ANY 20-F DEF-14A Report Dec. 31, 2016 | Alphaminr
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ANY 20-F Report ended Dec. 31, 2016

Balance Sheet
Cash Flow
Income Statement
Debt
20-F 1 form20-fspherecorp12312016.htm 20-F Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
For the transition period from___________________________to ___________________________
Commission File Number: 001-36532
__________________________________
Sphere 3D Corp.
(Exact name of Registrant as specified in its charter)
__________________________________
Ontario, Canada
(Jurisdiction of incorporation or organization)
240 Matheson Blvd. East
Mississauga, Ontario, Canada, L4Z 1X1
(Address of principal executive offices)
Jenny C. Yeh
(408) 283-4754
jyeh@sphere3d-overland.com
125 S. Market Street, Suite 1300, San Jose, California 95113
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to section 12(b) of the Act:
Title of each class
Name of exchange on which registered
Common Shares
NASDAQ Capital Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
__________________________________

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 66,565,174 common shares as of December 31, 2016
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x



If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP x International Financial Reporting Standards as issued     Other ¨
by the International Accounting Standards Board ¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x












SPHERE 3D CORP.
FORM 20-F ANNUAL REPORT
TABLE OF CONTENTS
GENERAL PRESENTATION MATTERS
FORWARD-LOOKING INFORMATION
PART 1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
A. Selected Financial Data
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
ITEM 4 INFORMATION ON THE COMPANY
A. History and Development of the Company
B. Business Overview
C. Organizational Structure
D. Property, Plant and Equipment
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
B. Liquidity and Capital Resources
C. Research and Development, Patents and Licenses, etc.
D. Trend Information
E. Off-Balance Sheet Information
F. Tabular Disclosure of Contractual Obligations
G. Safe Harbor
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
B. Compensation
C. Board Practices
D. Employees
E. Share Ownership
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
B. Related Party Transactions
C. Interests of Experts and Counsel
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
B. Significant Changes
ITEM 9. THE OFFERING AND LISTING
A. Offer and Listing Details
B. Plan of Distribution
C. Markets



D. Selling Shareholders
E. Dilution
F. Expenses of the Issue
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
B. Memorandum and Articles of Association
C. Material Contracts
D. Exchange Controls
E. Taxation
F. Dividends and Paying Agents
G. Statement By Experts
H. Documents on Display
I. Subsidiary Information
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
B. Warrants and Rights
C. Other Securities
D. American Depositary Shares
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS




GENERAL
Any reference to the “Company”, “Sphere 3D”, “Sphere”, “we”, “our”, “us”, or similar terms refers to Sphere 3D Corp. and its subsidiaries. The information, including any financial information, disclosed in this Annual Report is stated as at December 31, 2016 or for the year ended December 31, 2016 , as applicable, unless otherwise indicated. Unless otherwise indicated, all dollar amounts are expressed in U.S. dollars and references to “$” are to the lawful currency of the United States (“U.S.”).
Market data and other statistical information used in this Annual Report are based on independent industry publications, government publications, reports by market research firms, or other published independent sources. Some data is also based on good faith estimates that are derived from management’s review of internal data and information, as well as independent sources, including those listed above. Although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy or completeness.
FORWARD-LOOKING INFORMATION
Certain statements in this Annual Report constitute forward-looking information that involves risks and uncertainties. This forward-looking information includes, but is not limited to, statements with respect to management’s expectations regarding the future growth, results of operations, performance and business prospects of Sphere 3D. This forward-looking information relates to, among other things, the Company’s future business plans and business planning process, the Company’s uses of cash, and may also include other statements that are predictive in nature, or that depend upon or refer to future events or conditions. Statements with the words “could”, “expects”, “may”, “will”, “anticipates”, “assumes”, “intends”, “plans”, “believes”, “estimates”, “guidance”, and similar expressions are intended to identify statements containing forward-looking information, although not all forward-looking statements include such words. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events.
Although management believes the expectations reflected in such forward-looking statements are reasonable, forward-looking statements are based on the opinions, assumptions and estimates of management at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. These factors include, but are not limited to: our ability to refinance our credit facilities and to raise additional debt or equity financing, the inability to gain compliance with the minimum bid price requirement of the NASDAQ Capital Market and/or inability to maintain listing with the NASDAQ Capital market; the limited operating history of Sphere 3D; the ability of Sphere 3D to manage growth and specifically, its recent acquisition of Unified ConneXions, Inc. (“UCX”) and HVE ConneXions, LLC (“HVE”); the impact of competition; the investment in technological innovation; any defects in components or design of Sphere 3D’s products; the retention or maintenance of key personnel; the possibility of significant fluctuations in operating results; currency fluctuations; the ability of Sphere 3D to maintain business relationships; financial, political or economic conditions; financing risks; future acquisitions; the ability of Sphere 3D to protect its intellectual property; third party intellectual property rights; volatility in the market price for the common shares of the Company; compliance by Sphere 3D with financial reporting and other requirements as a public company; conflicts of interests; future sales of common shares by Sphere 3D’s directors, officers and other shareholders; dilution and future sales of common shares; risks related to the business of Overland Storage, Inc. (“Overland”) and other factors described in this Annual Report under the heading “Risk Factors”.
In addition, if any of the assumptions or estimates made by management prove to be incorrect, actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking information contained in this Annual Report. Accordingly, investors are cautioned not to place undue reliance on such statements.
All the forward-looking information in this Annual Report is qualified by these cautionary statements. Statements containing forward-looking information contained herein are made only as of the date of such document. The Company expressly disclaims any obligation to update or alter statements containing any forward-looking information, or the factors or assumptions underlying them, whether as a result of new information, future events or otherwise, except as required by law.

1


PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following selected financial data as of and for each of the years in the five-year period ended December 31, 2016 is derived from our audited consolidated financial statements. The selected financial data should be read in conjunction with the Company’s Operating and Financial Review and Prospects in Item 5 of this Annual Report, the Consolidated Financial Statements and related notes in Item 18 of this Annual Report, and other financial information included elsewhere in this Annual Report.
2016
2015
2014
2013
2012 (1)
(in thousands, except per share data)
Consolidated Statements of Operations Data
Net revenue
$
76,393

$
76,165

$
13,469

$
—

$
410

Impairment of goodwill and acquired intangible assets
$
34,398

$
10,702

$
—

$
—

$
—

Operating loss
$
(63,824
)
$
(44,839
)
$
(12,039
)
$
(3,296
)
$
(2,443
)
Net loss
$
(68,460
)
$
(47,227
)
$
(12,722
)
$
(3,336
)
$
(2,462
)
Net loss per share
Basic and diluted
$
(1.38
)
$
(1.24
)
$
(0.53
)
$
(0.19
)
$
(0.21
)
Shares used in computing net loss per share:

Basic and diluted
49,736

37,957

24,131

17,331

11,918

Consolidated Balance Sheets
Total assets
$
92,556

$
139,111

$
149,263

$
8,361

$
3,227

Net assets
$
20,446

$
68,140

$
85,140

$
7,437

$
2,922

Debt
$
43,995

$
36,891

$
24,390

$
—

$
—

Share capital
$
157,254

$
136,058

$
106,117

$
14,407

$
5,437

Period end number of shares outstanding
66,565

45,198

34,554

21,098

16,114

_______________
(1)
Amounts are presented using International Financial Reporting Standards and converted to USD using the average and ending Canadian exchange rates of 1.0004 and 1.0051, respectively.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.

2


D. Risk Factors
An investment in our Company involves a high degree of risk. Each of the following risk factors in evaluating our business and prospects as well as an investment in our Company should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks occur, our business and financial results could be harmed and the trading price of our common shares could decline.
Risks Related to our Business
Our credit facility matures on the earlier of the maturity date in the 8% Senior Secured Convertible Debenture, dated December 1, 2014, issued to FBC Holdings S.a.r.l., or June 30, 2017. If we are unable to refinance or amend our credit facility before its maturity date, we may be forced to liquidate assets and/or curtail or cease operations.
We have obtained external funding for our business through a credit agreement with Opus Bank. Pursuant to the terms of the Second Amendment, the credit facility matures on the earlier of (a) the maturity date in the Debenture, or (b) June 30, 2017 if the Maturity Extension Trigger Date occurs on or before March 31, 2017. The Maturity Extension Trigger Date occurred when we received gross cash proceeds of at least $3.0 million from the issuance of the common shares and warrants and, in addition, contributed to Overland at least $2.5 million in immediately available funds from the sale of common shares and warrants by depositing such funds into the primary operating account that Overland maintains at Opus Bank. We met the requirements of the Maturity Extension Trigger Date on March 29, 2017.
Even though we met the requirements of the Maturity Extension Trigger Date, we will need to raise additional funds and/or amend or refinance our credit facility in order to satisfy our obligations under our credit agreement with Opus Bank. In addition, upon the occurrence of certain events of default under our current credit facility, including failure to meet certain monthly revenue and EBITDA targets, to enter into a term sheet with a new lender by April 28, 2017, or to enter into a letter of intent with respect to a financing or retain a financial advisor with respect to a sale of a significant portion of the company's assets, our lender may elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. In addition, a default under the agreement could result in default and cross-acceleration under other indebtedness. There can be no guarantee that we will be able to raise additional funds or amend or refinance our credit facility on favorable terms or at all. If we are unable to, we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or curtail, suspend or cease planned programs or operations generally or possibly seek bankruptcy protection, which would have a material adverse effect on our business, results of operations, financial position and liquidity.
If we are unable to generate sufficient cash from operations or raise additional financing, we may be unable to fund our operations.
We require sufficient cash from operations together with cash from debt, equity, or equity based financing to fund our operations as currently conducted. Our available cash and cash equivalents was $5.1 million and our outstanding indebtedness was $44.0 million as of December 31, 2016 . Our available cash and cash equivalents was $3.5 million as of March 17, 2017. Cash forecasts and capital requirements are subject to change as a result of a variety of risks and uncertainties. Cash from operations can change as a result of a variety of factors including changes in sales levels, unexpected increases in product costs, increases in operating costs, and changes to the historical timing of collecting accounts receivable. In addition, we expect to continue to need to raise debt, equity, and equity-linked financing in the near future, but such financing may not be available on favorable terms, on a timely basis or at all. If we are unable to generate sufficient cash from operations or financing sources, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or curtail, suspend or cease planned programs or operations generally or possibly seek bankruptcy protection, which would have a material adverse effect on our business, results of operations, financial position and liquidity.

3


Our cash and other sources of liquidity may not be sufficient to fund our operations beyond June 30, 2017 . If we raise additional funding through sales of equity or equity-based securities, your shares will be diluted. If we need additional funding for operations and we are unable to raise it, we may be forced to liquidate assets and/or curtail or cease operations.
We have projected that cash on hand will not be sufficient to allow the Company to continue operations beyond June 30, 2017 if we are unable to amend or refinance our credit facility with Opus Bank. As a result, we expect to need to refinance the short-term portions of our existing debt and/or continue to raise additional debt, equity or equity-linked financing in the near future, but such financing may not be available on favorable terms on a timely basis or at all. Significant changes from the Company’s current forecasts, including but not limited to: (i) our ability to refinance our credit facilities and to raise additional debt or equity financing; (ii) failure to comply with the financial covenants in our credit facility; (iii) shortfalls from projected sales levels; (iv) unexpected increases in product costs; (v) increases in operating costs; (vi) changes in the historical timing of collecting accounts receivable; and (vii) inability to gain compliance with the minimum bid price requirement of the NASDAQ Capital Market and/or inability to maintain listing with the NASDAQ Capital market 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 occurs or we are unable to generate sufficient cash from operations or financing sources, we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or curtail, suspend or cease planned programs or operations generally or possibly seek bankruptcy protection, which would have a material adverse effect on our business, results of operations, financial position and liquidity.
If we raise additional funds by selling additional shares of our capital stock, or securities convertible into shares of our capital stock, the ownership interest of our existing shareholders will be diluted. The amount of dilution could be increased by the issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets.
We urge you to review the additional information about our liquidity and capital resources in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this report. If our business ceases to continue as a going concern due to lack of available capital or otherwise, it could have a material adverse effect on our business, results of operations, financial position, and liquidity.
We may not be successful in raising additional capital necessary to meet expected increases in working capital needs. If we need additional funding for operations and we are unable to raise it, we may not be able to continue our business operations.
We expect our working capital needs to increase in the future as we continue to expand and enhance our operations. Our ability to raise additional funds through equity or debt financings or other sources will depend on the financial success of our current business and successful implementation of our key strategic initiatives, financial, economic and market conditions and other factors, some of which are beyond our control. No assurance can be given that we will be successful in raising the required capital at reasonable cost and at the required times, or at all. Further equity financings may have a dilutive effect on shareholders and any debt financing, if available, may require restrictions to be placed on our future financing and operating activities. If we require additional capital and are unsuccessful in raising that capital, we may not be able to continue our business operations and advance our growth initiatives, which could adversely impact our business, financial condition and results of operations.
We have in the past failed to comply with financial covenants and other provisions in certain of our loan documents, which have resulted in defaults under certain of our loan documents, and we could be deemed to be in default under other indebtedness and agreements. These and similar defaults in the future could adversely affect our financial condition and our ability to meet our payment obligations on our indebtedness.
We have in the past defaulted under financial and other covenants under our Opus Bank credit agreement and under our previous loan documents, which have been waived by our lenders. In the past, these defaults generally have related to maintenance of required minimum asset coverage ratios. Upon the occurrence of certain events of default under our current credit facility, including failure to meet certain monthly revenue and EBITDA targets, to enter into a term sheet with a new lender by April 28, 2017, or to enter into a letter of intent with respect to a financing or retain a financial advisor with respect to a sale of a significant portion of the Company’s assets, our lender may elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. While our ongoing defaults have been waived, our lender may not in the future

4


waive such defaults. In addition, as a result of such defaults, we could be deemed to be in default under other of our indebtedness and agreements.
In the event of the acceleration of our indebtedness or if we are unable to otherwise maintain compliance with covenants set forth in these arrangements, including our Opus Bank credit agreement, Term Loan Agreement, and Debenture or if these arrangements are otherwise terminated for any reason, management may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or curtail, suspend or cease planned programs or operations generally or possibly seek bankruptcy protection, which would have a material adverse effect on our business, results of operations, financial position and liquidity.
We face a selling cycle of variable length to secure new purchase agreements for our products and services, and design wins may not result in purchase orders or new customer relationships.
We face a selling cycle of variable lengths to secure new purchase agreements. Even if we succeed in developing a relationship with a potential new customer and/or obtaining design wins, we may not be successful in securing new sales for our products or services, or new customers. In addition, we cannot accurately predict the timing of entering into purchase agreements with new customers due to the complex purchase decision processes of some large institutional customers, such as healthcare providers or school districts, which often involve high-level management or board approvals. Consequently, we have only a limited ability to predict the timing of specific new customer relationships.
If our common shares are delisted from NASDAQ, our business, financial condition, results of operations and share price could be adversely affected, and the liquidity of our common shares and our ability to obtain financing could be impaired.
Maintaining the listing of our common shares on the NASDAQ Capital Market requires that we comply with certain listing requirements. If our common shares cease to be listed for trading on NASDAQ for any reason, it may harm our share price, increase the volatility of our share price, decrease the level of trading activity and make it more difficult for investors to buy or sell shares of our common shares. Our failure to maintain a listing on NASDAQ may constitute an event of default under our outstanding indebtedness as well as any future indebtedness, which would accelerate the maturity date of such debt or trigger other obligations. In addition, certain institutional investors that are not permitted to own securities of non-listed companies may be required to sell their shares, which would adversely affect the trading price of our common shares. If we are not listed on NASDAQ, we will be limited in our ability to raise additional capital we may need. See also “Risks Related to Our Public Company Status and Our Common Shares.”
We have a limited operating history and a history of net losses. We may not achieve or maintain profitability.
Sphere 3D has only recently moved from being a development stage company to commercial operations. As such, we have a limited operating history and limited non-recurring revenues derived from operations. Significant expenditures have been focused on research and development to create the Glassware 2.0 ® (“Glassware”) product offering. Sphere 3D’s near-term focus has been in actively developing reference accounts and building sales, marketing and support capabilities. Overland, which we acquired in December 2014, also has a history of net losses since fiscal 2006. We expect to continue to incur net losses and we may not achieve or maintain profitability. We may see continued losses during 2017 and as a result of these and other factors, we may not be able to achieve, sustain or increase profitability in the near future.
Even after the Overland acquisition, Sphere 3D is subject to many risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources, technology, and market acceptance issues. There is no assurance that we will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered considering our stage of operations.

5


Our plans for growth will place significant demands upon our resources. If we are unsuccessful in achieving our plan for growth, our business could be harmed.
We are actively pursuing a plan to market our products throughout Canada, the U.S. and internationally. The plan will place significant demands upon managerial, financial, and human resources. Our ability to manage future growth will depend in large part upon several factors, including our ability to rapidly:
•
build or leverage, as applicable, a network of channel partners to create an expanding presence in the evolving marketplace for our products and services;
•
build or leverage, as applicable, a sales team to keep end-users and channel partners informed regarding the technical features, issues and key selling points of our products and services;
•
attract and retain qualified technical personnel in order to continue to develop reliable and flexible products and provide services that respond to evolving customer needs;
•
develop support capacity for end-users as sales increase, so that we can provide post-sales support without diverting resources from product development efforts; and
•
expand our internal management and financial controls significantly, so that we can maintain control over our operations and provide support to other functional areas as the number of personnel and size increases.
Our inability to achieve any of these objectives could harm our business, financial condition and results of operations.
Our market is intensely competitive and dynamic. New competing products and services could be introduced at any time that could result in reduced profit margins and loss of market share.
The technology industry is very dynamic, with new technology and services being introduced by a range of players, from larger established companies to start-ups, on a frequent basis. Our competitors may announce new products, services, or enhancements that better meet the needs of end-users or changing industry standards. Further, new competitors or alliances among competitors could emerge. Increased competition may cause price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, the worldwide storage market is intensely competitive. A number of manufacturers of tape-based and disk-based storage solutions compete for a limited number of customers. Barriers to entry are relatively low in these markets, and some of our competitors in this market have substantially greater financial and other resources, larger research and development staffs, and more experience and capabilities in manufacturing, marketing and distributing products. Ongoing pricing pressure could result in significant price erosion, reduced profit margins and loss of market share, any of which could have a material adverse effect on our business, results of operations, financial position and liquidity.
Our success depends on our ability to anticipate rapid technological changes and develop new and enhanced products.
The markets for our products are characterized by rapidly changing technology, evolving industry standards and increasingly sophisticated customer requirements. The introduction of products embodying new technology and the emergence of new industry standards can negatively impact the marketability of our existing products and can exert price pressures on existing products. It is critical to our success that we are able to anticipate and react quickly to changes in technology or in industry standards and to successfully develop, introduce, manufacture and achieve market acceptance of new, enhanced and competitive products on a timely basis and cost-effective basis. We invest substantial resources towards continued innovation; however, there can be no assurance that we will successfully develop new products or enhance and improve our existing products, that new products and enhanced and improved existing products will achieve market acceptance or that the introduction of new products or enhanced existing products by others will not negatively impact us. Our inability to develop products that are competitive in technology and price and that meet end-user needs could have a material adverse effect on our business, financial condition or results of operations.

6


Development schedules for technology products are inherently uncertain. We may not meet our product development schedules, and development costs could exceed budgeted amounts. Our business, results of operations, financial position and liquidity may be materially and adversely affected if the products or product enhancements that we develop are delayed or not delivered due to developmental problems, quality issues or component shortage problems, or if our products or product enhancements do not achieve market acceptance or are unreliable. We or our competitors will continue to introduce products embodying new technologies, such as new sequential or random access mass storage devices. In addition, new industry standards may emerge. Such events could render our existing products obsolete or not marketable, which would have a material adverse effect on our business, results of operations, financial position and liquidity.
Our business is dependent on the continued market acceptance and usage of tape-based systems. The impact of recent storage technology trends on our business is uncertain.
The industry in which we operate has experienced significant historical growth due to the continuing increase in the demand for storage by consumers, enterprises and government bodies around the world. While information technology spending has fluctuated periodically due to technology transitions and changing economic and business environments, overall growth in demand for storage has continued. Recent technology trends, such as the emergence of hosted storage, software as a service and mobile data access are driving significant changes in storage architectures and solution requirements. The impact of these trends on overall long-term growth patterns is uncertain. Nevertheless, if the general level of historic industry growth, or if the growth of the specific markets in which we compete, were to decline, our business and results of operations could suffer.
As a result of the acquisition of Overland, we expect to continue to derive a portion of our revenue from products that use magnetic tape drives for backup and recovery of digital data. Our tape-based storage solutions now compete directly with other storage technologies, such as hard disk drives, and may face competition in the future from other emerging technologies. The prices of hard disk drives continue to decrease as their capacity and performance increase. We expect our tape-based products to face increased competition from these alternative technologies and come under increasing pricing pressure. If our strategy to compete in disk-based markets does not succeed, it could have a material adverse effect on our business, results of operations, financial position and liquidity.
Our management team continually reviews and evaluates our product portfolio, operating structure, and markets to assess the future viability of our existing products and market positions. We may determine that the infrastructure and expenses necessary to sustain an existing product offering are greater than the potential contribution margin that we would realize. As a result, we may determine that it is in our best interest to exit or divest one or more existing product offerings, which could result in costs incurred for exit or disposal activities and/or impairments of long-lived assets. Moreover, if we do not identify other opportunities to replace discontinued products or operations, our revenues would decline, which could lead to further net losses and adversely impact the market price of our common shares.
In addition, we could incur charges for excess and obsolete inventory. The value of our inventory may be adversely affected by factors that affect our ability to sell the products in our inventory. Such factors include changes in technology, introductions of new products by us or our competitors, the current or future economic downturns, or other actions by our competitors. If we do not effectively forecast and manage our inventory, we may need to write off inventory as excess or obsolete, which adversely affects cost of sales and gross profit. Our business has previously experienced, and we may in the future experience, reductions in sales of older generation products as customers delay or defer purchases in anticipation of new products that we or our competitors may introduce. We have established reserves for slow moving or obsolete inventory. These reserves, however, may prove to be inadequate, which would result in additional charges for excess or obsolete inventory.

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We have granted security interests over certain of our assets in connection with various debt arrangements.
We have granted security interests over certain of our assets in connection with our credit facility and other indebtedness, and we may grant additional security interests to secure future borrowings. If we are unable to satisfy our obligations under these arrangements, we could be forced to sell certain assets that secure these loans, which could have a material adverse effect on our ability to operate our business. In the event we are unable to maintain compliance with covenants set forth in these arrangements or if these arrangements are otherwise terminated for any reason, it could have a material adverse effect on our ability to access the level of funding necessary to continue operations at current levels. If any of these events occur, management may be forced to make 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.
Our products may contain defects in components or design, and our warranty reserves may not adequately cover our warranty obligations for these products.
Although we employ a vigorous testing and quality assurance program, our products may contain defects or errors, particularly when first introduced or as new versions are released. We may not discover such defects or errors until after a solution has been released to a customer and used by the customer and end-users. Defects and errors in our products could materially and adversely affect our reputation, result in significant costs, delay planned release dates and impair our ability to sell our products in the future. The costs incurred in correcting any solution defects or errors may be substantial and could adversely affect our operating margins. While we plan to continually test our products for defects and errors and work with end-users through our post-sales support services to identify and correct defects and errors, defects or errors in our products may be found in the future.
We have also established reserves for the estimated liability associated with product warranties. However, we could experience unforeseen circumstances where these or future reserves may not adequately cover our warranty obligations. For example, the failure or inadequate performance of product components that we purchase could increase our warranty obligations beyond these reserves.
The failure to attract, hire, retain and motivate key personnel could have a significant adverse impact on our operations.
Our success depends on the retention and maintenance of key personnel, including members of senior management and our technical, sales and marketing teams, including personnel who joined Sphere 3D in connection with the Overland acquisition. Achieving this objective may be difficult due to many factors, including competition for such highly skilled personnel; fluctuations in global economic and industry conditions; changes in our management or leadership; competitors’ hiring practices; and the effectiveness of our compensation programs. The loss of any of these key persons could have a material adverse effect on our business, financial condition or results of operations. Additionally, prior to our acquisition of Overland, Overland experienced a prolonged period of operating losses and declines in its cash position, which affected Overland’s employee morale and retention and may continue to affect the morale and retention of our employees. Our success is also dependent on our continuing ability to identify, hire, train, motivate and retain highly qualified management, technical, sales and marketing personnel. Any such new hire may require a significant transition period prior to making a meaningful contribution. Competition for qualified employees is particularly intense in the technology industry, and we have in the past experienced difficulty recruiting qualified employees. Our failure to attract and to retain the necessary qualified personnel could seriously harm our operating results and financial condition. Competition for such personnel can be intense, and no assurance can be provided that we will be able to attract or retain highly qualified technical and managerial personnel in the future, which may have a material adverse effect on our future growth and profitability. We do not have key man insurance.

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Our financial results may fluctuate substantially for many reasons, and past results should not be relied on as indications of future performance.
Our revenues and operating results may fluctuate from quarter to quarter and from year to year due to a combination of factors, including, but not limited to:
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varying size, timing and contractual terms of orders for our products, which may delay the recognition of revenue;
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competitive conditions in the industry, including strategic initiatives by us or our competitors, new products or services, product or service announcements and changes in pricing policy by us or our competitors;
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market acceptance of our products and services;
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our ability to maintain existing relationships and to create new relationships with channel partners;
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the discretionary nature of purchase and budget cycles of our customers and end-users;
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the length and variability of the sales cycles for our products;
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general weakening of the economy resulting in a decrease in the overall demand for our products and services or otherwise affecting the capital investment levels of businesses with respect to our products or services;
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timing of product development and new product initiatives.
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changes in customer mix;
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increases in the cost of, or limitations on, the availability of materials;
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fluctuations in average selling prices;
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changes in product mix;
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increases in costs and expenses associated with the introduction of new products; and
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currency exchange fluctuations.
Further, the markets that we serve are volatile and subject to market shifts that we may be unable to anticipate. A slowdown in the demand for workstations, mid-range computer systems, networks and servers could have a significant adverse effect on the demand for our products in any given period. In the past, we have experienced delays in the receipt of purchase orders and, on occasion, anticipated purchase orders have been rescheduled or have not materialized due to changes in customer requirements. Our customers may cancel or delay purchase orders for a variety of reasons, including, but not limited to, the rescheduling of new product introductions, changes in our customers’ inventory practices or forecasted demand, general economic conditions affecting our customers’ markets, changes in our pricing or the pricing of our competitors, new product announcements by us or others, quality or reliability problems related to our products, or selection of competitive products as alternate sources of supply. In particular, our ability to forecast sales to distributors, VARs and DMRs is especially limited because these customers typically provide us with relatively short order lead times or are permitted to change orders on short notice. Because a large portion of our sales is generated by our European channel, our third quarter (July through September) results of operations have been in the past and may be in the future impacted by seasonally slow European orders, reflecting the summer holiday period in Europe.
Thus, there can be no assurance that we will be able to reach profitability on a quarterly or annual basis. We believe that our revenue and operating results will continue to fluctuate, and that period-to-period comparisons are not necessarily meaningful and should not be relied on as indications of future performance. Our revenue and operating results may fail to meet the expectations of public market analysts or investors, which could have a material adverse effect on the price of our common shares. In addition, portions of our expenses are fixed and difficult to reduce if our revenues do not meet our expectations. These fixed expenses magnify the adverse effect of any revenue shortfall.

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Our plans for implementing our business strategy and achieving profitability are based upon the experience, judgment and assumptions of our key management personnel, and available information concerning the communications and technology industries. If management’s assumptions prove to be incorrect, it could have a material adverse effect on our business, financial condition or results of operations.
We are subject to exchange rate risk in connection with our international operations.
A substantial portion of our revenue is earned in U.S. dollars and Euros. Fluctuations in the exchange rate between the U.S. dollar and other currencies, may have a material adverse effect on our business, financial condition and operating results. Further, our sales in international markets are denominated in U.S. dollars as well as local currency. Our wholly-owned subsidiaries in Canada, Europe and Asia incur costs that are denominated in local currencies. As exchange rates vary, these results when translated into U.S. dollars may vary from expectations and adversely impact overall expected results. A weaker U.S. dollar would result in an increase to revenue and expenses upon consolidation, and a stronger U.S. dollar would result in a decrease to revenue and expenses upon consolidation. There can be no assurances that we will prove successful in our effort to manage currency risk, which may adversely impact our operating results.
We rely on indirect sales channels to market and sell our branded products. Therefore, the loss of, or deterioration in, our relationship with one or more of our distributors or resellers could negatively affect our operating results.
We have relationships with third party resellers, OEMs, system integrators and enterprise application providers that facilitate our ability to sell and implement our products. These business relationships are important to extend the geographic reach and customer penetration of our sales force and ensure that our products are compatible with customer network infrastructures and with third party products. Further, we sell all of our Overland branded products through our network of distributors, VARs, and DMRs, who in turn sell our products to end users.
We believe that our success depends, in part, on our ability to develop and maintain strategic relationships with resellers, independent software vendors, OEMs, system integrators, and enterprise application providers. Should any of these third parties go out of business, or choose not to work with us, we may be forced to increase the development of those capabilities internally, incurring significant expense and adversely affecting operating margins. Any of these third parties may develop relationships with other companies, including those that develop and sell products that compete with ours. We could lose sales opportunities if we fail to work effectively with these parties or they choose not to work with us. Most of our distributors and resellers also carry competing product lines that they may promote over our products. A distributor or reseller might not continue to purchase our products or market them effectively, and each determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to end user customers. Further, the long-term success of any of our distributors or resellers is difficult to predict, and we have no purchase commitments or long-term orders from any of them to assure us of any baseline sales through these channels.
Therefore, the loss of, or deterioration in, our relationship with one or more of our distributors or resellers could negatively affect our operating results. Our operating results could also be adversely affected by a number of factors, including, but not limited to:
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a change in competitive strategy that adversely affects a distributor’s or reseller’s willingness or ability to stock and distribute our products;
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the reduction, delay or cancellation of orders or the return of a significant amount of our products;
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the loss of one or more of our distributors or resellers; and
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any financial difficulties of our distributors or resellers that result in their inability to pay amounts owed to us.

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If our suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and this could negatively affect our operations.
Some of our products have a large number of components and subassemblies produced by outside suppliers. We depend greatly on these suppliers for items that are essential to the manufacture of our products, including tape drives and printed circuit boards. We work closely with our regional, national and international suppliers, which are carefully selected based on their ability to provide quality parts and components that meet both our technical specifications and volume requirements. For certain items, we qualify only a single source, which magnifies the risk of shortages and decreases our ability to negotiate with that supplier on the basis of price. From time to time, we have in the past been unable to obtain as many drives as have needed due to drive shortages or quality issues from certain of our suppliers. If these suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations.
Our international operations are important to our business and involve unique risks related to financial, political, and economic conditions.
We expect sales to customers outside of the U.S. to continue to represent a significant portion of our total sales in the future and we may be subject to additional risks associated with doing business in foreign countries. Our future results could be materially adversely affected by a variety of political, economic or other factors relating to our operations outside the U.S., any or all of which could have a material adverse effect on our operating results and financial condition. In addition to the language barriers, different presentations of financial information, different business practices, and other cultural differences and barriers, ongoing business risks may result from the international political situation, uncertain legal systems and applications of law, prejudice against foreigners, corrupt practices, uncertain economic policies and potential political and economic instability. In doing business in foreign countries we may also be subject to such risks, including, but not limited to, the following:
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cultural and language differences;
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increased costs of doing business in countries with limited infrastructure;
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possible difficulties in collecting accounts receivable;
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corporate and personal liability for violations of local laws;
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the worldwide impact of the recent global economic downturn and related market uncertainty, including the ongoing European economic and financial turmoil related to sovereign debt issues in certain countries;
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the imposition of governmental controls mandating compliance with various foreign and U.S. export laws;
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currency exchange fluctuations;
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weak economic conditions in foreign markets;
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political or social unrest;
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economic instability or weakness in a specific country or region;
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environmental and trade protection measures and other legal and regulatory requirements;
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health or similar issues, such as pandemic or epidemic or natural disasters;
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trade restrictions, tariffs and taxes;
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expropriation;
•
longer payment cycles typically associated with international sales; and
•
difficulties in staffing and managing international operations.

