Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________________
FORM 10-Q
_____________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2013
           
Commission File Number: 000-22071
OVERLAND STORAGE, INC.
(Exact name of registrant as specified in its charter)
 
California
95-3535285
(State or other jurisdiction
of incorporation)
(IRS Employer
Identification No.)
9112 Spectrum Center Boulevard,
 
 San Diego, California
92123
(Address of principal executive offices)
(Zip Code)
(858) 571-5555
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  
Large accelerated filer   o
Accelerated filer   o
Non-accelerated filer   o
Smaller reporting company x
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).    Yes   ¨     No   x
As of February 4, 2014 , there were 86,932,020 shares of the registrant's common stock, no par value, issued and outstanding.
 



Table of Contents

OVERLAND STORAGE, INC.
FORM 10-Q

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


Table of Contents

PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements.
OVERLAND STORAGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)  
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
 
(Unaudited)
Net revenue:
 
 
 
 
 
 
 
Product revenue
$
6,594

 
$
7,782

 
$
12,727

 
$
14,421

Service revenue
4,042

 
4,817

 
8,515

 
9,889

 
10,636

 
12,599

 
21,242

 
24,310

Cost of product revenue
5,350

 
6,333

 
10,727

 
12,385

Cost of service revenue
1,620

 
1,669

 
3,280

 
3,385

Gross profit
3,666

 
4,597

 
7,235

 
8,540

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
3,295

 
4,353

 
7,040

 
8,478

Research and development
1,352

 
1,591

 
2,661

 
3,188

General and administrative
3,518

 
2,765

 
6,129

 
5,649

 
8,165

 
8,709

 
15,830

 
17,315

Loss from operations
(4,499
)
 
(4,112
)
 
(8,595
)
 
(8,775
)
Interest expense
(269
)
 
(46
)
 
(583
)
 
(88
)
Other income (expense), net
(62
)
 
(47
)
 
(223
)
 
(156
)
Loss before income taxes
(4,830
)
 
(4,205
)
 
(9,401
)
 
(9,019
)
Provision for (benefit from) income taxes
(514
)
 
68

 
(495
)
 
117

Net loss
$
(4,316
)
 
$
(4,273
)
 
$
(8,906
)
 
$
(9,136
)
Net loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.12
)
 
$
(0.15
)
 
$
(0.27
)
 
$
(0.33
)
Shares used in computing net loss per share:
 
 
 
 
 
 
 
Basic and diluted
36,884

 
28,339

 
33,414

 
28,108

See accompanying notes to consolidated condensed financial statements.

1

Table of Contents

OVERLAND STORAGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)  
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2013
 
2012
 
2013

2012
 
(Unaudited)
 
(Unaudited)
 
 
 
 
 
 
 
 
Net loss
$
(4,316
)
 
$
(4,273
)
 
$
(8,906
)
 
$
(9,136
)
Other comprehensive income:
 
 
 
 
 
 
 
Change in unrealized gains, net of tax of $1,546, $0, $1,546,
     $0, respectively
1,306

 

 
2,690

 

Foreign currency translation adjustments
25

 
25

 
99

 
119

Total other comprehensive income
1,331

 
25

 
2,789

 
119

Comprehensive loss
$
(2,985
)
 
$
(4,248
)
 
$
(6,117
)
 
$
(9,017
)
See accompanying notes to consolidated condensed financial statements.


2

Table of Contents

OVERLAND STORAGE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
 
December 31,
2013
 
June 30,
2013
 
(Unaudited)
Assets
 
 
 
Current assets:
 
 
 
Cash
$
4,894

 
$
8,831

Short-term investment — related party
4,717

 

Accounts receivable, net of allowance for doubtful accounts of $155 and $94, respectively
6,335

 
6,640

Inventories
10,171

 
10,354

Other current assets
1,695

 
1,923

Total current assets
27,812

 
27,748

Property and equipment, net
2,205

 
2,014

Intangible assets, net
823

 
652

Other assets
782

 
989

Total assets
$
31,622

 
$
31,403

Liabilities and Shareholders' Equity (Deficit)
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,467

 
$
5,221

Accrued liabilities
5,392

 
5,003

Accrued payroll and employee compensation
1,532

 
2,140

Income taxes payable
202

 
178

Accrued warranty
599

 
790

Deferred revenue
7,131

 
7,732

Total current liabilities
20,323

 
21,064

Deferred revenue, long-term
2,561

 
2,975

Long-term debt
11,028

 
16,750

Other long-term liabilities
1,019

 
910

Total liabilities
34,931

 
41,699

Commitments and contingencies (Note 6)


 


Shareholders’ equity (deficit):
 
 
 
Preferred stock, no par value, 1,000 shares authorized; no shares issued and outstanding as of December 31, 2013 and June 30, 2013

 

Common stock, no par value, 90,200 shares authorized; 39,771 and 30,403 shares issued and outstanding as of December 31, 2013 and June 30, 2013, respectively
136,169

 
123,065

Accumulated other comprehensive income (loss)
1,798

 
(991
)
Accumulated deficit
(141,276
)
 
(132,370
)
Total shareholders’ equity (deficit)
(3,309
)
 
(10,296
)
Total liabilities and shareholders’ equity (deficit)
$
31,622

 
$
31,403

See accompanying notes to consolidated condensed financial statements.

3

Table of Contents

OVERLAND STORAGE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)  
 
Six Months Ended
 
December 31,
 
2013
 
2012
 
(Unaudited)
Operating activities:
 
 
 
Net loss
$
(8,906
)
 
$
(9,136
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
654

 
593

Deferred tax benefit
(560
)
 

Share-based compensation
1,746

 
2,504

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
305

 
1,523

Inventories
191

 
283

Accounts payable and accrued liabilities
(375
)
 
(1,680
)
Accrued payroll and employee compensation
(430
)
 
(255
)
Deferred revenue
(1,015
)
 
(1,110
)
Other assets and liabilities, net
343

 
871

Net cash used in operating activities
(8,047
)
 
(6,407
)
Investing activities:
 
 
 
Purchase of fixed assets
(457
)
 
(672
)
Purchase of intangible assets
(250
)
 

Net cash used in investing activities
(707
)
 
(672
)
Financing activities:
 
 
 
Payment for restricted stock tax liability on net settlement
(239
)
 
(429
)
Proceeds from exercise of stock options and ESPP purchases
49

 
145

Proceeds from convertible notes
5,000

 

Net cash provided by (used in) financing activities
4,810

 
(284
)
Effect of exchange rate changes on cash
7

 
4

Net decrease in cash
(3,937
)
 
(7,359
)
Cash, beginning of period
8,831

 
10,522

Cash, end of period
$
4,894

 
$
3,163

Supplemental disclosures of non-cash activities:
 
 
 
Conversion of convertible notes
$
10,700

 
$

Short-term investment — related party
$
481

 
$

Equity award fair value adjustment to liability
$
204

 
$
829

Common stock issued for purchase of intangible assets
$
250

 
$

Accounts payable for purchase of property and equipment
$
166

 
$

See accompanying notes to consolidated condensed financial statements.

4

Table of Contents

OVERLAND STORAGE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BASIS OF PRESENTATION
Financial Statement Preparation
The accompanying interim unaudited consolidated condensed financial statements of Overland Storage, Inc. and its subsidiaries (the “Company”) should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2013 . The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These condensed statements do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are normal and recurring, necessary for a fair statement of the Company's consolidated condensed results of operations, comprehensive loss, financial position, and cash flows as of December 31, 2013 , and for all periods presented. The results reported in these consolidated condensed financial statements for the three and six months ended December 31, 2013 are not necessarily indicative of the results that may be expected for the full fiscal year.
The Company operates its business in one operating segment.
Effective the second quarter of fiscal 2014 , the Company changed how it reports its operations to use a 52-week fiscal year end with each year ending on June 30, compared to prior reporting using a 52-53 week fiscal year with each year ending on the Sunday closest to June 30. The Company's last fiscal year ended June 30, 2013 and the Company's second quarter of fiscal 2014 ended December 31, 2013 . The second quarter of fiscal 2013 ended December 30, 2012.
The Company has incurred losses since fiscal 2006 and negative cash flows from operating activities since fiscal 2007. As of December 31, 2013 , the Company had an accumulated deficit of $141.3 million . During the first half of fiscal 2014 , the Company incurred a net loss of $8.9 million . The Company expects to incur a net loss as it continues to change its business model and improve operational efficiencies.
The Company has projected its cash on hand, short-term investment, and available borrowings under its credit facility will be sufficient to allow the Company to continue operations for the next 12 months. Significant changes from the Company’s current forecast, including but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, and/or (iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on the Company’s liquidity. This could force the Company to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations, and future prospects. The Company may seek debt, equity, or equity-based financing (such as convertible debt) when market conditions permit.
The Company's recurring losses and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. The accompanying consolidated condensed 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.
  Principles of Consolidation
The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiaries, Overland Storage (Europe) Ltd., Overland Storage SARL, and Overland Storage GmbH. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal 2014 presentation.

