UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________________
FORM 10-Q
_____________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
           
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)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  
Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company x
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).    Yes  ¨    No  x
As of November 6, 2014, there were 17,690,908 shares of the registrant's common stock, no par value, issued and outstanding.
 



OVERLAND STORAGE, INC.
FORM 10-Q

Table of Contents
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 

2

PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements.
OVERLAND STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
Three Months Ended
 
September 30,
 
2014
 
2013
 
 
 
 
 
(Unaudited)
Net revenue:
 
 
 
Product revenue
$
19,256

 
$
6,133

Service revenue
3,640

 
4,473

 
22,896

 
10,606

Cost of product revenue
14,983

 
5,377

Cost of service revenue
1,551

 
1,660

Gross profit
6,362

 
3,569

Operating expenses:
 
 
 
Sales and marketing
5,586

 
3,745

Research and development
1,920

 
1,309

General and administrative
5,811

 
2,611

 
13,317

 
7,665

Loss from operations
(6,955
)
 
(4,096
)
Investment income
1,801

 
—

Interest expense
(364
)
 
(314
)
Other income (expense), net
(381
)
 
(161
)
Loss before income taxes
(5,899
)
 
(4,571
)
Provision for income taxes
1,395

 
19

Net loss
$
(7,294
)
 
$
(4,590
)
Net loss per share:
 
 
 
Basic and diluted
$
(0.42
)
 
$
(0.75
)
Shares used in computing net loss per share:
 
 
 
Basic and diluted
17,567

 
6,145

See accompanying notes to condensed consolidated financial statements.

3

OVERLAND STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
 
Three Months Ended
 
September 30,
 
2014
 
2013
 
 
 
 
 
(Unaudited)
 
 
 
 
Net loss
$
(7,294
)
 
$
(4,590
)
Other comprehensive income (loss):
 
 
 
Change in unrealized gains on related party short-term investment, net of income tax of
     $1,021 and $0, respectively
(1,849
)
 
1,384

Reclassification of realized gains on related party short-term investment included in net income,
      net of income tax of $639 and $0, respectively
(1,162
)
 
—

Foreign currency translation adjustments
57

 
75

Total other comprehensive income (loss)
(2,954
)
 
1,459

Comprehensive loss
$
(10,248
)
 
$
(3,131
)
See accompanying notes to condensed consolidated financial statements.

4

OVERLAND STORAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
September 30,
2014
 
June 30,
2014
 
 
 
 
 
(Unaudited)
Assets
 
 
 
Current assets:
 
 
 
Cash
$
3,452

 
$
4,262

Short-term investment — related party
3,444

 
7,814

Accounts receivable, net of allowance for doubtful accounts of $61 and $31, respectively
13,292

 
14,171

Inventories
15,821

 
15,525

Other current assets
3,417

 
2,419

Total current assets
39,426

 
44,191

Property and equipment, net
5,802

 
5,799

Goodwill
19,044

 
19,044

Intangible assets, net
23,142

 
23,784

Other non-current assets
1,331

 
1,121

Total assets
$
88,745

 
$
93,939

Liabilities and Shareholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,454

 
$
11,159

Accrued liabilities
6,731

 
6,780

Accrued payroll and employee compensation
3,930

 
3,561

Income taxes payable
128

 
118

Accrued warranty
942

 
994

Deferred revenue
7,254

 
7,941

Other current liabilities
1,487

 
1,874

Current portion of debt
5,137

 
—

Total current liabilities
39,063

 
32,427

Deferred revenue, long-term
3,171

 
3,371

Long-term debt — related party
17,278

 
14,528

Long-term debt
—

 
5,406

Other long-term liabilities
1,794

 
1,413

Total liabilities
61,306

 
57,145

Commitments and contingencies (Note 11)


 


Shareholders’ equity:
 
 
 
Preferred stock, no par value, 1,000 shares authorized; no shares issued and outstanding as of September 30, 2014 and June 30, 2014
—

 
—

Common stock, no par value, 125,000 shares authorized; 17,586 and 17,540 shares issued and outstanding as of September 30, 2014 and June 30, 2014, respectively
188,326

 
187,434

Accumulated other comprehensive income
1,700

 
4,654

Accumulated deficit
(162,587
)
 
(155,294
)
Total shareholders’ equity
27,439

 
36,794

Total liabilities and shareholders’ equity
$
88,745

 
$
93,939

See accompanying notes to condensed consolidated financial statements.

5

OVERLAND STORAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Three Months Ended
 
September 30,
 
2014
 
2013
 
 
 
 
 
(Unaudited)
Operating activities:
 
 
 
Net loss
$
(7,294
)
 
$
(4,590
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
896

 
328

Tax provision
1,661

 
—

Gain on sale of short-term investment — related party
(1,801
)
 
—

Share-based compensation
794

 
910

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
879

 
273

Inventories
(295
)
 
333

Accounts payable and accrued liabilities
2,008

 
(1,011
)
Accrued payroll and employee compensation
510

 
(200
)
Deferred revenue
(887
)
 
(580
)
Other assets and liabilities, net
(406
)
 
251

Net cash used in operating activities
(3,935
)
 
(4,286
)
Investing activities:
 
 
 
Proceeds from sale of short-term investment — related party
1,000

 
—

Purchase of fixed assets
(270
)
 
(190
)
Purchase of intangible assets
—

 
(250
)
Net cash provided by (used in) investing activities
730

 
(440
)
Financing activities:
 
 
 
Proceeds from borrowings — related party
2,750

 
—

Repayment of borrowings
(270
)
 
—

Payment for restricted stock tax liability on net settlement
(42
)
 
(224
)
Proceeds from ESPP purchases
23

 
49

Net cash provided by (used in) financing activities
2,461

 
(175
)
Effect of exchange rate changes on cash
(66
)
 
4

Net decrease in cash
(810
)
 
(4,897
)
Cash, beginning of period
4,262

 
8,831

Cash, end of period
$
3,452

 
$
3,934

Supplemental disclosures of non-cash activities:
 
 
 
Sale of short-term investment in other current assets
$
1,000

 
$
—

Fixed asset purchases in accounts payable and accrued liabilities
$
463

 
$
105

Short-term investment — related party
$
500

 
$
481

Equity award fair value adjustment to liability
$
117

 
$
145

Common stock issued for purchase of intangible assets — related party
$
—

 
$
250

See accompanying notes to condensed consolidated financial statements.

6

OVERLAND STORAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
Financial Statement Preparation
Overland Storage, Inc. (“Overland” or the “Company”), incorporated in September 1980, provides data protection solutions designed for backup and recovery to ensure business continuity. The Company has a portfolio of disk-based data protection solutions, including network attached storage (“NAS”) and storage area network (“SAN”) products and solutions, as well as tape-based data protection solutions, including tape and virtual tape library systems, designed for small and medium business computing environments.
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Overland and its wholly-owned subsidiaries, including Tandberg Data Holdings S.à r.l. (“Tandberg”) which the Company acquired on January 21, 2014. All intercompany balances and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These condensed consolidated statements do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are normal and recurring, necessary for a fair statement of the Company's condensed consolidated results of operations, comprehensive loss, financial position, and cash flows as of September 30, 2014, and for all periods presented. The results reported in these condensed consolidated financial statements for the three months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2014.
The Company operates its business in one operating segment.
Effective the second quarter of fiscal 2014, the Company changed how it reports its operations to use a 52-week fiscal year end with each year ending on June 30, compared to prior year reporting using a 52-53 week fiscal year with each year ending on the Sunday closest to June 30. The first quarter of fiscal 2014 ended September 29, 2013.
The Company has incurred losses since fiscal 2006 and negative cash flows from operating activities since fiscal 2007. As of September 30, 2014, the Company had an accumulated deficit of $162.6 million. During the first quarter of fiscal 2015, the Company incurred a net loss of $7.3 million. The Company expects to incur negative operating cash flows during the continued period of integration for its acquisition completed in January 2014 as the Company works to improve operational efficiencies.
The Company has projected its cash on hand, its short-term investment (the common shares of Sphere 3D the Company owns), available borrowings under the Company's credit facility, and other sources of funding will be sufficient to allow the Company to continue operations for the next 12 months. Significant changes from the Company's current forecast, including but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, (iv) changes in the historical timing of collecting accounts receivable, and/or (v) the Company's inability to liquidate its short-term investment could have a material adverse impact on the Company's ability to access the level of funding necessary to continue its operations at current levels. If any of these events occur or if we are not able to secure additional funding (including from Sphere 3D), the Company 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 the Company's business, results of operations and future prospects, and/or prevent us from consummating the proposed merger with Sphere 3D. The Company may seek debt, equity or equity-based financing (such as convertible debt) when market conditions and the merger agreement with Sphere 3D permit.
The Company's recurring losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

