10-K 1 ovrl630201310k.htm 10-K OVRL 6.30.2013 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, 2013
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  ¨    No  x



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 28, 2012, the last business day of the registrant's second fiscal quarter, was approximately $18,433,000 (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 6, 2013, the number of outstanding shares of the registrant's common stock was 31,118,558.
 
 




OVERLAND STORAGE, INC.
FORM 10-K
For the fiscal year ended June 30, 2013
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 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 regain compliance with the continued listing requirements of, and thereby 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; 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.
Overview
We are a trusted global provider of unified data management and data protection solutions designed to enable small and medium enterprises (“SMEs”), distributed enterprises, and small and medium businesses (“SMBs”) to anticipate and respond to data storage requirements. Whether an organization's data is locally or globally based, our solutions consolidate and protect data for easy and cost-effective management of different tiers of information. We enable companies to expend fewer resources on information technology (“IT”), allowing them to focus on being more responsive to the needs of their customers.
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® and REO SERIES® libraries are tape and virtual tape solutions designed to meet the need for cost-effective, reliable data storage for long-term archiving and compliance requirements.
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.

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End users of our products include SMEs, 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.
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, disk backup and recovery, and software for data management and protection. For long-term storage requirements, we offer automated tape solutions for tape backup and archive.
Data Management Software
Our GuardianOS storage-optimized platform OS is designed for SnapServer® NAS devices to deliver simplified data management and consolidation throughout distributed IT environments. The GuardianOS platform provides a flexible solution for storage infrastructures, combining cross-platform file sharing with block-level data access on a single device. 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. The flexibility and scalability of GuardianOS reduces the total cost of ownership of storage infrastructures.
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 Protection OS® software provides virtualization, data protection, data management and connectivity features for REO® virtual tape library (“VTL”) systems. With our Protection OS® software, administrators can implement REO® appliances in a wide variety of storage and backup environments. The Protection OS® software is compatible with all major operating systems, popular backup software solutions, and iSCSI networks and Fibre Channel networks.

2


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 S1000 is a 2U storage array with iSCSI, Fibre Channel, or SAS host connections, designed for providing non-stop services to the most demanding applications. The SnapSAN S1000 can be configured to utilize high capacity Nearline SAS drives for up to 48 terabytes, or high performance SAS drives for up to 7.2 terabytes, with maximum scalability using SnapServer® E1000 enclosures up to 240 terabytes.
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 288TB 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 288TB using the SnapSAN Expansions.
SnapScale Clustered Network Attached Storage Solutions
Our SnapScale X2 product is a clustered NAS solution that enables 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 X2 is a rackmount 2U, 12-bay scale-out NAS system designed for high performance, high scalability, and is available for the storage and archiving of unstructured data. The SnapScale X2 can be configured with up to 12 Nearline SAS hard drives for a capacity of 48TB per node, and can scale out to 512PB with 2-way or 3-way data redundancy.
SnapServer® Network Attached Storage Solutions
Our SnapServer® family is an ideal platform for primary or nearline storage. With a full range of appliances, from desktop systems to rackmount systems that scale to hundreds of terabytes, the SnapServer® line delivers 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.
Rackmount System — The SnapServer® DX Series products are rack-mountable systems intended for the server room or data center. The rackmount systems provide higher performance and capacity than desktop systems, and are designed for data protection and server consolidation. The SnapServer® DX Series products support Dynamic RAID 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.

3


Desktop System — The SnapServer® 210 is designed for easy set up and maintenance and is an ideal solution for branch and remote offices or departments that do not have dedicated IT personnel. These systems provide network accessible storage and cost effective data protection in a compact, portable, desktop storage unit. The SnapServer® 210 is configured with two SATA II drives for up to 4 terabytes of storage capacity and supports RAID levels 0 and 1.
REO® Virtual Tape Library Solutions
Our REO SERIES® VTL solutions provide best-in-class disk-based backup and recovery. Systems can be configured as virtual tape libraries, standalone virtual tape drives, and/or disk volumes, or LUNs. Powered by our REO Protection OS® software, our REO® system includes a unique feature known as dynamic virtual tape which provides more efficient and cost-effective disk storage than other competitive products on the market. REO® solutions are compatible with all popular open systems or windows-based backup software, physical tape drives or tape libraries and connect easily to iSCSI Ethernet networks for seamless integration into existing backup environments.
The REO® 4600 is a 2U rackmount VTL designed for high performance, scalable backup and recovery. The REO® 4600 can be configured with 12 SATA II drives for 12 or 24 terabytes of storage capacity. The REO® 4600 can be scaled to 120 terabytes by adding up to four SnapServer® E2000 Expansion enclosures and supports RAID levels 5 and 6.
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, or a complex enterprise environment 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 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 incorporate the latest linear tape-open (“LTO”) technologies, as well as SAS and FC connectivity. The NEO® 100s is a tape drive in a compact, rack-friendly 1u form factor. The NEO® 200s is a 2U tape library that supports up to 24 cartridge slots and two tape drives. The NEO® 400s is a 4U tape library that supports up to 48 cartridge slots and four tape drives.
The NEO® E Series provides scalable, high capacity, data-center 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 SCSI, SAS and FC connectivity. The NEO® 2000e is a 5U tape library that supports up to 30 cartridge slots and two tape drives. 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 to 1,000 cartridge slots and 24 tape drives.
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.

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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, Synnex Corporation, and Ingram Micro Inc. We have approximately 35 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 2013, one distribution partner accounted for more than 10% of net revenue. No distribution partners accounted for more than 10% of net revenue for fiscal 2012.
 
Reseller channel Our 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 sometimes 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 North America and South America;
EMEA, consisting of Europe, the Middle East and Africa; and
APAC, consisting of Asia Pacific countries.
We support our customers in the Americas primarily from our San Diego, California and San Jose, California locations. We support our EMEA customers through our wholly-owned subsidiaries located in Wokingham, England; Paris, France; and Munich, Germany. Each of these subsidiaries provides sales and technical support. Our subsidiary in England also provides repair services. We support our APAC customers from Singapore and South Korea. We grant our distributors the nonexclusive right to sell our products in a country or group of 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 sets forth foreign revenue by geographic area (in thousands):  
 
2013
 
2012
Foreign revenue:
 
 
 

France
$
5,746

 
$
7,458

Netherlands
2,463

 
4,867

United Kingdom
3,308

 
4,201

Germany
3,598

 
3,741

Europe (other than UK, France, Germany and Netherlands)
3,476

 
3,636

Singapore
1,535

 
2,074

Other foreign countries
4,859

 
6,111

 
$
24,985

 
$
32,088

 
 
 
 
Foreign revenue as a percentage of net revenue
52.0
%
 
53.8
%

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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.
In July 2011, we introduced the enhanced OverlandCare service offering for our entire line of disk-based and tape-based products. OverlandCare offers on-site service and installation options, round-the-clock phone access to solution experts, as well as proof of concept and architectural design offerings. The OverlandCare program strengthens our ability to provide comprehensive technical assistance on a global scale.
The following details the warranties we currently offer on our major products:
three-year advance replacement OverlandCare Level 1 limited warranty on our REO SERIES® and SnapSAN products;
three-year advance replacement OverlandCare Level 1 limited warranty on our SnapServer® NAS products;
one-year on-site by next business day service OverlandCare Level 2 limited warranty on our SnapScale NAS products;
one-year advance replacement OverlandCare Level 1 limited warranty on our NEO® 100s, NEO® 200s, NEO® 400s and NEO® 2000e products; and
one-year on-site by next business day service OverlandCare Level 2 limited warranty on our NEO® 4000e and NEO® 8000e products.
Research and Development
We incurred research and development costs of $6.5 million and $8.1 million in fiscal 2013 and 2012, representing 13.6% and 13.7% of net revenue, respectively. In fiscal 2013, we continued to augment our product lines by expanding our hardware platforms and feature enhancements to our software. Noteworthy product releases for fiscal 2013 included the SnapSAN S3000, SnapSANS5000, and SnapScale X2. Our plans for fiscal 2014 include enhancements across all of our product lines. Particular areas of focus are the introduction of the next generation Scale-out NAS products, cloud capabilities and enterprise storage software.
Manufacturing and Suppliers
We perform product assembly, integration and testing at our manufacturing facility in San Diego, California. We purchase servers, tape drives, chassis, printed circuit boards, integrated circuits, and all 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 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. In the tape automation market, we believe our primary competitors are Dell Inc. (“Dell”), Hewlett-Packard Company (“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.
Our primary disk-based platform competitors are EMC Corporation (both branded EMC and Iomega division), NetGear, Inc., NetApp, Inc., HP, International Business Machines Corporation (“IBM”), and 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.
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 36 United States patents and we have 19 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, 2013, we had 176 full-time employees and 2 part-time employees, including 75 in sales and marketing, 28 in research and development, 50 in manufacturing and operations and 25 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 1 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 July 2013, we entered into a supply agreement, and a technology license agreement, with Sphere 3D Corporation (“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 213,220 shares of our common stock with a value at the time of issuance of approximately $250,000. 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 $0.5 million. In connection with this 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 represents approximately 5% of Sphere 3Ds outstanding shares.
In August 2013, we amended our Silicon Valley Bank credit facility to, among other things, extend the maturity date to August 7, 2015 and add a separate credit line of $750,000 for letters of credit, foreign exchange contracts and cash management, which is in addition to the existing $8.0 million revolving line of credit.
In September 2013, we announced that Lisa Loe joined us as Vice President of Worldwide Sales.
In September 2013, we released our SnapScale X4, a clustered NAS solution that is designed to provide a high-density solution to more efficiently manage growing amounts of unstructured data. The SnapScale X4 unifies NAS and iSCSI storage volumes under one global namespace helping enterprises strike the balance between storage capacity and return on investment, while still maintaining the ability to expand.
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.
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, combined with available borrowings under our credit facility, 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 and/or (iv) changes to the historical timing of collecting accounts receivable 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, 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.