5


Short-term Investment
The Company's short-term investment is made up of a marketable security. This investment is classified as available-for-sale and is reported at fair value based on quoted prices using the specific identification method. Unrealized gains and losses are recorded in other comprehensive loss and included as a separate component of shareholders' equity (deficit). Realized gains and losses and declines in value judged to be other than temporary on marketable securities, if any, are included in other income in the consolidated condensed statements of operations.
Fair Value of Financial Instruments
The Company's financial instruments including cash, accounts receivable, accounts payable, and accrued liabilities are carried at cost, which management believes approximates fair value because of the short-term maturity of these instruments. The Company's short-term investment is measured at fair value using Level 1 inputs as the stock is traded on the TSX Venture Exchange. The carrying amount of the Company's borrowings under its credit facility approximates its fair value as the interest rate of the credit facility is substantially comparable to rates offered for similar debt instruments. The fair value of the Company's convertible notes is estimated at $6.5 million using an estimated interest rate of 12% , and is classified within Level 3 of the fair value hierarchy. At December 31, 2013 , the carrying value of the convertible notes was $7.5 million .
The framework for measuring fair value provides a hierarchy that prioritizes the inputs to valuation techniques used in measuring fair value as follows:
Level 1 -
Quoted prices (unadjusted) in active markets for identical assets or liabilities,
 
 
Level 2 -
Inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data , and
 
 
Level 3 -
Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
NOTE 2 — SHORT-TERM INVESTMENT
Related Party
In July 2013, the Company entered into a supply agreement with Sphere 3D Corporation (“Sphere 3D”). As partial payment under the supply agreement, Sphere 3D issued 769,231 common shares with a value as of the date of issuance equal to approximately $0.5 million to the Company. Sphere 3D's shares are traded on the TSX Venture Exchange. The short-term investment is classified as available-for-sale marketable securities. See note 10 for additional related party disclosure.
The following summarizes short-term investment (in thousands):
 
 
December 31, 2013
 
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Short-term investment — related party
 
$
481

 
$
4,236

 
$

 
$
4,717


6


NOTE 3 — COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
The following table summarizes inventories (in thousands):
 
December 31,
2013
 
June 30,
2013
Raw materials
$
3,522

 
$
3,496

Work in process
848

 
857

Finished goods
5,801

 
6,001

 
$
10,171

 
$
10,354

The following table summarizes other current assets (in thousands):
 
December 31,
2013
 
June 30,
2013
Deferred cost - service contracts
$
988

 
$
1,192

Prepaid insurance and services
379

 
355

VAT receivable
87

 
155

Short-term deposits
83

 
119

Other
158

 
102

 
$
1,695

 
$
1,923

The following table summarizes other assets (in thousands):
 
December 31,
2013
 
June 30,
2013
Deferred cost – service contracts
$
456

 
$
702

Other
326

 
287

 
$
782

 
$
989

The following table summarizes accrued liabilities (in thousands):
 
December 31,
2013
 
June 30,
2013
Accrued expenses
$
3,455

 
$
3,955

Accrued third-party service contracts
951

 
1,048

Deferred income tax
986

 

 
$
5,392

 
$
5,003


7


The following table summarizes other long-term liabilities (in thousands):
 
December 31,
2013
 
June 30,
2013
Deferred rent
$
494

 
$
782

Related party supply agreement
432

 

Accrued third-party service contracts
93

 
125

Other

 
3

 
$
1,019

 
$
910

NOTE 4 — NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss applicable to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed based on the weighted-average number of shares of common stock outstanding during the period increased by the weighted-average number of dilutive common stock equivalents outstanding during the period, using the treasury stock method. Dilutive common stock equivalents are comprised of options granted under the Company's stock option plans, employee stock purchase plan (“ESPP”) share purchase rights, convertible notes, and common stock purchase warrants. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company's net loss position.
Anti-dilutive common stock equivalents excluded from the computation of diluted net loss per share were as follows (in thousands):  
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2013
 
2012
 
2013

2012
Restricted stock not yet vested and released
3,375

 
3,524

 
3,375

 
3,524

Options outstanding and ESPP share purchase rights
1,402

 
1,706

 
1,511

 
1,441

Common stock purchase warrants
14,168

 
12,637

 
14,168

 
12,637

Convertible notes
6,944

 

 
6,944

 

Convertible notes interest
2,452

 

 
2,452

 

NOTE 5 — INCOME TAXES
The Company recognizes the impact of an uncertain income tax position on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company had no material accrual for interest and penalties in its consolidated condensed balance sheets at December 31, 2013 and June 30, 2013 , and recognized no interest or penalties in the consolidated condensed statements of operations for the three and six months ended December 31, 2013 and 2012.
The Company is subject to federal and state taxation in the United States and also in certain foreign tax jurisdictions. The Company's tax returns for fiscal 2010 and thereafter are subject to examination by the U.S. federal tax authorities, and the Company's tax returns for fiscal 2009 and thereafter are subject to examination by state tax authorities.
The Company's ability to use its net operating loss and research and development credit carryforwards may be substantially limited due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company

8


became a “loss corporation” under the definition of Section 382. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company.
NOTE 6 — COMMITMENTS AND CONTINGENCIES
Lease
On October 15, 2013, the Company amended the lease for its corporate headquarters in San Diego, California. Under the terms of the amendment, the Company extended the expiration date of the lease from February 28, 2014 to March 31, 2019 , reduced the rentable square footage under the lease, and reduced the Company's monthly base rent and share of facility expenses.
Warranty and Extended Warranty
The Company records a provision for estimated future warranty costs for both return-to-factory and on-site warranties. 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. The Company contracts 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. The Company had $1.4 million and $1.9 million in deferred costs related to deferred service revenue at December 31, 2013 and June 30, 2013 , respectively.
In addition, the Company had $0.1 million and $0.2 million in deferred software revenue at December 31, 2013 and June 30, 2013 , respectively, which is not included in the table below.
Changes in the liability for product warranty and deferred revenue associated with extended warranties and service contracts were as follows (in thousands):  
 
Product
Warranty
 
Deferred
Revenue
Liability at June 30, 2013
$
790

 
$
10,354

Settlements made during the period
(142
)
 
(5,943
)
Change in liability for warranties issued during the period
138

 
4,921

Change in liability for preexisting warranties
(187
)
 

Liability at December 31, 2013
$
599

 
$
9,332

Litigation
From time to time, the Company may be involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. Management does not believe any legal proceedings or claims pending at December 31, 2013 will have, individually or in the aggregate, a material adverse effect on its business, liquidity, financial position, or results of operations. Litigation, however, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company's business.
In August and October 2010, the Company filed patent infringement lawsuits in the United States District Court for the Southern District of California and with the United States International Trade Commission (“ITC”), respectively, against various parties. Both lawsuits claim infringement of two of the Company's U.S. Patents; Nos. 6,328,766 and 6,353,581.
In November 2011, the Company entered into a multi-year settlement and cross-licensing agreement with IBM pursuant to which the Company released all claims it had against IBM and Dell in connection with the patent infringement lawsuits the Company had filed in the United States District Court for the Southern District of California and at the ITC. In opinions issued

9


by the ITC in November 2012 and May 2013, the ITC concluded or otherwise did not disturb findings that BDT’s customers directly infringe the six asserted claims of U.S. Patent No. 6,328,766, and that all but one of the asserted claims of U.S. Patent No. 6,353,581 are valid. The ITC also concluded that the six asserted claims of U.S. Patent No. 6,328,766 were invalid as anticipated, and that the accused BDT products did not infringe the asserted claims of U.S. Patent No. 6,353,581. In May 2013, the ITC terminated the investigation.
In June 2012, the Company filed five additional patent infringement lawsuits in the United States District Court for the Southern District of California against seven companies. In these lawsuits, the Company has asserted claims of infringement based on one or both of U.S. Patent Nos. 6,328,766 and 6,353,581 against the following defendants: Quantum Corporation (“Quantum”), based in San Jose, California; Spectra Logic Corporation (“Spectra Logic”), based in Boulder, Colorado; PivotStor, LLC, based in Irvine, California; Qualstar Corporation, based in Simi Valley, California; Tandberg Data GmbH, based in Germany; Tandberg Data Corp., based in Westminster, Colorado; and Venture Corporation Limited, based in Singapore. In October 2012, the Company voluntarily dismissed its claims against Venture Corporation. In February 2013, the Company filed a joint motion to dismiss its case against Tandberg Data GmbH and Tandberg Data Corp. without prejudice.
In August 2012, Quantum filed counterclaims against the Company in the United States District Court for the Southern District of California action alleging trademark infringement and unfair competition claims, and infringement of U.S. Patent Nos. 5,491,812, 6,542,787, 6,498,771 and 5,925,119 by its products. In April 2013, Quantum filed a complaint against the Company in the United States District Court for the Southern District of California alleging infringement of U.S. Patent No. 7,263,596 by the Company's products. Quantum is seeking monetary damages from the Company and injunctive relief.
In May 2013, Safe Storage LLC (“Safe Storage”), a Delaware limited liability company, filed a complaint against the Company in the United States District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,978,346 by the Company's products. Safe Storage is seeking monetary damages from the Company and injunctive relief.
In June 2013, Spectra Logic filed a Petition for Inter Partes Review of the claims of U.S. Patent No. 6,328,766 with the United States Patent and Trademark Office. The petition has been assigned Case No. IPR2013-00357. In December 2013, the United States Patent and Trademark Office initiated an inter partes review proceeding involving U.S. Patent No. 6,328,766. The inter partes review proceeding is ongoing.
In February 2014, the District Court for the Southern District of California conditionally stayed our litigation against BDT, Spectra Logic and PivotStor pending the results of the inter partes review filed by Spectra Logic.  The stay as to BDT and PivotStor is conditional on both of them agreeing to be bound by the results of the inter partes review at the United States Patent and Trademark Office.
NOTE 7 — INTANGIBLE ASSETS
Intangible assets, net, consist of customer contracts and trade names acquired in the June 2008 acquisition of SnapServer, which have been assigned an estimated useful life of six years . The intangible assets are being amortized on a straight-line basis over their estimated useful lives.
In the first quarter of fiscal 2014, the Company entered into a technology license agreement, with a related party, and recorded an intangible asset of $0.5 million . Amortization will commence upon shipment of the product, which is expected during the second half of fiscal 2014.

10


The following table summarizes intangible assets (in thousands):
 
December 31,
2013
 
June 30,
2013
Technology
$
2,427

 
$
1,928

Customer contracts and trade names
3,853

 
3,853

 
6,280

 
5,781

Less: Accumulated amortization
(5,457
)
 
(5,129
)
 
$
823

 
$
652

 
Amortization expense of intangible assets was $0.2 million during the secon d quarter of both fiscal 2014 and 2013. Amortization expense of intangible of intangible assets was $0.3 million during the first half of both fiscal 2014 and 2013. Estimated amortization expense for intangible assets is approximately $0.3 million for the remainder of fiscal 2014.
NOTE 8 — EQUITY (DEFICIT)
Restricted Stock
During the first half of fiscal 2014 , the Company issued 472,804 shares of common stock in conjunction with vested restricted stock units. The restricted stock unit holders surrendered 216,367 restricted stock units to pay for minimum withholding taxes totaling $0.2 million . During the first half of fiscal 2013 , the Company issued 562,124 shares of common stock in conjunction with vested restricted stock units, and the restricted stock unit holders surrendered 242,514 restricted stock units to pay for minimum withholding taxes totaling $0.4 million . Options and restricted stock units outstanding were approximately 5.0 million shares and 4.4 million shares as of December 31, 2013 and June 30, 2013 , respectively.
Outside of 2009 Equity Incentive Plan
During the first half of fiscal 2014 , the Company granted to an officer a restricted stock award to acquire 125,000 shares of common stock, and an option award to purchase 75,000 shares of common stock. These awards vest over three years. During the first half of fiscal 2013, the Company granted to an officer a restricted stock award to acquire 200,000 shares of common stock. This restricted stock award vests over three years.
2009 Equity Incentive Plan
During the first half of fiscal 2014 , the Company granted to an officer a restricted stock award to acquire 1.1 million shares of common stock. This award vests over three years.
Employee Stock Purchase Plan
During the first half of fiscal 2014 and 2013 , the Company issued 54,357 and 64,890 , respectively, shares of common stock purchased through the Company's 2006 employee stock purchase plan.
Common Stock Exercises
During the first half of fiscal 2014 and 2013 , the Company issued no and 27,751 , shares of common stock, respectively, upon exercise of outstanding stock options.
Issuance of Common Stock for Convertible Notes
During the first half of fiscal 2014 , the Company issued an aggregate of 8,247,896 shares of common stock at $1.30 per share in satisfaction of $10.7 million of the Company's outstanding convertible notes.

