Comprehensive amendment expected to
allow previously announced divestiture of Overland Storage
with the objective of eliminating Sphere 3D principal
liabilities
Sphere 3D Corp. (NASDAQ: ANY) (“Sphere 3D” or the “Company”)
announced today that it has entered into a second amendment (the
“Second Amendment”) to its previously announced Share Purchase
Agreement, dated February 20, 2018 (as amended by that certain
First Amendment to Share Purchase Agreement dated as of August 21,
2018, the “Purchase Agreement”), by and among the Company, Overland
Storage, Inc., a wholly owned subsidiary of the Company
(“Overland”), and Silicon Valley Technology Partners, Inc.
(formerly Silicon Valley Technology Partners LLC), a Delaware
corporation established and controlled by Eric Kelly, the Company’s
Chief Executive Officer and Chairman of the Board of Directors (the
“Purchaser”).
Second Amendment to Share Purchase
Agreement
As previously announced, on February 20, 2018,
the Company, Overland and SVTP entered into the Purchase Agreement
pursuant to which, among other things, and subject to certain
closing conditions, the Company would sell to Purchaser all of the
issued and outstanding shares of capital stock of Overland for
approximately $45.0 million (the “Purchase Price”), subject to
working capital adjustments (the “Share Purchase”).
The Second Amendment provides, among other
things, that the Purchase Price will be satisfied through and upon
(i) the issuance to the Company of shares of Series A Preferred
Stock of Purchaser (the “SVTP Shares”) representing 19.9% of the
fully diluted outstanding securities of Purchaser as of the closing
of the Share Purchase (the “Closing”) (or such other
percentage as mutually agreed upon by Purchaser and the Company),
and (ii) the release of the Company and all of its subsidiaries
(other than Overland) from all the obligations and liabilities
under the Closing Indebtedness (as defined below) and assumption
thereof by Purchaser. For purposes of the Purchase Agreement, as
amended by the Second Amendment, “Closing Indebtedness” means the
Indebtedness (as defined in the Purchase Agreement) evidenced by
that certain (i) 8% Senior Secured Convertible Debenture, dated
December 1, 2014, by and between the Company and FBC Holdings
S.A.R.L. (“FBC”), having an outstanding principal amount of $24.5
million (as amended, the “Debenture”), provided that only $18
million of the outstanding principal amount of the Debenture shall
be included in the definition of Closing Indebtedness, (ii) Credit
Agreement, dated April 6, 2016, by and among Overland, Tandberg
Data GMBH, and Opus Bank, as amended and as assigned to FBC, having
an outstanding principal amount of $18.9 million, and (iii)
Subordinated Promissory Note, dated December 11, 2017, by and
between Overland and MF Ventures, LLC (“MFV”), having an
outstanding principal amount of $2.2 million. The value of the
liabilities of the Company that will be released upon the Closing
is expected to be not less than $45.0 million (the amount of the
Purchase Price). In addition to the other closing conditions
contained in the Purchase Agreement (including the consummation of
the transfer of certain assets and liabilities among Overland and
the Company, the “Asset Transfer”), the Second Amendment provides
that the Closing is conditioned on the Parties entering into a
mutually agreed upon transition services agreement.
As previously announced, the net proceeds from
the Share Purchase were to be used to repay the Company’s
outstanding obligations under the Debenture, with any remaining net
proceeds to be used to pay other liabilities of the Company and
transaction expenses associated with the Share Purchase. Effective
upon the Closing, as a result of the Share Purchase and the
conversion and release of the outstanding indebtedness of the
Company as described herein, the Company does not expect to retain
any debt liabilities, other than ordinary course liabilities to
trade creditors.
The Second Amendment was approved by the Board
of Directors of the Company (the “Board”) (with Mr. Kelly
abstaining). The documents evidencing the Asset Transfer and the
transition services agreement described above remain subject to the
approval of the Special Committee of the Board previously
constituted for purposes of reviewing and determining whether to
approve the Purchase Agreement and related matters, as well as the
Board.