7

Reverse Stock Split
On April 9, 2014, the Company filed a certificate of amendment to its Amended and Restated Certificate of Incorporation with the Secretary of the State of California effecting a one-for-five reverse split of the Company's capital stock. All share, per share, and stock option data information in the accompanying consolidated financial statements and the notes thereto have been restated for all periods to reflect the reverse stock split.
Proposed Merger
In May 2014 and amended in October 2014, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Sphere 3D Corporation (“Sphere 3D”).
Pursuant to the terms of the merger agreement, upon the consummation of the merger, the Company would become a wholly owned subsidiary of Sphere 3D. The merger is expected to close in the second quarter of fiscal 2015.
At the effective time of the merger, each issued and outstanding share of common stock of the Company will be canceled and automatically converted into the right to receive 0.46385 shares of common stock of Sphere 3D, subject to adjustment in certain circumstances. The Merger Agreement contains customary reciprocal operating covenants as well as customary negative covenants. Additionally, the Company is subject to a “no-shop” restriction on its ability to solicit alternative acquisition proposals, provide information to third parties and engage in discussions with third parties (subject to exceptions in certain limited circumstance).
The Merger Agreement contains certain termination rights for both the Company and Sphere 3D. The Merger Agreement provides that, upon termination under specified circumstances, the Company would be required to pay Sphere 3D a termination fee of $3.5 million. The Company and Sphere 3D are entitled to seek specific performance in order to enforce one another's obligations under the Merger Agreement.
The Company's shareholders will be asked to vote on the approval of the Merger Agreement and the Merger at a special shareholders' meeting that will be held on a date to be announced. The closing of the Merger is subject to a condition that the Merger be approved by the affirmative vote of the holders of a majority of all outstanding shares of common stock of the Company. Consummation of the Merger is also subject to certain customary closing conditions. Certain shareholders of the Company holding a majority of the issued and outstanding shares of common stock of the Company have entered into voting agreements with Sphere 3D pursuant to which they have agreed to vote their shares of common stock in favor of the Merger at the special meeting. The Merger is not conditioned upon Sphere 3D obtaining additional financing.
The Board of Directors of the Company approved the Merger Agreement on May 15, 2014, with Eric Kelly abstaining (in order to avoid any appearance of conflict of interest resulting from his position as a director of Sphere 3D) and Daniel Bordessa abstaining (in order to avoid any appearance of conflict of interest resulting from his position as a nominee of Cyrus Capital Partners, the majority shareholder of the Company, and a holder of certain debt securities of Sphere 3D).
The terms of the Merger Agreement did not impact the Company's consolidated financial statements as of and for the period ended September 30, 2014.
Fair Value of Financial Instruments
Financial instruments including cash, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which management believes approximates fair value because of the short-term maturity of these instruments. Short-term investment is measured at fair value using Level 1 inputs from the TSX Venture Exchange on which the stock is traded. The carrying amount of the credit facilities borrowings approximate their fair value as the interest rate of the credit facilities are substantially comparable to rates offered for similar debt instruments. At September 30, 2014, the fair value of related party long-term debt is estimated at $14.0 million using an estimated interest rate of 12%, and is classified within Level 3 of the fair value hierarchy. At September 30, 2014, the carrying value of the related party long-term debt was $17.3 million.

8

The framework for measuring fair value provides a hierarchy that prioritizes the inputs to valuation techniques used in measuring fair value as follows:
Level 1 -
Quoted prices (unadjusted) in active markets for identical assets or liabilities,
 
 
Level 2 -
Inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data, and
 
 
Level 3 -
Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. If not discussed, the Company believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's consolidated financial statements upon adoption.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern. ASU 2014-15 provides that in connection with preparing financial statements for each annual and interim reporting period, an entity's management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 will be effective for the annual reporting period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The impact on our financial condition, results of operations and cash flows as a result of the adoption of ASU 2014-15 has not yet been determined.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a single comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The impact on our financial condition, results of operations and cash flows as a result of the adoption of ASU 2014-09 has not yet been determined.
In July 2013, the FASB, issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 provides that an entity is required to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance affected presentation only and, therefore, did not have a material impact on the Company's consolidated financial results.

9

NOTE 2 — BUSINESS COMBINATION
On January 21, 2014, the Company acquired Tandberg, a privately held provider of data storage and data protection solutions, for a purchase price of approximately $49.0 million, which was paid in shares of the Company's common stock. The shareholders of Tandberg received 9,430,526 shares of the Company's common stock at $5.20 per share. This acquisition expanded the Company's number of global channel and service partners, product lines and service offerings, as well as expanded the Company's market reach in Europe and the Asia-Pacific region.
A summary of the estimated fair values of the assets acquired and liabilities assumed as of the closing date (in thousands):
Cash and cash equivalents
 
$
1,715

Restricted cash
 
400

Accounts receivable
 
7,571

Inventories
 
6,416

Property and equipment
 
3,763

Identifiable intangible assets
 
24,260

Other assets
 
1,959

Total identifiable assets acquired
 
46,084

Current liabilities
 
(13,796
)
Other liabilities
 
(2,293
)
Total identifiable liabilities assumed
 
(16,089
)
Net identifiable assets acquired
 
29,995

Goodwill
 
19,044

Net assets acquired
 
$
49,039

Goodwill is comprised of expected synergies from combining Tandberg's operations with that of the Company, reduction in future combined research and development expenses, and intangible assets, such as acquired workforce, that do not qualify for separate recognition.
The fair value estimates for the assets acquired and liabilities assumed for the acquisition were based on estimates and analysis, including work performed by third-party valuation specialists. None of the goodwill recognized upon acquisition is deductible for tax purposes.
The following unaudited pro forma combined financial information gives effect to the acquisition as if it were consummated on July 1, 2012 (the beginning of the earliest fiscal period presented). The unaudited pro forma combined financial information is presented for informational purposes only, is not intended to represent or be indicative of the results of operations of the Company that would have been reported had the acquisition occurred on July 1, 2012, and should not be taken as representative of future consolidated results of operations of the combined company (in thousands):
 
Three Months Ended
 
 
September 30, 2013
 
 
 
 
Net revenue
 
$
24,323

Net loss
 
$
(6,996
)
Net loss per share
 
$
(0.40
)

10

NOTE 3 — SHORT-TERM INVESTMENT - RELATED PARTY
In July 2013, the Company entered into a supply agreement with Sphere 3D Corporation (“Sphere 3D”). For certain payments under the supply agreement, Sphere 3D has issued common shares to the Company. Sphere 3D's common shares are traded on the TSX Venture Exchange and the NASDAQ Global Market. The short-term investment is classified as available-for-sale marketable securities. See note 6 for additional related party disclosure.
The following summarizes short-term investments (in thousands):
 
 
September 30, 2014
 
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Short-term investment — related party
 
$
781

 
$
2,801

 
$
(138
)
 
$
3,444

 
 
June 30, 2014
 
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Short-term investment — related party
 
$
481

 
$
7,333

 
$
—

 
$
7,814

As of September 30, 2014, a portion of the Company's investment in Sphere 3D is in a gross unrealized loss position, all of which had been in such position for less than twelve months. Based on the Company's review of these securities, the Company believes it had no other-than-temporary impairments on these securities as of September 30, 2014.
NOTE 4 — INVENTORIES
The following table summarizes inventories (in thousands):
 
September 30,
2014
 
June 30,
2014
Raw materials
$
4,652

 
$
4,767

Work in process
843

 
875

Finished goods
10,326

 
9,883

 
$
15,821

 
$
15,525


11

NOTE 5 — INTANGIBLE ASSETS
The following table summarizes purchased intangible assets (in thousands):
 
September 30,
2014
 
June 30,
2014
Developed technology
$
23,467

 
$
23,467

Customer contracts and trade names
3,853

 
3,853

Customer relationships(1)
1,043

 
1,120

 
28,363

 
28,440

Less: Accumulated amortization
(7,321
)
 
