10-K 1 ovrl630201410k.htm FORM 10-K OVRL 6.30.2014 10K
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________________
FORM 10-K
_____________________________________
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
              For the transition period from              to             
Commission File Number: 000-22071
_______________________________________
OVERLAND STORAGE, INC.
(Exact name of registrant as specified in its charter)
_______________________________________
 
California
95-3535285
(State or other jurisdiction
of incorporation)
(IRS Employer
Identification No.)
9112 Spectrum Center Boulevard,
 
 San Diego, California
92123
(Address of principal executive offices)
(Zip Code)
(858) 571-5555
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
 
Common Stock, no par value
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
x
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).    Yes  ¨    No   x
The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 2013, the last business day of the registrant's second fiscal quarter, was approximately $20,082,265 (based on the closing price reported on such date by the NASDAQ Capital Market of the registrant's Common Stock). Shares of Common Stock held by officers and directors and holders of 10% or more of the outstanding Common Stock have been excluded from the calculation of this amount because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of September 15, 2014, the number of outstanding shares of the registrant's common stock was 17,586,556.
 
 




OVERLAND STORAGE, INC.
FORM 10-K
For the fiscal year ended June 30, 2014
Table of Contents
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 1B.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
Item 7.
 
 
 
 
 
 
 
Item 7A.
 
 
 
 
 
 
 
Item 8.
 
 
 
 
 
 
 
Item 9.
 
 
 
 
 
 
 
Item 9A.
 
 
 
 
 
 
 
Item 9B.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 10.
 
 
 
 
 
 
 
Item 11.
 
 
 
 
 
 
 
Item 12.
 
 
 
 
 
 
 
Item 13.
 
 
 
 
 
 
 
Item 14.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 15.
 
 
 
 
 
 
 
 
 
 



PART I
Item 1.    Business.
This report contains certain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, but are not limited to: our anticipated closing of the merger with Sphere 3D; our ability to successfully integrate the businesses of Tandberg Data with our other businesses; our ability to maintain and increase sales volumes of our products; our ability to continue to aggressively control costs and operating expenses; our ability to achieve the intended cost savings and maintain quality with our manufacturing partner; our ability to generate cash from operations; the ability of our suppliers to provide an adequate supply of components for our products at prices consistent with historical prices; our ability to raise outside capital and to repay our debt as it comes due; our ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new products introduced by our competitors; our ability to maintain strong relationships with branded channel partners; our ability to maintain the listing of our common stock on the NASDAQ Capital Market; customers', suppliers', and creditors' perceptions of our continued viability; rescheduling or cancellation of customer orders; loss of a major customer; our ability to enforce our intellectual property rights and protect our intellectual property (including the outcome of our ongoing patent litigation); general competition and price measures in the market place; unexpected shortages of critical components; worldwide information technology spending levels; and general economic conditions. In evaluating such statements we urge you to specifically consider various factors identified in this report, including the matters set forth under the heading “Risk Factors” in Part I, Item 1A of this report, any of which could cause actual results to differ materially from those indicated by such forward-looking statements. Forward-looking statements speak only as of the date of this report and we undertake no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this report. Actual events or results may differ materially from such statements. Share and per share amounts herein have been adjusted to give effect to the April 9, 2014 one-for-five reverse stock split.
Overview
We are a trusted global provider of unified data management and data protection solutions across the data lifecycle. We provide an integrated range of technologies and services for primary, nearline, offline, and archival data storage. Our solutions consolidate and protect data for easy and cost-effective management of different tiers of information whether the distributed data is local or global based. In May 2014, we announced that we entered into a definitive agreement for a proposed merger with Sphere 3D Corporation (“Sphere 3D”), which is intended to bring together next generation technologies for virtualization and cloud coupled with end-to-end scalable storage offerings, allowing the combined company to address the growing virtualization and cloud markets.
We develop and deliver a comprehensive solution set of award-winning products and services for storing data throughout the organization and during the entire data lifecycle. Our SnapScale® clustered network attached storage (“NAS”) products allow customers to scale-out in capacity and performance as their storage needs grow. Our SnapServer® products are unified NAS servers that integrate into businesses requiring simple, expandable block and file storage. Our SnapSAN® products are storage area network (“SAN”) arrays designed to ensure primary and secondary data is accessible and protected regardless of its location. Our SnapScale®, SnapServer®, and SnapSAN® solutions are available with backup, replication, and mirroring software in highly scalable configurations. These solutions provide simplified disk-based data protection and maximum flexibility to protect mission critical data for both continuous local backup and remote disaster recovery. Our NEO Series®, StorageLoader® and StorageLibrary® tape library solutions are designed to meet the need for cost-effective, reliable data storage for long-term archiving and data storage compliance requirements, offering a wide range of capacity, performance and feature sets.

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In January 2014, we completed our acquisition of Tandberg Data Holdings S.à r.l. (“Tandberg Data”) which added a range of RDX® products including RDX QuikStor®, RDX QuikStation® and RDX® media, as well as additional tape automation solutions. Our RDX QuikStor® and QuikStation® removable media-based storage systems offer reliable and convenient storage for backup, archive, data interchange and disaster recovery.
Our approach emphasizes long-term investment protection for our customers and reduces the complexities and ongoing costs associated with storage management. Moreover, most of our products are designed with a scalable architecture which enables companies to purchase additional storage as needed, on a just-in-time basis, and make it available instantly without downtime.
End users of our products include small and medium enterprises (“SMEs”), small and medium businesses (“SMBs”), distributed enterprise companies such as divisions and operating units of large multi-national corporations, governmental organizations, and educational institutions. Our products are used in a broad range of industries including financial services, video surveillance, healthcare, retail, manufacturing, telecommunications, broadcasting, research and development, and many others.
We sell our solutions worldwide in the Americas, Europe, the Middle East and Africa (“EMEA”) and the Asia Pacific (“APAC”) region. We generate sales of our branded products through a worldwide channel, which consists of commercial distributors, direct market resellers (“DMRs”) and value-added resellers (“VARs”).
We were incorporated in California in 1980 as Overland Data, Inc., and changed our name to Overland Storage, Inc. in 2002. Our headquarters is located at 9112 Spectrum Center Boulevard, San Diego, California 92123, and our telephone number is (858) 571-5555.
Our Direction and Strategy
In today's business environment, we believe that improving productivity and effectively managing digital assets, while controlling operating expenses, has become one of the top priorities for organizations worldwide. At the same time, we believe that the cost and complexity of managing vital information has risen exponentially. As a result of these opposing forces, we believe that many companies find themselves lacking the essential resources and expertise required to adequately manage information across their businesses and they continue to spend a significant portion of their time and money tying isolated islands of data together. Without an effective alternative to mitigate the cost and complexity of traditional approaches, their data simply cannot be effectively shared and sufficiently protected. We provide solutions designed to deliver enterprise features with the simplicity that allows organizations to reduce the cost of managing and protecting their information. Our comprehensive data storage and protection solutions are designed to enable IT managers to easily and cost effectively share and preserve critical and non-critical data across their organizations and to provide continuous access, replication for disaster recovery, and reduced backup windows for improved business continuity. Our direction is to extend our current products beyond the data center and distributed enterprise into cloud capabilities and mobile devices.
In May 2014, we announced that we entered into a definitive agreement for a proposed merger with Sphere 3D, which is intended to bring together next generation technologies for virtualization and cloud coupled with end-to-end scalable storage offerings, allowing the combined company to address the growing virtualization and cloud markets upon the consummation of the proposed merger.
Our Products and Services
Our data management and data protection solutions provide SMEs, SMBs, distributed enterprises and branch offices with disk-based systems for primary or nearline storage, and backup and recovery. For long-term data storage requirements, we offer automated tape backup and archive solutions.
Data Management Software
Our GuardianOS® storage-optimized platform is designed for SnapServer® NAS devices and delivers simplified data management and consolidation throughout distributed IT environments by combining cross-platform file sharing with block-level data access on a single device. The flexibility and scalability of GuardianOS® reduces the total cost of ownership of storage infrastructures. In addition to a unified storage architecture, the GuardianOS® platform offers scalability through features such as DynamicRAID®, centralized storage management, and a comprehensive suite of data protection tools. Beginning in August 2014,

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for customers who have the need to synchronize large data sets over geographically dispersed systems, we include our BitTorrent Sync functionality as part of our GuardianOS® software.
Our Snap Enterprise Data Replicator® (“Snap EDR”) provides multi-directional, WAN-optimized replication for SnapServer® systems. With Snap EDR, administrators can automatically replicate data between multiple SnapServer systems for data distribution, data consolidation, and disaster recovery.
Our AccuGuard® is a powerful windows-based backup and recovery data protection software designed to be used with our RDX QuikStor® and QuikStation® removable-disk solutions. AccuGuard® is an easy-to-deploy solution that protects Windows servers and desktops on physical machines and in virtual environments. AccuGuard® delivers reliable, automated backup and recovery utilizing a powerful deduplication engine.
Disk Systems
SnapSAN® Storage Area Network Solutions
Our SnapSAN® products provide block-based primary storage for virtual server environments and low latency applications. Systems can be managed through intuitive management interfaces that employ guided wizards to facilitate easy installation and administration. Our SnapSAN® products also offer a powerful set of features including thin provisioning, mirroring for high availability, replication and snapshots for data protection.
The SnapSAN® S3000 is a 2U storage array with options for 1Gb or 10Gb iSCSI, Fibre Channel, or SAS host connections, designed for midrange businesses and offers thin provisioning, volume cloning, synchronous and asynchronous remote replication, snapshots and disk spin down for reduced power consumption. The SnapSAN® S3000 can scale up to 384TB using the SnapSAN® Expansions.
The SnapSAN® S5000 is a 2U storage array with options for 1Gb or 10Gb iSCSI, Fibre Channel, or SAS host connections, designed for the enterprise and offers the same features as the SnapSAN® S3000 as well as SSD integration for caching and policy-based tiering, performance analysis, and tuning and compliance tools. The SnapSAN® S5000 can scale up to 384TB using the SnapSAN® Expansions.
SnapScale® Clustered Network Attached Storage Solutions
Our SnapScale X2® and SnapScale X4 products are clustered NAS solutions that enable organizations with rapid or unpredictable data growth to scale capacity and performance without adding management complexity. SnapScale® eliminates islands of storage, which enables scaling without having to predict capacity in advance. SnapScale® writes data across multiple nodes and drives simultaneously for instant protection and high availability. Our SnapScale® products are designed for high performance, high scalability, and are available for the storage and archiving of unstructured data.
The SnapScale X2® is a 2U rackmount, which can be configured with up to 12 Nearline SAS hard drives for a minimum capacity of 24TB per node, and can scale out to 512PB with 2-way or 3-way redundancy.
The SnapScale X4 is a high-density 4U rackmount, which can be configured with up to 36 Nearline SAS hard drives for a minimum capacity of 72TB per node, and can scale out to 512PB with 2-way or 3-way redundancy.
SnapServer® Network Attached Storage Solutions
Our SnapServer® solutions are an ideal platform for primary or nearline storage, and deliver stability and best-in-class integration with Windows, UNIX/Linux, and Macintosh environments. For virtual servers and database applications, the SnapServer® family supports iSCSI block-level access with Microsoft VSS and VDS integration to simplify Windows management. For data protection, the SnapServer® family offers RAID replication, and snapshots for point-in-time data recovery. The SnapServer DX Series products support DynamicRAID® and traditional RAID levels 0, 1, 5, 6, and 10.
The SnapServer® DX1 is a 1U server that can be configured with up to four SATA II drives, and can scale to 120 terabytes of storage capacity by adding SnapExpansion enclosures.
The SnapServer® DX2 is a 2U server that can be configured with up to 12 SATA II drives, and can scale to 288 terabytes of storage capacity by adding up to seven SnapExpansion enclosures.

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RDX® Removable Disk Solutions
Our RDX® removable disk media are shock resistant to accommodate accidental falls from the rack, desktop or during transport. The media can also be secured with cartridge encryption for additional levels of security. We offer two types of RDX® media; media with hard drives inside the cartridge and media with solid-state disks inside. Hard drive RDX® media is designed to provide easy-to-use and reliable data protection, while solid-state disk RDX® media is designed for customers who are operating in environments that need extreme speed and durability in a portable storage device. RDX® removable media are available in several different capacity points, ranging from 64GB to 2TB per cartridge.
The RDX QuikStor® removable-media storage system combines the portability and reliability of tape-based backup with the speed and simplicity of hard disk drives in order to deliver reliable and convenient storage for backup, archive, data interchange and disaster recovery. RDX QuikStor® drives utilize either hard disk drives or SSD drives, with either SATA or USB 3.0 connectivity, and provide up to 2TB of data storage.
The RDX QuikStation® is a network-attached removable disk array designed to provide a platform for data protection and off-site disaster recovery for SMB environments. The RDX QuikStation® can appear to a host as a tape library, a virtual RDX drive, a stand-alone tape drive, generic disk drives or a combination of disk and tape, offering users versatility and expanded compatibility.
Tape Automation Systems
NEO® Tape-Based Backup and Long-Term Archive Solutions
Our NEO Series® Tape Libraries and Autoloaders are designed for small and medium businesses looking for simple, cost-effective data protection, as well as for complex enterprise environments with stringent performance and data availability requirements. We provide a complete range of high capacity, high performance, flexible tape-based solutions for data backup, recovery and archive. When combined with our SnapServer® systems, our NEO Series® products create a complete disk-to-disk-to-tape solution with a variety of storage capacity options. The NEO® tape solutions are designed to utilize the latest linear tape-open (“LTO”) technologies, and can accommodate up to 24 tape drives and 1,000 cartridges for maximum efficiency and data protection.
The NEO® S Series provides affordable tape backup for small and medium businesses. The NEO® S libraries are available in compact rack-mount configurations with either SAS or FC connectivity. The NEO® 100s is a 1U, 9-cartridge, single-drive autoloader that provides up to 56TB of storage capacity. The NEO® 200s is a 2U tape library that supports up to 24 cartridge slots and two tape drives, and delivers up to 150TB of storage capacity. The NEO® 400s is a 4U tape library that supports up to 48 cartridge slots and four tape drives, with a maximum storage capacity of 300TB.
The NEO® E Series provides scalable, high capacity, enterprise-class tape automation that is ideal for large businesses. The NEO® E systems incorporate the latest LTO technologies as well as redundant robotics, partitioning capability, mail slot access, and SAS and FC connectivity. The NEO® 2000e is a 5U tape library that supports up to 30 cartridge slots and two tape drives per module. The NEO® 4000e is a 10U tape library that supports up to 60 cartridge slots and four tape drives. The NEO® 2000e and NEO® 4000e modules can be combined to provide a maximum capacity of up to 240 cartridge slots and 16 tape drives. The NEO® 8000e is a 43U tape library that supports up to 500 cartridge slots and 12 tape drives in a single module, scalable up to 1,000 cartridge slots and 24 tape drives.
StorageLoader® and StorageLibrary® Tape-Based Backup Solutions
The StorageLoader® Autoloader is available in a 1U form factor, and provides access to eight data cartridges and a single tape drive, delivering up to 50TB of storage capacity.
The StorageLibrary® T24 is a 2U form factor, available in both 12-cartridge and 24-cartridge configurations, and supports up to two LTO tape drives.
The StorageLibrary® T40+ is a scalable 4U tape library offering up to 40 slots and 4 tape drives in a single module, with the ability to scale to as many as 151 cartridges and 16 tape drives.

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Customers
Our solution-focused product offerings are designed specifically for SMEs, SMBs, and distributed enterprises. We sell our products through our worldwide distributor and reseller network. A significant portion of our net revenue is derived from with a limited number of customers. In fiscal 2014 and 2013, the percentage of our net revenue that was derived from our top five customers was 30.5% and 35.7%, respectively.
All of our products and services are designed and manufactured to address enterprise customer requirements and reliability standards. The following provides additional detail on our channels:
Distribution channel Our primary distribution partners in North America include Promark Technology, Ingram Micro Inc., and Synnex Corporation. We have over 50 distribution partners throughout Europe and Asia. We sell through a two-tier distribution model where distributors sell our products to system integrators, VARs or DMRs, who in turn sell to end users. We support these distribution partners through our dedicated field sales force and field engineers. In fiscal 2014, no distribution partner accounted for more than 10% of net revenue. In fiscal 2013, one distribution partner accounted for more than 10% of net revenue.
 
Reseller channel Our worldwide reseller channel includes systems integrators, VARs and DMRs. Our resellers frequently package our products as part of a complete data processing system or with other storage devices to deliver a complete storage subsystem. Our resellers also recommend our products as replacement solutions when backup systems are upgraded or bundle our products with storage management software specific to the end user's system. We support the reseller channel through our dedicated field sales representatives, field engineers and technical support organizations.
We divide our worldwide sales into three geographical regions:
the Americas, consisting of United States, Canada and Latin America;
EMEA, consisting of Europe, the Middle East and Africa; and
APAC, consisting of Asia Pacific countries.
Sales to customers outside of the United States represent a significant portion of our sales and international sales are subject to various risks and uncertainties. See “Our international operations are important to our business and involve unique risks” under the heading “Risk Factors” in Part I, Item 1A of this report. Sales generated by our European channel generally show seasonal slowing during our first fiscal quarter (July through September), reflecting the summer holiday period in Europe.
The following table, which includes our acquisition of Tandberg Data beginning in January 2014, sets forth net revenue by geographic area (in thousands): 
 
Fiscal Year
 
2014
 
2013
Americas
$
24,138

 
$
24,148

Europe, Middle East, Africa
32,070

 
19,516

Asia Pacific
9,484

 
4,356

Net revenue
$
65,692

 
$
48,020

Sales to customers inside the United States comprised $20.8 million and $23.0 million of Americas net revenue during fiscal 2014 and 2013, respectively. Sales to customers in Germany accounted for $11.3 million and $3.6 million of EMEA net revenue during fiscal 2014 and 2013, respectively. Sales to customers inside France accounted for $6.9 million and $5.7 million of EMEA net revenue during fiscal 2014 and 2013, respectively. No other foreign country had customers that accounted for 10% or more of our net revenue in fiscal 2014 or fiscal 2013.

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We provide a full range of marketing materials for our branded products, including training videos, webinars, product specific literature and application notes. We also offer lead generation opportunities and market development funds to key channel partners. Our sales management and field engineering personnel provide support to channel partners and visit potential customer sites to demonstrate the technical advantages of our products. We maintain press relations in the United States and Europe, and we participate in national and regional trade shows worldwide.
Customer Service and Support
Customer service and support are key elements of our strategy and critical components of our commitment to making enterprise-class support and services available to companies of all sizes. Our technical support staff is trained to assist our customers with deployment and compatibility for any combination of hardware platforms, operating systems and backup, data interchange and storage management software. Our application engineers assist with more complex customer issues. We maintain global toll-free service and support phone lines and we also provide self-service and support through our website support portal and email.
Our service offerings provide for on-site service and installation options, round-the-clock phone access to solution experts, and proof of concept and architectural design offerings. We are able to provide comprehensive technical assistance on a global scale.
The following details the range of potential warranties we currently offer on our products:
one-year and three-year advanced parts replacement;
one-year and three-year on-site by next business day service;
upgrades to four-hour response for next business day on-site service; and
upgrades to 24x7 response for next business day on-site service.
Research and Development
We incurred research and development costs of $6.2 million and $6.5 million in fiscal 2014 and 2013, representing 9.4% and 13.6% of net revenue, respectively. In fiscal 2014, we continued to augment our product lines by expanding our hardware platforms, adding feature enhancements to our software, and by completing the acquisition of Tandberg Data. Noteworthy product releases for fiscal 2014 included the SnapScale X4 clustered NAS platform with 36-drive high density storage nodes, new versions of RAINcloud®OS with additional features including iSCSI support, user and group quotas, VMware certification and enhanced performance. In January 2014, we acquired Tandberg Data which added a range of RDX® products including RDX QuikStor®, RDX QuikStation® and RDX® media, as well as additional tape automation solutions. Our plans for fiscal 2015 include enhancements across all of our product lines. Particular areas of focus are the introduction of the next generation NAS and Scale-out NAS products, enhanced RDX® product offerings, cloud capabilities and enterprise storage software.
Manufacturing and Suppliers
We perform product assembly, integration and testing at our manufacturing facilities in San Diego, California; and Guangzhou, China. We purchase disk drives, tape drives, chassis, printed circuit boards, integrated circuits, and other major components from outside suppliers. We carefully select suppliers based on their ability to provide quality parts and components which meet technical specifications and volume requirements. We actively monitor these suppliers but we are subject to substantial risks associated with the performance of our suppliers. For certain components, we qualify only a single source, which magnifies the risk of shortages and decreases our ability to negotiate with that supplier. See “If our suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations” under the heading “Risk Factors” in Part I, Section 1A of this report.

