| 2014 | 2015 | ||||||
| Price: | 10.80 | EPS | neg | neg | |||
| Shares Out. (in M): | 29 | P/E | neg | neg | |||
| Market Cap (in $M): | 312 | P/FCF | neg | neg | |||
| Net Debt (in $M): | -2 | EBIT | 0 | 0 | |||
| TEV (in $M): | 310 | TEV/EBIT | neg | neg | |||
| Borrow Cost: | NA | ||||||
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Short Sphere 3D Equity
TSXV: ANY | NASDAQ: ANY (starting July 8, 2014)
Last: $10.80
Shares Outstanding: 28.9 million fully diluted shares prior to the acquisition; estimated over 40 million shares outstanding after completion of the acquisition
Market Cap: $312 million fully diluted
SPHERE 3D - SOFTWARE PIONEER OR STOCK PROMOTION?
Sphere 3D is a near $312 million capitalization software company that has yet to recognize a dollar of revenue or even fully release a commercial product. However, Sphere has been incredibly successful in the stock market - generating a total return since going public in 2012 of approximately 938% on the back of a steady stream of press releases announcing industry deals and blue sky promises. But the technology appears shaky, the Company's technical team seems ill-equipped to execute on their grand vision, and perhaps most telling: several senior executives and directors look to be running Sphere 3D out of the same playbook as their last (ultimately failed) company: Biosign Technologies (BIO.V).
DESCRIPTION OF COMPANY
Sphere 3D is a development stage software company. Its main product is the yet-to-be-released Glassware 2.0, an ultra-thin application virtualization system that will allow any device to access essentially any software virtualized on a private Cloud. For example, a designer could access desktop quality Autocad from home on her iPad. The Company claims their system will render several of the established players in virtualization obsolete thanks to new features and an order of magnitude lower resource usage at the server level. You can watch a November 2012 preview of the technology on Youtube here (http://www.youtube.com/watch?v=hIqGfWj_KIc).
HISTORY
Sphere 3D was incorporated on October 20, 2009. Although the Sphere 3D website was first crawled in February 2010 (http://web.archive.org/web/20100211202250/http://sphere3d.com/index.html) the Company officially began operations on December 31, 2010.
The Company acquired all emulation and virtualization software technology from Promotion Depot Inc., for a notional $695k (1mm shares at $0.695 / share) from Company founders Mario Biasini and Giovanni Morelli. Promotion Depot Inc. is a commercial printer based in Missassauga. Biasini was the president while Morelli was (and is) the Chief Technology Officer. Essentially Biasini and Morelli appear to have spun off a software project they had at that time run out of their printing company.
Concurrent with this technology transfer, 6,999,900 shares of Sphere 3D were issued at $0.005/sh in cash to unknown entities, prompting us to ask the question: How valuable was that intellectual property vended into Sphere 3D - $695k or $500?
Two years later and after some private fundraising rounds at $0.70/sh, Sphere 3D completed a qualifying transaction with the TSX Venture listed T.B. Mining on Dec 21 2012. Existing Sphere shareholders became 96% owners of the combined company.
Prior to the transaction Sphere 3D sold 3.5mm units @$0.85/unit which included a full warrant at $1.00/sh, valuing the new company at approximately $12mm. All of Sphere's capital raising prior to its RTO are presented above. Cash raised through 2012 totaled $5.1mm.
Following completion of the RTO Sphere 3D traded below the $0.85/sh issue price until August 1st of 2013 when it took off - marching steadily higher until March 2014.
On May 28, 2013 Sphere 3D announced the first of several industry deals and partnerships with the signing of a Value Added Reseller and Distributor agreement with Corel Corporation (makers of Wordperfect) in order to distribute three versions of Corel's Office suite: a standard desktop version, a Virtual Desktop Instance (VDI), or a mobile software version "power by Sphere 3D's Software Virtualization solution, Glassware 2.0."
