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Summary

  • Sphere 3D owns barely $15 million in assets but is offering to buyout Overland Storage for more than $80 million.
  • Canada-based Sphere 3D is a massive money-loser hyping an aging technology that already exists.
  • Overland was nearly booted off the Nasdaq multiple times, sports a going concern issue, claims most recent sales from a recent acquisition and ran up $148 million in losses.
  • Primarily artificially fueled, Overland rocketed from 80 cents to about $4 in six weeks, while Sphere 3D jumped from 44 cents to nearly $10 in 52 weeks.

By Sonya Colberg, Senior Investigative Reporter

Overland Storage (NASDAQ:OVRL) knows a zombie when it sees one. The irony is that the one it sees at the moment is Sphere 3D (SPIHF) (ANY.V), the very company that is buying Overland.

The two unprofitable companies last week announced an all-stock deal worth over $80 million that within the next four months would hand Overland assets to its current partner, Sphere 3D. Canada-based technology company Sphere 3D trades on the Canadian exchange as "ANY.V" and over-the-counter as "SPIHF."

Overland considers Sphere 3D in such horrible shape and of so little promise, it acknowledged in its Securities and Exchange Commission filings that ANY.V is entirely capable of pulling down wounded Overland.

Here are a couple highlights straight out of Overland's 10-Q, filed the same day ANY.V made an astounding offer - a 53 percent premium (~$4.40 offered for shares that closed at $2.90) to buy out Overland:

  • "Sphere 3D may not be able to achieve or maintain revenues or profitability"
  • "Limited trading of Sphere 3D's stock on the TSX Venture Exchange"

Overland crammed its filings with shockers guaranteed to worry any investors who might assume ANY.V has found a wealthy sugar daddy to revive the company (though the merger depends partially on ANY.V setting up "bought deal" financing in order to loan Overland $5 million.) These issues include:

  • Overland has $2.4 million cash and about $4.9 million in short term investment - and got $1.7 million cash from its acquisition of Tandberg four months ago.
  • Though revenue reached $20.2 million, recurring losses and negative cash flows "raise substantial doubt about its ability to continue as a going concern."
  • Net loss to Overland shareholders is 44 cents. (Net loss of ANY.V shareholders is 4 cents.)

Under the terms of the merger, ANY.V will issue 9.4 million shares on closing, expected sometime between July 1 and September 30.

At recent prices, the terms would spike ANY.V's market cap from about $190 million to an even more outlandish $270 million.

So that's $270 million for an overhyped, over-the-counter zombie company propped up by a suffering San Diego-based company.

"It's like the Wild West when it comes to investing in small cap Canadian stocks," an analyst told TheStreetSweeper.

ANY.V and Overland Storage have not responded to TheStreetSweeper's requests for comment.

TheSreetSweeper's recent article on ANY.V may be read here, as well as other viewpoints on the company.

WHAT OVERLAND WOULD LIKE TO FORGET

To its credit, Overland does have its Nasdaq listing - ANY.V's trying to get listed, too. But Overland nearly got booted out of that exchange multiple times.

And the fact is that just about 1 ½ months ago, Overland was trading for just 80 cents. That's right. The stock price zoomed from 80 cents to about $4 in six weeks. And, with its market value below the $35 million minimum, Nasdaq was once again breathing down Overland's neck.

Unable to thrill investors with performance and product, Overland pulled off a 1-for-5 split on April 10 - the second stock split in 5 years. Last month's stock split popped the price to about $4 and swept away the market value worries. And made it a more believable merger target.

Much like ANY.V, Overland is a roll-up company. Indeed, along with the stock splits, the financially stumbling Overland has employed eight acquisitions designed to help prop up the company.

Industry insiders have been snickering for quite some time about Overland's Snap Appliances acquisition fiasco. It was largely orchestrated by Overland's CEO Eric Kelly, who is also ANY.V's chairman of the board, a position he gained last July (along with about $7.7 million worth of options for 850,000 shares of ANY.V) when Overland struck an agreement to supply cloud-based equipment to ANY.V.

Mr. Kelly rode Nasdaq delisting threats and executive head-rollings to the position of Overland board member, then chief executive.

In 2002, he led the purchase of Snap Appliances for $10 million and became Snap's president and CEO. He later sold the business for $100 million to Adaptec and worked there as an executive for a couple of years.

Mr. Kelly's Adaptec had quite the reputation in the early 2000s.

Adaptec bought companies, choked on them and then sold them for pennies, Enterprise Strategy Group's Steve Duplessie told The Channel Register's Chris Mellor.

That's ultimately what happened after Mr. Kelly reportedly influenced Overland to buy the Snap business back from Adaptec in 2008 for a few million bucks.

So Overland paid $3.6 million for a company that Mr. Kelly had sold just four years earlier for $100 million.

Mr. Kelly's Snap fell far short of expectations for Overland, according to The Channel Register. It was supposed to save the day and generate $20 million a quarter but in the first quarter of 2010 managed to produce less than $2 million.

UMM, COULD YOU PLEASE NOT REPEAT THAT QUESTION?