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Backlog
We manufacture our products based on a combination of our forecast of customer demand and specific order requirements. Orders are generally placed by customers on an as-needed basis. A substantial portion of our products are sold on the basis of standard purchase orders that are cancelable prior to shipment without penalty. We ship most of the backlog that we accumulate during any particular fiscal quarter in the same quarter in which the backlog initially occurs. Therefore, our backlog generally grows during the initial part of each fiscal quarter and shrinks during the latter part of the quarter to reach its lowest levels at the end of that same quarter, by which time shipments have occurred. As a result, our backlog as of the end of any fiscal quarter is not expected to be material and is not a predictor of future sales.
Competition
The worldwide storage market is highly competitive. Competitors vary in size from small start-ups to large multi-national corporations which may have substantially greater financial, research and development and marketing resources. Our primary disk-based platform competitors are EMC Corporation (both branded EMC and Iomega division), NetGear, Inc., NetApp, Inc., Hewlett-Packard Company (“HP”), International Business Machines Corporation (“IBM”), and Dell Inc. (“Dell”). Key competitive factors in these markets include performance, functionality, scalability, availability, interoperability, connectivity, time to market enhancements, and total value of ownership. Barriers to entry for disk-based backup products are low. In the tape automation market, we believe our primary competitors are Dell, HP, Spectra Logic, and Quantum Corporation. Key competitive factors include product features, reliability, durability, scalability, and price. Barriers to entry in tape automation are relatively high.
The markets for all of our products are characterized by significant price competition and we anticipate that our products will continue to face price pressure.
Proprietary Rights
General — We presently hold 74 United States patents and we have 17 United States patents pending. In general, these patents have a 20-year term from the first effective filing date for each patent. The patents that are material to our business will begin to expire in November 2015. We also hold a number of foreign patents and patent applications for certain of our products and technologies. These rights, however, may not prevent competitors from developing products substantially equivalent or superior to our products. In addition, our present and future patents may be challenged, invalidated or circumvented, reducing or eliminating our proprietary protection. We continue to be diligent about maintaining our patent portfolio and monitoring potential infringement of our patents.
Employees
As of June 30, 2014, we had 482 full-time employees and 5 part-time employees, including 109 in sales and marketing, 34 in research and development, 301 in manufacturing and operations and 43 in finance, information systems, human resources and other management. There are no collective bargaining contracts covering any of the employees and we believe that our relationship with our employees is good.
Financial Information about Segments and Geographic Areas
We operate our business in one reportable segment. For information about our net revenue by product, and net revenue and long-lived assets broken down by geographic area, see Note 11 to our consolidated financial statements and refer to “Information about Products and Services” and “Information about Geographic Areas”.

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Recent Developments
In May 2014, we announced that we entered into a definitive agreement for a proposed merger with Sphere 3D. Pursuant to the terms of the merger agreement, upon the consummation of the merger, we would become a wholly owned subsidiary of Sphere 3D. The merger is expected to close in the second quarter of fiscal 2015.
In June 2014, we won “Tape-Based Product of the Year” at the 2014 Storage Awards for our NEO® 8000e tape library.
In July 2014, we settled all claims in our patent infringement litigation filed against BDT Media Automation GmbH (“BDT”). In connection with the settlement, we entered into a patent cross-license agreement with BDT.
In August 2014, we announced our collaboration with BitTorrent, Inc. to embed BitTorrent Sync within our SnapServer® NAS product line. This solution delivers an integrated, secure private cloud mobility solution, and synchronizes files between geographically-dispersed mobile devices, tablets, desktop clients, and networked storage systems with no transfer limits or subscription fees.
In August 2014, we launched the V3 hyper-converged virtual desktop appliances to address the rapidly-growing virtualization and cloud markets. Developed in partnership with Sphere 3D, the V3 appliances are the first in a series of planned turn-key solutions that will expand our product portfolio. The “purpose-built” V3 appliance delivers an easy-to-deploy virtual desktop solution with simplified management tools and lower total cost of ownership.
In August 2014, we announced the availability of our GuardianOS® 7.6 release software in a new desktop form factor NAS platform. With a small desktop footprint, the SnapServer XSD 40 is the newest member of our scalable SnapServer® Series of NAS servers, and with SnapServer Manager, it makes it easy for customers with small or remote offices to easily manage and protect their data from a central console.
Additional Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available on our website at http://www.overlandstorage.com, free of charge, as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the Securities and Exchange Commission. The contents of our website are not a part of this report.

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Item 1A.
Risk Factors.
An investment in our company involves a high degree of risk. In addition to the other information included or incorporated by reference in this report, you should carefully consider each of the following risk factors in evaluating our business and prospects as well as an investment in our company. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline.
Our cash and other sources of liquidity may not be adequate to fund our operations for the next 12 months. If we raise additional funding through sales of equity or equity-based securities, your shares will be diluted. If we need additional funding for operations and we are unable to raise it, we may be forced to liquidate assets and/or curtail or cease operations.
We have projected that cash on hand, our short-term investment (the common shares of Sphere 3D we own), available borrowings under our credit facility, and other sources of funding will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including, but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, (iv) changes to the historical timing of collecting accounts receivable, and/or (v) our inability to liquidate our short-term investment could have a material adverse impact on our ability to access the level of funding necessary to continue our operations at current levels. If any of these events occur or if we are not able to secure additional funding (including from Sphere 3D), we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects, and/or prevent us from consummating the proposed merger with Sphere 3D.
We may seek debt, equity or equity-based financing (such as convertible debt) when market conditions permit. Such financing would require a waiver from Sphere 3D under the merger agreement, and may not be available on favorable terms, or at all. If we need additional funding for operations and are unable to raise it through debt or equity financings, we may be forced to liquidate assets and/or curtail or cease operations, any of which would require a waiver from Sphere 3D under the merger agreement. If we raise additional funds by selling additional shares of our capital stock, or securities convertible into shares of our capital stock, the ownership interest of our existing shareholders will be diluted. The amount of dilution could be increased by the issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets.
We urge you to review the additional information about our liquidity and capital resources in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of this report. If we cease to continue as a going concern due to lack of available capital or otherwise, you may lose your entire investment in our company.
The pending merger with Sphere 3D is not guaranteed to occur. If the merger does not occur, it could have a material and adverse effect on our business, growth, revenue, liquidity and results of operations.
On May 15, 2014, we entered into a merger agreement and related agreements with Sphere 3D and we would become a wholly owned subsidiary of Sphere 3D and each share of the our common stock would be converted into the right to receive 0.510594 of a Sphere 3D common share, subject to adjustment in certain circumstances. Completion of the merger is conditioned upon the satisfaction of certain closing conditions, including the approval of the merger by our shareholders, as set forth in the merger agreement. The required conditions to closing may not be satisfied in a timely manner, if at all, or, if permissible, waived. If the merger is not consummated for these or any other reasons, our ongoing business may be adversely affected and will be subject to a number of risks and consequences, including the following:
we may be required, under certain circumstances, to pay Sphere 3D a termination fee of $3.5 million;
we will be required to repay the loan made to us by Sphere 3D upon its maturity in May 2018, and to pay interest on the loan in accordance with its terms;
we must pay the substantial fees and expenses that we incurred related to the merger, such as legal, accounting, printing and synergy planning fees and expenses, even if the merger is not completed and, except in certain circumstances, we may not be able to recover such fees and expenses from Sphere 3D;

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under the merger agreement, we are subject to certain restrictions on the conduct of our business prior to completing the merger, which restrictions could adversely affect our ability to realize certain of our business strategies, including our ability to enter into additional acquisitions or other strategic transactions;
matters relating to the merger may require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us;
the market price of our common shares may decline to the extent that the current market price reflects a market assumption that the merger will be completed;
we may experience negative reactions to the termination of the merger from customers, clients, business partners, lenders and employees; and
In addition, any delay in the consummation of the merger, or any uncertainty about the consummation of the merger, may adversely affect our future business, growth, revenue, liquidity and results of operations.
Compliance with the terms of the merger agreement in the interim could adversely affect our business.
As a result of the pending merger: (a) the attention of management and employees has been and will continue to be diverted from day-to-day operations as they focus on matters relating to preparation for integrating our operations with those of Sphere 3D; (b) the restrictions and limitations on the conduct of our business pending the merger have and will continue to disrupt or otherwise adversely affect our business, and may not be in the best interests of us if we were to have to act as an independent entity following a termination of the merger agreement; (c) our ability to retain existing employees may be adversely affected due to the uncertainties created by the merger; and (d) our ability to maintain existing programs, or to establish new ones, may be adversely affected. Any delay in consummating the merger may exacerbate these issues.
The merger agreement contains provisions that could discourage a potential competing acquiror of us.
The merger agreement contains provisions that, subject to limited exceptions, restrict our ability to solicit, encourage, facilitate or discuss competing third-party proposals to acquire shares or assets of us. In addition, certain shareholders holding approximately 66% of our issued and outstanding shares have entered into voting agreements with Sphere 3D pursuant to which they have agreed to vote in favor of the merger. These provisions and the voting agreements could discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of us from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share, cash or market value than the merger consideration proposed to be received or realized in the merger, or might result in a potential competing acquiror proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the $3.5 million termination fee that may become payable in certain circumstances.
If the merger agreement is terminated by us, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the merger.
The consummation of the merger between us and Sphere 3D could affect the value of your investment in us.
Pursuant to the merger agreement among us and Sphere 3D, at the closing of the merger our shareholders will exchange their shares of our common stock for shares of Sphere 3D common stock. There are a number of additional risks related to the merger (including any failure to complete the merger), the potential combined company following the merger and the business of Sphere 3D that may affect your investment in us or the potential combined company. These risks include, without limitation, the following:
the exchange ratio will not be adjusted in the event of any change in either our stock price or Sphere 3D's stock price;
because the merger will be completed after the date of the special meeting, at the time of our special meeting, the exact market value of the Sphere 3D common shares that Overland shareholders will receive upon completion of the merger could be higher or lower than the market value at the time of the special meeting;

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the merger is subject to a number of conditions, including the receipt of consents and clearances from regulatory authorities that may not be obtained, may not be completed on a timely basis or may impose conditions that could have an adverse effect on us or Sphere 3D;
if the merger does not qualify as a reorganization under Section 368(a) of the Code or is otherwise taxable to U.S. holders of our common stock, then such holders may be required to pay substantial U.S. federal income taxes;
the rights of our shareholders who become Sphere 3D shareholders in the merger will be governed by the Ontario Business Corporations Act and subject to Sphere 3D's articles of incorporation and Sphere 3D's bylaws;
the market price of Sphere 3D's common shares has been, and may continue to be, volatile;
our current shareholders will have reduced ownership and voting interests after the merger;
the merger will result in changes to Sphere 3D's board of directors and management that may affect the strategy and operations of the combined company as compared to that of us and Sphere 3D as they currently exist;
any delay in completing the merger may reduce or eliminate the benefits expected to be achieved thereunder;
uncertainties associated with the merger may cause a loss of management personnel and other key employees which could adversely affect the future business and operations following the merger;
the expected benefits of the merger may not be realized;
the obligations and liabilities of Sphere 3D, some of which may be unanticipated or unknown, may be greater than anticipated, which may diminish the value of Sphere 3D's common shares;
Sphere 3D may be treated as a Passive Foreign Investment Company, resulting in adverse U.S. federal income tax consequences;
Overland and Sphere 3D expect to incur substantial expenses related to the merger and the integration of the two companies;
Sphere 3D and Overland may be unable to integrate their respective businesses successfully;
Sphere 3D's future results will suffer if it does not effectively manage its expanded operations following the merger;
the merger will increase Sphere 3D's overall exposure to international operations;
the merger may result in a loss of customers, clients and strategic alliances;
the market price of Sphere 3D's common shares after the consummation of the merger may be affected by factors different from those affecting Sphere 3D's common shares or our common stock prior to consummation of the merger; and
third parties may terminate or alter existing contracts with us and Sphere 3D.
Lawsuits have been filed against us and Sphere 3D relating to the merger and an adverse ruling in any such lawsuit may prevent the merger from being completed.
Since the merger was announced, four separate putative shareholder class action lawsuits were filed against us, all of our directors, and Sphere 3D in the California Superior Court in and for the County of San Diego. Three of the lawsuits also named Cyrus Capital Partners, the majority shareholder of us, as a defendant. On June 25, 2014, the Superior Court entered an order providing for the consolidation of all cases relating to our decision to enter into the merger agreement with Sphere 3D. These cases have been consolidated before a single judge and are referred to as In re Overland Storage Inc., Shareholders Litigation, Lead Case No. 37-2014-00016017-CU-SL-CTL. On July 30, 2014, the plaintiffs filed their consolidated amended complaint. The lawsuit alleges breaches of fiduciary duties and conflicts of interest against our directors relating to the merger process, the terms of the merger agreement, and the consideration to be received by our shareholders under the terms of the merger agreement. The lawsuit alleges that the other defendants aided and abetted the purported breaches of fiduciary duties by our directors. The relief sought includes an injunction prohibiting the consummation of the proposed merger, rescission of the merger to the extent already implemented or rescissory damages, damages, and an award of attorneys' fees and costs. We believe the lawsuit to be without

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merit and intend to vigorously defend against the action. However, if the plaintiffs are successful in preventing the merger, or are awarded significant damages, it could materially and adversely affect our business, financial condition, liquidity and the market price of its common stock.
Our investment in Sphere 3D is subject to a variety of risks which could reduce its value.
 At June 30, 2014, we held 769,231 shares of common stock of Sphere 3D Corporation, which had a value of approximately $7.8 million, representing 8.3% of our total assets as of such date. The value of our investment in Sphere 3D could decrease substantially or entirely for a number of reasons, including Sphere 3D's limited operating history, that Sphere 3D may not be able to achieve or maintain revenues or profitability, the limited trading of Sphere 3D's stock on the TSX Venture Exchange and the NASDAQ Global Market and continued significant volatility of its trading price, our lack of control over Sphere 3D's management and operating decisions, the timing and nature of any exit transaction, risks relating to the proposed merger between us and Sphere 3D, the fact that the shares of common stock of Sphere 3D owned by us have not been registered under U.S. securities laws, and the fact that we have pledged the shares of common stock of Sphere 3D owned by us as collateral for certain of our debt obligations, which could make it more difficult to sell such shares. These factors could cause the value of our investment to decrease significantly, which could cause our financial condition to suffer as a result.
We may not have sufficient funds to repay our notes when due and the conversion of the notes or additional payments of interest on the notes in shares may cause dilution to our existing shareholders.
In February 2013, we sold convertible notes to investors in a private placement. A total of $2.5 million of these convertible notes remain outstanding, and are scheduled to mature in February 2017. In connection with our acquisition of Tandberg Data, we issued an additional $7.0 million in aggregate original principal amount of convertible notes which are scheduled to mature between November 2017 and January 2018. These convertible notes are held by a related party.
In May 2014, we issued a note in the amount of $5.0 million to Sphere 3D, which was amended and restated in September 2014 to increase the principal amount under the note to the greater of the amount actually borrowed from Sphere 3D and $10.0 million. As of September 23, 2014, the principal balance of the note was $7.8 million. The note is payable in full in one lump sum on May 15, 2018; provided however that immediately prior to the closing of the proposed merger with Sphere 3D, the note is required to be repaid in shares of common stock of Sphere 3D owned by us with a value equal to the total borrowings under the note, and to the extent the note is not repaid in full by such transfer of shares, any remaining portion of the note will remain outstanding following the completion of the merger.
In the event we are unable to repay the notes when due or extend the notes, we may be unable to continue our business operations. If we are unable to repay the notes when required, the note holders could commence legal action against us to recover the amounts due. The conversion of the notes or the additional issuance of shares of common stock as payment of interest on the notes could cause substantial dilution to our shareholders.
We have a history of net losses. We expect to continue to incur net losses for some time and we may not achieve or maintain profitability.
We have incurred losses since fiscal 2006 and we anticipate continued losses during fiscal 2015. As of June 30, 2014, we had an accumulated deficit of $155.3 million. To return to profitability we will need to maintain or increase revenue, increase gross profit margins and improve our operating model. We may also need to implement additional cost reduction efforts across our operations as discussed below.
Our financial condition and the “going concern” opinion from our independent registered public accounting firm may negatively impact our business.
As a result of our recurring losses from operations and negative cash flows, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30, 2014 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Such report, and our financial condition and history of net losses, could cause current or potential customers to defer new orders with us or to select other suppliers, and may cause suppliers to require terms that are unfavorable to us.