On July 16, 2013 Sphere announced the signing of a licensing and supply agreement with Overland Storage (NASDAQ:OVRL), a quite old technology company known for data storage and backup, particularly with the use of tape drives. Sphere 3D received $250k in cash and $250k worth of Overland stock and Sphere 3D issued $500k worth of stock to Overland. Concurrently, Overland's CEO, Eric Kelly, was appointed to Sphere 3D's board of directors (subsequently elected chairman) and was awarded 850k Sphere 3D options struck at $0.65/sh.
On September16, 2013 Sphere 3D announced a public beta of the "Sphere 3D Corel Office for iPad." A randomly selected 5000 users that register before October 31, 2013 were to receive a PC version of Corel Office. We recently registered for the beta but have not received the software or any updates. An email to the Corel Corporation PR Manger, Liz Mitchell, received no reply.
On October 25, 2013 Sphere 3D announced a $3.35mm bought deal financing, led by Cormark, at $3.35/unit. The deal was later upsized to $4.2mm and included half warrants struck at $4.50/sh with a forced conversion after two weeks' trading above $6.00/sh.
February 11, 2014 saw Sphere 3D make its first acquisition since going public with the signing of a deal to acquire V3 Systems Inc. of Salt Lake City, Utah for $4mm in cash and 1.1mm shares valued at $5.7mm. Founded in 2010, V3 Systems principal product is its Desktop Cloud Orchestrator software and associated custom built servers. Despite the fact that V3 is currently selling these systems Sphere 3D did not provide any indication of current revenues or revenue expectations for the deal. However, the announcement did include this odd comment from CEO, Peter Tassiopoulos: "Sphere 3D has been working closely with V3 for several months and commenced shipping of V3 Appliances to customers in January, 2014." This deal raises lots of questions including: Why has Sphere 3D not given any indication of financial metrics for V3? Why does Sphere 3D need another hardware partner - especially one specializing in desktop virtualization? Who are the customers that Sphere 3D is shipping V3 appliances to a month in advance of a deal being announced?
On March 21, 2014, a month after the V3 Systems announcement, Sphere 3D closed the acquisition and also announced the sale of a US$5mm convertible debenture to Cyrus Capital Partners, a distressed debt manager based in NYC. The debenture came with an 8% interest rate and was convertible at US$7.50/sh. The financier is interesting as Cyrus (through entities it controls) owns a controlling stake in Overland Storage Inc., Sphere 3D's industry partner and shareholder, prompting the question: is Cyrus simply throwing good money after its souring investment in Overland Storage?
On June 30, 2014, Sphere 3D announced confirmation that it will commence trading on the NASDAQ under the symbol ANY on July 8, 2014. With no change in fundamental valuation, the stock soared 11%.
ACQUISITION OF OVERLAND STORAGE (NASDAQ:OVRL)
Though discuss of Overland is peppered throughout this report with indication of declining revenues and margins, we would like to highlight how this acquisition will yield limited accretion, synergies and result in no ultimate benefit to shareholder value.
The two company’s share various conflicts: Sphere 3D’s Chairman and Overland’s CEO are the same person, Overland’s largest shareholder Cyrus Capital Partners also owns debt in Sphere 3D and both companies are already partners to which no one knows or understands the economics of the relationship.
After Sphere 3D used announcements about Overland partnerships in mid-2013, Sphere 3D’s stock promotion has allowed it to take out a company that actually has revenue, unlike its own situation.
This acquisition is a key part of the thesis because it will open up the float of the stock and be the catalyst that may drive a reversion to fundamental valuation after a long period of irrational exuberance. The acquisition is expected to close in Q3 of calendar year 2014.
WHAT MAKES SPHERE 3D SO SPECIAL?
Sphere 3D's principal product is Glassware 2.0, a virtualization technology that purports to offer a major improvement over existing virtualization technology (led by Citrix, Microsoft, VMware, and others).
