EX-99.2 3 exhibit99-2.htm EXHIBIT 99.2 Sphere 3D Corporation: Exhibit 99.2 - Filed by newsfilecorp.com

MANAGEMENT DISCUSSION & ANALYSIS

Ontario Securities Commission FORM 51-102F1

ISSUER DETAILS
 

FOR QUARTER ENDED

September 30, 2014

   

DATE OF REPORT

December 1, 2014

   

NAME OF ISSUER

Sphere 3D Corporation

   

ISSUER ADDRESS

240 Matheson Blvd. East

 

Mississauga, ON L4Z 1X1

   

ISSUER TELEPHONE NUMBER

(416) 749-5999

   

CONTACT PERSON

Peter Tassiopoulos

CONTACT POSITION

CEO

CONTACT TELEPHONE NUMBER

(416) 749-5999

CONTACT EMAIL ADDRESS

peter.tassiopoulos@sphere3d.com

   

WEB SITE ADDRESS

www.sphere3d.com


FORM 51-102F1

SPHERE 3D CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014

Sphere 3D Corporation is a virtualization technology solution provider. Sphere 3D's Glassware 2.0™ platform delivers virtualization of many of the most demanding applications in the marketplace today; making it easy to move applications from a physical PC or workstation to a virtual environment either on premise and/or from the cloud. Sphere 3D’s V3 Systems division supplies the industry’s first purpose built appliance for virtualization as well as the Desktop Cloud Orchestrator management software for Converged Infrastructure.

This Management’s Discussion and Analysis includes the financial results of the Company, its wholly-owned subsidiaries, V3 Systems Holding, Inc., which was incorporated in the State of Delaware on January 14, 2014, S3D Acquisition Company, which was incorporated in the State of California on May 14, 2014, Sphere 3D Inc., which was incorporated under the Canada Business Corporation Act on October 20, 2009, and its wholly owned subsidiary, Frostcat Technologies Inc., which was incorporated under the Business Corporations Act (Ontario) on February 13, 2012.

The Company was incorporated under the Business Corporations Act (Ontario) on May 2, 2007 and is listed on the TSXV and the NASDAQ Global Market, under the trading symbol “ANY”. The Company has its main and registered office at 240 Matheson Blvd. East, Mississauga, Ontario, L4Z 1X1.

ADVISORY

This Management’s Discussion and Analysis (“MD&A”) comments on the financial condition and operations of Sphere 3D Corporation (“Sphere 3D” or the “Company”), for the three and nine months ended September 30, 2014 and updates our MD&A for fiscal 2013. The information contained herein should be read in conjunction with the Consolidated Financial Statements and Auditor’s Report for fiscal 2013 and the unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2014.

The Company prepares its condensed consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as set out in the Handbook of The Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate IFRS, and requires publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, the Company has reported on this basis in these condensed consolidated financial statements. All financial information contained in this MD&A and in the unaudited condensed consolidated financial statements has been prepared in accordance with International Financial Reporting Standards (“IFRS”).

The quarterly unaudited consolidated financial statements and this MD&A have been reviewed by the Company’s Audit Committee and approved by its Board of Directors on November 28, 2014.

FORWARD LOOKING INFORMATION

Certain statements in this MD&A constitute forward-looking statements that involve risks and uncertainties. Forward-looking statements, without limitation, may contain the words believes, expects, anticipates, estimates, intends, plans, or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions and Sphere 3D’s actual results could differ materially from those anticipated. Forward looking statements are based on the opinions and estimates of management at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. In the context of any forward-looking information please refer to risk factors detailed herein, as well as other information contained in the company’s filings with Canadian securities regulators (www.sedar.com).

ADDITIONAL INFORMATION

Additional information relating to the Company is available on SEDAR at www.sedar.com and on the Company’s web-site at www.sphere3d.com.