(6,756
)
Total finite-lived intangible assets, net
21,042

 
21,684

Indefinite lived intangible assets - trade name
2,100

 
2,100

Total intangible assets, net
$
23,142

 
$
23,784

____________________
(1)
Includes the impact of foreign currency exchange rate fluctuations.
 
Amortization expense of intangible assets was $0.6 million and $0.2 million during the first quarter of fiscal 2015 and 2014, respectively. Estimated amortization expense for intangible assets is approximately $1.7 million for the remainder of fiscal 2015 and $2.2 million, $2.0 million, $1.8 million, $1.8 million and $1.8 million in fiscal 2016, 2017, 2018, 2019, and 2020, respectively.
NOTE 6 — RELATED PARTY
In July 2013, the Company entered into a supply agreement, and a technology license agreement, with Sphere 3D. As consideration for the transactions contemplated by the technology license agreement, the Company paid Sphere 3D $250,000 in cash and issued Sphere 3D shares of common stock with a value at the time of issuance of approximately $250,000. As payments under the supply agreement, Sphere 3D issued common shares with a value as of the date of issuance equal to approximately $0.5 million to the Company during both the three months ended September 30, 2014 and 2013.
During the quarter ended September 30, 2014, Sphere 3D entered into a commercial relationship with a third party customer to sell a license to its Glassware product. The customer required that the Glassware product be provided through one of its preapproved distribution partners. Sphere 3D did not have a relationship with such distribution partner and in order to facilitate such transaction on a timely basis, Sphere 3D and Overland agreed that Overland would purchase the Glassware product from Sphere 3D and resell it to the distribution partner, with whom Overland had a preexisting relationship. As a result, Overland issued a purchase order of approximately $0.3 million for the Glassware products being supplied through the distribution partner.
In connection with the July 2013 Sphere 3D transaction, Eric Kelly, the Company's President and Chief Executive Officer, was appointed 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 approximately $0.63.
At September 30, 2014, the Company had $0.6 million, $0.3 million, $0.6 million, and $0.7 million in accounts receivable, inventory, accrued expenses, and other long-term liabilities, respectively, related to the Sphere 3D supply agreement. At June 30, 2014, the Company had $0.5 million and $0.2 million in accounts receivable and other long-term liabilities, respectively, related to the Sphere 3D supply agreement. The Company recognized $0.6 million and zero in revenue related to the supply agreement during the three months ended September 30, 2014 and 2013, respectively. No related party expense, other than debt interest expense, was recognized during the three months ended September 30, 2014 and 2013.

12

NOTE 7 — DEBT
Credit Facility
In August 2011, the Company entered into a loan and security agreement, or credit facility, which allows for revolving cash borrowings up to $8.0 million. The proceeds of the credit facility may be used to fund the Company's working capital and to fund its general business requirements. The obligations under the credit facility are secured by substantially all assets of the Company other than 65% of the stock of its foreign subsidiaries, which are pledged under the Company's convertible notes. Borrowings under the credit facility bear interest at the prime rate (as defined in the credit facility) plus a margin of either 1.00% or 1.25%, depending on the Company's liquidity coverage ratio. The Company is also obligated to pay other customary facility fees and arrangement fees for a credit facility of this size and type. In August 2013, the credit facility was amended to extend the scheduled maturity date to August 7, 2015 and add a separate line of credit in the amount of $750,000 for letters of credit, foreign exchange contracts, and cash management. In March 2014, the credit facility was amended to provide for a $3.0 million sublimit for advances to one of the Company's subsidiaries. Borrowings under the sublimit bear interest at the prime rate (as defined in the credit facility) plus a margin of either 2.00% or 2.25%, depending on the Company's net cash. At September 30, 2014, the interest rates on the credit facility and the sublimit were 4.5% and 5.5%, respectively.
The credit facility requires the Company to comply with a liquidity coverage ratio and contains customary covenants, including covenants that limit or restrict the Company's and its subsidiaries' ability to incur liens and indebtedness, make certain types of payments, merge or consolidate, and make dispositions of assets. The credit facility specifies customary events of default (some of which are subject to applicable grace or cure periods) including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and material judgment defaults. Upon the occurrence of an event of default under the credit facility, the lender may cease making loans, terminate the credit facility, and declare all amounts outstanding to be immediately due and deduct such amounts from the Company’s lockbox account on deposit with the bank. At September 30, 2014, the Company was in compliance with all covenants of the credit facility.
At September 30, 2014 and June 30, 2014, the Company had $5.1 million and $5.4 million, respectively, outstanding on the credit facility. At September 30, 2014, an external borrowing capacity of up to $2.9 million remained on the credit facility. Payment is due in full upon maturity on August 7, 2015.
Convertible Notes - Related Party
In February 2013, the Company entered into a note purchase agreement (the “NPA”) with the purchasers party thereto (the “Purchasers”), including certain affiliates of Cyrus Capital Partners, L.P. (the “Cyrus Purchasers”), which was amended in March 2013. The Company sold to the Purchasers convertible promissory notes (the “Initial Notes”) of the Company in an aggregate original principal amount of $13.25 million. On November 1, 2013, the Company amended and restated the NPA and agreed to sell additional convertible promissory notes (the “Additional Notes” and, together with the Initial Notes, the “Notes”) to the Cyrus Purchasers. The Company issued the Additional Notes in amounts of $3.0 million, $2.0 million, and $2.0 million on November 12, 2013, December 24, 2013, and January 21, 2014, respectively.
The Initial Notes are scheduled to mature in February 2017. The Additional Notes are scheduled to mature four years from date of issuance. Debt issuance costs of $0.3 million have been included in other assets and will be amortized over the term of the Notes. The Notes bear interest at a rate of 8% per annum, payable semi-annually.
On November 8, 2013, the Company issued 1,649,579 shares of common stock to the Purchasers in satisfaction of approximately $10.7 million of the Initial Notes. On November 8, 2013, the Cyrus Purchasers, the beneficial owners of Tandberg, became the sole holders of the outstanding Notes. In January 2014, the Company completed the acquisition of Tandberg.
At September 30, 2014 and June 30, 2014, the Notes' principal balance was $9.5 million and has been recorded as long-term debt — related party. No payments of principal are due within the next 12 months.
Through July 2015, the Company may, subject to certain limitations, pay interest in cash or in shares of common stock at its option. Subsequent to July 2015, if at any time the Cyrus Purchasers hold 20% or more of the then outstanding common stock,

13

the Cyrus Purchasers (and not the Company) will have the option to determine whether the applicable interest payment payable to the Cyrus Purchasers during such time is payable in cash or shares of common stock. The number of shares of common stock that may be issued as payment of interest on the Notes will be determined by dividing the amount of interest due to the holders of the Notes by the volume weighted average of the closing prices of one share of common stock as reported on the NASDAQ Capital Market for the 20 consecutive trading days up to and including the trading day on the third trading day prior to the valuation date, using the interest payment due date as the valuation date; provided the Company may not pay interest in shares of common stock at a price per share lower than, in the case of the Initial Notes, $4.90, and in the case of the Additional Notes, $4.50 (in each case as adjusted from time to time for items such as stock splits, combinations, reclassifications, or recapitalizations). In the event of a share price lower than, in the case of the Initial Notes, $4.90, and in the case of the Additional Notes, $4.50, the Company has the option to pay interest in a combination of shares of common stock and cash so long as the number of shares of common stock that the Company issues does not exceed the quotient obtained by dividing the interest payable at such time by, in the case of the Initial Notes, $4.90, and in the case of the Additional Notes, $4.50, and the difference between the amount of the interest paid in shares and the average closing price of the shares of common stock, determined as described above, will be payable in cash. Interest expense for the Notes was $0.2 million and $0.3 million for the three months ended September 30, 2014 and 2013, respectively.
The Cyrus Purchasers may elect to convert all or a portion of the outstanding principal amount of such Purchaser's Note into shares of common stock (subject to certain limitations) in an amount equal to the principal amount of the Notes being converted divided by, in the case of the Initial Notes, $6.50, and in the case of the Additional Notes, $5.00, in each case subject to adjustment as set forth in the NPA, such as stock splits.
The Company may, at its option, convert the outstanding Initial Notes or Additional Notes, as applicable, into shares of common stock (subject to certain limitations) on the first trading day immediately following the date that the closing bid price of the common stock exceeds, in the case of the Initial Notes, $13.00, and in the case of the Additional Notes, $7.50, for 10 consecutive trading days.
The obligations under the Notes are secured by a pledge of 65% of the Company's stock in each of its foreign subsidiaries.
The NPA contains customary covenants, including covenants that limit or restrict the Company's ability to incur liens, incur indebtedness, or make certain restricted payments. Upon the occurrence of an event of default under the NPA, the Cyrus Purchasers may declare all amounts outstanding to be immediately due and payable. The NPA specifies a number of events of default (some of which are subject to applicable grace or cure periods) including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and material judgment defaults. In the event of default, the interest rate shall automatically increase to 11%. The Company has also granted certain registration rights to the Notes' Purchasers. At September 30, 2014, the Company was in compliance with all covenants of the Notes.
Note Payable - Related Party
In May 2014, the Company issued a note to Sphere 3D, which was amended and restated on September 8, 2014 to increase the principal amount under the note to the greater of the amount actually borrowed from Sphere 3D and $10 million. The note is subordinated to certain existing indebtedness and is secured by the Company's inventory and shares of common stock of Sphere 3D owned by the Company. The note bears interest at the prime rate (as defined in the agreement) plus 2% which is payable in kind semi-annually through an increase in the principal balance of the note. At September 30, 2014, the interest rate on the note was 5.25% and the principal balance was $7.8 million, recorded as long-term debt - related party. Interest expense for the note was $0.1 million and zero during the three months ended September 30, 2014 and 2013, respectively.
The note is payable in full in one lump sum on May 15, 2018; provided however that immediately prior to the closing of the proposed merger with Sphere 3D, the note is required to be repaid in shares of common stock of Sphere 3D owned by the Company with a value equal to the total borrowings under the note, and to the extent the note is not repaid in full by such transfer of shares, any remaining portion of the note will remain outstanding following the completion of the merger. In addition, following the September 2014 amendment of the note, the Company may not sell any shares of Sphere 3D common stock without the prior consent of Sphere 3D to such sale.