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We also may face competition from local companies which have longer operating histories, greater name recognition, and broader customer relationships and industry alliances in their local markets, and it may be difficult to operate profitably in some markets as a result of such competition.
Furthermore, we may be unable to comply with changes in foreign laws, rules and regulations applicable to us in the future, which could have a material adverse effect on our business, results of operations, financial position and liquidity.
We are subject to laws, regulations and similar requirements, changes to which may adversely affect our business and operations.
We are subject to laws, regulations and similar requirements that affect our business and operations, including, but not limited to, the areas of commerce, intellectual property, income and other taxes, labor, environmental, health and safety, and our compliance in these areas may be costly. While we have implemented policies and procedures to comply with laws and regulations, there can be no assurance that our employees, contractors, suppliers or agents will not violate such laws and regulations or our policies. Any such violation or alleged violation could materially and adversely affect our business. Any changes or potential changes to laws, regulations or similar requirements, or our ability to respond to these changes, may significantly increase our costs to maintain compliance or result in our decision to limit our business or products, which could materially harm our business, results of operations and future prospects.
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes provisions regarding certain minerals and metals, known as conflict minerals, mined from the Democratic Republic of Congo and adjoining countries. These provisions require companies to undertake due diligence procedures and report on the use of conflict minerals in its products, including products manufactured by third parties. Compliance with these provisions will cause us to incur costs to certify that our supply chain is conflict free and we may face difficulties if our suppliers are unwilling or unable to verify the source of their materials. Our ability to source these minerals and metals may also be adversely impacted. In addition, our customers may require that we provide them with a certification and our inability to do so may disqualify us as a supplier.
Furthermore, future changes to U.S. tax laws could materially adversely affect Sphere 3D. Under current law, Sphere 3D is expected to be treated as a foreign corporation for U.S. federal income tax purposes. However, changes to the rules in Section 7874 of the Code or the Treasury regulations promulgated thereunder or other guidance issued by the Treasury or the Internal Revenue Service (“IRS”) could adversely affect Sphere 3D’s status as a foreign corporation for U.S. federal income tax purposes, and any such changes could have prospective or retroactive application. On May 20, 2014, Senator Carl Levin and Representative Sander M. Levin introduced the Stop Corporate Inversions Act of 2014 (the “Inversion Bill”) in the Senate and the House of Representatives, respectively. Similar legislation was introduced by Senator Dick Durbin and Representative Sander M. Levin on January 20, 2015. In its current form, the Inversion Bill would treat Sphere 3D as a U.S. corporation if the management and control of the expanded affiliated group which includes Sphere 3D occurs, directly or indirectly, primarily within the U.S. and the expanded affiliated group has significant U.S. business activities. If enacted, the Inversion Bill would apply to taxable years ending after May 8, 2014. Because certain members of Sphere 3D’s senior management team reside in the U.S., and are expected to continue to reside in the U.S., Sphere 3D could be treated as a U.S. corporation if the Inversion Bill becomes law.

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We have made a number of acquisitions in the past and we may make acquisitions in the future. Our ability to identify complementary assets, products or businesses for acquisition and successfully integrate them could affect our business, financial condition and operating results.
In the future, we may continue to pursue acquisitions of assets, products or businesses that we believe are complementary to our existing business and/or to enhance our market position or expand our product portfolio. There is a risk that we will not be able to identify suitable acquisition candidates available for sale at reasonable prices, complete any acquisition, or successfully integrate any acquired product or business into our operations. We are likely to face competition for acquisition candidates from other parties including those that have substantially greater available resources. Acquisitions may involve a number of other risks, including:
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diversion of management’s attention;
•
disruption to our ongoing business;
•
failure to retain key acquired personnel;
•
difficulties in integrating acquired operations, technologies, products or personnel;
•
unanticipated expenses, events or circumstances;
•
assumption of disclosed and undisclosed liabilities; and
•
inappropriate valuation of the acquired in-process research and development, or the entire acquired business.
If we do not successfully address these risks or any other problems encountered in connection with an acquisition, the acquisition could have a material adverse effect on our business, results of operations and financial condition. Problems with an acquired business could have a material adverse effect on our performance or our business as a whole. In addition, if we proceed with an acquisition, our available cash may be used to complete the transaction, diminishing our liquidity and capital resources, or shares may be issued which could cause significant dilution to existing shareholders.
We are implementing cost reduction efforts. We may need to implement additional cost reduction efforts, which could materially harm our business.
Since our acquisition of the Overland business, we have been implementing certain cost reduction efforts, which we intend to continue. There can be no assurance that these cost reduction efforts will be successful. As a result, we may need to implement further cost reduction efforts across our operations, such as further reductions in the cost of our workforce and/or suspending or curtailing planned programs, either of which could materially harm our business, results of operations and future prospects.
Risks Related to Intellectual Property
Our ability to compete depends in part on our ability to protect our intellectual property rights.
Our success depends in part on our ability to protect our rights in our intellectual property. We rely on various intellectual property protections, including copyright, trade-mark and trade secret laws and contractual provisions, to preserve our intellectual property rights. We have filed a number of patent applications and have historically protected our intellectual property through trade secrets and copyrights. As our technology is evolving and rapidly changing, current intellectual property rights may not adequately protect us.
Intellectual property rights may not prevent competitors from developing products that are substantially equivalent or superior to our products. Competitors may independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents. To the extent that we have or obtain patents, such patents may not afford meaningful protection for our technology and products. Others may challenge our patents and, as a result, our patents could be narrowed, invalidated or declared unenforceable. The patents that are material to our business began expiring in November 2015. In addition, our current or future patent applications may not result in the issuance of patents in the U.S. or foreign countries.

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Although we believe we have a proprietary platform for our technologies and products, we may in the future become subject to claims for infringement of intellectual property rights owned by others. Further, to protect our own intellectual property rights, we may in the future bring claims for infringement against others.
Our commercial success depends, in part, upon not infringing intellectual property rights owned by others. Although we believe that we have a proprietary platform for our technologies and products, we cannot determine with certainty whether any existing third party patents or the issuance of any third party patents would require us to alter our technology, obtain licenses or cease certain activities. We may become subject to claims by third parties that our technology infringes their intellectual property rights. While we provide our customers with a qualified indemnity against the infringement of third party intellectual property rights, we may become subject to these claims either directly or through indemnities against these claims that we routinely provide to our end-users and channel partners.
Further, our customers may use our products in ways that may infringe the intellectual property rights or third parties and/or require a license from third parties.  Although our customers are contractually obligated to use our products only in a manner that does not infringe third party intellectual property rights, we cannot guarantee that such third parties will not seek remedies against us for providing products that may enable our customers to infringe the intellectual property rights of others.
In addition, we may receive in the future, claims from third parties asserting infringement, claims based on indemnities provided by us, and other related claims. Litigation may be necessary to determine the scope, enforceability and validity of third party proprietary or other rights, or to establish our proprietary or other rights. Furthermore, despite precautions, it may be possible for third parties to obtain and use our intellectual property without our authorization. Policing unauthorized use of intellectual property is difficult, and some foreign laws do not protect proprietary rights to the same extent as the laws of Canada or the U.S. To protect our intellectual property, we may become involved in litigation. In addition, other companies may initiate similar proceedings against us. The patent position of information technology firms is highly uncertain, involves complex legal and factual questions, and continues to be the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under information technology patents.
Some of our competitors have, or are affiliated with companies having, substantially greater resources than us and these competitors may be able to sustain the costs of complex intellectual property litigation to a greater degree and for a longer period of time than us. Regardless of their merit, any such claims could:
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divert the attention of our management, cause significant delays, materially disrupt the conduct of our business or materially adversely affect our revenue, financial condition and results of operations;
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be time consuming to evaluate and defend;
•
result in costly litigation and substantial expenses;
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cause product shipment delays or stoppages;
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subject us to significant liabilities;
•
require us to enter into costly royalty or licensing agreements;
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require us to modify or stop using the infringing technology; or
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result in costs or other consequences that have a material adverse effect on our business, results of operations and financial condition.

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Risks Related to Our Public Company Status and Our Common Shares
If our common shares are delisted from the NASDAQ Capital Market, our business, financial condition, results of operations and share price could be adversely affected, and the liquidity of our common shares and our ability to obtain financing could be impaired.
In August 2016, we received a letter from the NASDAQ Stock Market LLC (“NASDAQ”) notifying us that we were not in compliance with the requirement of NASDAQ Listing Rule 5450(a)(1) (“Listing Rule”) for continued listing on the NASDAQ Global Market as a result of the closing bid price for our common shares being below $1.00 for 30 consecutive business days. This notification has had no effect on the listing of our common shares at this time. In accordance with the Listing Rule, we had 180 calendar days, or until January 30, 2017, to regain compliance with such rule. On February 1, 2017, we were granted an additional 180 calendar day period to regain compliance with the Listing Rule in connection with the transfer of the listing of our common shares to the NASDAQ Capital Market. To regain compliance, we must have a closing bid price of our common shares above $1.00 for a minimum of 10 consecutive business days. No assurance can be given that we will regain compliance during that period.
Any delisting of our common shares from the NASDAQ Capital Market could adversely affect our ability to attract new investors, decrease the liquidity of our outstanding common shares, reduce our flexibility to raise additional capital, reduce the price at which our common shares trade, and increase the transaction costs inherent in trading such shares with overall negative effects for our shareholders. In addition, delisting of our common shares could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common shares, and might deter certain institutions and persons from investing in our securities at all. If our Board of Directors exercises its discretion to approve a reverse share split to seek to regain compliance with the NASDAQ listing requirements and increase the per share trading price of our common shares, the announcement of the reverse share split could adversely affect the trading price per share even if we ultimately regain compliance. For these reasons and others, delisting could adversely affect our business, financial condition, and results of operations.
Future sales of our securities under certain circumstances may trigger price-protection provisions in outstanding warrants, which would dilute your investment and could result in a decline in the trading price of our common shares.
In connection with our registered direct offering in December 2015, we issued a warrant exercisable to purchase up to 1,500,000 common shares that contains certain price protection provisions. If we, at any time while these warrants are outstanding, effect certain variable rate transactions and the issue price, conversion price or exercise price per share applicable thereto is less than the exercise price then in effect for the warrants, then the exercise price of the warrants will be reduced to equal such price. In addition, in connection with our private placement offering in March 2017, we issued warrants that contain certain price protection provisions. If at any time while the warrants are outstanding, we sell or grant options to purchase, reprice or otherwise issue any common shares or securities convertible into common shares at a price less than $0.30, then the exercise price for the warrants will be reduced to such price, provided that the exercise price will not be lower than $0.10, and the number of common shares issuable under the warrants will be increased such that, after taking into account the decrease in the exercise price, the aggregate exercise price under the warrants will remain the same. The triggering of these price protection provisions, together with the exercise of these warrants, could cause additional dilution to our shareholders.
The market price of our common shares is volatile.
The market price for common shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following:
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price and volume fluctuations in the overall stock market from time to time;
•
volatility in the market prices and trading volumes of technology stocks;
•
changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
•
future capital raising activities;

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•
sales of common shares by holders thereof or by us;
•
failure of securities analysts to maintain coverage of Sphere 3D, changes in financial estimates by securities analysts who follow Sphere 3D, or our failure to meet these estimates or the expectations of investors;
•
the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
•
market acceptance of our products and technologies;
•
announcements by us or our competitors of new products or services;
•
the public’s reaction to our press releases, other public announcements and filings with the SEC and the applicable Canadian securities regulatory authorities;
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rumors and market speculation involving us or other companies in our industry;
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actual or anticipated changes in our operating results or fluctuations in our operating results;
•
actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;
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litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
•
developments or disputes concerning our intellectual property or other proprietary rights;
•
announced or completed acquisitions of businesses or technologies by us or our competitors;
•
new laws or regulations or new interpretations of existing laws or regulations applicable to us and our business;
•
changes in accounting standards, policies, guidelines, interpretations or principles;
•
any significant change in our executive officers and other key personnel or Board of Directors;
•
general economic conditions and slow or negative growth of our markets;
•
release of transfer restrictions on certain outstanding common shares;
•
news reports relating to trends, concerns or competitive developments, regulatory changes and other related issues in our industry or target markets.
Financial markets may experience price and volume fluctuations that affect the market prices of equity securities of companies and that are unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the common shares may decline even if our operating results, underlying asset values or prospects have not changed. As well, certain institutional investors may base their investment decisions on consideration of our governance and social practices and performance against such institutions’ respective investment guidelines and criteria, and failure to meet such criteria may result in a limited or no investment in our common shares by those institutions, which could adversely affect the trading price of our common shares. There can be no assurance that fluctuations in price and volume will not occur due to these and other factors.
In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be a target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention from day-to-day operations and consume resources, such as cash. In addition, the resolution of those matters may require us to issue additional common shares, which could potentially result in dilution to our existing shareholders. Expenses incurred in connection with these matters (which include fees of lawyers and other professional advisors and potential obligations to indemnify officers and directors who may be parties to such actions) could adversely affect our cash position. See Item 18 “Financial Statements”, Note 15 “Commitments and Contingencies”.

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We must comply with the financial reporting requirements of a public company, as well as other requirements associated with being listed on NASDAQ. Additional reporting requirements could apply if we lose our status as a Foreign Private Issuer or as an Emerging Growth Company.
Sphere 3D is subject to reporting and other obligations under applicable Canadian securities laws, SEC rules and the rules of the NASDAQ Capital Market. These reporting and other obligations, including National Instrument 52-102 - Continuous Disclosure Obligations and National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings, place significant demands on our management, administrative, operational and accounting resources. Moreover, any failure to maintain effective internal controls could cause us to fail to meet our reporting obligations or result in material misstatements in our consolidated financial statements. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results could be materially harmed, which could also cause investors to lose confidence in our reported financial information, which could result in a lower trading price of our common shares.
Management does not expect that our disclosure controls and procedures and internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that its objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of some persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations in a cost-effective control system, misstatements due to error, or fraud may occur and not be detected.
In addition to these reporting requirements, additional reporting requirements may apply if Sphere 3D loses its status as a Foreign Private Issuer under the U.S. Securities Exchange Act of 1934. Sphere 3D is considered a “foreign private issuer” under the rules of the SEC. As a result, Sphere 3D is subject to the reporting requirements under the Exchange Act applicable to foreign private issuers. Sphere 3D is required to file its annual report on Form 20-F with the SEC within four months of its fiscal year end, or Form 40-F, if applicable, with the SEC at the time it files its annual information form with the applicable Canadian Securities Regulatory authorities. In addition, Sphere 3D must furnish reports on Form 6-K to the SEC regarding certain information required to be publicly disclosed by Sphere 3D in Canada or filed with the NASDAQ Capital Market and which was made public by the NASDAQ Capital Market, or regarding information distributed or required to be distributed by Sphere 3D to its shareholders. Moreover, Sphere 3D is not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies (or foreign companies that do not qualify as “foreign private issuers”) whose securities are registered under the Exchange Act. Sphere 3D is not required to comply with Regulation FD, which addresses certain restrictions on the selective disclosure of material information. In addition, among other matters, Sphere 3D’s officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Sphere 3D common shares. If Sphere 3D loses its status as a foreign private issuer, it will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if it were a company incorporated in the United States. Sphere 3D does, however, file quarterly financial information under Canadian periodic reporting requirements for public corporations, which is accessible through the Internet at www.sedar.com, and will furnish such quarterly financial information to the SEC under cover of Form 6-K, which is available at www.sec.gov. Insiders of Sphere 3D are generally required to disclose their trading in Sphere 3D shares within 5 days of the date of the trade and these trading activity reports can be accessed through the Internet at www.sedi.ca.
Sphere 3D is an “emerging growth company” as defined in the Jumpstart Our Business Startups (“JOBS”) Act, enacted on April 5, 2012, and Sphere 3D will continue to qualify as an “emerging growth company” until the earliest to occur of: (a) the last day of the fiscal year during which Sphere 3D has total annual gross revenues of $1.0 billion or more; (b) the last day of the fiscal year of Sphere 3D following the fifth anniversary of the date of the first sale of common equity securities of Sphere 3D pursuant to an effective registration statement under the Securities Act; (c) the date on which Sphere 3D has, during the previous three-year period, issued more than $1.0 billion in nonconvertible debt; or (d) the date on which Sphere 3D is deemed to be a ‘large accelerated filer’.

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For so long as Sphere 3D continues to qualify as an emerging growth company, it will be exempt from the requirement to include an auditor attestation report relating to internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act (“SOA”) in its annual reports filed under the Exchange Act, even if it does not qualify as a “smaller reporting company”. In addition, section 103(a)(3) of the SOA has been amended by the JOBS Act to provide that, among other things, auditors of an emerging growth company are exempt from any rules of the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the registrant (auditor discussion and analysis).
Any U.S. domestic issuer that is an emerging growth company is able to avail itself of the reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and to not present to its shareholders a nonbinding advisory vote on executive compensation, obtain approval of any golden parachute payments not previously approved, or present the relationship between executive compensation actually paid and our financial performance. As a foreign private issuer, Sphere 3D is not subject to such requirements, and will not become subject to such requirements even if we were to cease to be an emerging growth company.
Sphere 3D is and will remain through December 31, 2017, an “emerging growth company” within the meaning under the JOBS Act, and until Sphere 3D ceases to be an emerging growth company Sphere 3D may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the SOA. Investors may find our common shares less attractive because Sphere 3D relies on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.
We may be treated as a Passive Foreign Investment Company.
There is also an ongoing risk that Sphere 3D may be treated as a Passive Foreign Investment Company, or PFIC, for U.S. federal income tax purposes. A non-U.S. corporation generally will be considered to be a PFIC for any taxable year in which 75% or more of its gross income is passive income, or 50% or more of the average value of its assets are considered “passive assets” (generally, assets that generate passive income). This determination is highly factual, and will depend upon, among other things, Sphere 3D’s market valuation and future financial performance. Sphere 3D believes that it was classified as a PFIC during the tax year ended December 31, 2013. However, based on current business plans and financial expectations, Sphere 3D expects that it will not be a PFIC for its current tax years ending December 31, 2014, 2015 and 2016, as well as current business plans and financial expectations, Sphere 3D expects that it will not be a PFIC for its current tax year ending December 31, 2017 and for the foreseeable future. If Sphere 3D were to be classified as a PFIC for any future taxable year, holders of Sphere 3D common shares who are U.S. taxpayers would be subject to adverse U.S. federal income tax consequences.
There is a possibility that, in the future, certain of our directors, officers and management could be in a position of conflict of interest.
Certain of the directors, officers and members of management of Sphere 3D may also serve as directors and/or officers of other companies. We may contract with such directors, officers, members of management and such other companies or with affiliated parties or other companies in which such directors, officers or members of management own or control. These persons may obtain compensation and other benefits in transactions relating to Sphere 3D. Consequently, there exists the possibility for such directors, officers and members of management to be in a position of conflict. Any decision made by any of such directors, officers and members of management involving Sphere 3D are being made in accordance with their duties and obligations to deal fairly and in good faith with a view to the best interests of Sphere 3D.
Future sales of common shares by directors, officers and other shareholders could adversely affect the prevailing market price for common shares.
Subject to compliance with applicable securities laws, officers, directors and other shareholders and their respective affiliates may sell some or all of their common shares in the future. No prediction can be made as to the effect, if any, such future sales will have on the market price of the common shares prevailing from time to time. However, the future sale of a substantial number of

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common shares by Sphere 3D’s officers, directors and other shareholders and their respective affiliates, or the perception that such sales could occur, could adversely affect prevailing market prices for the common shares.
We may issue an unlimited number of common shares. Future sales of common shares will dilute your shares.
Sphere 3D’s articles permit the issuance of an unlimited number of common shares, and shareholders will have no pre-emptive rights in connection with such further issuances. The directors of Sphere 3D have the discretion to determine the price and the terms of issue of further issuances of common shares in accordance with applicable laws.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Sphere 3D was incorporated on May 2, 2007 under the Business Corporations Act (Ontario) as “T.B. Mining Ventures Inc.” (“T.B. Mining”). Our registered office is located at 240 Matheson Blvd. East Mississauga, Ontario L4Z 1X1. In December 2012, a subsidiary of T.B. Mining acquired 100% of the operating business of Sphere 3D Inc. and the former security holders of Sphere 3D Inc. acquired control of the Company through a reverse takeover. In connection with the reverse takeover, the Company changed its name to “Sphere 3D Corporation”. As such, all discussion of the history of the Company and all financial results contained in this Annual Report relate to Sphere 3D. On December 1, 2014, the Company completed the acquisition of Overland. On March 24, 2015, the Company completed a short-form amalgamation with a wholly-owned subsidiary. In connection with the short-form amalgamation, the Company changed its name to “Sphere 3D Corp.”.
We have a global presence and maintain offices in multiple locations. Executive offices and our primary operations are conducted from our San Jose and San Diego, California locations. Our main office is located at 9112 Spectrum Center Blvd., San Diego, CA 92123. Our virtualization product development is primarily done from its research and development center near Toronto, Canada. Our European headquarters are in Germany. We maintain additional offices in Singapore, Japan, and the United Kingdom.
RDX ® Asset Acquisition
On August 10, 2015, we completed an acquisition of assets related to the RDX ® removable disk product lines from Imation Corp. (“Imation”). We issued 1,529,126 common shares with an approximate value of $6.1 million, and a warrant exercisable for 250,000 additional common shares exercisable in connection with certain purchase price adjustments under the asset purchase agreement. In February 2016, Imation exercised the warrant and we issued 250,000 common shares at $0.01.
Acquisition of Overland
On December 1, 2014, we completed our acquisition of Overland. The acquisition was carried out pursuant to the terms and conditions contained in an Agreement and Plan of Merger dated May 15, 2014 (as amended, the “merger agreement”). Under the terms of the merger agreement, Sphere 3D issued a total of 8,556,865 common shares for all the outstanding Overland shares on the basis of one Overland share for 0.46385 common shares. In addition, we issued warrants to purchase up to 1,323,897 of its common shares, options to purchase up to 168,488 common shares and 673,776 restricted share units, calculated on the basis of the exchange ratio.
This acquisition allowed us to add a complete data management and storage portfolio to its offerings. The addition of Overland provides an integrated range of technologies and services for primary, nearline, offline, and archival data storage. Data storage, management, and backup brands include SnapServer ® , SnapScale ® , SnapSAN ® , NEO ® and RDX ® . Collectively, these products are designed to allow easy and cost-effective management of different tiers of information over the entire data lifecycle.
The rationale for the purchase of Overland was multifaceted, and was in part driven by the market for converged infrastructure (“CI”) that is currently transforming the modern data center, coupled with current trends for hybrid cloud deployments. The portfolio of storage products is listed in greater detail under “ Products and Service ” below. In addition to providing us with a stronger intellectual property (“IP”) portfolio, the acquisition of Overland enables us to capitalize on a global footprint that has been established over more than 30 years, consisting of a service and support infrastructure that would take significant financial and human resource investments to replicate, and a dedicated team of field sales agents, an extensive number of resellers and first tier

19


original equipment manufacturer ( “ OEM ” ) partners. We have now assembled a stack of technologies that allows us, through its partners, to deliver a very competitive set of end-to-end solutions with a wide array of deployment options.
During the fourth quarter of 2015, we concluded that our lower net revenue due to timing of projected growth of products and integration of channel partner relationships from the acquisition of Overland could be indicators of impairment and, therefore, performed a third party impairment analysis. At December 31, 2015, as a result of the analysis, we recorded an impairment of $10.7 million related to developed technology, channel partner relationships, and trade names.
Purchase of VDI Technology
On March 21, 2014, we acquired from V3 Systems certain Virtual Desktop Infrastructure (“VDI”) technology, including V3 Desktop Cloud Orchestrator ® software, which allows administrators to manage local, cloud hosted, or hybrid virtual desktop deployments, and purpose-built, compact, efficient and easy-to-manage servers. The purchase price for the acquired technology assets of V3 Systems was $14.4 million, consisting of $4.2 million in cash and the issuance of 1,089,867 of our common shares at $5.92. We purchased certain VDI technology, associated trademarks and IP, and brand name “V3 ® ”, so that we could add CI as part of our offerings. The addition of VDI technology allowed us to expand our technology capabilities and provide the intellectual property and industry knowhow for delivering hyper-converged and converged infrastructure for VDI as well as a platform for the introduction of appliances for application virtualization that incorporate our container technologies.
VDI refers to the hosting of virtualized end user desktops on servers either on or offsite. End users then access their virtual desktops over a network using various remote display protocols. End users can access their desktop from a number of different devices and locations. Since the desktops are virtual, they can be centralized and end users can access their desktops and data from multiple locations. CI refers to the consolidation of multiple information technology components, such as storage, computing, and network interface, into a single computing package that can then be optimized for specific use cases.
The V3 ® platform was designed to alleviate these and other barriers to VDI adoption. The V3 ® hyper-converged infrastructure solution includes one of the industry’s first purpose-built appliances (a type of server) for desktop virtualization. Unlike other CI solutions, V3 ® was designed specifically for the needs of desktop virtualization. The V3 ® appliance combines storage, computing, network interface, virtualization software and management software to create a single box that can be quickly and easily deployed to deliver VDI. Through the V3 Desktop Cloud Orchestrator ® management software for VDI, we can offer a simple user interface that adds additional functionality while reducing the total cost of ownership for VDI implementations.
Our capital expenditures, excluding acquisitions, totaled $0.2 million , $0.4 million and $0.5 million for fiscal 2016, 2015 and 2014, respectively. Our capital expenditures were primarily related to computer equipment to support product quality and development. For further information on capital expenditures, see Note 5 to our consolidated financial statements included in Item 18 of this Annual Report.
B. Business Overview
We are a virtualization technology and data management solutions provider with a portfolio of products that address the complete data continuum. We enable the integration of virtual applications, virtual desktops, and storage into workflow, and allow organizations to deploy a combination of public, private or hybrid cloud strategies. We achieve this through the sale of solutions that are derived from our primary product groups: disk systems, virtualization, and data management and storage.
We, through the design of a proprietary virtualization software, created our own platform, Glassware 2.0 TM (“Glassware”), for the delivery of applications from a server-based computing architecture. This is accomplished through a number of unique approaches to virtualization utilized by Glassware including the use of software “containers” and “microvisors.” A container refers to software that takes an application and all the things required to run that application and encapsulates them with software. By doing so, users can run numerous applications from a single server and on a single copy of the operating system. A microvisor refers to the technology that allows non-Windows ® based applications to run on the same servers as Windows software through the use of a lightweight emulator.

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Products and Service
Disk Systems
G-Series Appliance and G-Series Cloud powered by Glassware
The G-Series appliance powered by Glassware containerization technology simplifies Windows ® application migration and enables access from any device including Macintosh, Windows ® , iOS, Chrome OS, and Android. The G-Series appliance is optimized for simplicity, flexibility and scalability. Through Glassware, a Microsoft Windows ® based container technology, organizations looking to migrate applications to the cloud can quickly deploy a complete solution for virtualizing 16-bit, 32-bit, or 64-bit applications with their native functionality intact. For the provisioning of a 16-bit application to the G-Series appliance, users will often require the skills to package the application, or can contract professional services from the Company or one of our certified system integrators. End users can access the containerized applications from any cloud connected device (iOS, Android or Windows ® ), through a lightweight downloadable app or simply from a browser. The G-Series appliance eliminates the complex tasks of designing, implementing, and maintaining application hosting environments and provides application session density and scale compared to traditional hypervisor-based virtualization solutions.
G-Series Cloud, is our latest product to utilize Glassware, which eliminates the complex task of designing, implementing, and maintaining application-hosting environments, and provides application session density and scale. G-Series Cloud is pre-configured and can be deployed in just minutes. It has a user interface to allow for administrators to quickly deploy applications, integrate with existing workflow and enable a mobile workforce.
Virtual Desktop Management Software
Our Desktop Cloud Orchestrator™ (“DCO”) software provides a user-friendly interface for managing virtual desktop pools on Sphere 3D’s V3 ® Hyper-Converged Appliances for virtualized desktop infrastructures, allowing desktop administrators to quickly create, move, delete and manage desktop pools without requiring extensive knowledge of a VMWare environment. DCO presents on its centralized console, the key tasks that a desktop administrator would need from the underlying system infrastructure built with VMware ® View, vCenter, and vSphere. Its key features include: (i) desktop cloud infrastructure dashboard, which provides status of key attributes of the virtual environment; (ii) optimized desktop allocation, which enables pool migration across network resources; (iii) pool management, which allows simplified pool creation and management; and (iv) diagnostics, which provide information about vital performance indicators such as BIOS, processor, memory, temperature and fan status and log file downloading capabilities.
V3 ® Virtual Desktop Infrastructure
In 2016, we announced the general availability of the V3 ® distributed Virtual Desktop Infrastructure (“VDI”) appliance family. With this, we introduced an approach to architecting the fundamentals of VDI to outperform desktop centric appliances as well deliver proprietary failover capabilities. We call this approach a Distributed Desktop Hyperconvergence (“DDH”) architecture, and it enables simplified virtual desktop deployment and management while optimized for distributed environments.
The V3 ® appliance family comes pre-provisioned with our DCO software and leverages VMware’s VMware vSphere ® virtualization and server management software, VMware Virtual SAN™ enterprise-class shared storage solutions, and GPU technology from NVIDIA, to take aim at making VDI accessible and applicable to business and branch offices of any size. The V3 ® all-flash appliances start with a single appliance for VDI or use or a 3-node configuration for a Virtual SAN cluster. The V3 ® appliances are designed to stand alone, or extend and simplify existing VMware customer environments, and can deliver performance and capacity advantages from a single product family with one point of support.
Our DDH architecture is designed to simplify virtual desktop deployment and management for remote office branch office (“ROBO”) installations, and it also reduces the cost and necessary infrastructure to support VDI. DDH reduces VDI management overhead and complexity while creating desktop resilience and decreasing branch office infrastructure. DDH is also road-mapped to use application containerization to shift the focus from storage onto end user computing.

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V3 ® appliances with DCO provide hardware awareness with real time alerts of the state of the hardware and the ability to migrate end users, on a case by case basis, from appliance to appliance for optimal performance and availability. Utilizing proprietary resource scheduling technology enables either user defined, or administrator defined, rights that ensure workloads have dynamic access to resources. In addition, Glassware technology for containerizing commonly used applications delivers performance at a server utilization level that can reduce server sprawl. Glassware containerized applications can be delivered based on policy to the virtual desktop through a VMware™ portal.
RDX ® Removable Disk Solutions
In 2015, we completed an acquisition of assets related to RDX ® removable disk product lines from Imation Corp., which complemented our existing RDX ® removable disk solutions. Our RDX ® portfolio can use public cloud providers, including Microsoft and Amazon, as a backup target, and our SnapScale ® product can be deployed as a standalone private cloud with the use of sync and share technologies for file collaboration. The removable disk solutions can be secured with cartridge encryption for additional levels of security, and is shock resistant to accommodate accidental falls from the rack, desktop, or during transport. We offer two types of RDX ® media: media with hard drives inside the cartridge and media with solid-state disks inside. Hard drive RDX ® media is designed to provide easy-to-use and reliable data protection, while solid-state disk RDX ® media is designed for customers who are operating in environments that need extreme speed and durability in a portable storage device. RDX ® removable media are available in several different capacity points, ranging from 64 gigabytes (“GB”) to two terabytes (“TB”) per cartridge.
•
The RDX ® QuikStor is a single cartridge purpose-built backup solution that combines the portability and reliability of tape-based backup with the speed and simplicity of hard disk drives in order to deliver reliable and convenient storage for backup, archive, data interchange and disaster recovery. RDX ® QuikStor utilizes either hard disk drives or SSD drives, with either SATA or USB 3.0 connectivity, and provide up to three TB of data storage.
•
The RDX ® QuikStation™ is a network-attached removable disk purpose-built backup system designed to provide a platform for data protection and off-site disaster recovery for small and medium enterprise (“SME”) environments. The RDX ® QuikStation™ can appear to a host as a tape library, a virtual RDX ® drive, a stand-alone tape drive, generic disk drives or a combination of disk and tape, offering users versatility and expanded compatibility.
In 2016, we launched the RDX ® QuikStation™ 8. The QuikStation™ 8 is an iSCSI network-attached removable disk appliance designed to provide a flexible platform for data protection and off-site disaster recovery for physical or virtual small and medium business (“SMB”) and SME environments. QuikStation™ 8 delivers high RDX ® media capacity of up to eight x 3TB RDX ® slots for a maximum capacity of 24TB online and unlimited offline. Appliances allow for multiple configuration options to meet today’s ever-changing backup storage requirements.
In 2015, we introduced RDX ® QuikStation 4, a lower-end version of the RDX ® QuikStation network attached purpose-built backup system, that fit into a slimmer one rack unit space, and includes four slots for RDX+ cartridges. The RDX ® QuikStation™ 4 is compatible with the previous generation RDX ® cartridges. RDX ® QuikStation™ 4 includes a virtual volume feature that enables the system to represent a single logical volume representation by aggregating and virtualizing the combined capacity across all four cartridges.
SnapServer ® Network Attached Storage Solutions
Our SnapServer ® solutions are an ideal platform for primary or nearline storage, and deliver stability and best-in-class integration with Windows ® , UNIX/Linux, and Macintosh environments. For virtual servers and database applications, the SnapServer ® family supports iSCSI block-level access with Microsoft VSS and VDS integration to simplify Windows ® management. For data protection, the SnapServer ® family offers RAID replication, and snapshots for point-in-time data recovery. The SnapServer DX Series ™ products support DynamicRAID ® and traditional RAID levels 0, 1, 5, 6, and 10.
•
The SnapServer ® XSR40 is a 1U server that can be configured with up to four SATA II drives, and can scale to 320 TB of storage capacity by adding SnapExpansion enclosures.
•
The SnapServer ® XSR120 is a 2U server that can be configured with up to 12 SATA II drives, and can scale to 768 TB of storage capacity by adding up to seven SnapExpansion enclosures.