GENERAL DEVELOPMENT OF THE BUSINESS

Sphere 3D is a technology company that delivers an application virtualization platform aimed at extending the life of software indefinitely. The Company’s technology enhances the user experience of both legacy and current applications and empowers users to gain access to these applications from devices of their choosing.

Over the last five years, Sphere 3D has designed a proprietary platform, namely Glassware 2.0™, for the delivery of applications from a server-based computing architecture.

Through the creation of Glassware 2.0, software is made available from a central location irrespective of the device that is accessing the software. Legacy software can be run using Glassware 2.0 even if the operating system and the machine upon which it is run on is no longer sold or supported. Software publishers who invest millions of dollars to write software code can be assured that their software can be utilized for as long as it is required. With Glassware 2.0, new software released by publishers will be driven by new feature sets rather than the next release of the original OS upon which the software was written.

The Company has taken a unique approach in that it has built its technology platform without the use of a hypervisor and instead has designed its own microvisor. This required the Company to design Glassware 2.0 without resorting to layers of OS programming code. With the removal of the OS, Glassware 2.0 did not connect to hardware so additional code was written to access that hardware directly. Glassware 2.0 has a series of different emulators within its design so that any device can access a wide array of applications that sit on top of Glassware 2.0. This process is fundamentally different from other software that approximates the feature sets which management believes results in a quantum leap in functionality and a significant decrease in cost.

One of the additional benefits of this approach is the ability to deliver multiple application sessions on either a single server or through clusters of servers without the requirement to deliver complete VDI. Through Glassware 2.0™, the process for “porting” and “publishing” applications is streamlined to the point that it is practically automated, requiring very little administration input.

The Company’s technology eliminates the complexity associated with planning, implementation, licensing and support of virtualization and Cloud migration while expanding the ecosystem of applications available to users. Additionally, Glassware 2.0™ architecture and unique “application only” virtualization, coupled with complementary VDI technology of V3 Systems (as described below), enables the Company and its partners to deliver flexibility within the industry and a wide array of deployment options.

Since inception, the Company has invested the majority of its capital in the design, development and testing of its technology, with the majority of employees and financial resources allocated to such functions. In 2013, the Company started to transition its focus from entirely a research and design organization to a commercial enterprise, through an increased investment in sales and marketing resources. In 2014 the company successfully started to generate revenue from the sale of its products.

New Product Introductions

The third quarter has further increased the Company’s product and solutions offerings with:

  • the launch of Sphere 3D’s “V3” Hyper-Converged solution within Overland’s data management and protection product lines to addressed the Converged Infrastructure solutions market;

  • The introduction of a Glassware 2.0 solution to power Chromebooks and other end points within the education market;

  • the beta launch of the 2.5 update to Sphere 3D’s Desktop Cloud Orchestrator ™ (DCO) software.
    DCO v2.5 brings a new level of Optimized Desktop Allocation to the table, allowing virtual desktops to intelligently access additional resources, including 3D GPU or allocations of CPU and RAM. Based on policy, DCO v2.5 provides migratory access to virtual desktops which provide enhanced resources on a temporary basis and on demand.

Continued Innovation

Sphere 3D continues on its quest to redefine the boundaries of hardware through its “software defined everything” approach to computing. DLA Piper, on behalf of the Company, filed a provisional patent for the first microvisor runtime environment available on a chip. The latest IP creation is a culmination of years of miniaturization work with the intent of making Glassware 2.0 completely portable and available offline.

Glassware 2.0 has seen its architecture streamlined and gain efficiency continuously since the first iteration that required 8 individual hardware servers in 2010, to its current production state of availability on a single appliance.

The most recent progress of the Glassware 2.0 single chip architecture allowed Sphere 3D to showcase Glassware 2.0 server technology running on a single laptop for attendees at BriForum in London England, and Boston, as well as at VM World in San Francisco.

