. This unit volume and revenue were up by approximately 50% as compared to the prior quarter.

Tape revenue decreased 18.3% or approximately $770,000 when compared to the immediately preceding quarter and decreased 19.8% or approximately $850,000 compared to the same quarter of fiscal 2012. The decreases in revenue for both quarters were primarily due to the reduction in tape revenues in the EMEA. Within the tape products, the tape library revenue remained relatively unchanged with the decrease being primarily attributable to the reduction in sales of add-on drives within the quarter.

Our gross margin percentage for the third quarter was 33.1%, up from 31.1% in the same quarter of last year and down from 36.5% in the immediately preceding quarter. Product margins remain stronger during the quarter as the sequential decrease was due to increases in repair costs during the quarter.

Total operating expenses, including stock-based compensation for the third quarter, were $9 million compared to $8.4 million in the same quarter of last year and $8.7 million in the immediately preceding quarter. The sequential increase in operating expenses was primarily due to planned increases related to launch activities of our new SnapScale clustered NAS solution.

Total share-based compensation expense included in the third quarter of fiscal 2013 was approximately $1.2 million compared to $1.3 million in the immediately preceding quarter and $1.1 million in the third quarter of fiscal 2012. We expect stock compensation to remain in the range of $1.1 million to $1.3 million in the fourth quarter of the fiscal year.

Depreciation and amortization for the third fiscal quarter and the immediately preceding quarter was approximately $300,000 and was approximately $400,000 in the third quarter of fiscal 2012. The net loss for the third quarter of fiscal 2013 was $5.1 million or a loss of $0.17 per share compared to a net loss in the same quarter of fiscal 2012 of $3.8 million or $0.16 per share and a net loss in the preceding quarter of $4.3 million or $0.15 per share.

On the balance sheet, cash and cash equivalents at March 31, 2013 was $14.1 million compared to $10.5 million as of June 30, 2012. At the end of the third quarter, we had $3.5 million outstanding under our credit facility, which remains unchanged from the preceding quarter and $13.25 million outstanding under our convertible notes.

Net accounts receivable was $6.3 million at March 31, 2013, compared to $7.7 million at the end of the preceding quarter. Operating cash used in the third quarter of fiscal 2013 was $2.9 million compared to $3.1 million in the preceding quarter.

With that, I will turn it back to Eric.

Eric L. Kelly

Thank you, Kurt. I would like to conclude by saying that we continue to be excited about the significant market opportunities and the continued traction and adoption of our new branded products. As we look towards the balance of the year, our primary focus is to strengthen our engineering efforts to support our product roadmap, deliver new products and features to maximize the opportunities within the large and growing markets that they address. While there's still work to be done to generate the kind of growth we want to see, we believe our turnaround is starting to gain traction. We are seeing a healthy pipeline of new opportunities in the markets we are targeting. And we believe the combination of an improving macroeconomic environment, our strategic partnership and the new product coming to market over the course of the year will increase our confidence in being able to achieve financial growth and profitability in the second half of 2013.

I would now like to open the call up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Glenn Hanus with Needham.

Glenn Hanus - Needham & Company, LLC, Research Division

So at the very end there, you made a comment on your financial outlook. Are you still looking for -- I think you've talked in the past about $18 million to $20 million in revenue, 37% to 40% gross margins, OpEx $8.4 million to $8.9 million. That's what would be required to reach profitability. And then -- and so I'm assuming you're saying the fourth calendar quarter now of this year is that -- is -- are all those still your targets?

Kurt L. Kalbfleisch

Glenn, it's Kurt. I think we're pretty comfortable on not having to get to that revenue number anymore at this point in order to get there with some of the progress we showed. The quarter before this one, we just reported in regards to margins and being able to work our way back up beyond that. I think that the top line will be able to -- be a little bit reduced from there and still be able to reach that goal. At this point, we're not going to get specific numbers on that, but we feel comfortable that we won't have to get to $18 million to $19 million?