11


During the first half of fiscal 2014 , the Company issued an aggregate of 379,310 shares of common stock at $0.98 per share to the holders of its outstanding convertible notes as payment of interest on such notes, which was payable upon conversion of the convertible notes in November 2013.
NOTE 9 — DEBT
Credit Facility
In August 2011, the Company entered into a loan and security agreement, or credit facility, which allows for revolving cash borrowings up to $8.0 million . The proceeds of the credit facility may be used to fund the Company's working capital and to fund its general business requirements. The obligations under the credit facility are secured by substantially all assets of the Company other than 65% of the stock of our foreign subsidiaries, which are pledged under the Company's convertible notes. Borrowings under the credit facility bear interest at the prime rate (as defined in the credit facility) plus a margin of either 1.00% or 1.25% , depending on the Company's liquidity coverage ratio. The Company is also obligated to pay other customary facility fees and arrangement fees for a credit facility of this size and type. In August 2013, the credit facility was amended to extend the scheduled maturity date to August 7, 2015 and add a separate line of credit in the amount of $750,000 for letters of credit, foreign exchange contracts, and cash management. At December 31, 2013, the interest rate on the credit facility was 4.25% .
The credit facility requires the Company to comply with a liquidity coverage ratio and contains customary covenants, including covenants that limit or restrict the Company's and its subsidiaries' ability to incur liens and indebtedness, make certain types of payments, merge or consolidate, and make dispositions of assets. The credit facility specifies customary events of default (some of which are subject to applicable grace or cure periods) including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and material judgment defaults. Upon the occurrence of an event of default under the credit facility, the lender may cease making loans, terminate the credit facility, and declare all amounts outstanding to be immediately due and deduct such amounts from the Company’s lockbox account on deposit with the bank. At December 31, 2013, the Company was in compliance with all covenants of the credit facility.
At December 31, 2013, the Company had $3.5 million outstanding on the credit facility, which was recorded as long-term debt, and remaining external borrowing capacity, subject to certain limitations of accounts receivable, of $4.5 million . No payments are due within the next 12 months. While the credit facility is recorded as long-term debt, it is a revolving line of credit and borrowings and payments are presented on a net basis in the consolidated statement of cash flows.
Convertible Notes
In February 2013, the Company entered into a note purchase agreement (the “NPA”) with the purchasers party thereto (the “Purchasers”), including certain affiliates of Cyrus Capital Partners, L.P. (the “Cyrus Purchasers”), which was amended in March 2013. The Company sold to the Purchasers convertible promissory notes (the “Initial Notes”) of the Company in an aggregate original principal amount of $13.25 million . On November 1, 2013, the Company amended and restated the NPA and agreed to sell up to an additional $7.0 million in convertible promissory notes (the “Additional Notes” and, together with the Initial Notes, the “Notes”) to the Cyrus Purchasers. The Company issued the Additional Notes in amounts of $3.0 million , $2.0 million , and $2.0 million on November 12, 2013, December 24, 2013, and January 17, 2014, respectively.
The Initial Notes are scheduled to mature in February 2017 . The Additional Notes are scheduled to mature four years from date of issuance. Debt issuance costs of $0.3 million have been included in other assets and will be amortized over the term of the Notes. The Notes bear interest at a rate of 8% per annum, payable semi-annually.
On November 8, 2013, the Company issued 8,247,896 shares of common stock to the Purchasers in satisfaction of approximately $10.7 million of the Initial Notes. On November 8, 2013, the Cyrus Purchasers, the beneficial owners of Tandberg, became the sole holders of the outstanding Notes. See discussion of the Tandberg acquisition in Note 12 - Subsequent Events .
At December 31, 2013, the Notes' principal balance was $7.5 million and has been recorded as long-term debt. No payments of principal are due within the next 12 months.

12


Through July 2015, the Company may, subject to certain limitations, pay interest in cash or in shares of common stock at its option. Subsequent to July 2015, if at anytime the Cyrus Purchasers hold 20% or more of the then outstanding common stock, the Cyrus Purchasers (and not the Company) will have the option to determine whether the applicable interest payment payable to the Cyrus Purchasers during such time is payable in cash or shares of common stock. The number of shares of common stock that may be issued as payment of interest on the Notes will be determined by dividing the amount of interest due to the holders of the Notes by the volume weighted average of the closing prices of one share of common stock as reported on the NASDAQ Capital Market for the 20 consecutive trading days up to and including the trading day on the third trading day prior to the valuation date, using the interest payment due date as the valuation date; provided the Company may not pay interest in shares of common stock at a price per share lower than, in the case of the Initial Notes, $0.98 , and in the case of the Additional Notes, $0.90 (in each case as adjusted from time to time for items such as stock splits, combinations, reclassifications, or recapitalizations). In the event of a share price lower than, in the case of the Initial Notes, $0.98 , and in the case of the Additional Notes, $0.90 , the Company has the option to pay interest in a combination of shares of common stock and cash so long as the number of shares of common stock that the Company issues does not exceed the quotient obtained by dividing the interest payable at such time by, in the case of the Initial Notes, $0.98 , and in the case of the Additional Notes, $0.90 , and the difference between the amount of the interest paid in shares and the average closing price of the shares of common stock, determined as described above, will be payable in cash.
The Cyrus Purchasers may elect to convert all or a portion of the outstanding principal amount of such Purchaser's Note into shares of common stock (subject to certain limitations) in an amount equal to the principal amount of the Notes being converted divided by, in the case of the Initial Notes, $1.30 , and in the case of the Additional Notes, $1.00 , in each case subject to adjustment as set forth in the NPA, such as stock splits.
The Company may, at its option, convert the outstanding Initial Notes or Additional Notes, as applicable, into shares of common stock (subject to certain limitations) on the first trading day immediately following the date that the closing bid price of the common stock exceeds, in the case of the Initial Notes, $2.60 , and in the case of the Additional Notes, $1.50 , for 10 consecutive trading days.
If certain conditions are met with respect to ongoing litigation, the Company has an option to repay a portion of the Initial Notes prior to the maturity date. In addition, the Company has the option to prepay the Additional Notes in full or in part within 90 days following the consummation of the Tandberg acquisition (as described in Note 12 below).
The obligations under the Notes are secured by a pledge of 65% of the Company's stock in each of its foreign subsidiaries.
The NPA contains customary covenants, including covenants that limit or restrict the Company's ability to incur liens, incur indebtedness, or make certain restricted payments. Upon the occurrence of an event of default under the NPA, the Cyrus Purchasers may declare all amounts outstanding to be immediately due and payable. The NPA specifies a number of events of default (some of which are subject to applicable grace or cure periods) including, among other things, non-payment defaults, covenant defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency defaults, and material judgment defaults. In the event of default, the interest rate shall automatically increase to 11% . The Company has also granted certain registration rights to the Cyrus Purchasers. At December 31, 2013 , the Company was in compliance with all covenants contained in the NPA and the Notes.
NOTE 10 — RELATED PARTY
In July 2013, the Company entered into a supply agreement, and a technology license agreement, with Sphere 3D. As consideration for the transactions contemplated by the technology license agreement, the Company paid Sphere 3D $250,000 in cash and issued Sphere 3D 213,220 shares of its common stock, with a value at the time of issuance of approximately $250,000 . As partial payment under the supply agreement, Sphere 3D issued 769,231 common shares with a value as of the date of issuance equal to approximately $0.5 million to the Company.
In connection with the July 2013 Sphere 3D transaction, Eric Kelly, the Company's President and Chief Executive Officer, was appointed chairman of the board of directors of Sphere 3D. Mr. Kelly was also awarded an option to purchase up to 850,000

13


shares of common stock of Sphere 3D with an exercise price of approximately $0.63 , which is believed to represent approximately 5% of Sphere 3D's outstanding shares at the time the award was granted.
At December 31, 2013 , the Company had $175,000 and $432,000 in accounts receivable and other long-term liabilities, respectively, related to the Sphere 3D supply agreement. The Company recognized $237,000 in revenue related to the supply agreement during the three and six months ended December 31, 2013 . No related party expense was recognized during the first half of fiscal 2014 .
  NOTE 11 — RECENT ACCOUNTING PRONOUNCEMENTS
From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. If not discussed, the Company believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's consolidated financial statements upon adoption.
In July 2013, the FASB, issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . ASU No. 2013-11 provides that an entity is required to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance affects presentation only and, therefore, it is not expected to have a material impact on the Company's consolidated financial results.
NOTE 12 — SUBSEQUENT EVENTS
Authorized Number of Shares of Common Stock
On January 17, 2014, the Company increased its authorized shares of common stock from 90,200,000 shares to 125,000,000 shares.
2009 Equity Incentive Plan
On January 17, 2014, the Company increased the number of shares of its common stock available for award grant purposes under the 2009 Equity Incentive Plan by 7,000,000 shares.
Acquisition
On January 21, 2014, the Company acquired Tandberg Data Holdings S.à r.l. (“Tandberg”), a privately held global leader of data storage and data protection solutions, for a purchase price of $49.0 million , which was paid in shares of the Company's common stock. The shareholders of Tandberg received 47,152,630 shares of the Company's common stock. Tandberg became a wholly-owned subsidiary of the Company, and the acquisition will be treated as a business combination for accounting purposes. The Company has included Tandberg's historical financial statements and the related proforma statements in the definitive proxy filed on December 19, 2013. The determination of the acquisition-date fair value of the total assets acquired and liabilities assumed is pending completion of a valuation.