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The Snap family of products, SnapCLOUD™, SnapScale ® and SnapServer ® , have integrated data mobility tools to enable customers to build private clouds for sharing and synchronizing data for anytime, anywhere access.
Our GuardianOS ® storage software is designed for the SnapServer ® family of enterprise-grade network attached storage (“NAS”) systems and delivers simplified data management and consolidation throughout distributed information technology environments by combining cross-platform file sharing with block-level data access on a single system. The flexibility and scalability of GuardianOS ® reduces the total cost of ownership of storage infrastructures for small and medium businesses to large Fortune 500 enterprises. In addition to a unified storage architecture, GuardianOS ® offers highly differentiated data integrity and storage scalability through features such as DynamicRAID ® , centralized storage management, and a comprehensive suite of data protection tools.
Our Snap Enterprise Data Replicator ® (“Snap EDR”) provides multi-directional, WAN-optimized replication for SnapServer ® and SnapScale ® systems. With Snap EDR, administrators can automatically replicate data between multiple SnapServer ® systems for data distribution, data consolidation, and disaster recovery.
During 2016, we announced the enhancement of our widely deployed Snap family of on-premise and Cloud storage products with encrypted continuous replication (“ECR”). Snap ECR™ provides business continuity to SMBs and enterprises with near-zero data loss in the event of an information technology failure. Snap ECR™ is a highly secure, continuous replication solution that replicates only changed data at wire speed, thereby providing bandwidth savings, and ensuring that data is protected even during peak usage hours. Moreover, it provides secure and encrypted data transmission across the network, therefore eliminating the need for a VPN.
SnapScale ® Clustered Network Attached Storage Solutions
Our SnapScale X2 ® and SnapScale X4 ™ products are clustered NAS solutions that enable organizations with rapid or unpredictable data growth to scale capacity and performance without adding management complexity. SnapScale ® eliminates islands of storage, which enables scaling without having to predict capacity in advance. SnapScale ® writes data across multiple nodes and drives simultaneously for instant protection and high availability. SnapScale ® uses peer-set protection technology which delivers protection against multiple disk failures while enabling faster rebuild of data once the failed disks are replaced. Our SnapScale ® products are designed for high performance, high scalability, and are suited for the storage of large amounts of unstructured data.
•
The SnapScale X2 ® is a 2U rackmount, which can be configured with up to 12 Nearline SAS hard drives for a maximum capacity of 96 TB per node, and can scale out to over 512 petabytes (“PB”) with two-way or three-way redundancy.
•
The SnapScale X4 ™ is a high-density 4U rackmount, which can be configured with up to 36 Nearline SAS hard drives for a maximum capacity of 288 TB per node, and can scale out to over 512 PB with two-way or three-way redundancy.
Tape Automation Systems
NEO ® Tape-Based Backup and Long-Term Archive Solutions
Our NEO Series ® Tape Libraries, Tape Autoloaders, stand-alone tape drives and LTFS solutions are designed for both small and medium businesses looking for simple, cost-effective long-term data protection, as well as for complex enterprises faced with the demands of “big data” storage applications. Regardless of the size or type of environment, information technology managers continue to recognize the efficiency and value tape-based solutions provide for long-term data storage. NEO Series ® tape solutions are designed to utilize the latest linear tape-open (“LTO”) technologies, and can accommodate as many as 42 tape drives and up to 1,000 cartridges for maximum efficiency and data protection.
October 2016, we announced our new NEO Agility LTFS Archive Management solution. NEO Agility provides the convenience of disk-like drag and drop file access, providing users with easy, rapid access to large amounts of data. While the data appears to be stored on the disk contained in the NEO Agility appliance, it is actually stored on a NEO tape library. This provides a higher-capacity, cost-effective storage solution while still providing the ease of data access associated with disk technology. NEO Agility is currently available in three configurations; NEO Agility 48 (optimized for storing data on our NEOs T48 tape

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library), NEO Agility 80 (optimized for storing data on our NEOxl80 tape library) and NEO Agility 160 (optimized for storing data on our NEO 8000e tape library). NEO Agility is also compatible with our NEOs StorageLoader and NEOs T24 tape libraries, as well as tape libraries manufactured by other vendors.
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NEO ® XL-Series libraries are designed for mid-range and enterprise businesses, providing automated backup and archive that combines flexibility, density, high-performance and affordability to ensure that data is protected faster and more cost effectively. NEO ® XL-Series tape libraries provide data storage capacity that ranges from 90 TB to 8.4 PB, enabling customers to expand their storage capability as their storage requirements changes. NEO ® XL-Series significantly reduces backup windows and improves efficiency with high-performance data transfer rates that range from 504 GB per hour to over 114 TB per hour. The NEOxl 80 supports up to 80 cartridges (with capacity ranging from 120 TB to 1.2 PB) and six tape drives (for data transfer rates ranging from 504 GB per hour to 8.6 TB per hour) per module. Up to six 80-cartridge per six-drive NEOxl Expansion Modules can be added to provide a total of 560 cartridges (with capacity of 8.4 PB) and 42 tape drives (for data transfer rates of 114 TB per hour).
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NEO ® S-Series libraries provide affordable tape backup and archive for small and medium businesses. NEO ® S-Series libraries are available in compact rack-mount configurations with either SAS or FC connectivity. The NEOs StorageLoader is a 1U, eight-cartridge, single-drive autoloader that provides up to 120 TB of storage capacity. The NEOs T24 is a 2U tape library that supports up to 24 cartridge slots and two tape drives, and delivers up to 360 TB of storage capacity. The NEOs T48 is a 4U tape library that supports up to 48 cartridge slots and four tape drives, with a maximum storage capacity of 720 TB.
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NEO ® E-Series provides scalable, high capacity, enterprise-class tape automation designed for large businesses. NEO ® E-Series provides enterprise-level RAS (reliability, availability and serviceability) features, such as robotic and power redundancy, partitioning and scalability, to ensure corporate data is reliably protected. The NEO ® 8000e is a 42U tape library that supports up to 500 cartridge slots (up to 7.5 PB) and 12 tape drives (up to 32.4 TB per hour) in a single module. For truly enterprise-class storage requirements, the NEO ® 8000e is scalable up to 1,000 cartridge slots (15 PB) and 24 tape drives (64 TB per hour).
Tape Drives and Media
In addition to our tape automation solutions, we provide stand-alone LTO tape drives and LTO media products.
•
Stand-alone LTO tape drives provide low-cost, compact affordable backup and archive abilities. Available either as internal drives to be integrated into server-based bundles or as eternal drives for desktop use, stand-alone tape drives deliver storage capacities ranging from 1.5 TB to 15 TB.
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LTO media (data cartridges and cleaning cartridges) allows our customers to purchase the media for their tape drives and libraries at the same time they purchase their NEO Series ® solution, providing the ability to have their NEO Series ® solution fully operational upon installation. With four generations of LTO tape media (LTO 4, 5, 6, and 7) in our portfolio, native capacities range from 800 GB per cartridge to 6 TB per cartridge.
Service
Customer service and support are key elements of our strategy and critical components of our commitment to making enterprise-class support and services available to companies of all sizes. Our technical support staff is trained to assist our customers with deployment and compatibility for any combination of virtual desktop infrastructures, hardware platforms, operating systems and backup, data interchange and storage management software. Our application engineers assist with more complex customer issues. We maintain global toll-free service and support phone lines and we also provide self-service and support through our website support portal and email.
Our service offerings provide for on-site service and installation options, round-the-clock phone access to solution experts, and proof of concept and architectural design offerings. We are able to provide comprehensive technical assistance on a global scale.

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Net Revenue by Category and Geographic Market
We divide our worldwide sales into three geographical regions:
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Americas, consisting of the U.S., Canada and Latin America;
•
EMEA, consisting of Europe, the Middle East and Africa; and
•
APAC, consisting of Asia Pacific countries.
The following table summarizes sales mix by product (in thousands):
Year Ended December 31,
2016
2015
2014
Disk systems
$
46,795

$
39,836

$
8,518

Tape automation systems
10,297

12,764

1,868

Tape drives and media
10,973

12,914

1,815

Service
8,328

10,651

1,268

$
76,393

$
76,165

$
13,469

The following table summarizes net revenue by geographical region (in thousands):
Year Ended December 31,
2016
2015
2014
EMEA
$
39,719

$
39,331

$
7,172

Americas
23,043

25,284

4,749

APAC
13,631

11,550

1,548

$
76,393

$
76,165

$
13,469

Seasonality
Since a large portion of our sales is generated by our European channel, our third quarter (July through September) results of operations have been in the past and may continue to be impacted by seasonally slow European orders, reflecting the summer holiday period in Europe.
Production
A significant number of our components and finished products are manufactured or assembled, in whole or in part, by a limited number of third parties. For certain products, we control the design process internally and then outsource the manufacturing and assembly in order to achieve lower production costs. For certain RDX ® product and SnapServer ® products, we perform product assembly, integration and testing at our manufacturing facilities in Guangzhou, China.
We purchase disk drives, tape drives, chassis, printed circuit boards, integrated circuits, and other major components from outside suppliers. We carefully select suppliers based on their ability to provide quality parts and components which meet technical specifications and volume requirements. We actively monitor these suppliers but we are subject to substantial risks associated with the performance of our suppliers. For certain components, we qualify only a single source, which magnifies the risk of shortages and may decreases our ability to negotiate with that supplier. For a more detailed description of risks related to suppliers, see “Risk Factors”.

25


Sales and Distribution
For 2016 , our solution-focused product offerings were aimed at SMEs, SMBs, as well as large distributed enterprises. We primarily sell our products through its worldwide distributor and reseller network. A significant portion of our net revenue is derived from a limited number of customers. In 2016 , 2015 and 2014, the percentage of net revenue that was derived from our top five customers was 32.5%, 35.1% and 34.7%, respectively.
All of our products and services are designed and manufactured to address customers’ requirements and reliability standards. The following provides additional detail on our channels:
•
Distribution channel — Our primary distribution partners in North America include Promark Technology, Inc., Ingram Micro Inc., Tech Data Corporation, and Synnex Corporation. We have over 50 distribution partners throughout Europe and Asia. We sell through a two-tier distribution model where distributors sell our products to system integrators, VARs or DMRs, who in turn sell to end users. We support these distribution partners through our dedicated field sales force and field engineers. In 2016 , no distribution partner accounted for more than 10% of net revenue.
•
Reseller channel — Our worldwide reseller channel includes systems integrators, VARs and DMRs. Our resellers may package our products as part of complete application and desktop virtualization solutions data processing systems or with other storage devices to deliver complete enterprise information technology infrastructure solutions. Our resellers also recommend our products as replacement solutions when systems are upgraded, or bundle our products with storage management software specific to the end user’s system. We support the reseller channel through its dedicated field sales representatives, field engineers and technical support organizations.
•
Cloud Marketplace — In 2015, we added Microsoft Azure Cloud Marketplace as an additional channel for two of our cloud solutions to sell to end-users directly as well as to our traditional channel partners. With the pay per use model, supported through the Microsoft Azure Cloud, our customers now can accelerate their adoption of cloud based application and data delivery.
Intellectual Property
We rely on a combination of patents, trademarks, trade secret and copyright laws, as well as contractual restrictions, to protect the proprietary aspects of our products and services. Although every effort is made to protect Sphere 3D’s intellectual property, these legal protections may only afford limited protection.
We may continue to file for patents regarding various aspects of our products, services and delivery method at a later date depending on the costs and timing associated with such filings. We may make investments to further strengthen our copyright protection going forward, although no assurances can be given that it will be successful in such patent and trademark protection endeavors. We seek to limit disclosure of our intellectual property by requiring employees, consultants, and partners with access to our proprietary information to execute confidentiality agreements and non-competition agreements (when applicable) and by restricting access to our proprietary information. Due to rapid technological change, we believe that establishing and maintaining an industry and technology advantage in factors such as the expertise and technological and creative skills of our personnel, as well as new services and enhancements to our existing services, are more important to our company’s business and profitability than other available legal protections.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. The laws of many countries do not protect proprietary rights to the same extent as the laws of the U.S. or Canada. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar services or products. Any failure by us to adequately protect our intellectual property could have a material adverse effect on our business, operating results and financial condition. See “Risks Related to Intellectual Property” under the heading “Risk Factors”.

26


Competitive Conditions
We believe that our products are unique and innovative and afford us various advantages in the market place; however, the market for information technology is highly competitive. Competitors vary in size from small start-ups to large multi-national corporations which may have substantially greater financial, research and development, and marketing resources. Competitive factors in these markets include performance, functionality, scalability, availability, interoperability, connectivity, time to market enhancements, and total cost of ownership. Barriers to entry vary from low, such as those in traditional disk-based backup products, to high, in tape automation and virtualization software. The markets for all of our products are characterized by price competition and as such we may face price pressure for our products. For a more detailed description of competitive and other risks related to our business, see “Risk Factors.”
Governmental Regulations
The Company is subject to laws and regulations enforced by various regulatory agencies such as the U.S. Consumer Product Safety Commission and the U.S. Environmental Protection Agency. For a detailed description of the material effects of government regulations on the Company’s business, see “Our international operations are important to our business and involve unique risks related to financial, political, and economic conditions” and “We are subject to laws, regulations and similar requirements, changes to which may adversely affect our business and operations” in the section of the Annual Report entitled Risk Factors—Risks Related to Our Business.
C. Organizational Structure
The following sets forth the Company’s direct and indirect wholly-owned subsidiaries at December 31, 2016.
Name of subsidiary
Jurisdiction of Incorporation
or Organization
Sphere 3D Inc.
Ontario, Canada
V3 Systems Holdings, Inc.
Delaware, United States
Overland Storage, Inc.
California, United States
Overland Storage (Europe), Ltd.
United Kingdom
Overland Storage S.a.r.L.
France
Overland Storage GmbH
Germany
Overland Technologies Luxembourg S.a.r.L.
Luxembourg
Tandberg Data Holdings S.a.r.L.
Luxembourg
Tandberg Data SAS
France
Tandberg Data (Asia) Pte., Ltd.
Singapore
Tandberg Data (Japan), Inc.
Japan
Tandberg Data (Hong Kong), Ltd.
Hong Kong
Tandberg Data GmbH
Germany
Tandberg Data Norge AS
Norway
Guangzhou Tandberg Electronic Components Co. Ltd.
China

27


D. Property, Plant and Equipment
•
We lease an 86,900 square foot facility in Guangzhou, China. This lease expires in July 2019. This facility houses manufacturing of the majority of our RDX product and repair services.
•
We own a 25,600 square foot facility in Dortmund, Germany. This facility houses sales and marketing, repair services, technical support, and administrative functions.
•
We lease a 20,515 square foot facility in a light industrial complex in San Diego, California. The lease expires in March 2020. This facility houses repair services, research and development, technical support, and administrative functions.
•
We lease a 20,777 square foot facility in San Jose, California. In March 2017, the lease was amended to 10,282 square feet and expires in October 2022. The San Jose facility houses research and development, technical support, sales and marketing, and administrative functions.
We also lease additional smaller sales offices and research and development facilities throughout the U.S. and internationally.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.

28


ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
The following table sets forth certain financial data as a percentage of net revenue:
Year Ended December 31,
2016
2015
2014
Net revenue
100.0
%
100.0
%
100.0
%
Cost of revenue
70.8

70.3

60.4

Gross profit
29.2

29.7

39.6

Operating expenses:


Sales and marketing
29.1

30.9

38.3

Research and development
11.5

13.0

4.9

General and administrative
27.1

30.6

85.9

Impairment of goodwill and acquired intangible assets
45.0

14.1

—

112.7

88.6

129.1

Loss from operations
(83.5
)
(58.9
)
(89.5
)
Interest expense
(6.7
)
(4.1
)
(3.3
)
Other expense, net
1.7

(0.9
)
(1.4
)
Loss before income taxes
(88.5
)
(63.9
)
(94.2
)
(Benefit from) provision for income taxes
1.1

(1.8
)
0.3

Net loss
(89.6
)%
(62.1
)%
(94.5
)%
A summary of the sales mix by product follows:
Year Ended December 31,
2016
Change
2015
Change
2014
Disk systems
$
46,795

17.5
%
$
39,836

367.7
%
$
8,518

Tape automation systems
10,297

(19.3
)%
12,764

583.3
%
1,868

Tape drives and media
10,973

(15.0
)%
12,914

611.5
%
1,815

Service
8,328

(21.8
)%
10,651

740.0
%
1,268

Total
$
76,393

0.3
%
$
76,165

465.5
%
$
13,469

We divide our worldwide sales into three geographical regions: Americas, consisting of the U.S., Canada and Latin America; EMEA, consisting of Europe, the Middle East and Africa; and APAC, consisting of Asia Pacific countries.
The following table summarizes net revenue by geographic area (in thousands):
Year Ended December 31,
2016
Change
2015
Change
2014
EMEA
$
39,719

1.0
%
$
39,331

448.4
%
$
7,172

Americas
23,043

(8.9
)%
25,284

432.4
%
4,749

APAC
13,631

18.0
%
11,550

646.1
%
1,548

Total
$
76,393

0.3
%
$
76,165

465.5
%
$
13,469


29


Results of Operations – Comparison of Years Ended December 31, 2016 , 2015 and 2014
In December 2014, we completed our acquisition of Overland, which added approximately 470 employees to our workforce and a wide variety of data protection products to our product mix. As such, overall increases from 2015 compared to 2014 are primarily from our Overland acquisition.
Net Revenue
We had revenue of $76.4 million during 2016 compared to $76.2 million during 2015 . The slight increase in net revenue is an increase in product revenue of $2.5 million primarily due to an increase in sales units for disk systems, offset by a decrease in service revenue of $2.3 million primarily due to the decrease in tape automation product sales, which resulted in a decrease in sales of extended service contracts.
We had revenue of $76.2 million during 2015 compared to $13.5 million during 2014 . The increase in net revenue is a result of our acquisition of Overland in December 2014, which contributed significant product offerings in 2015. In addition, in August 2015, we completed an acquisition of Imation’s RDX ® product line which accounted for 6.0% of net revenue in 2015. During 2014, we had $0.8 million of revenue that was earned from our related agreements with Overland.
Original equipment manufacturer ( “ OEM ” ) net revenue accounted for 18.5%, 16.9% and 11.1% of net revenue during the years ended 2016, 2015 and 2014, respectively.
Product Revenue
Net product revenue increased to $68.1 million during 2016 from $65.5 million during 2015 , an increase of $2.6 million. Revenue from disk systems increased by $7.0 million primarily related to additions of net product revenue from the RDX ® product line acquired from Imation in August 2015, partially offset by a $4.4 million decrease in tape automation, and tape drives and media revenue related to lower tape sales volume.
Net product revenue increased to $65.5 million during 2015 from $12.2 million during 2014 . The increase of approximately $53.3 million resulted from our product offerings from our acquisition of Overland in December 2014 and $4.5 million from our RDX ® product line which we acquired in August 2015.
Service Revenue
Net service revenue decreased to $8.3 million during 2016 from $10.7 million during 2015 . The decrease of approximately $2.4 million was primarily due to the decrease in tape automation product sales which resulted in a decrease in sales of extended service contracts.
Net service revenue increased to $10.7 million during 2015 from $1.3 million during 2014 . The increase of approximately $9.4 million was primarily due to service revenue generated by Overland which was acquired in December 2014.
Gross Profit
2016
Change
2015
Change
2014
Gross profit
$
22,339

(1.2
)%
$
22,619

323.9
%
$
5,336

Gross margin
29.2
%
(0.5) pt

29.7
%
(9.9) pt

39.6
%
Gross profit - product
$
17,631

5.6
%
$
16,689

257.7
%
$
4,665

Gross margin - product
25.9
%
0.4 pt

25.5
%
(12.7) pt

38.2
%
Gross profit - service
$
4,708

(20.6
)%
$
5,930

783.8
%
$
671

Gross margin - service
56.5
%
0.8 pt

55.7
%
2.8 pt

52.9
%
In 2016, gross profit for service revenue decreased due to lower sales of extended service contracts primarily related to decreased tape automation product sales during the year.

30


In 2015 , gross profit increased compared to 2014 due to sales volumes related to our acquisition of Overland in December 2014 and the RDX ® product line which we acquired in August 2015. Gross margin for 2015 decreased compared 2014 due to our transition to a company with worldwide operations and a significant increase in product sales as a result of our acquisition of Overland in December 2014. Gross margin on service revenue increased due to higher margin service contracts we assumed in connection with our acquisition of Overland in December 2014.
Operating Expenses
Sales and Marketing Expense
Sales and marketing expenses were $22.2 million , $23.6 million and $5.2 million for the years ended December 31, 2016, 2015 and 2014 , respectively. The 2016 decrease of $1.4 million was primarily due to a decrease of $1.3 million in employee and related expenses associated with a lower average headcount and a $0.3 million decrease in share-based compensation, offset by a $0.3 million increase in outside contractor fees.
In 2015, the increase of $18.4 million was primarily due to an increase related to our acquisition of Overland in December 2014, which led to a $14.4 million increase in employee and related expenses associated with a higher average headcount, a $1.5 million increase in outside contractor fees, and a $2.0 million increase in share-based compensation.
Research and Development Expense
Research and development expenses were $8.8 million , $9.9 million and $0.7 million for the years ended December 31, 2016, 2015 and 2014 , respectively. The 2016 decrease of $1.1 million was primarily due to a decrease of $1.5 million in employee and related expenses associated with a decrease in average headcount and a decrease of $0.3 million in outside contractor fees and development costs, offset by a $0.7 million increase in share-based compensation.
In 2015, the increase of $9.2 million was primarily due to an increase of $6.3 million in employee and related expenses associated with an increase in average headcount from our acquisition of Overland in December 2014, a $0.7 million increase in share-based compensation, and a $0.4 million increase in outside contractor fees and development costs. During 2015 and 2014, we capitalized $0.1 million and $1.8 million , respectively, of development costs, which were primarily made up of employee and related costs, development supplies, and share-based compensation.
General and Administrative Expense
General and administrative expenses were $20.7 million , $23.3 million and $11.6 million for the years ended December 31, 2016, 2015 and 2014 , respectively. The 2016 decrease of $2.6 million was primarily due to: (i) an $0.8 million decrease in bad debt expense; (ii) a $0.7 million decrease in amortization expense related to intangible assets; (iii) a $0.7 million decrease in legal and advisory expenses primarily related to transactional matters and litigation; (iv) a $0.4 million decrease in auditor and tax professionals’ fees; (v) a $0.4 million decrease in outside contractor fees; (vi) a $0.4 million decrease in employee related expenses associated with a decrease in average headcount; and (vii) a $0.3 million decrease in public reporting expenses. These decreases were offset by a $1.4 million increase in share-based compensation.
In 2015, the increase of $11.7 million was primarily due to: (i) a $3.4 million increase in employee related expenses associated with an increase in average headcount related to our acquisition of Overland in December 2014; (ii) a $1.9 million increase in outside contractor fees; (iii) a $1.6 million increase in auditor and tax professionals’ fees primarily as a result of our expanded business operations caused by our acquisition of Overland in December 2014; (iv) a $1.6 million increase in bad debt expense; (v) an $0.8 million increase in amortization expense related to intangible assets; (vi) an $0.8 million increase in public reporting expenses including public relations; and (vii) a $0.7 million increase in share-based compensation, and (viii) a $0.6 million increase in legal and advisory expenses primarily related to transactional matters and litigation.

31


Impairment of Acquired Intangible Assets
Impairment of acquired intangible assets were $34.4 million , $10.7 million and zero for the years ended December 31, 2016, 2015 and 2014 , respectively. During the third quarter of 2016, we concluded that our declining market capitalization could be an indicator of impairment and, therefore, had a third party impairment analysis performed. As a result of the analysis, we recorded an impairment of $33.2 million related to goodwill and an impairment of $1.2 million related to indefinite-lived trade names. During the fourth quarter of 2015, we concluded that our lower net revenue due to timing of projected growth of products and integration of channel partner relationships from the acquisition of Overland could be indicators of impairment and, therefore, performed a third party impairment analysis. At December 31, 2015, as a result of the analysis, we recorded an impairment of $10.7 million of which $1.7 million related to developed technology, $4.1 million related to channel partner relationships, and $4.9 million related to trade names.
Non-Operating Expenses
Interest Expense
Interest expense was $5.1 million , $3.1 million and $0.4 million for the years ended December 31, 2016, 2015 and 2014 , respectively. In 2016, the increase is related to an increase in outstanding debt of $7.1 million compared to the same period in the prior year. In addition, in April 2016, the Company paid in full its prior year outstanding credit facilities and expensed the remaining $0.7 million of related capitalized debt costs. In 2015, the increase is related to interest expense for the $19.5 million convertible note with affiliates of Cyrus Capital Partners, a related party, and the $17.4 million outstanding on our credit facilities, $10.0 million of which was payable to affiliates of Cyrus Capital Partners.
Other Income (Expense), Net.
Other income (expense), net, in 2016 was $1.3 million of other income, net, compared to $0.7 million and $0.2 million in 2015 and 2014, respectively, of other expense, net. In 2016, other income, net, was primarily related to revaluation of warrants. In 2015, other expense, net, was primarily related to realized foreign currency losses of $1.7 million, offset by other income of $1.0 million which included $0.5 million for revaluation of warrants.
Income Tax
Income tax provision was $0.8 million for the year ended December 31, 2016, which primarily related to deferred foreign tax expense offset by a reduction in the deferred tax liabilities for the $1.2 million impairment on intangible assets recognized in 2016. Income tax benefit was $1.4 million for the year ended December 31, 2015, which primarily related to the deferred tax liabilities for the $10.7 million impairment on intangible assets recognized in 2015. In 2014, we had a minimal income tax provision related to foreign tax provisions.
Foreign Currency Risk
We conduct business on a global basis and a significant portion of our sales in international markets are not denominated in U.S. dollars. Our wholly-owned foreign subsidiaries incur costs that are denominated in local currencies. As exchange rates vary, these results may vary from expectations when translated into U.S. dollars, which could adversely impact overall expected results. The effect of exchange rate fluctuations on our results of operations resulted in a minimal loss in 2016 , and a loss of $1.7 million and $0.2 million for the years ended December 31, 2015 and 2014 , respectively.

32


B. Liquidity and Capital Resources
In 2016, we experienced a significant decline in the market value of our common shares, and we incurred a net loss of $68.5 million .
At December 31, 2016 , we had cash of $5.1 million compared to cash of $8.7 million at December 31, 2015 . Our primary source of cash flow is generated from sales of our disk and tape automation systems. Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows as we increase our sales volume, and as we work to improve operational efficiencies.
On March 24, 2017, we entered into a securities purchase agreement (“SPA”) with certain investors party thereto (the “Investors”), pursuant to which we issued to the Investors, in the aggregate, 20,454,546 of our common shares for gross proceeds of $4.5 million. The purchase price for one common share was $0.22. The SPA also provided for the concurrent private placement of warrants exercisable to purchase up to 20,454,546 common shares. Each warrant has an initial exercise price of $0.30 per warrant share. The warrants are exercisable for cash immediately or on a cashless basis commencing on a date which is the earlier of (i) six months from the date of the effective date of the offering or (ii) the date on which we fail to fulfill our obligations to register the common shares underlying the warrants under the registration rights agreements and expiring on a date which is no more than five years from the date of the effective date of the offering. If at any time while the Warrants are outstanding, we sell or grant options to purchase, reprice or otherwise issue any common shares or securities convertible into common shares at a price less than $0.30, then the exercise price for the warrants will be reduced to such price, subject to certain limitations.
Between December 2016 and March 16, 2017, we completed a private placement and issued a total of 18,139,998 “Units” at a purchase price of $0.30 per Unit. Each Unit consisted of one common share and one warrant from each of two series of warrants, as described below. We received gross proceeds of $5.4 million in connection with the sale of the Units.
The first series of warrants is exercisable to purchase 18,139,998 common shares in the aggregate and has an exercise price of $0.40 per share, a one-year term, and is exercisable in whole or in part at any time prior to expiration. The second series of warrants is exercisable for 18,139,998 common shares in the aggregate and has an exercise price of $0.55 per share, a five-year term, and is exercisable in whole or in part at any time prior to expiration.
Management has projected that cash on hand will not be sufficient to allow the Company to continue operations beyond June 30, 2017 if we are unable to amend or refinance our credit facility with Opus Bank. As a result, we expect to need to refinance the short term portions of our existing debt and/or continue to raise additional debt, equity or equity-linked financing in the near future, but such financing may not be available on favorable terms on a timely basis or at all. Significant changes from our current forecasts, including but not limited to: (i) failure to comply with the financial covenants in our credit facility; (ii) shortfalls from projected sales levels; (iii) unexpected increases in product costs; (iv) increases in operating costs; (v) changes in the historical timing of collecting accounts receivable; and (vi) inability to gain compliance with the minimum bid price requirement of the NASDAQ Capital Market and/or inability to maintain listing with the NASDAQ Capital market 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 occurs or we are unable to generate sufficient cash from operations or financing sources, we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or curtail, suspend or cease planned programs or operations generally or possibly seek bankruptcy protection, which would have a material adverse effect on our business, results of operations, financial position and liquidity.
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 December 31, 2016 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

33


As of December 31, 2016, our outstanding debt balance was as follows (in thousands):
Maturity Date
Interest Rate
Amount Outstanding
Term loan, net of unamortized debt discount of $0.9 million
3/31/2017
Prime + 2.75%
$
9,100

Revolving loan
3/31/2017
Prime + 2.75%
$
8,195

Term loan - related party
1/31/2018
20.0%
$
2,500

Convertible notes - related party, net of unamortized debt
discount of $0.3 million

3/31/2018
8.0%
$
24,200

All debt and credit facilities are denominated in U.S. dollars. Our debt and credit facilities contain standard borrowing conditions and can be recalled by the lenders if certain conditions are not met.
On March 12, 2017, the Company and Opus Bank entered into an Amendment Number Two to Credit Agreement, Amendment Number One to Amendment Number 1, Waiver and Reaffirmation (the “Second Amendment”). On March 22, 2017, the Company and Opus Bank entered into an Amendment Number Three to Credit Agreement, further amending the Second Amendment. Under the terms of the Second Amendment, as modified by the Third Amendment, (i) the maturity date for the revolving and term loan credit facilities were amended to be the earlier of (a) the maturity date in the Debenture or (b) June 30, 2017 if the Maturity Extension Trigger Date occurs on or before March 31, 2017, (ii) the Lender granted a waiver of specified defaults under the Credit Agreement relating to obligations to deliver to the Lender an executed letter of intent with respect to refinancing the credit facility, and (iii) certain other terms of the Credit Agreement were amended, including but not limited to terms related to collateral coverage, milestone deliverables, and financial covenants. We met the requirements of the Maturity Extension Trigger Date on March 29, 2017. In the event of certain specified events of default, including failure to meet certain monthly revenue and EBITDA targets, to enter into a term sheet with a new lender by April 28, 2017, or to enter into a letter of intent with respect to a financing or retain a financial advisor with respect to a sale of a significant portion of the Company’s assets, all amounts under the Credit Agreement may be accelerated and become immediately payable.
The following table shows a summary of our cash flows (used in) provided by operating activities, investing activities and financing activities (in thousands):
2016
2015
2014
Net cash used in operating activities
$
(17,473
)
$
(23,157
)
$
(8,545
)
Net cash used in investing activities
$
(237
)
$
(583
)
$
(8,937
)
Net cash provided by financing activities
$
14,123

$
28,298

$
16,513

The use of cash during 2016 was primarily a result of our net loss of $68.5 million offset by $51.5 million in non-cash items, which included a $34.4 million impairment to goodwill and acquired intangible assets, share-based compensation, depreciation and amortization, provision for losses on accounts receivable, amortization of debt issuance costs, loss on extinguishment of debt, deferred tax provision, and fair value adjustment of warrants.
During 2016 , capital expenditures totaled $0.2 million . Such expenditures were primarily associated with computer equipment to support product quality. During 2015 , capital expenditures totaled $0.4 million. Such expenditures were primarily associated with computer equipment to support product quality. During 2015, we capitalized $0.1 million of development costs as intangible assets. In 2014, we loaned $5.3 million, net, to Overland, capitalized $1.5 million of development costs as intangible assets, purchased $0.5 million of fixed assets primarily associated with computer equipment to support product development, and purchased $4.0 million of intangible assets related to developed technology. These were offset by $2.3 million of cash assumed from our acquisition completed in December 2014.

