Sphere 3D: Rewarded For A Shotgun Wedding That's Doomed To Backfire?

Jul. 9.14 | About: Sphere 3D (ANY)


A bleeding rollup company with no established technology of its own, Sphere 3D has nevertheless transformed itself from a lowly penny stock into a double-digit highflier.

Despite its paltry revenue and its ongoing losses, Sphere 3D has offered a fortune to merge with yet another company incapable of supporting itself.

With both Sphere 3D and its desperate mate dragging so much baggage into their proposed union, the company’s stock could easily crash before that celebrated merger even takes place.

Maybe Sphere 3D (NASDAQ:ANY) finds some way to look busy if it actually expects company. The bleeding technology firm seemed almost lifeless when TheStreetSweeper paid a surprise visit to its Canadian headquarters on a recent weekday, however, arriving fairly late in the morning to find the executive suite empty and just a tiny handful of underlings inside the entire facility.

With little (if any) sign of real business activity, Sphere 3D looked nothing like a $250 million corporation that had just offered a fortune to merge with a far more established – but increasingly desperate – company by using its highflying stock as valuable currency. Sphere 3D looked nothing like a $250 million corporation, especially one that had just offered a fortune to merge with Overland Storage (Nasdaq: OVRL) -- a far more established, but increasingly desperate, company -- by using its highflying stock as valuable currency.

No telephone calls to answer from patient customers eagerly awaiting the overdue Glassware 2.0 “virtualization” platform that Sphere 3D has trumpeted as a revolutionary breakthrough – set to take the challenging market by storm -- for years. No meetings to orchestrate with important clients seeking to order the V3 storage solution that Sphere 3D inherited from a dinky firm accused of blatantly stealing its assets before it officially changed hands. No appointments to keep with hopeful investors willing to place risky bets on Sphere 3D, either, especially now that the bleeding rollup companytrades at a staggering 250 times its prior-year pro forma sales.

Talk about a joke.

How on earth did Sphere 3D – a glorified rollup companythat, until last summer, traded for mere pocket change – ever manage to escape from penny-stock territory in the first place? Moreover, what made Sphere 3D now believe that it could pull off an $80 million merger with Overland Storage (Nasdaq: OVRL) – a fragile, but legitimate, company also incapable of supporting itself – and somehow transform the combined entity into an outright success?

Take a careful look at that pair.

A bleeding technology firm that relies on others to cover its expensive shopping habit, Sphere 3D has nevertheless managed to present itself as the unlikely savior in this cozy relationship. Despite the steep price tag attached to its all-stock merger offer, however, Sphere 3D actually looks more like a freeloader with clever designs on a vulnerable partner too blinded by conflict to acknowledge the truth. While Overland Storage arguably stands out as the far superior catch – with its prior-year sales topping $50 million, its employee count approaching 200 and its stock already trading on the prestigious Nasdaq exchange – both the company and its CEO accepted so much stock from Sphere 3D ahead of its merger offer that their loyalties appear somewhat divided, to state the obvious.

Granted, without that well-timed proposal, Overland might have chosen to look out for itself by taking advantage of its lucky suitor instead. When Overland prepared its latest quarterly report, after all, the company pointed directly at its tempting multimillion-dollar stake in Sphere 3Da thinly traded Canadian stock bound to collapse under heavy selling pressure – as the largest source of its future liquidity. The same day that Overland officially filed that revealing 10Q, however, the two companies suddenly announced their big wedding plans.

Talk about averting a potential disaster. Just imagine the brutal plunge that Sphere 3D might have suffered if Overland and/or its CEO – who scored enough cheap options to secure an even more valuable stake in the company when he agreed to double as the chairman of its board – even tried to cash in millions of dollars worth of the former penny stock in spite of its limited trading volume.

No wonder Cyrus Capital decided to intervene. As an influential backer of both companies, with a majority interest in Overland Storage itself, Cyrus faced a relatively simple choice: Help facilitate a marriage between the pair, conveniently boosting the value of both investments in the meantime, or test its luck by waiting to see if those bleeding firms could find some way to work things out and finally make it on their own.