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. Then can you talk about the -- so would it still be your -- the gross margin now in the 37% to 40% range or the OpEx that -- can you talk about what's your think -- is OpEx still -- do you have any OpEx reduction plans or anything? And what's the gross margin going to be like in a few quarters?

Kurt L. Kalbfleisch

I think the 37% to 40% is still a targeted range that we feel comfortable with. And on the OpEx, we've got some things, obviously, that we're working on. The San Diego building, we'll see when we're able to move out of that. Some other things that we'll be able to, that were onetime expenses, that we've incurred over the last couple of quarters, that we'll be able to stabilize and make some impact there as well.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. So it sounds like the gross margin target is where it was and may -- and on less revenue you get there with possibly less OpEx?

Kurt L. Kalbfleisch

I think that's fair. Yes.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. Then on the -- let's shift to the gross margins there. The product gross margins were -- at least, they were light relative to my forecast. Can you talk about what the outlook is for gross margins next quarter? Why were they light this quarter on the -- especially on the product side? Some comments there?

Kurt L. Kalbfleisch

Yes, W.hat caused the gross margins was obviously -- part of it was the decrease in volume, and secondarily was the increase in repair expenses according to warranty and non-warranty repair. We're up from last quarter as well, which with the decreased revenue, impacted the margins more than what we -- would have like to seen. We expect to see a recovery this next quarter, and we're back towards the margins from last quarter and then surpass those hopefully towards the end of the calendar year.

Glenn Hanus - Needham & Company, LLC, Research Division

So recovery in both the product and the service side?

Kurt L. Kalbfleisch

Yes.

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. Maybe you could talk about -- if we shift to Tandberg a little bit, could you give us any more of a profile on Tandberg in terms of -- I mean you mentioned revenues, are they currently profitable? And what's their mix of business, disk and tape? I assume it is pretty much all tape. And then also, could you -- you've given us a lot of synergies here. Could you rank some things? What's really going to drive if the companies were combined? What are the top 2, 3, things that are really going to drive combined profitability that would really enhance shareholder value?

Eric L. Kelly

Glenn, this is Eric. I mean, as you know, Tandberg is a private company. So not a lot of their financials there in a public market. But what they did disclose in their letter was that they're roughly about $67 million trailing. And one of the things that's going to drive us to profitability in the combination is one of scale. So as we've talked about in the letter, they -- if by having a larger company, north of $100 million in revenue, is definitely going to provide us scale. I also highlighted that they have a world-class manufacturing facility in China, which we will be able to leverage as well. Our products are very similar, so they're -- they both have tape products, but they also have disk products as well. They just launched a NAS product that is complementary to what we have. They have their RDX product line as well. So a lot of synergies from just manufacturing operations, technology and products and also the combination of the sales and marketing organizations as well gives us that velocity to be able to accelerate our path to profitability and have a much better technology roadmap as well.

Glenn Hanus - Needham & Company, LLC, Research Division

Can you talk just about -- can you talk a little bit about just airing all this in public? You're sort of reading this. I'm just wondering why this is sort of coming out publicly and you wouldn't -- coming out here is the definitive agreement and here is really how we're going to get from a to b. Can you talk about the process here, your own feelings about really supporting this deal and whether there's some other strategic options being considered?

Eric L. Kelly

The reason why we wanted to discuss this was because of the requirement for a 13D filing. Because Cyrus Capital was an investor in our last round of financing. They put about $13.2 million in the last round of financing. And because of that, there was a 13D filing that they have to provide at the close of that initial round, and there's any significant changes that they had to amend their 13D filing. So that was the reason why it's a -- we're talking about it in our earnings call.

Glenn Hanus - Needham & Company, LLC, Research Division

All right, so it sounds like you're pretty supportive but negotiations are still being finalized.