34


During 2016, we received $8.3 million from net proceeds of debt issuance, of which $2.5 million was related to net payments to the holders of our related party debt; $2.1 million was from the issuance of common shares for equity financings; and $3.7 million was from the exercise of warrants. During 2015 , we received $14.5 million net, from the issuance of common shares for equity financings, $10.0 million from draws on our related party credit facility, $2.5 million from draws on our credit facility, and $1.3 million from the exercise of warrants. During 2014 , we received $8.5 million net, from the issuance of common shares, $5.0 million from a note payable with a related party, and $2.7 million from the exercise of warrants.
C. Research and Development, Patents and Licenses, etc.
Research and development expenses include payroll, employee benefits, share-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to manufacturing. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products.
D. Trend Information
The Company has experienced relatively stable demand but increasing price pressures in tape automation systems and tape drives. Tape media continues fluctuates based upon the timing of opportunities and cost of the product. The Company continues to see growth in volume in disk systems, which includes RDX ® , SnapServer ® , SnapScale ® along with the virtualization offerings. Production has increased with sales of disk based products and associated inventory levels have remained relatively stable.
For additional discussion of the trends that affect the Company’s business and financial condition and results of operations, see “History and Development of the Company,” “Operating Results,” “Risk Factors” and “Liquidity and Capital Resources.”
E. Off-Balance Sheet Information
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 December 31, 2016 , we had $0.4 million in standby letters of credit that were not recorded on our consolidated balance sheets.

35


F. Tabular Disclosure of Contractual Obligations
The following schedule summarizes our contractual obligations to make future payments at December 31, 2016 (in thousands):
Contractual Obligations
Total
Less than
1 year
1-3 years
3-5 years
After 5
years
Long-term debt — related party, including interest (1)
$
29,738

$
4,559

$
25,179

$
—

$
—

Credit facility and term note, including interest (1)
18,491

18,491

—

—

—

Operating lease obligations (2)
3,272

1,331

1,718

223

—

Purchase obligations (3)
2,208

2,208

—

—

—

Total contractual obligations
$
53,709

$
26,589

$
26,897

$
223

$
—

Other commercial commitments:
Letters of credit
$
400

$
400

$
—

$
—

$
—

________________
(1)
Interest payments have been calculated using the amortization profile of the debt outstanding at December 31, 2016 , taking into account the fixed rate paid at year end.
(2)
Represents contractual lease obligations under non-cancelable operating leases.
(3)
Represents purchase orders for inventory and non-inventory items entered into prior to December 31, 2016 , with purchase dates extending beyond January 1, 2017. Some of these purchase obligations may be canceled.
G. Safe Harbor
See “ Forward-Looking Information ”.

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information with respect to each of the directors and officers of the Company.
Name
Age
Director Since
Position with Sphere 3D
Peter Ashkin (1)(2)(3)(4)
65
January 16, 2012
(6)
Director
Mario Biasini (7)
56
October 21, 2009
(6)
Director
Daniel Bordessa (8)
43
December 1, 2014
Director
Glenn M. Bowman (1)(2)(3)(4)
59
January 16, 2012
(6)
Director
Eric L. Kelly
58
July 15, 2013
Chief Executive Officer, Chairman and Director
Vivekanand Mahadevan (1)(3)(4)(5)
63
December 1, 2014
Director
Peter Tassiopoulos
48
March 7, 2014
President, Vice Chairman and Director
Kurt L. Kalbfleisch
51
N/A
Senior Vice President and Chief Financial Officer
Randall T. Gast
55
N/A
Senior Vice President and Chief Operating Officer
Jenny C. Yeh
42
N/A
Vice President, Legal and General Counsel
_______________
(1)
Independent director. See “Audit Committee - Audit Committee Composition”.
(2)
Member of Audit Committee.
(3)
Member of Compensation Committee.
(4)
Member of the Nominating and Governance Committee.
(5)
Mr. Mahadevan was appointed to the Audit Committee effective December 20, 2016.
(6)
Includes period as Director of the predecessor company, Sphere 3D Inc.
(7)
Mr. Biasini resigned as a Director of the Company on May 11, 2016.
(8)
Mr. Bordessa resigned as a Director of the Company on December 22, 2016.
Peter Ashkin, Director
Mr. Ashkin member of the Board and also serves as the Chairman of its Compensation Committee. Mr. Ashkin has been a Managing Partner of Baker, Cook and Constable LLC, a venture capital firm that focuses on investing in, and operating high-tech start-up companies since March 2012 and President of Peter Ashkin Consulting, a consulting agency that focuses on high-tech start-up companies since 2006. Previously, Mr. Ashkin served as President of the Technology Group for CanWest Mediaworks (2004 - 2006), at that time, Canada’s largest media company, with multiple locations across Canada consisting of newspapers, broadcast television and cable. Prior to CanWest, Mr. Ashkin served as President of Product Strategy for AOL (America Online) (2001 - 2004), at that time, the world’s largest internet provider. Mr. Ashkin also served as Senior Vice President and Chief Technology Officer of Gateway Computer (1998 - 2001) and prior thereto a number of senior and executive management positions at both Toshiba Corporation and Apple.

37


Glenn M. Bowman, Director
Mr. Bowman is a current member of the Board and serves as the Chairman of the Audit Committee. Mr. Bowman, FCPA, FCA, is Managing Director with CCC Investment Banking (“CCC”). Mr. Bowman was Managing Partner with Capital Canada Limited from 2003 to 2014; a provider of investment banking services to predominantly mid-market companies, since 2003. Mr. Bowman is a Chartered Accountant and a Fellow of the Institute of Chartered Professional Accountants of Ontario. Mr. Bowman’s responsibilities at CCC include investment banking, financial advisory work (including fairness opinions and business and securities valuations), and financial restructuring services. Mr. Bowman has extensive experience in a wide range of topics including mergers and acquisitions, private placements of debt and equity and preparation and assessment of financial forecasts. Mr. Bowman previously served on the board of directors of Rockcliff Resources Inc., a Canadian resource exploration company, and was a member of its audit committee (2010-2015) the board of directors of WireIE Holdings International Inc. (privately held), a global provider of IP based broadband wireless network solutions, and served as Chairman of Alliance Financing Group Inc. (renamed Stream Ventures Inc.)
Eric L. Kelly, Chief Executive Officer, Chairman and Director
Mr. Kelly is a current member of the Board, has served as its Chairman since July 2013, and also serves as its Chief Executive Officer since December 1, 2014. Mr. Kelly formerly served as Chief Executive Officer of Overland since January 2009, President and Chief Executive Officer of Overland since January 2010 and has been a member of Overland’s board of directors since November 2007. Prior to joining Overland, Mr. Kelly was President of Silicon Valley Management Partners Inc., a management consulting and merger and acquisition advisory firm which he co-founded in 2007. Mr. Kelly is serving a second term on the U.S. Department of Commerce’s Manufacturing Council, where he offers advice and counsel to the Obama Administration on strategies and policy recommendations on ways to promote and advance U.S. manufacturing globally, and from 2013 to 2014 he was appointed to President Obama’s Advanced Manufacturing Steering Committee. He is a member of the Global Leadership Council for San Jose State University’s Lucas College and Graduate School of Business. Mr. Kelly has spent over 30 years in computer technology developing distinct operational, marketing and sales expertise. His previous corporate affiliations include Adaptec Inc., Maxtor Corp., Dell Computer Corp., Diamond Multimedia, Conner Peripherals and IBM. Mr. Kelly earned an M.B.A. from San Francisco State University and a B.S. in Business Management from San Jose State University.
Vivekanand Mahadevan, Director
Mr. Mahadevan has been the Chief Executive Officer of Dev Solutions, Inc., a consulting firm that helps technology startups build next-generation market leaders in data analytics, security, storage and cloud markets since March 2012. Mr. Mahadevan was the Chief Strategy Officer for NetApp, Inc., a supplier of enterprise storage and data management software and hardware products and services, from November 2010 until February 2012. Prior to that time served as Vice President of Marketing for LSI Corporation, an electronics company that designs semiconductors and software that accelerate storage and networking, from January 2009 to September 2010. Prior to LSI Corporation, he was Chief Executive Officer for Deeya Energy, Inc., and has also held senior management positions with leading storage and systems management companies including BMC Software, Compaq, Ivita, and Maxxan Systems. Mr. Mahadevan is also a current board member of Violin Memory, Inc. Mr. Mahadevan holds an M.B.A. in Marketing and MS in Engineering from the University of Iowa as well a degree in Mechanical Engineering from the Indian Institute of Technology.
Peter Tassiopoulos, President, Vice Chairman and Director
Mr. Tassiopoulos is a current member of the Board and has served as President of the Company since December 1, 2014. Mr. Tassiopoulos served as the Chief Executive Officer of the Company from March 2013 until December 1, 2014. Mr. Tassiopoulos has extensive experience in information technology business development and global sales as well as a successful track record leading early-stage technology companies. He has been actively involved as a business consultant over the past 10 years, including acting as Chief Operating Officer and then Chief Executive Officer of BioSign Technologies Inc. from September 2009 to April 2011 and Chief Executive Officer of IgeaCare Systems Inc. from February 2003 to December 2008. Mr. Tassiopoulos is also a current board member of Northern Sphere Mining Corp., formerly Argentium Resources Inc.

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Kurt L. Kalbfleisch, Senior Vice President and Chief Financial Officer
Mr. Kalbfleisch has served as Senior Vice President and Chief Financial Officer of the Company since December 1, 2014. Mr. Kalbfleisch had 20 years of service with Overland and served as Overland's Senior Vice President since June 2012, Chief Financial Officer since February 2008, and Secretary since October 2009. Prior to that, he served as Overland's Vice President of Finance from July 2007 to June 2012.
Randall T. Gast, Senior Vice President and Chief Operating Officer
Mr. Gast has served as Senior Vice President and Chief Operating Officer of the Company since December 1, 2014. Mr. Gast served as Overland’s Chief Operating Officer from January 2014 until December 1, 2014, as its Senior Vice President of Worldwide Operations and Service from August 2013 through December 1, 2014, and as its Senior Vice President of Strategic Alliances and Client Services from August 2012 until December 1, 2014. Prior to joining Overland, Mr. Gast was Vice President, Corporate Operations, of 3PAR, Inc. from May 2006 until October 2010 when 3PAR, Inc. was acquired by Hewlett Packard. Mr. Gast served as Vice President of ESSN Supply Chain & Logistics at Hewlett Packard from October 2010 to June 2012.
Jenny C. Yeh, Vice President, Legal and General Counsel
Ms. Yeh has served as Vice President, Legal and General Counsel of the Company since October 5, 2015. Prior to joining the Company, Ms. Yeh served as Executive Counsel, Transactions and Finance, at General Electric Company where she was a senior legal advisor to GE Corporate’s business development group, supporting global corporate strategy and transactions across all GE industrial businesses worldwide. From 2007 to 2011, Ms. Yeh was a corporate partner at Baker & McKenzie LLP, where she advised clients in general corporate and securities matters, with a specialization in complex cross-border transactions. Ms. Yeh holds a Juris Doctorate from Georgetown University Law Center, and Bachelor of Arts degrees from the University of California at Berkeley.
B. Compensation
The following discussion and analysis describes the compensation provided to the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) for fiscal 2016 as well as each of the three other most highly compensated executive officers of the Company. For purposes of this Statement of Executive Compensation, the Company’s named executive officers (the “NEOs”) are determined under rules prescribed by the U.S. Securities and Exchange Commission and generally include: (1) each individual who, at any time during the year, served as the Company’s chief executive officer or chief financial officer, (2) up to three other individuals serving as executive officers on the last day of the year, and (3) up to two other individuals who served as executive officers during the year and are not serving as executive officers on the last day of the year.
Executive Officer Compensation
Our executive compensation programs are determined by the Compensation Committee, within the scope of the authority delegated to it by our Board of Directors and subject to applicable law. The goals of our program are to attract and retain highly qualified and experienced executives and to provide compensation opportunities that are linked to corporate and individual performance. Decisions by the Compensation Committee on our executive compensation programs are subjective and the result of its business judgment, which is informed by the experiences of its members. The NEOs do not have any role in determining their own compensation, although the Compensation Committee does consider the recommendations of the Chief Executive Officer in setting compensation levels for the NEOs other than himself.
The Compensation Committee is authorized under its charter to retain an independent compensation consultant to assist in its decision-making process. The Compensation Committee may also review external compensation data from time to time as a reference point for its decisions. Given the straightforward nature of the compensation provided to our NEOs for fiscal 2016, the Compensation Committee determined that it was not necessary to retain a compensation consultant or to review any compensation surveys or other external compensation data as to its NEO compensation decisions for fiscal 2016.

39


The primary components of our executive compensation program are base salary, performance bonuses and long-term equity incentive awards. We also provide certain executives with severance benefits pursuant to their employment agreements. Each of these components is discussed in more detail below.
Employment Agreements . In connection with our acquisition of Overland Storage, Inc. (“Overland”) on December 1, 2014, we assumed the employment and severance agreements previously entered into by Overland with Messrs. Kelly and Kalbfleisch, and the obligations set forth under Mr. Gast’s offer of employment letter in effect at the time of the acquisition. The material terms of these agreements are described below under “Employment Agreements.” No other employment agreements were in effect in fiscal 2016.
Base Salaries. Base salaries are primarily intended to attract and retain highly qualified executives by providing them with fixed, predictable levels of compensation. The NEOs’ salary levels are specified in their employment agreements (other than for Mr. Tassiopoulos who is not a party to an employment agreement with the Company) and are subject to periodic review and adjustment by the Compensation Committee. Mr. Tassiopoulos and Mr. Gast received an increase in annual base salary during 2016. Mr. Tassiopoulos’ annual base salary was increased in May 2016 to $310,000 CAD from $240,000 CAD. Mr. Gast’s annual base salary was increased in March 2016 to $300,000 from $240,000.
Performance Bonuses. In March 2016, the Compensation Committee approved a bonus plan for fiscal 2016. The bonus plan was divided into two bonus periods, with the first period consisting of the first two quarters of 2016 and the second period consisting of the last two quarters of fiscal 2016. The bonus amounts were determined based on our revenue and operating expenses for each bonus period against performance targets established by the Compensation Committee for that period. The Compensation Committee also approved the following target bonuses for the NEOs participating in the plan (in each case expressed as a percentage of the executive’s annual base salary: Mr. Kelly - 100%; Mr. Tassiopoulos - 100%; Mr. Kalbfleisch - 60%; Mr. Gast - 50% and Ms. Yeh - 20%. No bonuses have been awarded to date for the 2016 bonus periods.
Long-Term Equity Incentive Awards. Long-term equity incentives are intended to align the NEOs’ interests with those of our shareholders as the ultimate value of these awards depends on the value of the Company’s shares. The Company has historically granted equity awards in the form of stock options with an exercise price that is equal to the per-share closing price of our common shares on the grant date. In recent years, restricted stock units have also been granted as provided for under the Company’s 2015 Plan. The Compensation Committee believes that stock options are an effective vehicle for aligning the interests of our executives with those of our shareholders as the executive will only realize value on their options if the share price increases during the period between the grant date and the date the stock option is exercised. The stock options and restricted stock units function as a retention incentive for the NEOs as they typically vest over a multi-year period following the date of grant. Restricted stock units, which are payable in our common shares, also link the interests of the award recipient with those of our shareholders as the potential value of the award is directly linked to the value of our common shares. Restricted stock units were included as part of the equity award mix granted in fiscal 2016 because they serve as a heightened retention incentive (as the awards generally have some value regardless of our stock price performance) and to help manage the potential dilutive impact of our equity awards (as one restricted stock unit generally has a greater grant date fair value than one stock option, so fewer restricted stock units generally have to be granted than if an award of equivalent grant date fair value was granted in the form of stock options).
In 2016, the Compensation Committee recommended and the Board of Directors approved a grant of restricted stock units to Ms. Yeh. This grant is subject to a multi-year vesting schedule and set by the Compensation Committee at levels it deemed in its judgment to be appropriate to provide a retention incentive.
Other Benefits. We do not provide any material perquisites to the NEOs. As described below under “Employment Agreements,” we enter into agreements with our executive officers from time to time that provide for severance benefits if their employment terminates under certain defined circumstances. The Compensation Committee believes these severance protections are appropriate and help us to attract and retain qualified executives.

40


Summary Compensation Table
The following table sets forth the compensation for services rendered by the NEOs for the fiscal year ended December 31, 2016.
Name and Principal Position
Year
Salary
($)
Share- based Awards
($)
Non-equity Incentive Plan Compensation(1)
($)
All Other Compensation(2) ($)
Total Compensation
($)
Eric L. Kelly
Chief Executive Officer
2016
400,000
—
—
17,674
417,674
Peter Tassiopoulos (3)
President
2016
214,480
—
—
3,417
217,897
Kurt L. Kalbfleisch
Senior Vice President and Chief Financial Officer
2016
300,000
—
—
23,593
323,593
Randall T. Gast
Senior Vice President and Chief Operations Officer
2016
285,000
—
—
9,609
294,609
Jenny C, Yeh
Vice President, Legal and General Counsel
2016
300,000
173,100
(4)
—
6,308
479,408
_______________
(1)
The amounts shown in the “Non-equity Incentive Plan Compensation” column represent bonuses awarded to the NEO for the applicable year under our bonus program in effect for that year.
(2)
The amounts shown in the “All Other Compensation” column reflect amounts we paid on the NEOs’ behalf for health insurance and life insurance premiums and certain out-of-pocket medical expenses. For the amounts reported in this column for Mr. Tassiopoulos, see the applicable footnote below.
(3)
The dollar amounts reported for Mr. Tassiopoulos in the table above are presented after conversion from Canadian dollars to U.S. dollars based on an exchange rate of 1.3275 U.S. dollars to one Canadian dollar, which is the average conversion rate in effect for 2016.
(4)
This award is a restricted stock unit which was granted on August 9, 2016 and was valued at $0.87 per share on the grant date (the closing market price for a share of our common stock on that date).
Employment Agreements
Eric L. Kelly . In connection with our acquisition of Overland, we assumed the employment agreement then in effect between Overland and Mr. Kelly (the “Kelly Agreement”), who had been serving as Overland’s President and Chief Executive Officer and was appointed our Chairman and Chief Executive Officer, effective December 1, 2014. The Kelly Agreement provides for Mr. Kelly to earn a base salary of $400,000 and to be eligible to receive an annual bonus based upon the achievement of financial and management objectives reasonably established by our Board of Directors or an authorized committee of our Board of Directors. His annual bonus target is 100% of the greater of $400,000 or his base salary as of the end of the applicable fiscal quarter or year in which the bonus is earned, and he has the opportunity to earn an annual bonus of up to 150% of the target bonus. If we terminate Mr. Kelly’s employment without cause or he resigns for good reason, or if he dies or becomes disabled, before the end of a fiscal quarter or year, he will be eligible to receive a prorated amount of the target bonus for the fiscal quarter or year in which his employment terminates. For purposes of the Kelly Agreement, the terms “cause” and “good reason” are defined in the agreement, and a termination of employment by us without cause includes a termination by us at the end of the term then in effect. To the extent that any travel, lodging or auto expense reimbursements are taxable to Mr. Kelly, we will provide him with a tax restoration payment so that he will be put in the same after-tax position as if such reimbursements had not been subject to tax. The Kelly

41


Agreement automatically renews each year for an additional one-year term. We may unilaterally modify Mr. Kelly’s cash compensation at any time, subject to Mr. Kelly’s right to terminate his employment for good reason.
The Kelly Agreement also provides that if we terminate Mr. Kelly’s employment without cause or if Mr. Kelly resigns from employment for good reason, then we will be obligated to pay him an aggregate severance payment equal to the sum of (i) 150% of the greater of his base salary then in effect or his original base salary, (ii) a portion of his target bonus prorated based on the number of days he was employed during the period on which the target bonus is based, (iii) an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents under COBRA for 18 months following the date of his termination, and (iv) an amount necessary for him to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his termination for a period of 18 months following his termination (reduced by the amount of any reimbursement for COBRA premiums as described in clause (iii) above). The severance payment will be made in equal monthly installments over 18 months in accordance with our regular payroll practices. In addition, Mr. Kelly will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards that would otherwise have vested during the 12-month period following his termination. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year of the date of his termination, subject to earlier termination upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change in control. The severance benefits described above are contingent upon Mr. Kelly providing us with a general release of all claims.
In addition, we assumed a retention agreement between Overland and Mr. Kelly, which provides that he will receive a lump sum severance payment if, within 60 days before or two years following a change of control of Overland, his employment is terminated by Overland without cause or he resigns for good reason (as such terms are defined in the agreement). The severance payment will equal 150% of the sum of Mr. Kelly’s base salary at the time of the consummation of the change of control or termination date or $400,000, whichever is higher, plus any annual target bonus. The retention agreement provides that (i) if Mr. Kelly elects to continue insurance coverage as provided by COBRA, we will reimburse him for an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents under COBRA for 18 months following the date of his termination, and (ii) we will reimburse him for an amount necessary for him to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his termination for a period of 18 months following his termination (reduced by the amount of any reimbursements for COBRA premiums as described in clause (i) above). We are required to reimburse Mr. Kelly for the estimated costs of these benefits in one lump sum payment on his termination date. In addition, Mr. Kelly will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards granted by Overland. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year of the date of his termination, subject to earlier termination upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change of control. If any portion of any payment under the retention agreement would constitute an “excess parachute payment” within the meaning of Section 280G of the U.S. Internal Revenue Code, then that payment will be reduced to an amount that is one dollar less than the threshold for triggering the tax imposed by Section 4999 of the U.S. Internal Revenue Code if such reduction would result in a greater benefit for Mr. Kelly on an after-tax basis. The consideration payable to Mr. Kelly under the retention agreement is contingent upon him providing us a general release of claims.
Kurt L. Kalbfleisch. In connection with our acquisition of Overland, we assumed the employment agreement then in effect between Overland and Mr. Kalbfleisch (the “Kalbfleisch Agreement”), who had been serving as Overland’s Senior Vice President and Chief Financial Officer and was appointed our Senior Vice President and Chief Financial Officer, effective December 1, 2014. The Kalbfleisch Agreement provides for Mr. Kalbfleisch to earn a base salary of $266,000. In November 2013, Mr. Kalbfleisch’s base salary was increased to $300,000. If we terminate Mr. Kalbfleisch’s employment without cause or he resigns his employment for good reason before the end of a fiscal quarter or year, he will be eligible to receive a prorated amount of the target bonus for the fiscal quarter or year in which his employment terminates. For purposes of the Kalbfleisch Agreement, the terms “cause” and “good reason” are defined in the agreement, and a termination of employment by us without cause includes a termination by us at the end of the term then in effect. The Kalbfleisch Agreement automatically renews each year for additional one-year terms. We

42


may unilaterally modify Mr. Kalbfleisch’s cash compensation at any time, subject to Mr. Kalbfleisch’s right to terminate his employment for good reason.
The Kalbfleisch Agreement provides that if we terminate Mr. Kalbfleisch’s employment without cause or if Mr. Kalbfleisch resigns from employment for good reason, we will be obligated to pay him an aggregate severance payment equal to the sum of (i) the greater of his annual base salary then in effect or his original base salary of $266,000, (ii) a portion of any target bonus prorated based on the number of days he was employed during the period on which the target bonus is based, (iii) an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents under COBRA for 12 months following the date of his termination, and (iv) an amount necessary for him to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his termination for a period of 12 months following his termination (reduced by the amount of any reimbursement for COBRA premiums as described in clause (iii) above). The severance payment will be made in equal monthly installments over the 12 months following termination of employment. In addition, Mr. Kalbfleisch will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards that would otherwise have vested during the 12-month period following his termination. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year of the date of his termination, subject to earlier termination upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change in control. If such a termination of employment occurs within two years following a change in control of our Company, then the severance benefits will generally be the same as described above except that the cash severance will be paid in a single lump sum on the sixtieth day after termination of employment and Mr. Kalbfleisch will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards. If any payment under the Kalbfleisch Agreement would constitute an “excess parachute payment” within the meaning of Section 280G of the U.S. Internal Revenue Code, then that payment will be reduced to an amount that is one dollar less than the threshold for triggering the tax imposed by Section 4999 of the U.S. Internal Revenue Code if such reduction would result in a greater benefit for Mr. Kalbfleisch on an after-tax basis. The severance benefits described above are contingent upon Mr. Kalbfleisch providing us with a general release of all claims.
Peter Tassiopoulos. Upon Mr. Tassiopoulos’ transition from consultant to employee status in June 2014, the Company and Mr. Tassiopoulos agreed that the bonus and severance arrangements provided in his consulting agreement with the Company would continue in effect. Under these arrangements, Mr. Tassiopoulos is eligible for performance bonuses, at the sole discretion of the Board of Directors, of up to 100% of his annual base salary. In the event of a transaction resulting in the sale of all or substantially all of the shares or assets of the Company, Mr. Tassiopoulos would be entitled to receive on a sliding scale of 1% to 5% of the transaction value, net of certain amounts. If Mr. Tassiopoulos’ employment is terminated without cause, he would be entitled to a lump sum payment equal to six months of his base salary, plus two additional months of base salary for each additional completed year of his service with the Company after March 1, 2014. Mr. Tassiopoulos’ current annual base salary is $310,000 CAD as increased from $240,000 CAD in May 2016.
Randall T. Gast. As our Senior Vice President Chief Operations Officer, Mr. Gast is an at-will employee and his employment may be terminated by us for any reason, with or without notice. Mr. Gast currently earns an annual salary of $300,000 as increased from $240,000 in March 2016. In connection with our acquisition of Overland, we assumed the obligations set forth in Mr. Gast’s offer of employment letter which provides that if Mr. Gast’s employment is terminated by us without cause he is eligible to receive severance benefits consisting of (i) six months base salary based upon  the greater of his annual base salary then in effect or his original base salary of $240,000, (ii) a portion of any target bonus prorated based on the number of days he was employed during the period on which the target bonus is based, and (iii) an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans under COBRA for 12 months following the date of his termination, should he timely elect and remains eligible for COBRA coverage. The base salary and bonus shall be paid in accordance with standard payroll procedures over the six-month period following his termination date and an amount based upon the cost of COBRA premiums shall be paid in accordance with standard payroll procedures over 12 months following his termination. If within two years of the consummation of a change of control of our company, his employment is terminated without cause or he resigns with good reason, Mr. Gast will be entitled to a severance payment equal to a lump sum payment of (i) 12 months base salary based

43


upon  the greater of his annual base salary then in effect or his original base salary of $240,000, (ii) a portion of any target bonus prorated based on the number of days he was employed during the period on which the target bonus is based, and (iii) an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans under COBRA for 12 months following the date of his termination, should he timely elect and remains eligible for COBRA coverage. In addition, Mr. Gast will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards.
Jenny C. Yeh. As our Vice President, Legal and General Counsel, Ms. Yeh is an at-will employee and her employment may be terminated by us for any reason, with or without notice. Ms. Yeh currently earns an annual salary of $300,000. If her employment is terminated by her for good reason or by us without cause during the two-year period following a change of control, then any unvested portion of equity-based awards granted to her by the Company shall vest in full as of the date of such termination.
2015 Performance Incentive Plan
Employees, officers, directors and consultants that provide services to us or one of our subsidiaries may be selected to receive awards under the 2015 Plan. Our Board of Directors has broad authority to administer the 2015 Plan, including the authority to select participants and determine the types of awards that they are to receive, determine the grants levels, vesting and other terms and conditions of awards, and construe and interpret the terms of the 2015 Plan and any agreements relating to the plan.
A total of 10,090,315 shares of our common stock are authorized for issuance with respect to awards granted under the 2015 Plan (not including shares subject to terminated awards under our Second Amended and Restated Stock Option Plan that become available for issuance under the 2015 Plan). Awards under the 2015 Plan may be in the form of incentive or nonqualified stock options, stock appreciation rights, stock bonuses, restricted stock, stock units and other forms of awards including cash awards. Awards under the plan generally will not be transferable other than by will or the laws of descent and distribution, except that the plan administrator may authorize certain transfers.
The number and type of shares available under the 2015 Plan and any outstanding awards, as well as the exercise or purchase prices of awards, are subject to customary adjustments in the event of stock splits, stock dividends and certain other corporate transactions. Generally, and subject to limited exceptions set forth in the 2015 Plan, if we dissolve or undergo certain corporate transactions such as a merger, business combination or other reorganization, or a sale of all or substantially all of our assets, all awards then-outstanding under the 2015 Plan will become fully vested or paid, as applicable, and will terminate or be terminated in such circumstances, unless the Board of Directors provides for the assumption, substitution or other continuation of the award. The Board of Directors also has the discretion to establish other change in control provisions with respect to awards granted under the 2015 Plan.
The Board of Directors may amend or terminate the 2015 Plan at any time, but no such action will affect any outstanding award in any manner materially adverse to a participant without the consent of the participant. Plan amendments will be submitted to stockholders for their approval as required by applicable law or deemed advisable by the Board of Directors. If not earlier terminated by the Board of Directors, the 2015 Plan will terminate on May 14, 2025. The 2015 Plan is not exclusive - the Board of Directors may grant stock and performance incentives or other compensation, in stock or cash, under other plans or authority.