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A single shareholder owns a majority of our outstanding stock.
Cyrus Capital Partners and its affiliates beneficially owned approximately 66% of our outstanding Common Stock as of June 30, 2014. As a result, Cyrus Capital Partners, acting with its affiliates, is able to exercise discretion over all matters requiring shareholder approval, including an acquisition of the Company, subject to certain limitations imposed by the Voting Agreement between the Company and certain affiliates of Cyrus Capital Partners. Such concentration of ownership may also have the effect of delaying or preventing a change in control of the Company, impeding a merger, consolidation, takeover or other business combination involving the Company, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company (in each case other than the proposed merger with Sphere 3D).
Our business may be harmed if growth in the storage market declines.
Our industry has experienced significant historical growth due to the continuing increase in the demand for storage by consumers, enterprises and government bodies around the world, and our customers' purchases of storage solutions to address this demand. While information technology (“IT”) spending has fluctuated periodically due to technology transitions and changing economic and business environments, overall growth in demand for storage has continued. Recent technology trends, such as the emergence of hosted (or “cloud”) storage, software as a service (“SaaS”) and mobile data access are driving significant changes in storage architectures and solution requirements. The impact of these trends on overall long-term growth patterns is uncertain. Nevertheless, if the general level of historic industry growth, or if the growth of the specific markets in which we compete, were to decline, our business and results of operations could suffer.
We may need to implement additional cost reduction efforts across our operations.
There can be no assurance that our cost reduction efforts will be successful and we may need to implement additional cost reduction initiatives, such as further reductions in the cost of our workforce and/or suspending or curtailing planned programs, either of which could materially harm our business, results of operations and future prospects.
We rely on indirect sales channels to market and sell our branded products. Therefore, the loss of, or deterioration in, our relationship with one or more of our distributors or resellers could negatively affect our operating results.
We sell all of our branded products through our network of distributors, VARs and DMRs, who in turn sell our products to end users. The long-term success of any of our distributors or resellers is difficult to predict, and we have no purchase commitments or long-term orders from any of them to assure us of any baseline sales through these channels. Most of our distributors and resellers also carry competing product lines that they may promote over our products. A distributor or reseller might not continue to purchase our products or market them effectively, and each determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to end user customers. Our operating results could be adversely affected by a number of factors, including, but not limited to:
a change in competitive strategy that adversely affects a distributor's or reseller's willingness or ability to stock and distribute our products;
the reduction, delay or cancellation of orders or the return of a significant amount of our products;
the loss of one or more of our distributors or resellers; and
any financial difficulties of our distributors or resellers that result in their inability to pay amounts owed to us.
If our suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations.
Our products have a large number of components and subassemblies produced by outside suppliers. We depend greatly on these suppliers for items that are essential to the manufacture of our products, including tape drives, printed circuit boards. We work closely with our regional, national and international suppliers, which are carefully selected based on their ability to provide quality parts and components that meet both our technical specifications and volume requirements. For certain items, we qualify only a single source, which magnifies the risk of shortages and decreases our ability to negotiate with that supplier on the basis of price. From time to time, we have been unable to obtain as many drives as we have needed due to drive shortages or quality issues

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from certain of our suppliers. If our suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations.
We have granted security interests over certain of our assets in connection with various debt arrangements.
We have granted security interests over certain of our assets in connection with our credit facility and the notes we issued to Sphere 3D, and we may grant additional security interests to secure future borrowings. If we are unable to satisfy our obligations under these arrangements, we could be forced to sell certain assets that secure these loans, which could have a material adverse effect on our ability to operate our business. In the event we are unable to maintain compliance with covenants set forth in these arrangements or if these arrangements are otherwise terminated for any reason, it could have a material adverse effect on our ability to access the level of funding necessary to continue operations at current levels. If any of these events occur, management may be forced to make further reductions in spending, further extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects.
Our success depends on our ability to anticipate rapid technological changes and develop new and enhanced products.
As an advanced technology company, we are subject to numerous risks and uncertainties characterized by rapid technological change and intense competition. Our future success will depend on our ability to anticipate changes in technology, and to develop, introduce, manufacture and achieve market acceptance of new and enhanced products on a timely and cost-effective basis.
Development schedules for technology products are inherently uncertain. We may not meet our product development schedules, and development costs could exceed budgeted amounts. Our business, results of operations, financial position and liquidity may be materially and adversely affected if the products or product enhancements that we develop are delayed or not delivered due to developmental problems, quality issues or component shortage problems, or if our products or product enhancements do not achieve market acceptance or are unreliable. We or our competitors will continue to introduce products embodying new technologies, such as new sequential or random access mass storage devices. In addition, new industry standards may emerge. Such events could render our existing products obsolete or not marketable, which would have a material adverse effect on our business, results of operations, financial position and liquidity.
We face intense competition and price pressure, and many of our competitors have substantially greater resources than we do.
The worldwide storage market is intensely competitive. A number of manufacturers of tape-based and disk-based storage solutions compete for a limited number of customers. In addition, barriers to entry are relatively low in these markets. Some of our competitors have substantially greater financial and other resources, larger research and development staffs, and more experience and capabilities in manufacturing, marketing and distributing products. Ongoing pricing pressure could result in significant price erosion, reduced profit margins and loss of market share, any of which could have a material adverse effect on our business, results of operations, financial position and liquidity.
Our business is dependent on the continued market acceptance and usage of tape-based systems for data backup and recovery.
We have historically derived a majority of our revenue from products that use magnetic tape drives for backup and recovery of digital data. Our tape-based storage solutions now compete directly with other storage technologies, such as hard disk drives, and may face competition in the future from other emerging technologies. The prices of hard disk drives continue to decrease as their capacity and performance increase. We expect our tape-based products to face increased competition from these alternative technologies and come under increasing pricing pressure. If our strategy to compete in disk-based markets does not succeed, it could have a material adverse effect on our business, results of operations, financial position and liquidity.

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If our revenue base declines, we may choose to discontinue or exit some or a substantial portion of our current operations.
Our management team continually reviews and evaluates our product portfolio, operating structure and markets to assess the future viability of our existing products and market positions. We may determine that the infrastructure and expenses necessary to sustain an existing product offering are greater than the potential contribution margin that we would realize. As a result, we may determine that it is in our best interest to exit or divest one or more existing product offerings, which could result in costs incurred for exit or disposal activities and/or impairments of long-lived assets. Moreover, if we do not identify other opportunities to replace discontinued products or operations, our revenues would decline, which could lead to further net losses and adversely impact the market price of our common stock.
Our ability to compete depends in part on our ability to protect our intellectual property rights.
We rely on a combination of patent, copyright, trademark, trade secret and other intellectual property laws to protect our intellectual property rights. However, these rights may not prevent competitors from developing products that are substantially equivalent or superior to our products. To the extent that we have or obtain patents, such patents may not afford meaningful protection for our technology and products. Others may challenge our patents and, as a result, our patents could be narrowed, invalidated or declared unenforceable. The patents that are material to our business will begin to expire in November 2015. In addition, our current or future patent applications may not result in the issuance of patents in the United States or foreign countries. The laws of certain foreign countries may not protect our intellectual property to the same extent as U.S. laws. Furthermore, competitors may independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents.
In order to protect or enforce our patent rights, we may initiate interference proceedings, oppositions, or patent litigation against third parties, such as infringement suits. In addition, other companies may initiate similar proceedings against us. Such enforcement efforts and/or defense efforts could be expensive and divert management's time and attention from other business concerns. The patent position of information technology firms in particular is highly uncertain, involves complex legal and factual questions, and continues to be the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under information technology patents. Current litigation involving our intellectual property includes the following:
In August 2010 and October 2010, we filed patent infringement lawsuits in the United States District Court for the Southern District of California and United States International Trade Commission (“ITC”), respectively, against various parties. Both lawsuits claim infringement of two of our U.S. Patents, Nos. 6,328,766 and 6,353,581.
In July 2014, we entered into a settlement and cross-license agreement with BDT pursuant to which we released all claims we had against BDT. In connection with the settlement, we also dismissed our patent infringement claims filed against PivotStor, LLC, a BDT customer based in Irvine, California, which was pending in the United States District Court for the Southern District of California.
In June 2012, we filed patent infringement lawsuits in the United States District Court for the Southern District of California against Spectra Logic Corporation (“Spectra Logic”), based in Boulder, Colorado and Qualstar Corporation (“Qualstar”), based in Simi Valley, California. In the Spectra Logic case, we claimed infringement of U.S. Patent Nos. 6,328,766 and 6,353,581. In the Qualstar case, we claimed infringement of U.S. Patent No. 6,328,766.
In June 2013, Spectra Logic filed a Petition for Inter Partes Review of the claims of U.S. Patent No. 6,328,766 with the United States Patent and Trademark Office. The petition has been assigned Case No. IPR2013-00357. In December 2013, the United States Patent and Trademark Office initiated an inter partes review proceeding involving U.S. Patent No. 6,328,766. The inter partes review proceeding is ongoing.
In January and February 2014, the District Court for the Southern District of California stayed our litigation against Qualstar and Spectra Logic, respectively, pending the results of the inter partes review filed by Spectra Logic. We are continuing to pursue our claims against Spectra Logic and Qualstar.

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In May 2013, Safe Storage LLC (“Safe Storage”), a Delaware limited liability company, filed a complaint against us in the United States District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,978,346 by our products. Safe Storage is seeking monetary damages from us and injunctive relief.
We could incur charges for excess and obsolete inventory.
The value of our inventory may be adversely affected by factors that affect our ability to sell the products in our inventory. Such factors include changes in technology, introductions of new products by us or our competitors, the current or future economic downturns, or other actions by our competitors. If we do not effectively forecast and manage our inventory, we may need to write off inventory as excess or obsolete, which adversely affects cost of sales and gross profit. We have previously experienced, and may in the future experience, reductions in sales of older generation products as customers delay or defer purchases in anticipation of new products that we or our competitors may introduce. We have established reserves for slow moving or obsolete inventory. These reserves, however, may prove to be inadequate, which would result in additional charges for excess or obsolete inventory.
Our warranty reserves may not adequately cover our warranty obligations.
We have established reserves for the estimated liability associated with our product warranties. However, we could experience unforeseen circumstances where these or future reserves may not adequately cover our warranty obligations. For example, the failure or inadequate performance of product components that we purchase could increase our warranty obligations beyond these reserves.
The failure to attract, hire, retain and motivate key personnel could have a significant adverse impact on our operations.
Our business is dependent on our ability to attract, hire, retain and motivate talented, highly skilled personnel. Achieving this objective may be difficult due to many factors, including competition for such highly skilled personnel; fluctuations in global economic and industry conditions; changes in our management or leadership; competitors' hiring practices; and the effectiveness of our compensation programs. Additionally, we have experienced a prolonged period of operating losses and declines in our stock price and cash position, which have affected and may continue to affect employee morale and retention. Turnover, particularly among senior management, may also create distractions as we search for replacement personnel, which could result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with our business and operations. In addition, manpower in certain areas may be constrained, which could lead to disruptions over time. We cannot guarantee that we will successfully attract or retain the management we need, or be able to maintain an optimal workforce size. Any inability to attract, hire, retain or motivate such personnel or to address manpower constraints could materially adversely affect our results of operations, financial position or cash flows. We do not currently maintain any key-man insurance for any of our employees.
Our financial results may fluctuate substantially for many reasons, and past results should not be relied on as indications of future performance.
The markets that we serve are volatile and subject to market shifts that we may be unable to anticipate. A slowdown in the demand for workstations, mid-range computer systems, networks and servers could have a significant adverse effect on the demand for our products in any given period. In the past, we have experienced delays in the receipt of purchase orders and, on occasion, anticipated purchase orders have been rescheduled or have not materialized due to changes in customer requirements. Our customers may cancel or delay purchase orders for a variety of reasons, including, but not limited to, the rescheduling of new product introductions, changes in our customers' inventory practices or forecasted demand, general economic conditions affecting our customers' markets, changes in our pricing or the pricing of our competitors, new product announcements by us or others, quality or reliability problems related to our products, or selection of competitive products as alternate sources of supply. In particular, our ability to forecast sales to distributors, VARs and DMRs is especially limited because these customers typically provide us with relatively short order lead times or are permitted to change orders on short notice. Because a large portion of our sales is generated by our European channel, our first fiscal quarter (July through September) results of operations are often impacted by seasonally slow European orders, reflecting the summer holiday period in Europe. None of our customers is obligated to purchase a specific amount of our products.

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Our financial results have fluctuated and will continue to fluctuate quarterly and annually based on, among others, the following factors:
changes in customer mix;
increases in the cost of, or limitations on, the availability of materials;
fluctuations in average selling prices;
changes in product mix;
increases in costs and expenses associated with the introduction of new products; and
currency exchange fluctuations.
We therefore believe that our revenue and operating results will continue to fluctuate, and that period-to-period comparisons are not necessarily meaningful and should not be relied on as indications of future performance. Our revenue and operating results may fail to meet the expectations of public market analysts or investors, which could have a material adverse effect on the price of our common stock. In addition, portions of our expenses are fixed and difficult to reduce if our revenues do not meet our expectations. These fixed expenses magnify the adverse effect of any revenue shortfall.
We are in the process of replacing our enterprise resource planning (“ERP”) system. This will be expensive and may be disruptive to our business.
We are in the process of replacing our ERP system. Transitioning to a new ERP system will be expensive and time consuming, and our business and results of operations may be materially and adversely affected if problems occur during the transition. In addition, we have modified our current ERP system significantly during its term of use and it is possible that we could experience a significant system failure before we replace it. Any such failure may materially and adversely affect our business, liquidity, results of operations and financial position.
Our international operations are important to our business and involve unique risks.
Sales to customers outside of the United States represent a significant portion of our total sales, and following our acquisition of Tandberg Data in January 2014, we expect them to continue to do so. Our future results could be materially adversely affected by a variety of political, economic or other factors relating to our operations outside the United States, including impacts from the global macroeconomic environment and continuing challenges in Europe, any or all of which could have a material adverse effect on our operating results and financial condition, including, but not limited to, the following:
the worldwide impact of the recent global economic downturn and related market uncertainty, including the ongoing European economic and financial turmoil related to sovereign debt issues in certain countries;
the imposition of governmental controls mandating compliance with various foreign and U.S. export laws;
currency exchange fluctuations;
weak economic conditions in foreign markets;
political or social unrest;
economic instability or weakness in a specific country or region;
environmental and trade protection measures and other legal and regulatory requirements;
health or similar issues, such as pandemic or epidemic or natural disasters;
trade restrictions, tariffs and taxes;
longer payment cycles typically associated with international sales; and
difficulties in staffing and managing international operations.
Furthermore, we may be unable to comply with changes in foreign laws, rules and regulations applicable to us in the future, which could have a material adverse effect on our business, results of operations, financial position and liquidity.

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We are subject to exchange rate risk in connection with our international operations.
We do not currently engage in foreign currency hedging activities and, therefore, we are exposed to some level of currency risk. Our sales in international markets are denominated in U.S. dollars as well as local currency. Our wholly-owned subsidiaries in Europe and Asia incur costs that are denominated in local currencies. As exchange rates vary, these results when translated into U.S. dollars may vary from expectations and adversely impact overall expected results. A weaker U.S. dollar would result in an increase to revenue and expenses upon consolidation, and a stronger U.S. dollar would result in a decrease to revenue and expenses upon consolidation.
We have made a number of acquisitions in the past and we may make acquisitions in the future. The failure to successfully integrate acquisitions and successfully complete product development and launch of the related products could harm our business, financial condition and operating results.
We have in the past, and in the event the proposed merger with Sphere 3D is not consummated, may in the future make acquisitions of complementary businesses, products or technologies as we implement our business strategy. Mergers and acquisitions, including our acquisition of Tandberg Data in January 2014, involve numerous risks, including liabilities that we may assume from the acquired companies, difficulties in completion of in-process product development and assimilation of the operations and personnel of the acquired business, the diversion of management's attention from other business concerns, risks of entering markets in which we have no direct prior experience, and the potential loss of key employees of the acquired business. There can be no assurance that we will successfully integrate the operations of Tandberg Data, or any other companies that we may acquire in the future, into the operations of the company.
Future mergers and acquisitions by us also may result in dilutive issuances of our equity securities and the incurrence of debt, amortization expense and potential impairment charges related to intangible assets. Any of these factors could adversely affect our business, liquidity, results of operations and financial position.
In May 2014, we announced a proposed merger with Sphere 3D. Pursuant to the terms of the merger agreement, upon the consummation of the merger we would become a wholly owned subsidiary of Sphere 3D. The merger is expected to close in the second quarter of fiscal 2015.
The market price of our common stock is volatile.
The market price of our common stock has experienced significant fluctuations since it commenced trading in February 1997, and may continue to fluctuate significantly in the future. Many factors could cause the market price of our common stock to fluctuate, including, but not limited to:
our ability to meet our working capital needs;
announcements concerning us, our competitors, our customers or our industry;
changes in earnings estimates by analysts;
purchasing decisions of significant customers;
quarterly variations in operating results;
the introduction of new technologies or products by us or our competitors;
changes in product pricing policies by us or our competitors;
the terms of any financing arrangements we enter into; and
changes in general economic conditions.
In addition, stock markets have generally experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

18


If our common stock is delisted from the NASDAQ Capital Market, our business, financial condition, results of operations and stock price could be adversely affected, and the liquidity of our stock and our ability to obtain financing could be impaired.
Maintaining the listing of our common stock on The NASDAQ Capital Market requires that we comply with certain listing requirements. We have in the past and may in the future fail to continue to meet one or more listing requirements. For example, in January 2013, we received a notification from The NASDAQ Stock Market LLC indicating non-compliance with the requirement to maintain minimum market value of listed securities of $35 million and that we would be delisted if we did not timely regain compliance. We regained compliance in December 2013, but we could fail to meet the continued listing requirements as a result of a decrease in our stock price or otherwise, and there can be no that our common stock will remain listed on the NASDAQ Capital Market.
If our common stock ceases to be listed for trading on The NASDAQ Capital Market for any reason, it may harm our stock price, increase the volatility of our stock price, decrease the level of trading activity and make it more difficult for investors to buy or sell shares of our common stock. Our failure to maintain a listing on The NASDAQ Capital Market may constitute an event of default under our outstanding indebtedness as well as any future indebtedness, which would accelerate the maturity date of such debt or trigger other obligations. In addition, certain institutional investors that are not permitted to own securities of non-listed companies may be required to sell their shares adversely affecting the trading price of our common stock. If we are not listed on The NASDAQ Capital Market, we will be limited in our ability to raise additional capital we may need.
We are subject to laws, regulations and similar requirements, changes to which may adversely affect our business and operations.
We are subject to laws, regulations and similar requirements that affect our business and operations, including, but not limited to, the areas of commerce, intellectual property, income and other taxes, labor, environmental, health and safety, and our compliance in these areas may be costly. While we have implemented policies and procedures to comply with laws and regulations, there can be no assurance that our employees, contractors, suppliers or agents will not violate such laws and regulations or our policies. Any such violation or alleged violation could materially and adversely affect our business. Any changes or potential changes to laws, regulations or similar requirements, or our ability to respond to these changes, may significantly increase our costs to maintain compliance or result in our decision to limit our business or products, which could materially harm our business, results of operations and future prospects.
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes provisions regarding certain minerals and metals, known as conflict minerals, mined from the Democratic Republic of Congo and adjoining countries. These provisions require companies to undertake due diligence procedures and report on the use of conflict minerals in its products, including products manufactured by third parties. Compliance with these provisions will cause us to incur costs to certify that our supply chain is conflict free and we may face difficulties if our suppliers are unwilling or unable to verify the source of their materials. Our ability to source these minerals and metals may also be adversely impacted. In addition, our customers may require that we provide them with a certification and our inability to do so may disqualify us as a supplier.
For additional information on risk factors related to Sphere 3D, please see the Registration Statement on Form F-4 filed by Sphere 3D with the SEC on July 23, 2014.
Item 1B.
Unresolved Staff Comments.
None.

19


Item 2.
Properties.
Our headquarters is located in San Diego, California, where we lease a 51,000 square foot facility in a light industrial complex. The lease expires in March 2019. This facility houses manufacturing, repair services, research and development, technical support, and administrative functions.
We lease a 86,900 square foot facility in Guangzhou, China. This lease expires in July 2016. This facility houses manufacturing and repair services. We own a 25,600 square foot facility in Dortmund, Germany. This facility houses sales and marketing, repair services, technical support, and administrative functions. We lease a 20,777 square foot facility in San Jose, California. The lease expires in May 2017 and can be renewed for one additional five-year period. The San Jose facility houses research and development, technical support, sales and marketing, and administrative functions. We lease other sales offices and research and development facilities throughout the U.S. and internationally.
Item 3.
Legal Proceedings.
We are from time to time involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. We do not believe any such legal proceedings or claims will have, individually or in the aggregate, a material adverse effect on our business, liquidity, results of operations, or financial position. Litigation, however, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
Proposed Merger
In May 2014, we announced that we had signed an agreement and plan of merger with Sphere 3D. Since the merger was announced, four separate putative shareholder class action lawsuits were filed against us, all of our directors, and Sphere 3D in the California Superior Court in and for the County of San Diego. Three of the lawsuits also named Cyrus Capital Partners, the majority shareholder of us, as a defendant. On June 25, 2014, the Superior Court entered an order providing for the consolidation of all cases relating to our decision to enter into the merger agreement with Sphere 3D. These cases have been consolidated before a single judge and are referred to as In re Overland Storage Inc., Shareholders Litigation, Lead Case No. 37-2014-00016017-CU-SL-CTL. On July 30, 2014, the plaintiffs filed their consolidated amended complaint. The lawsuit alleges breaches of fiduciary duties and conflicts of interest against our directors relating to the merger process, the terms of the merger agreement, and the consideration to be received our shareholders under the terms of the merger agreement. The lawsuit alleges that the other defendants aided and abetted the purported breaches of fiduciary duties by our directors. The relief sought includes an injunction prohibiting the consummation of the proposed merger, rescission of the merger to the extent already implemented or rescissory damages, damages, and an award of attorneys' fees and costs. We believe the lawsuit to be without merit and intend to vigorously defend against the action. However, if the plaintiffs are successful in preventing the merger, or are awarded significant damages, it could materially and adversely affect our business, financial condition, liquidity, and the market price of its common stock.
Patent Infringement
In August 2010, we filed a patent infringement lawsuit in the United States District Court for the Southern District of California against BDT AG, BDT Products, Inc., and BDT-Solutions GmbH. In October 2010, we filed an amended complaint for patent infringement in that court naming the following defendants: BDT AG; BDT Products, Inc.; BDT-Solutions GmbH & Co. KG; BDT Automation Technology (Zhuhai FTZ) Co., Ltd.; BDT de México, S. de R.L. de C.V.; IBM; and Dell. The lawsuit claimed infringement of two of our U.S. Patents; Nos. 6,328,766 and 6,353,581.
In November 2011, we entered into a multi-year settlement and cross-licensing agreement with IBM pursuant to which we released all claims we had against IBM and Dell in connection with the patent infringement lawsuits we had filed.
In July 2014, we entered into a settlement and cross-license agreement with BDT pursuant to which we released all claims we had against BDT. In connection with the settlement, we also dismissed our patent infringement claims filed against PivotStor, LLC, a BDT customer based in Irvine, California, which was pending in the United States District Court for the Southern District of California.
In June 2012, we filed patent infringement lawsuits in the United States District Court for the Southern District of California against Spectra Logic Corporation (“Spectra Logic”), based in Boulder, Colorado; and Qualstar Corporation, based in Simi Valley, California. In the Spectra Logic case, we claimed infringement of U.S. Patent Nos. 6,328,766 and 6,353,581. In the Qualstar case, we claimed infringement of U.S. Patent No. 6,328,766.