14


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction, or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates,” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, but are not limited to: our ability to maintain and increase sales volumes of our products; our ability to continue to aggressively control costs and operating expenses; our ability to achieve the intended cost savings and maintain quality with our manufacturing partner; our ability to generate cash from operations; the ability of our suppliers to provide an adequate supply of components for our products at prices consistent with historical prices; our ability to raise outside capital and to repay our debt as it comes due; our ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new products introduced by our competitors; our ability to maintain strong relationships with branded channel partners; our ability to maintain the listing of our common stock on the NASDAQ Capital Market; customers', suppliers', and creditors' perceptions of our continued viability; rescheduling or cancellation of customer orders; loss of a major customer; our ability to enforce our intellectual property rights and protect our intellectual property (including the outcome of our ongoing patent litigation); general competition and price measures in the market place; unexpected shortages of critical components; worldwide information technology spending levels; and general economic conditions. In evaluating such statements, we urge you to specifically consider various factors identified in this report, including the matters set forth under the heading “Risk Factors” in Item 1A of Part II of this report, and set forth in our annual report on Form 10-K for the fiscal year ended June 30, 2013 filed with the Securities and Exchange Commission ("SEC") on September 18, 2013 under the caption “Risk Factors” in Item 1A of Part I, any of which could cause actual results to differ materially from those indicated by such forward-looking statements.
We are a trusted global provider of unified data management and data protection solutions designed to enable small and medium enterprises (“SMEs”), distributed enterprises, and small and medium businesses (“SMBs”) to anticipate and respond to data storage requirements. Whether an organization's data is locally or globally based, our solutions consolidate and protect data for easy and cost-effective management of different tiers of information. We enable companies to expend fewer resources on information technology (“IT”), allowing them to focus on being more responsive to the needs of their customers.
We develop and deliver a comprehensive solution set of award-winning products and services for storing data throughout the organization and during the entire data lifecycle. Our SnapScale clustered network attached storage (“NAS”) products allow customers to scale-out in capacity and performance as their storage needs grow. Our SnapServer ® products are unified NAS servers that integrate into businesses requiring simple, expandable block and file storage. Our SnapSAN ® products are storage area network (“SAN”) arrays designed to ensure primary and secondary data is accessible and protected regardless of its location. Our SnapScale , SnapServer ® , and SnapSAN ® solutions are available with backup, replication, and mirroring software in highly scalable configurations. These solutions provide simplified disk-based data protection and maximum flexibility to protect mission critical data for both continuous local backup and remote disaster recovery. Our NEO SERIES ® and REO SERIES ® libraries are tape and virtual tape solutions designed to meet the need for cost-effective, reliable data storage for long-term archiving and compliance requirements.
Our approach emphasizes long-term investment protection for our customers and reduces the complexities and ongoing costs associated with storage management. Moreover, most of our products are designed with a scalable architecture which enables companies to purchase additional storage as needed, on a just-in-time basis, and make it available instantly without downtime.
End users of our products include SMEs, SMBs, distributed enterprise companies such as divisions and operating units of large multi-national corporations, governmental organizations, and educational institutions. Our products are used in a broad range of industries including financial services, video surveillance, healthcare, retail, manufacturing, telecommunications, broadcasting, research and development, and many others.

15

Table of Contents

Overview
This overview discusses matters on which our management primarily focuses in evaluating our financial position and operating performance.
Generation of revenue . We generate the majority of our revenue from sales of our data protection products. The balance of our revenue is provided by selling maintenance contracts and rendering related services. The majority of our sales are generated from sales of our branded products through a worldwide channel, which includes systems integrators and value-added resellers.
We reported net revenue of $10.6 million for the second quarter of fiscal 2014 , compared with $12.6 million for the second quarter of fiscal 2013 . We reported net revenue of $21.2 million for the first half of fiscal 2014 , compared with $24.3 million for the first half of fiscal 2013 . We reported a net loss of $4.3 million , or $0.12 per share, for the second quarter of fiscal 2014 compared with a net loss of $4.3 million , or $0.15 per share, for the second quarter of fiscal 2013 . We reported a net loss of $8.9 million , or $0.27 per share, for the first half of fiscal 2014 compared with a net loss of $9.1 million , or $0.33 per share, for the first half of fiscal 2013 .
Acquisition. On November 1, 2013, we entered into a definitive agreement to acquire Tandberg Data Holdings S.à r.l. (“Tandberg”), a privately held global leader of data storage and data protection solutions in exchange for shares of our common stock. The acquisition was completed on January 21, 2014 and Tandberg became a wholly-owned subsidiary of the Company. The shareholders of Tandberg received, as a result of the acquisition, 47,152,630 shares of our common stock.
Liquidity and capital resources. At December 31, 2013 , we had cash and a short-term investment of $4.9 million and $4.7 million , respectively, compared to cash of $8.8 million at June 30, 2013 . In the first half of fiscal 2014 , we incurred a net loss of $8.9 million . Our credit facility provides for an up to $8.0 million secured revolving loan and may be used to fund our working capital and our general business requirements. At December 31, 2013 , we had a balance of $3.5 million recorded as long-term debt, and a remaining external borrowing capacity, subject to certain limitations of accounts receivable, of $4.5 million . Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during fiscal 2014 as we continue to reshape our business model and further improve operational efficiencies.
Management has projected that cash on hand, short-term investment, and available borrowings under our credit facility will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, and/or (iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on our liquidity. This could force us to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations, and future prospects. We may seek debt, equity, or equity-based financing (such as convertible debt) when market conditions permit.
As of December 31, 2013 , we had working capital of $7.5 million , reflecting an increase in current assets of $0.1 million and a decrease in current liabilities of $0.7 million compared to June 30, 2013 . The increase in current assets is primarily attributable to a $4.7 million increase in our short-term investment in Sphere 3D, offset by (i) a $3.9 million decrease in cash, (ii) a $0.3 million decrease in accounts receivable due to lower sales volumes primarily in our tape-based products sold in the Americas and EMEA regions, a (iii) a $0.2 million decrease in inventory, and (iv) a $0.2 million decrease in other current assets primarily related to deferred cost for service contracts. The decrease in current liabilities is primarily attributable to (i) a $0.6 million decrease in deferred revenue, (ii) a $0.4 million decrease in accrued payroll and employee compensation related to a 15% decrease in headcount, (iii) a $0.2 million decrease in accrued warranty, and (iv) a $0.2 million decrease in our stock appreciation rights valuation liability included in accrued payroll and employee compensation. These decreases were offset by an increase of $0.6 million in accounts payable and accrued liabilities related to deferred income tax of $1.0 million for our short-term investment in Sphere 3D, offset by a decrease in accrued liabilities related to operating activities.

16

Table of Contents

Recent Developments
On January 16, 2014, we appointed Randy Gast as our Chief Operating Officer. Mr. Gast joined the Company as Senior Vice President of Strategic Alliances and Client Services in August 2012. He has served as Senior Vice President of Worldwide Operations and Service since August 2012.
On January 17, 2014, we completed a private placement of $2.0 million of convertible notes.
On January 17, 2014, we increased our authorized shares of common stock from 90,200,000 shares to 125,000,000 shares, as well as increased the number of shares of our common stock available for award grant purposes under the 2009 Equity Incentive Plan by 7,000,000 shares.
On January 21, 2014, we acquired Tandberg Data Holdings S.à r.l. (“Tandberg”), a privately held global leader of data storage and data protection solutions, in exchange for shares of our common stock. The shareholders of Tandberg received, as a result of the acquisition, 47,152,630 shares of our common stock.
Critical Accounting Policies and Estimates
We describe our significant accounting policies in Note 1, “Operations and Summary of Significant Accounting Policies,” of the notes to the consolidated financial statements included in our annual report on Form 10-K for the fiscal year ended June 30, 2013 ; and we discuss our critical accounting policies and estimates in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of that report. Unless otherwise described below, there have been no material changes in our critical accounting policies and estimates.
Results of Operations
The following table sets forth certain financial data as a percentage of net revenue:  
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2013
 
2012
 
2013

2012
Net revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue
65.5

 
63.5

 
65.9

 
64.9

Gross profit
34.5

 
36.5

 
34.1

 
35.1

Operating expenses:
 
 
 
 
 

 
 

Sales and marketing
31.0

 
34.6

 
33.1

 
34.9

Research and development
12.7

 
12.6

 
12.5

 
13.1

General and administrative
33.1

 
21.9

 
28.9

 
23.2

 
76.8

 
69.1

 
74.5

 
71.2

Loss from operations
(42.3
)
 
(32.6
)
 
(40.4
)
 
(36.1
)
Other income (expense), net
(3.1
)
 
(0.8
)
 
(3.7
)
 
(1.1
)
Loss before income taxes
(45.4
)
 
(33.4
)
 
(44.1
)
 
(37.2
)
Provision for (benefit from) income taxes
(4.8
)
 
0.5

 
(2.3
)
 
0.5

Net loss
(40.6
)%
 
(33.9
)%
 
(41.8
)%
 
(37.7
)%
 

17

Table of Contents

A summary of the sales mix by product follows:  
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2013
 
2012
 
2013
 
2012
Tape-based products:
 
 
 
 
 

 
 

NEO Series ®
28.6
%
 
33.5
%
 
27.3
%
 
33.0
%
Disk-based products:
 
 
 
 
 
 
 