44



Outstanding Equity Awards at 2016 Fiscal Year-End
The following table provides information about the current holdings of stock and option awards by our NEO’s at December 31, 2016.
Name
Option-based Awards
Stock Awards
Grant Date
Number of securities
underlying
unexercised options (#)
Number of securities
underlying
unexercised options (#)
Option exercise price(1)
($)
Option expiration date
Number of units of stock that have not vested (#)
Market value of unites of stock that have not vested(2)
($)
exercisable
unexercisable
Eric L. Kelly
7/9/2013
850,000

—

0.49

7/8/2023

—

—

9/16/2013
25,000

—

2.02

9/15/2023

—

—

8/26/2015
93,332

46,668

(3)
2.71

8/26/2021

—

—

8/26/2015
—

—

—

—

280,000

(3)
84,000

Peter Tassiopoulos
3/4/2013
100,000

—

0.64

3/3/2018

—

—

9/16/2013
100,000

—

2.02

9/15/2023

—

—

Kurt L. Kalbfleisch
8/26/2015
66,666

33,334

(3)
2.71

8/26/2021

—

—

8/26/2015
—

—

—

—

200,000

(3)
60,000

Randall T. Gast
8/23/2012
4,638

—

20.48

8/23/2018

—

—

8/26/2015
66,666

33,334

(3)
2.71

8/26/2021

—

—

8/26/2015
—

—

—

—

207,407

(5)
62,222

Jenny C. Yeh
11/10/2015
—

—

—

—

133,332

(6)
40,000

8/9/2016
—

—

—

—

200,000

(7)
60,000

_______________
(1)
The exercise prices reported for the options expiring in 2023 for Mr. Kelly, and for each of the options expiring in 2018 and 2023 for Mr. Tassiopoulos, in the table above are presented after conversion from Canadian dollars to U.S. dollars based on an exchange rate of 1.3275 U.S. dollars to one Canadian dollar, which is the average conversion rate in effect for 2016.
(2)
Computed by multiplying the number of unvested shares by $0.30, the closing market price of our common shares on December 30, 2016 (the last trading day of December).
(3)
These options are scheduled to vest in monthly installments beginning in January 2017 and ending in August 2018.
(4)
This stock award is scheduled to vest in quarterly installments beginning in January 2017 and ending in February 2018.
(5)
This stock award is scheduled to vest in monthly installments beginning in January 2017 and ending in February 2018. Subject to the vesting requirements, the entire award for 400,000 shares will be in paid in one installment on or promptly following February 19, 2018.
(6)
This stock award is scheduled to vest in semi-annual installments beginning in January 2017 and ending in October 2018.
(7)
This stock award is scheduled to vest in semi-annual installments beginning in January 2017 and ending in August 2019.

45



Incentive Awards - Value Vested During the Year
The following table sets forth information regarding stock awards that vested during the fiscal year ended December 31, 2016. No options were exercised by our NEOs during fiscal year 2016.
Name
Number of Shares
Acquired on Vesting
Valued Realized
on Vesting(1) ($)
Eric L. Kelly
224,000
203,343
Kurt L. Kalbfleisch
160,000
145,245
Randall T. Gast
177,778
163,839
Jenny C. Yeh
66,668
36,667
_______________
(1)
The value realized on vesting is determined by multiplying (x) the number of shares that vested during 2016, times (y) the closing price of our common shares on NASDAQ on the applicable vesting date.
The following table sets forth summary information regarding compensation of our NEOs subject to deferred payment arrangements during fiscal 2016.
Name
Executive
Contributions in
Last Fiscal Year(1)
($)
Registrant
Contributions in
Last Fiscal Year
($)
Aggregate
Earnings in Last Fiscal Year(2)
($)
Aggregate
Withdrawals/
Distributions(3)
($)
Aggregate
Balance
at Last Fiscal
Year End
($)
Randall T. Gast
163,839
—
(110,507)
—
53,332
_______________
(1)
These entries reflect the aggregate market value of certain stock units that vested during 2016 (based on the stock price on their vest), but which had not been paid as of December 31, 2016. These stock units were awarded by the Company to Mr. Gast in August 2015.
(2)
This entry reflects changes in the market value of the stock units between the applicable vest dates and the last day of fiscal 2016.

46


Compensation of Directors
The following table sets forth compensation information for the year ended December 31, 2016 for the members of our Board of Directors during 2016 who were not employed by us or any of our subsidiaries (“non-employee directors”). Eric Kelly and Peter Tassiopoulos are each NEOs who also served on the Board of Directors during 2016. The 2016 compensation information for each of these individuals is presented in the Summary Compensation Table above and they were not entitled to any additional compensation for their service on the Board during fiscal 2016.
Name
Fees Earned
($)
Share-based Awards(1)
($)
All Other Compensation
($)
Total
($)
Peter Ashkin
40,000
78,754
—
118,754
Mario Biasini (3)
10,000
—
84,773
(2)
94,773
Daniel Bordessa (4)
40,000
—
—
40,000
Glenn Bowman
40,000
78,754
—
118,754
Vivekanand Mahadevan
50,000
87,643
—
137,643
_______________
(1)
On February 26, 2016, Messrs. Ashkin, Bowman, and Mahadevan were each awarded a restricted stock unit (“RSU”) for 26,666 Shares for their service on a Special Committee of the Board. The RSUs were valued at $1.62 per share on the grant date (the closing market price on NASDAQ for one of our common shares on that date) and vested in full on the grant date. On November 8, 2016, Messrs. Ashkin and Bowman, were each awarded a restricted stock unit (“RSU”) for 63,492 Shares for their service on the Board. On the same date, Mr. Mahadevan was awarded a RSU for 79,365 shares for his service on the Board as Lead Board member. All of the RSUs awarded on November 8, 2016 were valued at $0.56 per share on the grant date (the closing market price on NASDAQ for one of our common shares on that date) and vest in full on September 13, 2017.
(2)
All other compensation for Mr. Biasini includes consulting fees paid to Mr. Biasini and health insurance premiums paid on his behalf. Mr. Biasini’s consulting agreement with the Company was terminated effective April 30, 2016. In exchange for a general release agreement, he is being paid a monthly severance of CAD$9,750 and medical coverage through April 30, 2017. The amount reported is presented after conversion from Canadian dollars to U.S. dollars based on an exchange rate of 1.3275 U.S. dollars to one Canadian dollar, which was the average conversion rate in effect for 2016.
(3)
Mr. Biasini resigned as a Director of the Company on May 10, 2016.
(4)
Mr. Bordessa resigned as a Director of the Company on December 20, 2016.
Director Compensation
The non-employee board members are paid $10,000 per quarter for their service on the Board and the Lead Board member is paid $12,500 per quarter for his service on the Board. During 2016, the Board also granted restricted stock units to certain non-employee directors as described in the notes to the table above. The Board retains complete discretion to adopt or modify our programs for providing cash and/or equity-based compensation to our non-employee directors as it deems appropriate from time to time.

47


C. Board Practices
The term of office of each director expires at the next annual general meeting of the Shareholders.
Board Committees
The Board has established an Audit Committee, a Compensation Committee and a Nominating and Governance Committee.
Audit Committee
The Audit Committee assists the Board in fulfilling its oversight responsibilities by overseeing the accounting, treasury, financial reporting and risk management processes, and the reviews and audits of the financial statements of the Company. The Audit Committee meets at least four times per year and at least once every fiscal quarter, with authority to convene additional meetings, as circumstances require. All Audit Committee members are expected to attend each meeting, in person or via telephone conference. The Audit Committee will invite members of management, auditors or others to attend meetings and provide pertinent information, as necessary. It will hold private meetings with auditors and executive sessions. The Audit Committee may meet privately with any single member of management or any combination of members of management, as it deems appropriate.
The members of the Company’s Audit Committee are:
Glenn M. Bowman (Chair)
Independent (1)
Financially Literate (2)
Peter Ashkin
Independent (1)
Financially Literate (2)
Vivekanand Mahadevan (3)
Independent (1)
Financially Literate (2)
________________
(1)
A member of an audit committee is independent if the member has no direct or indirect material relationship with the Company, which could, in the view of the board of directors, reasonably interfere with the exercise of a member’s independent judgment.
(2)
An individual is financially literate if he or she has the ability to read and understand a set of financial statements that present a breadth of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company’s financial statements.
(3)
Mr. Mahadevan was appointed to the Audit Committee effective December 21, 2016.
Compensation Committee
The Compensation Committee acts on behalf of the Board in matters pertaining to the appointment, compensation, benefits and termination of members of the senior management team. The Compensation Committee reviews the goals and objectives relevant to the compensation of the senior management team, as well as the annual salary, bonus, pension, severance and termination arrangements and other benefits, direct and indirect, of the senior management team, and makes recommendations to the Board and/or management, as appropriate. The members of the Compensation Committee are Peter Ashkin (Chair), Glenn M. Bowman, and Vivekanand Mahadevan.
Nominating and Governance Committee
The Corporate Governance and Nominating Committee assists the Board in carrying out its responsibilities by reviewing corporate governance and nomination issues and making recommendations to the Board as appropriate. The Nominating and Governance Committee is responsible for identifying individuals qualified to become directors, recommending to the Board proposed nominees for election to the Board, and overseeing the Board’s overall approach to governance, Board processes and leadership. In identifying potential Board members, the Nominating and Governance Committee considers, among other things, the competencies and skills the Board as a whole should possess, criteria for candidates after considering the competencies and skills of existing directors, and the competencies and skills of each potential new nominee. The members of the Nominating and Governance Committee are Peter Ashkin, Glenn M. Bowman, and Vivekanand Mahadevan (Chair).

48


D. Employees
The Company had 387 employees at December 31, 2016 . The Company’s employees in Germany and China are covered by labor unions, and the Company believes its relationships with the unions representing these employees are good. The following table sets forth information concerning our employees by geographic location.
Year Ended December 31,
2016
2015
2014
Canada
15

17

25

United States
102

130

129

EMEA
62

62

93

APAC
208

220

257

387

429

504

The following table sets forth information concerning our employees by category of activity.
Year Ended December 31,
2016
2015
2014
Cost of sales
224

240

272

Sales and marketing
92

104

136

Research and development
29

40

46

General and administrative
42

45

50

387

429

504


49


E. Share Ownership
The following table sets forth certain information concerning the direct and beneficial ownership of common shares at March 29, 2017 by each director, each NEO, and all directors and officers of the Company as a group. Each common share entitles its holder to one vote. There are no arrangements involving employee ownership of capital of the Company besides the grant of options or other awards under the Company’s Inducement or 2015 Plan. Common shares outstanding on March 29, 2017 were 102,608,418 .
Name
Number of Common Shares
Beneficial Ownership
Eric L. Kelly
2,302,041

(1)
2.2%
Peter Tassiopoulos
300,000

(2)
0.3%
Kurt L. Kalbfleisch
359,656

(3)
0.3%
Randall T. Gast
422,441

(4)
0.4%
Jenny C. Yeh
104,051

(5)
0.1%
Peter Ashkin
67,777

0.1%
Glenn M. Bowman
87,777

0.1%
Vivekanand Mahadevan
51,763

(6)
0.1%
All officers and directors as a group
3,695,506

(7)
3.5%
_______________
(1)
These shares include the right to acquire shares upon exercise of 983,888 stock options and the payment of 112,000 restricted stock units.
(2)
These shares include the right to acquire shares upon exercise of 200,000 stock options.
(3)
These shares include the right to acquire shares upon exercise of 77,777 stock options and the payment of 80,000 restricted stock units.
(4)
These shares include the right to acquire shares upon exercise of 82,415 stock options and the payment of 266,667 restricted stock units.
(5)
These shares include the right to acquire shares upon the payment of 66,667 restricted stock units.
(6)
These shares include the right to acquire shares upon exercise of 2,783 stock options.
(7)
These shares include the right to acquire shares upon exercise of 1,346,863 stock options and the payment of 525,334 restricted stock beneficially owned by our directors and NEOs.

50


ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our common shares as of March 29, 2017 by each person known to us to beneficially own, directly or indirectly, or exercise control or discretion over, voting securities carrying more than 5% of voting rights attached to the common shares. We have experienced significant changes in the percentage ownership held by major shareholders as a result of the related party transactions as described in Item 7.B. “Related Party Transactions”.
Name
Type of Ownership (direct, indirect)
Number of Common Shares(1)
Beneficial Ownership(2)
MF Ventures, LLC
Direct
41,966,969

(3)
32.8%
Cyrus Capital Partners, L.P. managed funds and affiliates
Direct
20,289,192

(4)
18.1%
Lynn Factor
Direct
11,044,500

(5)
10.0%
Sheldon Inwentash
Direct
8,440,100

(6)
7.8%
_______________
(1)
These amounts include common shares, which could be acquired upon exercise of outstanding convertible securities within 60 days.
(2)
Based on 102,608,418 shares outstanding on March 29, 2017.
(3)
Information was obtained from MF Ventures, LLC pursuant to Schedule 13D/A filed March 21, 2017 and Company records. These shares include the right to acquire 25,380,087 shares upon exercise of certain convertible securities. MF Ventures, LLC is a limited liability company formed to make one or more investments in business ventures or activities deemed appropriate by Victor B. MacFarlane, as Manager of MF Ventures, LLC. Mr. MacFarlane as Manager of MF Ventures, LLC and Thaderine D. MacFarlane as a controlling member of MF Ventures, LLC share voting power over the shares of common stock held by MF Ventures, LLC.
(4)
Information was obtained from Cyrus Capital Partners, L.P. pursuant to Schedule 13D/A filed February 13, 2017. Certain funds and affiliates managed by Cyrus, directly and indirectly own these shares. These shares include 9,466,667 Shares upon exercise of certain convertible securities. shares (the “Cyrus Group”). These shares include 9,466,667 Shares upon exercise of certain convertible securities. The Cyrus Group is comprised of Cyrus Capital Partners, L.P., a Delaware limited partnership, (“Cyrus”), Crescent 1, L.P., a Delaware limited partnership (“Crescent”), CRS Master Fund, L.P., a Cayman Islands exempted limited partnership, (“CRS”), Cyrus Opportunities Master Fund II, Ltd., a Cayman Islands exempted limited company, (“Cyrus Opportunities)”, Cyrus Select Opportunities Master Fund, Ltd., a Cayman Islands exempted limited company, (“Cyrus Select”), Cyrus Capital Partners GP, L.L.C., a Delaware limited partnership, (“Cyrus GP”), Cyrus Capital Advisors, L.L.C., a Delaware limited liability company, (“Cyrus Advisors”), and Mr. Stephen C. Freidheim. Each of Crescent, CRS, Cyrus Opportunities and Cyrus Select, or collectively the Cyrus Funds, are private investment funds engaged in the business of acquiring, holding and disposing of investments in various companies. Cyrus is the investment manager of each of the Cyrus Funds. Cyrus GP is the general partner of Cyrus. Cyrus Advisors is the general partner of Crescent and CRS. Mr. Freidheim is the managing member of Cyrus GP and Cyrus Advisors and is the Chief Investment Officer of Cyrus. Crescent, CRS, Cyrus Opportunities, Cyrus Select and Mr. Freidheim have entered into an investment management agreement with Cyrus giving Cyrus full voting and disposition power over the shares of common stock held by the Cyrus Group.

51


(5)
Information was obtained from Lynn Factor pursuant to a Schedule 13D filed February 23, 2017. Ms. Factor has sole rights to vote and dispose of the shares of common stock held in her name. These shares include the right to acquire 7,719,500 shares upon exercise of certain convertible securities. Excluded are 8,440,100 shares beneficially owned by Sheldon Inwentash. By virtue of Ms. Factor’s marriage to Mr. Inwentash, Ms. Factor may be deemed to have shared power to vote or dispose of the common shares owned by Mr. Inwentash and the common shares issuable upon exercise of the convertible securities owned by Mr. Inwentash (collectively, the “Inwentash Shares”). However, Ms. Factor does not have such power and therefore disclaims beneficial ownership of the Inwentash Shares.
(6)
This information was obtained from Sheldon Inwentash pursuant to a Schedule 13D filed February 23, 2017. These shares include the right to acquire 4,328,100 shares upon exercise of certain convertible securities and 700,000 common shares owned by ThreeD Capital Inc. (“3D”) and the right to acquire 1,400,000 shares upon the exercise of certain convertible securities held by 3D. Mr. Inwentash is the Chief Executive Officer of 3D and has shared rights to vote and dispose of the shares held by 3D. Mr. Inwentash does not share rights to vote and dispose of the shares held in his name. Excluded are 11,044,500 shares beneficially owned by Lynn Factor. By virtue of Mr. Inwentash’s marriage to Ms. Factor, Mr. Inwentash may be deemed to have shared power to vote or dispose of the common shares owned by Ms. Factor and the common shares issuable upon exercise of the convertible securities owned by Ms. Factor (collectively, the “Factor Shares”). However, Mr. Inwentash does not have such power and therefore disclaims beneficial ownership of the Factor Shares.
There are no limitations on the rights to own Sphere 3D’s securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on Sphere 3D’s common shares imposed by Canadian law or by the charter or other constituent document of the company. As of March 29, 2017 , approximately 58% of the common shares were held by residents of the U.S. and there were 17 holders of record in the U.S. The actual number of holders is greater than these numbers of record holders, and includes beneficial owners whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include holders whose shares may be held in trust by other entities. Additionally, within the past five years, more than 10% of our capital stock was paid for with assets other than cash.
B. Related Party Transactions
Related parties of the Company include the Company’s directors, key management personnel and persons that beneficially own, control or direct, directly or indirectly, more than 10% of the voting securities of the Company. Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the Company, directly or indirectly. There were no transactions between the Company and such related parties for the period from the beginning of the Company’s last full fiscal year up to March 30, 2017 that were material to the Company or such related party, except for the following:
Registered Direct Offering and Concurrent Private Placement. On March 24, 2017, the Company entered into a securities purchase agreement with certain investors party thereto, pursuant to which the Company issued to the investors, in the aggregate, 20,454,546 of the Company’s common shares for gross proceeds of $4.5 million. The purchase price for one common share was $0.22. The security purchase agreement also provided for the concurrent private placement of warrants exercisable to purchase up to 20,454,546 common shares.
MF Ventures, LLC, which beneficially owns, directly or indirectly, securities of the Company carrying more than 10% of the voting rights attached to the outstanding voting securities of the Company (on a partially-diluted basis), participated in the offering by acquiring 4,545,454 common shares and warrants to purchase 4,545,454 common shares, for an aggregate purchase price of $1.0 million.

52


Private Placement. Between December 2016 and March 16, 2017, the Company completed a private placement and issued a total of 18,139,998 “Units” at a purchase price of $0.30 per Unit. Each Unit consisted of one common share and one warrant from each of two series of warrants. The Company received gross proceeds of $5.4 million in connection with the sale of the Units. The first series of warrants is exercisable to purchase 18,139,998 common shares in the aggregate and has an exercise price of $0.40 per share, a one-year term, and is exercisable in whole or in part at any time prior to expiration. The second series of warrants is exercisable for 18,139,998 common shares in the aggregate and has an exercise price of $0.55 per share, a five-year term, and is exercisable in whole or in part at any time prior to expiration.
MF Ventures, LLC, participated in the private placements by acquiring 8,333,333 common shares and warrants to purchase 16,666,666 shares.
Lynn Factor and Sheldon Inwentash, a married couple who beneficially owns, directly or indirectly, securities of the Company carrying more than 10% of the voting rights attached to the outstanding voting securities of the Company (on a partially-diluted basis), participated in the private placements by acquiring 5,325,000 common shares and warrants to purchase 10,650,000 shares. An additional 700,000 common shares and warrants to purchase 1,400,000 shares were acquired by ThreeD Capital Inc. Mr. Inwentash is the Chief Executive Officer of ThreeD Capital Inc.
Related Party Term Loan. In September 2016, the Company entered into a $2.5 million term loan agreement with FBC Holdings (an affiliate of Cyrus Capital Partners, a related party). The term loan has a maturity date of January 31, 2018 and bears interest at a 20.0% simple annual interest rate, payable monthly in arrears. Monthly payments of principal on the term loan begin on January 31, 2017, in 13 equal installments. The Company has the option to pre-pay the outstanding balance of the term loan, plus any accrued interest, at any time.
Related Party Warrant Exchange Agreement. The Company entered into a warrant exchange agreement (the “Warrant Exchange Agreement”), dated March 25, 2016, with MF Ventures, LLC (the “Holder”) pursuant to which the Company agreed to issue a warrant (the “New Warrant”) for the purchase of up to 7,199,216 common shares (the “Warrant Shares”), no par value, in a privately negotiated exchange under Section 3(a)(9) of the Securities Act of 1933, as amended, in exchange for the surrender and cancellation of previously outstanding warrants for the purchase of up to, in aggregate, 3,031,249 common shares (the “Previously Outstanding Warrants”). The Previously Outstanding Warrants were issued pursuant to: (i) that certain Purchase Agreement, dated as of May 13, 2015, by and between the Company and the Holder (the “May Purchase Agreement”); (ii) that certain Purchase Agreement, dated as of August 10, 2015, by and between the Company and the Holder (the “August Purchase Agreement”); and (iii) that certain Subscription Agreement, dated as of September 22, 2015, by and between the Company and the Holder (the “2015 Subscription Agreement”). The terms of the New Warrant are substantially similar to the Previously Outstanding Warrants except: (i) in the case of the Previously Outstanding Warrants issued pursuant to the May Purchase Agreement, the exercise price changed from $4.00 per common share to $1.22 per common share; (ii) in the case of the Previously Outstanding Warrants issued pursuant to the August Purchase Agreement and the 2015 Subscription Agreement, the exercise price changed from $2.33 per common share to $1.22 per common share; and (iii) the expiry date changed from various dates between May 18, 2020 and September 22, 2020 to April 14, 2016. However, if the holder exercises the New Warrant for the purchase of at least 3,031,249 common shares before April 14, 2016, then the expiry date for the balance of any unexercised portion of the New Warrant shall become March 25, 2021. On March 25, 2016, the Holder exercised 3,031,249 of the Warrant Shares for 3,031,249 common shares pursuant to which the Company received $3.7 million in proceeds. The expiration date for the remaining balance of the New Warrant is March 25, 2021.
The Company also entered into a Registration Rights Agreement (the “Registration Rights Agreement”), dated as of March 25, 2016, with the Holder. Pursuant to the Registration Rights Agreement, the Company filed a registration statement with the SEC to register the resale of the Warrant Shares.

53


Related Party Convertible Notes. On December 1, 2014, in connection with the acquisition of Overland, the existing debt of Overland and the remaining debt of the Company were amended and restated into a $19.5 million convertible note with FBC Holdings.  In April 2016, the Company modified its convertible note with FBC Holdings, pursuant to which the holder made an additional advance of $5.0 million to the Company. The convertible note is scheduled to mature March 31, 2018 and bears interest at an 8.0% simple annual interest rate, payable semi-annually. The obligations under the convertible note are secured by substantially all assets of the Company. At December 31, 2016 , the Company had $24.2 million , net of unamortized debt costs of $0.3 million , outstanding on the convertible note.
In February 2016, in connection with the November 2015 modification and certain specified terms, we issued to the holder of the convertible note a warrant to purchase 500,000 of common shares of the Company at a price of $1.62.
In 2016, we issued 4,214,849 common shares for the payment of interest expense on our convertible note.
Terminated Related Party Credit Facility. In December 2014, the Company entered into a revolving credit agreement with FBC Holdings for a revolving credit facility of $5.0 million. In July 2015, the credit facility was amended to extend the scheduled maturity date to May 2016 with an automatic extension to November 2016, and the aggregate borrowing amount was increased from $5.0 million to $10.0 million. In April 2016, the credit facility was terminated upon repayment of the outstanding balance.
For the year ended December 31, 2016, interest expense for the credit facility was $0.9 million, which included $0.7 million of amortization of issuance costs.
C. Interest of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See Item 18. Financial Statements.
The Company has not declared or paid any dividends on its common shares to date. The Company’s current intention is to retain any future earnings to support the development of the business of Sphere 3D and does not anticipate paying cash dividends in the foreseeable future. Payment of any future dividends will be at the discretion of the Board of Directors of Sphere 3D after taking into account various factors, including but not limited to the financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that Sphere 3D may be a party to at the time. Accordingly, investors must rely on sales of their Sphere 3D common shares after price appreciation, which may never occur, as the only way to realize a return on their investment.
B. Significant Changes
Registered Direct Offering and Concurrent Private Placement. On March 24, 2017, the Company entered into a securities purchase agreement (“SPA”) with certain investors party thereto (the “Investors”), pursuant to which the Company issued to the Investors, in the aggregate, 20,454,546 of the Company’s common shares for gross proceeds of $4.5 million. The purchase price for one common share was $0.22. The SPA also provided for the concurrent private placement of warrants exercisable to purchase up to 20,454,546 common shares. Each warrant has an initial exercise price of $0.30 per warrant share. The warrants are exercisable for cash immediately or on a cashless basis commencing on a date which is the earlier of (i) six months from the date of the effective date of the offering or (ii) the date on which we fail to fulfill our obligations to register the common shares underlying the warrants under the registration rights agreements and expiring on a date which is no more than five years from the date of the effective date of the offering. If at any time while the Warrants are outstanding, the Company sells or grants options to purchase, reprice or otherwise issue any common shares or securities convertible into common shares at a price less than $0.30, then the exercise price for the warrants will be reduced to such price, subject to certain limitations. In addition, upon the occurrence of certain fundamental transactions, including certain mergers, sales of substantially all of our assets or those of our significant subsidiaries, and other significant corporate events, the warrant holders will have certain rights, including for the exchange of the warrants for warrants

54


to purchase common shares of the successor entity and the right to have the company purchase the warrants for their Black Scholes value.
Pursuant to the terms of the securities purchase agreement, purchasers of at least $0.5 million of common shares and warrants will, in the aggregate, have the right to participate in future offerings of our common shares or securities convertible into common shares, in an amount equaling up to 50% of such subsequent financings, which right expires 15 months from the closing of this offering.
Debt Refinance. On March 12, 2017, the Company and Opus Bank entered into an Amendment Number Two to Credit Agreement, Amendment Number One to Amendment Number 1, Waiver and Reaffirmation (the “Second Amendment”). On March 22, 2017, the Company and Opus Bank entered into an Amendment Number Three to Credit Agreement, further amending the Second Amendment. Under the terms of the Second Amendment, as modified by the Third Amendment, (i) the maturity date for the revolving and term loan credit facilities were amended to be the earlier of (a) the maturity date in the Debenture or (b) June 30, 2017 if the Maturity Extension Trigger Date occurs on or before March 31, 2017, (ii) the Lender granted a waiver of specified defaults under the Credit Agreement relating to obligations to deliver to the Lender an executed letter of intent with respect to refinancing the credit facility, and (iii) certain other terms of the Credit Agreement were amended, including but not limited to terms related to collateral coverage, milestone deliverables, and financial covenants. We met the requirements of the Maturity Extension Trigger Date on March 29, 2017. In the event of certain specified events of default, including failure to meet certain monthly revenue and EBITDA targets, to enter into a term sheet with a new lender by April 28, 2017, or to enter into a letter of intent with respect to a financing or retain a financial advisor with respect to a sale of a significant portion of the Company’s assets, all amounts under the Credit Agreement may be accelerated and become immediately.
Further, as a condition of the entry into the Second Amendment, the Company issued to Opus Bank (i) a warrant, exercisable in the event that we have not repaid all outstanding amounts due under the Credit Agreement on or prior to April 17, 2017, for the purchase of the number of common shares equivalent to $75,000 at an exercise price of $0.01 per common share and (ii) a warrant, exercisable in the event that we have not repaid all outstanding amounts due under the Credit Agreement on or prior to May 31, 2017, for the purchase of the number of common shares equivalent to $100,000 at an exercise price of $0.01 per common share.
Private Placement. Between December 2016 and March 16, 2017, the Company completed a private placement and issued a total of 18,139,998 “Units” at a purchase price of $0.30 per Unit. Each Unit consisted of one common share and one warrant from each of two series of warrants, as described below. The Company received gross proceeds of $5.4 million in connection with the sale of the Units. In December 2016, 6,933,333 common shares were issued and the remaining common shares and warrants were issued in 2017.
The first series of warrants is exercisable to purchase 18,139,998 common shares in the aggregate and has an exercise price of $0.40 per share, a one-year term, and is exercisable in whole or in part at any time prior to expiration. The second series of warrants is exercisable for 18,139,998 common shares in the aggregate and has an exercise price of $0.55 per share, a five-year term, and is exercisable in whole or in part at any time prior to expiration.
Business Acquisition. On January 27, 2017, the Company acquired 80.1% of the outstanding equity securities and membership interests of UCX and HVE, respectively, for $1.1 million in cash and issued 2,205,883 common shares for an approximate value of $0.8 million, such that after such acquisition, the Company owned 100% of the outstanding equity securities of each such entity. UCX and HVE provide information technology consulting services and hardware solutions around cloud computing, data storage and server virtualization to corporate, government, and educational institutions primarily in the southern central United States. By adding UCX’s products, technologies, professional services and engineering talent, and HVE’s engineering and virtualization expertise, the Company intends to expand its virtualization practice as well as enhance its ability to accelerate the delivery of hybrid cloud solutions to customers. The Company is preparing the fair value estimates for the assets acquired and liabilities assumed.

55


Nasdaq Listing. In January 2017, the Company received a letter from the Listing Qualifications Staff of the Nasdaq Stock Market (“Nasdaq”) granting the Company an extension until July 31, 2017 to regain compliance with the minimum bid price requirement under Nasdaq Listing Rule 5550(a)(2) (the “Rule”). If at any time before July 31, 2017, the bid price of the Company’s common shares closes at $1.00 per share or more for a minimum of 10 consecutive business days, the Company will regain compliance with the Rule, and the matter will be closed. If the Company does not regain compliance with the Rule by July 31, 2017 the Company may be subject to delisting from NASDAQ. In connection with the grant of the extension to regain compliance with the Rule, the listing of the Company’s common shares was transferred, at the Company’s request, to the NASDAQ Capital Market under the existing ticker symbol (ANY) at the opening of business on February 1, 2017.

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ITEM 9. THE OFFERING LISTING
A. Offer and Listing Details
On December 28, 2012, our common shares commenced trading on the TSX Venture Exchange under the symbol “ANY”. On July 8, 2014, our common shares commenced trading on the NASDAQ Global Market under the symbol “ANY”. On December 10, 2014, we voluntarily delisted our common shares from the TSXV. On February 1, 2017, our common shares commenced trading on the NASDAQ Capital Market in connection with our application to transfer our shares from the NASDAQ Global Market.
TSXV (CAD$)
Annual Highs and Lows
High
Low
Fiscal 2012 (from December 28, 2012)
0.95
0.74
Fiscal 2013
6.80
0.41
Fiscal 2014 (through December 10, 2014)
11.20
5.35
NASDAQ (USD$)
Annual Highs and Lows
High
Low
Fiscal 2014 (from July 8, 2014)
11.00
4.87
Fiscal 2015
7.49
1.30
Fiscal 2016
2.00
0.18
NASDAQ (USD$)
Quarterly Highs and Lows for Fiscal 2015 and 2016
High
Low
First Quarter Fiscal 2015
7.49
3.35
Second Quarter Fiscal 2015
5.46
2.98
Third Quarter Fiscal 2015
5.73
1.66
Fourth Quarter Fiscal 2015
3.80
1.30
First Quarter Fiscal 2016
2.00
1.02
Second Quarter Fiscal 2016
1.38
0.66
Third Quarter Fiscal 2016
0.95
0.40
Fourth Quarter Fiscal 2016
0.92
0.18
NASDAQ (USD$)
Monthly Highs and Lows
High
Low
September 2016
0.84
0.40
October 2016
0.68
0.45
November 2016
0.92
0.42
December 2016
0.85
0.18
January 2017
0.56
0.26
February 2017
0.36
0.26
March 2017 (through March 27, 2017)
0.34
0.20
B. Plan of Distribution
Not applicable.

57


C. Markets
The common shares of the Company are traded on the NASDAQ Capital Market under the symbol “ANY”.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following is a summary of the material provisions of our Articles of Amalgamation (“Articles”) and by-laws (as amended, “By-laws”) and certain related sections of the Business Corporations Act (Ontario) (“BCA”). This summary is qualified in its entirety by reference to the Articles and By-laws, which are included as Exhibits 1.1-1.2 to this Annual Report, and the BCA.
Stated Objects or Purposes. Our Articles do not contain stated objects or purposes and do not place any limitations on the business that we may carry on.
Directors’ Power to Vote on Matters in which a Director is Materially Interested. Our Articles issued pursuant to the BCA contain no restrictions on the power of directors:
(1)
to vote on a proposal arrangement or contract in which the director is materially interested;
(2)
in the absence of an independent quorum, to vote compensation to themselves or any member of their body; or
(3)
with respect to borrowing powers exercisable by the directors or how such borrowing powers may be varied.
The restrictions on the ability of a director to vote and the requirement to disclose his or her interest are governed by applicable corporate legislation.
Directors’ Power to Determine the Compensation of Directors. The remuneration of our directors, if any, may be determined by our directors. Such remuneration may be in addition to any salary or other remuneration paid to any of our officers or employees who are also directors.
Retirement or Non-Retirement of Directors Under an Age Limit Requirement. Our Articles do not impose any mandatory age-related retirement or non-retirement requirement for our directors.
Number of Shares Required to be Owned by a Director. Our Articles do not require that a director hold any shares as a qualification for his or her office.
Rights, Preferences and Restrictions of Shares. The rights, preferences and restrictions attaching to the common shares are as set forth in the Articles.
Action Necessary to Change the Rights of Holders of Shares. Under the BCA, certain types of amendments to our Articles, including amendments to change the rights, privileges, restrictions or conditions attached to our shares, are subject to approval by special resolution of the Shareholders.