20


In June 2013, Spectra Logic filed a Petition for Inter Partes Review of the claims of U.S. Patent No. 6,328,766 with the United States Patent and Trademark Office. The petition has been assigned Case No. IPR2013-00357. In December 2013, the United States Patent and Trademark Office initiated an inter partes review proceeding involving U.S. Patent No. 6,328,766. The inter partes review proceeding is ongoing.
In January 2014 and February 2014, the District Court for the Southern District of California stayed our litigation against Qualstar and Spectra Logic, respectively, pending the results of the inter partes review filed by Spectra Logic. We are continuing to pursue our claims against Spectra Logic and Qualstar.
In May 2013, Safe Storage LLC (“Safe Storage”), a Delaware limited liability company, filed a complaint against us in the United States District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,978,346 by our products. Safe Storage is seeking monetary damages from us and injunctive relief.
Patent Litigation Funding Agreement
In December 2010, we entered into a litigation funding agreement (the “Funding Agreement”) with Special Situations Fund III QP, L.P., Special Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P., and Special Situations Technology Fund II, L.P. (collectively, the “Special Situations Funds”) pursuant to which the Special Situations Funds agreed to fund certain patent litigation brought by the Company. In May 2014, the Special Situations Funds filed a complaint against us in the Supreme Court for New York County, alleging breach of the Funding Agreement. The Special Situations Funds allege that our January 2014 acquisition of Tandberg Data entitled the Special Situation Funds to a $6.0 million payment under the Funding Agreement, and therefore the Company's refusal to make the payment constitutes a breach of the Funding Agreement by us. The Special Situations Funds are seeking $6.0 million in contractual damages as well as costs and fees. We believe the lawsuit to be without merit and intend to vigorously defend against the action.
Item 4.
Mine Safety Disclosures.
Not Applicable.



PART II
Item 5.
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the NASDAQ Capital Market under the symbol “OVRL.” As of September 15, 2014, there were approximately 51 shareholders of record. On September 15, 2014, the closing sales price of our common stock was $3.45 per share.
The following table shows the high and low sale prices per share of our common stock as reported on the NASDAQ Capital Market for the periods indicated:
 
Sale Prices 
 
High
 
Low 
Fiscal Year 2014:
 
 
 
Fourth quarter
$5.24
 
$2.63
Third quarter
$5.80
 
$3.76
Second quarter
$6.10
 
$3.95
First quarter
$6.40
 
$4.62
Fiscal Year 2013:
 
 
 
Fourth quarter
$6.70
 
$4.90
Third quarter
$6.65
 
$4.56
Second quarter
$8.80
 
$4.55
First quarter
$11.60
 
$8.00
Dividends
We have not paid any cash dividends on our common stock for our two most recent fiscal years and do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
On March 31, 2014, we issued an aggregate of 28,423 shares of common stock to the holders of certain of our outstanding convertible notes as payment of interest on such notes. The issuance of these shares was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as sales of securities not involving any public offering.
On July 12, 2013, we issued 42,644 shares of common stock to Sphere 3D Corporation (“Sphere 3D”). We issued these shares as partial consideration for the transactions contemplated by the Technology License Agreement, dated as of July 12, 2013, by and between us and Sphere 3D. The issuance of these shares was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act, as sales of securities not involving any public offering. See Item 13, “Certain Relationships and Related Transactions, and Director Independence - Certain Transactions with Related Persons” for additional information about this transaction.
Item 6.
Selected Financial Data.
Not applicable.

22


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, but are not limited to: our anticipated closing of the merger with Sphere 3D; our ability to successfully integrate the businesses of Tandberg Data with our other businesses; our ability to maintain and increase sales volumes of our products; our ability to continue to aggressively control costs and operating expenses; our ability to achieve the intended cost savings and maintain quality with our manufacturing partner; our ability to generate cash from operations; the ability of our suppliers to provide an adequate supply of components for our products at prices consistent with historical prices; our ability to raise outside capital and to repay our debt as it comes due; our ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new products introduced by our competitors; our ability to maintain strong relationships with branded channel partners; our ability to maintain the listing of our common stock on the NASDAQ Capital Market; customers', suppliers', and creditors' perceptions of our continued viability; rescheduling or cancellation of customer orders; loss of a major customer; our ability to enforce our intellectual property rights and protect our intellectual property (including the outcome of our ongoing patent litigation); general competition and price measures in the market place; unexpected shortages of critical components; worldwide information technology spending levels; and general economic conditions. In evaluating such statements we urge you to specifically consider various factors identified in this report, including the matters set forth under the heading “Risk Factors” in Part I, Item 1A of this report, any of which could cause actual results to differ materially from those indicated by such forward-looking statements. Forward-looking statements speak only as of the date of this report and we undertake no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this report. Actual events or results may differ materially from such statements. Share and per share amounts herein have been adjusted to give effect to the April 9, 2014 one-for-five reverse stock split.
We are a trusted global provider of unified data management and data protection solutions across the data lifecycle. We provide an integrated range of technologies and services for primary, nearline, offline, and archival data storage. Our solutions consolidate and protect data for easy and cost-effective management of different tiers of information whether the distributed data is local or global based. In May 2014, we announced that we entered into a definitive agreement for a proposed merger with Sphere 3D, which is intended to bring together next generation technologies for virtualization and cloud coupled with end-to-end scalable storage offerings, allowing the combined company to address the growing virtualization and cloud markets upon the consummation of the merger.
We develop and deliver a comprehensive solution set of award-winning products and services for storing data throughout the organization and during the entire data lifecycle. Our SnapScale® clustered network attached storage (“NAS”) products allow customers to scale-out in capacity and performance as their storage needs grow. Our SnapServer® products are unified NAS servers that integrate into businesses requiring simple, expandable block and file storage. Our SnapSAN® products are storage area network (“SAN”) arrays designed to ensure primary and secondary data is accessible and protected regardless of its location. Our SnapScale®, SnapServer®, and SnapSAN® solutions are available with backup, replication, and mirroring software in highly scalable configurations. These solutions provide simplified disk-based data protection and maximum flexibility to protect mission critical data for both continuous local backup and remote disaster recovery. Our NEO Series®, StorageLoader®, and StorageLibrary® tape library solutions are designed to meet the need for cost-effective, reliable data storage for long-term archiving and data storage compliance requirements, offering a wide range of capacity, performance and feature sets.
In January 2014, we completed our acquisition of Tandberg Data Holdings S.à r.l. (“Tandberg Data”) which added a range of RDX® products including RDX QuikStor®, RDX QuikStation® and RDX® media, as well as additional tape automation solutions. Our RDX QuikStor® and QuikStation® removable media-based storage systems offer reliable and convenient storage for backup, archive, data interchange and disaster recovery.

23


Our approach emphasizes long-term investment protection for our customers and reduces the complexities and ongoing costs associated with storage management. Moreover, most of our products are designed with a scalable architecture which enables companies to purchase additional storage as needed, on a just-in-time basis, and make it available instantly without downtime.
End users of our products include small and medium enterprises (“SMEs”), small and medium businesses (“SMBs”), distributed enterprise companies such as divisions and operating units of large multi-national corporations, governmental organizations, and educational institutions. Our products are used in a broad range of industries including financial services, video surveillance, healthcare, retail, manufacturing, telecommunications, broadcasting, research and development, and many others.
See “Part I, Item 1. Business” of this report for more information about our business, products and operations.
Overview
This overview discusses matters on which our management primarily focuses in evaluating our financial position and operating performance.
Generation of revenue. We generate the majority of our revenue from sales of our data protection products. The balance of our revenue is provided by selling maintenance contracts and rendering related services. The majority of our sales are generated from sales of our branded products through a worldwide channel, which includes systems integrators and VARs.
We reported net revenue of $65.7 million for fiscal 2014, compared with $48.0 million for fiscal 2013. We incurred a net loss of $22.9 million, or $1.99 per share, for fiscal 2014 compared with a net loss of $19.6 million, or $3.41 per share, for fiscal 2013.
Acquisition. In January 2014, we completed our acquisition of Tandberg Data, a privately held global leader of data storage and data protection solutions in exchange for shares of our common stock, and Tandberg Data became a wholly-owned subsidiary of the Company. Our financial position and operating performance include the financial position of Tandberg Data and operating performance from and after January 21, 2014.
Liquidity and capital resources. At June 30, 2014, we had a cash balance of $4.3 million, compared to $8.8 million at June 30, 2013. In fiscal 2014, we incurred a net loss of $22.9 million. At June 30, 2014, we had a balance of $19.9 million recorded as long-term debt of which $14.5 million was owed to a related party. At June 30, 2014, our credit facility had a remaining external borrowing capacity of up to $2.6 million. Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during the continued period of integration for our acquisition completed in January 2014 as we work to combine the entities and to improve operational efficiencies.
Management has projected that cash on hand, our short-term investment (the common shares of Sphere 3D we own), available borrowings under our credit facility, and other sources of funding will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including, but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, (iv) changes to the historical timing of collecting accounts receivable, and/or (v) our inability to liquidate our short-term investment could have a material adverse impact on our ability to access the level of funding necessary to continue our operations at current levels. If any of these events occur or if we are not able to secure additional funding (including from Sphere 3D), we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects, and/or prevent us from consummating the proposed merger with Sphere 3D. We may seek debt, equity or equity-based financing (such as convertible debt) when market conditions and the merger agreement with Sphere 3D permit.
As of June 30, 2014, we had working capital of $11.8 million, reflecting increases in current assets and current liabilities of $16.4 million and $11.4 million, respectively, during fiscal 2014. The increase in current assets and current liabilities as a whole, is related to our acquisition completed in January 2014. The increase in current assets is primarily attributable to (i) a $7.5 million increase in accounts receivable, a (ii) a $5.2 million increase in inventory, and a $7.8 million increase in our short-term investment in Sphere 3D, offset by a $4.6 million decrease in cash. The increase in current liabilities is primarily attributable to (i) a $7.7 million increase in accounts payable and accrued liabilities, (ii) a $1.9 million increase in other current liabilities, and (iii) a $1.4

24


million increase in accrued payroll and employee compensation related to an increase in average year-to-date headcount from our acquisition in January 2014.
Recent Developments
In May 2014, we announced that we entered into a definitive agreement for a proposed merger with Sphere 3D. Pursuant to the terms of the merger agreement, upon the consummation of the merger, we would become a wholly owned subsidiary of Sphere 3D. The merger is expected to close in the second quarter of fiscal 2015.
In June 2014, we won “Tape-Based Product of the Year” at the 2014 Storage Awards for our NEO® 8000e tape library.
In July 2014, we settled all claims in our patent infringement litigation filed against BDT Media Automation GmbH (“BDT”). In connection with the settlement, we entered into a patent cross-license agreement with BDT.
In August 2014, we announced our collaboration with BitTorrent, Inc. to embed BitTorrent Sync within our SnapServer® NAS product line. This solution delivers an integrated, secure private cloud mobility solution, and synchronizes files between geographically-dispersed mobile devices, tablets, desktop clients, and networked storage systems with no transfer limits or subscription fees.
In August 2014, we launched the V3 hyper-converged virtual desktop appliances to address the rapidly-growing virtualization and cloud markets. Developed in partnership with Sphere 3D, the V3 appliances are the first in a series of planned turn-key solutions that will expand our product portfolio. The “purpose-built” V3 appliance delivers an easy-to-deploy virtual desktop solution with simplified management tools and lower total cost of ownership.
In August 2014, we announced the availability of our GuardianOS® 7.6 release software in a new desktop form factor NAS platform. With a small desktop footprint, the SnapServer XSD 40 is the newest member of our scalable SnapServer® Series of NAS servers, and with SnapServer Manager, it makes it easy for customers with small or remote offices to easily manage and protect their data from a central console.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial position and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net revenue and expenses, and related disclosure of contingent liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. The footnotes to our consolidated financial statements also include disclosure of significant accounting policies. We believe the critical accounting policies below to be critical to the judgments, estimates and assumptions used in the preparation of the consolidated financial statements.
Revenue Recognition
We recognize revenue from sales of products when persuasive evidence of an arrangement exists, the price is fixed or determinable, collectibility is reasonably assured and delivery has occurred. Under this policy, revenue on direct product sales (excluding sales to distributors) is recognized upon shipment of products to our customers. These customers are not entitled to any specific right of return or price protection, except for any defective product that may be returned under our warranty policy.

25


Generally, title and risk of loss transfer to the customer when the product leaves our dock, except for our Tandberg Data subsidiary, where title and risk of loss generally transfer to the customer when the product arrives at the customer's location. Product sales to distribution customers are subject to certain rights of return, stock rotation privileges and price protection. Because we are unable to estimate our exposure for returned product or price adjustments, revenue from shipments to these customers is not recognized until the related products are in turn sold to the ultimate customer by the distributor. For products in which software is more than an incidental component, we recognize revenue in accordance with current authoritative guidance for software revenue recognition.
Inventory Valuation
We record inventories at the lower of cost or market. We assess the value of our inventories periodically based upon numerous factors including, among others, expected product or material demand, current market conditions, technological obsolescence, current cost and net realizable value. If necessary, we write-down our inventory for obsolete or unmarketable inventory by an amount equal to the difference between the cost of the inventory and the estimated market value. If actual market conditions are less favorable than we project, we may need to record additional inventory adjustments and adverse purchase commitments.
Goodwill and Purchased Intangible Assets
Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired. Goodwill is measured and tested for impairment on an annual basis or more frequently if we believe indicators of impairment exist. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization.
Purchased intangible assets are amortized on a straight-line basis over their economic lives of three to ten years for developed technology, and 15 years for customer relationships as the Company believes this method most closely reflects the pattern in which the economic benefits of the assets will be consumed. When the carrying value is not considered recoverable, an impairment loss for the amount by which the carrying value of an intangible asset exceeds its fair value is recognized, with an offsetting reduction in the carrying value of the related intangible asset. If our future results are significantly different than forecasted, we may be required to further evaluate its intangible assets for recoverability and such analysis could result in an impairment charge in a future period.
Warranty Obligations
For return-to-factory and on-site warranties, we accrue for warranty costs at the time revenue is recognized based on contractual rights and on the historical rate of claims and costs to provide warranty services. If we experience an increase in warranty claims above historical experience or our costs to provide warranty services increase, we may be required to increase our warranty accrual. Any such unforeseen increases may have an adverse impact on our gross margins in the periods in which they occur. Similarly, if we experience a decrease in warranty claims or our costs to provide services decline, we may be required to decrease our warranty accrual, which may have a favorable impact on our gross margins in the periods in which they occur.
Warrants
We have warrants to purchase common stock that are issued and outstanding and have been classified as equity. The terms of these warrants, in particular their anti-dilution provisions, are evaluated on an on-going basis to determine whether equity classification remains appropriate. If these warrants were classified as a liability obligation, then the warrants would be adjusted to fair value at each reporting period with the fair market value adjustments being recorded to earnings.

26


Results of Operations
The following table sets forth certain financial data as a percentage of net revenue:
 
Fiscal Year
 
2014
 
2013
Net revenue
100.0
 %
 
100.0
 %
Cost of revenue
69.1

 
65.0

Gross profit
30.9

 
35.0

Operating expenses:
 

 
 

Sales and marketing
28.0

 
36.6

Research and development
9.4

 
13.6

General and administrative
29.9

 
24.1

 
67.3

 
74.3

Loss from operations
(36.4
)
 
(39.3
)
Other income (expense), net
(2.3
)
 
(1.2
)
Loss before income taxes
(38.7
)
 
(40.5
)
Provision for income taxes
(3.9
)
 
0.3

Net loss
(34.8
)%
 
(40.8
)%
 
A summary of the sales mix by product follows: 
 
Fiscal Year 
 
2014
 
2013
Disk systems
38.3
%
 
20.0
%
Tape automation systems
21.6

 
35.0

Tape drives and media
13.7

 
5.1

Service
26.4

 
39.9

 
100.0
%
 
100.0
%
Fiscal 2014 compared with Fiscal 2013
Net Revenue. Net revenue increased to $65.7 million during fiscal 2014 from $48.0 million during fiscal 2013, an increase of $17.7 million, or 36.9%. The increase in net revenue, is related to our acquisition completed in January 2014, which contributed $25.5 million in net revenue in fiscal 2014. The increase from our acquisition was partially offset by a $3.5 million decrease in revenue from our branded products, primarily as a result of decreased sales volumes of our products sold in the Americas and EMEA regions, and a $3.5 million decrease in service revenue. OEM revenue represented approximately 15.0% of net revenue in fiscal 2014 compared to 12.2% of net revenue fiscal 2013.
Product Revenue
Net product revenue increased to $48.4 million during fiscal 2014 from $28.8 million during fiscal 2013. The increase of approximately $19.6 million, or 68.1%, resulted from our acquisition that was completed in January 2014, which contributed $23.8 million of product revenue in fiscal 2014. The increase from our acquisition was offset by a decrease in revenue from our branded products due to a decrease in sales of our tape automation systems of $4.2 million.