REO Series ®
0.8

 
1.4

 
0.7

 
1.2

SnapServer ®
22.7

 
17.9

 
23.4

 
17.4

 
23.5

 
19.3

 
24.1

 
18.6

Service
38.0

 
38.2

 
40.1

 
40.6

Spare parts and other
9.9

 
9.0

 
8.5

 
7.8

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

18

Table of Contents

The Second Quarter of Fiscal 2014 compared with the Second Quarter of Fiscal 2013
Net Revenue. Net revenue decreased to $10.6 million during the second quarter of fiscal 2014 from $12.6 million during the second quarter of fiscal 2013 , a decrease of $2.0 million, or 15.9%. The decline was due to lower revenue from our branded products, primarily as a result of decreased sales volumes in our tape-based products sold in the Americas and EMEA. OEM net revenue, which is primarily made up of service revenue, accounted for 12.8% and 13.5% of net revenues in the second quarter of fiscal 2014 and 2013 , respectively.
Product Revenue
Net product revenue decreased to $6.6 million during the second quarter of fiscal 2014 from $7.8 million during the second quarter of fiscal 2013 . The decrease of approximately $1.2 million, or 15.4%, was associated with a decrease in sales of our NEO ® products of $1.2 million primarily related to a decrease in sales of our S-series and add-on drives.
Service Revenue
Net service revenue decreased to $4.0 million during the second quarter of fiscal 2014 from $4.8 million during the second quarter of fiscal 2013 . The decrease of approximately $0.8 million, or 16.7%, was primarily due to decreased service revenue from our extended service contracts primarily related to lower tape-based product sales.
Gross Profit. Overall gross profit decreased to $3.7 million during the second quarter of fiscal 2014 compared to $4.6 million during the second quarter of fiscal 2013 . Gross margin at 34.5% for the second quarter of fiscal 2014 decreased from 36.5% for the second quarter of fiscal 2013 .
Product Revenue
Gross profit on our products during the second quarter of fiscal 2014 was $1.2 million compared to $1.4 million during the second quarter of fiscal 2013 . The decrease of $0.2 million, or 14.3%, was primarily due to decreased sales volumes of tape-based products. Gross margin on product revenue at 18.9% for the second quarter of fiscal 2014 increased from 18.6% for the second quarter of fiscal 2013 .
Service Revenue
Gross profit on our services during the second quarter of fiscal 2014 was $2.5 million compared to $3.1 million during the second quarter of fiscal 2013 . The decrease of $0.6 million, or 19.4%, was primarily due to a decrease in our extended service contracts due to a decrease in tape-based product sales. Gross margin on our services at 59.9% for the second quarter of fiscal 2014 decreased from 65.4% for the second quarter of fiscal 2013 .

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Table of Contents

Share-based Compensation Expense. During the second quarter of fiscal 2014 and 2013 , we recorded share-based compensation expense of approximately $0.8 million and $1.3 million , respectively. Share-based compensation expense for the third quarter of fiscal 2014 is expected to be approximately $1.0 million.
The Company recorded the following compensation expense related to its share-based compensation awards (in thousands):
 
Three Months Ended
 
December 31,
 
2013
 
2012
Cost of product sales
$
30

 
$
33

Sales and marketing
(68
)
 
262

Research and development
80

 
81

General and administrative
794

 
875

 
$
836

 
$
1,251

Sales and Marketing Expense. Sales and marketing expense in the second quarter of fiscal 2014 decreased to $3.3 million from $4.4 million during the second quarter of fiscal 2013 . The decrease of $1.1 million, or 25.0%, was primarily due to a decrease of $0.5 million in employee and related expenses associated with a decrease in average headcount, a decrease of $0.2 million in public relations and advertising expense, including contractor fees, and a decrease of $0.3 million in share-based compensation primarily related to the departure of an officer.
Research and Development Expense. Research and development expense in the second quarter of fiscal 2014 decreased to $1.4 million from $1.6 million during the second quarter of fiscal 2013 . The decrease of $0.2 million, or 12.5%, was primarily due to a decrease in employee and related expenses associated with a decrease in average headcount.
General and Administrative Expense. General and administrative expense in the second quarter of fiscal 2014 increased to $3.5 million from $2.8 million during the second quarter of fiscal 2013 . The increase of $0.7 million, or 25.0%, was primarily a result of an increase of $0.8 million in legal and advisory expenses primarily related to our acquisition of Tandberg in January 2014, offset by a $0.1 million decrease in share-based compensation.
Interest Expense. Interest expense in the second quarter of fiscal 2014 increased to $269,000 from $46,000 during the second quarter of fiscal 2013 . The increase was related to interest expense for the convertible notes we sold in February 2013 and November 2013.
Other Income (Expense), Net. During the second quarter of fiscal 2014 , we incurred other expense, net, of $62,000 compared to $47,000 of expense, net, during the second quarter of fiscal 2013 . The change was primarily due to an increase in realized foreign currency exchange losses during the second quarter of fiscal 2014 due to currency fluctuations.
The First Half of Fiscal 2014 compared with the First Half of Fiscal 2013
Net Revenue. Net revenue decreased to $21.2 million during the first half of fiscal 2014 compared to $24.3 million during the first half of fiscal 2013 , a decrease of $3.1 million, or 12.8%. The decline was primarily due to a decrease of $1.4 million from our branded channel, and a decrease of $1.4 million in service revenue. The decrease in net revenue was attributable to decreased sales volumes primarily in our tape-based products sold in the Americas and EMEA regions. Our sole OEM customer represented approximately 12.5% of net revenue in the first half of fiscal 2014 compared to 12.6% of net revenue in the first half of fiscal 2013 .

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Table of Contents

Product Revenue
Net product revenue decreased to $12.7 million during the first half of fiscal 2014 compared to $14.4 million during the first half of fiscal 2013 . The decrease of $1.7 million , or 11.8%, was primarily associated with a decrease of $2.2 million in tape-based products sold in the Americas and EMEA regions, offset by an increase of $0.6 million in disk-based products sold in the Americas and EMEA regions.
Service Revenue
Net service revenue decreased to $8.5 million in the first half of fiscal 2014 compared to $9.9 million during the first half of fiscal 2013 . The decrease of $1.4 million , or 14.1%, was primarily due to a decrease in our extended service contracts primarily related to lower tape-based product sales in EMEA and the Americas regions. As a percentage of total revenue, service revenue remained relatively constant at 40.1% for the first half of fiscal 2014 compared to 40.7% for the first half of fiscal 2013 .
Gross Profit. Gross profit in the first half of fiscal 2014 decreased to $7.2 million compared to $8.5 million in the first half of fiscal 2013 . Gross margin decreased to 34.1% in the first half of fiscal 2014 compared to 35.1% in the first half of fiscal 2013 .
Product Revenue
Gross profit on our products was constant at $2.0 million for the first half of fiscal 2014 and the first half of fiscal 2013 . Gross margin on our products was 15.7% for the first half of fiscal 2014 compared to 14.1% for the first half of fiscal 2013 .
Service Revenue
Gross profit on our services was $5.2 million during the first half of fiscal 2014 compared to $6.5 million in the first half of fiscal 2013 . The decrease of $1.3 million was primarily due to a decrease in our extended service contracts. Gross margin on service at 61.5% for the first half of fiscal 2014 decreased from 65.8% for the first half of fiscal 2013 .
Share-based Compensation. During the first half of fiscal 2014 and 2013 , we recorded share-based compensation expense of approximately $1.7 million and $2.5 million , respectively.
The following table summarizes share-based compensation by income statement caption (in thousands):
 
 
Six Months Ended
 
December 31,
 
2013
 
2012
Cost of product sales
$
48

 
$
68

Sales and marketing
173

 
512

Research and development
144

 
160

General and administrative
1,381

 
1,764

 
$
1,746

 
$
2,504

Sales and Marketing Expenses. Sales and marketing expenses decreased to $7.0 million during the first half of fiscal 2014 compared to $8.5 million during the first half of fiscal 2013 . The decrease of approximately $1.5 million, or 17.6%, was primarily a result of a decrease of $0.7 million in employee and related expenses associated with an decrease in average headcount, a decrease of $0.4 million in public relations and advertising expense, and a decrease of $0.3 million in share-based compensation expense related to the departure of an officer.
Research and Development Expenses. Research and development expenses decreased to $2.7 million during the first half of fiscal 2014 compared to $3.2 million during the first half of fiscal 2013 . The decrease of approximately $0.5 million , or 15.6%,

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was primarily a result of a decrease of $0.5 million in employee and related expenses associated with a decrease in average headcount.
General and Administrative Expenses . General and administrative expenses increased to $6.1 million during the first half of fiscal 2014 compared to $5.6 million for the first half of fiscal 2013 . The increase of approximately $0.5 million , or 8.9%, was primarily a result of an increase of $1.0 million in legal and advisory expenses primarily related to our acquisition of Tandberg in January 2014 and our on-going patent infringement lawsuits, offset by a $0.4 million decrease in share-based compensation primarily related to the departure of an officer.
Interest Expense. Interest expense increased to $0.6 million during the first half of fiscal 2014 compared to $0.1 million during the first half of fiscal 2013 . The increase of approximately $0.5 million was related to interest expense for the convertible notes we sold in February 2013 and November 2013.
Liquidity and Capital Resources
At December 31, 2013 , we had cash and a short-term investment of $4.9 million and $4.7 million , respectively, compared to cash of $8.8 million at June 30, 2013 . In the first half of fiscal 2014 , we incurred a net loss of $8.9 million . Our credit facility provides for an up to $8.0 million secured revolving loan and may be used to fund our working capital and our general business requirements. At December 31, 2013 , we had a balance of $3.5 million recorded as long-term debt, and a remaining external borrowing capacity, subject to certain limitations of accounts receivable, of $4.5 million . Cash management and preservation continue to be a top priority. We expect to incur negative operating cash flows during fiscal 2014 as we continue to reshape our business model and further improve operational efficiencies.
As of December 31, 2013 , we had working capital of $7.5 million , reflecting an increase in current assets of $0.1 million and a decrease in current liabilities of $0.7 million compared to June 30, 2013 . The increase in current assets is primarily attributable to a $4.7 million increase in our short-term investment in Sphere 3D, offset by (i) a $3.9 million decrease in cash, (ii) a $0.3 million decrease in accounts receivable due to lower sales volumes primarily in our tape-based products sold in the Americas and EMEA regions, a (iii) a $0.2 million decrease in inventory, and (iv) a $0.2 million decrease in other current assets primarily related to deferred cost for service contracts. The decrease in current liabilities is primarily attributable to (i) a $0.6 million decrease in deferred revenue, (ii) a $0.4 million decrease in accrued payroll and employee compensation related to a 15% decrease in headcount, (iii) a $0.2 million decrease in accrued warranty, and (iv) a $0.2 million decrease in our stock appreciation rights valuation liability included in accrued payroll and employee compensation. These decreases were offset by an increase of $0.6 million in accounts payable and accrued liabilities related to deferred income tax of $1.0 million for our short-term investment in Sphere 3D, offset by a decrease in accrued liabilities related to operating activities.
Management has projected that cash on hand, short-term investment, and available borrowings under our credit facility will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs, and/or (iv) changes in the historical timing of collecting accounts receivable could have a material adverse impact on our liquidity. This could force us to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations, and future prospects. We may seek debt, equity, or equity-based financing (such as convertible debt) when market conditions permit.
As a result of our recurring losses from operations and negative cash flows, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30, 2013 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
During the first half of fiscal 2014 , we used net cash in operating activities of $8.0 million , compared to $6.4 million in the first half of fiscal 2013 . The use of cash during the first half of fiscal 2014 was primarily a result of our net loss of $8.9 million