In reality, as far as we can tell, all Sphere 3D has done is develop a Microsoft RDP (Remote Desktop Protocol - We assume Glassware is using RDP because one of Sphere 3D’s three patent applications deal with RDP implementation, "RDP session monitor/control system and application" - renamed to "Systems and Methods for Managing Emulation Sessions" http://www.google.com/patents/US20130185448?cl=en) implementation (or some other remote access protocol like VNC or SPICE) and client for various mobile devices. This allows a mobile device to connect using RDP to a remote desktop, virtual desktop, or virtualized application (as Sphere 3D emphasises). The problem of course is that this is no great technological development – there are several commercial and even open source solutions which do this – tutorials are available online, such as this one (http://michael.requeny.com/2012/03/20/cook-vmware-appblast/), for a relatively tech savvy user to build their own version of Glassware 2.0 for any HTML 5 compliant web browser (almost all modern ones)!
During Sphere’s product demonstration, Sphere’s CTO, John Morelli, demonstrated that Glassware can allow any mobile device to access any virtualized application. But “virtualizing” an application is actually a trivial task – Microsoft provides a tutorial on how to “publish a RemoteApp Application on Remote Desktop Service” here (http://social.technet.microsoft.com/wiki/contents/articles/2345.publish-a-remoteapp-application-on-remote-desktop-service.aspx). The Remote Desktop Service could be located on a real physical desktop, or on a virtual desktop located in the infamous “Cloud” – there is no fundamental difference. As for accessing such a virtualized app on a mobile (and non-Windows device) – all that is required is an RDP client, which as we will see – there are many options:
Ericom AccessNow (http://www.ericom.com/Ericom_AccessNow_Products.asp):
eyeOS (http://www.eyeos.com/):
Cybele ThinRDP (http://www.cybelesoft.com/thinrdp/):
RemoteSpark HTML 5 Solution (http://remotespark.com/html5.html):
The point of this exercise is that the very features which Sphere 3D claims are so revolutionary (access any software from any device anywhere) are already available from multiple vendors. Sphere throws out words like virtualization and “the Cloud,” but so far what we have seen from the Company is simply an implementation of an RDP (or other protocol) client with some virtual desktop backend management – which are neither technological breakthroughs nor unique. Whether Glassware 2.0 runs “directly on the hardware” or not, we are not sure. But regardless, from a user experience perspective since every feature Sphere 3D touts is nothing new one has to ask: How much will Sphere 3D be able to charge for just another me-too entrant in the remote access space?
Furthermore, as the above vendors show, demo versions are a dime a dozen with almost all products available to be previewed or installed with a limited license. And if a demo version is not available for download, comprehensive documentation and white pages are available which explain exactly how these solutions work. Why can we not check out a demo or beta version of Glassware 2.0 or even a whitepaper laying out the underlying systems?
And finally, as for the ability to run an office productivity suite like Corel or Microsoft Office being Glassware 2.0's "edge," we have to wonder if the Company is worried over Microsoft's recent announcement (http://blogs.office.com/2014/03/27/announcing-the-office-you-love-now-on-the-ipad/) of Office for the iPad, or its expansion of Cloud services for mobile devices (http://www.microsoft.com/en-us/news/press/2014/mar14/03-27mobilecloudpr.aspx). If Microsoft's entire suite of productivity software is eventually offered entirely natively with full mobile integration (http://blogs.technet.com/b/in_the_cloud/archive/2014/03/27/enterprise-mobility-for-every-business-and-every-device.aspx), how useful is an app that enables Corel Wordperfect on an iOS device?
MANAGEMENT TEAM AND DIRECTORS: WORKING FROM THE BIOSIGN TECHNOLOGIES PLAYBOOK?
Sphere 3D's CEO, Peter Tassiopoulos, officially joined Sphere 3D on March 14, 2013 (http://www.sphere3d.com/press-releases/Sphere3D_VPSales_Tassiopoulos_directorFinal.pdf) (although he stated in a Cambridge House presentation (http://www.youtube.com/watch?v=eumlqzhctDk) that he was one of the original founders of the Company) , replacing Mario Biasini. Tassiopoulos' last job was with Biosign Technologies (TSXV:BIO), a health care devices company which briefly boasted a market cap over $200 million in 2011. Tassiopoulos served as Biosign's COO from July 2009 to January 2011 and as its CEO until April 2011 when he was relieved of his duties (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ax2TOFJY8NIc) by the Company's board of directors.