27


Service Revenue
Net service revenue decreased to $17.3 million during fiscal 2014 from $19.2 million during fiscal 2013. The decrease of approximately $1.9 million, or 9.9%, was primarily due to decreased service revenue from extended service contracts primarily related to lower tape automation system sales in EMEA and the Americas regions, offset by $1.7 million of service revenue generated by our acquisition that was completed in January 2014.
Gross Profit. Overall gross profit increased to $20.3 million during fiscal 2014 compared to $16.8 million during fiscal 2013. Gross margin decreased to 30.9% during fiscal 2014 from 35.0% during fiscal 2013. The decrease in overall gross margin was primarily due to a 13.6% decrease in our service revenue as a percentage of net revenue, whereby service revenue typically has a higher gross margin than product revenue. The change to the net revenue mix was primarily related to our acquisition completed in January 2014.
Product Revenue
Gross profit on product revenue during fiscal 2014 was $10.2 million compared to $3.9 million during fiscal 2013. The increase of $6.3 million, or 162%, was primarily due increase sales volumes related to our acquisition completed in January 2014. Gross margin on our products was 21.1% for fiscal 2014 compared to 13.5% for fiscal 2013 due to higher margins for the sale of products we acquired through our acquisition that was completed in January 2014.
Service Revenue
Gross profit on service revenue during fiscal 2014 was $10.1 million compared to $12.9 million during fiscal 2013. The decrease of $2.8 million, or 21.7%, was primarily due to a decrease in extended service contracts related to a decrease in product sales. Gross margin on service revenue was 58.4% for fiscal 2014 compared to 67.3% for fiscal 2013 due to allocation of fixed costs over a smaller revenue base.
Sales and Marketing Expense. Sales and marketing expense in fiscal 2014 increased to $18.4 million from $17.6 million during fiscal 2013. The increase of $0.8 million, or 4.5%, was primarily a result of an increase of $2.2 million in employee and related expenses associated with an increase in our average headcount after our acquisition completed in January 2014; offset by a decrease of $0.7 million in share-based compensation expense, and a decrease of $0.5 million in public relations and advertising expense.
Research and Development Expense. Research and development expense in fiscal 2014 decreased to $6.2 million from $6.5 million during fiscal 2013. The decrease of $0.3 million, or 4.6%, was primarily a result of a decrease in outside contractors as well as a decrease in employee and related expenses associated with a decrease in our average headcount.
General and Administrative Expense. General and administrative expense in fiscal 2014 increased to $19.7 million from $11.6 million during fiscal 2013. The increase of $8.1 million, or 69.8%, was primarily a result of a $3.4 million increase in legal and advisory expenses primarily related to the completion and integration of our acquisition in January 2014 and our proposed merger with Sphere 3D announced in May 2014, a $2.8 million increase in employee related expenses primarily associated with an increase in headcount, and a $1.8 million increase in outside contractor expenses, each primarily related to the completion and integration of our acquisition in January 2014.
Interest Expense. We incurred interest expense of $1.2 million and $0.6 million during fiscal 2014 and 2013, respectively. The increase was primarily related to interest expense for the convertible notes we sold in fiscal 2014.
Other Income (Expense), Net. During fiscal 2014, we incurred $0.3 million of other income (expense), net, compared with $13,000 of expense during fiscal 2013. In fiscal 2014, other income (expense), net primarily related to realized foreign currency losses.
Provision for Income Taxes. During fiscal 2014, we recognized income tax benefit of $2.6 million compared to a tax expense of $0.2 million in fiscal 2013. In fiscal 2014, the tax benefit primarily related to unrealized gains on our related party short-term investment, which will adjust as the unrealized gains change or when the unrealized gains are realized. In fiscal 2013, the tax expense primarily related to taxes for our foreign subsidiaries.

28


Liquidity and Capital Resources
At June 30, 2014, we had a cash balance of $4.3 million, compared to $8.8 million at June 30, 2013. In fiscal 2014, we incurred a net loss of $22.9 million. At June 30, 2014, we had a balance of $19.9 million recorded as long-term debt of which $14.5 million was owed to a related party. At June 30, 2014, our credit facility had a remaining external borrowing capacity of up to $2.6 million. Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during the continued period of integration for our acquisition completed in January 2014 as we work to combine the entities and to improve operational efficiencies.
As of June 30, 2014, we had working capital of $11.8 million, reflecting decreases in current assets and current liabilities of $16.4 million and $11.4 million, respectively, during fiscal 2014. The increase in current assets and current liabilities as a whole, is related to our acquisition completed in January 2014. The increase in current assets is primarily attributable to (i) a $7.5 million increase in accounts receivable, a (ii) a $5.2 million increase in inventory, and a $7.8 million increase in our short-term investment in Sphere 3D, offset by a $4.6 million decrease in cash. The increase in current liabilities is primarily attributable to (i) a $7.7 million increase in accounts payable and accrued liabilities, (ii) a $1.9 million increase in other current liabilities, and (iii) a $1.4 million increase in accrued payroll and employee compensation related to an increase in average year-to-date headcount from our acquisition in January 2014.
Management has projected that cash on hand, our short-term investment (the common shares of Sphere 3D we own), available borrowings under our credit facility, and other sources of funding will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including, but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, (iv) changes to the historical timing of collecting accounts receivable, and/or (v) our inability to liquidate our short-term investment could have a material adverse impact on our ability to access the level of funding necessary to continue our operations at current levels. If any of these events occur or if we are not able to secure additional funding (including from Sphere 3D), we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects, and/or prevent us from consummating the proposed merger with Sphere 3D. We may seek debt, equity or equity-based financing (such as convertible debt) when market conditions and the merger agreement with Sphere 3D permit.
As a result of our recurring losses from operations and negative cash flows, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30, 2014 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
During fiscal 2014, we used cash in operating activities of $19.0 million, compared to $14.0 million in fiscal 2013. The use of cash during fiscal 2014 was primarily a result of our net loss of $22.9 million offset by $4.4 million in non-cash items, which were primarily share-based compensation, deferred tax benefit, depreciation and amortization. In addition, we had decreases in inventory and deferred revenue.
We generated cash in investing activities of $0.9 million during fiscal 2014, compared to cash used in investing activities of $1.0 million in fiscal 2013. In fiscal 2014, we assumed $1.7 million of cash and $0.4 million of restricted cash (no longer restricted at the end of fiscal 2014) from our acquisition completed in January 2014, offset by $0.3 million of intangible assets purchased related to a technology license agreement. During both fiscal 2014 and 2013, capital expenditures totaled $1.0 million. In fiscal 2014, such expenditures were primarily associated with the implementation of a new enterprise resource planning system. In fiscal 2013, such expenditures were associated with machinery and equipment to support quality assurance, as well as computer equipment and software associated with the replacement of our enterprise resource planning system.
We generated cash from our financing activities of $13.5 million during fiscal 2014, compared to $13.3 million during fiscal 2013. During fiscal 2014, we received $7.0 million from the sale of our convertible notes, $5.0 million from a note payable with a related party, and $1.9 million from net proceeds from our credit facility; offset by $0.5 million paid for taxes for net settlement of restricted stock units. During fiscal 2013, we received $13.25 million (net proceeds of approximately $13.0 million) from the sale of our convertible notes, $1.0 million from the issuance of common stock; offset by $0.8 million paid for taxes for net settlement of restricted stock units.

29


Off-Balance Sheet Arrangements
During the ordinary course of business, we provide standby letters of credit to third parties as required for certain transactions initiated by us. As of June 30, 2014, we had standby letters of credit of $0.7 million that were not recorded on our consolidated balance sheets.
Contractual Obligations
The following schedule summarizes our contractual obligations to make future payments at June 30, 2014 (in thousands):
Contractual Obligations
 
Total 
 
Less than
1 year 
 
1-3 years 
 
4-5 years 
 
After 5
years
Long-term debt  related party, including interest(1)
 
$
18,139

 
$
1,025

 
$
4,502

 
$
12,612

 
$

Credit facility
 
5,407

 

 
5,407

 

 

Operating lease obligations (2)
 
7,948

 
2,690

 
3,637

 
1,601

 
20

Purchase obligations(3)
 
2,461

 
2,461

 

 

 

Total contractual obligations
 
$
33,955

 
$
6,176

 
$
13,546

 
$
14,213

 
$
20

Other commercial commitments:
 
 
 
 
 
 
 
 
 
 
Letters of credit
 
$
662

 
$
662

 
$

 
$

 
$

________________
(1)
Long-term debt includes our related party notes. Interest payments have been calculated using the amortization profile of the debt outstanding at June 30, 2014, taking into account the fixed rate paid at our fiscal year end.
(2)
Represents contractual lease obligations under non-cancelable operating leases.
(3)
Represents purchase orders for inventory and non-inventory items entered into prior to June 30, 2014, with purchase dates extending beyond July 1, 2014. Some of these purchase obligations may be canceled.
Inflation
Inflation has not had a significant impact on our operations during the periods presented. Historically, we have been able to pass on to our customers increases in raw material prices caused by inflation. If at any time we cannot pass on such increases, our margins could suffer.
Recently Issued Accounting Pronouncements
See Note 1 to our consolidated financial statements.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk from changes in foreign currency exchange rates as measured against the U.S. dollar. These exposures are directly related to our normal operating and funding activities. Historically, we have not used derivative instruments or engaged in hedging activities.
Foreign Currency Risk. We conduct business on a global basis and essentially all of our products sold in international markets are denominated in U.S. dollars. Historically, export sales have represented a significant portion of our sales and are expected to continue to represent a significant portion of sales. Our wholly-owned foreign subsidiaries incur costs that are denominated in local currencies. As exchange rates vary, these results may vary from expectations when translated into U.S. dollars, which could adversely impact overall expected results. The effect of exchange rate fluctuations on our results of operations resulted in a loss of $353,000 and $19,000 for fiscal 2014 and fiscal 2013, respectively.

30


Item 8.
Financial Statements and Supplementary Data.
Our consolidated financial statements and supplementary data required by this item are set forth at the pages indicated in Item 15(a)(1) and 15(a)(2), respectively.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.
Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Internal Control Over Financial Reporting
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Based on our evaluation under the framework in Internal Control-Integrated Framework, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of June 30, 2014.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report on internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.
This report on internal control over financial reporting shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any of our filings, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal year ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Other Information.
None.


31


PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
The following table sets forth the name, age, and position of our directors. The table also sets forth the year in which each director was first elected to the Board. Directors are elected each year, and all directors serve one-year terms. As of September 15, 2014, directors are as follows: 
Name of Director Nominee 
 
Age 
 
Director  Since 
 
Position 
 
Committee Membership 
Daniel J. Bordessa
 
41
 
2014
 
Independent Director
 
None
Robert A. Degan
 
75
 
2000
 
Independent Director
 
Audit (Chairperson), Compensation and Nominating and Governance
Joseph A. De Perio
 
36
 
2011
 
Independent Director
 
Audit and Nominating and Governance
Nils Hoff
 
51
 
2014
 
Director
 
None
Eric L. Kelly
 
56
 
2007
 
President and Chief
Executive Officer
 
None
Vivekanand Mahadevan
 
61
 
2012
 
Independent Director
 
Audit
Scott McClendon
 
75
 
1991
 
Executive Chairperson of the Board (Independent Director)
 
Compensation (Chairperson) and Nominating and Governance (Chairperson)
Each of the above-listed committee members served in such capacities for all of fiscal 2014. There are no family relationships between any nominees or executive officers of our company, and, except as described below, there are no arrangements or understandings between any nominee and any other person pursuant to which such nominee was or is selected as a director or nominee.
Mr. De Perio was elected to our Board of Directors on April 6, 2011. Pursuant to the terms of the purchase agreement, dated March 16, 2011, by and among us, Clinton Group, Inc. (“CGI”) and other investors party thereto, we agreed to nominate Mr. De Perio, as representative of CGI, to our Board of Directors.
Messrs. Bordessa and Hoff were elected to our Board of Directors on March 27, 2014. Pursuant to the terms of the Tandberg Data Holdings S.à r.l. (“Tandberg Data”) acquisition, we entered into a Voting Agreement dated January 21, 2014 (the “Voting Agreement”) with FBC Holdings S.à r.l (“FBC”), an entity wholly-owned by Cyrus Capital Partners, in which we agreed to expand the size of the Board to seven directors. Pursuant to the Voting Agreement, until the earlier of (a) the filing by the Company of its annual report on Form 10-K for the fiscal year ending on or about June 30, 2015 with the U.S. Securities Exchange Commission or (b) September 30, 2015 (i) up to two persons designated by FBC and reasonably acceptable to the current Board will be nominated for election to the Board at each meeting of shareholders at which members of the Board are elected (Messrs. Bordessa and Hoff currently); (ii) in any election of members of the Board, FBC agreed to vote all shares of common stock of the Company held by FBC with respect to any nominee for election to the Board (other than the nominees designated by FBC) in the same proportion that the Company's other shareholders vote for such nominee; (iii) FBC agreed not to nominate any person for election to the Board other than the two persons described above; and (iv) FBC agreed not to initiate, propose or otherwise solicit, or participate in the solicitation of shareholders for the approval of, any shareholder proposals with respect to the Company. After September 30, 2015, as Cyrus Capital Partners and its affiliates (collectively, “Cyrus”) are the beneficial owners of FBC, Cyrus will have the right to appoint all of the Company's directors by virtue of the fact that the Cyrus will hold a majority of the outstanding voting stock of the Company (assuming there are no additional shares issued prior to such date).
We have a standing audit committee as defined in Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The members of the Audit Committee are Messrs. Degan, De Perio, and Mahadevan.
In addition to being independent under NASDAQ Marketplace Rule 5605(a)(2), all members of the Audit Committee must meet the additional independence standards for audit committee members set forth in Rule 10A-3(b)(1) of the Exchange Act and NASDAQ Marketplace Rule 5605(c)(2)(A). The Board of Directors has determined that Mr. Degan qualifies as an audit committee financial expert as defined in Item 407(d)(5) of Regulation S-K under the Exchange Act.

32


Biographical Information of Directors
Daniel J. Bordessa is currently a partner of, and has been employed by, Cyrus Capital Partners, an affiliate of the Company, since March 2005. Prior to joining Cyrus, he worked in investment banking in both London and Toronto. Mr. Bordessa has served as a director of a number of public and private companies in both North America and Europe. Mr. Bordessa's extensive experience in mergers and acquisitions, debt restructuring, worldwide corporate finance and as a director of other public companies, enables him to provide our Board of Directors with strategic business expertise and insights as to the perspectives of our institutional shareholder base.
Robert A. Degan has been a private investor since January 2000. From November 1998 to December 1999, Mr. Degan served as General Manager of the Enhanced Services & Migration Business Unit (formerly, Summa Four, Inc.) of Cisco Systems, Inc., an internet networking company. From July 1998 to November 1998, Mr. Degan was Chairperson, President and Chief Executive Officer of Summa Four, Inc., and from January 1997 to July 1998, he served as its President and Chief Executive Officer and as a director. Mr. Degan retired from the board of directors of CaminoSoft Corp. in December 2007, FlexiInternational Software, Inc. in July 2006 and Gensym Corporation in May 2005. Mr. Degan was formerly on the research staff at Massachusetts Institute of Technology. Mr. Degan's significant prior experience as a director and Chief Executive Officer of Summa Four, along with his experience from his career in related industries and as a board member of other public technology companies, provides our Board of Directors with financial and operational expertise and analytical skills relevant to the storage industry.
Joseph A. De Perio has been a senior member of the portfolio management team of Clinton Group, Inc. (“CGI”) from June 2006 to December 2007, serving as Vice President, Activist Investments and Long/Short Equity and Private Equity, and from October 2010 to the present, serving as Senior Portfolio Manager, Activist Investments and Private Equity. As a senior portfolio manager at CGI, Mr. De Perio is involved in all aspects of portfolio management for the public equity and private equity strategies at CGI, including origination, trading, structuring and research. From December 2007 to September 2010, he was a vice president at Millennium Management, L.L.C., a global investment management firm, executing a public equity strategy. Prior to his work in hedge funds, Mr. De Perio was an associate at Trimaran Capital Partners, a middle-market private equity investment fund, where he originated, executed and monitored leveraged buyout and growth equity investments in the healthcare, technology and consumer industries. Mr. De Perio has served as the Vice Chairman and President of ROI Acquisition Corporation, a company formed for the purpose of acquiring one or more businesses or assets, since its inception in September 2011. Mr. De Perio previously served on the board of directors of Viking Systems, Inc., a developer, manufacturer and marketer of visualization solutions for complex, minimally invasive surgery, from June 2011 until its sale to Conmed Corporation in October 2012. Mr. De Perio's experience in corporate finance, including as an investment analyst and portfolio manager in private equity and public equity, his strong understanding of corporate finance and strategic business planning activities, and his significant experience advising and investing in public companies enables him to provide our Board of Directors with insights as to the perspectives of our institutional shareholder base.
Nils Hoff has served as a consultant to the Company since the Tandberg Data acquisition in January 2014. Prior to the acquisition, Mr. Hoff served as Chief Financial Officer of Tandberg Data S.a.r.l from May 2009 to January 2014; Chief Financial Officer of Tandberg Data ASA from August 2008 to April 2009, and Chief Financial Officer of Tandberg Storage ASA from August 2006 through June 2008. Mr. Hoff's prior experience with the Tandberg Data entities prior to the acquisition enables him to provide our Board of Directors with strategic business expertise and insights as well as important knowledge useful for the integration of Tandberg Data into the Company.

33


Eric L. Kelly has served as our Chief Executive Officer since January 2009, our President since January 2010 and a member of our Board of Directors since November 2007. In July 2013, Mr. Kelly was appointed to the Board of Directors of Sphere 3D Corporation (“Sphere 3D”) to serve as Chairman of the Board of Directors. Sphere 3D is a Canadian publicly traded company specializing in virtualization technology. From April 2007 to January 2009, Mr. Kelly served as President of Silicon Valley Management Partners Inc., a management consulting and M&A advisory firm, which he co-founded in April 2007. From July 2004 to August 2006, Mr. Kelly was Vice President and General Manager of storage systems solutions at Adaptec, Inc. (“Adaptec”). From August 2002 to July 2004, he served as President and Chief Executive Officer of Snap Appliance, Inc., which was acquired by Adaptec in July 2004. The Snap division of Adaptec was acquired by us in June 2008. From March 2000 to June 2002, Mr. Kelly served as President, Network Systems Division of Maxtor Corporation. From 1980 to 1998, he served in executive or managerial roles with Netpower Incorporated, Diamond Multimedia Systems Incorporated, Conner Peripherals Incorporated, Marq Technologies Incorporated and International Business Machines Corporation (“IBM”). Mr. Kelly's position as our President and Chief Executive Officer provides our Board of Directors with unique insight and direct access to strategic and operational information about us. His significant experience in the storage industry, including his involvement in Snap Appliance, Inc., allows him to draw on experiences and knowledge from across the storage industry and enables him to identify best practices and strategic initiatives for us.
Vivekanand Mahadevan has been the Chief Executive Officer of Dev Solutions, Inc., a consulting firm that helps technology startups build next-generation market leaders in data analytics, security, storage and cloud markets since March 2012. Mr. Mahadevan was the Chief Strategy Officer for NetApp, Inc., a supplier of enterprise storage and data management software and hardware products and services, from November 2010 until February 2012 and prior to that time served as Vice President of Marketing for LSI Corporation, an electronics company that designs semiconductors and software that accelerate storage and networking, from January 2009 to September 2010. Prior to LSI Corporation, he was Chief Executive Officer for Deeya Energy, Inc., a company that develops and manufactures stationary electrical energy storage solutions, from December 2007 to July 2008. Mr. Mahadevan has also held senior management positions with leading storage and systems management companies including BMC Software, Compaq, Ivita, and Maxxan Systems. Mr. Mahadevan is a board member of Violin Memory, Inc., a company which designs memory-based storage solutions designed to bring storage performance in line with high-speed applications, servers and networks. Mr. Mahadevan's significant experience at NetApp, Inc. and other technology companies provides our Board of Directors with valuable insight directly related to technology developments in the storage industry. His engineering background and storage experience makes him particularly well suited to understanding our technology and allows him to provide valuable perspective to our Board of Directors on new product initiatives.
Scott McClendon has served as the Executive Chairperson of our Board of Directors since May 2011 and, from March 2001 to May 2011, served as Chairperson of our Board of Directors. From November 2006 to August 2007, Mr. McClendon served as our interim President and Chief Executive Officer and as our President and Chief Executive Officer from October 1991 to March 2001, when he was named Chairperson of our Board of Directors, and continued as an executive officer and employee until June 2001. Mr. McClendon has been a business consultant since June 2001. Mr. McClendon was employed by Hewlett-Packard Company (“HP”) for over 32 years in various positions in engineering, manufacturing, sales and marketing. He last served as the general manager of the San Diego Technical Graphics Division and site manager of HP in San Diego, California. Mr. McClendon is Chairperson and a director of Procera Networks, Inc., a network equipment company. Mr. McClendon's significant experience with HP, his prior tenure as our President and Chief Executive Officer and his current experience as the Executive Chairperson of our Board of Directors and director of Procera Networks, Inc. provide him with a unique set of managerial, operational and strategic skills, which provides our Board of Directors insights into our challenges, opportunities and operations.
Executive Officers of the Registrant
The executive officers, their ages, positions held and biographical information as of September 15, 2014, are as follows: 
Name
 
Age 
 
Position Held 
Eric L. Kelly
 
56
 
President and Chief Executive Officer
Kurt L. Kalbfleisch
 
48
 
Senior Vice President, Chief Financial Officer and Secretary
Randall T. Gast
 
52
 
Senior Vice President and Chief Operating Officer

34


Eric L. Kelly is our President and Chief Executive Officer and a director. See the description of his business experience above under Biographical Information of Directors.
Kurt L. Kalbfleisch has 20 years of service with Overland Storage and has served as our Senior Vice President since June 2012, Chief Financial Officer since February 2008, and Secretary since October 2009. He served as our Vice President of Finance from July 2007 to June 2012. He served as our Interim Chief Financial Officer from August 2007 to February 2008.
Randall T. Gast has served as our Chief Operating Officer since January 2014. Mr. Gast joined the Company as Senior Vice President of Strategic Alliances and Client Services in August 2012. He has served as Senior Vice President of Worldwide Operations and Service since August 2013. Prior to joining the Company, Mr. Gast was Vice President, Corporate Operations, of 3PAR, Inc. from May 2006 until October 2010 when 3PAR, Inc. was acquired by HP. Mr. Gast served as Vice President of ESSN Supply Chain & Logistics at HP from October 2010 to June 2012.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and beneficial owners of more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. Based solely on copies of these reports provided to us and written representations from our officers and directors that no other reports were required, we believe that these persons met all of the applicable Section 16(a) filing requirements during fiscal 2014, with the exception of one late Form 4 filing for Mr. Degan.
Code of Business Conduct and Ethics
We have adopted the Overland Storage, Inc. Code of Business Conduct and Ethics, which applies to our directors, executive officers and employees. A copy of the Code of Business Conduct and Ethics is publicly available on our website at www.overlandstorage.com. If we make any substantive amendments to the Code of Business Conduct and Ethics or grant any waiver from a provision of the code applying to our principal executive officer or our principal financial or accounting officer, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.