58


Shareholder Meetings. The board, the chairman of the board, the managing director, the president or the holders of not less than 5% of the issued Shares of the Company that carry the right to vote at a meeting sought, shall have power to call a special meeting of Shareholders at any time. For the purposes of determining Shareholders entitled to receive notice of a meeting, the directors may fix an advance date as the record date for such determination. Any record date shall not precede by more than 60 days or by less than 30 days the date on which the meeting is to be held.
The only persons entitled to be present at a meeting of the Shareholders shall be those entitled to vote the directors and auditor of the Company and others who, although not entitled to vote, are entitled or required under any provision of the BCA, the Articles or the by-laws to be present at the meeting A quorum for the transaction of business at any meeting of shareholders shall be at least two shareholders entitled to vote at such meeting, whether present in person or represented by proxy.
Limitations on the Right to Own Securities. Our Articles do not provide for any limitations on the rights to own our securities.
Change of Control. Our Articles and Bylaws do not contain any change of control limitations with respect to a merger, acquisition or corporate restructuring that involves us.
Shareholder Ownership Disclosure. Although U.S. and Canadian securities laws regarding share ownership by certain persons require certain disclosure, our Articles do not provide for any ownership threshold above which Share ownership must be disclosed.
C. Material Contracts
The following are material contracts, other than contracts in the ordinary course of business, which have been entered into by Sphere 3D and/or its subsidiaries for the two years immediately preceding the publication of this Annual Report and are in effect:
1.
Subscription Agreement dated May 13, 2015 between the Company and Lynn Factor for the purchase of up to 500,000 common shares and warrants exercisable for the purchase of up to 500,000 common shares, for an aggregate purchase price of $1.6 million. The warrant has an exercise price of $4.00 and an expiration date of May 21, 2020.
2.
Subscription Agreement dated October 6, 2015 between the Company and Lynn Factor for the purchase of up to 300,000 common shares and warrants exercisable for the purchase of up to 75,000 common shares, for an aggregate purchase price of $699,000. The warrant has an exercise price of $2.33 and an expiration date of October 14, 2020.
3.
Subscription Agreement dated November 30, 2015 between the Company and Lynn Factor for the purchase of up to 220,000 common shares and warrants exercisable for the purchase of up to 220,500 common shares, for an aggregate purchase price of $440,000. The warrant has an exercise price of $2.50 and an expiration date of December 15, 2020.
4.
Subscription Agreement dated November 30, 2015 between the Company and Sheldon Inwentash for the purchase of up to 220,000 common shares and warrants exercisable for the purchase of up to 220,500 common shares, for an aggregate purchase price of $440,000. The warrant has an exercise price of $2.50 and an expiration date of December 15, 2020.
5.
Warrant to purchase 274,000 common shares for an exercise price of $2.33 per common share dated December 18, 2015 and expiring on October 14, 2020 issued by the Company to Lynn Factor issued pursuant to the price protection provisions of the Subscription Agreement described in 10C(2) above.
6.
Asset Purchase Agreement dated August 10, 2015 between Imation Corp., Overland Storage, Inc. and Sphere 3D Corp. (see Note 3, Business Combinations, RDX Asset Acquisition in our Notes to Consolidated Financial Statements)
7.
Lock-Up Agreement dated August 10, 2015 between Imation Corp. and Sphere 3D Corp. (see Note 3, Business Combinations, RDX Asset Acquisition in our Notes to Consolidated Financial Statements)
8.
First Amendment to 8% Senior Secured Convertible Debenture dated November 30, 2015 between the Company and FBC Holdings S.A.R.L. (see ITEM 7.B. Related Party Transactions)

59


9.
Warrant Exchange Agreement dated March 25, 2016 between Sphere 3D Corp. and MF Ventures, LLC (formerly MacFarlane Family Ventures, LLC) for the issuance of warrants to purchase up to 7,199,216 common shares of the Company at an exercise price of $1.22, in exchange for the surrender of previously issued warrants, in the aggregate, of 3,031,249. (see ITEM 7.B. Related Party Transactions)
10.
Credit Agreement dated April 6, 2016 between the Company and Opus Bank for a term loan in the amount of $10.0 million and a credit facility in the amount of up to $10.0 million. (see Note 7, Debt, Opus Bank Credit Agreement in our Notes to Consolidated Financial Statements)
11.
Second Amendment to 8% Senior Secured Convertible Debenture dated April 6, 2016 between the Company and FBC Holdings S.A.R.L.
12.
Term Loan Agreement dated September 16, 2016 between Sphere 3D Corp. and FBC Holdings S.A.R.L. (see Note 7, Debt, Opus Bank Credit Agreement in our Notes to Consolidated Financial Statements)
13.
Consent, Waiver, Reaffirmation and Amendment Number One to Credit Agreement dated December 30, 2016 between the Company and Opus Bank. (see Note 7, Debt, Opus Bank Credit Agreement in our Notes to Consolidated Financial Statements)
14.
Warrant to Purchase 862,068 common shares for an exercise price of $0.01 per common share dated December 30, 2016 and expiring on December 30, 2022 issued by the Company to Opus Bank. (see Note 7, Debt, Opus Bank Credit Agreement in our Notes to Consolidated Financial Statements)
15.
Purchase Agreement dated December 30, 2016 between the Company and MF Ventures, LLC for the purchase of up to 8,333,333 common shares and warrants exercisable for the purchase of up to 16,666,666 common shares, for an aggregate purchase price of $2.5 million. (see ITEM 7.B. Related Party Transactions)
16.
Purchase Agreement dated December 30, 2016 between the Company and Lynn Factor for the purchase of up to 3,325,000 common shares and warrants exercisable for the purchase of up to 6,650,000 common shares, for an aggregate purchase price of $997,500. (see ITEM 7.B. Related Party Transactions)
17.
Purchase Agreement dated December 29, 2016 between the Company and Sheldon Inwentash for the purchase of up to 2,000,000 common shares and warrants exercisable for the purchase of up to 4,000,000 common shares, for an aggregate purchase price of $600,000. (see ITEM 7.B. Related Party Transactions)
18.
Purchase Agreement dated December 29, 2016 between the Company and ThreeD Capital Inc. for the purchase of up to 700,000 common shares and warrants exercisable for the purchase of up to 1,400,000 common shares, for an aggregate purchase price of $210,000. (see Item 7 (B) Related Party Transactions)
19.
Amendment Number Two to Credit Agreement, Amendment Number One to Amendment Number 1, Waiver and Reaffirmation dated March 12, 2017 between Overland Storage, Inc., Tandberg Data Gmbh and Opus Bank. (see Note 7, Debt, Opus Bank Credit Agreement in our Notes to Consolidated Financial Statements)
20.
Third Amendment to Credit Agreement dated March 21, 2017 between Overland Storage, Inc., Tandberg Data Gmbh and Opus Bank. (see Note 7, Debt, Opus Bank Credit Agreement in our Notes to Consolidated Financial Statements)
21.
Securities Purchase Agreement dated March 24, 2017 between the Company and MF Ventures, LLC for the purchase of up to 4,545,454 common shares and warrants exercisable for the purchase of up to 4,545,454 common shares, for an aggregate purchase price of $1.0 million. (see ITEM 7.B. Related Party Transactions)
22.
Securities Purchase Agreement dated March 24, 2017 between the Company and various investors for the purchase of up to 15,909,092 common shares and warrants exercisable for the purchase of up to 15,909,092 common shares, for an aggregate purchase price of $3.5 million.
23.
Registration Rights Agreement between the Company and various investors, including MF Ventures, LLC.,  dated March 24, 2017 for the registration of up to 20,454,546 common shares issuable upon the exercise of warrants.

60


D. Exchange Controls
The Company is not aware of any Canadian federal or provincial laws, decrees, or regulations that restrict the export or import of capital, including foreign exchange controls, or that affect the remittance of dividends, interest or other payments to non-Canadian holders of the common shares. There are no limitations under the laws of Canada or by the charter or other constituent documents of the Company, except the Investment Canada Act which may require review and approval by the Minister of Industry (Canada) of certain acquisition of control of the Company by non-Canadians. The threshold for acquisitions of control is generally defined as being one third or more of Sphere 3D's voting shares. If the investment is potentially injurious to national security it may be subject to review under the Investment Canada Act notwithstanding the percentage interest acquired or amount of the investment. "Non-Canadian" generally means an individual who is not Canadian citizen, or a corporation partnership, trust or joint venture that is ultimately controlled by non-Canadians.
E. Taxation
Material Canadian Federal Income Tax Considerations
The following summarizes the material Canadian federal income tax considerations generally applicable to the holding and disposition of common shares of Sphere 3D by holders who, at all relevant times, (i) are residents of the U.S. for the purposes of the Canada-United States Tax Convention (1980), as amended (the “Convention”), (ii) are not resident in Canada or deemed to be resident in Canada for purposes of the Income Tax Act (Canada), as amended to the date hereof (the “Canadian Tax Act”), (iii) deal at arm’s length with and are not affiliated with the Company for the purposes of the Canadian Tax Act, and (iv) do not use or hold and are not deemed to use or hold such common shares in the course of carrying on or being deemed to be carrying on business in Canada (“U.S. Resident Holders”). Special rules, which are not discussed in this summary, may apply to a U.S. Resident Holder that is an insurer carrying on business in Canada or elsewhere or an “authorized foreign bank” (all as defined in the Canadian Tax Act).
This summary is based upon the current provisions of the Canadian Tax Act, the regulations thereunder, all specific proposals to amend the Canadian Tax Act and regulations thereunder publicly announced by or on behalf of the Minister of Finance of Canada prior to the date hereof (the “Proposals”), the provisions of the Convention as in effect on the date hereof, and an understanding, based on publicly available published materials, of the current administrative policies and assessing practices of the Canada Revenue Agency in force as of the date hereof. Other than the Proposals, this summary does not take into account or anticipate any changes in law or in the administrative policies or assessing practices of the Canada Revenue Agency, whether by legislative, governmental or judicial action, nor does it take into account tax laws of any province or territory of Canada or of any jurisdiction outside Canada which may differ significantly from those discussed herein. The summary assumes that the Proposals will be enacted substantially as proposed, but there can be no assurance that the Proposals will be enacted as proposed or at all.
This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular U.S. Resident Holder, and no representation with respect to the tax consequences to any particular U.S. Resident Holder is made. The tax liability of a U.S. Resident Holder will depend on the holder’s particular circumstances. Accordingly, U.S. Resident Holders should consult with their own tax advisors for advice with respect to their own particular circumstances.
All amounts relevant in computing a U.S. Resident Holder’s liability under the Canadian Tax Act are generally required to be computed in Canadian dollars.
Dividends. Dividends paid or credited or deemed under the Canadian Tax Act to be paid or credited to a U.S. Resident Holder on the common shares of Sphere 3D are subject to Canadian withholding tax equal to 25% of the gross amount of such dividends. Under the Convention and subject to the provisions thereof, the rate of Canadian withholding tax which would apply to dividends paid on the common shares to a U.S. Resident Holder that beneficially owns such dividends and is fully entitled to the benefits under the Convention is generally 15%, unless the beneficial owner is a company which owns at least 10% of the voting shares of Sphere 3D at that time, in which case the rate of Canadian withholding tax is reduced to 5%.

61


Dispositions. For purposes of the following discussion, we have assumed that the common shares of Sphere 3D will remain listed on the NASDAQ. A U.S. Resident Holder is not subject to tax under the Canadian Tax Act in respect of a capital gain realized on the disposition of the common shares of Sphere 3D in the open market unless the shares are “taxable Canadian property” to the holder thereof and the U.S. Resident Holder is not entitled to relief under the Convention. The common shares of Sphere 3D will be taxable Canadian property to a U.S. Resident Holder if, at any time during the 60-month period preceding the disposition: (i) the U.S. Resident Holder, alone or together with persons with whom the U.S. Resident Holder did not deal at arm’s length (for purposes of the Canadian Tax Act), owned 25% or more of the issued shares of Sphere 3D of any class or series, and (ii) more than 50% of the fair market value of the common shares was derived, directly or indirectly, from one or any combination of real property situated in Canada, timber resource properties, Canadian resource properties, or an option in respect of, or an interest in, or for civil law a right in, any of the foregoing.
Notwithstanding the foregoing, the common shares of Sphere 3D may otherwise be deemed to be taxable Canadian property to a U.S. Resident Holder for purposes of the Canadian Tax Act in particular circumstances. U.S. Resident Holders to whom common shares constitute taxable Canadian property should consult with their own tax advisors as to the Canadian income tax consequences of a disposition of the common shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement By Experts
Not applicable.
H. Documents on Display
We are subject to the informational requirements of the Exchange Act. In accordance with these requirements, we file reports and other information as a foreign private issuer with the SEC. You may inspect and copy our public filings without charge at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC.
You may also inspect reports and other information a bout the Company electronically on SEDAR at www.sedar.com and on its website at www.sphere3d.com.
I. Subsidiary Information
Not applicable.
ITEM 11. 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 a significant portion of our sales in international markets are not denominated in U.S. dollars. Export sales represent a significant portion of our sales and are expected to continue to represent a significant portion of sales. Purchase contracts are typically in U.S. dollars. In addition, our wholly-owned foreign subsidiaries incur costs that are denominated in local currencies. As exchange rates vary, these results may vary from expectations when translated into U.S. dollars, which could adversely impact overall expected results.

62


We have noticed only a slight depreciation, less than 1%, in the average value of the Euro compared to the U.S. dollar, in 2016 compared to 2015. Our 2016 revenues would have been impacted with a 10% change in the average value of the Euro compared to the U.S. dollar by approximately $3.7 million, or 4.9% of total revenue, primarily as a result of revenue denominated in Euros.
Credit Risk. Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations, resulting in a financial loss to us. We sell to a diverse customer base over a global geographic area. We evaluate collectability of specific customer receivables based on a variety of factors including currency risk, geopolitical risk, payment history, customer stability and other economic factors. Collectability of receivables is reviewed on an ongoing basis by management and the allowance for doubtful receivables is adjusted as required. Account balances are charged against the allowance for doubtful receivables when we determine that it is probable that the receivable will not be recovered. We believe that the geographic diversity of the customer base, combined with our established credit approval practices and ongoing monitoring of customer balances, mitigates this counterparty risk.
Liquidity Risk. Liquidity risk is the risk that we will not be able to meet our financial obligations as they come due. We continually monitor our actual and projected cash flows and believe that our internally generated cash flows will provide us with sufficient funding to meet all working capital and financing needs for at least the next 12 months.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depository Shares
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective to give reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis as of the end of the period covered by this annual report.

63


Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Based on our evaluation under the framework in Internal Control-Integrated Framework, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2016 . Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management's report on internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.
This report on internal control over financial reporting shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any of our filings, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Company’s Board of Directors has determined that Glenn M. Bowman qualifies as an “audit committee financial expert of the Company’s Audit Committee is independent as that term is defined by the rules and regulations of the NASDAQ Stock Market, Inc. and qualifies as an “audit committee financial expert” and is an independent director as defined in Item 407(d)(5) of Regulation S-K under the U.S. Securities Exchange Act of 1934, as amended.
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Such code is posted on the Company’s website and is available at www.sphere3d.com.

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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees incurred by the Company’s current external auditor, Moss Adams, in each of the last two years for audit and other fees are as follows (in thousands):
2016
2015
Audit fees (1)
$
514

$
553

Audit related fees (2)
10

61

Tax fees (3)
9

51

All other fees (4)
—

—

$
533

$
665

___________________
(1)
Audit fees consist of fees billed for professional services rendered in connection with the audit of our annual consolidated financial statements, which were provided in connection with statutory and regulatory filings or engagements.
(2)
Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements, and are not reported under audit fees.
(3)
Tax fees consist of fees billed for professional services rendered for IRS Section 302 net operating loss limitation study.
(4)
All other fees consist of fees for products and services other than the services reported above. There were no such services rendered to us.
Pre-Approval Policies and Procedures
The Audit Committee has the authority to pre-approve all non-audit services to be provided to the Company by its independent auditor. All services provided by Moss Adams during the years 2016 and 2015 were pre-approved by the Audit Committee.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
At no time since the commencement of the Company’s most recently completed financial year has the Company relied on the exemptions in NI 52-110 (de minimis non-audit services), or an exemption from NI 52-110, in whole or in part, granted under Part 8 of NI 52-110.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
Not applicable.

65


ITEM 16G. CORPORATE GOVERNANCE
NASDAQ Listing Rule 5635 generally provides that shareholder approval is required of U.S. domestic companies listed on the NASDAQ Capital Market prior to issuance (or potential issuance) of securities equaling 20% or more of the Company’s common shares or voting power for less than the greater of market, or book value or in transactions which will result in a “change of control” of the Company. Notwithstanding this general requirement, NASDAQ Listing Rule 5615(a)(3)(A) permits foreign private issuers like Sphere 3D to follow their home country practice rather than this shareholder approval requirement. Since the Company is not required under Canadian securities laws to obtain shareholder approval prior to entering into a transaction with the potential to issue securities as described above, Sphere 3D relied upon this exemption in connection with the integrated offerings of common shares and warrants to purchase common shares consummated in September, October, and December 2015; in connection with the warrant exchange in March 2016; and the integrated offerings of common shares and warrants to purchase common shares consummated in the period between December 2016 and March 16, 2017.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of Sphere 3D are included at the end of this Annual Report.
ITEM 19. EXHIBITS
The exhibits listed in the accompanying “Exhibit Index” are incorporated herein by reference.

66


SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned Annual Report on its behalf.
Sphere 3D Corp.

/s/ Eric L. Kelly
Eric L. Kelly
Chief Executive Officer
Date: March 30, 2017





67


___________________________________________________


spherelogofinala05.jpg



SPHERE 3D CORP.
For the Years Ended December 31, 2016 , 2015 and 2014



Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Sphere 3D Corp.
We have audited the accompanying consolidated balance sheets of Sphere 3D Corp. (the “Company”) as of December 31, 2016 and 2015 , and the related consolidated statements of operations, comprehensive loss, cash flows, and shareholders’ equity for each of the three years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sphere 3D Corp. as of December 31, 2016 and 2015 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses and negative operating cash flows raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Moss Adams LLP
San Diego, California
March 30, 2017



Sphere 3D Corp.
Consolidated Balance Sheets
(in thousands of U.S. dollars)
December 31, 2016
December 31, 2015
Assets
Current assets:
Cash and cash equivalents
$
5,056

$
8,661

Accounts receivable, net of allowance for doubtful accounts of $1,648 and $1,567, respectively
11,591

13,401

Inventories
10,002

11,326

Investment
1,500

—

Other current assets
2,121

3,155

Total current assets
30,270

36,543

Property and equipment, net
3,058

3,972

Intangible assets, net
47,728

54,019

Goodwill
11,068

44,132

Other assets
432

445

Total assets
$
92,556

$
139,111

Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
$
10,561

$
10,855

Accrued liabilities
3,619

4,326

Accrued payroll and employee compensation
2,227

2,625

Deferred revenue
5,338

6,150

Debt - related party
2,294

10,000

Debt
17,300

7,391

Other current liabilities
1,515

5,050

Total current liabilities
42,854

46,397

Deferred revenue, long-term
1,051

1,675

Long-term debt - related party
24,401

19,500

Long-term deferred tax liabilities
3,100

2,755

Other long-term liabilities
704

644

Total liabilities
72,110

70,971

Commitments and contingencies (Note 15)




Shareholders’ equity:
Common shares, no par value; 66,565 and 45,198 shares issued and outstanding as of December 31, 2016 and 2015, respectively
157,254

136,058

Accumulated other comprehensive loss
(1,565
)
(1,135
)
Accumulated deficit
(135,243
)
(66,783
)
Total shareholders’ equity
20,446

68,140

Total liabilities and shareholders’ equity
$
92,556

$
139,111


See accompanying notes to consolidated financial statements.

F- 1


Sphere 3D Corp.
Consolidated Statements of Operations
(in thousands of U.S. dollars, except per share amounts)
Year Ended December 31,
2016
2015
2014
Net revenue:
Product revenue
$
68,065

$
65,514

$
12,201

Service revenue
8,328

10,651

1,268

76,393

76,165

13,469

Cost of product revenue
50,434

48,825

7,536

Cost of service revenue
3,620

4,721

597

Gross profit
22,339

22,619

5,336

Operating expenses:
Sales and marketing
22,243

23,569

5,153

Research and development
8,794

9,916

655

General and administrative
20,728

23,271

11,567

Impairment of goodwill and acquired intangible assets
34,398

10,702

—

86,163

67,458

17,375

Loss from operations
(63,824
)
(44,839
)
(12,039
)
Other income (expense):
Interest expense - related party
(3,106
)
(2,710
)
(207
)
Interest expense
(1,981
)
(355
)
(240
)
Other income (expense), net
1,276

(689
)
(194
)
Loss before income taxes
(67,635
)
(48,593
)
(12,680
)
Provision for (benefit from) income taxes
825

(1,366
)
42

Net loss
$
(68,460
)
$
(47,227
)
$
(12,722
)
Net loss per share:
Basic and diluted
$
(1.38
)
$
(1.24
)
$
(0.53
)
Shares used in computing net loss per share:
Basic and diluted
49,736

37,957

24,131

See accompanying notes to consolidated financial statements.

F- 2


Sphere 3D Corp.
Consolidated Statements of Comprehensive Loss
(in thousands of U.S. dollars)
Year Ended December 31,
2016
2015
2014
Net loss
$
(68,460
)
$
(47,227
)
$
(12,722
)
Other comprehensive (loss) income:
Foreign currency translation adjustment
(430
)
286

(1,285
)
Total other comprehensive (loss) income
(430
)
286

(1,285
)
Comprehensive loss
$
(68,890
)
$
(46,941
)
$
(14,007
)
See accompanying notes to consolidated financial statements.

F- 3


Sphere 3D Corp.
Consolidated Statements of Shareholders’ Equity
(in thousands of U.S. dollars)
Common Shares
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Shareholders'
Equity
Shares
Amount
Balance at January 1, 2014
21,098

$
14,407

$
(136
)
$
(6,834
)
$
7,437

Issuance of common shares for acquisition
8,557

68,627

—

—

68,627

Issuance of common shares for cash
3,423

11,901

—

—

11,901

Issuance of common shares for technology
1,090

6,454

—

—

6,454

Issuance of common shares for conversion of convertible notes
333

2,500

—

—

2,500

Shares returned for related party loan payment
(194
)
(1,513
)
—

—

(1,513
)
Issuance of common shares pursuant to the exercise of stock options
247

148

—

—

148

Share-based compensation
—

3,593

—

—

3,593

Other comprehensive loss
—

—

(1,285
)
—

(1,285
)
Net loss
—

—

—

(12,722
)
(12,722
)
Balance at December 31, 2014
34,554

106,117

(1,421
)
(19,556
)
85,140

Issuance of common shares for cash, net
6,916

13,697

—

—

13,697

Issuance of common shares for acquisition
1,529

6,147

—

—

6,147

Issuance of common shares for settlement of
related party interest expense
668

1,560

—

—

1,560

Issuance of common shares pursuant to the exercise of stock options and vesting of restricted stock units, net
1,531

(6
)
—

—

(6
)
Issuance of warrants in relation to related party debt
—

1,380

—

—

1,380

Share-based compensation
—

7,163

—

—

7,163

Other comprehensive income
—

—

286

—

286

Net loss
—

—

—

(47,227
)
(47,227
)
Balance at December 31, 2015
45,198

136,058

(1,135
)
(66,783
)
68,140

Issuance of common shares for cash
10,472

5,707

—

—

5,707

Issuance of common shares for investment purchase
3,947

1,500

—

—

1,500

Issuance of common shares for settlement of related party
interest expense
4,215

1,859

—

—

1,859

Issuance of warrants
—

1,994

—

—

1,994

Issuance of warrants in relation to related party debt
—

485

—

—

485

Issuance of common shares pursuant to the vesting of
restricted stock units
2,032

(11
)
—

—

(11
)
Issuance of restricted stock awards
701

531

—

—

531

Share-based compensation
—

9,131

—

—

9,131

Other comprehensive loss
—

—

(430
)
—

(430
)
Net loss
—

—

—

(68,460
)
(68,460
)
Balance at December 31, 2016
66,565

$
157,254

$
(1,565
)
$
(135,243
)
$
20,446

See accompanying notes to consolidated financial statements.

F- 4


Sphere 3D Corp.
Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
Year Ended December 31,
2016
2015
2014
Operating activities:
Net loss
$
(68,460
)
$
(47,227
)
$
(12,722
)
Adjustments to reconcile net loss to cash used in operating activities:
Impairment of goodwill and acquired intangible assets
34,398

10,702

—

Depreciation and amortization
6,187

7,450

3,453

Share-based compensation
9,131

7,154

3,253

Provision for losses on accounts receivable
715

1,567

—

Deferred tax provision (benefit)
349

(1,632
)
(3
)
Amortization of debt issuance costs
1,453

727

3

Loss on extinguishment of debt
502

—

—

Fair value adjustment of warrants
(1,248
)
(478
)
—

Changes in operating assets and liabilities (net of effects of acquisitions) :
Accounts receivable
(1,185
)
(1,499
)
(4,827
)
Inventories
1,282

6

(424
)
Accounts payable and accrued liabilities
1,066

1,984

3,311

Accrued payroll and employee compensation
(377
)
(1,187
)
951

Deferred revenue
(1,344
)
(1,901
)
57

Other assets and liabilities, net
58

1,177

(1,597
)
Net cash used in operating activities
(17,473
)
(23,157
)
(8,545
)
Investing activities:
Purchase of fixed assets
(237
)
(415
)
(487
)
Development costs capitalized as intangible assets
—

(108
)
(1,499
)
Purchase of intangible assets
—

(60
)
(4,013
)
Loan to related party
—

—

(7,750
)
Proceeds received from related party loan
—

—

2,500

Cash received from acquisition
—

—

2,312

Net cash used in investing activities
(237
)
(583
)
(8,937
)
Financing activities:
Proceeds from debt
18,195

—

—

Payments on debt
(7,391
)
—

—

Proceeds from issuance of common shares and warrants
5,831

16,812

12,092

Payment for issuance costs
—

(1,009
)
(868
)
Proceeds from debt - related party
2,500

10,000

5,000

Payments on debt - related party
(5,000
)
—

—

Proceeds from credit facility, net
—

2,501

141

Proceeds from exercise of stock options
—

225

148

Payment for restricted stock units tax liability on net settlement
(12
)
(231
)
—

Net cash provided by financing activities
14,123

28,298

16,513

Effect of exchange rate changes on cash
(18
)
(155
)
10

Net (decrease) increase in cash and cash equivalents
(3,605
)
4,403

(959
)
Cash and cash equivalents, beginning of period
8,661

4,258

5,217

Cash and cash equivalents, end of period
$
5,056

$
8,661

$
4,258



F- 5


Sphere 3D Corp.
Consolidated Statements of Cash Flows (continued)
(in thousands of U.S. dollars)

Year Ended December 31,
2016
2015
2014
Supplemental disclosures of cash flow information:
Cash paid for income taxes
$
228

$
54

$
30

Cash paid for interest
$
946

$
647

$
23

Supplemental disclosures of non-cash investing and financing activities:
Issuance of common shares for cost-method investment
$
1,500

$
—

$
—

Issuance of common shares for acquisition
$
—

$
6,147

$
68,627

Issuance of common shares for related party interest expense
$
1,859

$
1,560

$
—

Issuance of warrants in relation to related party credit facility

$
485

$
1,380

$
—

Issuance of warrants
$
1,995

$
(1,925
)
$
—

Contingent liability for the acquisition of intangible assets
$
—

$
(2,500
)
$
2,500

Issuance of common shares for technology
$
—

$
—

$
6,454

Issuance of common shares for conversion of convertible notes
$
—

$
—

$
2,500

Issuance of common shares for settlement of liabilities
$
531

$
—

$
677

Common shares received for settlement of related party debt
$
—

$
—

$
(1,513
)

See accompanying notes to consolidated financial statements.

F- 6

Sphere 3D Corp.
Notes to Consolidated Financial Statements
1.
Organization and Business
Sphere 3D Corp. (the “Company”) was incorporated under the Business Corporations Act (Ontario) on May 2, 2007 as T.B. Mining Ventures Inc. On March 24, 2015, the Company completed a short-form amalgamation with a wholly-owned subsidiary. In connection with the short-form amalgamation, the Company changed its name to “Sphere 3D Corp.”
The Company delivers data management, and desktop and application virtualization solutions via hybrid Cloud, Cloud and on-premise implementations through its global reseller network. The Company achieves this through a combination of containerized applications, virtual desktops, virtual storage and physical hyper-converged platforms. The Company’s products allow organizations to deploy a combination of public, private or hybrid cloud strategies while backing them up with the latest storage solutions. The Company has a portfolio of brands including Glassware 2.0™, NEO ® , RDX ® , SnapCLOUD™, SnapServer ® , SnapSync™ and V3 ® .
These consolidated statements include the financial statements of the Company, its wholly-owned subsidiaries, including Overland Storage, Inc. (“Overland”), V3 Systems Holdings, Inc., and Sphere 3D Inc.
The Company has projected that cash on hand will not be sufficient to allow the Company to continue operations beyond June 30, 2017 if the Company is unable to amend or refinance our credit facility with Opus Bank. As a result, the Company expects to need to refinance the short term portions of its existing debt and/or continue to raise additional debt, equity or equity-linked financing in the near future, but such financing may not be available on favorable terms on a timely basis or at all. Significant changes from the Company’s current forecasts, including but not limited to: (i) failure to comply with the financial covenants in our credit facility; (ii) shortfalls from projected sales levels; (iii) unexpected increases in product costs; (iv) increases in operating costs; (v) changes in the historical timing of collecting accounts receivable; and (vi) inability to gain compliance with the minimum bid price requirement of the NASDAQ Capital Market and/or inability to maintain listing with the NASDAQ Capital market 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 occurs or the Company is unable to generate sufficient cash from operations or financing sources, the Company may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or curtail, suspend or cease planned programs or operations generally or possibly seek bankruptcy protection, which would have a material adverse effect on the Company’s business, results of operations, financial position and liquidity.
The Company incurred losses from operations and negative cash flows from operating activities for the 12 months ended December 31, 2016 , and such losses might continue for a period of time. Based upon the Company's current expectations and projections for the next year, the Company believes that it may not have sufficient liquidity necessary to sustain operations beyond June 30, 2017 due to the maturity dates of the existing debt facilities. These factors, among others, raise doubt that the Company will be able to continue as a going concern.
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 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.
2.
Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”), applied on a basis consistent for all periods. These consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany balances and transactions have been appropriately eliminated in consolidation.

F- 7


Reclassifications
Certain reclassifications have been made to prior periods’ amounts to conform to the current period’s presentation.
Use of Estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of provisions for litigation claims; deferred revenue; allowance for doubtful receivables; inventory valuation; warranty provisions; deferred income taxes; and impairment assessments of goodwill, other indefinite-lived intangible assets and long-lived assets. Actual results could differ from these estimates.
Foreign Currency Translation
The financial statements of foreign subsidiaries, for which the functional currency is the local currency, are translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as other comprehensive income (loss) within shareholders’ equity. Gains or losses from foreign currency transactions are recognized in the consolidated statements of operations. Such transactions resulted in a minimal loss in 2016, and a loss of $1.7 million and $0.2 million for the years ended December 31, 2015 and 2014 , respectively.
Cash Equivalents
Highly liquid investments with insignificant interest rate risk and original maturities of three months or less, when purchased, are classified as cash equivalents. Cash equivalents are composed of money market funds. The carrying amounts approximate fair value due to the short maturities of these instruments.
Accounts Receivable
Accounts receivable is recorded at the invoiced amount and is non-interest bearing. We estimate our allowance for doubtful accounts based on an assessment of the collectability of specific accounts and the overall condition of the accounts receivable portfolio. When evaluating the adequacy of the allowance for doubtful accounts, we analyze specific trade and other receivables, historical bad debts, customer credits, customer concentrations, customer credit-worthiness, current economic trends and changes in customers’ payment terms and/or patterns. We review the allowance for doubtful accounts on a quarterly basis and record adjustments as considered necessary. Customer accounts are written-off against the allowance for doubtful accounts when an account is considered uncollectable. At both December 31, 2016 and 2015 , allowance for doubtful accounts of $1.6 million was recorded.
Inventories
Inventories are stated at the lower of cost or market using the first-in-first-out method. We assess the value of inventories periodically based upon numerous factors including, among others, expected product or material demand, current market conditions, technological obsolescence, current cost, and net realizable value. If necessary, we write down its inventory for obsolete or unmarketable inventory by an amount equal to the difference between the cost of the inventory and the estimated market value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense is computed using the straight-line method. Leasehold improvements are depreciated over the shorter of the remaining estimated useful life of the asset or the term of the lease.
Expenditures for normal maintenance and repair are charged to expense as incurred, and improvements are capitalized. Upon the sale or retirement of property or equipment, the asset cost and related accumulated depreciation are removed from the respective accounts and any gain or loss is included in the results of operations.