The Company's CFO, Scott Worthington, who joined Sphere 3D in December 2011 is also a Biosign alum, albeit for only 6 months during 2010 and 2011.
It's worth noting that of the three officers and directors that were associated with Biosign, only Jason Meretsky is disclosed on Sphere 3D's website as having any connection, and although Tassiopoulos' LinkedIn page mentions his time as Biosign's COO, it neglects to disclose that he was also its CEO - albeit briefly. A chart of the Company’s share price is probably a good indication that the individuals would rather forget their involvement (see the 5 year chart on https://www.google.com/finance?q=CVE%3ABIO&ei=g120U9jfHOWO6wGil4HoDA).
Biosign Technologies' main product during the tenure of Peter Tassiopoulos was the UFIT health monitor, which amounted to a portable inflatable cuff which monitored the user’s heart rate at the wrist via a connection to a computer. Not exactly compelling but, like Sphere 3D after it, Biosign issued a steady stream of announcements of industry partnerships and distribution agreements. For example, during 2010 the Company announced deals with DynamiCARE AG, ALQAEM International (its website alqaem.biz is currently under construction), DLF Solutions Inc., Triton Pharma, and McMaster University. As far as we can tell, none of these deals amounted to any material business developments for the Company as 2011 revenue totaled $360k and 2012's came in at less than $100k. But, these deals and associated announcements did manage to drive the Biosign share price to close to $3 at the beginning of 2011 (a 100%+ return from previous levels).
Biosign, again like Sphere 3D, also made several modest acquisitions. In 2010 it bought Cloud Diagnostics LLC with the issuance of 3.2mm shares (valued at $0.62/sh), and Healthanywhere Inc. with the issuance of 3.5mm shares (valued at $1.22/sh). Again, as far as we can tell, none of these acquisitions delivered positive results for Biosign shareholders over the following years.
On January 10, 2011 Peter Tassiopoulos was promoted from COO to CEO (http://www.newswire.ca/en/story/730913/peter-tassiopoulos-appointed-ceo-of-biosign). It would be a short-lived position.
A few more press releases announcing contract wins or collaborations were signed in the opening months of 2011 with ALQAEM (http://www.newswire.ca/fr/story/791461/biosign-master-distributor-alqaem-increases-initial-ufit-order-by-150), Peconic Bay Medical Center (http://www.prnewswire.com/news-releases/biosign-and-peconic-bay-medical-center-sign-agreement-to-implement-healthanywhere-remote-patient-management-program-118073104.html) and Dell (http://www.prnewswire.com/news-releases/biosign-and-peconic-bay-medical-center-sign-agreement-to-implement-healthanywhere-remote-patient-management-program-118073104.html). A previous exclusive master distribution agreement signed with Germany's DynamiCARE AG (subject of one of the many press releases of summer 2010) was renegotiated (or canceled?) to a non-exclusive distribution agreement. Notably absent of the renegotiated agreement was the cancelling of a $2.5mm milestone payment DynamiCARE was to pay to Biosign.
Finally, on April 19, with Biosign's shares down more than 50% from its highs, Peter Tassiopoulos was fired by Biosign's board of directors. The rest of the eventual Sphere 3D team would also leave the Company. Biosign's CFO, Scott Worthington, would resign within the week (http://www.newswire.ca/en/story/729623/colley-clarke-appointed-cfo-of-biosign-technologies) whereas Jason Meretsky would not resign for another two years.
Needless to say, Biosign's time in the sun had come to an end. Its shares closed out 2011 south of $0.30 (down 90% from its highs) and they currently change hands around 5c.
Which brings us back to Sphere 3D. We think any rational investor will see the parallels between the two companies. They share management and some directors, both are focused on a "hot" technology segment (remote medical monitoring vs. Cloud computing), both issue press releases at a steady rate - often distribution or partnership agreements with little cash changing hands, and both are bootstrapping up their businesses with small - mostly share based - acquisitions of similar early stage companies.