Eric L. Kelly

Yes. I mean, as I stated, we -- and stated in the letter, we've been in conversations with them for some time. And now it's something that we'll be getting -- we have 2 steps obviously. It has to be approved by our board and then it has to be approved by our shareholders. But our objective is to make sure that this is the best opportunity available for our shareholders.

Glenn Hanus - Needham & Company, LLC, Research Division

If the deal were consummated, can you make any comment about potential accretion to earnings?

Eric L. Kelly

Not at this time, Glenn, but as soon as we are able to, I will make sure that you have that information.

Operator

Our next question is from the line of Krishna Shankar with Roth Capital.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Yes. What was the revenue mix for the quarter, again, between your disk tape warranty and service revenues?

Kurt L. Kalbfleisch

Yes. This is Kurt. Warranty was 41% of the total and -- let me just look up here, on the tape side, we were at about 35%. The remainder was disk and service and other.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Okay. And regarding the June quarter, are you able to provide any guidance in terms of bookings, what you see in EMEA and some of the revenue opportunities in the June quarter? Can you provide some color on how business trends are so far shaping up for the June quarter?

Kurt L. Kalbfleisch

No. At this point, we're not going to be providing any granularity in regards to the June quarter.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Okay. And on the SnapScale products, what kind of applications are you getting design wins there in terms of what -- where are you seeing the traction there in terms of design wins and applications for the Snap store family?

Eric L. Kelly

Yes. Krishna, this is Eric. It's actually across the board. We're seeing in the SnapServer family both, I would call, primary storage for I'd say small and medium enterprise, secondary stores where people are looking for very simplistic way to back up and store their information. The other thing that we see fairly large wins is what I call the distributed enterprise, where corporations have either divisions or units globally. But they want to make sure they have local NAS solution at their particular locations. And the other thing that we're seeing a lot of activity is really in our scale-out products where people are not looking -- they're looking, not only on premise, but also looking at deploying our clustered file system into their cloud infrastructure. So the good news is whether -- we're having a very broad success across multiple industries, and even with some of the impact in Europe, we're still, as we highlighted, our NAS platform continues to grow there as well.

Operator

Our next question is from the line of Steve Emerson with Emerson Investment Group.

Steve Emerson

Let me start with the ITC. Historically, when they rule to rehear or hear at the pool board or ruling by their hearing examiner, what proportion of the time does the board or has the board historically overturned the hearing officer?

Eric L. Kelly

Steve, great question. What we've been told by DLA, who is probably one of the most prolific folks in the ITC arena, they say it's probably about 50% of the time, it is reversed by the full commission.

Steve Emerson

Okay. If it is reversed, and you do a merger with Tandberg, will there be a mechanism for an adjustment in the merger price? Is this one of the negotiating point you're working on?

Eric L. Kelly

Yes. I mean, Steve, I -- I mean, obviously, I can't address that at this point, but everyone understands on both sides the potential for the patent litigation and the ITC ruling. So in the forefront of everyone's mind, yes.

Steve Emerson

Okay. If you conclude some kind of an agreement, would that deliberately be beyond the date, the June date, of the full hearing of the ITC?

Eric L. Kelly

No, it wouldn't be deliberate. We're looking at this. We think it's something that we just take a serious look at. As I've mentioned, we think that definitely accelerates our strategy. And as Cyrus Capital pointed out, there's a list of synergies that could potentially make it a good opportunity for both companies.

Steve Emerson

Okay. Can you give us any flavor as to the latest quarter run rate in Tandberg and what kind of a revenue decline they are seeing, which may be similar to your own?

Eric L. Kelly

Yes. Steve, we don't have -- we're under NDA with the Tandberg information. So I -- it's not something that I can disclose publicly at this particular time.

Steve Emerson

Okay. Are -- I guess, are you starting to see an upturn in orders other than your Snap series?

Kurt L. Kalbfleisch

Yes. Steve, this is Kurt. Where we're seeing the bulk of the growth from last quarter of this was in the -- on the disk-based products. And that's also where our pipeline is growing the fastest. Within this quarter, we're not yet giving any color on that. But obviously, last quarter, there was a decrease in the tape-based products related to, primarily as we stated in the call, the add-on drives whereas as our tape libraries are staying relatively consistent.