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We may seek debt, equity or equity-based financing (such as convertible debt) when market conditions permit. Such financing 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. 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.
We may not have sufficient funds to repay our convertible 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 in an aggregate original principal amount of $13.25 million to investors in a private placement and the notes are scheduled to mature in February 2017. 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. Additionally, the notes are convertible into 10,192,304 shares of common stock at an initial conversion price of $1.30 per share and automatically convert into shares of common stock upon the occurrence of certain events. The notes provide that we may pay interest on the notes in cash or in shares of common stock at our option and at any time certain note holders collectively hold 20% or more of the then-outstanding common stock, those holders will have the option to determine whether the applicable interest payment payable to such holders is payable in cash or shares of common stock. In June 2013, we elected to pay interest on the notes in shares of common stock, which also resulted in a downward adjustment to the exercise price of certain of our outstanding warrants and an increase in the number of shares issuable upon exercise of such warrants. As a result, we will receive less proceeds from the exercise of those warrants, if any. 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 significant operating losses in our last eight fiscal years and we anticipate continued losses during fiscal 2014. As of June 30, 2013, we had an accumulated deficit of $132.4 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, 2013 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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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. In fiscal 2013, we had one distributor that accounted for more than 10% of our sales. In fiscal 2012, we had no distributors that accounted for more than 10% of our sales. 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 and integrated circuits. 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 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.

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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 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- 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 highly 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 continues to decline, 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. Such enforcement 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.
In August 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 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 the United States District Court for the Southern District of California and at the ITC against BDT AG and certain of its affiliates, IBM and Dell. However, our infringement case against BDT AG and its affiliates continued. In June 2012, the Chief Administrative Law Judge of the ITC issued a public notice of the Initial Determination affirming that both of our asserted patents are valid, but that BDT did not violate Section 337 of the Tariff Act of 1930. In July 2012, the ITC released the public version of the Initial Determination, which found that the six asserted claims of U.S. Patent No. 6,328,766 were valid. The Initial Determination found no infringement of U.S. Patent No. 6,353,581, but concluded the asserted claims of the patent were valid.
In November 2012, the full Commission issued an opinion that did not revisit the Chief Administrative Law Judge's conclusion that BDT's customers directly infringe every asserted claim of U.S. Patent No. 6,328,766, and affirmed the validity of the asserted claims of U.S. Patent No. 6,353,581. The Commission remanded certain aspects of the Chief Administrative Law Judge's validity findings for U.S. Patent No. 6,328,766. In March 2013, the Chief Administrative Law Judge of the ITC issued a public notice of the Remand Initial Determination. The Remand Initial Determination held that there is no infringement of certain claims of U.S. Patent No. 6,353,581, and that the six asserted claims of U.S. Patent No. 6,328,766 are invalid as anticipated. In May 2013, the ITC granted in part our request to review the Remand Initial Determination, and reviewed the findings that BDT's FlexStor II® product line does not infringe one claim of U.S. Patent No. 6,353,581, and that the asserted

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claims of U.S. Patent No. 6,328,766 are invalid as anticipated. See “Item 3. Legal Proceedings” for additional information on the patent litigation lawsuits.
In June 2012, we filed five additional patent infringement lawsuits in the United States District Court for the Southern District of California against seven companies. In February 2013, we filed a joint motion to dismiss our case against one of the seven companies. See “Item 3. Legal Proceedings” for additional information on these patent litigation lawsuits.
In August 2012, Quantum Corporation (“Quantum”) filed counterclaims against us in the United States District Court for the Southern District of California action, alleging trademark infringement and unfair competition claims, and infringement of U.S. Patent Nos. 5,491,812, 6,542,787, 6,498,771 and 5,925,119 by our products. In April 2013, Quantum filed a complaint against us in the United States District Court for the Southern District of California alleging infringement of U.S. Patent No. 7,263,596 by our products. Quantum is seeking monetary damages from us and injunctive relief.
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.

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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.
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.
Our ERP system is 16 years old, and we are in the process of replacing it. 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 will 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.

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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 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.
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. While essentially all of our sales in international markets are denominated in U.S. dollars, our wholly-owned subsidiaries in the United Kingdom, France and Germany 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 may in the future make acquisitions of complementary businesses, products or technologies as we implement our business strategy. Mergers and acquisitions involve numerous risks, including liabilities that we may assume from the acquired company, 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.
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.

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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.
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.
On January 2, 2013, we received a notice from The NASDAQ Stock Market LLC stating that for the last 30 consecutive business days our common stock had not maintained a minimum market value of listed securities, or MVLS, of $35 million as required for continued listing on the NASDAQ Capital Market under NASDAQ Listing Rule 5550(b)(2). In accordance with NASDAQ Listing Rule 5810(c)(3)(C), we had 180 calendar days, or until July 1, 2013, to regain compliance with the MVLS requirement. On July 2, 2013, we received the expected written notification from The NASDAQ Stock Market LLC of the Staff's decision to delist our securities from the NASDAQ Capital Market as a result of our failure to comply with the minimum MVLS requirement. To regain compliance with such rule, the MVLS (which is determined based on the closing bid price of our common stock on the NASDAQ Capital Market) would have had to have been at least $35 million for ten consecutive trading days during the period from January 2, 2013 through July 1, 2013. Based on the number of shares of common stock outstanding as of June 27, 2013, the MVLS would have exceeded $35 million if such closing bid price was at least $1.17 per share for the ten trading day period referred to above. We timely requested an appeal before the NASDAQ Listing Qualifications Panel, or the Panel, to seek continued listing pending our return to compliance with the minimum MVLS requirement under NASDAQ Listing Rule 5550(b)(2) and the delisting was stayed pending a decision by the Panel. The hearing was held on August 8, 2013. On September 17, 2013, the Panel granted our request to continue the listing of our common stock on the NASDAQ Capital Market, subject to our regaining compliance with minimum MLVS requirement and our demonstrating compliance with all other requirements for continued listing by December 30, 2013, and our complying with certain other requirements. There can be no assurance that we will satisfy these conditions and that our common stock will remain listed on the NASDAQ Capital Market.

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Any delisting of our common stock from the NASDAQ Capital Market could adversely affect our ability to attract new investors, decrease the liquidity of our outstanding shares of common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades, and increase the transaction costs inherent in trading such shares with overall negative effects for our shareholders. In addition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could adversely affect our business, financial condition and results of operations.
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.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
We own no real property and we currently lease all facilities used in our business. Our headquarters is located in San Diego, California, where we lease a 91,300 square foot facility in a light industrial complex. The lease expires in February 2014 and may be renewed for one additional five-year period. This facility houses manufacturing, repair services, research and development, 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 a 17,000 square foot facility located in Wokingham, England, which houses sales, technical support and repair services, and administration functions. The lease expires in January 2018. We also maintain small sales offices located close to Paris, France; Munich, Germany; and in Singapore.

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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.
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. Also in October 2010, we filed a complaint for patent infringement with the United States International Trade Commission (“ITC”) against the same defendants. Both lawsuits claim infringement of two of our U.S. Patents, Nos. 6,328,766 and 6,353,581. The complaints broadly claimed infringement by BDT's products, and they specifically identify BDT's FlexStor II® product line as infringing our patents. The complaints also claimed infringement by IBM and Dell Inc. products that are manufactured by BDT based on the FlexStor II®. The Southern District of California case has been stayed to allow the ITC case to move forward first. The ITC instituted the case on November 18, 2010 (Investigation No. 337-TA-746). The trial for such case began on August 29, 2011 and ended on September 7, 2011.
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 the United States District Court for the Southern District of California and at the ITC against BDT AG and certain of its affiliates, IBM and Dell. However, our infringement case against BDT AG and its affiliates continued. In June 2012, the Chief Administrative Law Judge of the ITC issued a public notice of the Initial Determination affirming that both of our asserted patents are valid, but that BDT did not violate Section 337 of the Tariff Act of 1930. In July 2012, the ITC released the public version of the Initial Determination, which found that the six asserted claims of U.S. Patent No. 6,328,766 were valid and found no infringement of U.S. Patent No. 6,353,581, but concluded the asserted claims of this patent were valid. In November 2012, the full Commission issued an opinion that did not revisit the Chief Administrative Law Judge's conclusion that BDT's customers directly infringe every asserted claim of U.S. Patent No. 6,328,766, and affirmed the validity of the asserted claims of U.S. Patent No. 6,353,581. The Commission remanded certain aspects of the Chief Administrative Law Judge's validity findings for U.S. Patent No. 6,328,766. In December 2012, the Commission granted us a petition for reconsideration and further remanded the determination of whether BDT directly or indirectly infringes certain claims of U.S. Patent No. 6,353,581 to the Chief Administrative Law Judge. In March 2013, the Chief Administrative Law Judge of the ITC issued a public notice of the Remand Initial Determination. The Remand Initial Determination held that there is no infringement of certain claims of U.S. Patent No. 6,353,581, and that the six asserted claims of U.S. Patent No. 6,328,766 are invalid as anticipated. In April 2013, the ITC released a public version of the Remand Initial Determination. In May 2013, the ITC granted in part our request to review the Remand Initial Determination, and reviewed the findings that BDT's FlexStor II® product line does not infringe one claim of U.S. Patent No. 6,353,581, and that the asserted claims of U.S. Patent No. 6,328,766 are invalid as anticipated. In May 2013, the ITC issued a Notice of Decision that upheld the findings of the Remand Initial Determination and terminated the investigation. In June 2013, the ITC issued a public version of the Commission Opinion on Remand.
In June 2012, we filed five additional patent infringement lawsuits in the United States District Court for the Southern District of California against seven companies. In these lawsuits we have asserted claims of infringement on one or both of the following U.S. Patent Nos. owned by us: 6,328,766 and 6,353,581, against the following defendants: Quantum Corporation, based in San Jose, California; Spectra Logic Corporation, based in Boulder, Colorado; PivotStor, Inc., based in Irvine, California; Qualstar Corporation, based in Simi Valley, California; Tandberg Data GmbH, based in Germany; Tandberg Data Corp., based in Westminster, Colorado; and Venture Corporation Limited, based in Singapore. In February 2013, we filed a joint motion to dismiss our case against Tandberg without prejudice.