F- 8


Estimated useful lives are typically as follows:
Building
40 years
Machinery and equipment
3-5 years
Furniture and fixtures
5 years
Computer equipment and software
1-5 years
Goodwill and Intangible Assets
Goodwill represents the excess of consideration paid over the value assigned to the net tangible and identifiable intangible assets acquired. For intangible assets purchased in a business combination, the estimated fair values of the assets received are used to establish their recorded values. For intangible assets acquired in a non-monetary exchange, the estimated fair values of the assets transferred (or the estimated fair values of the assets received, if more clearly evident) are used to establish their recorded values. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value.
Purchased intangible assets are amortized on a straight-line basis over their economic lives of 25 years for channel partner relationships, four to nine years for developed technology, eight years for capitalized development costs, and five to 25 years for customer relationships as this method most closely reflects the pattern in which the economic benefits of the assets will be consumed.
Impairment of Goodwill, Other Indefinite-Lived Intangible Assets and Long-Lived Assets
Goodwill and other indefinite-lived assets are tested for impairment on an annual basis at December 31, or more frequently if there are indicators of impairment. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. Other indefinite-lived intangible assets are quantitatively assessed for impairment, if necessary, by comparing their estimated fair values to their carrying values. If the carrying value exceeds the fair value, the difference is recorded as an impairment. See Note 6 - Intangible Assets and Goodwill for further information on impairment.
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. Our consideration includes, but is not limited to: (i) significant under-performance relative to historical or projected future operating results; (ii) significant changes in the manner of use of the assets or the strategy for the Company’s overall business; (iii) significant decrease in the market value of the assets; and (iv) significant negative industry or economic trends. When the carrying value is not considered recoverable, an impairment loss for the amount by which the carrying value of a long-lived asset exceeds its fair value is recognized, with an offsetting reduction in the carrying value of the related asset. See Note 6 - Intangible Assets and Goodwill for further information on impairment.
Revenue Recognition
Revenue from sales of products is recognized when persuasive evidence of an arrangement exists, the price is fixed or determinable, collectability is reasonably assured and delivery has occurred. Under this policy, revenue on direct product sales, excluding sales to distributors, is recognized upon shipment of products to customers. These customers are not entitled to any specific right of return or price protection, except for any defective product that may be returned under our standard product warranty. Revenue from services, such as extended product warranties, are deferred and recognized over the period of the service agreement.
Title and risk of loss transfer to the customer when the product leaves the Company’s dock, except for one subsidiary where title and risk of loss transfer to the customer when the product arrives at the customer’s location. Product sales to distribution customers are subject to certain rights of return, stock rotation privileges and price protection. Because we are unable to estimate its exposure for returned product or price adjustments, revenue from shipments to these customers is not recognized until the related products are in turn shipped to the ultimate customer by the distributor. For products for which software is more than an incidental component, we recognize revenue in accordance with current authoritative guidance for software revenue recognition.

F- 9


The Company enters into revenue arrangements that may consist of multiple deliverables of its product and service offerings, such as for sales of hardware devices and extended warranty services. The Company allocates revenue to deliverables in multiple element arrangements based on relative selling prices. The Company determines its vendor-specific objective evidence (“VSOE”) based on its normal pricing and discounting practices for the specific product or service when sold separately. When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, the Company attempts to determine the selling price of each element based on third party evidence of selling price, or based on the Company’s actual historical selling prices of similar items, whichever management believes provides the most reliable estimate of expected selling prices.
Warranty and Extended Warranty
We record a provision for standard warranties provided with all products. If future actual costs to repair were to differ significantly from estimates, the impact of these unforeseen costs or cost reductions would be recorded in subsequent periods.
Separately priced extended on-site warranties and service contracts are offered for sale to customers on all product lines. We contract with third party service providers to provide service relating to on-site warranties and service contracts. Extended warranty and service contract revenue and amounts paid in advance to outside service organizations are deferred and recognized as service revenue and cost of service, respectively, over the period of the service agreement.
Shipping and Handling
Amounts billed to customers for shipping and handling are included in product revenue, and costs incurred related to shipping and handling are included in cost of product revenue.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses were $2.5 million , $1.6 million and $0.7 million for the years ended December 31, 2016, 2015 and 2014 , respectively.
Research and Development Costs
Research and development expenses include payroll, employee benefits, share-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to manufacturing. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products. During 2016 , no development costs were capitalized. During 2015 and 2014 , the Company capitalized $0.1 million and $1.8 million , respectively, of development costs.
Segment Information
We report segment data based on the management approach. The management approach designates the internal reporting that is used by management for making operating and investment decisions and evaluating performance as the source of our reportable segments. We use one measurement of profitability and do not disaggregate our business for internal reporting. We operate in one segment providing data management, and desktop and application virtualization solutions for small and medium businesses and distributed enterprises. We disclose information about products and services, geographic areas, and major customers.
Income Taxes
We provide for income taxes utilizing the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when a judgment is made that it is considered more likely than not that a tax benefit will not be

F- 10


realized. A decision to record a valuation allowance results in an increase in income tax expense or a decrease in income tax benefit. If the valuation allowance is released in a future period, income tax expense will be reduced accordingly.
The calculation of tax liabilities involves evaluating uncertainties in the application of complex global tax regulations. The impact of an uncertain income tax position is recognized 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. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Comprehensive Loss
Comprehensive loss and its components encompasses all changes in equity other than those arising from transactions with shareholders, including net loss and foreign currency translation adjustments, and is disclosed in a separate consolidated statement of comprehensive loss.
Concentration of Credit Risks
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of trade accounts receivable, which are generally not collateralized. To reduce credit risk, we perform ongoing credit evaluations of its customers and maintain allowances for potential credit losses for estimated bad debt losses.
At December 31, 2016 and 2015, there was one customer that made up 13.0% and 17.5% , respectively, of accounts receivable. There were no customers for the years ended December 31, 2016, 2015 and 2014 that made up 10% or more of net revenue.
Share-based Compensation
We account for share-based awards, and similar equity instruments, granted to employees, non-employee directors, and consultants under the fair value method. Share-based compensation award types include stock options and restricted stock. We use the Black-Scholes option pricing model to estimate the fair value of option awards on the measurement date, which generally is the date of grant. The expense is recognized over the requisite service period (usually the vesting period) for the estimated number of instruments for which service is expected to be rendered. The fair value of restricted stock units (“RSUs”) is estimated based on the market value of the Company’s common shares on the date of grant. The fair value of options granted to non-employees is estimated at the measurement date using the Black-Scholes option pricing model and the unvested options remeasured at each reporting date, with changes in fair value recognized in expense in the consolidated statement of operations.
Share-based compensation expense for options with graded vesting is recognized pursuant to an accelerated method. Share-based compensation expense for RSUs is recognized over the vesting period using the straight-line method. Share-based compensation expense for an award with performance conditions is recognized when the achievement of such performance conditions are determined to be probable. If the outcome of such performance condition is not determined to be probable or is not met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
We have not recognized, and do not expect to recognize in the near future, any tax benefit related to share-based compensation cost as a result of the full valuation allowance of our net deferred tax assets and its net operating loss carryforward.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“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 January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) . ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for

F- 11


the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss
recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for annual reporting periods, including interim periods, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material effect on our financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses eight cash flow classification issues and how they should be reported in the statement of cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted for all companies in any interim or annual period. We are currently evaluating the effect that the updated standard will have on our consolidated financial position, results of operations or cash flows.
In April 2016, the FASB issued ASU No. 2016-10, Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The effective date of ASU 2016-10 will coincide with ASU 2014-09 and, as described below, ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017. The impact on our consolidated financial position, results of operations or cash flows as a result of the adoption of ASU 2016-10 has not yet been determined.
In March 2016, the FASB issued ASU No. 2016-08, Revenue From Contracts With Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) (“ASU 2016-08”). ASU 2016-08 amends the principal-versus-agent implementation guidance in ASU 2014-09. ASU 2016-08 clarifies the principal-versus-agent guidance in Topic 606 and requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. The effective date of ASU 2016-08 will coincide with ASU 2014-09 and, as described below, ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017. The impact on our consolidated financial position, results of operations or cash flows as a result of the adoption of ASU 2016-08 has not yet been determined.
In February 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We have not yet selected a transition method and we are still evaluating any potential impact of the adoption of ASU 2016-09 may have on our consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. We are still evaluating any potential impact of the adoption of ASU 2016-02 may have on our consolidated financial position, results of operations or cash flows.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory . ASU 2015-11 requires that for entities that measure inventory using the first-in, first-out method, inventory should be measured at the lower of cost and net realizable value. Topic 330, Inventory , currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit

F- 12


margin. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The impact on our consolidated financial position, results of operations or cash flows as a result of the adoption of ASU 2015-11 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 as amended is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We have not yet selected a transition method and the impact on our consolidated financial position, results of operations or cash flows as a result of the adoption of ASU 2014-09 has not yet been determined.
Recently Adopted Accounting Pronouncements
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. For public business entities, the guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all companies in any interim or annual period. The guidance may be adopted on either a prospective or retrospective basis. We have adopted this guidance prospectively as of December 31, 2016. Therefore, prior periods have not been adjusted to reflect this adoption. This change in accounting principle does not change our consolidated financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805). ASU No. 2015-16 requires that an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change in provisional amounts, calculated as if the accounting had been completed at the acquisition date. This guidance requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU No. 2015-16 is effective beginning fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The impact on our consolidated financial position, results of operations or cash flows as a result of the adoption of ASU 2015-16 was not material.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount. The recognition and measurement guidance for debt issuance costs is not affected by ASU 2015-03. ASU 2015-03 is effective fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early application is permitted. The impact on our consolidated financial position, results of operations or cash flows as a result of the adoption of ASU 2015-03 was not material.
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 periods ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The impact on our consolidated financial disclosures as a result of the adoption of ASU 2014-15 was not material.

F- 13


3.
Business Combinations
RDX ® Asset Acquisition
In August 2015, the Company completed an acquisition of assets related to the RDX ® removable disk product lines and related inventory from Imation Corp. (“Imation”). The Company issued 1,529,126 common shares with an approximate value of $6.1 million , and a warrant exercisable for 250,000 additional common shares in connection with certain purchase price adjustments under the asset purchase agreement. In February 2016, Imation exercised the warrant and the Company issued 250,000 common shares at $0.01 .
In addition, the Company and Imation entered into that certain Lock-Up Agreement, dated as of August 10, 2015, which imposed limitations on the transfer and sale of the common shares issued to Imation at closing and requires that Imation vote its shares in accordance with any recommendation of the Company’s board of directors for a designated period of time.
The asset purchase agreement also terminated an existing license agreement and settled all disputes between the parties. We incurred acquisition related expenses of $0.2 million which consisted primarily of due diligence, legal and other one-time charges and are included in general and administrative expense in the consolidated statements of operations.
A summary of the estimated fair values of the assets acquired and liabilities assumed is as follows (in thousands):
Inventory
$
1,673

Other current assets
100

Property and equipment
789

Identifiable intangible assets
670

Total identifiable assets acquired
3,232

Contingent liability
(2,376
)
Other liabilities
(20
)
Net identifiable assets acquired
836

Goodwill
5,311

Net assets acquired
$
6,147

Goodwill is comprised of realization of expanded market share which provides greater control over the backup appliance components that form a key part of Sphere 3D’s strategy to deliver comprehensive virtualization, storage and data management for on premise, cloud and hybrid infrastructures. In December 2015, goodwill increased by $2.4 million , related to contingent consideration to Imation. The above table reflects such adjustment.
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. The goodwill recognized upon acquisition is deductible for tax purposes.
The results of operations related to this acquisition have been included in our consolidated statements of operations from the acquisition date. Pro forma results of operations have not been presented because at this time it is impracticable to provide as the information is not available at the level of detail required.

F- 14


The identified intangible assets as of the date of acquisition consisted of the following (in thousands):
Estimated
Fair Value
Weighted-
Average
Useful Life
(years)
Developed technology
$
190

0.5
Customer relationships
480

21.3
Total identified intangible assets
$
670

15.4
Overland Acquisition
On December 1, 2014, the Company completed its acquisition of Overland for a purchase price of $69.7 million . Included in this amount are 8.6 million common shares valued as of December 1, 2014 at $7.71 per share, $3.2 million of equity awards for which vesting accelerated upon consummation of the acquisition, as well as other consideration of $0.5 million . The acquisition was carried out pursuant to the terms and conditions contained in an Agreement and Plan of Merger dated May 15, 2014 (as amended, the “merger agreement”). The integration of Overland and Sphere 3D positions the Company to address the rapidly growing cloud, virtualization, and data storage markets.
As per the terms of the merger agreement, Overland became a wholly-owned subsidiary of Sphere 3D, and Overland’s common stock ceased to be traded on the NASDAQ Capital Market. Under the terms of the merger agreement, Sphere 3D issued a total of 8,556,865 common shares for all of the outstanding Overland shares on the basis of one Overland share for 0.46385 common shares . In addition, the Company issued warrants to purchase up to 1,323,897 of our common shares, options to purchase up to 168,488 common shares and 673,776 restricted share units, calculated on the basis of the exchange ratio.
A summary of the estimated fair values of the assets acquired and liabilities assumed as of the closing date is as follows (in thousands):
Cash and cash equivalents
$
2,312

Accounts receivable
10,558

Inventories
9,387

Property and equipment
4,117

Identifiable intangible assets
60,376

Other assets
2,364

Total identifiable assets acquired
89,114

Current liabilities
(28,133
)
Debt - current
(4,749
)
Debt - long term
(17,000
)
Other liabilities
(3,990
)
Deferred tax liabilities
(4,412
)
Total identifiable liabilities assumed
(58,284
)
Net identifiable net assets acquired
30,830

Goodwill
38,821

Net assets acquired
$
69,651


F- 15


Goodwill is comprised of expected synergies from combining Overland’s operations with that of the Company, including: (i) the creation of a larger and more diverse combined company to gain the scale, infrastructure and resources required to become a global virtualization company and to strengthen the Company’s ability to service and support partners and customers globally; (ii) the ability to better leverage Overland’s existing global distribution network of reseller, integrators and Tier One OEM’s, along with Overland’s global manufacturing, delivery and support networks; and (iii) the complementary nature of the respective products brings together next generation technologies for virtualization and cloud computing coupled with end-to-end scalable storage offerings enabling the combined company to address the larger and growing virtualization and cloud markets.
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 identified intangible assets as of the date of acquisition consisted of the following (in thousands):
Estimated
Fair Value
Weighted-
Average
Useful Life
(years)
Channel partner relationships
$
17,000

25.0
Developed technology
15,590

7.9
Customer relationships
816

9.0
Total finite lived intangible assets
33,406

16.6
Indefinite live intangible assets - trade names
26,970

n/a
Total identified intangible assets
$
60,376


The following unaudited pro forma combined financial information gives effect to the acquisition as if it were consummated on January 1, 2014 (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 us that would have been reported had the acquisition occurred on January 1, 2014, and should not be taken as representative of future consolidated results of operations of the combined company (in thousands):
Year Ended December 31, 2014
Net revenue
$
93,591

Net loss
$
(35,709
)
Net loss per share
$
(1.12
)
In 2014, we incurred acquisition related expenses of $2.2 million , which consisted primarily of due diligence, legal and other one-time charges, and are included in general and administrative expense in the consolidated statements of operations.
4.
Investment
On December 30, 2016, the Company acquired 19.9% of the outstanding equity securities and membership interests of Unified ConneXions, Inc. (“UCX”) and HVE ConneXions, LLC (“HVE”), respectively, for the purchase price of $1.5 million . The Company issued 3,947,368 shares of its common shares in satisfaction of payment.
The investment is accounted for using the cost-method of accounting. There are no known identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment at December 31, 2016 .

F- 16


5.
Certain Balance Sheet Items
The following table summarizes inventories (in thousands):
December 31,
2016
2015
Raw materials
$
1,697

$
1,734

Work in process
2,673

2,483

Finished goods
5,632

7,109

$
10,002

$
11,326

The following table summarizes property and equipment (in thousands):
December 31,
2016
2015
Building
$
1,646

$
1,667

Computer equipment
1,864

1,636

Machinery and equipment
1,062

1,116

Leasehold improvements
1,100

1,126

Furniture and fixtures
83

89

5,755

5,634

Accumulated depreciation and amortization
(2,697
)
(1,662
)
$
3,058

$
3,972

Depreciation and amortization expense for property and equipment was $1.1 million , $1.3 million and $0.3 million for the years ended December 31, 2016, 2015 and 2014 , respectively.

F- 17


6.
Intangible Assets and Goodwill
The following table summarizes intangible assets, net (in thousands):
December 31,
2016
2015
Developed technology
$
23,685

$
23,684

Channel partner relationships (1)
11,989

12,039

Capitalized development costs (1)
2,937

2,856

Customer relationships (1)
1,171

1,194

39,782

39,773

Accumulated amortization:
Developed technology
(11,234
)
(7,078
)
Channel partner relationships (1)
(565
)
(68
)
Capitalized development costs (1)
(958
)
(589
)
Customer relationships (1)
(207
)
(99
)

(12,964
)
(7,834
)
Total finite-lived assets, net
26,818

31,939

Indefinite lived intangible assets - trade names
20,910

22,080

Total intangible assets, net
$
47,728

$
54,019

________________
(1)
Includes the impact of foreign currency exchange rate fluctuations.
Amortization expense of intangible assets was $5.1 million , $6.1 million and $3.1 million for the years ended December 31, 2016, 2015 and 2014 , respectively. Estimated amortization expense for intangible assets is approximately $5.1 million , $3.4 million , $2.4 million , $2.4 million and $2.0 million in fiscal 2017, 2018, 2019, 2020 and 2021, respectively.
The Company tests the carrying amount of other indefinite-lived assets for impairment on an annual basis at December 31 of each year and during an interim period if an event occurs or circumstances change that would warrant impairment testing. During the third quarter of 2016, as a result of the Company’s declining market capitalization it was determined the carrying value exceeded its estimated fair value. In measuring fair value, the Company used income and market approaches. The Company compared the indicated fair value to the carrying value of its indefinite-lived assets, and as a result of the analysis, an impairment charge of $1.2 million was recorded to indefinite-lived trade names for the year ended December 31, 2016 .
During the fourth quarter of 2015, the Company concluded that its lower net revenue due to timing of projected growth of products and integration of channel partner relationships from the acquisition of Overland could be indicators of impairment and, therefore, had a third party impairment analysis performed. At December 31, 2015, as a result of the analysis, the Company recorded an impairment of $10.7 million of which $1.7 million related to developed technology, $4.1 million related to channel partner relationships, and $4.9 million related to trade names.
On March 21, 2014, the Company acquired from V3 Systems certain Virtual Desktop Implementation (“VDI”) technology, including V3 Desktop Cloud Orchestrator ® software, which allows administrators to manage local, cloud hosted, or hybrid virtual desktop deployments, and purpose-built, compact, efficient and easy-to-manage servers. On closing, the purchase price for the acquired assets was $14.4 million , which was paid with a combination of $4.2 million in cash and the issuance of 1,089,867 common shares at $5.92 per share. The identified intangible assets as of the date of the purchase agreement consisted of $14.4 million of developed technology with a useful life of four years. In addition, the Company was subject to an earn-out, based on the achievement of certain milestones in revenue and gross margin related to the VDI technology, of up to an additional $5.0

F- 18


million . The estimated earn-out liability was $2.5 million as of December 31, 2014, and was included in other current liabilities. The earn-out period expired on June 21, 2015 and the estimated earn-out liability of $2.5 million was reversed with an offsetting reduction to developed technology.
Goodwill
The changes in the carrying amount of goodwill were as follows (in thousands):
Balance as of January 1, 2015
$
38,821

Goodwill acquired
5,311

Balance as of December 31, 2015
44,132

Goodwill acquired
164

Impairment loss
(33,228
)
Balance as of December 31, 2016
$
11,068

The Company tests the carrying amount of goodwill for impairment on an annual basis at December 31 of each year and during an interim period if an event occurs or circumstances change that would warrant impairment testing. During the third quarter of 2016, as a result of the Company’s declining market capitalization it was determined the carrying value of the reporting unit exceeded its estimated fair value. In measuring fair value, the Company used income and market approaches. The Company compared the implied fair value of the goodwill to the carrying value of the goodwill, and as a result of the analysis, an impairment charge of $33.2 million was recorded for the year ended December 31, 2016 .
7.
Debt
Convertible Notes - Related Party
In December 2014, in connection with the acquisition of Overland, the existing debt of Overland and the remaining debt of the Company were amended and restated into a $19.5 million convertible note held by FBC Holdings (an affiliate of Cyrus Capital Partners, a related party). In April 2016, the Company modified its convertible note with FBC Holdings, pursuant to which the holder made an additional advance and principal amount under the convertible note amount was increased to $24.5 million . The convertible note is scheduled to mature March 31, 2018 and bears interest at an 8.0% simple annual interest rate, payable semi-annually. The obligations under the convertible note are secured by substantially all assets of the Company. At December 31, 2016 , the Company had $24.2 million , net of unamortized debt costs of $0.3 million , outstanding on the convertible note.
The Company has the option to pay accrued and outstanding interest either entirely in cash or common shares. If the Company choses to pay the interest in common shares, the calculation is based upon the number of common shares that may be issued as payment of interest on the convertible note and will be determined by dividing the amount of interest due by current market price as defined in the convertible note agreement.
The convertible note was originally convertible into common shares at a price equal to $7.50 per share in the case of $10 million of the convertible note and $8.50 per share in the case of $9.5 million of the convertible note. In November 2015, the convertible note was modified and the conversion prices of $7.50 per share and $8.50 per share were adjusted to $3.00 per share. In February 2016, in connection with the November 2015 modification and certain specified terms, the Company issued to the holder of the convertible note a warrant to purchase 500,000 common shares of the Company at a price of $1.62 .
At the option of the Company, the convertible note is convertible into common shares at the conversion price at any time that the weighted average trading price for the common shares exceeds 150% of the conversion price (i.e. exceeds $4.50 per share), for 10 consecutive trading days on its principal stock exchange that the common shares trade.
The convertible note 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 convertible note, the Holder may declare all amounts outstanding to be immediately due and payable. The convertible note specifies a number of events of default (some of which are subject to applicable grace or cure periods), including, among other things, non-payment

F- 19


defaults, covenant defaults, cross-defaults to other materials indebtedness, bankruptcy and insolvency defaults, and material judgment defaults. As of December 31, 2016 , the Company was in compliance with all covenants of the convertible note.
For the years ended December 31, 2016, 2015 and 2014 , interest expense, including amortization of debt costs, on the convertible note was $2.1 million , $1.6 million and $0.4 million , respectively.
Term Loan - Related Party
In September 2016, the Company entered into a $2.5 million term loan agreement with FBC Holdings. The term loan has a maturity date of January 31, 2018 and bears interest at a 20.0% simple annual interest rate, payable monthly in arrears. Monthly payments of principal on the term loan began on January 31, 2017 , in 13 equal installments. The Company has the option to pre-pay the outstanding balance of the term loan, plus any accrued interest, at any time.
The obligations of the Company and certain of its subsidiaries (collectively, the “Loan Parties”) under the term loan agreement and related documents will be secured by substantially all assets of the Loan Parties.
For the year ended December 31, 2016 , interest expense, including amortization of debt costs, on the term loan was $0.1 million .
Opus Bank Credit Agreement
In April 2016, the Company entered into a Credit Agreement with Opus Bank for a term loan in the amount of $10.0 million and a credit facility in the amount of up to $10.0 million . A portion of the proceeds were used to pay off the Company’s then outstanding credit facilities with FBC Holdings and Silicon Valley Bank. The remainder of the proceeds were used for working capital and general business requirements. At December 31, 2016 , the outstanding balance of the term loan was $9.1 million , net of unamortized debt costs of $0.9 million , and the outstanding balance of the credit facility was $8.2 million .
The term loan and credit facility contain 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 term loan, the holder may declare all amounts outstanding to be immediately due and payable. The term loan and credit facility specify 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 materials indebtedness, bankruptcy and insolvency defaults, and material judgment defaults. As of December 31, 2016 , the Company was in compliance with all covenants of the term loan and credit facility.
On December 30, 2016, the term loan and credit facility maturity dates were accelerated, in accordance with the terms of the agreement, to March 31, 2017 , and the credit facility was reduced to $8.2 million . The obligations under the term loan and credit facility are secured by substantially all assets of the Company other than the stock of its subsidiaries organized outside of the U.S. and Canada that are pledged to secure the Company’s obligations under the Company’s convertible note. At December 31, 2016, the interest rate on the term loan and credit facility was 6.5% .
In December 2016, as a condition of the extension of credit to the Company under the Credit Agreement, the Company issued to Opus Bank a warrant for the purchase of up to 862,068 common shares of the Company at an exercise price of $0.01 per common share. The warrant is immediately exercisable and has a six -year term. The December 2016 warrant replaced the warrant that was previously issued in April 2016.
For the year ended December 31, 2016 , interest expense, including amortization of debt costs, on the Opus facilities was $1.8 million .

F- 20


On March 12, 2017, the Company and Opus Bank entered into an Amendment Number Two to Credit Agreement, Amendment Number One to Amendment Number 1, Waiver and Reaffirmation (the “Second Amendment”). On March 22, 2017, the Company and Opus Bank entered into an Amendment Number Three to Credit Agreement, further amending the Second Amendment. Under the terms of the Second Amendment, as modified by the Third Amendment, (i) the maturity date for the revolving and term loan credit facilities were amended to be the earlier of (a) the maturity date in the Debenture or (b) June 30, 2017 if the Maturity Extension Trigger Date occurs on or before March 31, 2017, (ii) the Lender granted a waiver of specified defaults under the Credit Agreement relating to obligations to deliver to the Lender an executed letter of intent with respect to refinancing the credit facility, and (iii) certain other terms of the Credit Agreement were amended, including but not limited to terms related to collateral coverage, milestone deliverables, and financial covenants. We met the requirements of the Maturity Extension Trigger Date on March 29, 2017. In the event of certain specified events of default, including failure to meet certain monthly revenue and EBITDA targets, to enter into a term sheet with a new lender by April 28, 2017, or to enter into a letter of intent with respect to a financing or retain a financial advisor with respect to a sale of a significant portion of the Company’s assets, all amounts under the Credit Agreement may be accelerated and become immediately payable.
Further, as a condition of the entry into the Second Amendment, the Company issued to Opus Bank (i) a warrant, exercisable in the event that we have not repaid all outstanding amounts due under the Credit Agreement on or prior to April 17, 2017, for the purchase of the number of common shares equivalent to $75,000 at an exercise price of $0.01 per common share and (ii) a warrant, exercisable in the event that we have not repaid all outstanding amounts due under the Credit Agreement on or prior to May 31, 2017, for the purchase of the number of common shares equivalent to $100,000 at an exercise price of $0.01 per common share.
Terminated Credit Facility
In December 2014, in connection with the acquisition of Overland, the Company assumed the existing credit facility of Overland. The credit facility was originally entered into in August 2011, as amended, and allowed for revolving cash borrowings up to $8.0 million , which included a $3.75 million sublimit for advances to one of the Company’s subsidiaries. In April 2016 , the credit facility was terminated upon repayment of the outstanding balance.
For the years ended December 31, 2016 and 2015 , interest expense, including amortization of issuance costs, for the credit facility was $0.1 million and $0.3 million , respectively.
Terminated Related Party Credit Facility
In December 2014, the Company entered into a revolving credit agreement with FBC Holdings for a revolving credit facility of $5.0 million . In July 2015, the credit facility was amended to extend the scheduled maturity date to May 2016 with an automatic extension to November 2016, and the aggregate borrowing amount was increased to $10.0 million . In April 2016 , the credit facility was terminated upon repayment of the outstanding balance.
For the years ended December 31, 2016 and 2015 , interest expense for the credit facility was $0.9 million and $1.2 million , respectively, which included $0.7 million of amortization of issuance costs in both of the years ended 2016 and 2015. At December 31, 2016 and 2015, there was zero and $0.1 million , respectively, in accrued liabilities related to interest expense and fees.
8.
Fair Value Measurements
The authoritative guidance for fair value measurements establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

F- 21


Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Our financial instruments include cash equivalents, investment, accounts receivable, prepaid expenses, accounts payable, accrued expenses, credit facilities, and related party long-term debt. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash equivalents, investment, accounts receivable, prepaid expenses, accounts payable and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. 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. The carrying value of long-term debt approximates its fair value as the borrowing rates are substantially comparable to rates available for loans with similar terms.
The following table provides information by level for liabilities that are measured at fair value using significant unobservable inputs (Level 3) (in thousands):
Warrant liability as of January 1, 2015
$
—

Additions to warrant liability
1,925

Change in fair value of warrants
(478
)
Warrant liability as of December 31, 2015
1,447

Change in fair value of warrants
(1,248
)
Reclassification to equity
1

Warrant liability as of December 31, 2016
$
200

The Company determined the estimated fair value of the warrant liability using a Black-Scholes model using similar assumptions as disclosed in Note 10 - Equity Incentive Plan.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
The Company's non-financial assets such as goodwill, intangible assets and property and equipment are recorded at fair value when an impairment is recognized or at the time acquired in a business combination. As discussed in Note 3 - Business Combinations, the Company acquired assets related to the RDX ® removable disk product lines during 2015 and recorded the acquired assets and liabilities, including goodwill, intangible assets and property and equipment at their estimated fair value. The determination of the estimated fair value of such assets required the use of significant unobservable inputs which would be considered Level 3 fair value measurements. As discussed in Note 6 - Intangible Assets and Goodwill, at December 31, 2016, the Company recorded impairment charges associated with goodwill and acquired intangible assets, and reduced the carrying amount of such assets subject to the impairment to their estimated fair value. At December 31, 2015, the Company recorded impairment charges associated with intangible assets and reduced the carrying amount of such assets subject to the impairment to their estimated fair value.

F- 22


9.
Share Capital
The Company has unlimited authorized shares of common shares at no par value. The share capital activity was as follows (in thousands):
Number of Shares
Amount
Shares issued during the year ended December 31, 2014:


Common shares issued
11,108

$
85,257

Common shares issued for warrants exercised
2,101

$
2,712

Shares issued under equity incentive plan
247

$
148

Shares issued during the year ended December 31, 2015:
Common shares issued
8,764

$
20,139

Common shares issued for warrants exercised
349

$
1,265

Shares issued under equity incentive plan
1,531

$
(6
)
Shares issued during the year ended December 31, 2016:
Common shares issued
15,126

$
5,414

Common shares issued for warrants exercised
3,508

$
3,652

Shares issued under equity incentive plan
2,733

$
520

At December 31, 2016, the Company had the following outstanding warrants to purchase common shares (in thousands):
Date issued
Contractual life (years)
Exercise price
Number outstanding
Expiration
February 2015
3
$4.50
100

February 20, 2018
March 2015
3
$7.21
100

March 6, 2018
March 2015
3
$5.02
100

March 20, 2018
May 2015
5
$4.00
840

May 31, 2020
October 2015
5
$2.33
402

October 14, 2020
December 2015
3
$1.54
500

December 21, 2018
December 2015
5
$2.50
1,028

December 15, 2020
December 2015
5
$1.08
(1)
1,500

(2)
December 4, 2020
February 2016
3
$1.62
500

February 26, 2019
March 2016
5
$2.50
30

March 4, 2021
March 2016
5
$1.22
4,168

March 25, 2021
November 2016
3
$2.00
25

November 8, 2019
January 2016
3
$2.06
88

November 30, 2018
December 2016
6
$0.01
862

December 30, 2022
10,243

(3)
_______________
(1)
These warrants to purchase common shares include a one-time adjustment provision, as defined in the agreement, which provided that the exercise price will be automatically adjusted, if the adjustment price as calculated on May 28, 2016, is less than $2.50. On May 28, 2016, the exercise price was adjusted to $1.08 for the one-time adjustment provision.