Steve Emerson

Are the -- is the add-on drive now starting to grow now that they've absorbed the generation changeover, which doubled capacity per drive?

Kurt L. Kalbfleisch

I think we'll know better as we move through this quarter. But again, at this point, I wouldn't want to go into any specific detail on the quarter we're currently in.

Operator

Our next question is from the line of Jim Kennedy with Marathon Capital Management.

James G. Kennedy - Marathon Capital Management, LLC

I'm assuming that this is the forum at which we should ask relevant Tandberg questions.

Eric L. Kelly

No. I mean, I -- Jim, I can't really go into details on Tandberg business. They are -- as you know, they're a private company, and all of the due diligence that were doing, obviously, is confidential. So at this point, we really can't answer those questions.

James G. Kennedy - Marathon Capital Management, LLC

Well, can you answer the question of are -- have you been talking with other companies or looking at other strategic alternatives to this one?

Eric L. Kelly

Really can't answer that question as well, Jim. I mean, we always, as you know, look -- continue to look at strategic partners and how we actually ensure that we expand our business. But I can't really talk about specific opportunities other than this one.

Operator

Our next question is from the line of Evan Ratner with Charter Management.

Evan Ratner

I just wanted to echo those same questions, are you actively running a sales process?

Eric L. Kelly

Yes. I mean we -- yes, we -- as I said, we always look at strategic partners, but I can't really go any further than that. I think that in terms of the opportunity with Cyrus Capital and Tandberg, I mean, I can -- as I highlighted some of the strategic or synergies that they feel are relevant to a combination. But that's pretty much as far as I can go as you probably understand.

Evan Ratner

No. I completely understand. Now I guess my other question is, right now, the company is about $35 million enterprise value. I mean do you expect, if it's a merger of equals, I mean, enterprise value basically to double through this acquisition?

Kurt L. Kalbfleisch

I think it'd be a little premature for us to comment specifically on that with the lack of information that's currently out there. Obviously, the one piece of information that Cyrus disclosed today was their trailing 12 months' revenue. And at this point, that's kind of where we can point to without any additional data out there.

Eric L. Kelly

But you would definitely -- as everyone look at this, it has to be a 1 plus 1 is greater than 2, right? Or it doesn't make sense for our shareholders. And so that's, obviously, what we'll be looking at that there's going to be the combination of the 2 is much better than -- it'd be much greater than 2, right, which I think that's what your question was.

Operator

[Operator Instructions] Our next question is from -- a follow-up question from the line of Jim Kennedy.

James G. Kennedy - Marathon Capital Management, LLC

Eric, are you guys limiting questions today?

Eric L. Kelly

I think we have so many queued up. I think, so we're just trying to make sure that we move through the list.

James G. Kennedy - Marathon Capital Management, LLC

Okay. Am I going to cut off for some reason?

Eric L. Kelly

Oh, no. Go ahead, Jim.

James G. Kennedy - Marathon Capital Management, LLC

I want to come back to my question to you because what I see at the end of this 13D is a breakup fee of $1.5 million or break fee of $1.5 million or 25% of any value proposed above our proposal. So how do I read that? Is there a proposal indeed? If you are a merger of equals, and to the gentleman's point before, we have call it a $35 million market value. Does this essentially mean that if someone wanted to buy you for anything more than -- well, if they want to buy you, period, and you agree. But if any body wanted to buy you for more than $70 million in lieu of this that we would pay them 25% above and beyond $35 million?

Kurt L. Kalbfleisch

Yes. Jim, it's a great question. As I think I mentioned, we received this letter around 7:30 this morning. We haven't had a chance to really go through a lot of the details or all the details in terms of the proposal. And as I said, obviously, this has to go through review with our board. And so, yes, we saw that as well in terms of, yes, the $1.5 million and the breakup fee. I mean, I think we have not signed the agreement. Obviously, we have to go through the board. So you're looking at it and -- just as we are, but -- so I wouldn't...