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In August 2012, Quantum Corporation (“Quantum”) filed counterclaims against us in the United States District Court for the Southern District of California action, alleging trademark infringement and unfair competition claims, and infringement of U.S. Patent Nos. 5,491,812; 6,542,787; 6,498,771; and 5,925,119 by our products. In April 2013, Quantum filed a complaint against us in the United States District Court for the Southern District of California alleging infringement of U.S. Patent No. 7,263,596 by our products. Quantum is seeking monetary damages from us and injunctive relief.
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.
Item 4.
Mine Safety Disclosures.
Not Applicable.

19


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 6, 2013, there were approximately 55 shareholders of record. On September 6, 2013, the closing sales price of our common stock was $1.10 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 2013:
 
 
 
Fourth quarter
$1.34
 
$0.98
Third quarter
$1.33
 
$0.91
Second quarter
$1.76
 
$0.91
First quarter
$2.32
 
$1.60
Fiscal Year 2012:
 
 
 
Fourth quarter
$2.39
 
$1.18
Third quarter
$2.80
 
$1.91
Second quarter
$2.60
 
$2.04
First quarter
$3.24
 
$2.00
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 June 28, 2013, we issued an aggregate of 348,490 shares of common stock to the holders 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 213,220 shares of common stock to Sphere 3D Corporation. 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 Corporation. 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.

20


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 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 regain compliance with the continued listing requirements of, and thereby 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; 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.
We are a trusted global provider of unified data management and data protection solutions designed to enable small and medium enterprises (“SMEs”), distributed enterprises, and small and medium businesses (“SMBs”) to anticipate and respond to data storage requirements. Whether an organization's data is locally or globally based, our solutions consolidate and protect data for easy and cost-effective management of different tiers of information. We enable companies to expend fewer resources on information technology (“IT”), allowing them to focus on being more responsive to the needs of their customers.
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® and REO SERIES® libraries are tape and virtual tape solutions designed to meet the need for cost-effective, reliable data storage for long-term archiving and compliance requirements.
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.

21


End users of our products include SMEs, 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 $48.0 million for fiscal 2013, compared with $59.6 million for fiscal 2012. The decline in net revenue resulted in a net loss of $19.6 million, or $0.68 per share, for fiscal 2013 compared with a net loss of $16.2 million, or $0.66 per share, for fiscal 2012.
Intellectual property rights. In August 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 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 the United States District Court for the Southern District of California and at the ITC. However, our infringement case against BDT AG and its affiliates continues.
In July 2012, the ITC released the public version of the Initial Determination, which found that the six asserted claims of U.S. Patent No. 6,328,766 were valid and found no infringement of U.S. Patent No. 6,353,581, but concluded the asserted claims of this patent were valid. In November 2012, the full Commission issued an opinion that did not revisit the Chief Administrative Law Judge's conclusion that BDT's customers directly infringe every asserted claim of U.S. Patent No. 6,328,766, and affirmed the validity of the asserted claims of U.S. Patent No. 6,353,581. The Commission remanded certain aspects of the Chief Administrative Law Judge's validity findings for U.S. Patent No. 6,328,766. In December 2012, the Commission granted us a petition for reconsideration and further remanded the determination of whether BDT directly or indirectly infringes certain claims of U.S. Patent No. 6,353,581 to the Chief Administrative Law Judge. In March 2013, the Chief Administrative Law Judge of the ITC issued a public notice of the Remand Initial Determination. The Remand Initial Determination held that there is no infringement of certain claims of U.S. Patent No. 6,353,581, and that the six asserted claims of U.S. Patent No. 6,328,766 are invalid as anticipated. In April 2013, the ITC issued a public notice of the Remand Initial Determination. In May 2013, the ITC granted in part our request to review the Remand Initial Determination, and reviewed the findings that BDT's FlexStor II® product line does not infringe one claim of U.S. Patent No. 6,353,581, and that the asserted claims of U.S. Patent No. 6,328,766 are invalid as anticipated. See “Item 3. Legal Proceedings” for additional information on the patent litigation lawsuits.
In June 2012, we filed five additional patent infringement lawsuits in the United States District Court for the Southern District of California against seven companies. In February 2013, we filed a joint motion to dismiss our case against one of the seven companies without prejudice. See “Item 3. Legal Proceedings” for additional information on these patent litigation lawsuits.

22


In August 2012, Quantum Corporation (“Quantum”) filed counterclaims against us in the United States District Court for the Southern District of California action, alleging trademark infringement and unfair competition claims, and infringement of U.S. Patent Nos. 5,491,812, 6,542,787, 6,498,771 and 5,925,119 by our products. In April 2013, Quantum filed a complaint against us in the United States District Court for the Southern District of California alleging infringement of U.S. Patent No. 7,263,596 by our products. Quantum is seeking monetary damages from us and injunctive relief.
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.
Liquidity and capital resources. At June 30, 2013, we had a cash balance of $8.8 million, compared to $10.5 million at June 30, 2012. In fiscal 2013, we incurred a net loss of $19.6 million. During the third quarter of fiscal 2013, we completed a private placement of $13.25 million in convertible notes (the “Notes”), for net proceeds of approximately $13.0 million. The Notes are scheduled to mature in February 2017 and bear interest at a rate of 8% per annum payable semi-annually. The Notes are convertible into shares of common stock at an initial conversion price of $1.30 per share. At June 30, 2013, we had a balance of $13.25 million recorded as long-term debt. In addition, during the third quarter of fiscal 2013, in a private placement transaction, we sold an aggregate of 1,020,409 shares of our common stock for gross proceeds of $1.0 million, and net proceeds of approximately $0.9 million. In August 2011, we entered into a credit facility that provides for an $8.0 million secured revolving loan and may be used to fund our working capital and our general business requirements. At June 30, 2013, we had a balance of $3.5 million recorded as long-term debt, and a remaining external borrowing capacity of $3.1 million. Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during fiscal 2014 as we continue to reshape our business model and further improve operational efficiencies.
Management has projected that cash on hand, combined with available borrowings under our credit facility, 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 and/or (iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on our liquidity. This could force us 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. We may seek debt, equity or equity-based financing (such as convertible debt) when market conditions permit.
As of June 30, 2013, we had working capital of $6.7 million, reflecting decreases in current assets and current liabilities of $6.4 million and $5.7 million, respectively, during fiscal 2013. The decrease in current assets is primarily attributable to (i) a $2.5 million decrease in accounts receivable due to lower sales volumes primarily in our tape-based and disk-based products sold in the Americas region, and disk-based products sold in Europe, the Middle East and Africa (“EMEA”), (ii) a $1.9 million decrease in other current assets primarily due to a decrease in deferred costs for service contracts, (iii) a $1.7 million decrease in cash, and (iv) a $0.3 million decrease in inventory. The decrease in current liabilities is primarily attributable to (i) a $4.4 million decrease in accounts payable and accrued liabilities related to operating activities, (ii) a $0.9 million decrease in our stock appreciation rights' valuation liability, and (iii) a $0.4 million decrease in accrued warranty obligations.