14

NOTE 8 — EQUITY
Restricted Stock
During the first quarter of fiscal 2015, the Company issued 38,555 shares of common stock in conjunction with vested restricted stock units. The restricted stock unit holders surrendered 10,696 restricted stock units to pay for minimum withholding taxes totaling $42,000. During the first quarter of fiscal 2014, the Company issued 89,659 shares of common stock in conjunction with vested restricted stock units, and the restricted stock unit holders surrendered 40,641 restricted stock units to pay for minimum withholding taxes totaling $0.2 million. Options and restricted stock units outstanding were approximately 2.1 million shares and 2.2 million shares as of September 30, 2014 and June 30, 2014, respectively.
Employee Stock Purchase Plan
During the first quarter of fiscal 2015 and 2014, the Company issued 7,973 and 10,871, respectively, shares of common stock purchased through the Company's 2006 employee stock purchase plan.
NOTE 9 — NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss applicable to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed based on the weighted-average number of shares of common stock outstanding during the period increased by the weighted-average number of dilutive common stock equivalents outstanding during the period, using the treasury stock method. Dilutive common stock equivalents are comprised of options granted under the Company's stock option plans, employee stock purchase plan (“ESPP”) share purchase rights, convertible notes, and common stock purchase warrants. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company's net loss position.
Anti-dilutive common stock equivalents excluded from the computation of diluted net loss per share were as follows (in thousands):
 
Three Months Ended
 
September 30,
 
2014
 
2013
Restricted stock not yet vested and released
1,854

 
419

Options outstanding and ESPP share purchase rights
277

 
309

Common stock purchase warrants
2,875

 
2,726

Convertible notes
1,789

 
2,038

Convertible notes interest
523

 
795

NOTE 10 — INCOME TAXES
The Company recognizes the impact of an uncertain income tax position on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company had no material accrual for interest and penalties in its condensed consolidated balance sheets at September 30, 2014 and June 30, 2014, and recognized no interest or penalties in the condensed consolidated statements of operations for the three months ended September 30, 2014 and 2013.
The Company's ability to use its net operating loss and research and development credit carryforwards may be substantially limited due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. The Company has not completed a study

15

to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company became a “loss corporation” under the definition of Section 382. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
Warranty and Extended Warranty
The Company had $1.0 million and $1.1 million in deferred costs related to deferred service revenue at September 30, 2014 and June 30, 2014, respectively. Changes in the liability for product warranty and deferred revenue associated with extended warranties and service contracts were as follows (in thousands):
 
Product
Warranty
 
Deferred
Revenue
Liability at June 30, 2014
$
1,419

 
$
10,216

Settlements made during the period
(44
)
 
(2,661
)
Change in liability for warranties issued during the period(1)
113

 
1,947

Change in liability for pre-existing warranties
(159
)
 
—

Liability at September 30, 2014
$
1,329

 
$
9,502

 
 
 
 
Current liability
$
942

 
$
6,397

Non-current liability
387

 
3,105

Liability at September 30, 2014
$
1,329

 
$
9,502

____________________
(1)
Includes the impact of foreign currency exchange rate fluctuations.
Litigation
From time to time, the Company may be involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. Management does not believe any legal proceedings or claims pending at September 30, 2014 will have, individually or in the aggregate, a material adverse effect on its business, liquidity, financial position, or results of operations. 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 the Company's business.

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Proposed Merger
In May 2014, the Company announced that it had signed an agreement and plan of merger by and among the Company and Sphere 3D. Since the merger was announced, four separate putative shareholder class action lawsuits were filed against the Company, all of its directors, and Sphere 3D in the California Superior Court in and for the County of San Diego. Three of the lawsuits also named Cyrus Capital Partners, the majority shareholder of the Company, as a defendant. On June 25, 2014, the Superior Court entered an order providing for the consolidation of all cases relating to the Company's decision to enter into the merger agreement with Sphere 3D. These cases have been consolidated before a single judge and are referred to as In re Overland Storage Inc., Shareholders Litigation, Lead Case No. 37-2014-00016017-CU-SL-CTL. On July 30, 2014, the plaintiffs filed their consolidated amended complaint. The lawsuit alleges breaches of fiduciary duties and conflicts of interest against the Company's directors relating to the merger process, the terms of the merger agreement, and the consideration to be received by Company shareholders under the terms of the merger agreement. The lawsuit alleges that the other defendants aided and abetted the purported breaches of fiduciary duties by the Company's directors. The relief sought includes an injunction prohibiting the consummation of the proposed merger, rescission of the merger to the extent already implemented or rescissory damages, damages, and an award of attorneys' fees and costs.
On October 13, 2014, the plaintiffs and the Company Defendants entered into a memorandum of understanding (the “Memorandum of Understanding”) to settle the Consolidated Action and Merger Actions. The Memorandum of Understanding provides, among other things, that additional disclosures would be made concerning the analysis performed by the Company’s financial advisor relating to the proposed merger, the Company’s management projections, and the circumstances leading up to the proposed merger.
While the Company believes that the lawsuits are without merit, and the Company specifically denies the allegations made in the lawsuits and maintains that it and the other defendants committed no wrongdoing whatsoever, to permit the timely consummation of the proposed merger, and without admitting the validity of any allegations made in the lawsuits, the Company concluded that it is desirable that the Consolidated Action and Merger Actions be resolved. The proposed settlement of the Consolidated Action and Merger Actions, which is subject to confirmatory discovery and court approval, provides for the release of all claims against the defendants relating to the proposed merger and the allegations in the Consolidated Action and Merger Actions. There can be no assurance that the settlement will be finalized or that the Superior Court will approve the settlement.
Patent Infringement
In August 2010 and October 2010, the Company 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 the Company's U.S. Patents, Nos. 6,328,766 and 6,353,581.
In November 2011, the Company entered into a multi-year settlement and cross-licensing agreement with IBM pursuant to which the Company released all claims it had against IBM and Dell Inc. in connection with the patent infringement lawsuits the Company had filed.
In July 2014, the Company entered into a settlement and cross-license agreement with BDT pursuant to which the Company released all claims it had against BDT. In connection with the settlement, the Company also dismissed its patent infringement claims filed against PivotStor, LLC, a BDT customer based in Irvine, California, which was pending in the United States District Court for the Southern District of California.
In June 2012, the Company filed patent infringement lawsuits in the United States District Court for the Southern District of California against Spectra Logic Corporation (“Spectra Logic”), based in Boulder, Colorado, and Qualstar Corporation (“Qualstar”), based in Simi Valley, California. In the Spectra Logic case, the Company claimed infringement of U.S. Patent Nos. 6,328,766 and 6,353,581. In the Qualstar case, the Company claimed infringement of U.S. Patent No. 6,328,766.
In June 2013, Spectra Logic filed a Petition for Inter Partes Review of the claims of U.S. Patent No. 6,328,766 with the United States Patent and Trademark Office. The petition has been assigned Case No. IPR2013-00357. In December 2013, the