And there is one final similarity between the two companies: they share press releases. On March 4 2013 (a few months before Sphere 3D really turned on its press release engine), the Company announced the appointment of former Biosign COO and CEO, Peter Tassiopoulos as CEO. The press release had one small error. See if you can spot it (see link: http://globenewswire.com/news-release/2013/03/04/527890/10023861/en/Sphere-3D-Appoints-CEO.html).
Pursuing a similar strategy is one thing, but apparently Peter Tassiopoulos and friends are literally following the Biosign playbook word for word!
The history between Biosign, Tassiopoulos, Worthington, and Meretsky is obviously more involved than we have explored, but suffice it to say that current Sphere shareholders should probably ask a variation on the following question of these three men: What happened at Biosign and why will Sphere 3D shareholders fare any better?
MORE QUESTIONS FOR PETER TASSIOPOULOS
Before joining Biosign Technologies in August 2009, Peter Tassiopoulos was CEO of Healthanywhere Inc., a subsidiary of IgeaCare Systems. Healthanywhere was eventually acquired by Biosign Technologies reuniting Tassiopoulos and his former company. Healthanywhere's mission statement sounds oddly familiar given what we have heard from Sphere 3D to date: "Healthanywhere is a world leading innovative eHealth solutions provider. Our innovative, simple to use solutions promote improved quality of life...Clinical efficiencies are realized by providing healthcare professionals real-time health information...anytime, anywhere."
Prior to Healthanywhere Tassiopoulos served as president of Koda Resources, a listed shell company until its reverse merger with African Gold Group (TSXV:AGG) in 2004. African Gold Group ultimately did not succeed as its shares have declined by over 90% since its listing.
Tassiopoulos' public company experience stretches back over ten years to his time as a consultant (http://www.secinfo.com/d112xt.5f89q.a.htm#1stPage) with Bach-Hauser Inc., then Financial Access Technologies, ABV Gold, and finally Parmacom Biovet. Bach-Hauser was not a pleasant story for investors as despite failing completely to develop a real business, it did manage to compensate several consultants to the tune of tens of millions of shares, valued in this StockPatrol.com article (http://www.stockpatrol.com/article/key/bachhauser) at more than $17 million. Bach-Hauser was also one of the instances cited in an SEC complaint (https://www.sec.gov/litigation/complaints/comp17985.htm) against Samuel Aaron Meltzer for illegal stock promotion involving email spam and misleading statements about Bach-Hauser's business prospects. The SEC eventually settled (http://www.spamfighter.com/News-8813-Stock-Spammer-Settles-with-SEC-Consents-to-Courts-Judgment.htm) with Meltzer. The above events all took place around the time of Tassiopoulos' employment as a consultant to Bach-Hauser.
One has to ask: Is this the type of corporate experience Sphere 3D shareholders are looking for in their CEO?
THE SPHERE 3D TECHNICAL TEAM AND R&D RESOURCES
Sphere 3D's founders, Mario Biasini and John Morelli, have limited public company experience. As far as we can tell they have worked together at the commercial printer, Promotion Depot Inc., since 2008. According to their LinkedIn pages, Biasini was president of Promotion Depot from 2003 to 2009 and John Morelli (listed as Giovanni Morelli) has been CTO since 2008.
Neither Biasini or Morelli have LinkedIn pages typical of senior executives particularly in the software space. For example Morelli's lists his only skill as "Software Development" with 6 endorsements and only 60 connections. He manages to misspell the "Chief" (http://ca.linkedin.com/pub/giovanni-morelli/5a/77/1a3) in "Chief Technology Officer" and has no experience listed other than Promotion Depot and Sphere 3D. Similarly, Biasini's LinkedIn profile (http://ca.linkedin.com/pub/mario-biasini/1/936/258?trk=pub-pbmap) does not list any experience prior to the 2003 start date of Promotion Depot except his 1984 graduation from Ryerson university.