Additional Transaction Details; Steps to
Closing
In connection with the Closing, the Company
anticipates it will adopt an amendment to its Articles of
Amalgamation setting forth the rights, privileges, restrictions and
conditions of a new series of non-voting preferred shares of the
Company (the “Preferred Shares”) and enter into a Conversion
Agreement, by and between the Company and FBC, pursuant to which
$6.5 million of the outstanding principal amount of the Debenture
(representing the principal amount not assumed as a result of the
completion of the Share Purchase) will be converted into 6,500,000
Preferred Shares. Further, the Company anticipates it will enter
into a Conversion and Royalty Agreement, by and among the Company,
Purchaser, and FBC, pursuant to which, among other things,
Purchaser will assume the obligations and liabilities of the
Company with regard to $18 million of the Debenture, and effective
upon the execution of such Conversion and Royalty Agreement, the
Company and its subsidiaries will automatically be released as
obligors and guarantors under the Debenture and any lien or
security interest granted by the Company or its subsidiaries with
respect to the Debenture will automatically terminate and be
released.
The Preferred Shares will (i) subject to prior
shareholder approval, be convertible into the Company’s common
shares, no par value per share (the “Common Shares”), at a
conversion rate equal to $1.00 per share, plus accrued and unpaid
dividends, divided by an amount equal to 0.85 multiplied by a
15-day volume weighted average price per Common Share prior to the
date the conversion notice is provided (the “Conversion Rate”),
subject to a conversion price floor of $0.10, (ii) carry a
cumulative preferred dividend at a rate of 8% of the subscription
price per Preferred Share, (iii) be subject to mandatory redemption
for cash at the option of the holders thereof after a two-year
period, and (iv) carry a liquidation preference equal to the
subscription price per Preferred Share plus any accrued and unpaid
dividends.
The Common Shares issuable upon the conversion
of the Preferred Shares may constitute more than 20% of the Common
Shares of the Company currently outstanding and therefore the
Company will seek shareholder approval for the issuance of all
Common Shares issuable upon conversion of the Preferred Shares;
provided, however, that the Company shall not seek shareholder
approval unless such approval would occur after the six-month
anniversary of the initial issue date of the Preferred Shares. In
the event shareholder approval is not obtained, FBC and its
affiliates will not be entitled to convert such Preferred Shares
into Common Shares, but any unaffiliated transferee may convert all
or any part of the Preferred Shares held by such transferee into
the number of fully paid and non-assessable Common Shares that is
equal to the number of Preferred Shares to be converted multiplied
by the Conversion Rate in effect on the date of conversion;
provided that, (x) after such conversion, the Common Shares
issuable upon such conversion, together with all Common Shares held
by such third party transferee that are or would be deemed to be
aggregate under the rules of the Nasdaq Stock Market, in the
aggregate would not exceed 19.9% of the total number of Common
Shares of the Company then outstanding and (y) such conversion and
issuance would not otherwise violate or cause the Company to
violate the Company’s obligations under the rules or regulations of
the Nasdaq Stock Market.
In connection with the Closing, the Company
anticipates it will also enter into an Exchange and Buy-Out
Agreement, by and among the Company, FBC, Purchaser, and MFV,
pursuant to which, among other things, (i) the Company will grant
FBC the right to exchange all or any portion of the Preferred
Shares held by FBC for up to all of the SVTP Shares held by the
Company, and (ii) MFV and Purchaser will have a buy-out right with
respect to the Preferred Shares (or, following exercise of the
exchange right, the SVTP Shares) held by FBC and/or the SVTP Shares
held by the Company.
Proximate to the time of the Closing, the
Company may seek financing from the Purchaser in an amount not
expected to exceed $500,000, the proceeds of which would be used
for the payment of certain transition expenses on or after the
Closing. Such financing would be evidenced by a promissory
note.
Application of MI 61-101
Each of the foregoing transactions (other than
the Second Amendment) are subject to approval by the Special
Committee of the Board previously constituted for purposes of
reviewing and determining whether to approve the Purchase Agreement
and related matters, as well as the Board, and is subject to the
entering by the Company into definitive agreements with respect
thereto. The Share Purchase (including the Second Amendment), the
issuance of the Preferred Shares in accordance with the Conversion
Agreement, the entering into of the Conversion and Royalty
Agreement, the entering into of the Exchange and Buy-Out agreement
and the ancillary actions described herein including transition
services or the financing of transition expenses (collectively, the
“Transactions”) constitute or would constitute “related party
transactions” within the meaning of Multilateral Instrument 61-101
– Protection of Minority Security Holders in Special Transactions
adopted by certain of the Canadian securities regulatory
authorities (“MI 61-101”), including as a result of the
participation of FBC, MFV, Eric Kelly and/or their respective
affiliates therein. The Board has, and all directors of the Company
who are independent in respect of the Transactions have, determined
that: (i) the Company is in serious financial difficulty; (ii) the
Transactions are designed to improve the Company’s financial
position; and (iii) the Transactions are reasonable for the Company
in the circumstances. Accordingly, the Company is relying on the
“financial hardship” exemptions from the “minority approval” and
“formal valuation” requirements contained in sections 5.5(g) and
5.7(e) of MI 61–101.