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offset by $1.9 million in non-cash items, which were share-based compensation, deferred income tax benefit, depreciation and amortization. In addition, we had decreases in accounts receivable, inventory, and accrued liabilities due to lower sales.
Net cash used in investing activities was $0.7 million during the first half of fiscal 2014 and first half of fiscal 2013 . During the first half of fiscal 2014 and 2013 , capital expenditures totaled $0.5 million and $0.7 million, respectively. In the first half of fiscal 2014 , such expenditures were primarily associated with the implementation of a new enterprise resource planning system and equipment for quality assurance testing. In the first half of fiscal 2013 , such expenditures were associated with machinery and equipment to support new product introductions. During the first half of fiscal 2014 , intangible assets totaled $250,000 and related to a technology license agreement.
Net cash provided by financing activities was $4.8 million during the first half of fiscal 2014 , compared to net cash used of $0.3 million during the first half of fiscal 2013 . During the first half of fiscal 2014 , we received gross proceeds of $5.0 million from the sale of our convertible notes, offset by $0.2 million paid for taxes for net settlement of restricted stock units. During the first half of fiscal 2013 , $0.4 million was paid for taxes for net settlement of restricted stock units, offset by proceeds received of $145,000 from ESPP purchases.
Inflation
Inflation has not had a significant impact on our operations during the periods presented. Historically, we have been able to pass on to our customers increases in raw material prices caused by inflation. If at any time we cannot pass on such increases, our margins could suffer.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements or significant guarantees to third parties that are not fully recorded in our consolidated condensed balance sheet or fully disclosed in the notes to our consolidated condensed financial statements.
Recently Issued Accounting Pronouncements
See Note 11 to our consolidated condensed financial statements for information about recent accounting pronouncements.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Market risk represents the risk of loss that may impact our financial position, results of operations, or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk from changes in foreign currency exchange rates as measured against the U.S. dollar. These exposures are directly related to our normal operating and funding activities. Historically, we have not used derivative instruments or engaged in hedging activities.
Foreign Currency Risk. We conduct business on a global basis and essentially all of our products sold in international markets are denominated in U.S. dollars. Historically, export sales have represented a significant portion of our sales and are expected to continue to represent a significant portion of sales. Our wholly-owned subsidiaries in the United Kingdom, France, and Germany incur costs that are denominated in local currencies. As exchange rates vary, these results may vary from expectations when translated into U.S. dollars, which could adversely impact overall expected results. The effect of exchange rate fluctuations on our results of operations during the first half of fiscal 2014 and 2013 resulted in losses of $224,000 and $189,000, respectively, to our consolidated condensed financial statements.
Item 4.
Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15

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(e) and 15d-15(e) under the Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.
Legal Proceedings.
We are from time to time involved in various lawsuits, legal proceedings, or claims that arise in the ordinary course of business. We do not believe any such legal proceedings or claims will have, individually or in the aggregate, a material adverse effect on our business, liquidity, results of operations, or financial position. Litigation, however, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
In August 2010, we filed a patent infringement lawsuit in the United States District Court for the Southern District of California against BDT AG, BDT Products, Inc., and BDT-Solutions GmbH. In October 2010, we filed an amended complaint for patent infringement in that court naming the following defendants: BDT AG; BDT Products, Inc.; BDT-Solutions GmbH & Co. KG; BDT Automation Technology (Zhuhai FTZ) Co., Ltd.; BDT de México, S. de R.L. de C.V.; IBM; and Dell. Also in October 2010, we filed a complaint for patent infringement with the United States International Trade Commission (“ITC”) against the same defendants. Both lawsuits claimed infringement of two of our U.S. Patents; Nos. 6,328,766 and 6,353,581. The complaints broadly claimed infringement by BDT's products, and they specifically identify BDT's FlexStor II ® product line as infringing our patents. The Southern District of California case was stayed to allow the ITC case to move forward first. The ITC instituted the case on November 18, 2010 (Investigation No. 337-TA-746). The trial for such case began on August 29, 2011 and ended on September 7, 2011. In July 2013, the court issued an order lifting the stay of our case against BDT in the United States District Court for the Southern District of California.
In November 2011, we entered into a multi-year settlement and cross-licensing agreement with IBM pursuant to which we released all claims we had against IBM and Dell in connection with the patent infringement lawsuits we had filed in the United States District Court for the Southern District of California and at the ITC. In opinions issued by the ITC in November 2012 and May 2013, the ITC concluded or otherwise did not disturb findings that BDT’s customers directly infringe the six asserted claims of U.S. Patent No. 6,328,766, and that all but one of the asserted claims of U.S. Patent No. 6,353,581 are valid. The ITC also concluded that the six asserted claims of U.S. Patent No. 6,328,766 were invalid as anticipated, and that the accused BDT products did not infringe the asserted claims of U.S. Patent No. 6,353,581. In May 2013, the ITC terminated the investigation.
In June 2012, we filed five additional patent infringement lawsuits in the United States District Court for the Southern District of California against seven companies. In these lawsuits, we have asserted claims of infringement based on one or both of U.S. Patent Nos. 6,328,766 and 6,353,581 against the following defendants: Quantum Corporation (“Quantum”), based in San Jose, California; Spectra Logic Corporation (“Spectra Logic”), based in Boulder, Colorado; PivotStor, LLC, based in Irvine, California; Qualstar Corporation, based in Simi Valley, California; Tandberg Data GmbH, based in Germany; Tandberg Data Corp., based in Westminster, Colorado; and Venture Corporation Limited, based in Singapore. In October 2012, we voluntarily dismissed our claims against Venture Corporation. In February 2013, we filed a joint motion to dismiss our case against Tandberg Data GmbH and Tandberg Data Corp. without prejudice.
In August 2012, Quantum filed counterclaims against us in the United States District Court for the Southern District of California action alleging trademark infringement and unfair competition claims, and infringement of U.S. Patent Nos. 5,491,812; 6,542,787; 6,498,771; and 5,925,119 by our products. In April 2013, Quantum filed a complaint against us in the United States

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District Court for the Southern District of California alleging infringement of U.S. Patent No. 7,263,596 by our products. Quantum is seeking monetary damages from us and injunctive relief.
In May 2013, Safe Storage LLC (“Safe Storage”), a Delaware limited liability company, filed a complaint against us in the United States District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,978,346 by our products. Safe Storage is seeking monetary damages from us and injunctive relief.
In June 2013, Spectra Logic filed a Petition for Inter Partes Review of the claims of U.S. Patent No. 6,328,766 with the United States Patent and Trademark Office. The petition has been assigned Case No. IPR2013-00357. In December 2013, the United States Patent and Trademark Office initiated an inter partes review proceeding involving U.S. Patent No. 6,328,766. The inter partes review proceeding is ongoing.
In February 2014, the District Court for the Southern District of California conditionally stayed our litigation against BDT, Spectra Logic and PivotStor pending the results of the inter partes review filed by Spectra Logic.  The stay as to BDT and PivotStor is conditional on both of them agreeing to be bound by the results of the inter partes review at the United States Patent and Trademark Office.
Item 1A.
Risk Factors.
An investment in our company involves a high degree of risk. In addition to the risk factor below and the other information included or incorporated by reference in this report, you should carefully consider each of the following risk factors in evaluating our business and prospects as well as an investment in our company. The risks and uncertainties described in Item 1A of Part II of our annual report on Form 10-K for the fiscal year ended June 30, 2013 are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks actually occur, our business and financial results could be harmed. In that case, the trading price of our common stock could decline.
Our investment in Sphere 3D is subject to a variety of risks which could reduce its value.
  We hold 769,231 shares of common stock of Sphere 3D Corporation (“Sphere 3D”), which had a value as of December 31, 2013 of approximately $4.7 million, representing 14.9% of our total assets as of such date. The value of our investment in Sphere 3D could decrease substantially or entirely for a number of reasons, including Sphere 3D's limited operating history, that Sphere 3D may not be able to achieve or maintain revenues or profitability, the limited trading of Sphere 3D's stock on the TSX Venture Exchange and continued significant volatility of its trading price, our lack of control over Sphere 3D's management and operating decisions, the timing and nature of any exit transaction, the fact that the common stock of Sphere 3D is not listed on any U.S. stock exchange, and the fact that the shares of common stock of Sphere 3D owned by us have not been registered under U.S. securities laws, which could make it more difficult to sell our such shares. These factors could cause the value of our investment to decrease significantly, which could cause our financial condition to suffer as a result.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
On November 12, 2013 and December 24, 2013 we issued and sold $3.0 million and $2.0 million, respectively, of convertible promissory notes (the “Notes”) pursuant to an amended and restated note purchase agreement, dated as of November 1, 2013 (the “NPA”), by and among the Company and the purchasers party thereto, all of which were accredited investors. The Notes are convertible into shares of common stock (subject to certain limitations) in an amount equal to the principal amount of the Notes being converted divided by $1.00, subject to adjustment as set forth in the NPA. In addition, the Company may, subject to certain limitations, pay interest on the Notes in cash or in shares of common stock at its option.
The Notes were issued pursuant to the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended, or the Securities Act, and/or Regulation D and/or Regulation S promulgated thereunder. The shares issuable upon conversion of the Notes and any shares that we may issue as payment of interest on the Notes will be restricted in accordance with Rule 144 under the Securities Act in the event they are not registered under the Securities Act. The issuance of the Notes did not involve any public offering; the Company has made and will make no solicitation in connection with the private placement other than communications with the purchasers; the Company obtained representations from the purchasers regarding their investment intent, knowledge and experience; the purchasers either received or had access to adequate information about the Company in order to make informed investment decisions; the Company reasonably believed that the purchasers are capable of evaluating the merits and risks of their investment; and the shares potentially issuable under the NPA are issuable with restricted securities legends.