Analysts did not universally applaud the odd pairing of the hyped, largely unknown Nasdaq wannabe ANY.V with rising loss-maker, just-by-the-skin-of-its-teeth-Nasdaq-listed Overland.

Overland and ANY.V held a May 15 conference call to discuss Overland quarterly results and the merger. A skeptical analyst listening in nagged execs for a measly detail or two.

Analyst: "As far as the background transaction, could you maybe just talk about if this was solicited or unsolicited? Did you guys hold an auction process for this? Just talk about how this came about."

Overland's chief executive and president Mr. Kelly didn't answer the question but did opine about the grandness of the proposed merger. The analyst persisted.

Analyst: "So did you talk to other parties, or was this just a one-off thing?"

Mr. Kelly: "Again, that's not something that we're going to discuss on the call."

Some analysts are prickly about this merger.

"Both companies needed to pull a rabbit from a hat," said another analyst, who requested anonymity. "So they looked to each other and did a deal, which could be hyped as forward looking and progressive."

DISTRESSED DEBT FUND MANAGER'S LAST-DITCH EFFORT

Analysts may have been particularly prickly about just how this merger occurred because money-bags Cyrus Capital Partners has wrangled odd pairings previously. Some analysts may suspect it's happening again.

The fund manager specializing in financially distressed companies encouraged the struggling tape and disk storage company Overland to buy Tandberg to attempt to boost its revenue. The $42 million all-stock merger of the two companies attempting to overcome their declining antiquated tape storage businesses was completed just last November.

Cyrus proposed this merger as a major Overland investor and as the owner of Tandberg - a position it got into because Tandberg could not pay back the money owed to Cyrus. In fact, Cyrus has loaned millions to numerous strugglers, and, as TheStreetSweeper explained previously, made it possible for ANY.V to buy tiny, $535,256-revenue-generating V3 Systems for $9.7 million in cash and stock.

The Overland-Tandberg deal may well have been proposed by Cyrus as a desperate effort to save whatever possible of its investment.

It looks as though the ANY.V-Overland merger may be the next step in that last-ditch effort by Cyrus to avoid getting pulled down by those bleeding companies.

SPHERE 3D DEJA VU

Looking at the numbers alone, we've got to ask: How on earth could ANY.V -- with zilch sales all last year and less than $15.2 million in assets -- fork out $80 million to acquire Overland?

How? One way you do it is you control both companies.

Indeed, ANY.V and Overland remind us of other controlled, over-hyped, reverse-merger, weak-product companies with overlapping management. TheStreetSweeper's investigative subjects like Coronado Biosciences (CNDO $8.65 day of article, now ~$1.70 ) and Revolution Lighting (RVLT $4 day of article, now ~$2 ) shared many of ANY.V's characteristics and ultimately left investors in the lurch.

But a recent ANY.V piece on Seeking Alpha says otherwise. The author suggests tech companies with no sales can logically fetch a share price that "is simply a recognition of the potential."

The author continued: "This is why these share prices can be so volatile, as they are expectations driven and there is little in the way of firm metrics to anchor the price at least to some extent. The shares of Sphere 3D haven't been volatile …"

The author says that is partially due to low float, loyal support that buys any dip and the difficulty of borrowing stock to short.

TheStreetSweeper disagrees.

We believe the real reason ANY.V isn't highly volatile right now - and in fact enjoyed a relatively smooth rise over a year from 44 cents to $9 - is because it's reminiscent of a 1990's style boxed stock.

We've seen it time and again. If and when a company with boxed stock gets listed on a larger exchange such as the Nasdaq, the stock will become liquid, volatile and shortable.

As we've noted before with these over-the-counter stocks like Lot78, Inc. (LOTE $10 day of article, now 2 cents) and Jammin Java (JAMN $5.17 day of article, now ~30 cents), things suddenly go south and shareholders decide to sell, then move on to the next stock.

People will sell. Smaller investors will lose money.

CONCLUSION: FEEL THE BURN

Overland still can't brag about its cash position. It has just over $7 million in cash left and is burning through it fast while sporting negative operating margins.

"So Overland was desperate enough to take the hugely inflated Sphere stock, and even agree to a break up clause of $3.5 million," an analyst told TheStreetSweeper.

Indeed, the premise surrounding the merger would make novelist John Grisham envious: A hyped company with no revenue, interesting management and a product trying to get firmly out of the chute before everyone turns gray and dies, eyes a buy-out target.

Hopped up on its own hype, ANY.V offers to pay way too much for Nasdaq-listed Overland, which carries a "going concern" issue, overlapping management, $148 million in losses and a burning desire for more money as it blisters through its last few million bucks.

"Sphere needed to show that it had a real business - beyond their 'thin' virtualization client - so they bought a real business, with real sales and very real losses," an analyst said.

ANY.V will need to raise additional cash to cover the burning hole they bought.

"Sphere," said the analyst, "will live to regret this deal."

And so will investors.

Disclosure: The owners of TheStreetSweeper hold a short position in ANY.V and stand to profit on any future declines in the stock price. Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.

Source: Sphere 3D Merger Threatens To Eat Companies Alive