The Company will promptly file a material change
report relating to the Transactions in compliance with applicable
Canadian securities laws. However, the closing of certain or all of
the Transactions may occur less than 21 days following the filing
of such material change report, in order for the Company to: (i)
avoid a potential default under certain agreements governing the
Closing Indebtedness and comply with conditions that may be imposed
by creditors thereunder; and (ii) secure the benefit of the
Transactions, including the elimination of its debt liabilities
(other than ordinary course liabilities to trade creditors), as
soon as practicable.
All Matters Approved at Special Meeting
of Shareholders
On October 31, 2018, the Company held a special
meeting of the Company’s shareholders in San Jose, California (the
“Special Meeting”). As of September 27, 2018, the Company’s record
date for the Special Meeting, there were a total of 15,457,856
common shares, no par value per share (the “Common Shares”),
outstanding and entitled to vote at the Special Meeting. At the
Special Meeting, 10,797,739 Common Shares were present or
represented by proxy and, therefore, a quorum was present. The
Company’s shareholders voted on two proposals—a proposal to
authorize the Board, in its discretion, to effect a share
consolidation (also known as a reverse stock split) of the
Company’s Common Shares at a specific ratio, ranging from
one-for-two to one-for-ten, to be determined by the Board and
effected, if at all, within one year from the date of the Special
Meeting (“Proposal 1”), and a proposal to approve an amendment to
the Sphere 3D Corp. 2015 Performance Incentive Plan (“Proposal 2”).
Proposal 1 and Proposal 2 were approved by the requisite vote of
the Company’s shareholders.
About Sphere 3D
Sphere 3D Corp. (NASDAQ: ANY) delivers
containerization, virtualization, and data management solutions via
hybrid cloud, cloud and on-premise implementations through its
global reseller network and professional services
organization. Sphere 3D, along with its wholly owned
subsidiaries Overland Storage and Tandberg Data, has
a strong portfolio of brands, including Overland-Tandberg, HVE
ConneXions and UCX ConneXions, dedicated to helping
customers achieve their IT goals. For more information,
visit www.sphere3d.com. Follow us on
Twitter @Sphere3D, @HVEconneXions and @ovltb.
Safe Harbor Statement
This press release contains forward–looking
statements, which include, among others, Sphere 3D’s expectations,
beliefs, plans, objectives, prospects, financial condition,
assumptions or future events or performance, that may involve
risks, uncertainties, and assumptions concerning the Company’s
business and products, including the entry into the Purchase
Agreement with Purchaser, pursuant to which Purchaser proposes to
acquire Overland and the Data Protection and Archive business from
Sphere 3D; the market adoption, actual performance and
functionality of our products; our inability to comply with the
covenants in our credit facilities or to obtain additional debt or
equity financing; any increase in our future cash needs; our
ability to maintain compliance with NASDAQ Capital Market listing
requirements; unforeseen and proposed changes in the course of
Sphere 3D’s business or the business of its wholly–owned
subsidiaries, including, without limitation, Overland Storage and
Tandberg Data; the level of success of our collaborations and
business partnerships; possible actions by customers, partners,
suppliers, competitors or regulatory authorities; and other risks
detailed from time to time in our periodic reports contained in our
Annual Information Form and other filings with Canadian securities
regulators (www.sedar.com) and in periodic reports filed with the
United States Securities and Exchange Commission (www.sec.gov). All
forward–looking statements speak only as of the date of this
written communication. Sphere 3D undertakes no obligation to update
any forward–looking statement, whether written or oral, that may be
made from time to time, whether as a result of new information,
future developments or otherwise, except as required by law.
Investor Contact:Tina
Brown+1-408-283-4731Investor.relations@sphere3d-overland.com
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