35


Item 11.
Executive Compensation.
Summary Compensation Table for Fiscal Year 2014
The following table summarizes the total compensation earned by our principal executive officer and our two other most highly compensated executive officers (referred to as our “named executive officers”) for the Company's 2014 and 2013 fiscal years.
Name and
Principal Position 
 
Fiscal
Year
 
Salary
($)
 
Stock Awards
($)(1)
 
Non-Equity
Incentive Plan
Compensation
($)(2)
 
All Other
Compensation
($)(3)
 
Total
   ($)
Eric L. Kelly
 
2014
 
400,000

 
1,950,000

 
200,000

 
25,163

 
2,575,163

President and Chief Executive
Officer
 
2013
 
400,000

 

 
100,000

 
7,718

 
507,718

Kurt L. Kalbfleisch
 
2014
 
286,923

 
840,000

 
120,000

 
19,371

 
1,266,294

Senior Vice President, Chief Financial Officer
and Secretary
 
2013
 
266,000

 

 
50,000

 
33,924

 
349,924

Randall T. Gast
 
2014
 
240,000

 
990,000

 

 
12,436

 
1,242,436

Senior Vice President and Chief Operations Officer (4)
 
 
 
 
 
 
 
 
 
 
 

_____________
(1)
The amounts shown in this column do not reflect compensation actually received by the named executive officer. These amounts represent the fair value on the grant date of the equity awards granted to these officers during fiscal 2014. These values have been determined under the principles used to calculate the grant date fair value of equity awards for purposes of our financial statements. For a more detailed discussion on the valuation model and assumptions used to calculate the fair value of these awards in each fiscal year, see the Equity Incentive Plans note to the consolidated financial statements included herein.
(2)
The amounts shown in the “Non-Equity Incentive Plan” column represent bonuses awarded for fiscal 2014 and 2013 pursuant to the terms of our Executive Bonus Plan and as established by the Compensation Committee for the fiscal year.
(3)
The amounts shown in the “All Other Compensation” column reflect amounts we paid on the officer's behalf for health insurance and term life insurance premiums, as well as certain out-of-pocket medical and wellness expenses.
(4)
Mr. Gast became a named executive officer of the Company on January 16, 2014.

36


Outstanding Equity Awards at End of Fiscal Year 2014
The following table provides information about the holdings of stock and option awards by our named executive officers outstanding at the end of fiscal year 2014.
 
 
 
 
Option Awards 
 
Stock Awards 
Name 
 
Grant Date
 
Number of
securities
underlying
unexercised
options
(#)
exercisable
 
Number of
securities
underlying
unexercised
options
(#)
unexercisable
 
Option
exercise
price
($)
 
Option
expiration
date
 
Number
of units of
stock that
have not
vested
(#)
 
Market value
of units of
stock that
have not
vested
($)(1)
Eric L. Kelly
 
12/9/2008
 
1,200

 
 
3.75

 
12/9/2014
 
 
 
 
 
 
1/27/2009
 
59,999

 
 
3.90

 
1/27/2015
 
 
 
 
 
 
2/18/2010
 
247,600

(2) 
 
12.45

 
4/23/2016
 
 
 
 
 
 
6/29/2011
 
 
 
 
 
 
 
 
 
52,446

(3) 
236,007

 
 
5/13/2014
 
 
 
 
 
 
 
 
 
650,000

(4) 
2,925,000

Kurt L. Kalbfleisch
 
5/22/2006
 
66

 
 
120.45

 
5/22/2016
 
 
 
 
 
 
2/18/2010
 
35,400

(2) 
 
12.45

 
4/23/2016
 
 
 
 
 
 
6/29/2011
 
 
 
 
 
 
 
 
 
20,905

(3) 
94,073

 
 
5/13/2014
 
 
 
 
 
 
 
 
 
280,000

(4) 
1,260,000

Randall T. Gast
 
8/23/2012
 
6,389

(5) 
3,611
 
9.50

 
8/23/2018
 
 
 
 
 
 
8/23/2012
 
 
 

 
 
 
 
 
19,999

(6) 
89,996

 
 
11/14/2013
 
 
 
 
 
 
 
 
 
183,333

(7) 
824,999

______________
(1)
Amounts listed represent the aggregate market value of the unvested restricted stock unit awards held by the named executive officers based on the closing price of a share of our common stock of $4.85 on the last trading day of fiscal 2014.
(2)
This award was originally granted as a stock option award and was amended and reissued on June 29, 2011 as a stock appreciation rights (“SAR”) award. The purpose of the amendment and reissuance is to provide that, upon exercise, the SAR award will be settled in cash or stock, at our discretion. No other terms of the award changed.
(3)
This stock award vests in six equal installments, with the first installment vesting on January 15, 2012 and an additional installment vesting at the end of each six-month period thereafter. This stock award vested in full on July 15, 2014.
(4)
This stock award vests in six equal installments, with the first installment vesting on November 13, 2014, and an additional installment vesting at the end of each six-month period thereafter.
(5)
This option award vests monthly on the last day of each month over a three-year period ending July 31, 2015.
(6)
This stock award vests in six equal installments, with the first installment vesting on January 15, 2013, and an additional installment vesting at the end of each six-month period thereafter.
(7)
This stock award vests in six equal installments, with the first installment vesting on May 7, 2014 and an additional installment vesting at the end of each six-month period thereafter.
 

37


Employment, Severance and Change in Control Agreements
Employment Agreements. The following describes the employment arrangements we have with our named executive officers.
Eric L. Kelly. We entered into an employment agreement with Mr. Kelly, our President and Chief Executive Officer, on June 24, 2009, which was amended and restated on June 29, 2011 (the “Kelly Agreement”). The Kelly Agreement provides for Mr. Kelly to earn a base salary of $400,000, which has been his base salary since his appointment as Chief Executive Officer on January 27, 2009. Mr. Kelly is eligible to receive an annual bonus based upon the achievement of financial and management objectives reasonably established by our Board of Directors or an authorized committee of our Board of Directors. His annual bonus target is 100% of the greater of $400,000 or his base salary as of the end of the applicable fiscal quarter or year in which the bonus is earned, and he has the opportunity to earn an annual bonus of up to 150% of the target bonus. If we terminate Mr. Kelly's employment without cause or he resigns for good reason, or if he dies or becomes disabled, before the end of a fiscal quarter or year, he will be eligible to receive a prorated amount of the target bonus for the fiscal quarter or year in which his employment terminates. For purposes of the Kelly Agreement, the terms “cause” and “good reason” are defined in the agreement, and a termination of employment by us without cause includes a termination by us at the end of the term then in effect. To the extent that any travel, lodging or auto expense reimbursements are taxable to Mr. Kelly, we will provide him with a tax restoration payment so that he will be put in the same after-tax position as if such reimbursements had not been subject to tax. The Kelly Agreement has a three-year term and automatically renews for additional one-year terms. We may unilaterally modify Mr. Kelly's cash compensation at any time, subject to Mr. Kelly's right to terminate his employment for good reason.
The Kelly Agreement also provides that if we terminate Mr. Kelly's employment without cause or if Mr. Kelly resigns from employment for good reason, then we will be obligated to pay him an aggregate severance payment equal to the sum of (i) 150% of the greater of his base salary then in effect or his original base salary, (ii) a portion of his target bonus prorated based on the number of days he was employed during the period on which the target bonus is based, (iii) an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents under COBRA for 18 months following the date of his termination, and (iv) an amount necessary for him to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his termination for a period of 18 months following his termination (reduced by the amount of any reimbursement for COBRA premiums as described in clause (iii) above). The severance payment will be made in equal monthly installments over 18 months in accordance with our regular payroll practices. In addition, Mr. Kelly will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards that would otherwise have vested during the 12-month period following his termination. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year of the date of his termination, subject to earlier termination upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change in control. The severance benefits described above are contingent upon Mr. Kelly providing us with a general release of all claims.
Kurt L. Kalbfleisch. We entered into an employment and severance agreement with Mr. Kalbfleisch, our Senior Vice President of Finance, Chief Financial Officer and Corporate Secretary on September 29, 2009, which was amended and restated on June 29, 2011 (the “Kalbfleisch Agreement”). Pursuant to the Kalbfleisch Agreement, Mr. Kalbfleisch earned a base salary of $266,000 which was effective in May 2011. In November 2013, Mr. Kalbfleisch's base salary increased to $300,000. If we terminate Mr. Kalbfleisch's employment without cause or he resigns his employment for good reason before the end of a fiscal quarter or year, he will be eligible to receive a prorated amount of the target bonus for the fiscal quarter or year in which his employment terminates. For purposes of the Kalbfleisch Agreement, the terms “cause” and “good reason” are defined in the agreement, and a termination of employment by us without cause includes a termination by us at the end of the term then in effect. The Kalbfleisch Agreement has a three-year term and automatically renews for additional one-year terms. We may unilaterally modify Mr. Kalbfleisch's cash compensation at any time, subject to Mr. Kalbfleisch's right to terminate his employment for good reason.
The Kalbfleisch Agreement provides that if we terminate Mr. Kalbfleisch's employment without cause or if Mr. Kalbfleisch resigns from employment for good reason, we will be obligated to pay him an aggregate severance payment equal to the sum of (i) the greater of his annual base salary then in effect or his original base salary of $266,000, (ii) a portion of any target bonus prorated based on the number of days he was employed during the period on which the target bonus is based, (iii) an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents under COBRA for 12 months following the date of his termination, and (iv) an amount necessary for him to

38


continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his termination for a period of 12 months following his termination (reduced by the amount of any reimbursement for COBRA premiums as described in clause (iii) above). The severance payment will be made in equal monthly installments over the 12 months following termination of employment. In addition, Mr. Kalbfleisch will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards that would otherwise have vested during the 12-month period following his termination. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year of the date of his termination, subject to earlier termination upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change in control. If such a termination of employment occurs within two years following a change in control of our company, then the severance benefits will generally be the same as described above except that the cash severance will be paid in a single lump sum on the sixtieth day after termination of employment and Mr. Kalbfleisch will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards. If any payment under the Kalbfleisch Agreement would constitute an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue Code, then that payment will be reduced to an amount that is one dollar less than the threshold for triggering the tax imposed by Section 4999 of the Internal Revenue Code if such reduction would result in a greater benefit for Mr. Kalbfleisch on an after-tax basis. The severance benefits described above are contingent upon Mr. Kalbfleisch providing us with a general release of all claims.
Randall T. Gast. Mr. Gast entered into an offer letter with the Company dated July 31, 2012. The letter provides that Mr. Gast is an at-will employee and his employment may be terminated by us for any reason, with or without notice. His initial annual base salary under the letter is $240,000, and his target annual bonus is 50% of his base salary. Mr. Gast's offer letter provides that if his employment is terminated by us without cause or by him for good reason (as defined in the offer letter), he is eligible to receive severance benefits consisting of six months of continued payment of his base salary, a pro-rated portion of his target bonus for the year of termination and payment by the Company of twelve months of COBRA premiums. If such a termination occurs within two years after a change of control of the Company, he will be entitled to a lump sum payment equal to twelve months of his base salary (as opposed to six months) and the other benefits described above. These severance benefits are contingent upon Mr. Gast providing a general release of claims to the Company.
Retention Agreements. The following describes the severance arrangements we have with our named executive officers in the case of a change of control. For these purposes, the terms “cause,” “good reason,” and “change in control” are defined in the retention agreement.
Eric L. Kelly. On June 24, 2009, we entered into a retention agreement with Mr. Kelly, which provides that he will receive a lump sum severance payment if, within 60 days before or two years following a change of control of our company, his employment is terminated by us without cause or he resigns for good reason. The severance payment will equal 150% of the sum of Mr. Kelly's base salary at the time of the consummation of the change of control or termination date or $400,000, whichever is higher, plus any annual target bonus. The retention agreement provides that (i) if Mr. Kelly elects to continue insurance coverage as provided by COBRA, we will reimburse him for an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents under COBRA for 18 months following the date of his termination, and (ii) we will reimburse him for an amount necessary for him to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his termination for a period of 18 months following his termination (reduced by the amount of any reimbursements for COBRA premiums as described in clause (i) above). We are required to reimburse Mr. Kelly for the estimated costs of these benefits in one lump sum payment on his termination date. In addition, Mr. Kelly will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year of the date of his termination, subject to earlier termination upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change of control. If any portion of any payment under the retention agreement would constitute an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue Code, then that payment will be reduced to an amount that is one dollar less than the threshold for triggering the tax imposed by Section 4999 of the Internal Revenue Code if such reduction would result in a greater benefit for Mr. Kelly on an after-tax basis. The consideration payable to Mr. Kelly under the retention agreement is contingent upon him providing us a general release of claims.

39


Equity Awards Granted in Fiscal 2014
The “Stock Awards” column of the “Summary Compensation Table for Fiscal Year 2014” above reflects the grant date fair value (as determined for accounting purposes) of restricted stock unit awards granted to the named executive officers during fiscal 2014. In November 2013, Mr. Gast was granted an award of 220,000 restricted stock units, and in May 2014, Messrs. Kelly and Kalbfleisch were granted awards of 650,000 and 280,000 restricted stock units, respectively. Each of these awards was granted under our 2009 Equity Incentive Plan (“2009 Plan”). The 2009 Plan is administered by the Compensation Committee, which has authority to interpret the plan provisions and make all required determinations under the plan. Awards granted under the 2009 Plan are generally only transferable to a beneficiary of a named executive officer upon his or her death. However, the Compensation Committee may establish procedures for the transfer of awards to other persons or entities, provided that such transfers comply with applicable securities laws and, with limited exceptions, are not made for value.
Each restricted stock unit represents a contractual right to receive one share of our common stock upon vesting of the unit. The number of restricted stock units subject to each award granted to the named executive officers during fiscal 2014 and the vesting schedules for these awards are reported in the “Outstanding Equity Awards at End of Fiscal Year 2014” table above. In each case, vesting of the restricted stock units is generally contingent on the executive's continued employment with us through the vesting date, subject to accelerated vesting on certain terminations of employment under the employment and retention agreements described above. The restricted stock units will vest in full in the event of the executive's death or disability. In addition, with respect to the restricted stock unit awards granted to Messrs. Kelly and Kalbfleisch in May 2014 (the “May Awards), if the executive's employment is terminated by us without cause or by the executive for good reason, the restricted stock units subject to the May Awards will vest pro-rata based on the number of months of the executive's employment through the date of termination. Under the original terms of the May Awards, the restricted stock units will vest in full upon a change in control of the Company. However, effective upon and subject to the closing of the merger whereby we will become a wholly owned subsidiary of Sphere 3D, the May Awards will be amended to limit the number of units that will vest in connection with the merger. The maximum number of units of the May Awards that may vest immediately prior to the closing of the merger will be a number of units with a value equal to a dollar amount specified in the amendment ($2,750,000 with respect to Mr. Kelly's award and $1,250,000 with respect to Mr. Kalbfleisch's award), such number of units to be determined based on the per-share price for the Company's common stock paid in the merger. The restricted stock units under the May Awards which do not vest immediately prior to closing will continue to be subject to the existing vesting schedule. However, should the executive officer's employment with the Company be terminated by the Company without cause or by the executive for good reason subsequent to the merger, or if a change in control of Sphere 3D occurs following the merger, the unvested portion of the May Award will vest in full.
Executive Bonus Plan
Our Executive Bonus Plan (“Bonus Plan”) provides bonus opportunities for selected employees of the Company, including each of our executive officers. Each participant in the Bonus Plan is assigned a target bonus percentage that is expressed as a percentage of the participant's base salary for the applicable bonus period (“Bonus Period”). Bonuses are payable based upon our attainment of one or more performance goal(s) for revenue, gross profit, operating income, operating expenses and/or earnings per share as approved by the Compensation Committee for the applicable Bonus Period. The Compensation Committee may establish minimum, target and/or maximum performance goals for one or more of these performance metrics. The Compensation Committee establishes target bonus amounts for each Bonus Period and also establishes the percentage of the total bonus that will be determined based on our performance and the percentage of the total bonus that will be determined based on individual performance and, as applicable, the performance goals that will be used to determine a participant's individual performance for the Bonus Period. The Bonus Plan is effective for each fiscal year unless and until otherwise determined by the Compensation Committee.
For fiscal 2014, the Compensation Committee established performance goals for our revenue growth and gross operating expenses. The named executive officers' target bonuses for fiscal 2014 (expressed as a percentage of the executive's annual base salary) were as follows: Mr. Kelly-100%; Mr. Kalbfleisch-60%; and Mr. Gast-50%. The bonuses awarded to each named executive officer under the Bonus Plan for fiscal 2014, if any, are reported in the Non-Equity Incentive Plan Compensation column of the “Summary Compensation Table for Fiscal 2014” above.

40


401(k) Plan
Our On-Track 401(k) Savings Plan covers all of our eligible employees who are at least 21 years old, and is intended to qualify under Section 401 of the Internal Revenue Code so that employee contributions and income earned on such contributions are not taxable to employees until withdrawn. Employees may elect to defer up to 60% of their eligible compensation (not to exceed the statutorily prescribed annual limit) in the form of elective deferral contributions to our 401(k) plan. However, our named executive officers qualify as highly compensated employees and may only elect to defer up to 8.5% of their eligible compensation (not to exceed the statutorily prescribed annual limit) in the form of elective deferral contributions to our 401(k) plan. Our 401(k) plan also has a catch up contribution feature for employees aged 50 or older (including those who qualify as highly compensated employees) who can defer amounts over the statutory limit that applies to all other employees. Our 401(k) Plan permits but does not require matching contributions by us on behalf of participants. We do not make matching contributions.