So what if the marriage ultimately failed? Cyrus specializes in making a fortune on “distressed” companies that run out of luck all the time. In fact, Cyrus actually secured its controlling interest in Overland Storage by selling it another ill-fated firm that it inherited after that company blew through its limited resources and wound up totally broke.

Still tempted to bet on that sort of fantasy, anyway? Keep on reading then. The sobering evidence presented below paints such a disturbing picture of Sphere 3d – as a heavily promoted company tarnished by allegations of theft, infidelity, failure and deceit – that it might just change your mind.

Dysfunctional Family

Let’s start with pending litigation that basically aims to strip Sphere 3D of the current source of its paltry revenue. That damaging lawsuit, which added Sphere 3D as a named defendant after the company arranged to purchase V3 (the original target of the case) earlier this year, states in pertinent part:

“V3 acquired Inaura’s trade secrets and intellectual property by improper means. (Since then), all of the Inaura assets fraudulently transferred to V3 … have been, or have recently been subjected to an agreement to be, transferred to Sphere and/or Doe, a subsidiary of Sphere created to hold the fraudulently transferred assets.”

Meanwhile, “V3 utilized copyrighted materials, trademarks and/or trade dress, without any license, in the promotion of its products and causing confusion in that it caused the public to believe that the products it promoted were its own, when in truth and in fact, the origin of all or parts of the products it sold were part of the assets looted from Inaura … All such copyrighted materials and trademarks, trade names or trade dress are now being misappropriated as part of the sale of all of V3’s assets to Sphere and/or Doe, such that Sphere and/or Doe should be enjoined from any further use of the copyrighted materials or misrepresentation of the origin of the Inaura assets sold as the products of, in whole or in part, V3.”

Indeed, “Inaura is entitled to recover the intellectual property and all other assets of Inaura that were fraudulently transferred to V3, to have a receiver appointed to take over all of V3’s assets and business operations … and to have an injunction against all other transfers. Inaura is also entitled to any damages that the transfer may have caused.”

Now let’s take a close look at one of the Sphere 3D directors who blessed the acquisition of V3 despite pending litigation that portrayed its assets as stolen. The actual chairman of Sphere 3D until last summer, when the CEO of Overland Storage assumed that important (if conflicted) leadership role, Jason Meretsky previously served as a high-ranking executive at Avid Life Media – the parent of a notorious adultery site, known as AshleyMadison.com, that proudly trumpets itself as “the world’s leading infidelity service” – and the CEO of a so-called “home-staging” firm that executed a rather controversial acquisition of its own.

Check out some of the juicy details that Wikipedia has chosen to include in its official entry on AshleyMadison.com:

“In December 2009, Ashley Madison attempted to purchase C$200,000 worth of advertising on Toronto Transit Commission streetcars. The plan was rejected after five of the six committee members voted against it. If approved, 10 streetcars would have been skinned with Ashley Madison’s slogan: ‘Life is short. Have an affair.’ The TTC commissioner showed displeasure in the ads, stating: ‘When it’s a core fundamental value around cheating or lying, we’re not going to let those kinds of ads go on … ‘

“On February 22, 2010, the company approached the city of Phoenix, Arizona, with an offer of $10 million to rename the Sky Harbor Airport to Ashley Madison International Airport for a five-year period. Even though the city was in financial trouble, it rejected the offer …

“Trish McDermott, a consultant who helped found Match.com, accused Ashley Madison of being a ‘business built on the back of broken hearts, ruined marriages and damaged families.’ (The CEO) responded by stating that the site is ‘just a platform’ and a website or a commercial will not CONVINCE anyone to commit adultery …

“Unless they know how to opt out of the ‘Ashley’s Angels’ feature, the site’s Terms and Conditions say that users who have not yet paid the site any money (‘guest accounts’) may get computer-generated messages from fictitious profiles that ‘are NOT conspicuously identified as such.’ These may cost money to respond to. The site says this is ‘to provide entertainment.’”