23


Recent Developments
In July 2013, we entered into a supply agreement, and a technology license agreement, with Sphere 3D Corporation (“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 213,220 shares of our common stock with a value at the time of issuance of approximately $250,000. 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 $0.5 million. In connection with this 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 represents approximately 5% of Sphere 3Ds outstanding shares.
In August 2013, we amended our Silicon Valley Bank credit facility to, among other things, extend the maturity date to August 7, 2015 and add a separate credit line of $750,000 for letters of credit, foreign exchange contracts and cash management, which is in addition to the existing $8.0 million revolving line of credit.
In September 2013, we announced that Lisa Loe joined us as Vice President of Worldwide Sales.
In September 2013, we released our SnapScale X4, a clustered NAS solution that is designed to provide a high-density solution to more efficiently manage growing amounts of unstructured data. The SnapScale X4 unifies NAS and iSCSI storage volumes under one global namespace helping enterprises strike the balance between storage capacity and return on investment, while still maintaining the ability to expand.
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, revenue and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition, share-based compensation, bad debts, inventories, intangible and other long-lived assets, warranty obligations and income taxes. 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. The footnotes to our consolidated financial statements also include disclosure of significant accounting policies. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our critical accounting policies and estimates that require the most significant judgment are discussed further below.
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.

24


Generally, title and risk of loss transfer to the customer when the product leaves our dock. 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.
Share-based Compensation
Share-based compensation expense can be significant to our results of operations, even though no cash is used for such expense. In determining period expense associated with unvested options, we estimate the fair value of each option at the date of grant. We use the Black-Scholes option pricing model to determine the fair value of the award. This model requires the input of highly subjective assumptions, including the expected volatility of our stock and the expected term the average employee will hold the option prior to the date of exercise. In addition, we estimate pre-vesting forfeitures for share-based awards that are not expected to vest. We primarily use historical data to determine the inputs and assumptions to be used in the Black-Scholes pricing model. Changes in these inputs and assumptions could occur and could affect the measure of estimated fair value and make it difficult to compare the results in future periods to our current results.
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 adjust 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.
Warranty Obligations
We provide for estimated future costs of warranty obligations in accordance with current accounting rules. 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 in accordance with applicable accounting standards. 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.

25


Results of Operations
The following table sets forth certain financial data as a percentage of net revenue:  
 
Fiscal Year
 
2013
 
2012
Net revenue
100.0
 %
 
100.0
 %
Cost of revenue
65.0

 
67.9

Gross profit
35.0

 
32.1

Operating expenses:
 

 
 

Sales and marketing
36.6

 
27.1

Research and development
13.6

 
13.7

General and administrative
24.1

 
19.9

 
74.3

 
60.7

Loss from operations
(39.3
)
 
(28.6
)
Other income (expense), net
(1.2
)
 
1.5

Loss before income taxes
(40.5
)
 
(27.1
)
Provision for income taxes
0.3

 
0.1

Net loss
(40.8
)%
 
(27.2
)%
 
A summary of the sales mix by product follows:  
 
Fiscal Year 
 
2013
 
2012
Tape-based products:
 

 
 

NEO Series®
32.1
%
 
31.4
%
Disk-based products:
 

 
 

REO Series®
1.3

 
1.8

SnapServer®
18.7

 
16.7

 
20.0

 
18.5

Service
39.9

 
40.7

Spare parts and other
8.0

 
9.4

 
100.0
%
 
100.0
%
Fiscal 2013 compared with Fiscal 2012
Net Revenue. Net revenue decreased to $48.0 million during fiscal 2013 from $59.6 million during fiscal 2012, a decrease of $11.6 million, or 19.5%. The decline was due to lower revenue from our branded products primarily as a result of decreased sales volumes in our taped-based and disk-based products sold in the Americas and EMEA, and decreased service revenue primarily from our sole OEM customer. In fiscal 2013, net revenue from our sole OEM customer decreased by 42.0% compared to fiscal 2012. OEM net revenue, which is primarily made up of service revenue, accounted for 12.2% and 17.0% of net revenues in fiscal 2013 and 2012, respectively.

26


Product Revenue
Net product revenue decreased to $28.8 million during fiscal 2013 from $35.3 million during fiscal 2012. The decrease of approximately $6.5 million, or 18.4%, was primarily associated with (i) $3.3 million decrease in sales of our NEO® products primarily related to a decrease in sales of our add-on drives, (ii) $1.7 million decrease in sales of spare parts related to our branded products and our OEM customer, (iii) $0.9 million decrease in sales of our SnapServer® products resulting primarily from the end of life of historical SnapServer® products such as the SnapServer® 410, and (iv) $0.5 million decrease in sales of our REO® products.
Service Revenue
Net service revenue decreased to $19.2 million during fiscal 2013 from $24.3 million during fiscal 2012. The decrease of approximately $5.1 million, or 21.0%, was primarily due to decreased service revenue from our sole OEM customer. In addition, there was a decrease in our extended service contracts primarily related to lower tape-based product sales. As a percentage of total revenue, service revenue remained relatively constant at 39.9% for fiscal 2013 compared to 40.7% for fiscal 2012.
Gross Profit. Overall gross profit decreased to $16.8 million during fiscal 2013 compared to $19.2 million during fiscal 2012. Gross margin increased to 35.0% during fiscal 2013 from 32.1% during fiscal 2012.
Product Revenue
Gross profit on product revenue during fiscal 2013 was $3.9 million compared to $5.1 million during fiscal 2012. The decrease of $1.2 million, or 23.5%, was primarily due to the 18.4% decrease in net product revenue related to decreased sales volumes of both tape-based and disk-based products. Gross margin on product revenue at 13.5% for fiscal 2013 decreased from 14.3% for fiscal 2012.
Service Revenue
Gross profit on service revenue during fiscal 2013 was $12.9 million compared to $14.1 million during fiscal 2012. The decrease of $1.2 million, or 8.5%, was primarily due to decreased service revenue from our sole OEM customer, and a decrease in extended service contracts due to a decrease in product sales. Gross margin on service revenue at 67.3% for fiscal 2013 increased from 58.2% for fiscal 2012. This increase was primarily the result of ongoing cost reductions related to service contracts as part of our strategy to improve operational efficiencies.
Sales and Marketing Expense. Sales and marketing expense in fiscal 2013 increased to $17.6 million from $16.2 million during fiscal 2012. The increase of $1.4 million, or 8.6%, was primarily a result of an increase of $1.3 million in employee and related expenses associated with an increase in our average headcount, and an increase of $0.2 million in share-based compensation expense. These increases were offset by a decrease of $0.2 million in public relations and advertising expense, including contractor fees.
Research and Development Expense. Research and development expense in fiscal 2013 decreased to $6.5 million from $8.1 million during fiscal 2012. The decrease of $1.6 million, or 19.8%, was primarily a result of (i) a decrease of $0.7 million in development expense as a result of a lower level of new product development, (ii) a decrease of $0.7 million in employee and related expenses associated with a decrease in our average headcount, and (iii) a decrease of $0.2 million in share-based compensation expense.
General and Administrative Expense. General and administrative expense in fiscal 2013 decreased to $11.6 million from $11.8 million during fiscal 2012. The decrease of $0.2 million, or 1.7%, was primarily a result of a decrease of $0.5 million in employee related expenses associated with a decrease in our average headcount, and a decrease of $0.3 million in share-based compensation expense. These decreases were offset by an increase of $0.3 million in outside contractor expense, primarily related to financial and accounting services, and $0.2 million in other asset write-offs.
Interest Income. We generated minimal interest income during fiscal 2013 compared with $0.4 million in fiscal 2012 related to the recovery of accounts receivable in our foreign subsidiaries previously written off in fiscal 2003.

27


Interest Expense. We incurred interest expense of $0.6 million and $0.1 million during fiscal 2013 and 2012, respectively. The increase was primarily related to interest expense for the convertible notes we sold in February 2013.
Other Income (Expense), Net. During fiscal 2013, we incurred minimal other income (expense), net, compared with $0.7 million of income during fiscal 2012. The change of $0.7 million was primarily due to the receipt of $0.5 million in fiscal 2012 related to the recovery of accounts receivable in our foreign subsidiaries previously written off in 2003. In addition, we realized $19,000 in foreign currency losses in fiscal 2013, compared to $173,000 in realized foreign currency gains in fiscal 2012.
Provision for Income Taxes. During fiscal 2013, we recognized income tax expense of $0.2 million compared to $0.1 million in fiscal 2012.
Liquidity and Capital Resources
At June 30, 2013, we had a cash balance of $8.8 million, compared to $10.5 million at June 30, 2012. In fiscal 2013, we incurred a net loss of $19.6 million. During the third quarter of fiscal 2013, we completed a private placement of $13.25 million in convertible notes, for net proceeds of approximately $13.0 million. The Notes are scheduled to mature in February 2017 and bear interest at a rate of 8% per annum payable semi-annually. The Notes are convertible into shares of common stock at an initial conversion price of $1.30 per share. At June 30, 2013, we had a balance of $13.25 million recorded as long-term debt. In addition, during the third quarter of fiscal 2013, in a private placement transaction, we sold an aggregate of 1,020,409 shares of our common stock for gross proceeds of $1.0 million, and net proceeds of approximately $0.9 million. In August 2011, we entered into a credit facility that provides for an $8.0 million secured revolving loan and may be used to fund our working capital and our general business requirements. At June 30, 2013, we had a balance of $3.5 million recorded as long-term debt, and a remaining external borrowing capacity of $3.1 million. We expect to incur negative operating cash flows during fiscal 2014 as we continue to reshape our business model and further improve operational efficiencies.
As of June 30, 2013, we had working capital of $6.7 million, reflecting decreases in current assets and current liabilities of $6.4 million and $5.7 million, respectively, during fiscal 2013. The decrease in current assets is primarily attributable to (i) a $2.5 million decrease in accounts receivable due to lower sales volumes primarily in our tape-based and disk-based products sold in the Americas region, and disk-based products sold in EMEA, (ii) a $1.9 million decrease in other current assets primarily due to a decrease in deferred costs for service contracts, (iii) a $1.7 million decrease in cash, and (iv) a $0.3 million decrease in inventory. The decrease in current liabilities is primarily attributable to (i) a $4.4 million decrease in accounts payable and accrued liabilities related to operating activities, (ii) a $0.9 million decrease in our stock appreciation rights' valuation liability, and (iii) a $0.4 million decrease in accrued warranty obligations.
Management has projected that cash on hand, combined with available borrowings under our credit facility, 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 and/or (iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on our liquidity. This could force us 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. We may seek debt, equity or equity-based financing (such as convertible debt) when market conditions 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, 2013 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
During fiscal 2013, we used cash in operating activities of $14.0 million, compared to $8.7 million in fiscal 2012. The use of cash during fiscal 2013 was primarily a result of our net loss of $19.6 million offset by $6.1 million in non-cash items, which were primarily share-based compensation, depreciation and amortization. In addition, we had decreases in accounts receivable and inventory, both due to lower sales, and in other assets due to decreases in deferred costs for service contracts.