Corporate Highlights

Merger Agreement with Overland

On May 16th, 2014, the Company announced that it had entered into a definitive agreement to acquire Overland Storage, Inc. (NASDAQ:OVRL). Overland is a trusted global provider of unified data management and data protection solutions designed to enable small and medium enterprises, distributed enterprises, and small and medium businesses to anticipate and respond to data storage requirements.

Overland provides an integrated range of technologies and services for primary, nearline, offline, and archival data storage, and makes it easy and cost effective to manage different tiers of information over time, whether distributed data is across the hall or across the globe.

Overland SnapServer, RDX removable disk-based technology, SnapScale, SnapServer, SnapSAN, NEO Series and REO Series solutions are available through a channel of over 17,000 resellers, multiple distributers and OEMs in over 70 countries.

On November 28th, 2014, over 99% of Overland Shareholders, who voted at a special meeting of shareholders held in San Jose California, approved the merger with Sphere 3D. It is anticipated the transaction will close the first week of December 2014.

Filing of SEC Form 40-F and F-4

On June 27, 2014, Sphere 3D announced that is has filed with the SEC a registration statement on Form 40-F to register the Common Shares under Section 12 of the U.S. Securities and Exchange Act of 1934, as amended. The Form 40-F entitles eligible Canadian issuers to register securities with the SEC pursuant to Section 12 of the U.S. Securities Exchange Act of 1934.

On July 23, 2014, Sphere 3D filed a registration statement, on form F-4, which serves as the proxy statement/prospectus for the acquisition of Overland Storage Inc. On November 7, 2014, the SEC issued its notice of effectiveness for the registration statement, as amended.

Future Developments

Sphere 3D intends to continue to build its organization with a focus on revenue generation, marketing and a continuation of its aggressive technology innovation cycle.

Upon completion of the merger with Overland Storage, the Company will have completed the assembly of an end to end technology stack for business of all sizes:

To support its marketing strategy, Sphere 3D intends to continue to increase its service delivery capacity within the scalable model it has already established, and add selective technology functionality to its platform to enhance specific vertical and/or client offerings.

With the announcement of the Merger Agreement, Sphere 3D and Overland have accelerated their efforts to develop an integrated application virtualization and data storage platform, as well as Converged Infrastructure solutions. It is expected that the combined businesses will accelerate Sphere 3D’s go to market strategy and allow it to leverage Overland’s robust third party reseller and OEM distribution model.

DESCRIPTION OF THE BUSINESS

All of the Company’s product development, sales, and marketing operations were conducted from its offices in Mississauga, Ontario, Canada, and since the first quarter of 2014, from various sales offices in the United States.

Market Overview

The market for the Company’s products and services has experienced strong demand and management anticipates that such demand will continue for the foreseeable future.

According to IHS Technology, enterprise businesses moving their IT services, applications and infrastructure to cloud-based architecture will cause market revenue in this segment to surge by a factor of three from 2011 to 2017.1

 

_______________________________
1 IHS: Cloud- Related Spending by Businesses to Triple from 2011 to 2017 – February 4, 2014.

IHS reports “Global business spending for infrastructure and services related to the cloud will reach an estimated $174.2 billion (in 2014), up a hefty 20 percent from $145.2 billion in 2013. By 2017, enterprise spending on the cloud will amount to a projected $235.1 billion, triple the $78.2 billion in 2011.

Within the Cloud market, IDC is predicting that the cloud software market will surpass $75 billion by 2017 attaining a five year compound annual growth rate of 22% in the forecast period2 and according to Gartner, SaaS and cloud-based business application services revenue will grow from $13.5 billion in 2011 to $32.8 billion in 2016, at a compound annual growth rate of 19.5% .3

Wikibon’s research projects rapid market growth for Converged Infrastructure, expecting the total available market to reach $402 billion by 2017 of which $217 billion is comprised of Server, Storage, Networking and Infrastructure Software.