17

United States Patent and Trademark Office initiated an inter partes review proceeding involving U.S. Patent No. 6,328,766. On November 7, 2014, the United States Patent and Trademark Office issued a Final Written Decision finding claims 1-11 of U.S. Patent No. 6,328,766 to be unpatentable. The Company has the option to appeal the decision to the United States Court of Appeals for the Federal Circuit.
In January and February 2014, the District Court for the Southern District of California stayed the Company's litigation against Qualstar and Spectra Logic, respectively, pending the results of the inter partes review filed by Spectra Logic. The Company is continuing to pursue its claims against Spectra Logic and Qualstar.
In May 2013, Safe Storage LLC (“Safe Storage”), a Delaware limited liability company, filed a complaint against the Company in the United States District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,978,346 by the Company's products. Safe Storage is seeking monetary damages from the Company and injunctive relief.
Patent Litigation Funding Agreement
In December 2010, the Company entered into a litigation funding agreement (the “Funding Agreement”) with Special Situations Fund III QP, L.P., Special Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P., and Special Situations Technology Fund II, L.P. (collectively, the “Special Situations Funds”) pursuant to which the Special Situations Funds agreed to fund certain patent litigation brought by the Company. In May 2014, the Special Situations Funds filed a complaint against the Company in the Supreme Court for New York County, alleging breach of the Funding Agreement. The Special Situations Funds allege that the Company's January 2014 acquisition of Tandberg Data entitled the Special Situation Funds to a $6.0 million payment under the Funding Agreement, and therefore the Company's refusal to make the payment constitutes a breach of the Funding Agreement by the Company. The Special Situations Funds are seeking $6.0 million in contractual damages as well as costs and fees. The Company believes the lawsuit to be without merit and intends to vigorously defend against the action.
NOTE 12 — SUBSEQUENT EVENTS
Note Payable - Related Party
On October 13, 2014, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with FBC Holdings S.à r.l. (the “Lender”), the majority shareholder of the Company and an affiliate of Cyrus Capital Partners, L.P. Pursuant to the Loan Agreement, the Lender loaned to the Company $7.5 million (the “Loan”). The Loan is scheduled to mature on the second anniversary of the funding date of the Loan; provided, however, that if the closing of the proposed merger between the Company and Sphere SD does not occur prior to January 12, 2015, the Company shall be required to pay the Loan in full on such date, together with all accrued and unpaid interest thereon. Outstanding principal under the Loan will bear interest at 8.0% simple interest per annum, payable semi-annually in arrears on the last day of June and December of each year.
On October 14, 2014, the Company paid $2.5 million of the Company’s outstanding note payable to Sphere 3D.
Amendment to Merger Agreement
On October 13, 2014, the Company entered into an Amendment to Agreement and Plan of Merger (the “Amendment to the Merger Agreement”) with Sphere 3D. Pursuant to the Amendment to the Merger Agreement, Sphere 3D consented to the entry by the Company into the Loan Agreement with the Lender and the completion of the transactions contemplated thereby. Sphere 3D additionally agreed to guaranty $2.5 million in principal amount of the Loan as described above and to permit the Company to transfer 25,000 shares of common stock of Sphere 3D to the holders of the existing convertible notes issued by the Company (all of which are affiliates of the Lender) as a fee for waiving the debt and lien restrictions under such convertible notes.
In exchange for the consent of Sphere 3D to the entry by the Company into the Loan Agreement and the issuance of shares of common stock by Sphere pursuant to the Conversion and the Waiver Issuance, the Company agreed in the Amendment to the Merger Agreement to reduce the Exchange Ratio from 0.510594 to 0.46385, subject to adjustment in certain circumstances.

18

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, but are not limited to: our anticipated closing of the merger with Sphere 3D; our ability to successfully integrate the businesses of Tandberg Data with our other businesses; our ability to maintain and increase sales volumes of our products; our ability to continue to aggressively control costs and operating expenses; our ability to achieve the intended cost savings and maintain quality with our manufacturing partner; our ability to generate cash from operations; the ability of our suppliers to provide an adequate supply of components for our products at prices consistent with historical prices; our ability to raise outside capital and to repay our debt as it comes due; our ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new products introduced by our competitors; our ability to maintain strong relationships with branded channel partners; our ability to maintain the listing of our common stock on the NASDAQ Capital Market; customers', suppliers', and creditors' perceptions of our continued viability; rescheduling or cancellation of customer orders; loss of a major customer; our ability to enforce our intellectual property rights and protect our intellectual property (including the outcome of our ongoing patent litigation); general competition and price measures in the market place; unexpected shortages of critical components; worldwide information technology spending levels; and general economic conditions. In evaluating such statements we urge you to specifically consider various factors identified in this report, including the matters set forth under the heading “Risk Factors” in Item 1A of Part II of this report, and set forth in our annual report on Form 10-K for the fiscal year ended June 30, 2014 filed with the Securities and Exchange Commission (“SEC”) on September 23, 2014 under the caption “Risk Factors” in Item 1A of Part I, any of which could cause actual results to differ materially from those indicated by such forward-looking statements. Share and per share amounts herein have been adjusted to give effect to the April 9, 2014 one-for-five reverse stock split.
We are a trusted global provider of unified data management and data protection solutions across the data lifecycle. We provide an integrated range of technologies and services for primary, nearline, offline, and archival data storage. Our solutions consolidate and protect data for easy and cost-effective management of different tiers of information whether the distributed data is local or global based. In May 2014, we announced that we entered into a definitive agreement for a proposed merger with Sphere 3D, which is intended to bring together next generation technologies for virtualization and cloud coupled with end-to-end scalable storage offerings, allowing the combined company to address the growing virtualization and cloud markets upon the consummation of the merger.
We develop and deliver a comprehensive solution set of award-winning products and services for storing data throughout the organization and during the entire data lifecycle. Our SnapScale® clustered network attached storage (“NAS”) products allow customers to scale-out in capacity and performance as their storage needs grow. Our SnapServer® products are unified NAS servers that integrate into businesses requiring simple, expandable block and file storage. Our SnapSAN® products are storage area network (“SAN”) arrays designed to ensure primary and secondary data is accessible and protected regardless of its location. Our SnapScale®, SnapServer®, and SnapSAN® solutions are available with backup, replication, and mirroring software in highly scalable configurations. These solutions provide simplified disk-based data protection and maximum flexibility to protect mission critical data for both continuous local backup and remote disaster recovery. Our NEO Series®, StorageLoader®, and StorageLibrary® tape library solutions are designed to meet the need for cost-effective, reliable data storage for long-term archiving and data storage compliance requirements, offering a wide range of capacity, performance and feature sets.
In January 2014, we completed our acquisition of Tandberg Data Holdings S.à r.l. (“Tandberg Data”) which added a range of RDX® products including RDX QuikStor®, RDX QuikStation® and RDX® media, as well as additional tape automation solutions. Our RDX QuikStor® and QuikStation® removable media-based storage systems offer reliable and convenient storage for backup, archive, data interchange and disaster recovery.