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We used cash in investing activities of $1.0 million during fiscal 2013, compared to $0.9 million in fiscal 2012. During fiscal 2013 and 2012, capital expenditures totaled $1.0 million and $0.9 million, respectively. In fiscal 2013, such expenditures were associated with machinery and equipment to support new product introductions, as well as computer equipment and software associated with the replacement of our enterprise resource planning system. In fiscal 2012, such expenditures were associated with machinery and equipment to support new product introductions.
We generated cash from our financing activities of $13.3 million during fiscal 2013, compared to $9.9 million during fiscal 2012. During fiscal 2013, we sold convertible notes with an aggregate principal amount of $13.25 million (net proceeds of approximately $13.0 million), we sold an aggregate of 1,020,409 shares of our common stock for gross proceeds of $1.0 million (net proceeds of approximately $0.9 million), and we received $0.2 million from the exercise of stock options, offset by $0.8 million paid for taxes for net settlement of restricted stock units. During fiscal 2012, we sold an aggregate of 3,640,000 shares of our common stock for gross proceeds of approximately $7.3 million (net proceeds of approximately $6.6 million), we drew $3.5 million on our credit facility, and we received $0.7 million from the exercise of warrants and stock options, offset by $0.8 million paid for taxes for net settlement of restricted stock units.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements or significant guarantees to third parties that are not fully recorded in our consolidated balance sheet or fully disclosed in the notes to our consolidated financial statements.
Contractual Obligations
The following schedule summarizes our contractual obligations to make future payments at June 30, 2013 (in thousands):  
Contractual Obligations 
 
Total 
 
Less than
1 year 
 
1-3 years 
 
4-5 years 
 
After 5
years
Long-term debt, including interest(1)
 
$
17,225

 
$
1,060

 
$
2,120

 
$
14,045

 
$

Operating lease obligations(2)
 
4,472

 
2,282

 
1,482

 
651

 
57

Purchase obligations(3)
 
3,452

 
3,208

 
244

 

 

Total contractual obligations
 
$
25,149

 
$
6,550

 
$
3,846

 
$
14,696

 
$
57

________________
(1)
Long-term debt includes our convertible notes, which automatically convert into shares of common stock on the first trading day following the date that the closing bid price of the common stock exceeds two times the conversion price of $1.30 for ten consecutive trading days. Interest payments have been calculated using the amortization profile of the debt outstanding at June 30, 2013, taking into account the fixed rate paid at our fiscal year end.
(2)
Represents contractual lease obligations under non-cancelable operating leases on our San Diego, California; San Jose, California; Wokingham, England; and Paris, France facilities.
(3)
Represents purchase orders for inventory and non-inventory items entered into prior to June 30, 2013, with purchase dates extending beyond July 1, 2013. 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.

29


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 subsidiaries in the United Kingdom, France and Germany 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 $19,000 for fiscal 2013 and a gain of $173,000 for fiscal 2012.
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.

30


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, 2013.
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, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

31


Item 9B.
Other Information.
On June 28, 2013, we issued an aggregate of 348,490 shares of common stock to the holders 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 213,220 shares of common stock to Sphere 3D Corporation. 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 Corporation. The issuance of these shares was exempt from registration under Section 4(2) of 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.


32


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 6, 2013, directors are as follows:  
Name of Director Nominee 
 
Age 
 
Director  Since 
 
Position 
 
Committee Membership 
Robert A. Degan
 
74
 
2000
 
Independent Director
 
Audit (Chairperson), Compensation and Nominating and Governance
Joseph A. De Perio
 
35
 
2011
 
Independent Director
 
Audit and Nominating and Governance
Eric L. Kelly
 
55
 
2007
 
President and Chief
Executive Officer
 
None
Vivekanand Mahadevan
 
60
 
2012
 
Independent Director
 
Audit
Scott McClendon
 
74
 
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 2013 except for:
Mr. De Perio, who was appointed to the Audit Committee in August 2012. He was also appointed to the Nominating and Governance Committee in November 2012 when Shmuel Shottan resigned from our Board of Directors and this committee;
Mr. McClendon, who was appointed to the Compensation Committee in August 2012 and appointed Chairman of the Compensation Committee in February 2013 when Nora Denzel resigned from our Board of Directors and this committee; and
Mr. Mahadevan, who was appointed to the Audit Committee in November 2012 replacing Ms. Denzel on the Audit Committee.
There are no family relationships between any of our directors or executive officers, and there are no arrangements or understandings between any of the directors and any other person pursuant to which such director was or is selected as a director.
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 Robert A. Degan, Joseph A. De Perio, and Vivekanand 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.

33


Biographical Information of Directors
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 was also an associate and an analyst in the Mergers and Acquisitions department of CIBC Oppenheimer. 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.
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.

34


Vivekanand Mahadevan has been a business consultant 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'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 6, 2013, are as follows:  
Name
 
Age 
 
Position Held 
Eric L. Kelly
 
55
 
President and Chief Executive Officer
Kurt L. Kalbfleisch
 
47
 
Senior Vice President, Chief Financial Officer and Secretary
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 19 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.
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 2013.

35


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.
Item 11.
Executive Compensation.
Summary Compensation Table for Fiscal Year 2013
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 2013 and 2012 fiscal years.  
Name and
Principal Position 
 
Fiscal
Year
 
Salary
($)
 
Non-Equity
Incentive Plan
Compensation
($)(1)
 
All Other
Compensation
($)(2)
 
Total
   ($)(4)
Eric L. Kelly
 
2013
 
400,000

 
100,000

 
7,718

 
507,718

President and Chief Executive
Officer
 
2012
 
400,000

 
180,000

 
16,260

 
596,260

Kurt L. Kalbfleisch
 
2013
 
266,000

 
50,000

 
33,924

 
349,924

Senior Vice President, Chief Financial Officer
and Secretary
 
2012
 
266,000

 
73,250

 
25,306

 
364,556

Jillian Mansolf
 
2013
 
326,500

(3) 

 
34,277

 
360,777

Senior Vice President of Global Sales
and Marketing (5)
 
2012
 
326,500

(3) 
9,688

 
29,617

 
365,805

_____________
(1)
The amounts shown in the “Non-Equity Incentive Plan” column represent bonuses awarded for fiscal 2013 and 2012 pursuant to the terms of our Executive Bonus Plan and as established by the Compensation Committee for the fiscal year.
(2)
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.
(3)
This amount includes sales commissions of $76,500 earned in both fiscal 2013 and 2012.
(4)
There were no Stock Awards granted in fiscal 2013 and 2012.
(5)
Effective on September 3, 2013, Jillian Mansolf no longer services as an executive officer of the Company. She continues to be employed by us as our Senior Vice President of Marketing.

36


Outstanding Equity Awards at End of Fiscal Year 2013
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 2013.
 
 
 
 
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
($)(4)
Eric L. Kelly
 
11/13/2007
 
6,000

 
 
5.31

 
11/13/2013
 
 
 
 
 
12/9/2008
 
6,000

 
 
0.75

 
12/9/2014
 
 
 
 
 
1/27/2009
 
299,999

 
 
0.78

 
1/27/2015
 
 
 
 
 
2/18/2010
 
1,238,000

(1) 
 
2.49

 
4/23/2016
 
 
 
 
 
6/29/2011
 
 
 
 
 
 
 
 
 
786,692

(2) 
896,829

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kurt L. Kalbfleisch
 
5/22/2006
 
333

 
 
24.09

 
5/22/2016
 
 
 
 
 
2/18/2010
 
177,000

(1) 
 
2.49

 
4/23/2016
 
 
 
 
 
6/29/2011
 
 
 
 
 
 
 
 
 
313,579

(2) 
357,480

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Jillian Mansolf
 
7/16/2009
 
40,000

 
 
1.65

 
7/16/2015
 
 
 
 
 
2/18/2010
 
178,356

(1) 
 
2.49

 
4/23/2016
 
 
 
 
 
6/29/2011
 
 
 
 
 
 
 
 
 
269,709

(2) 
307,468

______________
(1)
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.
(2)
This stock award vests in six equal installments, with the first installment vesting six months after July 15, 2011 and an additional installment vesting at the end of each six-month period thereafter.
(3)
Amounts listed represent the aggregate market value of the unvested restricted stock awards held by the named executive officers based on the closing price of a share of our common stock of $1.14 on the last trading day of fiscal 2013.
 