According to a very acrimonious 2013 court filing (Petrovskaya v. Morelli: http://rheta4.rssing.com/browser.php?indx=3831103&item=1703) associated with a suit filed against him by his deceased father's ex-wife, Giovanni Morelli was alleged to have embezzled funds, been subject to a police investigation, and had been out of work for some time in the past prior to the proceedings.
While not cut and dry, the publicly available information we can find on these two founders suggests Sphere 3D shareholders should be asking: Are Sphere 3D's founders likely able to near single-handedly develop a revolutionary or commercially feasible software product worthy of a near $312 million valuation?
For a Company that claims to have developed such valuable software, Sphere 3D also does not appear to have spent significant sums on R&D , been managed by experienced industry personnel, or even employed a team of experienced software developers - let alone cutting edge technologists.
Sphere 3D recognized salaries and consulting expenses of $988k in the first three quarters of 2013 and had general and administrative expenses of $207k. Its technology and development expenses amounted to a whopping $11,522 (although to be fair, the Company did capitalize $340k in technology investments during the time period), prompting the question: Is $11k in R&D spending enough to perfect a product with multi-million revenue potential like Glassware 2.0?
WHAT HAS THE COMPANY DONE SO FAR?
It appears that Glassware 2.0 was first mentioned publicly in late 2012, nearly a year and a half ago. A video posted November 29, 2012 on Sphere 3D's Youtube channel outlines the major features (http://www.youtube.com/watch?v=6CpV2Iy-6xU), which closely match the current product's description. We could not find any mention of Glassware 1.0, but old press releases and archived web pages at least are consistent with preliminary products in the same "space" as Glassware 2.0. However, Sphere 3D has also repeated a pattern of promising a product, announcing a public beta, and subsequently vanishing into history.
One example is Sphere 3D's product "SurfToGo." According to a March 19, 2013 press release (http://www.marketwatch.com/story/sphere-3d-completes-alpha-testing-of-surf-to-go-app-for-ipad-2013-03-19), SurfToGo, an app allowing the use of Firefox on the iPad, was released in Apple's App Store on December 20, 2012 (around the time of Sphere 3D's qualifying transaction) in "stealth mode" through an undisclosed third party. The Company claimed (http://www.sphere3d.com/press-releases-2013-03-19) that "In the first 60 days, without any advertising or promotion, there were over 5,000 registration requests that came from a multitude of countries around the World. The registration rate has increased from less than 2 per day to over 300 per day in that period." The app was subsequently pulled from the market - presumably to allow the Company to develop a beta version although nothing about SurfToGo has been heard since. Now the Company seems to refer to this as a proof of principal of the Glassware 2.0 technology. But why release the app in "stealth" mode and pull the app immediately after disclosing its existence?
Most of the Company's claims about SurfToGo do not quite match up with what we were able to determine from publicly available sources. A CNET download page discloses that only 6 downloads were made (see details here: http://download.cnet.com/Surf-to-GO/3000-2124_4-75832222.html), while a website which archives Apple App Store data disclosed only that the app was reviewed only 15 times with an average score of 2.5 (see details here: http://appshopper.com/productivity/surf-to-go) - hardly the response one would expect of 5,000 alpha users. Both sources also disclose that the "third party" developer of the app was Imhotep Technologies Inc. a Mississauga based (like Sphere) company with no website, contact information, or products.
An earlier product, Ralii Server Software 1.0 was announced in December 2010 (http://www.sphere3d.com/press-releases/Sphere_News_RaliiServer_15_12_2010.pdf). This release promised that the chipset emulation software would be placed in a production environment in early 2011. Nothing has been heard from since, although at the CanTech Investment presentation, Sphere 3D's CTO, John Morelli, did demonstrate a product which appeared to be involved with chipset emulation although the Ralii Server Software name was not used. Apart from the above press release, no other mention of the product is available anywhere on the web. Why did Sphere 3D acquire V3 Systems when it already had in-house server related technology?