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Our approach emphasizes long-term investment protection for our customers and reduces the complexities and ongoing costs associated with storage management. Moreover, most of our products are designed with a scalable architecture which enables companies to purchase additional storage as needed, on a just-in-time basis, and make it available instantly without downtime.
End users of our products include small and medium enterprises (“SMEs”), small and medium businesses (“SMBs”), distributed enterprise companies such as divisions and operating units of large multi-national corporations, governmental organizations, and educational institutions. Our products are used in a broad range of industries including financial services, video surveillance, healthcare, retail, manufacturing, telecommunications, broadcasting, research and development, and many others.
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 management and 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 value-added resellers.
We reported net revenue of $22.9 million for the first quarter of fiscal 2015, compared with $10.6 million for the first quarter of fiscal 2014. We reported a net loss of $7.3 million, or $0.42 per share, for the first quarter of fiscal 2015 compared with a net loss of $4.6 million, or $0.75 per share, for the first quarter of fiscal 2014.
Acquisition. In January 2014, we completed our acquisition of Tandberg, a privately held global leader of data storage and data protection solutions in exchange for shares of our common stock, and Tandberg became a wholly-owned subsidiary of the Company. Our financial position and operating performance include the financial position and operating performance of Tandberg from and after January 21, 2014.
Liquidity and capital resources. At September 30, 2014, we had cash and a short-term investment of $3.5 million and $3.4 million, respectively, compared to cash and short-term investment of $4.3 million and $7.8 million at June 30, 2014. In the first quarter of fiscal 2015, we incurred a net loss of $7.3 million. Our credit facility provides for an up to $8.0 million secured revolving loan and may be used to fund our working capital and our general business requirements. At September 30, 2014, we had a balance of $5.1 million recorded as current debt, and a remaining external borrowing capacity of up to $2.9 million. Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during the continued period of integration for our acquisition completed in January 2014 as we work to improve operational efficiencies.
Management has projected that cash on hand, our short-term investment (the common shares of Sphere 3D we own), available borrowings under our credit facility, and other sources of funding will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including, but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, (iv) changes to the historical timing of collecting accounts receivable, and/or (v) our inability to liquidate our short-term investment could have a material adverse impact on our ability to access the level of funding necessary to continue our operations at current levels. If any of these events occur or if we are not able to secure additional funding (including from Sphere 3D), we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects, and/or prevent us from consummating the proposed merger with Sphere 3D. We may seek debt, equity or equity-based financing (such as convertible debt) when market conditions and the merger agreement with Sphere 3D permit.
As of September 30, 2014, we had working capital of $0.4 million, reflecting a decrease in current assets of $4.8 million and an increase in current liabilities of $6.6 million compared to June 30, 2014. The decrease in current assets is primarily attributable to a $4.4 million decrease in our short-term investment in Sphere 3D related to the $2.0 million sale of the short-term investment, and a decrease in unrealized gains. The increase in current liabilities is primarily attributable to a $5.1 million increase in current

20

debt for our credit facility due in August 2015, and a $2.2 million increase in accounts payable and accrued liabilities, offset by a $0.7 million decrease in deferred revenue.
Recent Developments
•
In October 2014, we entered into an Amendment to Agreement and Plan of Merger with Sphere 3D.
•
In October 2014, we entered into a Loan and Security Agreement (the “Loan Agreement”) with FBC Holdings S.à r.l. (the “Lender”), the majority shareholder of the Company and an affiliate of Cyrus Capital Partners, L.P. Pursuant to the Loan Agreement, the Lender loaned to the Company $7.5 million.
•
In October 2014, we announced the launch of our NEO® XL-Series family of automated tape libraries, combining flexibility, density, high-performance and best value for backup, archive and disaster recovery. The NEO® XL-Series has 90TB of data storage capacity, and can increase storage capacity up to 3.5PB by adding additional NEO® XL-Series modules. The 6u form-factor NEO® XL-Series is now available in two configurations, utilizing both LTO5 and LTO6 tape drive technologies, and scales up to 560 slots and 42 tape drives. The NEOxl 60 supports up to three drives with capacity ranging from 90TB to 375TB, and data transfer rates from 504 GB/hour to 4.3TB/hour. The NEOxl 80 supports up to six drives with capacity ranging from 120TB to 500TB, and data transfer rates from 504 GB/hour to 8.6TB/hour. A NEOxl Expansion unit that supports 80 slots/6 drives is also available.
Critical Accounting Policies and Estimates
We describe our significant accounting policies in Note 1, “Operations and Summary of Significant Accounting Policies,” of the notes to the consolidated financial statements included in our annual report on Form 10-K for the fiscal year ended June 30, 2014; and we discuss our critical accounting policies and estimates in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of that report. Unless otherwise described below, there have been no material changes in our critical accounting policies and estimates.

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Results of Operations
The following table sets forth certain financial data as a percentage of net revenue:
 
Three Months Ended
 
September 30,
 
2014
 
2013
Net revenue
100.0
 %
 
100.0
 %
Cost of revenue
72.2

 
66.3

Gross profit
27.8

 
33.7

Operating expenses:
 
 
 
Sales and marketing
24.4

 
35.3

Research and development
8.4

 
12.3

General and administrative
25.4

 
24.6

 
58.2

 
72.2

Loss from operations
(30.4
)
 
(38.5
)
Investment income
7.9

 
—

Interest expense
(1.6
)
 
(3.0
)
Other income (expense), net
(1.7
)
 
(1.5
)
Loss before income taxes
(25.8
)
 
(43.0
)
Provision for income taxes
6.1

 
0.2

Net loss
(31.9
)%
 
(43.2
)%
A summary of our sales mix as a percentage of net revenue:
 
Three Months Ended
 
September 30,
 
2014
 
2013
Disk systems
47.2
%
 
24.8
%
Tape automation systems
17.8

 
26.6

Tape drives and media
19.1

 
6.4

Service
15.9

 
42.2

 
100.0
%
 
100.0
%
The First Quarter of Fiscal 2015 compared with the First Quarter of Fiscal 2014
Net Revenue. Net revenue increased to $22.9 million during the first quarter of fiscal 2015 from $10.6 million during the first quarter of fiscal 2014, an increase of $12.3 million, or 116%. The increase in net revenue as a whole, is a result of our acquisition that was completed in January 2014, which contributed $14.5 million in net revenue in the first quarter of fiscal 2015. The increase from our acquisition was offset by a $0.9 million decrease in revenue from our branded products, primarily as a result of decreased sales volumes of our products sold in APAC and EMEA, and a $1.3 million decrease in service revenue. OEM net revenue accounted for 19.2% and 12.2% of net revenues in the first quarter of fiscal 2015 and 2014, respectively.

22

Product Revenue
Net product revenue increased to $19.3 million during the first quarter of fiscal 2015 from $6.1 million during the first quarter of fiscal 2014. The increase of approximately $13.2 million, or 216%, resulted from our acquisition that was completed in January 2014, which contributed $14.1 million of product revenue in the first quarter of fiscal 2015. The increase from our acquisition was offset by a $0.9 million decrease in revenue from our branded products due to a decrease in sales of our tape automation systems, including tape drives and media, of $0.8 million, and a decrease in sales of our disk systems of $0.1 million.
Service Revenue
Net service revenue decreased to $3.6 million during the first quarter of fiscal 2015 from $4.5 million during the first quarter of fiscal 2014. The decrease of approximately $0.9 million, or 20%,was primarily due to a $1.3 million decrease in our revenue from extended service contracts primarily related to lower tape automation system sales, offset by $0.4 million of service revenue generated by our acquisition that was completed in January 2014.
Gross Profit. Overall gross profit increased to $6.4 million during the first quarter of fiscal 2015 compared to $3.6 million during the first quarter of fiscal 2014. The increase was due to increased sales volumes primarily related to our acquisition completed in January 2014. Gross margin at 27.8% for the first quarter of fiscal 2015 decreased from 33.7% for the first quarter of fiscal 2014.
Product Revenue
Gross profit on product revenue during the first quarter of fiscal 2015 was $4.3 million compared to $0.8 million during the first quarter of fiscal 2014. The increase of $3.5 million, or 437%, was due to increased sales volumes primarily related to our acquisition completed in January 2014. Gross margin on product revenue at 22.2% for the first quarter of fiscal 2015 increased from 12.3% for the first quarter of fiscal 2014 due to higher margins for the sale of products we received through our acquisition that was completed in January 2014.
Service Revenue
Gross profit on service revenue during the first quarter of fiscal 2015 was $2.1 million compared to $2.8 million during the first quarter of fiscal 2014. The decrease of $0.7 million, or 25%, was primarily due to a decrease in our extended service contracts due to a decrease in tape automation system sales. Gross margin on service revenue was 57.4% for the first quarter of fiscal 2015 compared to 62.9% for the first quarter of fiscal 2014 due to allocation of fixed costs over a smaller revenue base.
Share-based Compensation Expense. During the first quarter of fiscal 2015 and 2014, we recorded share-based compensation expense of approximately $0.8 million and $0.9 million, respectively. Share-based compensation expense for the remainder of fiscal 2014 is expected to be approximately $4.8 million.
The Company recorded the following compensation expense related to its share-based compensation awards (in thousands):
 