Additional research from IDC anticipates the overall spending on converged systems in the data center to grow at a compound annual growth rate (CAGR) of 54.7 percent, from $2.0 billion in 2011 to $17.8 billion in 2016 and that converged infrastructure will account for 12.8 percent of total storage, server, networking and software spending by 2016, up from only 3.9 percent in 2012.

Over the next 12 months, two additional significant trends are expected to benefit the Company: (i) within the next 12 months more than 50% of enterprises will prioritize building private internal Clouds (currently, the common approach that companies are using is by purchasing commercial software),4 and (ii) Cloud applications will account for 90% of total mobile data traffic by 2018 while Mobile cloud traffic will grow 12-fold from 2013 to 2018, attaining a compound annual growth rate of 64%.5

Sales and Marketing

The Company intends to focus the majority of sales efforts through an indirect sales channel in order to achieve the greatest possible impact with the least possible start-up costs. This indirect channel includes licensees, resellers, ISVs, OEMs and systems integrators. The Company has access through Overland to a global base of distributers, resellers, ISVs and OEMs.

The Company’s software is delivered through both a SaaS model, with maintenance to end-user customers included and under a perpetual license; if software is sold as a perpetual license, the Company will require end-user customers to purchase maintenance contracts when they purchase software.

In establishing prices for the Company’s products, the Company considers the value of the products and solutions in comparison to other industry virtualization and hardware solutions and strives to deliver the lowest total cost of ownership where possible.

Competitive Conditions

Management believes that many of Sphere 3D’s proprietary technologies have designs and architectures that are unique and innovative. While some of our competitors appear to have similar product offerings, management believes that Sphere 3D’s products represent a significant advance in terms of functionality and usability.

 

_______________________________
2 IDC infographic sponsored by Cisco.
3 Gartner Forecast Analysis: Enterprise Application Software, Worldwide, 2011-2016, 4Q12 Update, January 2013.
4 The Forrester Wave™: Private Cloud Solutions, Q4 2013 by Lauren E. Nelson, November 25, 2013.
5 Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2013–2018. Source: FORBES, Roundup of Cloud Computing Forecasts And Market Estimates, 2014.

Proprietary Protection

Sphere 3D has designed and maintains its virtualization platform, converged infrastructure technology, and related software. The Company will be relying on a combination of patents, trademarks, trade secret and copyright laws, as well as contractual restrictions, to protect the proprietary aspects of its products and services. Although every effort is made to protect Sphere 3D’s intellectual property, these legal protections may only afford limited protection. Sphere 3D intends to continue to selectively pursue patenting of further technology developed in the future.

Sphere 3D may continue to file for patents regarding aspects of its platform, services and delivery method at a later date depending on the costs and timing associated with such filings. The Company may make investments to further strengthen its copyright protection going forward, although no assurances can be given that it will be successful in such patent and trademark protection endeavours. Sphere 3D seeks to limit disclosure of its intellectual property by requiring employees, consultants, and partners with access to its proprietary platform and information to execute confidentiality agreements and non-competition agreements and by restricting access to Sphere 3D proprietary information. Due to rapid technological change, Sphere 3D believes that factors such as the expertise and technological and creative skills of our personnel, new services and enhancements to our existing services are more important to establish and maintain an industry and technology advantage than other available legal protections.

Despite Sphere 3D’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of its services or to obtain and use information that Sphere 3D regards as proprietary. The laws of many countries do not protect proprietary rights to the same extent as the laws of the United States or Canada. Litigation may be necessary in the future to enforce Sphere 3D’s intellectual property rights, to protect Sphere 3D’s trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on Sphere 3D’s business, operating results and financial condition. There can be no assurance that Sphere 3D’s means of protecting its proprietary rights will be adequate or that our competitors will not independently develop similar services or products. Any failure by Sphere 3D to adequately protect its intellectual property could have a material adverse effect on its business, operating results and financial condition.