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”). The Kalbfleisch Agreement provides for Mr. Kalbfleisch to earn a base salary of $266,000 which was effective in May 2011. 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.

38


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 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.
Jillian Mansolf. Under her offer letter with the Company, Ms. Mansolf is an at-will employee and her employment may be terminated by us for any reason, with or without notice. Ms. Mansolf currently earns an annual salary of $250,000 and during fiscal 2013 was eligible for quarterly commission earnings of $25,500, for a total annual compensation package of up to $352,000. Ms. Mansolf was also 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. As in effect during fiscal 2013, Ms. Mansolf's offer letter provides that if her employment is terminated by us without cause she is eligible to receive severance benefits consisting of six months of base salary plus earned commissions and twelve months of continued health benefits coverage.
As noted above, Ms. Mansolf ceased to serve as an executive officer of the Company during September 2013. In connection with her change in position, Ms. Mansolf and the Company entered into an amendment of her offer letter. The amendment provides for her to continue to receive her current base salary of $250,000 and to be eligible to receive a quarterly bonus under the Company's executive bonus plan commencing October 1, 2013 with a target bonus of $25,500 per quarter. She will no longer be eligible for quarterly commissions earnings after that date. In addition, the installment of her outstanding restricted stock unit award granted by the Company that is eligible to vest on January 15, 2014 will instead vest on January 3, 2014, subject to her continued employment through that date. If the Company terminates her employment at any time without cause, or if she voluntarily terminates her employment for any reason between January 3, 2014 and June 30, 2014, the Company will pay her severance equal to three months of her base salary and reimburse the cost of her COBRA premiums for six months following her termination, subject to her providing a release of claims in favor of the Company.

39


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 each executive's 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.
Jillian Mansolf. We entered into a retention agreement with Ms. Mansolf effective July 13, 2009, which was in effect during fiscal 2013. This agreement generally provides that Ms. Mansolf would receive a lump sum severance payment if, within two years of the consummation of a change of control of our company, her employment is terminated without cause or she resigns with good reason. These severance payments are based on Ms. Mansolf's base salary and target commission at the time of the consummation of the change of control or the termination date, whichever is higher, plus her target bonus for the year before the consummation of the change of control. The agreement provides that, upon a qualifying termination in connection with a change of control, Ms. Mansolf is entitled to receive an amount equal to her annual base salary, target commissions plus target bonus. 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. The agreement also provides that if Ms. Mansolf elects to continue health insurance coverage as provided by COBRA, we would reimburse her for the amount of the premiums incurred by her for 12 months following the termination date. The consideration payable to Ms. Mansolf under the retention agreement is contingent upon her providing us a general release of claims.
In connection with Ms. Mansolf's change in position in September 2013, she and the Company agreed to terminate her retention agreement.

40


Equity Awards Granted in Fiscal 2013
There were no equity awards granted to our named executive officers during fiscal 2013.
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 2013, the Compensation Committee established performance goals for our revenue growth and gross operating expenses. The named executive officers' target bonuses for fiscal 2013 (expressed as a percentage of the executive's annual base salary) were as follows: Mr. Kelly-100%; Mr. Kalbfleisch-50%; and Ms. Mansolf-10%. (Ms. Mansolf's participation in the Bonus Plan is in addition to her opportunity to be awarded sales commissions under her employment agreement as described above.) The bonuses awarded to each named executive officer under the Bonus Plan for fiscal 2013 are reported in the Non-Equity Incentive Plan Compensation column of the “Summary Compensation Table for Fiscal 2013” above.
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 2013
The following table provides compensation information for each individual who served on our Board of Directors during fiscal 2013 and was not employed by us or one of our subsidiaries (“non-employee directors”). See “Summary Compensation Table for Fiscal 2013” above for information related to the compensation of Mr. Kelly who was a director in fiscal 2013 and who also served as an executive officer during the fiscal year.  
Name 
 
Fees earned or
paid in cash
 
Option 
         awards(1)(2)(3)
 
Total 
Joseph De Perio
 
$40,000
 
$49,512
 
$89,512
Robert A. Degan
 
$40,000
 
$49,512
 
$89,512
Nora M. Denzel (4)
 
$20,000
 
$49,512
 
$69,512
Vivekanand Mahadevan (5)
 
$26,150
 
$30,249
 
$56,399
Scott McClendon
 
$50,000
 
 
$50,000
Shmuel Shottan (6)
 
$10,000
 
$49,512
 
$59,512
______________
(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 2013. 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 Note 7 to the consolidated financial statements.
(2)
The amounts in this column represent the fair value on the grant date of stock option awards granted on August 23, 2012 to Ms. Denzel and Messrs. De Perio, Degan, and Shottan and the fair value on the grant date of the stock option award granted on November 11, 2012 to Mr. Mahadevan. There were no stock awards granted in fiscal 2013.
(3)
At the end of fiscal 2013, the number of shares subject to outstanding option awards for each non-employee director were as follows: Mr. De Perio-62,728; Mr. Degan-109,150; Ms. Denzel-16,667; Mr. Mahadevan-30,000; Mr. McClendon-93,149; and Mr. Shottan-0. The number of shares subject to outstanding stock awards were as follows: Mr. De Perio-0; Mr. Degan-0; Ms. Denzel-0; Mr. Mahadevan-0; Mr. McClendon-339,521; and Mr. Shottan-0.
(4)
Ms. Denzel resigned from our Board of Directors in February 2013.
(5)
Mr. Mahadevan joined our Board of Directors in November 2012.
(6)
Mr. Shottan resigned from our Board of Directors in November 2012.
Overview of Non-Employee Director Compensation and Procedures
We compensate non-employee directors through cash and equity-based compensation. Each non-employee director 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 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. In August 2012, each non-employee director, except for the Executive Chairperson, received an annual equity award in the form of an option to purchase 40,000 shares of our common stock. In November 2012, when Mr. Mahadevan joined the Board, he received an equity award in the form of an option to purchase 30,000 shares of our common stock.

42


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 6, 2013 (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
 
 
 
 
 
 
 
 
Special Situations Fund
   527 Madison Avenue, Suite 600
   New York, NY 10022
 
3,143,459

(3) 
6,684,563

(3) 
9,828,022

 
26.0%
 
 
 
 
 
 
 
 
 
The Cyrus Group
   399 Park Avenue, 39th Floor
   New York, NY 10022
 
315,614

 
9,230,767

(11) 
9,546,381

 
19.9%
 
 
 
 
 
 
 
 
 
Marathon Capital Management
   4 North Park Drive, Suite 106
   Hunt Valley, MD 21030
 
5,040,464

(5) 

 
5,040,464

 
16.2%
 
 
 
 
 
 
 
 
 
Clinton Group, Inc.
   601 Lexington Avenue, 51st Floor
   New York, NY 10022
 
2,923,519

(4) 
2,015,688

(4) 
4,939,207

 
14.9%
 
 
 
 
 
 
 
 
 
Pinnacle Family Office Investments, L.P.
   4965 Preston Park Blvd., Suite 240
   Plano, TX 75093
 
2,227,680

 
347,600

 
2,575,280

 
8.2%
 
 
 
 
 
 
 
 
 
Executive Officers and Directors+
 
 

 
 

 
 

 
 
Eric Kelly
 
704,620

(7) 
1,652,233

(12) 
2,356,853

 
7.2%
Jillian Mansolf
 
269,513

(8) 
265,540

(13) 
535,053

 
1.7%
Kurt L. Kalbfleisch
 
244,893

 
177,333

 
422,226

 
1.3%
Scott McClendon
 
633,659

(9) 
132,467

(14) 
766,126

 
2.5%
Robert A. Degan
 
6,666

(6) 
109,150

 
115,816

 
*
Joseph A. De Perio(11)
 
16,000

 
62,728

 
78,728

 
*
Vivekanand Mahadevan
 
1,000

 
30,000

 
31,000

 
*
Current directors and executive officers as a group (7 persons)
 
1,876,351

 
2,429,451

 
4,305,802

 
12.8%
 
_____________________
+
Except as otherwise indicated, the address for each beneficial owner is 9112 Spectrum Center Boulevard, San Diego, CA, 92123.
*
Less than 1%.