F- 23


(2)
If the Company or any subsidiary thereof, at any time while this warrant is outstanding, enters into a Variable Rate Transaction (“VRT”) (as defined in the purchase agreement) and the issue price, conversion price or exercise price per share applicable thereto is less than the warrant exercise price then in effect, the exercise price shall be reduced to equal the VRT price.
(3)
Includes 6.8 million of warrants to purchase common shares, in the aggregate, issued to related parties.
Related Party Warrant Exchange Agreement
In March 2016, the Company entered into a warrant exchange agreement with MF Ventures, LLC (“MF Ventures”), a related party, pursuant to which the Company agreed to issue a warrant (the “New Warrant”) for the purchase of up to 7,199,216 common shares (the “Warrant Shares”) in exchange for the surrender and cancellation of previously outstanding warrants for the purchase of up to, in aggregate, 3,031,249 common shares (the “Previously Outstanding Warrants”). The terms of the New Warrant are substantially similar to the Previously Outstanding Warrants except the exercise price has changed to $1.22 per common share. On March 25, 2016, MF Ventures exercised 3,031,249 of the Warrant Shares for 3,031,249 common shares pursuant to which the Company received $3.7 million in proceeds. The expiration date for the remaining balance of the New Warrant is March 25, 2021 .
Private Placement
Between December 2016 and March 16, 2017, the Company completed a private placement and issued a total of 18,139,998 “Units” at a purchase price of $0.30 per Unit. Each Unit consisted of one common share and one warrant from each of two series of warrants, as described below. The Company received gross proceeds of $5.4 million in connection with the sale of the Units.
The first series of warrants is exercisable to purchase 18,139,998 common shares in the aggregate and has an exercise price of $0.40 per share, a one -year term, and is exercisable in whole or in part at any time prior to expiration. The second series of warrants is exercisable for 18,139,998 common shares in the aggregate and has an exercise price of $0.55 per share, a five -year term, and is exercisable in whole or in part at any time prior to expiration.
MF Ventures, a related party, participated in the private placement and acquired 8,333,333 common shares and warrants to purchase 16,666,666 shares.
Lynn Factor and Sheldon Inwentash, a married couple and related party, participated in the private placement by acquiring 5,325,000 common shares and warrants to purchase 10,650,000 shares. An additional 700,000 common shares and warrants to purchase 1,400,000 shares were acquired by ThreeD Capital Inc. Mr. Inwentash is the Chief Executive Officer of ThreeD Capital Inc.
10.
Equity Incentive Plans
In June 2015, the shareholders approved the adoption of our 2015 Performance Incentive Plan (“2015 Plan”). The 2015 Plan, as amended, authorizes the board of directors to grant stock and options awards of up to 10.1 million common shares to directors, employees and consultants. As of December 31, 2016 , the Company had 3.0 million share-based awards available for future grant.
In June 2015, the shareholders approved the adoption of our Employee Stock Purchase Plan (“ESPP”), authorizing the purchase of up to 2.0 million common shares by employees under the plan. As of December 31, 2016, there were no offering periods available to employees.

F- 24


Stock Options
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model, which uses the weighted-average assumptions noted in the following table:
Year Ended December 31,
2016
2015
2014
Expected volatility
93.0
%
93.0
%
97.0
%
Risk-free interest rate
1.5
%
1.5
%
1.7
%
Dividend yield
—

—

—

Expected term (in years)
4.7

4.7

3.0

The expected volatility was based on the Company’s historical share price. The Company applies a forfeiture rate based on historical pre-vesting option cancellations. The risk-free interest rate is determined based upon a constant maturity U.S. Treasury security with a contractual life approximating the expected term of the option. The expected term of options granted is estimated based on a number of factors, including but not limited to the vesting term of the award, historical employee exercise behavior, the expected volatility of the Company’s common shares and an employee’s average length of service.
Options typically vest over a three year period from the original grant date. The exercise price of each award is based on the market price of the Company’s common shares at the date of grant. Option awards can be granted for a maximum term of up to 10 years. Option activity is summarized below (shares and aggregate intrinsic value in thousands):
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
Options outstanding at January 1, 2014
2,810

$
1.11

Granted
735

$
7.08

Options assumed from acquisition
168

$
17.19

Exercised
(246
)
$
0.58

Forfeited
(74
)
$
4.51

Options outstanding at December 31, 2014
3,393

$
3.08

Granted
770

$
2.71

Exercised
(293
)
$
0.77

Forfeited
(156
)
$
13.26

Options outstanding at December 31, 2015
3,714

$
2.43

Granted
12

$
1.39

Exercised
—

$
—

Forfeited
(471
)
$
4.52

Options outstanding at December 31, 2016
3,255

$
2.17

5.9
$
—

Vested and expected to vest at December 31, 2016
3,225

$
2.16

5.9
$
—

Exercisable at December 31, 2016
2,711

$
2.05

5.8
$
—


F- 25


The following table summarizes information about the Company’s stock options (in thousands, except per share amounts):
Year Ended December 31,
2016
2015
2014
Weighted-average grant date fair value per share
$
0.97

$
1.89

$
5.51

Intrinsic value of options exercised
$
—

$
1,053

$
1,641

Cash received upon exercise of options
$
—

$
225

$
148

Restricted Stock Units
In December 2014, in connection with the acquisition of Overland, the Company assumed 673,776 RSUs, of which 359,482 units became vested at the close of the acquisition and were included in the purchase price. These 359,482 units were released in 2015.
The following table summarizes information about RSU activity (in thousands, except per share amounts):
Number of
Shares
Weighted Average Grant Date Fair Value
Outstanding — January 1, 2014
—

$
—

Awards assumed from acquisition
674

7.71

Forfeited
(1
)
7.71

Outstanding — December 31, 2014
673

7.71

Granted
6,391

3.56

Vested and released
(1,308
)
5.27

Forfeited
(138
)
4.71

Outstanding — December 31, 2015
5,618

3.66

Granted
1,638

0.82

Vested and released
(2,038
)
3.32

Forfeited
(1,454
)
3.39

Outstanding — December 31, 2016
3,764

$
2.58

The estimated fair value of RSUs was based on the market value of the Company’s common shares on the date of grant. RSUs typically vest over a three year period from the original date of grant. The fair value of RSUs vested during the years ended December 31, 2016, 2015 and 2014 was approximately $1.7 million , $2.3 million and $1.6 million , respectively. The total intrinsic value of RSUs vested during the years ended December 31, 2016, 2015 and 2014 was approximately zero , $14,000 and zero , respectively.
Outside of 2015 Equity Incentive Plan
In January 2017, the Company granted 5,156,030 RSUs to certain employees. The RSUs have an estimated fair value of $0.35 per unit and vest over one to three years.

F- 26


Restricted Stock Awards
During 2016, the Company granted restricted stock awards (“RSA”) to certain consultants in lieu of cash payment for services performed. There were no such awards in prior years. The estimated fair value of the RSAs was based on the market value of the Company’s common shares on the date of grant. The RSAs were fully vested on the date of grant. The fair value of the RSAs vested during the year ended December 31, 2016 was approximately $0.5 million .
The following table summarizes information about RSA activity (in thousands, except per share amounts):
Number of
Shares
Weighted Average Grant Date Fair Value
Outstanding — January 1, 2016
—

$
—

Granted
701

0.76

Vested
(701
)
0.76

Outstanding — December 31, 2016
—

$
—

Share-Based Compensation Expense
The Company recorded the following compensation expense related to its share-based compensation awards (in thousands):
Year Ended December 31,
2016
2015
2014
Cost of sales
$
366

$
183

$
—

Sales and marketing
2,773

3,090

1,072

Research and development
1,779

1,050

22

General and administrative
4,213

2,831

2,159

Total share-based compensation expense
$
9,131

$
7,154

$
3,253

There was zero , $9,000 and $347,000 of share-based compensation capitalized as development costs for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, there was a total of $7.3 million of unrecognized compensation expense related to unvested equity-based compensation awards. The expense associated with non-vested restricted stock units and options awards granted as of December 31, 2016 is expected to be recognized over a weighted-average period of 1.1 years.

F- 27


11.
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 common shares outstanding during the period. 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 share equivalents excluded from the computation of diluted net loss per share were as follows (in thousands):
December 31,
2016
2015
2014
Common share purchase warrants
10,243

9,078

2,419

Convertible notes
8,167

6,500

2,451

Convertible notes interest
8,144

2,316

657

Restricted stock not yet vested or released
3,764

5,618

673

Options outstanding
3,255

3,714

3,393

VDI earn-out liability
—

—

1,051

12.
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 tax position will not be recognized if it has less than a 50% likelihood of being sustained.
The following is a summary of the changes in the amount of unrecognized tax benefits (in thousands):
December 31,
2016
2015
Unrecognized tax benefits at the beginning of the period
$
673

$
673

Decrease related to prior periods
(267
)
—

Unrecognized tax benefits
$
406

$
673

At December 31, 2016 , there was $0.4 million of unrecognized tax benefits presented as a reduction of the related deferred tax asset for which there is full valuation allowance, and the entire amount of the unrecognized tax benefits at December 31, 2016 will affect the effective tax rate if recognized. However, the portion that would be recognized as an increase to deferred tax assets may result in a corresponding increase in the valuation allowance at the time of recognition resulting in no net effect to the effective tax rate, depending upon the Company’s assessment of the likelihood of realization of the tax benefits at the time they are recognized.
The Company believes it is reasonably possible that, within the next 12 months, the amount of unrecognized tax benefits may remain unchanged. 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 on its consolidated balance sheets at December 31, 2016 and 2015, and recognized no interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014 .
The Company is subject to taxation in Canada and also in certain foreign tax jurisdictions. The Company's tax returns for calendar year 2011 and forward are subject to examination by the Canadian tax authorities. The Company's tax returns for fiscal year 2005 and forward are subject to examination by the U.S. federal and state tax authorities.

F- 28


The components of loss before income taxes were as follows (in thousands):
Year Ended December 31,
2016
2015
2014
Domestic
$
(8,937
)
$
(8,549
)
$
(11,038
)
Foreign
(58,698
)
(40,044
)
(1,642
)
Total
$
(67,635
)
$
(48,593
)
$
(12,680
)
The provision for income taxes includes the following (in thousands):
Year Ended December 31,
2016
2015
2014
Current:
Federal
$
—

$
—

$
—

State
—

—

—

Foreign
476

266

45

Total current
476

266

45

Deferred:
Federal
—

—

—

Foreign
349

(1,632
)
(3
)
Total deferred
349

(1,632
)
(3
)
Provision for income taxes
$
825

$
(1,366
)
$
42

A reconciliation of income taxes computed by applying the federal statutory income tax rate of 26.5% to loss before income taxes to the total income tax (benefit) provision reported in the accompanying consolidated statements of operations is as follows (in thousands):
Year Ended December 31,
2016
2015
2014
Income tax at statutory rate
$
(17,923
)
$
(12,877
)
$
(3,360
)
Foreign rate differential
(1,652
)
(2,038
)
(354
)
Change in valuation allowance
(34,477
)
12,689

2,952

Share-based compensation expense
2,130

1,567

812

Goodwill impairment
8,699

—

—

Section 382 limitation
41,044

—

—

Other differences
3,004

(707
)
(8
)
Provision for (benefit from) income taxes
$
825

$
(1,366
)
$
42


F- 29


Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are shown below. A valuation allowance has been recorded, as realization of such assets is uncertain. Deferred income taxes are comprised as follows (in thousands):
December 31,
2016
2015
Deferred tax assets:
Net operating loss carryforward
$
48,138

$
82,636

Intangible assets
2,791

2,535

Tax credits
2,133

3,380

Inventory
1,906

2,344

Share-based compensation
920

852

Warranty and extended warranty
550

1,198

Other
2,708

1,325

Deferred tax asset, gross
59,146

94,270

Valuation allowance for deferred tax assets
(59,039
)
(93,516
)
Deferred tax asset, net of valuation allowance
107

754

Deferred tax liabilities:
Intangible assets
(3,063
)
(3,366
)
Property and equipment
(144
)
(143
)
Deferred tax liabilities
(3,207
)
(3,509
)
Net deferred tax asset (liabilities)
$
(3,100
)
$
(2,755
)
At December 31, 2016 , the Company had Canadian net operating loss carryforwards of $18.5 million . These carryforwards will begin expiring in 2030 , unless previously utilized.
At December 31, 2016 , the Company had U.S. federal and state net operating loss carryforwards of $108.9 million and $79.6 million , respectively. These amounts include share-based compensation deductions of $1.0 million that will be recorded to contributed capital when realized. The remaining federal net operating loss will begin expiring in 2023 , unless previously utilized. State net operating loss carryforwards generally begin expiring in 2017 , unless previously utilized.
The Company’s ability to use its U.S. federal and state 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 completed a study through December 31, 2014, 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.
At December 31, 2016 , the Company had California research and development tax credit carryforwards totaling $3.4 million . The California research credit may be carried forward indefinitely. The Company has federal alternative minimum tax credit carryforwards totaling $0.2 million which can be carried forward indefinitely.

F- 30


13.
Related Party Transactions
In July 2013, the Company entered into a supply agreement, and a technology license agreement, with Overland. As payments under the supply agreement, and prior to the acquisition of Overland in December 2014, Sphere 3D issued common shares with a value as of the date of issuance equal to $0.5 million to Overland during the year ended December 31, 2014. The Company made purchases of $1.4 million from Overland related to the supply agreement prior to the acquisition of Overland on December 1, 2014.
In September 2014, the Company 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. The Company did not have a relationship with such distribution partner and in order to facilitate such transaction on a timely basis, the Company and Overland agreed that Overland would purchase the Glassware product from the Company and resell it to the distribution partner, with whom Overland had a preexisting relationship. The Company recognized no revenue related to these agreements during the years ended December 31, 2016 and 2015, and $0.8 million in revenue during the year ended December 31, 2014.
Prior to the acquisition of Overland in December 2014, the Company recognized $0.2 million in interest income from a promissory note due from Overland during the year ended December 31, 2014.
Professional services of $1.0 million , $0.5 million and $0.1 million were provided by affiliates of the Company during the years ended December 31, 2016 , 2015 and 2014, respectively. As of December 31, 2016 and 2015, accounts payable and accrued liabilities included $17,000 and $163,000 , respectively, due to related parties.
14.
401K Plan
The Company maintains an employee savings and retirement plan (the “401(k) Plan”) covering all of the Company’s employees. The 401(k) Plan permits but does not require matching contributions by the Company on behalf of participants. The Company does not make matching contributions.
15.
Commitments and Contingencies
Leases
The Company leases various office space, production facilities, and vehicles under non-cancelable operating leases that expire in various years through 2021. Future minimum lease payments as of December 31, 2016 under these arrangements are as follows (in thousands):
Minimum
Lease
Payments
2017
$
1,331

2018
943

2019
774

2020
197

2021
26

Thereafter
—

Total
$
3,271

Rent expense under non-cancelable operating leases is recognized on a straight-line basis over the respective lease terms and was $1.8 million , $2.1 million and $0.3 million for the years ended December 31, 2016, 2015 and 2014 , respectively.

F- 31


Letters of credit
During the ordinary course of business, the Company provides standby letters of credit to third parties as required for certain transactions initiated by the Company. As of December 31, 2016 , the Company’s had standby letters of credit of $0.4 million that were not recorded on the Company’s consolidated balance sheets.
Warranty and Extended Warranty
The Company had $0.5 million and $0.6 million in deferred costs included in other current and non-current assets related to deferred service revenue at December 31, 2016 and 2015 , 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 January 1, 2015
$
1,437

$
8,948

Liabilities assumed from acquisition
20

—

Settlements made during the period
(224
)
(8,952
)
Change in liability for warranties issued during the period
398

7,047

Change in liability for pre-existing warranties
(602
)
—

Liability at December 31, 2015
1,029

7,043

Settlements made during the period
(54
)
(7,040
)
Change in liability for warranties issued during the period
634

5,429

Change in liability for pre-existing warranties
(558
)
—

Liability at December 31, 2016
$
1,051

$
5,432

Current liability
$
812

$
4,414

Non-current liability
239

1,018

Liability at December 31, 2016
$
1,051

$
5,432

Litigation
The Company is, from time to time, subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of such pending proceedings will not have a material effect on the Company’s results of operations, financial position or cash flows.
Patent Litigation Funding Agreement
In December 2010, Overland 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 Overland. In May 2014, the Special Situations Funds filed a complaint against Overland in the Supreme Court for New York County, alleging breach of the Funding Agreement. The Special Situations Funds allege that Overland’s January 2014 acquisition of Tandberg Data entitled the Special Situation Funds to a $6.0 million payment under the Funding Agreement, and therefore Overland’s refusal to make the payment constitutes a breach of the Funding Agreement by Overland. In November 2014, the Special Situations Funds amended their complaint to allege that Overland breached the Funding Agreement’s implied covenant of good faith and fair dealing by settling the patent litigation with BDT in bad faith to avoid a payment obligation under the Funding Agreement.  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. The parties have briefed cross- motions for summary judgment and are awaiting a decision from the Court.

F- 32


Patent Infringement
In May 2013, Safe Storage LLC (“Safe Storage”), a Delaware limited liability company, filed a complaint against Overland in the U.S. District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,978,346 by our products. In February 2017, Overland and Safe Storage entered into a settlement agreement, pursuant to which the claim was dismissed.
Other
In April 2015, we filed a proof of claim in connection with bankruptcy proceedings of V3 Systems, Inc. (“V3”) based on breaches by V3 of the Asset Purchase Agreement entered into between V3 and the Company dated February 11, 2014 (the “APA”). On October 6, 2015, UD Dissolution Liquidating Trust (“UD Trust”), the apparent successor to V3, filed a complaint against us and certain of our current and former directors in the U.S. Bankruptcy Court for the District of Utah Central Division objecting to our proof of claim and asserting claims for affirmative relief against us and our directors. This complaint alleges, among other things, that Sphere breached the APA and engaged in certain other actions and/or omissions that caused V3 to be unable to timely sell the Sphere common shares received by V3 pursuant to the APA. The plaintiff seeks, among other things, monetary damages for the loss of the potential earn-out consideration, the value of the common shares held back by us pursuant to the APA and costs and fees. We believe the lawsuit to be without merit and intend to vigorously defend against the action.
On December 23, 2015, we filed a motion seeking to dismiss the majority of the claims asserted by the UD Trust. On January 13, 2016, we filed a counterclaim against the UD Trust in which we allege that V3 breached numerous provisions of the APA. On July 22, 2016, we filed a motion seeking to transfer venue of this action to the United States District Court for the District of Delaware. The Bankruptcy Court granted our motion to transfer venue on August 30, 2016, and the case was formally transferred to the Delaware Court on October 11, 2016. There is currently no hearing set on our motion to dismiss.
16.
Segment Disclosure
The Company reports segment information as a single reportable business segment based upon the manner in which related information is organized, reviewed, and managed. The Company operates in one segment providing data storage and desktop virtualization solutions for small and medium businesses and distributed enterprises. The Company conducts business globally, and its sales and support activities are managed on a geographic basis. Our management reviews financial information presented on a consolidated basis, accompanied by disaggregated information it receives from its internal management system about revenues by geographic region, based on the location from which the customer relationship is managed, for purposes of allocating resources and evaluating financial performance.
Information about Products and Services
The following table summarizes net revenue (in thousands):
Year Ended December 31,
2016
2015
2014
Disk systems
$
46,795

$
39,836

$
8,518

Tape automation systems
10,297

12,764

1,868

Tape drives and media
10,973

12,914

1,815

Service
8,328

10,651

1,268

$
76,393

$
76,165

$
13,469


F- 33


Information about Geographic Areas
The Company markets its products domestically and internationally, with its principal international market being Europe. Revenue is attributed to the location to which the product was shipped. The Company divides its worldwide sales into three geographical regions: Americas, consisting of U.S., Canada and Latin America; EMEA, consisting of Europe, the Middle East and Africa; and APAC, consisting of Asia Pacific countries.
The following table summarizes net revenue by geographic area (in thousands):
Year Ended December 31,
2016
2015
2014
EMEA
$
39,719

$
39,331

$
7,172

Americas
23,043

25,284

4,749

APAC
13,631

11,550

1,548

Total
$
76,393

$
76,165

$
13,469

During 2016, 2015 and 2014, there were two geographic areas with specific concentrations of net revenue greater than 10% . Revenues from customers in the U.S. comprised $20.1 million , $19.1 million and $3.8 million of Americas net revenue during the year ended December 31, 2016 , 2015 and 2014, respectively. Revenue from customers in Germany accounted for $19.6 million , $17.2 million and $1.9 million of EMEA’s net revenue during the year ended December 31, 2016 , 2015 and 2014, respectively.
The following table presents property and equipment information for geographic areas based on the physical location of the assets (in thousands):
Year Ended December 31,
2016
2015
2014
EMEA
$
1,703

$
1,779

$
2,038

Americas
937

1,584

1,340

APAC
418

609

1,049

Total
$
3,058

$
3,972

$
4,427

17.
Subsequent Events
On January 27, 2017, the Company acquired 80.1% of the outstanding equity securities and membership interests of UCX and HVE, respectively, for $1.1 million in cash and issued 2,205,883 common shares for an approximate value of $0.8 million . UCX and HVE provide information technology consulting services and hardware solutions around cloud computing, data storage and server virtualization to corporate, government, and educational institutions primarily in the southern central United States. By adding UCX’s products, technologies, professional services and engineering talent, and HVE’s engineering and virtualization expertise, the Company intends to expand its virtualization practice as well as enhance its ability to accelerate the delivery of hybrid cloud solutions to customers. The Company is preparing the fair value estimates for the assets acquired and liabilities assumed.
On March 24, 2017, the Company entered into a securities purchase agreement with certain investors party thereto, pursuant to which the Company issued to the investors, in the aggregate, 20,454,546 of the Company’s common shares for gross proceeds of $4.5 million . The securities purchase agreement also provided for the concurrent private placement of warrants exercisable to purchase up to 20,454,546 common shares. Each warrant has an initial exercise price of $0.30 per warrant share. The warrants are exercisable for cash immediately or on a cashless basis commencing on a date which is the earlier of (i) six months from the date of the effective date of the offering or (ii) the date on which we fail to fulfill our obligations to register the common shares underlying the warrants under the registration rights agreements and expiring on a date which is no more than five years from the date of the effective date of the offering. If at any time while the Warrants are outstanding, the Company sells or grants options to purchase,

F- 34


reprice or otherwise issue any common shares or securities convertible into common shares at a price less than the initial exercise price of $0.30 , then the exercise price for the warrants will be reduced to such price, subject to certain limitations.
MF Ventures, LLC, a related party, participated in the offering by acquiring 4,545,454 common shares and warrants to purchase 4,545,454 shares.



F- 35


EXHIBIT LIST
Exhibit
Filed
Incorporated by Reference
Number
Description
Herewith
Form
File No.
Date Filed
1.1
Certificate and Articles of Amalgamation
6-K
001-36532
3/25/2015
1.2
By-Law Certificate
6-K
001-36532
3/25/2015
2.1
Specimen certificate evidencing Common Shares
F-3
333-210735
4/13/2016
4.1
Voting Agreements each dated July 15, 2013 between Eric L. Kelly and various shareholders of the Company
40-F
000-55232
6/27/2014
4.2
Board Nomination Rights Agreement dated July 15, 2013 between Eric L. Kelly and the Company
40-F
000-55232
6/27/2014
4.3
8% Senior Secured Convertible Debenture dated December 1, 2014 between the Company and FBC Holdings S.A.R.L. for $19.5 million
6-K
001-36532
12/16/2014
4.4
First Amendment to 8% Senior Secured Convertible Debenture dated November 30, 2015 between the Company and FBC Holdings S.A.R.L.
6-K
001-36532
12/2/2015
4.5
Second Amendment to 8% Senior Secured Convertible Debenture dated April 6, 2016 between the Company and FBC Holdings S.A.R.L.
6-K
001-36532
4/7/2016
4.6
Escrow Agreement dated December 1, 2014 between the Company and Continental Stock Transfer and Trust Company
6-K
001-36532
4/1/2015
4.7
Revolving Credit Agreement dated December 30, 2014 between the Company, Overland Storage, Inc. and FBC Holdings S.A.R.L. for $5.0 million
6-K
001-36532
1/22/2015
4.8
First Amendment to Revolving Credit Agreement dated July 10, 2015 between the Company, Overland Storage, Inc. and FBC Holdings S.A.R.L.
6-K
001-36532
7/31/2015
4.9
Form of Purchase Agreement
6-K
001-36532
6/2/2015
4.10
Form of Warrant
6-K
001-36532
6/2/2016
4.11
Asset Purchase Agreement dated August 10, 2015 between Imation Corp., Overland Storage, Inc. and Sphere 3D Corp.
6-K
001-36532
8/14/2015
4.12
Form of Subscription Agreement
6-K
001-36532
10/7/2015
4.13
Form of Warrant
6-K
001-36532
10/7/2015
4.14
Form of Subscription Agreement
6-K
001-36532
12/2/2015
4.15
Form of Canadian Warrant
6-K
001-36532
12/2/2015
4.16
Form of Securities Purchase Agreement
6-K
001-36532
12/2/2015
4.17
Form of Fund Warrant
6-K
001-36532
12/2/2015

F- 36


Exhibit
Filed
Incorporated by Reference
Number
Description
Herewith
Form
File No.
Date Filed
4.18
Warrant Exchange Agreement, dated March 25, 2016, by and between the Company and MF Ventures, LLC
40-F
001-36532
3/30/2016
4.19
Warrant for the purchase of up to 7,199,216 common shares, dated March 25, 2016, issued to MF Ventures, LLC
40-F
001-36532
3/30/2016
4.20*
Credit Agreement dated April 6, 2016 between Overland Storage, Inc., Tandberg Data Gmbh and Opus Bank
6-K
001-36532
4/21/2016
4.21*
Consent, Waiver, Reaffirmation and Amendment Number One to Credit Agreement dated December 30, 2016 between Overland Storage, Inc., Tandberg Data Gmbh and Opus Bank
6-K
001-36532
3/24/2017
4.22*
Amendment Number Two to Credit Agreement, Amendment Number One to Amendment Number 1, Waiver and Reaffirmation dated March 12, 2017 between Overland Storage, Inc., Tandberg Data Gmbh and Opus Bank
6-K
001-36532
3/24/2017
4.23*
Third Amendment to Credit Agreement dated March 21, 2017 between Overland Storage, Inc., Tandberg Data Gmbh and Opus Bank
6-K
001-36532
3/24/2017
4.24
Term Loan Agreement dated September 16, 2016 between Sphere 3D Corp. and FBC Holdings S.A.R.L.
6-K
001-36532
3/24/2017
4.25
Warrant to Purchase up to 862,068 common shares dated December 30, 2016 issued by the Company to Opus Bank
6-K
001-36532
3/24/2017
4.26
First Additional Warrant to Purchase common shares dated March 12, 2017 issued by the Company to Opus Bank
6-K
001-36532
3/24/2017
4.27
Second Additional Warrant to Purchase common shares dated March 12, 2017 issued by the Company to Opus Bank
6-K
001-36532
3/24/2017
4.28
Form of Securities Purchase Agreement dated March 24, 2017
6-K
001-36532
3/24/2017
4.29
Form of Warrant
6-K
001-36532
3/24/2017
4.30
Form of Leak-Out Agreement
6-K
001-36532
3/24/2017
4.31
Form of Registration Rights Agreement
6-K
001-36532
3/24/2017
4.32
Placement Agency Agreement dated March 24, 2017 between the Company and Roth Capital Partners, LLC
6-K
001-36532
3/24/2017
4.33
Form of Lock-Up Agreement
6-K
001-36532
3/24/2017
4.34
Sphere 3D Second Amended and Restated Stock Option Plan
F-4
333-197569
7/23/2014
4.35
Overland Storage, Inc. 2009 Equity Incentive Plan
S-8
333-203149
3/31/2015
4.36
Overland Storage, Inc. Form of Stock Option Agreement Under 2009 Plan
S-8
333-203149
3/31/2015
4.37
Overland Storage, Inc. Form of Inducement Stock Option Agreement
S-8
333-203149
3/31/2015
4.38
Sphere 3D Corp. 2015 Performance Incentive Plan
S-8
333-214605
11/15/2016

F- 37


Exhibit
Filed
Incorporated by Reference
Number
Description
Herewith
Form
File No.
Date Filed
4.39
Form of Inducement Restricted Stock Unit Agreement.
S-8
333-209251
2/1/2016
4.40
Form of Executive Inducement Restricted Stock Unit Agreement
S-8
333-209251
2/1/2016
4.41
Sphere 3D Corp. Employee Stock Purchase Plan
S-8
333-205236
6/25/2016
4.42
Retention Agreement between Overland Storage, Inc. and Eric Kelly dated June 24, 2009
10-Q
000-22071
2/10/2010
4.43
Employment Agreement between Overland Storage, Inc. and Eric Kelly dated August 3, 2011
8-K
000-22071
8/4/2011
4.44
Employment Agreement between Overland Storage, Inc. and Eric Kelly dated August 3, 2011
8-K
000-22071
8/4/2011
4.45
San Diego, California Headquarters Facility Lease dated October 12, 2000 between the Company and LBA-VIF One, LLC
10-Q
000-22071
2/14/2001
4.46
First Amendment to Lease dated January 18, 2001 between Overland Storage, Inc. and LBA Overland, LLC, (as successor-in-interest to LBA-VIF One, LLC)
10-K
000-22071
9/28/2001
4.47
Second Amendment to Lease dated July 1, 2010 between Overland Storage, Inc. between the Company and LBA Overland, LLC (as successor-in-interest to LBA-VIF One, LLC)
10-K
000-22071
9/28/2001
4.48
Third Amendment to Lease dated July 1, 2010 between the Company and Overtape (CA) QRS 15-14, Inc. (successor-in-interest to LBA Overland, LLC, the successor-in-interest to LBA-VIF One, LLC
10-K
000-22071
9/24/2010
4.49
Fourth Amendment to Lease dated October 15, 2013 between the Company and Overtape (CA) QRS 15-14, Inc. (successor-in-interest to LBA Overland, LLC, the successor-in-interest to LBA-VIF One, LLC
10-Q
000-22071
2/13/2014
4.50
Fifth Amendment to Lease dated December 8, 2015 between the Company and Overtape (CA) QRS 15-14, Inc. (successor-in-interest to LBA Overland, LLC, the successor-in-interest to LBA-VIF One, LLC
X
4.51
San Jose, California Headquarters Office Lease dated February 9, 2010 between Overland Storage, Inc. and Park Center Plaza Investors, L.P.
X
4.52
First Amendment to San Jose, California Headquarters Office Lease dated March 22, 2017 between Sphere 3D Corp. and Park Center Plaza Investors, L.P.
X
4.53
Lease Contract dated May 19, 2016 between Guangzhou Tandberg Electronic Components Co., Ltd. And Guangzhu Shi Panyu Tongxing Paper Products Co., Ltd.
X
4.54
Form of Stock Purchase Agreement
X
4.55
Form of One-Year Warrant Agreement
X

F- 38


Exhibit
Filed
Incorporated by Reference
Number
Description
Herewith
Form
File No.
Date Filed
4.56
Form of Five-Year Warrant Agreement
X
8.1
Subsidiaries of Registrant
X
11.1
Code of Business Conduct and Ethics Policy
6-K
001-36532
4/1/2015
12.1
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
12.2
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
13.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
13.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
15.1
Consent of Independent Registered Public Accounting Firm
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Extension Schema
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase
X
101.LAB
XBRL Taxonomy Extension Label Linkbase
X
101.PRE
XBRL Taxonomy Presentation Linkbase
X
_______________
*
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

F- 39
TABLE OF CONTENTS