This lack of 3rd party information on Sphere 3D's products is consistent with its entire purported product line. Type any of their offerings into Google and one will get a smattering of investor message board posts and press releases, but we could not find even a single software developer message board discussion of the product. Even Sphere's Youtube channel has views in the low hundred. Is that the response one would expect for a promising software product that has been in development for 4 years?
As for the technical documentation - there is essentially none. Sphere 3D has applied for 3 patents with Giovanni Morelli listed as the inventor. They are:
Deciphering these patent applications is beyond us, they appear vague, convoluted, stuffed with terminology, and repeating much of the same text - which is not to say they will not have value if they are actually awarded to the Company. A few questions for Sphere management might be: What will these patent applications actually protect? Why do they all effectively sound like the same thing? Are they really just one application?
Nor does there appear to be much to the industry deals Sphere 3D has signed thus far with Corel, Overland Storage, and VMware. The deal with Corel amounts to a Value Added Reseller (VAR) arrangement - essentially allowing Sphere to market Corel products to end-users. There are likely tens of thousands of VARs operating in the enterprise software space in Canada - some of whom are surely already reselling Corel products. As for Corel itself, it remains a bit player in the productivity software space - if Sphere 3D's product was so compelling why is only a 3rd tier productivity vendor working with them?
Sphere's former contract with Overland Storage, while considerably more substantial than the one with Corel - hundreds of thousands of dollars and shares changed hands – did not appear very promising. Overland Storage itself seems to be on its last legs. Prior to the Sphere acquisition, its market cap was approximately $30mm (a minor portion of ANY’s although it is the only one with revenue). OVRL’s revenue, $48mm in Fiscal 2013, has been dropping since 2004. Net income was negative $20mm in fiscal 2013 and cash burn is about the same. Its balance sheet is looking worse by the quarter - a year ago it had net cash of $4mm whereas the last quarter showed net debt of $11mm while its controlling shareholder, Cyrus Capital Partners, is a distressed debt fund: a difficult position for a company that has not generated positive EBITDA since fiscal 2005. What can be expected of a Company that markets data storage solutions on tape drives?
These poor historical results have not reduced Overland's optimism toward its relationship with Sphere 3D, going so far as to forecast significant revenue for Overland's fiscal 2015 (year ended June 30) during its fiscal 2014 1st quarter conference call - despite Sphere 3D's complete lack of a commercial product to date:
Eric L. Kelly (Chief Executive Officer, President, Independent Director and Member of Special Committee): I think the number we identified was about $10 million to $13 million for the year. [in response to potential revenue from relationship with Sphere 3D)
However, based on conversations with management we understand that neither Overland's CEO, Eric Kelly, nor Sphere 3D's CEO, Peter Tassiopoulos, are currently forecasting the $10 - $13mm revenue numbers for the relationship.
The role of Overland Storage's CEO and Sphere 3D's chairman, Eric Kelly, is also strange. While Overland received only 769k shares in Sphere 3D for the commitment to provide a significant chunk of hardware over the next couple of years, Kelly received 850k options (struck at $0.65/sh) upon signing on as Sphere 3D's chairman. Those options are now worth just under $10 million! Can we even speak of this Overland/Sphere 3D deal being on commercial terms or does it primarily look like a ploy to enrich Overland's CEO in exchange for a legitimatizing transaction with the public company he controls?
Finally, Sphere deemed it material to disclose joining the ranks of VMware TAP Elite program in October. The TAP Elite program is of course simply a club developers can join in order to get access to some additional VMware products and development tools. It requires the payment of $7,500 and the filling out of an application. What legitimate $312 million software company would think it necessary to press release such a triviality?