SEGEMENTED INFORMATION

The Company’s product development, sales, and marketing operations are conducted from its offices in North America. The Company’s operations focus on one market segment, Cloud Computing and Virtualization, including the development, and sale of Sphere 3D’s “Glassware 2.0™” virtualization platform, the V3 Desktop Cloud Orchestrator ™ management software and Hyper-Converged Infrastructure.

SELECTED CONSOLIDATED FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND ANALYSIS

Periods Ended September 30, 2014 and 2013

Adjusted EBITDA

The following table reconciles Adjusted EBITDA to Net profit (loss). This information is taken from and should be read in conjunction with Sphere 3D's financial statements and related notes:

    Three Months ended     Nine Months ended  
    September 30,     September 30,  

In thousands (except per share)

  2014     2013     2014     2013  

 

  (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Revenue

$  1,616   $  -   $  4,372   $  -  

Cost of Sales

  873     -     2,147     -  

Gross Margin

  743     -     2,225     -  

Gross margin percent

  46.0%     -     50.9%     -  

Net comprehensive loss for the period

  (3,753 )   (469 )   (7,150 )   (1,678 )

Loss per share

$  (0.16 ) $  (0.03 ) $  (0.31 ) $  (0.10 )

Add back

                       

       Stock based compensation

  869     54     2,053     101  

       Amortization of intangibles

  1,147     1     2,296     3  

       Amortization of property and equipment

77 50 241 146

       Financial expenses

  (32 )   27     119     27  

       Merger agreement costs

  579     -     935     -  

Total

  2,640     132     5,644     277  

Adjusted EBIDA

$  (1,113 ) $  (337 ) $  (1,506 ) $  (1,401 )

Adjusted EBITDA

The term Adjusted EBITDA refers to Profit before deducting share-based payment expense, finance expense, foreign exchange gain (loss), non-cash loss (gain) on fair market value of financial instruments, depreciation and income taxes. We believe that Adjusted EBITDA provides useful supplemental information as an indication of the results generated by the Company’s main business activities prior to taking into consideration how those activities are financed and taxed and also prior to taking into consideration share-based payment expense and the other items listed above. Accordingly, we believe that these measures may also be useful to investors in enhancing their understanding of the Company’s operating performance.

AS AT   September 30     December 31  
(in thousands)   2014     2013  
    (unaudited)     (audited)  
Current assets $  7,841   $  6,839  
Non-current assets   26,859     2,057  
Total assets $  34,700   $  8,896  
Current liabilities $  6,840   $  983  
Non-current liabilities   5,706     -  
Total liabilities $  12,546   $  983  
Total equity $  22,154   $  7,913  

Sphere 3D has not declared any dividends since its incorporation. Sphere 3D does not anticipate paying cash dividends in the foreseeable future on its Sphere 3D Shares, but intends to retain future earnings to finance internal growth, acquisitions and development of its business. Any future determination to pay cash dividends will be at the discretion of the board of directors of Sphere 3D and will depend upon Sphere 3D's financial condition, results of operations, capital requirements and such other factors as the board of directors of Sphere 3D deems relevant.

Results of Operations (in thousands except per share information)

Revenue

The Company generates and analyzes sales from the following segments:

  1.

Hardware and Software Products. A suite of emulation products, which includes Sphere 3D’s Glassware 2.0™ application virtualization platform products and its VDI appliances, including software that powers the Sphere 3D hardware and enables network operators to remotely control and monitor the appliances in their network. The Company also provides hardware and software from other companies (3rd Party Products) when required to complete an end-to-end network solution.

     
  2.

License fees – License fees include the charges for the right to use both Sphere 3D and 3rd Party Software products, as well as exclusivity and special use licenses.

     
  3.

Professional Services & Maintenance and Support. Professional services and support typically include installation, project management and training, as well as basic and extended warranty and online support. These services can be provided by Sphere 3D or by third party companies who work for Sphere 3D. Support

With first sales of the Company’s Glassware 2.0 technology, V3 appliances and DCO software in the first quarter of 2014, the Company has moved from a development stage enterprise into full commercialization. This has provided revenue from hardware, software, licensing and service and support.