An infamous home-staging companypurchased by a real estate firm that Meretsky once led – despite its reputation as an outright scam – generated some rather unflattering publicity, too. Both of the following posts (a media article and one of many customer complaints) surfaced on the Internet less than two months before the acquisition of that unpopular company took place.

Media coverage: “Who is behind Haverhill? The man behind the company is Darren Morgenstern, a man who was pursued by the FTC (Federal Trade Commission) in 2001 for allegedly perpetrating a domain name scam … Morgenstern settled these charges in 2002, and the companies accused by the FTC paid $375,000 to compensate alleged victims. He also agreed to be barred from making false or misleading statements in the sale of goods or services related to domain names, email or web-hosting services. He’s even barred from using unsolicited marketing faxes … The guy’s also got an interesting past related to a website he started for people who want to cheat on their spouses. Read up on that and judge for yourself … Haverhill says it’s ‘North America’s largest and fastest growing home-staging company.’ Impressive? Maybe. True? Who really knows …”

Customer complaint: “Haverhill’s training program is quite simply a SCAM (a word repeated dozens of times by other disgruntled customers describing their horrible experience with the company). Every step is designed to fail you, and if you persist, they just lie and change things so that they can deter you from finishing the program. I just got fed up with their games and deceit. NOTHING about this ‘program’ is designed to teach you or help you. If you want to learn anything, you might as well do it yourself, without a $1,000 binder full of useless typo’d information … P.S., apparently this company was started by a known con artist who has been in the news for other scams.”

With that in mind, go ahead and review some of the more jarring details included in an investigative report on the actual leader of Sphere 3D himself. Packed with so much disturbing evidence that it has already ballooned into a three-part series, that report summarizes Sphere 3D Chief Executive Officer Peter Tassiopoulos with the following:

“Peter Tassiopoulos’ first forays in the public equity markets were not in the highest quality of companies (they appear to be exclusively heavily promoted Bulletin Board stocks) nor with the highest quality people (many have been convicted of securities violations). Since 1995, Peter Tassiopoulos has been involved with stock promoters, stock promotions, a bankrupt electronics manufacturer, a failed shell company, a bankrupt healthcare technology company and a stock promotion and failed technology company. He has misrepresented his past on several occasions and repeatedly made big promises while failing to deliver actual results. (These) cases suggest that Tassiopoulos was not a successful dealmaker or executive, in stark contrast to how he portrays his past.”

Speaking of stock promoters, Sphere 3D sure has chosen a dubious “investor relations” firm to publicize the company. Handsomely rewarded for its services with generous cash payments and a pile of valuable stock options – now worth more than $2 millionfollowing a dramatic explosion in the company’s share price -- USA Investor Link counts a pair of documented troublemakers, one of them sanctioned by the Ontario Securities Commission just a few short months ago, as the official leaders (and the only publicly identified members) of its firm.

Let’s save the regulatory target for last and start with his partner Andy Almonte – arguably the less alarming of the two despite his recent criminal charges – instead. The official “BrokerCheck” report on Almonte, supplied by the National Association of Securites Dealers and briefly summarized below, might give even bullish investors some reason for pause.

Here are some of the more noteworthy details on that hired gun:

Employment History: John Thomas Financial (a notorious firm that made a name for itself as a disreputable “boiler room” specializing in the promotion of worthless penny stocks), August 2009 to July 2010; Unemployed, August 2010 to September 2011; Steve Madden (a company taken public by the very firm that inspired “The Wolf of Wall Street”), September 2011 to December 2012; USA Investor Link, December 2012 to September 2013; Unemployed, September 2013 to the present.

(Note: On its official website, USA Investor Link still showcases Almonte as one of the two leaders who oversee the firm.)

Customer Dispute: “Client alleges 1) churning; 2) unsuitability; 3) failure to supervise; 4) misrepresentation and omissions; 5) breach of fiduciary duty; 6) breach of contract; and 7) negligence.”