James G. Kennedy - Marathon Capital Management, LLC

Eric, I guess what I'm really surprised at is if you've been in discussions with them for a period of time, you've seen your -- you've seen their financials, you've seen what you need to see and yet they put a letter out today with a roughly 2-day deadline on it? That -- something in that doesn't sound right in terms of you're seeing this particular deadline and penalty for the first time. I mean, it sounds to me as though the negotiations weren't necessarily as overwhelmingly favorable as everyone would like them to be, otherwise, why would they even have a letter like this?

Eric L. Kelly

Well, I think, Jim, the interesting thing is because of the 13D filing, when they send us a letter, they have to publicize it through the 13D. And so, typically, like you to have letters going back and forth and negotiations going back and forth. In this particular situation, once they send a letter to us they have to publicly disclose it. So the sequence of events in terms of what you would typically happen versus having this out in the public view, so quickly, kind of they don't coincide. So I can understand the confusion. But that's kind of the SEC guidelines in terms of the 13D filing and amendments that have to happen. Did that help, Jim?

James G. Kennedy - Marathon Capital Management, LLC

That was my only point as to why that's in there.

Operator

Our next question is from the line of Wilson Jaeggli with Southwell.

Wilson S. Jaeggli - Southwell Management, L.P.

Yes. And we understand that 13D has to be filed and has to be updated like this. But this almost becomes a hostile situation in the sense of a 2-day deadline. Is this the first time you've seen this deadline?

Eric L. Kelly

Yes, it is. It's the first time I've seen it with the letter. But I -- Wilson, let me just kind of clarify it, in no way do I consider this hostile. I think the letter came across. Obviously, there'll conversations about multiple elements in the letter and beyond that in terms of, does this make -- is it the right thing to do for our shareholders? So I wouldn't just get stuck on one point that maybe in the letter, but it's clearly not a hostile situation. And so I have to make sure you don't take it the wrong way.

Wilson S. Jaeggli - Southwell Management, L.P.

Okay. I assume you'll put out a release of some sort if the board approves and you sign this letter.

Eric L. Kelly

Oh, absolutely. Yes.

Operator

Our next question is a follow-up question from the line of Steve Emerson.

Steve Emerson

Yes. I certainly hope you're going to protect yourself from what I would characterize as a take-under situation, where you agree to a proposal, you're still bleeding cash and the terms start to change.

Eric L. Kelly

Steve, we will make sure that would -- that doesn't happen.

Steve Emerson

Okay, great. So there -- if you negotiate a deal, there'll be penalties on their part for not executing.

Eric L. Kelly

Yes. [indiscernible].

Steve Emerson

I have to ask these things, because there's so little information and so small inability on your part to comment.

Eric L. Kelly

Yes. I know, Steve. It's important. I would love to be able to provide more detail. So it's -- but I felt -- well, we have to get this out just from the guidelines of the 13D. And I wanted to make sure that guidance to our earnings update as well. But just to be clear, I mean, we -- there's a long road from here to there. We'll make sure -- I mean, our job is to make sure that this is a great opportunity for our shareholders and that we don't do anything that's going to damage the value that we created for you.

Operator

There are no further questions at this time. I'd now like to turn the call back over to management for closing remarks.

Eric L. Kelly

Well, again, I wanted to thank everyone for attending our fiscal 2013 third quarter earnings call. We will clearly continue to provide updates as the business progresses and the strategic opportunities that are in front of us today. So I look forward to updating everyone as soon as we can. Thank you, again, for attending.

Operator

Ladies and gentlemen, this concludes the Overland's Storage Third Quarter Fiscal 2013 Financial Results Conference Call. If you'd like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030 with the access code of 4618527. We'd like to thank you for your participation. You may now disconnect.

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