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Item 3.
Defaults Upon Senior Securities.
Not applicable.
Item 4.
Mine Safety Disclosures.
Not applicable.
Item 5.
Other Information.
Not applicable.
Item 6.
Exhibits.
10.1
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).

 
 
10.2
Acquisition Agreement dated November 1, 2013 (incorporated by reference to the Company's Form 8-K filed November 1, 2013).

 
 
10.3
Amended and Restated Note Purchase Agreement, dated November 1, 2013 (incorporated by reference to the Company's Form 8-K filed November 1, 2013).

 
 
10.4
Amended and Restated Registration Rights Agreement, dated November 1, 2013 (incorporated by reference to the Company's Form 8-K filed November 1, 2013).

 
 
31.1
Certification of Eric L. Kelly, President and Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Kurt L. Kalbfleisch, Senior Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Eric L. Kelly, President and Chief Executive Officer, and Kurt L. Kalbfleisch, Senior Vice President and Chief Financial Officer.
 
 
101.INS
XBRL Instance Document.
 
 
101.SCH
XBRL Taxonomy Extension Schema.
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase.
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
OVERLAND STORAGE, INC.
 
 
 
 
 
Dated:
February 13, 2014
 
By:
/s/    Eric L. Kelly
 
 
 
 
Eric L. Kelly
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
OVERLAND STORAGE, INC.
 
 
 
 
 
Dated:
February 13, 2014
 
By:
/s/    Kurt L. Kalbfleisch
 
 
 
 
Kurt L. Kalbfleisch
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

27


Exhibit 10.1



FOURTH AMENDMENT TO LEASE AGREEMENT
THIS FOURTH AMENDMENT TO LEASE AGREEMENT (this “ Amendment ”), is entered into as of October 15, 2013, by and between OVERTAPE (CA) QRS 15-14, INC., a Delaware corporation (successor-in-interest to LBA OVERLAND, LLC, a California limited liability company, the successor-in-interest to LBA-VIF ONE, LLC, a California limited liability company) (“ Landlord ”) and OVERLAND STORAGE, INC., a California corporation, formally known as OVERLAND DATA, INC. (“ Tenant ”).
W I T NE S S E T H:
WHEREAS, Landlord and Tenant are parties to that certain Build-To-Suit Single-Tenant Lease (Triple Net) dated as of October 12, 2000, as amended by that certain First Amendment to Lease dated January 18, 2001, as further amended by that certain Second Amendment to Lease dated as of March 8, 2001, and as further amended by that certain Third Amendment to Lease Agreement dated as of July 1, 2010 (the “ Third Amendment ”) (collectively, the “ Lease ”) with respect to certain premises located in the City of San Diego, County of San Diego, California as more particularly described in the Lease (the “ Property ”);
WHEREAS, the Property contains approximately 98,250 rentable square feet in the R&D Building, of which Tenant currently leases approximately 91,300 rentable square feet;
WHEREAS, effective as of November 1, 2013 (the “ Fourth Amendment Effective Date ”), Tenant desires to amend the Lease to surrender approximately 40,235 rentable square feet (the “ Surrendered Premises ”), leaving approximately 51,065 rentable square feet, as depicted on Exhibit “A” attached hereto (the “ Overland Premises ”); and
WHEREAS, Landlord and Tenant desire to accordingly modify the Lease as provided in this Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby covenant and agree as follows:
1.
Effective Date . Unless otherwise specified in this Amendment, this Amendment and all the modifications to the Lease set forth herein shall be effective as of the Fourth Amendment Effective Date.
2.
Premises . All references in the Lease to the “Premises” shall mean the “Overland Premises”.
3.
Rent . Section 1.6(a) of the Lease shall be deleted in its entirety and the following shall be inserted in lieu thereof:





“The term “Monthly Base Rent” shall mean the Monthly Base Rent set forth in the rent schedule below.
EFFECTIVE DATES OF RENT
Monthly Base Rent
Annual Base Rent
November 1, 2013
$125,000.00
$1,500,000.00
April 1, 2014
$62,500.00
$750,000.00
October 1, 2014
$64,687.50
$776,250.00
October 1, 2015
$66,951.56
$803,418.72
October 1, 2016
$69,294.87
$831,538.44
October 1, 2017
$71,720.19
$860,642.28
October 1, 2018
$74,230.39
$890,764.68

4.
Term . Section 1.5 of the Lease is hereby deleted in its entirety and the following shall be inserted in lieu thereof:
“1.5      Lease Expiration Date: March 31, 2019.”
5.
Security Deposit .
(a) Section 1.7 of the Lease is hereby deleted in its entirety and the following shall be inserted in lieu thereof:
“1.7      Security: Sixty Two Thousand Five Hundred and No/100 Dollars ($62,500.00)      Letter of Credit.”
(b) The second, third and fourth sentences of Section 5.1 of the Lease are hereby deleted in their entirety and the following shall be inserted in lieu thereof:
“The Stated Amount of the Letter of Credit shall be Sixty Two Thousand Five Hundred and No/100 Dollars ($62,500.00).”
6.
Landlord’s Demising Work . Landlord shall perform the work necessary to separately demise the Overland Premises from the balance of the R&D Building substantially in accordance with the plans and scope of work attached hereto as Exhibit “B” (the “ Demising Work ”). Landlord agrees to commence the Demising Work on the date that is the earlier of (a) the Demising Effective Date (as defined in Section 13 of this Amendment) or (b) May 31, 2015. Except for the Demising Work, Landlord shall have no obligation to perform any work or make any alteration, installations or additions or otherwise prepare the Overland Premises for Tenant’s continued occupancy, and Tenant agrees to accept same in its “as-is” condition with all faults. Tenant agrees that it shall cooperate, as reasonably requested by Landlord, with the construction obligations of the Demising Work, including, but not limited to providing access and security clearance at all reasonable times to the Overland Premises and the R&D Building to Landlord’s agents for the Demising Work. Notwitstanding the foregoing, until such time as Landlord completes the Demising Work, Tenant shall continue to have access to and use of the existing lunch area and restrooms located on the first floor of the R&D Building.





7.
Common Area and R&D Building Expenses . Section 4 of the Lease (as amended by the Third Amendment) is hereby deleted in its entirety and the following shall be inserted in lieu thereof:
“4.      Common Area Expenses and R&D Building Expenses
4.1.      Payment of Common Area Expenses and R&D Building Expenses . Tenant will pay, as Additional Rent and in the manner this Section 4 describes, (i) Tenant’s Share of Common Area Expenses, and (ii) Tenant’s Share of R&D Building Expenses, in each case, for each calendar year of the Term. Landlord will prorate Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses for the calendar year in which this Lease terminates as of the termination date, as applicable, on a per diem basis based on the number of days of the Term within such calendar year.
4.2.      Estimation of Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses . Landlord will deliver to Tenant a written estimate of the following for each calendar year of the Term: (a) Common Area Expenses and R&D Building Expenses, (b) Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses and (c) the annual and monthly Additional Rent attributable to Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses. Landlord may re-estimate Common Area Expenses and R&D Building Expenses from time to time during the Term. In such event, Landlord will re-estimate the monthly Additional Rent attributable to Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses to an amount sufficient for Tenant to pay the re-estimated monthly amount over the balance of the calendar year. Landlord will notify Tenant of the re-estimate and Tenant will pay the re-estimated amount in the manner provided in the last sentence of Section 4.3.
4.3.      Payment of Estimated Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses . Tenant will pay the amount Landlord estimates as Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses under Section 4.2 in equal monthly installments, in advance, on the first day of each and every calendar month during the Term. If Landlord has not delivered the estimates to Tenant by the first day of January of the applicable calendar year, Tenant will continue paying Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses based on Landlord’s estimates for the previous calendar year. When Tenant receives Landlord’s estimates for the current calendar year, Tenant will pay the estimated amount for such calendar year (less amounts Tenant paid to Landlord in accordance with the immediately preceding sentence) in equal monthly installments over the balance of such calendar year, with the number of installments being equal to the number of full calendar months remaining in such calendar year.
4.4.      Confirmation of Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses . After the end of each calendar year within the Term, Landlord will determine the actual amount of Tenant’s Share of Common Area Expenses and Tenant’s Share of R&D Building Expenses for the expired calendar year and deliver to Tenant a written statement of such amount. If Tenant paid less than the amount of Tenant’s Share of Common Area Expenses and/or Tenant’s Share of R&D Building