Revenue by Segment

The proportion of the total revenue attributable to each segment is outlined in the following table:

    Three Months ended     Nine Months ended  
    September 30,     September 30,  
In thousands   2014     2013     2014     2013  
    (unaudited)     (unaudited)     (unaudited)       (unaudited)  
       Hardware and Software $  1,409   $ -   $ 3,345   $  -  
       License fees   27       -     592     -  
       Service and Support   180       -     435     -  
Total $  1,616   $ -   $ 4,372   $  -  

Hardware and Software revenue in the quarter increased by 7.1% over the second quarter of 2014, while total revenue declined due to seasonality, a decline in license fees associated with the Overland Storage initial license fees and the launch of the V3 line of Converged Infrastructure through Overland in the first half of the quarter. Upon completion of the merger agreement with Overland Storage, the Company will be able to recognize 100% of the revenue derived through Overland on the sale of Hardware, Software and Services and Support from the V3 product line.

The Company anticipates a continued growth in revenue as the Company continues its inroads in the Health, Education and Government sectors and broadens its product offering.

Cost of Goods Sold

Cost of goods sold for the three and nine months ended September 30, 2014 were $873 and $2,148, respectively, providing a gross margin of 46% and 51% respectively. Management expects that gross margins will fluctuate as it continues to introduce its products in various markets and takes an aggressive approach to pricing as part of its short term growth strategy.

Expenses

Salaries and consulting for the three and nine months ended September 30, 2014 were $889 and $1,967 respectively, compared to $146 and $886, respectively, for the three and nine months ended September 30, 2013. The increase in expenses, was the result of the Company expanding its sales, marketing and support staff throughout fiscal 2013 and early 2014. The Company expects to add additional staff in sales, marketing and research & development during the remainder of fiscal 2014.

Stock based compensation for the three and nine months ended September 30, 2014 were $869 and 2,053 respectively, compared to $54 and $101, respectively, for the three and nine months ended September 30, 2013. The increase in expenses, was the result of the Company issuing stock options as part of its ongoing hiring and staff retention processes. Charges for Stock based compensation are based on Black Scholes calculations, which result in higher expenses as the market price and the exercise price on the option awards increase.

General and administrative expenses were $966 and $1,764, respectively, for the three and nine months ended September 30, 2014 compared to $191 and $515, respectively, for the three and nine months ended September 30, 2013. General and administrative expenses increased significantly in the third quarter of 2014 as the Company accelerated it roll-out of new products and added a sales and support office in the United States.

Amortization of intangibles was $1,147 and $2,296, respectively, for the three and nine months ended September 30, 2014 compared to $1 and $3 for the three and nine months ended September 30, 2013. Amortization of the acquired and developed technology commenced in the second quarter of 2014 and will continue through the expected useful life.

Amortization of property and equipment for the three and nine months ended September 30, 2014 were $77 and $241 respectively, compared to $50 and $146 for the three and nine months ended September 30, 2013. The Company expects to continue growing its capital asset base resulting in continued growth in amortization.

Financing (income)/expenses were $(32) and $119, respectively, for the three and nine months ended September 30, 2014 compared to $27 and $27 for the three and nine months ended September 30, 2013. Financing expenses included both realized and unrealized foreign exchange and holding gains along with interest costs and derivative liability costs related to the debenture financing entered into by the Company on March 21, 2014.

Merger agreement costs for the three and nine months ended September 30, 2014 were $579 and $935 respectively, compared to $Nil for the three and nine months ended September 30, 2013. The costs related to the announced plan of merger between a wholly owned subsidiary of the Company and Overland Storage, Inc. and include legal, accounting and other costs that are expensed as incurred under IFRS requirements.