41


Director Compensation Table for Fiscal Year 2014
The following table provides compensation information for each individual who served on our Board of Directors during fiscal 2014 and was not employed by us or one of our subsidiaries (“non-employee directors”). See “Summary Compensation Table for Fiscal 2014” above for information related to the compensation of Mr. Kelly who was a director in fiscal 2014 and who also served as an executive officer during the fiscal year.
Name 
 
Fees earned or
paid in cash
 
Stock 
         awards(1)(2)
 
All Other Compensation
 
Total 
Daniel J. Bordessa (4)
 
 
 
 

Joseph A. De Perio
 
$40,000
 
 
 

$40,000

Robert A. Degan
 
$40,000
 
 
 

$40,000

Nils Hoff (4)
 
 
$180,000
(3) 
$180,301
(5) 

$360,301

Vivekanand Mahadevan
 
$40,000
 
 
 

$40,000

Scott McClendon
 
$50,000
 
 
 

$50,000

______________
(1)
The amounts shown in this column do not reflect compensation actually received by the non-employee director. These amounts represent the fair value on the grant date of the awards granted to the directors during fiscal 2014. These values have been determined under the principles used to calculate the grant date fair value of equity awards for purposes of our consolidated financial statements. For a more detailed discussion on the valuation model and assumptions used to calculate the fair value of these awards, see the Equity Incentive Plans note to the consolidated financial statements included herein.
(2)
At the end of fiscal 2014, the number of shares subject to outstanding option awards for each non-employee director were as follows: Mr. Bordessa-0; Mr. De Perio-12,545; Mr. Degan-20,629; Mr. Hoff-0; Mr. Mahadevan-6,000; and Mr. McClendon-17,428. The number of shares subject to outstanding stock awards were as follows: Mr. Bordessa-0; Mr. De Perio-0; Mr. Degan-0; Mr. Hoff-60,000; Mr. Mahadevan-0; and Mr. McClendon-22,634.
(3)
The amount represents the fair value on the grant date of restricted stock units granted on May 13, 2014 to Mr. Hoff as described below. There were no stock options or other stock awards granted to any of our non-employee directors in fiscal 2014.
(4)
Messrs. Bordessa and Hoff joined our Board of Directors in March 2014.
(5)
These fees were paid pursuant to a consulting agreement with Mr. Hoff dated January 21, 2014 as described below.
Overview of Non-Employee Director Compensation and Procedures
We compensate non-employee directors through cash and equity-based compensation. Each non-employee director, with the exception of Messrs. Bordessa and Hoff, receives an annual retainer of $40,000 payable quarterly. The Executive Chairperson of the Board of Directors receives an additional $10,000 retainer annually. No additional fees are paid for attendance at meetings of the Board of Directors or committees. We also reimburse expenses incurred by non-employee directors to attend meetings.
In addition to the above fees, each non-employee director generally receives an annual equity award with a grant date fair value of $50,000 (based on the assumptions used to value equity awards for purposes of our financial reporting). These equity awards generally vest one year from the grant date and, in the case of options and similar awards, have a per share exercise price equal to the fair market value of our common stock on the grant date, and a maximum exercise term of six years. However, there were no annual equity awards granted to the non-employee directors in fiscal year 2014, except for two restricted stock unit awards granted to Mr. Hoff in May 2014 as described below.

42


In January 2014, we entered into a consulting agreement with Mr. Hoff, with a term ending October 21, 2014, pursuant to which Mr. Hoff is paid a monthly consulting fee of 199,509 NOK, or approximately $33,000, and will be paid a bonus equal to 1,757,500 NOK, or approximately $300,000, in three equal installments payable on or about October 21, 2014, March 31, 2015 and July 31, 2015. In addition in May 2014, Mr. Hoff received an equity award of 30,000 restricted stock units which vests over a one-year period. The bonus and equity award are in consideration of Mr. Hoff's efforts in connection with the acquisition of Tandberg Data. In March 2014, Mr. Hoff was appointed to our Board of Directors, and in connection with, he received an additional equity award of 30,000 restricted stock units in May 2014 which vest over a three-year period. Mr. Bordessa did not receive an equity award or other compensation when he joined the Board in March 2014.

43


Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information regarding the beneficial ownership of our common stock as of September 15, 2014 (except as otherwise indicated) by each person who is known by us to own more than 5% of our shares of common stock, each named executive officer, each director and all of our directors and executive officers as a group.
Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.
 
 
Beneficial Ownership 
Beneficial Owner
 
Shares of
common stock
currently owned 
 
Shares acquirable
within 60 days(1)
 
Total shares
of common
stock owned
 
Percent
of
class(2)
5% shareholders
 
 
 
 
 
 
 
 
Cyrus Capital Partners L.P.
   399 Park Avenue, 39th Floor
   New York, NY 10022
 
11,048,049

 
1,788,882

 
12,836,931

(3) 
66.3%
Special Situations Fund
   527 Madison Avenue, Suite 2600
   New York, NY 10022
 

 
1,443,373

 
1,443,373

(4) 
7.6%
Marathon Capital Management
   4 North Park Drive, Suite 106
   Hunt Valley, MD 21030
 
1,166,820

 

 
1,166,820

(5) 
6.6%
Clinton Group, Inc.
   601 Lexington Avenue, 51st Floor
   New York, NY 10022
 
744,274

 
249,292

 
993,566

(6) 
5.6%
Pinetree Group
   130 King Street, Suite 2500
   Toronto, Ontario M5X 2A2
 
915,702

 

 
915,702

(7) 
5.2%
Executive Officers and Directors+
 
 
 
 
 
 

 
 
Eric Kelly
 
158,060

(8) 
491,654

(9) 
649,714

(9) 
3.6%
Kurt L. Kalbfleisch
 
55,560

 
103,038

 
158,598

 
1.0%
Randall T. Gast
 
9,668

 
87,501

 
97,169

 
*
Daniel J. Bordessa (10)
 

 

 

 
*
Robert A. Degan
 
3,604

(11) 
20,629

 
24,233

 
*
Joseph A. De Perio
 
3,200

 
12,545

 
15,745

 
*
Nils Hoff
 
15,000

 

 
15,000

 
*
Vivekanand Mahadevan
 
200

 
6,000

 
6,200

 
*
Scott McClendon
 
149,364

(12) 
48,552

(13) 
197,916

(13) 
1.1%
Current directors and executive officers as a
     group (9 persons)
 
394,656

 
769,919

 
1,164,575

 
6.3%
_____________________
+
Except as otherwise indicated, the address for each beneficial owner is 9112 Spectrum Center Boulevard, San Diego, CA, 92123.
*
Less than 1%.

44


(1)
With respect to holders of 5% or more of our shares of common stock, this amount includes shares of our common stock, which could be acquired upon exercise of outstanding warrants and convertible debt. With respect to our executive officers and directors, this amount includes shares of our common stock, which could be acquired upon exercise of stock options which are either currently vested and exercisable, will vest and become exercisable, or will be released within 60 days of September 15, 2014; with respect to Messrs. Kelly and McClendon, shares of our common stock, which could be immediately acquired upon exercise of outstanding warrants.
(2)
Based on 17,586,556 shares of common stock outstanding on September 15, 2014 and calculated in accordance with Rule 13d-3 promulgated under the Exchange Act.
(3)
These shares include 1,788,882 shares of common stock issuable to Cyrus Capital Partners L.P. and its affiliates (the “Cyrus Funds”) upon conversion of the Notes held by the Cyrus Funds. Additional shares of our common stock may be issued to the Cyrus Funds as payment of interest on notes pursuant to the terms of the note purchase agreement. The Cyrus Funds is comprised of Crescent 1, L.P. (“Crescent”), CRS Master Fund, L.P. (“CRS”), Cyrus Opportunities Master Fund II, Ltd. (“Cyrus Opportunities”), and Cyrus Select Opportunities Master Fund, Ltd. (“Cyrus Select”). FBC Holdings S.ar.l., a Luxembourg private limited liability company (“FBC”), serves as a special purpose vehicle for making investments and is wholly-owned by the Cyrus Funds. Each of the Cyrus Funds are private investment funds engaged in the business of acquiring, holding and disposing of investments in various companies. Cyrus Capital Partners L.P. (“Cyrus LP”) is the investment manager of each of the Cyrus Funds. Cyrus Capital Partners GP, L.L.C., a Delaware limited partnership (“Cyrus GP”) is the general partner of Cyrus Capital LP. Cyrus Capital Advisors, L.L.C., a Delaware limited liability company (“Cyrus Advisors”) is the general partner of Crescent and CRS. Mr. Freidheim is the managing member of Cyrus GP and Cyrus Advisors and is the Chief Investment Officer of Cyrus LP. Crescent, CRS, Cyrus Opportunities, Cyrus Select and Mr. Freidheim have entered into an investment management agreement with Cyrus LP giving Cyrus LP full voting and dispositive power over the shares of common stock held by the Cyrus Funds.
(4)
These shares include common stock acquirable within 60 days pursuant to warrants (“Warrant Shares”). Includes 594,330 Warrant Shares held directly by Special Situations Fund III Q.P., L.P., 424,521 Warrant Shares held directly by Special Situations Private Equity Fund, L.P., 59,433Warrant Shares held directly by Special Situations Technology Fund, L.P. and 365,089 Warrant Shares held directly by Special Situations Technology Fund II, L.P. MGP Advisors Limited (“MGP”) is the general partner of the Special Situations Fund III, QP, L.P. AWM Investment Company, Inc. (“AWM”) is the general partner of MGP and the investment adviser to the Special Situations Fund III, QP, L.P., the Special Situations Technology Fund, L.P., the Special Situations Technology Fund II, L.P. and the Special Situations Private Equity Fund, L.P. Austin W. Marxe and David M. Greenhouse are the principal owners of MGP and AWM. Through their control of MGP and AWM, Messrs. Marxe and Greenhouse share voting and investment control over the portfolio securities of each of the funds listed above.
(5)
According to a Schedule 13F filed for the period ended June 30, 2014, James Kennedy, as President of Marathon Capital Management, LLC has sole investment authority with respect to these shares and sole voting power with respect to 21,700 of these shares.
(6)
These shares include 249,292 shares of common stock issuable upon exercise of warrants held by Clinton Magnolia Master Fund, Ltd. (“CMAG”). Clinton Group, Inc. (“CGI”) is the investment manager of CMAG and consequently has voting control and investment discretion over securities held by CMAG. By virtue of his direct and indirect control of CMAB and CGI, George Hall, as chief investment officer and president of CGI, has voting and investment power over these securities.
(7)
Of these shares, Pinetree Income Partnership (“PIP”) owns 600,702 shares (“PIP Shares”) and Sheldon Inwentash owns 315,000 shares (“Inwentash Shares”). By virtue of PIP's direct ownership of the PIP Shares and Pinetree Capital Investment Corp. (“PCIC”) and Emerald Capital Corp.'s (“Emerald”) collective ownership and control in PIP, and Pinetree Capital Limited's (“Pinetree”) ownership of PCIC and Emerald; PCIC, Emerald and Pinetree may be deemed to have shared power to vote and dispose of the PIP Shares. Mr. Inwentash has voting and investment power over the Inwentash Shares. By virtue of his position as Chief Executive Officer of Pinetree, Mr. Inwentash has voting and investment power over the PIP Shares.
(8)
Includes 9,861 shares of common stock owned by Mr. Kelly through his family trust.
(9)
Includes 22,075 shares of common stock which could be acquired upon exercise of outstanding warrants owned by Mr. Kelly through his family trust.

45


(10)
Mr. Bordessa is an employee of Cyrus Capital Partners and was appointed to our Board of Directors pursuant to a Voting Agreement entered into between Overland and FBC, but Mr. Bordessa does not have voting or dispositive power of the shares beneficially owned by the Cyrus Funds or FBC.
(11)
Includes 666 shares of common stock held by Mr. Degan's wife.
(12)
Represents 142,632 shares of our common stock owned by Mr. McClendon through his family trust, 6,666 shares of our common stock through his self-directed IRA and 66 shares of our common stock held by his wife.
(13)
Includes 8,490 shares of common stock which could be acquired upon exercise of outstanding warrants owned by Mr. McClendon through his family trust.
Other than as described herein with respect to Sphere 3D, we are aware of no arrangements, including any pledge by any person of our common stock, whereby the operation of which may at a subsequent date result in a change of control of us.
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of the last day of fiscal 2014.
Plan Category 
 
(a)
Number of common  shares
to be issued upon exercise
of outstanding
options and rights 
 
(b)
Weighted-average
exercise price of
outstanding
options and 
rights(3)
 
(c)
Number of common  shares remaining available for
future issuance under equity compensation plans (excluding shares reflected
in column (a))
Equity compensation plans approved by our shareholders(1)
 
2,145,109

 
$10.33
 
385,277

Equity compensation plans not approved by our shareholders(2)
 
34,167

 
$8.41
 

Total
 
2,179,276

 
 
 
385,277

_________________
(1)
Of the aggregate number of shares that remained available for future issuance reported in column (c), 296,750 were available under the 2009 Plan and 88,527 were available under the 2006 Employee Stock Purchase Plan. The 2009 Plan permits the granting of the following types of incentive awards: stock options, stock appreciation rights, restricted shares, and stock units. Subject to any accelerated vesting that may apply in the circumstances, the unvested portion of a named executive officer's outstanding awards will immediately terminate upon termination of the named executive officer's employment.
(2)
These figures represent options to purchase shares of our common stock granted to certain employees (including Mr. Gast) (the “Inducement Options”) and stock units (the “Inducement Stock Units”) as an inducement to their commencing employment with us. Neither the Inducement Options nor the Inducement Stock Units were granted under a plan and are administered by the Compensation Committee. The Inducement Options and Inducement Stock Units are generally subject to the same terms as options and stock units granted under the 2009 Plan. The Inducement Options have a six-year term and the Inducement Stock Units vest over three years and are subject to earlier termination in the case of termination of the employee's employment or a change in control of us.
(3)
The weighted-average exercise prices do not reflect shares subject to outstanding awards of restricted stock units.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Certain Transactions with Related Persons
In July 2013, we entered into a supply agreement, and a technology license agreement, with Sphere 3D. As consideration for the transactions contemplated by the technology license agreement, we paid Sphere 3D $250,000 in cash and issued Sphere 3D 42,644 shares of our common stock, with a value at the time of issuance of approximately $250,000. The issuance of these shares was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as sales of securities not involving any public offering. In July 2013, as partial payment under the supply agreement, Sphere 3D issued 769,231 common shares to us, at $0.65 CAD, or approximately $0.63, with a value as of the date of issuance equal to approximately $500,000.

46


In connection with the Sphere 3D transaction, Eric Kelly, our President and Chief Executive Officer, was appointed the chairman of the Board of Directors of Sphere 3D. Mr. Kelly was also awarded an option to purchase up to 850,000 shares of common stock of Sphere 3D with an exercise price of $0.65 CAD, or approximately $0.63, which we believe represented approximately 5% of Sphere 3D's outstanding shares at the time the award was granted.
On May 15, 2014, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sphere 3D. The Merger Agreement provides for a business combination whereby we will become a wholly owned subsidiary of Sphere 3D at the closing of the merger.
Pursuant to the Merger Agreement, at the effective time of the merger each issued and outstanding share of our common stock will be canceled and extinguished and automatically converted into the right to receive 0.510594 of a share of Sphere 3D, subject to adjustment in certain circumstances. The Merger Agreement contains reciprocal operating covenants requiring operation of Overland and Sphere 3D in the ordinary course of business, as well as customary negative covenants.
In connection with the Merger Agreement, Sphere 3D loaned $5.0 million to us and we issued Sphere 3D a note payable in the amount of $5.0 million. The note is subordinated to certain existing indebtedness and is secured by our inventory and shares of common stock of Sphere 3D owned by us. In September 2014, we amended and restated the note payable with Sphere 3D to increase the principal amount under the note to the greater of the amount actually borrowed from Sphere 3D and $10.0 million. As of September 23, 2014, the principal balance of the note was $7.8 million. Immediately prior to the closing of merger, the number of shares of common stock of Sphere owned by the Company equal in value to the total borrowings under the note will be transferred to Sphere 3D as payment against the note. To the extent the note is not repaid in full by such transfer of shares, any remaining portion of the Company’s obligations to Sphere 3D under the note will remain outstanding following the completion of the merger without adjustment to the merger consideration. In addition, following the amendment of the note, we may not sell any shares of Sphere 3D common stock without the prior consent of Sphere 3D to such sale.
The Merger Agreement provides that, upon consummation of the merger Sphere 3D shall cause two nominees of Overland to be appointed to the Board of Directors of Sphere 3D, in addition to Eric Kelly who will remain as a Sphere 3D director. In addition, the Merger Agreement provides that at the closing of the merger Mr. Kelly shall be appointed as the Chief Executive Officer of Sphere 3D and Kurt Kalbfleisch, current Senior Vice President and Chief Financial Officer of Overland, shall be appointed as the Chief Financial Officer of Sphere 3D.
On July 18, 2014, Sphere 3D issued 52,801 common shares of Sphere 3D to us with a value of approximately $500,000 (at a deemed issue price of $9.47 per share) in accordance with the terms of the Sphere 3D supply agreement. These shares are subject to a restriction on their sale for a period of four months and one day from July 18, 2014.
Indemnification of Our Executive Officers and Directors
Our executive officers and directors are entitled to be indemnified under our articles of incorporation and bylaws to the fullest extent permitted under California law. We have also entered into indemnification agreements with each of our executive officers and directors.
Director Independence
The Board of Directors, upon the recommendation of the Nominating and Governance Committee, has affirmatively determined that Messrs. Bordessa, Degan, De Perio, Mahadevan, and McClendon are independent directors within the meaning of NASDAQ Marketplace Rule 5605(a)(2).
Mr. Kelly does not meet the independence requirements under NASDAQ Marketplace Rule 5605(a)(2) because he is our President and Chief Executive Officer.
Mr. Hoff does not meet the independence requirements under NASDAQ Marketplace Rule 5605(a)(2) because he was the Chief Financial Officer of a recently acquired subsidiary of the Company until January 21, 2014 and is a current consultant to the Company.
In the course of determining whether Messrs. Bordessa, Degan, De Perio, Mahadevan, and McClendon were independent under NASDAQ Marketplace Rule 5605(a)(2), the Board of Directors considered the following transactions, relationships and arrangements not required to be disclosed in “Certain Relationships and Related Transactions, and Director Independence”:

47


Although Mr. McClendon served as our Interim President and Chief Executive Officer from November 2006 through August 2007, he is not automatically disqualified from being an independent director under NASDAQ Marketplace Rule 5605(a)(2) because he served in these interim positions more than three years prior to our Board of Director's determination of his independence and for less than one year.
Although Mr. De Perio was elected to our Board of Directors pursuant to the terms of a purchase agreement between us and one of our shareholders and is the nominee of, and is employed by, one of our shareholders, he is not automatically disqualified from being an independent director under NASDAQ Marketplace Rule 5605(a)(2). In April 2011, the Board of Directors, upon the recommendation of the Nominating and Governance Committee, found that Mr. De Perio had no relationship with us which, in the opinion of the Board of Directors, would interfere with his exercise of independent judgment in carrying out the responsibilities of a director. In making this determination, the Board of Directors found that ownership of our securities by Mr. De Perio's employer does not preclude a finding of independence.
Although Mr. Bordessa was appointed to our Board of Directors pursuant to the terms of the Voting Agreement and is the nominee of, and is employed by, one of our shareholders, he is not automatically disqualified from being an independent director under NASDAQ Marketplace Rule 5605(a)(2). In March 2014, the Board of Directors, upon the recommendation of the Nominating and Governance Committee, found that Mr. Bordessa had no relationship with us which, in the opinion of the Board of Directors, would interfere with his exercise of independent judgment in carrying out the responsibilities of a director. In making this determination, the Board of Directors found that ownership of our securities by Mr. Bordessa's employer does not preclude a finding of independence.
Item 14.
Principal Accounting Fees and Services.
The following table summarizes the aggregate fees billed to us by our independent registered public accounting firm, Moss Adams LLP (“Moss Adams”) (in thousands):
 
 
Fiscal Year 
 
 
2014
 
2013
Audit fees(1)
 
$
574

 
$
383

Audit-related fees(2)
 

 
10

Tax fees(3)
 

 

All other fees(4)
 

 

Total
 
$
574

 
$
393

________________ 
(1)
Audit fees consist of fees billed for professional services rendered in connection with the audit of our annual consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports, which were provided by Moss Adams in connection with statutory and regulatory filings or engagements.
(2)
Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements, and are not reported under audit fees. This category includes fees principally related to the audit of the Company's employee benefit plan.
(3)
Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning. There were no such services rendered to us by Moss Adams during fiscal years 2014 or 2013.
(4)
All other fees consists of fees for products and services other than the services reported above. There were no such services rendered to us by Moss Adams during fiscal years 2014 or 2013.
Pre-Approval Policies and Procedures
As a matter of policy, all audit and non-audit services provided by our independent registered public accounting firm are approved in advance by the Audit Committee, which considers whether the provision of non-audit services is compatible with maintaining such firm's independence. All services provided by Moss Adams during fiscal years 2014 and 2013 were pre-approved by the Audit Committee.