Three Months Ended
 
September 30,
 
2014
 
2013
Cost of product sales
$
11

 
$
18

Sales and marketing
88

 
241

Research and development
69

 
64

General and administrative
626

 
587

 
$
794

 
$
910


23

Sales and Marketing Expense. Sales and marketing expense in the first quarter of fiscal 2015 increased to $5.6 million from $3.7 million during the first quarter of fiscal 2014. The increase of $1.8 million, or 48.6%, was primarily due to an increase of $1.9 million in employee and related expenses associated with an increase in average headcount related to our acquisition in January 2014, offset by a decrease of $0.2 million in share-based compensation.
Research and Development Expense. Research and development expense in the first quarter of fiscal 2015 increased to $1.9 million from $1.3 million during the first quarter of fiscal 2014. The increase of $0.6 million, or 46.2%, was primarily due to an increase of $0.4 million in employee and related expenses associated with an increase in average headcount related to our acquisition in January 2014.
General and Administrative Expense. General and administrative expense in the first quarter of fiscal 2015 increased to $5.8 million from $2.6 million during the first quarter of fiscal 2014. The increase of $3.2 million, or 123%, was a result of i) a $0.8 million increase in employee related to expenses associated with an increase in average headcount related to our acquisition completed in January 2014, ii) a $0.8 million increase in outside contractor expenses related to integration costs for our acquisition completed in January 2014 and additional information technology (IT) support, (iii) a $0.6 million increase in legal and advisory expenses primarily related to our Sphere 3D merger and related litigation, (iv) a $0.5 million increase for fees and severance payments for former employees of Tandberg which now consult for the Company, and (v) a $0.2 million increase in audit fees primarily related to our acquisition completed in January 2014.
Interest Expense. Interest expense in the first quarter of fiscal 2015 increased to $0.4 million from $0.3 million during the first quarter of fiscal 2014.
Investment Income. During the first quarter of fiscal 2015, we realized $1.8 million for gains on our related party short-term investment.
Provision for Income Taxes. During the first quarter of fiscal 2015, we recognized income tax expense of $1.4 million primarily related to both the realized gain on sale of our related party short-term investment, and the intraperiod adjustment for the remaining unrealized losses.
Liquidity and Capital Resources
At September 30, 2014, we had cash and a short-term investment of $3.5 million and $3.4 million, respectively, compared to cash and short-term investment of $4.3 million and $7.8 million, respectively, at June 30, 2014. In the first quarter of fiscal 2015, we incurred a net loss of $7.3 million. Our credit facility provides for an up to $8.0 million secured revolving loan and may be used to fund our working capital and our general business requirements. At September 30, 2014, we had a balance of $5.1 million recorded as current debt, and a remaining external borrowing capacity of up to $2.9 million. Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during the continued period of integration for our acquisition completed in January 2014 as we work to improve operational efficiencies.
As of September 30, 2014, we had working capital of $0.4 million, reflecting a decrease in current assets of $4.8 million and an increase in current liabilities of $6.6 million compared to June 30, 2014. The decrease in current assets is primarily attributable to a $4.4 million decrease in our short-term investment in Sphere 3D related to the $2.0 million sale of the short-term investment, and a decrease in unrealized gains. The increase in current liabilities is primarily attributable to a $5.1 million increase in current debt for our credit facility due in August 2015, and a $2.2 million increase in accounts payable and accrued liabilities, offset by a $0.7 million decrease in deferred revenue.
Management has projected that cash on hand, our short-term investment (the common shares of Sphere 3D we own), available borrowings under our credit facility, and other sources of funding will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including, but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, (iv) changes to the historical timing of collecting accounts receivable, and/or (v) our inability to liquidate our short-term investment could have a material adverse impact on our ability to access the level of funding necessary to continue our operations at current levels. If any of these events occur or

24

if we are not able to secure additional funding (including from Sphere 3D), we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects, and/or prevent us from consummating the proposed merger with Sphere 3D. We may seek debt, equity or equity-based financing (such as convertible debt) when market conditions and the merger agreement with Sphere 3D permit.
As a result of our recurring losses from operations and negative cash flows, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30, 2014 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
During the first quarter of fiscal 2015, we used net cash in operating activities of $3.9 million, compared to $4.3 million in the first quarter of fiscal 2014. The use of cash during the first quarter of fiscal 2015 was primarily a result of our net loss of $7.3 million offset by $1.6 million in non-cash items, which were share-based compensation, realized gains on sale of shares of our related party short-term investment, deferred income tax provision, depreciation and amortization. In addition, we had increases in accounts payable of $2.0 million.
During the first quarter of fiscal 2015, net cash provided by investing activities was $0.7 million compared to 0.4 million used in investing activities in the first quarter of fiscal 2014. During the first quarter of fiscal 2015, we received proceeds from sale of shares of our related party short-term investment of $1.0 million. During each of the first quarter of fiscal 2015 and 2014, capital expenditures totaled $0.3 million and $0.2 million, respectively, and were primarily associated with the implementation of a new enterprise resource planning system and equipment for quality assurance testing.
During the first quarter of fiscal 2015, net cash provided by financing activities was $2.5 million compared to $0.2 million used in financing activities during the first quarter of fiscal 2014. During the first quarter of fiscal 2015, we received $2.8 million from proceeds in borrowings from our related party note payable, offset by $0.3 million of net payments for our credit facility. During the first quarter of fiscal 2014, we paid $0.2 million for taxes for net settlement of restricted stock units.
Off-Balance Sheet Arrangements
During the ordinary course of business, we provide standby letters of credit to third parties as required for certain transactions initiated by us. As of September 30, 2014, we had standby letters of credit of $0.7 million that were not recorded on our consolidated balance sheets.
Recently Issued Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements for information about recent accounting pronouncements.
Item 3.
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 our products sold in international markets are denominated in U.S. dollars as well as local currencies. 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 Europe and Asia 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 during the first quarter of fiscal 2015 and 2014 resulted in losses of $0.5 million and $0.2 million, respectively, to our condensed consolidated financial statements.

25

Item 4.
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 of 1934. 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 report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.
Legal Proceedings.
We are from time to time involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. We do not believe any such legal proceedings or claims will have, individually or in the aggregate, a material adverse effect on our business, liquidity, results of operations, or financial position. Litigation, however, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
Proposed Merger
In May 2014, we announced that we had signed an agreement and plan of merger with Sphere 3D. Since the merger was announced, four separate putative shareholder class action lawsuits were filed against us, all of our directors, and Sphere 3D in the California Superior Court in and for the County of San Diego. Three of the lawsuits also named Cyrus Capital Partners, the majority shareholder of us, as a defendant. On June 25, 2014, the Superior Court entered an order providing for the consolidation of all cases relating to our decision to enter into the merger agreement with Sphere 3D. These cases have been consolidated before a single judge and are referred to as In re Overland Storage Inc., Shareholders Litigation, Lead Case No. 37-2014-00016017-CU-SL-CTL. On July 30, 2014, the plaintiffs filed their consolidated amended complaint. The lawsuit alleges breaches of fiduciary duties and conflicts of interest against our directors relating to the merger process, the terms of the merger agreement, and the consideration to be received our shareholders under the terms of the merger agreement. The lawsuit alleges that the other defendants aided and abetted the purported breaches of fiduciary duties by our directors. The relief sought includes an injunction prohibiting the consummation of the proposed merger, rescission of the merger to the extent already implemented or rescissory damages, damages, and an award of attorneys' fees and costs.
On October 13, 2014, the plaintiffs and the defendants entered into a memorandum of understanding (the “Memorandum of Understanding”) to settle the Consolidated Action and Merger Actions. The Memorandum of Understanding provides, among other things, that additional disclosures would be made concerning the analysis performed by our financial advisor relating to the proposed merger, our management projections, and the circumstances leading up to the proposed merger.