The net comprehensive loss for the three and nine months ended September 30, 2014 was $3,753 or $0.16 per share and $7,150 or $0.31 per share, respectively, compared with a net comprehensive loss in the three and nine months ended September 30, 2013 of $469 or $0.03 per share and $1,678 or $0.10 per share, respectively. The increases in losses were mainly driven by non-cash or non-operating expenses incurred over the quarter. The Company expects to continue to have significant non-cash expenses going forward as recognizes the value of the acquired and developed technology.

Financial Position

Sphere 3D's cash position decreased during the nine months ended September 30, 2014 by $2,563 compared to a decrease of $239 for the nine months ended September 30, 2013.

Operating activities required cash of $4,229, after adjustments for non-cash items and changes in other working capital balances, compared to $1,178 during the nine months ended September 30, 2013. The increase in use was mainly related to an increase in net working capital assets as revenue increased.

Investing activities required cash of $15,163 during the nine months ended September 30, 2014 compared to $422 for the nine months ended September 30, 2013. The increase related to the acquisition and development of technology and intangible assets, the acquisition of property and equipment to support Sphere 3D’s ongoing development work and loans made to support Overland’s working capital requirements as the merger arrangement is completed. .

Financing activities generated $16,830 during the nine months ended September 30, 2014 compared to $1362 for the nine months ended September 30, 2013. Financing activities included the sale of special warrants in June 2014, which converted to 1,235,325 shares of common stock and 617,663 common share purchase warrants on October 6, 2014, the closing of the 4 year 8% debenture financing on March 21, 2014 and the ongoing exercise of options and warrants. The Company expects that it will continue to receive cash from warrant exercises through the remainder of the year.

Liquidity and Capital Resources

At September 30, 2014 and December 31, 2013, Sphere 3D had the following:

    September 30, 2014     December 31, 2014  
  $    $   
             
Cash   2,988     5,551  
             
Working Capital:            
         Current assets   7,841     6,839  
         Current liabilities   (6,840 )   (983 )
       Contingent earn-out(1)   4,085     -  
             
Adjusted working capital   5,086     5,856  
(1) The Contingent earn-out is payable in cash or shares at the discretion of the Company.        

On October 17, 2014, the Company received a $2.5 million USD cash repayment of Promissory Notes outstanding from Overland Storage, Inc.

SUMMARY OF OUTSTANDING SHARES AND DILUTIVE INSTRUMENTS

The authorized capital of the Company consists of an unlimited number of common shares, of which 25,104,585 common shares were issued and outstanding as of the date of this MD&A.

Certain common shares of the Company are subject to escrow in accordance with TSXV policies. There are two separate escrow agreements in place which are subject to different rates of release. The following table summarizes the common shares that were issued by the Company and are subject to and held under each escrow and the dates of release therefrom:

    Surplus Share     Value Share              
    Escrow           Escrow           Total  
    Number     %     Number     %     Number     %  
                                     
Balance at December 21, 2012   4,655,000     100     4,306,253     100     8,961,253     100  
                                     
Released - December 27, 2012(1)   232,750     5     430,625     10     663,375     7  
Released - June 27, 2013   232,750     5     645,937     15     878,687     10  
Released - December 27, 2013   465,500     10     645,937     15     1,111,437     13  
                                     
Total subject to escrow at December 31, 2013   3,724,000     80     2,583,754     60     6,307,754     70  
Released - June 27, 2014   465,500     10     645,937     15     1,111,437     13  
                                     
Total subject to escrow at                                    
September 30, 2014   3,258,500     70     1,937,817     45     5,196,317     57  
                                     
Future releases                                    
                                     
December 27, 2014   698,250     15     645,939     15     1,344,189     15  
June 27, 2015   698,250     15     645,939     15     1,344,189     15  
December 27, 2015   1,862,000     40     645,939     15     2,507,939     27  
                                     
Total future releases   3,258,500     70     1,937,817     45     5,196,317     57  
(1) Date of issuance of TSXV exchange bulletin announcing the commencement of trading of the Company’s stock.        