43


(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 or will vest and become exercisable within 60 days of September 6, 2013; with respect to Ms. Mansolf and Messrs. Kelly and McClendon, shares of our common stock, which could be immediately acquired upon exercise of outstanding warrants.
(2)
Based on 31,118,558 shares of common stock outstanding on September 6, 2013 and calculated in accordance with Rule 13d-3 promulgated under the Exchange Act.
(3)
According to a Form 4 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2012 and our records, the number of shares of our common stock currently owned (“Shares”) and the number of shares of our common stock acquirable within 60 days pursuant to warrants (“Warrant Shares”) includes 1,311,720 Shares and 2,752,468 Warrant Shares held directly by Special Situations Fund III Q.P., L.P., 893,661 Shares and 1,966,047 Warrant Shares held directly by Special Situations Private Equity Fund, L.P., 131,329 Shares and 275,246 Warrant Shares held directly by Special Situations Technology Fund, L.P. and 806,749 Shares and 1,690,802 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.
(4)
The number of shares includes 2,923,519 Shares and 1,246,458 Warrant Shares held directly by Clinton Magnolia Master Fund, Ltd. (“CMAG”). On February 13, 2013, we issued convertible notes (the “Notes”) to certain investors, including CMAG, pursuant to a note purchase agreement. The number of shares reported above also includes 769,230 shares of our common stock issuable upon conversion of the Notes held by CMAG. Additional shares of our common stock may be issued to CMAG as payment of interest on the Notes pursuant to the terms of the note purchase agreement. Clinton Group, Inc. (“CGI”) is the investment manager of CMAG and consequently has voting control and investment discretion over securities held by CMAG. CGI and George Hall, as chief investment officer and president of CGI, may be deemed to beneficially own any securities owned by CGI and CMAG. Both CGI and Mr. Hall disclaim beneficial ownership of these securities.
(5)
According to a Schedule 13F filed for the quarter ended June 30, 2013, Marathon Capital Management, LLC has sole disposition authority with respect to these shares and sole voting power with respect to 483,750 of these shares.
(6)
Includes 3,333 shares of common stock held by Mr. Degan's wife.
(7)
Includes 49,309 shares of common stock owned by Mr. Kelly through his family trust.
(8)
Includes 22,760 shares of common stock owned by Ms. Mansolf through her family trust.
(9)
Represents 599,993 shares of our common stock owned by Mr. McClendon through his family trust, 33,333 shares of our common stock through his self-directed IRA and 333 shares of our common stock held by his wife.
(10)
Mr. De Perio was elected to our Board of Directors pursuant to the terms of that certain purchase agreement, by and among us and certain investors, including CGI and CMAG, dated March 16, 2011 (the “Purchase Agreement”). CMAG is the nominee of, and is employed by, CGI and CGI is the investment manager of CMAG. Pursuant to the Purchase Agreement, CMAG acquired 2,832,861 Shares and 1,246,458 Warrant Shares for total consideration of $5.0 million.

44


(11)
The number of shares includes 9,230,767 shares of common stock issuable to the Cyrus Group upon conversion of the Notes held by the Cyrus Group; however, the terms of the note purchase agreement provide that the number of shares of our common stock issuable upon conversion of the Notes will be limited to the extent necessary to ensure that, following such conversion, the total number of shares of our common stock beneficially owned by the Cyrus Group will not exceed 19.99% of the total number of the then-issued and outstanding shares of our common stock (including for such purposes the shares of our common stock issuable upon conversion of the Notes). Additional shares of our common stock may be issued to the Cyrus Group as payment of interest on the Notes pursuant to the terms of the note purchase agreement. The Cyrus Group is comprised of Cyrus Capital Partners, L.P. (“Cyrus”), Crescent 1, L.P. (“Crescent”), CRS Master Fund, L.P. (“CRS”), Cyrus Opportunities Master Fund II, Ltd. (“Cyrus Opportunities”), Cyrus Select Opportunities Master Fund, Ltd. (“Cyrus Select”), Cyrus Capital Partners GP, L.L.C. (“Cyrus GP”), Cyrus Capital Advisors, L.L.C. (“Cyrus Advisors”), and Mr. Stephen C. Freidheim. Each of Crescent, CRS, Cyrus Opportunities and Cyrus Select, or collectively the Cyrus Funds, are private investment funds engaged in the business of acquiring, holding and disposing of investments in various companies. Cyrus is the investment manager of each of the Cyrus Funds. Cyrus GP is the general partner of Cyrus. 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. Except for Mr. Freidheim, each member of the Cyrus Group disclaims beneficial ownership through these shares of common stock, other than those reported herein as being owned by such member of the Cyrus Group. Mr. Freidheim disclaims beneficial ownership of these shares of common stock held by the Cyrus Group, except to the extent of his pecuniary interest in members of the Cyrus Group, if any. Crescent 1, L.P., CRS Master Fund, L.P., Cyrus Opportunities Master Fund II, Ltd., Cyrus Select Opportunities Master Fund, Ltd. and Mr. Freidheim have entered into an investment management agreement with Cyrus giving Cyrus full voting and dispositive power over the shares of common stock held by the Cyrus Group.
(12)
Includes 102,234 shares of common stock which could be acquired upon exercise of outstanding warrants owned by Mr. Kelly through his family trust.
(13)
Includes 47,184 shares of common stock which could be acquired upon exercise of outstanding warrants owned by Ms. Mansolf through her family trust.
(14)
Includes 39,318 shares of common stock which could be acquired upon exercise of outstanding warrants owned by Mr. McClendon through his family trust.
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.

45


Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of the last day of fiscal 2013.  
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)
 
3,932,278

 
$2.26
 
2,830,882

Equity compensation plans not approved by our shareholders(2)
 
500,022

 
$1.72
 

Total
 
4,432,300

 
$2.16
 
2,830,882

_________________
(1)
Of the aggregate number of shares that remained available for future issuance reported in column (c), 2,290,085 were available under the 2009 Plan and 540,797 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 Ms. Mansolf) (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 Corporation (“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 213,220 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.
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 represents approximately 5% of Sphere 3D's outstanding shares.

46


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. 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. In the course of determining whether Messrs. 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”:
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 the Purchase 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 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.

47


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 
 
 
2013
 
2012
Audit fees(1)
 
$
361

 
$
347

Audit-related fees(2)
 

 
20

Tax fees(3)
 

 

All other fees(4)
 

 

Total
 
$
361

 
$
367

________________ 
(1)
Audit fees consist of fees incurred for professional services rendered in connection with the audit of the annual financial statements, and for the review of the quarterly financial statements.
(2)
Audit-related fees include fees incurred for professional services rendered in conjunction with assurance and related services that are not explicitly related to the audit or review of our financial statements, including registration statements.
(3)
Tax fees includes fees incurred 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 2013 or 2012.
(4)
All other fees includes 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 2013 or 2012.
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 2013 and 2012 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, 2013 and 2012
 
Consolidated Statements of Operations for the Years Ended June 30, 2013 and 2012
 
Consolidated Statements of Comprehensive Loss for the Years Ended June 30, 2013 and 2012
 
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended June 30, 2013 and 2012
 
Consolidated Statements of Cash Flows for the Years Ended June 30, 2013 and 2012
 
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.
2.1
Asset Purchase Agreement dated June 27, 2008 between the Company and Adaptec, Inc. (incorporated by reference to the Company's Form 8-K filed July 3, 2008). ++
 
 
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).
 
 

49


3.9
Amended and Restated Bylaws (incorporated by reference to the Company's Form 8-K filed August 26, 2005).
 
 
3.10
Certificate of Amendment of Bylaws (incorporated by reference to the Company's Form 8-K filed April 30, 2007).
 
 
4.1
Specimen stock certificate (incorporated by reference to the Company's Form 10-Q filed February 10, 2010).
 
 
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
Product Purchase Agreement No. 1585-042103 dated July 31, 2003 between the Company and Hewlett-Packard Company (incorporated by reference to the Company's Form 10-Q filed February 10, 2004). +
 
 
10.6
Addendum to Product Purchase Agreement No. 1585-042103 effective July 30, 2006 between the Company and Hewlett-Packard Company (incorporated by reference to the Company's Form 10-K filed September 15, 2006).
 
 
10.7
Addendum to Product Purchase Agreement between the Company and Hewlett-Packard Company dated December 15, 2007 (incorporated by reference to the Company's Form 10-Q filed May 1, 2008). +
 
 
10.8
Addendum to Product Purchase Agreement between the Company and Hewlett-Packard Company dated October 29, 2008 (incorporated by reference to the Company's Form 10-K filed September 9, 2009).
 
 

50


10.9
Addendum to Product Purchase Agreement between the Company and Hewlett-Packard Company dated April 6, 2009 (incorporated by reference to the Company's Form 10-K filed September 9, 2009).
 
 
10.10*
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).
 
 
10.11*
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).
 
 
10.12*
Retention Agreement between the Company and Jillian Mansolf dated July 13, 2009 (incorporated by reference to the Company's Form 10-K filed September 9, 2009).
 
 
10.13*
Employment letter between the Company and Jillian Mansolf dated June 23, 2009 (incorporated by reference to the Company's Form 10-K filed September 9, 2009).
 
 
10.14*
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).
 
 
10.15*
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).
 
 
10.16*
Amended and Restated 2003 Equity Incentive Plan (incorporated by reference to the Company's Form 8-K filed November 16, 2007).
 
 
10.17*
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).
 
 
10.18*
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).
 
 
10.19*
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).
 
 
10.20*
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).
 
 
10.21*
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).
 
 
10.22*
2006 Employee Stock Purchase Plan, as amended (incorporated by reference to the Company's Form 10-K filed September 14, 2011).
 
 
10.23*
2009 Equity Incentive Plan, as amended (incorporated by reference to the Company's Form 10-K filed September 14, 2011).
 
 
10.24*
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).
 
 
10.25*
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).
 
 
10.26*
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).
 