26

While we believe that the lawsuits are without merit, and we specifically deny the allegations made in the lawsuits and maintain that we and the other defendants committed no wrongdoing whatsoever, to permit the timely consummation of the proposed merger, and without admitting the validity of any allegations made in the lawsuits, we concluded that it is desirable that the Consolidated Action and Merger Actions be resolved. The proposed settlement of the Consolidated Action and Merger Actions, which is subject to confirmatory discovery and court approval, provides for the release of all claims against the defendants relating to the proposed merger and the allegations in the Consolidated Action and Merger Actions. There can be no assurance that the settlement will be finalized or that the Superior Court will approve the settlement.
Patent Infringement
In August 2010, we filed a patent infringement lawsuit in the United States District Court for the Southern District of California against BDT AG, BDT Products, Inc., and BDT-Solutions GmbH. In October 2010, we filed an amended complaint for patent infringement in that court naming the following defendants: BDT AG; BDT Products, Inc.; BDT-Solutions GmbH & Co. KG; BDT Automation Technology (Zhuhai FTZ) Co., Ltd.; BDT de México, S. de R.L. de C.V.; IBM; and Dell. The lawsuit claimed infringement of two of our U.S. Patents; Nos. 6,328,766 and 6,353,581.
In November 2011, we entered into a multi-year settlement and cross-licensing agreement with IBM pursuant to which we released all claims we had against IBM and Dell in connection with the patent infringement lawsuits we had filed.
In July 2014, we entered into a settlement and cross-license agreement with BDT pursuant to which we released all claims we had against BDT. In connection with the settlement, we also dismissed our patent infringement claims filed against PivotStor, LLC, a BDT customer based in Irvine, California, which was pending in the United States District Court for the Southern District of California.
In June 2012, we filed patent infringement lawsuits in the United States District Court for the Southern District of California against Spectra Logic Corporation (“Spectra Logic”), based in Boulder, Colorado; and Qualstar Corporation, based in Simi Valley, California. In the Spectra Logic case, we claimed infringement of U.S. Patent Nos. 6,328,766 and 6,353,581. In the Qualstar case, we claimed infringement of U.S. Patent No. 6,328,766.
In June 2013, Spectra Logic filed a Petition for Inter Partes Review of the claims of U.S. Patent No. 6,328,766 with the United States Patent and Trademark Office. The petition has been assigned Case No. IPR2013-00357. In December 2013, the United States Patent and Trademark Office initiated an inter partes review proceeding involving U.S. Patent No. 6,328,766. On November 7, 2014, the United States Patent and Trademark Office issued a Final Written Decision finding claims 1-11 of U.S. Patent No. 6,328,766 to be unpatentable. We have the option to appeal the decision to the United States Court of Appeals for the Federal Circuit.
In January 2014 and February 2014, the District Court for the Southern District of California stayed our litigation against Qualstar and Spectra Logic, respectively, pending the results of the inter partes review filed by Spectra Logic. We are continuing to pursue our claims against Spectra Logic and Qualstar.
In May 2013, Safe Storage LLC (“Safe Storage”), a Delaware limited liability company, filed a complaint against us in the United States District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,978,346 by our products. Safe Storage is seeking monetary damages from us and injunctive relief.
Patent Litigation Funding Agreement
In December 2010, we entered into a litigation funding agreement (the “Funding Agreement”) with Special Situations Fund III QP, L.P., Special Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P., and Special Situations Technology Fund II, L.P. (collectively, the “Special Situations Funds”) pursuant to which the Special Situations Funds agreed to fund certain patent litigation brought by the Company. In May 2014, the Special Situations Funds filed a complaint against us in the Supreme Court for New York County, alleging breach of the Funding Agreement. The Special Situations Funds allege that our January 2014 acquisition of Tandberg Data entitled the Special Situation Funds to a $6.0 million payment under the Funding Agreement, and therefore the Company's refusal to make the payment constitutes a breach of the Funding Agreement by us. The Special Situations Funds are seeking $6.0 million in contractual damages as well as costs and fees. We believe the lawsuit to be without merit and intend to vigorously defend against the action.

27

Item 1A.
Risk Factors.
An investment in our company involves a high degree of risk. In addition to the risk factor below and 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 in Item 1A of Part II of our annual report on Form 10-K for the fiscal year ended June 30, 2014 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 risks actually occur, our business and financial results could be harmed. In that case, the trading price of our common stock could decline.
The pending merger with Sphere 3D is not guaranteed to occur. If the merger does not occur, it could have a material and adverse effect on our business, growth, revenue, liquidity and results of operations.
On May 15, 2014, we entered into a merger agreement and related agreements with Sphere 3D, which was amended on October 13, 2014, and we would become a wholly owned subsidiary of Sphere 3D. Each share of the our common stock would be converted into the right to receive 0.46385 of a Sphere 3D common share, subject to adjustment in certain circumstances. Completion of the merger is conditioned upon the satisfaction of certain closing conditions, including the approval of the merger by our shareholders, as set forth in the merger agreement. The required conditions to closing may not be satisfied in a timely manner, if at all, or, if permissible, waived. If the merger is not consummated for these or any other reasons, our ongoing business may be adversely affected and will be subject to a number of risks and consequences, including the following:
•
If the closing of the Merger does not occur prior to January 12, 2015, Overland will be required to repay $7.5 million of loans made to Overland by the Cyrus Funds;
•
we may be required, under certain circumstances, to pay Sphere 3D a termination fee of $3.5 million;
•
we will be required to repay the loan made to us by Sphere 3D upon its maturity in May 2018, and to pay interest on the loan in accordance with its terms;
•
we must pay the substantial fees and expenses that we incurred related to the merger, such as legal, accounting, printing and synergy planning fees and expenses, even if the merger is not completed and, except in certain circumstances, we may not be able to recover such fees and expenses from Sphere 3D;
•
under the merger agreement, we are subject to certain restrictions on the conduct of our business prior to completing the merger, which restrictions could adversely affect our ability to realize certain of our business strategies, including our ability to enter into additional acquisitions or other strategic transactions;
•
matters relating to the merger may require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us;
•
the market price of our common shares may decline to the extent that the current market price reflects a market assumption that the merger will be completed;
•
we would not realize any of the anticipated benefits of having completed the merger.
In addition, any delay in the consummation of the merger, or any uncertainty about the consummation of the merger, may adversely affect our future business, growth, revenue, liquidity and results of operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3.
Defaults Upon Senior Securities.
Not applicable.

28

Item 4.
Mine Safety Disclosures.
Not applicable.
Item 5.
Other Information.
Not applicable.
Item 6.
Exhibits.
10.1
Patent Cross-License and Settlement Agreement, dated as of July 30, 2014, between the Company and BDT Media Automation GmbH.+ (incorporated by reference to the Company's Form 10-K filed September 23, 2014).
 
 
10.2
RSU Amendment dated August 12, 2014 for awards granted May 13, 2014 (incorporated by reference to the Company's Form 10-K filed September 23, 2014).
 
 
10.3
Amended and Restated Promissory Note, dated September 8, 2014, between the Company and Sphere 3D Corporation (incorporated by reference to the Company's Form 8-K filed September 12, 2014).
 
 
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
XBRL Instance Document.
 
 
101.SCH
XBRL Taxonomy Extension Schema.
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase.
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
____________________
+
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.


29

SIGNATURES
Pursuant to the requirements 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:
November 14, 2014
 
By:
/s/    Eric L. Kelly
 
 
 
 
Eric L. Kelly
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
OVERLAND STORAGE, INC.
 
 
 
 
 
Dated:
November 14, 2014
 
By:
/s/    Kurt L. Kalbfleisch
 
 
 
 
Kurt L. Kalbfleisch
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

30




Exhibit 31.1
Certifications
I, Eric L. Kelly, certify that:
1.
I have reviewed this report on Form 10-Q of Overland Storage, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 14, 2014
/s/ Eric L. Kelly
 
Eric L. Kelly
President and Chief Executive Officer
(Principal Executive Officer)







Exhibit 31.2
Certifications
I, Kurt L. Kalbfleisch, certify that:
1.
I have reviewed this report on Form 10-Q of Overland Storage, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 14, 2014
/s/ Kurt L. Kalbfleisch
 
Kurt L. Kalbfleisch
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)








Exhibit 32.1
CERTIFICATION REQUIRED BY
SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his capacity as an officer of Overland Storage, Inc. (the Company), that, to the best of his knowledge, the quarterly report of the Company on Form 10-Q for the fiscal quarter ended September 30, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.

Date: November 14, 2014
/s/ Eric L. Kelly
 
Eric L. Kelly
President and Chief Executive Officer
(Principal Executive Officer)

Date: November 14, 2014
/s/ Kurt L. Kalbfleisch
 
Kurt L. Kalbfleisch
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to Overland Storage, Inc. and will be retained by Overland Storage, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.


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