48


PART IV
Item 15.
Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements.
The following consolidated financial statements of Overland Storage, Inc. and the report of independent registered public accounting firm are included in a separate section of this report:
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets as of June 30, 2014 and 2013
 
Consolidated Statements of Operations for the Years Ended June 30, 2014 and 2013
 
Consolidated Statements of Comprehensive Loss for the Years Ended June 30, 2014 and 2013
 
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended June 30, 2014 and 2013
 
Consolidated Statements of Cash Flows for the Years Ended June 30, 2014 and 2013
 
Notes to Consolidated Financial Statements
 
(a)(2) Financial Statement Schedules.
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits.
3.1
Amended and Restated Articles of Incorporation (incorporated by reference to the Company's Form 10-K filed September 27, 2002).
 
 
3.2
Certificate of Amendment of Articles of Incorporation dated November 15, 2005 (incorporated by reference to the Company's Form 10-Q filed February 10, 2006).
 
 
3.3
Certificate of Amendment of Articles of Incorporation dated December 12, 2008 (incorporated by reference to the Company's Form 10-Q filed February 11, 2009).
 
 
3.4
Certificate of Amendment to the Company's Amended and Restated Articles of Incorporation dated December 8, 2009 (incorporated by reference to the Company's Form 8-K filed December 8, 2009).
 
 
3.5
Certificate of Determination of Rights, Preferences, Privileges and Restrictions of Series A Convertible Preferred Stock dated February 19, 2010 (incorporated by reference to the Company's Form 8-K filed February 24, 2010).
 
 
3.6
Certificate of Amendment to the Company's Amended and Restated Articles of Incorporation dated April 28, 2010 (incorporated by reference to the Company's Form 8-K filed April 29, 2010).
 
 
3.7
Certificate of Amendment of Certificate of Determination of Rights, Preferences, Privileges and Restrictions of Series A Convertible Preferred Stock dated April 29, 2010 (incorporated by reference to the Company's Form 8-K filed May 5, 2010).
 
 
3.8
Certificate of Amendment to the Company's Amended and Restated Articles of Incorporation dated June 23, 2011 (incorporated by reference to the Company's Form 10-K filed September 14, 2011).
 
 
3.9
Certificate of Amendment of Articles of Incorporation, dated January 16, 2014 (incorporated by reference to the Company's Form 8-K filed January 22, 2014).
 
 
3.10
Certificate of Amendment of Articles of Incorporation, dated April 9, 2014 (incorporated by reference to the Company's Form 8-K filed April 9, 2014).
 
 

49


3.11
Amended and Restated Bylaws (incorporated by reference to the Company's Form 8-K filed August 26, 2005).
 
 
3.12
Certificate of Amendment of Bylaws (incorporated by reference to the Company's Form 8-K filed April 30, 2007).
 
 
4.1
Specimen stock certificate.
 
 
4.2
Shareholder Rights Agreement dated August 22, 2005 between the Company and Wells Fargo Bank, N.A., as Transfer Agent (incorporated by reference to the Company's Form 8-K filed August 26, 2005).
 
 
4.3
Amendment No. 1 to Shareholder Rights Agreement dated March 21, 2011 (incorporated by reference to the Company's Form 8-K filed March 22, 2011).
 
 
4.4
Common Stock Purchase Warrant between the Company and Roth Capital Partners, LLC dated November 4, 2009 (incorporated by reference to the Company's Form 10-Q dated February 10, 2010).
 
 
4.5
Form of Common Stock Purchase Warrant dated February 18, 2010 (incorporated by reference to the Company's Form 8-K filed February 24, 2010).
 
 
4.6
Form of Registration Rights Agreement dated February 22, 2010 (incorporated by reference to the Company's Form 8-K filed February 24, 2010).
 
 
4.7
Form of Common Stock Purchase Warrant dated March 16, 2011 (incorporated by reference to the Company's Form 8-K filed March 22, 2011).
 
 
4.8
Form of Registration Rights Agreement dated March 21, 2011 (incorporated by reference to the Company's Form 8-K filed March 22, 2011).
 
 
10.1
San Diego Headquarters Facility Lease dated October 12, 2000 between the Company and LBA-VIF One, LLC (incorporated by reference to the Company's Form 10-Q filed February 14, 2001).
 
 
10.2
First Amendment to Lease dated January 18, 2001 between the Company and LBA Overland, LLC, as successor-in-interest to LBA-VIF One, LLC (incorporated by reference to the Company's Form 10-K filed September 28, 2001).
 
 
10.3
Second Amendment to Lease dated March 8, 2001 between the Company and LBA Overland, LLC (incorporated by reference to the Company's Form 10-K filed September 28, 2001).
 
 
10.4
Third Amendment to Lease dated June 30, 2010 between the Company and Overtape (CA) QRS 15-14, Inc. (successor-in-interest to LBA Overland, LLC, the successor-in-interest to LBA-VIF One, LLC) (incorporated by reference to the Company's Form 10-K filed September 24, 2010).
 
 
10.5
Fourth Amendment to Lease dated October 15, 2013 between the Company and Overtape (CA) QRS 15-14, Inc. (successor-in-interest to LBA Overland, LLC, the successor-in-interest to LBA-VIF One, LLC (incorporated by reference to the Company's Form 10-Q filed February 13, 2014).
 
 
10.6*
Form of Indemnification Agreement entered into between the Company and each of its directors and officers (incorporated by reference to the Company's Form 10-Q filed February 13, 2002).
 
 
10.7*
Retention Agreement between the Company and Eric Kelly dated June 24, 2009 (incorporated by reference to the Company's Form 10-Q filed February 10, 2010).
 
 
10.8*
Employment Agreement between the Company and Eric Kelly dated August 3, 2011 (incorporated by reference to the Company's Form 8-K filed August 4, 2011).
 
 
10.9*
Employment and Severance Agreement between the Company and Kurt L. Kalbfleisch dated August 3, 2011 (incorporated by reference to the Company's Form 8-K filed August 4, 2011).

50


 
 
10.10*
Employment letter between the Company and Randall T. Gast dated July 31, 2012.
 
 
10.11*
Amended and Restated 2003 Equity Incentive Plan (incorporated by reference to the Company's Form 8-K filed November 16, 2007).
 
 
10.12*
Amendment to 2003 Equity Incentive Plan effective as of January 27, 2009 (incorporated by reference to the Company's Form 10-K filed September 9, 2009).
 
 
10.13*
Form of Stock Option Agreement for options granted to senior officers under the 2003 Equity Incentive Plan (incorporated by reference to the Company's Form 10-Q filed February 10, 2004).
 
 
10.14*
Form of Stock Option Agreement for options granted to outside directors under the 2003 Equity Incentive Plan (incorporated by reference to the Company's Form 10-Q filed February 10, 2004).
 
 
10.15*
Form of Standard Stock Option Agreement for options granted under the 2003 Equity Incentive Plan (incorporated by reference to the Company's Form 10-Q filed February 10, 2004).
 
 
10.16*
Form of Stock Option Agreement for Inducement Options granted to executive officers (incorporated by reference to the Company's Form 10-K filed September 9, 2009).
 
 
10.17*
2006 Employee Stock Purchase Plan, as amended (incorporated by reference to the Company's Form 10-K filed September 14, 2011).
 
 
10.18*
2009 Equity Incentive Plan, as amended (incorporated by reference to the Company's Form 8-K filed January 22, 2014).
 
 
10.19*
Form of Notice of Stock Option Grant and Stock Option Agreement for options granted to senior officers under the 2009 Equity Incentive Plan (incorporated by reference to the Company's Form 10-Q filed February 2, 2010).
 
 
10.20*
Form of Notice of Stock Option Grant and Stock Option Agreement for options granted to outside directors under the 2009 Equity Incentive Plan (incorporated by reference to the Company's Form 10-Q filed February 2, 2010).
 
 
10.21*
Form of Notice of Restricted Stock Award and Restricted Stock Agreement for restricted stock granted to senior officers or outside directors under the 2009 Equity Incentive Plan (incorporated by reference to the Company's Form 10-Q filed February 2, 2010).
 
 
10.22*
Standard Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement for restricted stock units granted under the 2009 Equity Incentive Plan (incorporated by reference to the Company's Form 10-K filed September 14, 2011).
 
 
10.23*
Special Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement for restricted stock units granted under the 2009 Equity Incentive Plan dated June 29, 2011(incorporated by reference to the Company's Form 10-K filed September 14, 2011).
 
 
10.24*
Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement between the Company and Scott McClendon dated June 29, 2011(incorporated by reference to the Company's Form 10-K filed September 14, 2011).
 
 
10.25*
Special Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement for restricted stock units granted to Messers. Kelly and Kalbfleisch under the 2009 Equity Incentive Plan dated May 13, 2014.
 
 
10.26*
RSU Amendment for awards granted May 13, 2014.
 
 
10.27*
Form of Stock Appreciation Rights Award Agreement dated June 29, 2011(incorporated by reference to the Company's Form 10-K filed September 14, 2011).
 
 
10.28*
Executive Bonus Plan (incorporated by reference to the Company's Form 10-K filed September 24, 2010).

51


 
 
10.29
Form of Purchase Agreement dated February 18, 2010 (incorporated by reference to the Company's Form 8-K filed February 24, 2010).
 
 
10.30
Form of Subscription Agreement dated November 12, 2010 (incorporated by reference to the Company's Form 8-K filed November 17, 2010).
 
 
10.31
Financial Advisory Agreement, dated November 12, 2010, between Overland and Roth Capital Partners, LLC. (incorporated by reference to the Company's Form 8-K filed November 17, 2010).
 
 
10.32
Form of Purchase Agreement dated March 16, 2011 (incorporated by reference to the Company's Form 8-K filed March 22, 2011).
 
 
10.33
Underwriting Agreement, dated March 23, 2012, between the Company and Needham & Company, LLC (incorporated by reference to the Company's Form 8-K filed March 23, 2012).
 
 
10.34
Amended Loan and Security Agreement between the Company, Silicon Valley Bank, and Tandberg Data GmbH (incorporated by reference to the Company's Form 8-K filed March 24, 2014).
 
 
10.35
Settlement Agreement, by and between the Company and International Business Machines Corporation, dated November 16, 2011 (incorporated by reference to the Company's Form 10-Q filed February 15, 2012). +
 
 
10.36
Form of Subscription Agreement, dated February 13, 2013 (incorporated by reference to the Company's Form 8-K filed on February 14, 2013).
 
 
10.37
Acquisition Agreement dated November 1, 2013 (incorporated by reference to the Company's Form 8-K filed November 1, 2013).
 
 
10.38
Amended and Restated Note Purchase Agreement, dated November 1, 2013 (incorporated by reference to the Company's Form 8-K filed November 1, 2013).
 
 
10.39
Amended and Restated Registration Rights Agreement, dated November 1, 2013 (incorporated by reference to the Company's Form 8-K filed November 1, 2013).
 
 
10.40
Amendment to Acquisition Agreement, dated January 21, 2014 (incorporated by reference to the Company's Form 8-K filed January 22, 2014).
 
 
10.41
Voting Agreement, dated January 21, 2014 (incorporated by reference to the Company's Form 8-K filed January 22, 2014).
 
 
10.42
Registration Rights Agreement, dated January 21, 2014 (incorporated by reference to the Company's Form 8-K filed January 22, 2014).
 
 
10.43
Agreement and Plan of Merger, dated as of May 15, 2014, by and between the Company, Sphere 3D Corporation and Sphere 3D Acquisition Company (incorporated by reference to the Company's Form 8-K filed May 19, 2014).
 
 
10.44
Form of Voting Agreement, dated May 15, 2014, between Sphere 3D Corporation and certain Company shareholders (incorporated by reference to the Company's Form 8-K filed May 19, 2014).
 
 
10.45
Amended and Restated Promissory Note, dated September 8, 2014, between the Company and Sphere 3D Corporation (incorporated by reference to the Company's Form 8-K filed September 12, 2014).
 
 
10.46
Patent Cross-License and Settlement Agreement, dated as of July 30, 2014, between the Company and BDT Media Automation GmbH. +
 
 
21.1
Subsidiaries of the Company (incorporated by reference to the Company's Form 10-Q filed May 15, 2014).
 
 
23.1
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.

52


 
 
24.1
Power of Attorney (included on signature page).
 
 
31.1
Certification of Eric L. Kelly, President and Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Kurt L. Kalbfleisch, Senior Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Eric L. Kelly, President and Chief Executive Officer, and Kurt L. Kalbfleisch, Senior Vice President and Chief Financial Officer.
 
 
101.INS
Instance Document.
 
 
101.SCH
Taxonomy Extension Schema Document.
 
 
101.CAL
Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF
Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB
Taxonomy Extension Label Linkbase Document.
 
 
101.PRE
Taxonomy Extension Presentation Linkbase Document.
____________________
+    Portions of this exhibit have been omitted pursuant to a request for confidential treatment and the non-public information has been filed separately with the SEC.
*    Management contract or compensation plan or arrangement.

53


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
OVERLAND STORAGE, INC.
 
 
 
 
 
Dated:
September 23, 2014
 
By:
/s/    ERIC L. KELLY
 
 
 
 
 
Eric L. Kelly
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Eric L. Kelly and Kurt L. Kalbfleisch, jointly and severally, as his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this annual report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 
Signature 
 
Title 
 
Date 
 
 
 
 
 
/s/    ERIC L. KELLY
 
President, Chief Executive Officer and Director
(Principal Executive Officer)
 
September 23, 2014
Eric L. Kelly
 
 
 
 
 
 
 
 
 
/s/    KURT L. KALBFLEISCH
 
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
September 23, 2014
 Kurt L. Kalbfleisch
 
 
 
 
 
 
 
 
 
/s/    SCOTT MCCLENDON
 
Executive Chairperson of the Board
 
September 23, 2014
Scott McClendon
 
 
 
 
 
 
 
 
 
/s/    DANIEL J. BORDESSA
 
Director
 
September 23, 2014
Daniel J. Bordessa
 
 
 
 
 
 
 
 
 
/s/    ROBERT A. DEGAN
 
Director
 
September 23, 2014
Robert A. Degan
 
 
 
 
 
 
 
 
 
/s/    JOSEPH A. DE PERIO
 
Director
 
September 23, 2014
Joseph A. De Perio
 
 
 
 
 
 
 
 
 
/s/    NILS HOFF
 
Director
 
September 23, 2014
Nils Hoff
 
 
 
 
 
 
 
 
 
/s/    VIVEKANAND MAHADEVAN
 
Director
 
September 23, 2014
Vivekanand Mahadevan
 
 
 
 


54


Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Overland Storage, Inc.
We have audited the accompanying consolidated balance sheets of Overland Storage, Inc. (the “Company”) as of June 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, shareholders' equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Overland Storage, Inc. as of June 30, 2014 and 2013, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses and negative operating cash flows raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Moss Adams LLP
San Diego, California
September 23, 2014


F-1


OVERLAND STORAGE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
June 30,
2014
 
June 30,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash
$
4,262

 
$
8,831

Short-term investment — related party
7,814

 

Accounts receivable, net of allowance for doubtful accounts of $31 and $94, as of
    June 30, 2014 and 2013, respectively
14,171

 
6,640

Inventories
15,525

 
10,354

Other current assets
2,419

 
1,923

Total current assets
44,191

 
27,748

Property and equipment, net
5,799

 
2,014

Goodwill
19,044

 

Intangible assets, net
23,784

 
652

Other non-current assets
1,121

 
989

Total assets
$
93,939

 
$
31,403

Liabilities and Shareholders' Equity (Deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,159

 
$
5,221

Accrued liabilities
6,780

 
5,003

Accrued payroll and employee compensation
3,561

 
2,140

Income taxes payable
118

 
178

Accrued warranty
994

 
790

Deferred revenue
7,941

 
7,732

Other current liabilities
1,874

 

Total current liabilities
32,427

 
21,064

Deferred revenue, noncurrent
3,371

 
2,975

Long-term debt — related party
14,528

 
13,250

Long-term debt
5,406

 
3,500

Other long-term liabilities
1,413

 
910

Total liabilities
57,145

 
41,699

Commitments and contingencies (Note 13)


 


Shareholders' equity (deficit):
 
 
 
Preferred stock, no par value, 1,000 shares authorized; no shares issued and outstanding as of June 30, 2014 and 2013

 

Common stock, no par value, 125,000 shares authorized; 17,540 shares issued and outstanding as of June 30, 2014, and 90,200 shares authorized; 6,081 issued and outstanding as of June 30, 2013
187,434

 
123,065

Accumulated other comprehensive income (loss)
4,654

 
(991
)
Accumulated deficit
(155,294
)
 
(132,370
)
Total shareholders' equity (deficit)
36,794

 
(10,296
)
Total liabilities and shareholders' equity (deficit)
$
93,939

 
$
31,403

See accompanying notes to consolidated financial statements.

F-2


OVERLAND STORAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
 
Fiscal Year
 
 
2014
 
2013
Net revenue:
 
 
 
 
Product revenue
 
$
48,354

 
$
28,836

Service revenue
 
17,338

 
19,184

 
 
65,692

 
48,020

Cost of product revenue
 
38,165

 
24,950

Cost of service revenue
 
7,212

 
6,270

Gross profit
 
20,315

 
16,800

Operating expenses:
 
 
 
 
Sales and marketing
 
18,410

 
17,574

Research and development
 
6,189

 
6,522

General and administrative
 
19,666

 
11,579

 
 
44,265

 
35,675

Loss from operations
 
(23,950
)
 
(18,875
)
Other income (expense):
 
 
 
 
Interest expense
 
(1,192
)
 
(594
)
Other income (expense), net
 
(342
)
 
(13
)
Loss before income taxes
 
(25,484
)
 
(19,482
)
(Benefit from) provision for income taxes
 
(2,560
)
 
165

Net loss
 
$
(22,924
)
 
$
(19,647
)
Net loss per share:
 
 
 
 
Basic and diluted
 
$
(1.99
)
 
$
(3.41
)
Shares used in computing net loss per share:
 
 
 
 
Basic and diluted
 
11,491

 
5,768

See accompanying notes to consolidated financial statements.

F-3


OVERLAND STORAGE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
 
 
Fiscal Year
 
 
2014
 
2013
Net loss
 
$
(22,924
)
 
$
(19,647
)
Other comprehensive income (loss):
 
 
 
 
Change in unrealized gains, net of tax of $2,607 and $0, respectively
 
4,727

 

Foreign currency translation adjustments
 
918

 
(73
)
Total other comprehensive income (loss)
 
5,645

 
(73
)
Comprehensive loss
 
$
(17,279
)
 
$
(19,720
)
See accompanying notes to consolidated financial statements.

F-4


OVERLAND STORAGE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
 
 
Common Stock 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Shareholders'
Equity (Deficit)
 
Shares 
 
Amount 
 
Balance at June 30, 2012
5,548

 
$
116,682

 
$
(918
)
 
$
(112,723
)
 
$
3,041

Issuance of common stock, net of issuance costs
204

 
870

 

 

 
870

Issuance of common stock for settlement of
    convertible notes interest
70

 
401

 

 

 
401

Exercise of stock options and ESPP purchases
33

 
215

 

 

 
215

Issuance of restricted stock
226

 
(749
)