 

51


10.27*
2000 Stock Option Plan, as amended and restated (incorporated by reference to the Company's Form 10-K filed September 27, 2002).
 
 
10.28*
Form of Notice of Stock Option Award and Stock Option Award Agreement for options granted under the 2000 Stock Option Plan (incorporated by reference to the Company's Form 10-Q filed May 15, 2001).
 
 
10.29*
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).
 
 
10.30*
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).
 
 
10.31*
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).
 
 
10.32*
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).
 
 
10.33*
Executive Bonus Plan (incorporated by reference to the Company's Form 10-K filed September 24, 2010).
 
 
10.34*
Form of Purchase Agreement dated February 18, 2010 (incorporated by reference to the Company's Form 8-K filed February 24, 2010).
 
 
10.35
Form of Subscription Agreement dated November 12, 2010 (incorporated by reference to the Company's Form 8-K filed November 17, 2010).
 
 
10.36
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).
 
 
10.37
Form of Purchase Agreement dated March 16, 2011 (incorporated by reference to the Company's Form 8-K filed March 22, 2011).
 
 
10.38
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).
 
 
10.39
Loan and Security Agreement between the Company and Silicon Valley Bank (incorporated by reference to the Company's Form 10-K filed September 14, 2011).
 
 
10.40
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). +
 
 
10.41
Note Purchase Agreement, dated February 12, 2013 (incorporated by reference to the Company's Form 8-K filed on February 14, 2013). +
 
 
10.42
Amendment to Note Purchase Agreement, dated March 5, 2013 (incorporated by reference to the Company's Form 8-K filed on March 8, 2013).
 
 

52


10.43
Registration Rights Agreement, dated February 12, 2013 (incorporated by reference to the Company's Form 8-K filed on February 14, 2013).
 
 
10.44
Form of Subscription Agreement, dated February 13, 2013 (incorporated by reference to the Company's Form 8-K filed on February 14, 2013).
 
 
21.1
Subsidiaries of the Company.
 
 
23.1
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.
 
 
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.
++    Certain schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of the omitted schedules and similar attachments will be provided supplementally to the SEC upon request.
*    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 18, 2013
 
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 18, 2013
Eric L. Kelly
 
 
 
 
 
 
 
 
 
/s/    KURT L. KALBFLEISCH
 
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
September 18, 2013
 Kurt L. Kalbfleisch
 
 
 
 
 
 
 
 
 
/s/    SCOTT MCCLENDON
 
Executive Chairperson of the Board
 
September 18, 2013
Scott McClendon
 
 
 
 
 
 
 
 
 
/s/    ROBERT A. DEGAN
 
Director
 
September 18, 2013
Robert A. Degan
 
 
 
 
 
 
 
 
 
/s/    JOSEPH DE PERIO
 
Director
 
September 18, 2013
Joseph De Perio
 
 
 
 
 
 
 
 
 
/s/    VIVEKANAND MAHADEVAN
 
Director
 
September 18, 2013
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, 2013 and July 1, 2012, and the related consolidated statements of operations, comprehensive loss, shareholders' equity, 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, 2013 and July 1, 2012, 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 18, 2013


F-1


OVERLAND STORAGE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
June 30,
2013
 
June 30,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,831

 
$
10,522

Accounts receivable, net of allowance for doubtful accounts of $94 and $222, as of
    June 30, 2013 and 2012, respectively
6,640

 
9,193

Inventories
10,354

 
10,658

Other current assets
1,923

 
3,779

Total current assets
27,748

 
34,152

Property and equipment, net
2,014

 
1,446

Intangible assets, net
652

 
1,349

Other assets
989

 
1,313

Total assets
$
31,403

 
$
38,260

Liabilities and Shareholders’ Equity (Deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,221

 
$
7,012

Accrued liabilities
12,735

 
15,341

Accrued payroll and employee compensation
2,140

 
2,948

Income taxes payable
178

 
172

Accrued warranty
790

 
1,286

Total current liabilities
21,064

 
26,759

Long-term debt
16,750

 
3,500

Other long-term liabilities
3,885

 
4,960

Total liabilities
41,699

 
35,219

Commitments and contingencies (Note 9)


 


Shareholders’ equity (deficit):
 
 
 
Preferred stock, no par value, 1,000 shares authorized; no shares issued and outstanding as of June 30, 2013 and 2012

 

Common stock, no par value, 90,200 shares authorized; 30,403 and 27,737 shares issued and outstanding as of June 30, 2013 and 2012, respectively
123,065

 
116,682

Accumulated other comprehensive loss
(991
)
 
(918
)
Accumulated deficit
(132,370
)
 
(112,723
)
Total shareholders’ equity (deficit)
(10,296
)
 
3,041

Total liabilities and shareholders’ equity (deficit)
$
31,403

 
$
38,260

See accompanying notes to consolidated financial statements.

F-2


OVERLAND STORAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)  
 
 
Fiscal Year
 
 
2013
 
2012
Net revenue:
 
 
 
 
Product revenue
 
$
28,836

 
$
35,380

Service revenue
 
19,184

 
24,252

 
 
48,020

 
59,632

Cost of product revenue
 
24,950

 
30,328

Cost of service revenue
 
6,270

 
10,144

Gross profit
 
16,800

 
19,160

Operating expenses:
 
 
 
 
Sales and marketing
 
17,574

 
16,178

Research and development
 
6,522

 
8,148

General and administrative
 
11,579

 
11,848

 
 
35,675

 
36,174

Loss from operations
 
(18,875
)
 
(17,014
)
Other income (expense):
 
 
 
 
Interest income
 
3

 
377

Interest expense
 
(594
)
 
(100
)
Other income (expense), net
 
(16
)
 
655

Loss before income taxes
 
(19,482
)
 
(16,082
)
Provision for income taxes
 
165

 
79

Net loss
 
$
(19,647
)
 
$
(16,161
)
Net loss per share:
 
 
 
 
Basic and diluted
 
$
(0.68
)
 
$
(0.66
)
Shares used in computing net loss per share:
 
 
 
 
Basic and diluted
 
28,841

 
24,487

See accompanying notes to consolidated financial statements.

F-3


OVERLAND STORAGE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)  
 
 
Fiscal Year
 
 
2013
 
2012
 
 
 
 
 
Net loss
 
$
(19,647
)
 
$
(16,161
)
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation
 
(73
)
 
(233
)
Comprehensive loss
 
$
(19,720
)
 
$
(16,394
)
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
Loss
 
Accumulated
Deficit
 
Total
Shareholders'
Equity (Deficit)
 
Shares 
 
Amount 
 
Balance at June 30, 2011
22,993

 
$
104,382

 
$
(685
)
 
$
(96,562
)
 
$
7,135

Issuance of common stock, net of issuance costs
3,723

 
6,739

 

 

 
6,739

Exercise of stock options and ESPP purchases
293

 
523

 

 

 
523

Issuance of restricted stock
728

 
(831
)
 

 

 
(831
)
Share-based compensation

 
4,994

 

 

 
4,994

Stock appreciation rights

 
875

 

 

 
875

Net loss

 

 

 
(16,161
)
 
(16,161
)
Foreign currency translation

 

 
(233
)
 

 
(233
)
Balance at June 30, 2012
27,737

 
116,682

 
(918
)
 
(112,723
)
 
3,041

Issuance of common stock, net of issuance costs
1,020

 
870

 

 

 
870

Issuance of common stock for settlement of
    convertible notes interest
349

 
401

 

 

 
401

Exercise of stock options and ESPP purchases
167

 
215

 

 

 
215

Issuance of restricted stock
1,130

 
(749
)
 

 

 
(749
)
Share-based compensation

 
4,770

 

 

 
4,770

Stock appreciation rights

 
876

 

 

 
876

Net loss

 

 

 
(19,647
)
 
(19,647
)
Foreign currency translation

 

 
(73
)
 

 
(73
)
Balance at June 30, 2013
30,403

 
$
123,065

 
$
(991
)
 
$
(132,370
)
 
$
(10,296
)

See accompanying notes to consolidated financial statements.



F-5


OVERLAND STORAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)  
 
Fiscal Year
 
2013
 
2012
Operating activities:
 
 
 
Net loss
$
(19,647
)
 
$
(16,161
)
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
Depreciation and amortization
1,248

 
1,610

Provision for losses on accounts receivable
54

 
54

Share-based compensation
4,770

 
4,994

Loss on disposal of property and equipment
27

 
22

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
2,499

 
1,744

Inventories
304

 
(1,222
)
Accounts payable and accrued liabilities
(4,584
)
 
188

Accrued payroll and employee compensation
75

 
(76
)
Other assets and liabilities, net
1,211

 
149

Net cash used in operating activities
(14,043
)
 
(8,698
)
Investing activities:
 
 
 
Purchase of fixed assets
(983
)
 
(868
)
Net cash used in investing activities
(983
)
 
(868
)
Financing activities:
 
 
 
Proceeds from issuance of common stock, net of issuance costs
870

 
6,579

Payment for restricted stock tax liability on net settlement
(749
)
 
(831
)
Proceeds from exercise of outstanding warrants

 
160

Proceeds from exercise of stock options and ESPP purchases
215

 
523

Proceeds from borrowings, net

 
3,500

Proceeds from convertible notes, net of issuance costs
13,002