PROMOTERS
On March 6, 2013 Sphere 3D hired the investor relations firm USA Investor Link (press release here: http://www.sphere3d.com/press-releases-2013-03-06) for a fee of $10,000 / month and gradual issuance of 320k options struck at $0.60 (now worth nearly $2mm). USA Investor Link is run by James Barnett. According to his LinkedIn page (see link here: http://www.linkedin.com/pub/james-barnett/63/a77/b22) Barnett, a 1981 graduate of Mercer University where he "obtained a 4 year B.A. in 2 years (probably neverf (sic) done before or since). . ." founded the Ft. Lauderdale headquartered company in January 2013. USA Investor Link immediately won the business of NWM Mining (TSXV-NWM) - at signing its shares traded for 4c and were last traded at 0.5c. NWM did not renew the agreement and as of September 2013 had no further involvement with USA Investor Link. We could not find any direct evidence of the firm's work, but given Sphere 3D's approximately 1,000% appreciation since signing, it's a good bet they have been successful. One might want to ask: Does USA Investor Link have any clients other than Sphere 3D and what exactly is the firm doing to support the Company?
The only other firm that appears to be promoting Sphere 3D (beyond three Canadian investment dealers) is the investment newsletter, How To Find Big Stocks, run by Scott Shaffer, a resident of South and author of the ebook "How To Find Big Stocks: The tool that turned $10,000 into $2,800,000 in two years" (http://www.amazon.com/How-To-Find-Big-Stocks-ebook/dp/B005LDJR00). How To Find Big Stocks has touted Sphere 3D in several newsletters, one of which included an interview with the CEO, Peter Tassiopoulos. Another Company that HTFBS is promoting is Destiny Media (TSXV:DSY - down 50% over the last six months), but we have not seen any other of Shaffer's touts. Each newsletter does emphasize that HTFBS is not compensated by companies mentioned.
Sphere 3D’s largest shareholder is Pinetree Capital which through combined ownership with Sheldon Inwentash owns roughly 14% of Sphere 3D prior to the merger with Overland. Per slide 13 (http://www.pinetreecapital.com/_resources/presentation/Pinetree-Q1-2014.pdf), you can see that the 1 year performance of Pinetree is a loss of 29% to its NAV with the 3 year performance yielding a loss of 43%. Not the best endorsement by Sphere’s largest shareholder. Although, Sheldon did earn more than Larry Fink (CEO of BlackRock) in 2010 (http://www.businessinsider.com/sheldon-inwentash-pinetree-capital-salary-34-million-2011-5).
VALUATION THAT IS JUST ALL SIZZLE AND NO STEAK
Sphere 3D has had $671k of revenue since they incorporated the company. Further, until their most recent quarterly return, there had been no revenues in recent years. The only reason the most recent quarterly had $1 million of revenue was due to the acquisition of V3.
With a $312 million market cap, the company is trading at 300x+ last twelve months revenue with no relevant operating statistics to review for multiples. Further as previously noted, Sphere 3D has yet to release any commercial product to date. It has yet to release its flagship product Glassware 2.0 and we believe that it will not any time soon.
However, perhaps the company has invested in development over the years. To date, the company has invested $135k in R&D since the company began. Comparatively, the company has paid out $2.7 million in salaries.
Valuation and growth potential further indicates Sphere 3D’s likely imminent downside.
IS THERE ANYTHING TO SPHERE 3D BEYOND ITS PROMOTION?
There simply does not appear to be much to Sphere 3D. Despite its $312 million market cap, the Company has no revenue and shown no evidence that it developed a soon-to-be blockbuster software product. Indeed, our research suggests that it doesn't even have the ability to develop such a product given the fact that its Cheif (sic) Technology Officer, Giovanni Morelli, and inventor of Glassware 2.0 has no (at least disclosed) serious software development experience. We think it's a long shot at the very least.
Finally, Sphere 3D's CEO, Peter Tassiopoulos has a resume that does not breed much in the way of confidence. His last company, Biosign Technologies, fired him as CEO just as the promote began to run off the rails. Biosign was a disaster with several of the same faces showing up at Sphere 3D (CFO, Scott Worthington, and director, Jason Meretsky). It looks to us like it will be the same old story. Sphere 3D might be different, but the similarities run too deep for us. We think Sphere 3D shareholders may have some tough questions for management.
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