Alleged Damages: $640,182.07

Settlement Amount: $310,000.00

Criminal charges: theft of services, trespassing

Plea: Guilty

Broker Statement: “On February 6th, 2014, I was on my way to pick up my daughter from school, when I was arrested for attempting to enter the subway using her school Metro card. My daughter is 6 years old, and I genuinely thought that, since she is too young to pay for a fare of travel by herself, she was issued this Metro card to assist her parents in transporting her to and from school. I did not have to pay any fines or penalties in this case, and as the record states, (it) will be dismissed and sealed in August of 2014. This was a very embarrassing event, from which I learned a very valuable lesson that will never repeat itself again.”

Let’s hope that his partner, James Barnett (also known as John David), has finally learned an important lesson, too. After all, Barnett allegedly spent the better part of a decade violating securities laws by the time that Canadian regulators eventually nailed him for breaking the rules. The following settlement agreement, negotiated between the Ontario Securities Commission and Barnett on March 21, outlines his long history of misconduct and his resulting punishment:

“During the period between 2002 and October 12, 2012, Barnett was a de facto officer of MineralFields Management Inc. (‘MFMI’), Limited Market Dealer Inc. (‘LMDI) and Pathway Investment Counsel Inc. (‘Pathway’), which comprised a group of companies, the MineralFields Group. The MineralFields Group was involved in the distribution and management of flow-through limited partnerships. These limited partnerships invested primarily in flow-through shares of junior Canadian resource issuers through private placement issues …

“During the compliance reviews, it was revealed that, commencing in 2002 and continuing until 2011, there was a consistent failure to disclose in regulatory filings with the Commission that Barnett had beneficial interest in 49.99% of the non-voting shares of MFMI and LMDI since inception of these firms in 2002 and 2004, respectively, until after the compliance reviews. Barnett had an understanding with the individual who eventually became the Ultimate Designated Person (the ‘UDP’) of the firms of the MineralFields Group that Barnett would have a 49.9% interest and the UDP would have a 50.1% interest in the companies from the date each company was incorporated …

“Barnett’s failure to disclose his ownership of non-voting shares constituted conduct contrary to the public interest. (In addition), Barnett engaged in trading and advising without registration … By engaging in the trading and advising activity without being registered, Barnett acted contrary to Ontario securities laws …

“Barnett agrees to the terms of settlement listed below. The Commission will make an order … that (among other things): Barnett resign from any position he holds as a director of a registrant or as a chief executive officer, chief financial officer or chief operating officer of a registrant or the functional equivalent of any of these positions; Barnett shall be prohibited from becoming or acting as a registrant, a director of a registrant or as an individual who has beneficial ownership of, or direct or indirect control or direction over, 10% or more of the voting securities of a registered firm until the later of a period of four years from the date of the approval of the settlement agreement and the date on which Barnett successfully completes, in addition to any applicable proficiency requirements, the Conduct and Practices Handbook Course and, if seeking to become a director of a registered firm, until the later of a period of four years from the date of the approval of the settlement agreement and the date on which Barnett completes the Directors Education Program; subject to the satisfaction of (those requirements), Barnett will be subject to strict supervision of a sponsoring firm for a period of one year.”

In addition: “Barnett is reprimanded; Barnett shall pay an administrative penalty of $125,000 for breaching Ontario securities law by trading and advising without registration to the Commission; (and) Barnett shall pay the costs of the Commission’s investigation in the amount of $25,000 within 180 days of the approval of the settlement agreement. For his conduct contrary to the public interest, Barnett undertakes to make a voluntary payment of $75,000 …

“By engaging in the conduct described above, Barnett admits and acknowledges that he contravened Ontario securities laws by trading and advising without being registered and acted contrary to the public interest.”

Wow. Sphere 3D should probably make sure that it introduces Overland Storage all of the "colorful" members of its extended family. If Sphere 3D still looks attractive to its desperate mate even after that happens, then maybe those two companies really do deserve one another – and their shaky fate – after all.

* Important Disclosure: Prior to the publication of this report, the owners of TheStreetSweeper established a short position in both Sphere 3D (ANY.V) and Overland Storage (OVRL), and they stand to profit on any future declines in their respective share prices.

As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in any of the companies that they cover. To contact Melissa Davis, the editor of this website and the author of this report, please send an email to editor@thestreetsweeper.org.