Escrowed shares are subject to release every six months from the date of the exchange bulletin, at the rate shown. Release rates can change if the Company were to move to the TSX Tier 1 Exchange. As well, if the operations or development of the Intellectual Property or the business are discontinued then the unreleased securities held in the QT Escrow will be cancelled.

The Company has warrants outstanding to purchase up to an aggregate of 1,825,155 common shares, at an average exercise price of $5.47.

The stock option plan (the “Option Plan”) of the Company is administered by the Board of Directors, which is responsible for establishing the exercise price (at not less than the Discounted Market Price as defined in the policies of the TSX Venture Exchange) and the vesting and expiry provisions. The maximum number of common shares reserved for issuance for options that may be granted under the Option Plan is 20% of the number of common shares outstanding at the time of the record date for the last shareholders’ meeting, or 4,625,000 Options. As of the date of this MD&A, Options granted under the Option Plan to purchase up to an aggregate of 3,295,000 common shares are issued and outstanding.

Assuming that all of the outstanding options and warrants are exercised, 30,224,740 common shares would be issued and outstanding on a fully diluted basis. In addition, upon closing of the Overland acquisition, the Company will be issuing 8,579,310 shares of common stock to existing Overland shareholders and warrants, stock options, RSU equivalents which could convert to an additional 1,922,785 shares of common stock.

Related Party Transactions

Related parties of the Company include the Company’s key management personnel and independent directors.

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, including any director (whether executive or otherwise).

The compensation paid or payable to key management personnel is shown below:


    September 30     September 30  
    2014     2013  
Salaries, management fees and benefits $  403,750   $  440,000  
Share-based payments - management   207,314     38,365  
Share-based payments - directors   214,871     81,656  
  $  825,935   $  560,021  

Legal services of $365,200 (2013 - $74,076) were provided by a legal firm affiliated with a director of the Company. Professional services of $25,000 (2013 - $Nil) were provided by a company controlled by a director of the Company

Amounts owing to a legal firm affiliated with a director of the Company and officers and directors of the Company at period end included in trade and other payables total $211,439 (2013 - $13,265)


Quarterly Information                                            
                                             
Quarterly Information (in thousands, except loss per share)                          
                                                 

 

  Sep     Jun     Mar     Dec     Sep     Jun     Mar     Dec  

 

  2014     2014     2014     2013     2013     2013     2013     2012  

Revenue

$ 1,616   $ 1,751   $  1,005   $  -   $  -   $  -   $  -   $  -  

Cost of sales

  873     841     433                                

Gross margin

  743     910     572     -     -     -     -     -  

Expenses

  4,496     3,923     956     700     469     564     645     1,055  

Net comprehensive loss

 

$ (3,753 ) $ (3,013 ) $  (384 ) $  (700 ) $  (469 ) $  (564 ) $  (645 ) $  (1,055 )

 

                                               

Loss per share

$  (0.16 ) $  (0.13 ) $ (0.02 ) $  (0.04 ) $  (0.03 ) $  (0.04 ) $  (0.04 ) $  (0.08 )

 

                                               

Weighted average number of shares

23,567 23,314 21,692 19,868 17,188 16,114 16,114 13,737

 

                                               

 

  Sep     Jun     Mar     Dec     Sep     Jun     Mar     Dec  

 

  2014     2014     2014     2013     2013     2013     2013     2012  

 

                                               

Cash

$  2,988   $  8,783   $  7,141   $  5,551   $  1,395   $  494   $  1,054   $  1,633  

Total assets

$  34,700   $  35,585   $  27,240   $  8,896   $  3,896   $  1,901   $  2,555   $  3,211  

Working capital

$  983   $  5,914   $  5,026   $  5,856   $  1,842   $  563   $  1,078   $  1,729