Expenses specified in the statement, Tenant will pay the difference to Landlord as Additional Rent in the manner described in Section 3.2. If Tenant paid more than the amount of Tenant’s Share of Common Area Expenses and/or Tenant’s Share of R&D Building Expenses specified in the statement, Landlord will, at Landlord’s option, either (a) refund the excess amount to Tenant, or (b) credit the excess amount against Tenant’s next due monthly installment or installments of estimated Additional Rent. If Landlord is delayed in delivering such statement to Tenant, such delay does not constitute Landlord’s waiver of Landlord’s rights under this section. Notwithstanding the foregoing, if Tenant paid more than the amount of Tenant’s Share of Common Area Expenses and/or Tenant’s Share of R&D Building Expenses specified in the statement and the Term has expired, Landlord shall refund such excess amount to Tenant within forty five (45) days of the end of the Term.
4.5.      Tenant’s Inspection and Audit Rights . If Tenant desires to audit Landlord’s determination of the actual amount of Tenant’s Share of Common Area Expenses and/or Tenant’s Share of R&D Building Expenses for any calendar year, Tenant must deliver to Landlord written notice of Tenant’s election to audit within 30 days after Landlord’s delivery of the statement of such amount under Section 4.4. If such notice is timely delivered, and provided that no default then exists under this Lease, then Tenant (but not any subtenant or assignee) may, at Tenant’s sole cost and expense, cause a certified public accountant reasonably acceptable to Landlord to audit Landlord’s records relating to such amounts on a non-contingent basis. Such audit will take place during regular business hours at a time and place reasonably acceptable to Landlord (which may be the location where Landlord maintains the applicable records). Landlord shall deliver copies of such records to Tenant, to the extent reasonably practicable, in the event traveling to the location of the records is cost-prohibitive. Tenant’s election to audit Landlord’s determination of Tenant’s Share of Common Area Expenses and/or Tenant’s Share of R&D Building Expenses is deemed withdrawn unless Tenant completes and delivers the audit report to Landlord within 60 days after the date Tenant delivers its notice of election to audit to Landlord under this section. If the audit report shows that the amount Landlord charged Tenant for Tenant’s Share of Common Area Expenses and/or Tenant’s Share of R&D Building Expenses was greater than the amount this Section 4 obligates Tenant to pay, unless Landlord reasonably contests the audit, Landlord will refund the excess amount to Tenant, together with interest on the excess amount (computed at 10% per annum from the date Tenant delivers its dispute notice to Landlord) within 30 days after Landlord receives a copy of the audit report. If the audit report shows that the amount Landlord charged Tenant for Tenant’s Share of Common Area Expenses and/or Tenant’s Share of R&D Building Expenses was less than the amount this Section 4 obligates Tenant to pay, Tenant will pay to Landlord, as Additional Rent, the difference between the amount Tenant paid and the amount determined in the audit. Pending resolution of any audit under this section, Tenant will continue to pay to Landlord all estimated amounts of Tenant’s Share of Common Area Expenses and/or Tenant’s Share of R&D Building Expenses in accordance with Section 4.3. Tenant must keep all information it obtains in any audit strictly confidential and may only use such information for the limited purpose this section describes and for Tenant’s own account.
4.6.      Adjustment for Variable Common Area Expenses and R&D Building Expenses . If all of the rentable area of the R&D Building is not occupied at all times during any calendar year pursuant to





leases under which the terms and rents have commenced for such calendar year, Landlord will reasonably and equitably adjust its computation of Common Area Expenses and R&D Building Expenses for that calendar year to include all components of Common Area Expenses and R&D Building Expenses that vary based on occupancy in an amount equal to Landlord’s reasonable estimate of the amount Tenant would have paid for such components of Common Area Expenses and R&D Building Expenses had all of the rentable area of the R&D Building been so occupied at all times during such calendar year.
4.7.      Personal Property Taxes . Tenant will pay, prior to delinquency, all taxes charged against Tenant’s Personal Property. Tenant will use all reasonable efforts to have Tenant’s Personal Property taxed separately from the Property. If any of Tenant’s Personal Property is taxed with the Property, Tenant will pay the taxes attributable to Tenant’s Personal Property to Landlord as Additional Rent.
4.8.      Rent Tax . Tenant will pay to Landlord all Rent Tax due in connection with this Lease or the payment of Rent hereunder, which Rent Tax will be paid by Tenant to Landlord concurrently with each payment of Rent made by Tenant to Landlord under this Lease.
The following definitions shall apply for the purposes of this Section 4 :
Additional Rent ” means any charge, fee or expense (other than Rent) payable by Tenant under this Lease, however denoted.
Common Area ” means the parking area, driveways, landscaped areas, R&D Building electrical room, and other areas of the Property outside of the Overland Premises and the NG Premises which Landlord may designate from time to time as common area.
Common Area Expenses ” means the total amount of Operating Expenses due and payable with respect to the Common Area during any calendar year of the Term.
Operating Expenses ” means, subject to the exclusions listed below, all costs, expenses and charges which Landlord pays or incurs in connection with managing, maintaining, repairing and operating the R&D Building and the Common Area, as applicable, as reasonably determined by Landlord (or paid directly by Tenant), including, but not limited to, the following: (a) insurance premiums and deductible amounts under any insurance policy; (b) steam, electricity, water, sewer, gas and other utility charges; (c) lawn care and landscaping; (d) re-painting, re-striping, seal-coating, cleaning, sweeping, patching and repairing paved surfaces; (e) snow removal; (f) rubbish removal and other services provided to the Common Area and the R&D Building, as applicable; (g) property association fees, dues and assessments and all payments under any Permitted Encumbrance (except mortgages) affecting the Common Area and the R&D Building, as applicable; (h) wages, benefits and other related costs and expenses payable to and associated with persons at the level of manager and below whose duties are connected with managing, maintaining, repairing and operating the Common Area and the R&D Building, as applicable; (i) uniforms, supplies, materials and equipment used in connection





with managing, maintaining, repairing and operating the Common Area and the R&D Building, as applicable; (j) replacements required for the normal maintenance, repair and operation of the Common Area; (k) reasonable management fees; (l) capital improvements installed by Landlord (i) to comply with changes in Laws or the interpretation or enforcement thereof occurring after the Effective Date, or (ii) with a reasonable expectation of reducing energy costs or other Operating Expenses; provided that in computing Operating Expenses Landlord will amortize the cost of such capital improvements (including reasonable charges for interest on the unamortized amount) over the shorter of (A) their useful life (as reasonably determined by Landlord), and (B) 5 years; (m) costs, expenses and charges incurred by Landlord in connection with public rights of way or other public facilities, easements or other appurtenances to the Property; and (n) such other costs, expenses and charges as may ordinarily be incurred in connection with managing, maintaining, repairing and operating an industrial/warehouse complex similar to the Common Area and the R&D Building, as applicable.
Operating Expenses do not include the following: (aa) the cost of capital improvements to the Common Area, except as provided in clause (l) above; (bb) marketing costs, leasing commissions and tenant expenses Landlord incurs in connection with leasing or procuring tenants or renovating space for new or existing tenants; (cc) legal expenses incident to Landlord’s enforcement of any lease; (dd) interest or principal payments on any mortgage of Landlord (except as allowed under clause (m) above); (ee) any expense for which Landlord is directly reimbursed by another tenant, or for which Landlord is entitled to reimbursement from another tenant, other than as an Operating Expense; (ff) the cost of any repairs, restoration or other work for which Landlord is directly reimbursed by insurance proceeds or taking awards, or for which Landlord would have been directly reimbursed in the event Landlord fails to carry the insurance required of Landlord pursuant to the terms of this Lease; (gg) any amount paid for products or services to an entity that is an affiliate of Landlord, but only to the extent such amount exceeds the fair market value of such services and products; (hh) the costs of any utilities which are separately metered to another tenant’s premises; (ii) any fines or penalties imposed on Landlord for failing to timely perform its obligations under this Lease; (jj) salaries of employees not related to the management, operation, repair or maintenance of the Common Area; (kk) any rent payable under any ground lease now or hereafter affecting the Common Area; (ll) expenses resulting from any violation by Landlord of the terms of any lease of space in the R&D Building; (mm) any bad debt loss, rental loss, or reserves for bad debts or rental loss; or (nn) any costs which would allow Landlord a “double recovery” of any other costs for which Landlord is directly reimbursed other than as an Operating Expense.
Permitted Encumbrances ” means all easements, declarations, encumbrances, covenants, conditions, reservations, restrictions and other matters now or after July 1, 2010 affecting title to the Property.
R&D Building Expenses ” means the total amount of Operating Expenses with respect to the R&D Building and Real Property Taxes with respect to the parcels upon which the R&D Building is located





during any calendar year of the Term, provided however, charges related to steam, electricity, water, sewer, gas and other utility charges shall not be included in the calculation of Operating Expenses for the R&D Building to the extent same have been submetered and are paid directly by Tenant or billed separately to Tenant by Landlord. Furthermore, as described in Section 16 below, Tenant shall be responsible for direct payment of all utility charges to the applicable utility companies for the entire R&D Building through the Demising Effective Date (as defined in Section 13).
Real Property Taxes ” means all general and special real property taxes, assessments (including, without limitation, change in ownership taxes or assessments), liens, bond obligations, license fees or taxes, commercial rent taxes and any similar impositions in-lieu of other impositions now or previously within the definition of real property taxes or assessments and any and all assessments under any covenants, conditions and restrictions affecting parcels upon which the R&D Building is located, which may be now or hereafter levied or assessed against the parcels upon which the R&D Building is located.
Real Property Taxes shall include, by way of illustration but not limitation, the following: (a) any tax on Landlord’s “right” to rent or “right” to other income from the parcels upon which the R&D Building is located or as against Landlord’s business of leasing the R&D Building; (b) any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies and charges be included within the definition of Real Property Taxes for the purposes of this Lease; (c) any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or the Rent payable by Tenant hereunder, including, without limitation, any gross receipts tax or excise tax levied by state, city or federal government, or any political subdivision thereof, with respect to the receipt of such Rent, or upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant and of the Premises; (d) any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and/or (e) any assessment, tax, fee, levy or charge by any governmental agency related to any transportation plan, fund or system (including assessment districts) instituted within the geographic area of which the Premises make a part. Despite the foregoing, under no circumstances shall Real Property Taxes include Landlord’s federal, state or local, income, franchise, inheritance or estate taxes.”
Rent Tax ” means any tax or excise on rents, all other sums and charges required to be paid by Tenant under this Lease, and gross receipts tax, transaction privilege tax or other tax, however





described, which is levied or assessed by the United States of America, the state in which the Building is located or any city, municipality or political subdivision thereof, against Landlord in respect to the Rent, Additional Rent or other charges payable under this Lease or as a result of Landlord’s receipt of such rents or other charges accruing under this Lease, but excluding any net income tax of Landlord.
Tenant’s Personal Property ” means any trade fixtures, inventory, equipment, vehicles, or other personal property of any type or kind located at or about the Overland Premises which is owned or leased by, or is otherwise under the care, custody or control of, Tenant or its agents, employees, contractors, or invitees.
Tenant’s Pro Rata Share ” means 51.97%.
Tenant’s Share of Common Area Expenses ” means 32.20% of the Common Area Expenses.”
Tenant’s Share of R&D Building Expenses ” means 51.97% of the R&D Building Expenses.
8.
Signs . The following is hereby added at the end of Section 6.2 of the Lease:
“Notwithstanding anything to the contrary set forth herein, Tenant shall be permitted to retain any existing signage installed by Tenant at the Property, provided however, upon fifteen (15) days prior written notice to Tenant, Landlord shall have the right to, in Landlord’s sole discretion, proportionately reduce Tenant’s right to maintain exterior or monument-type signs at the Property to Tenant’s Pro-Rata Share of total existing signage and require Tenant to remove any existing signs in excess of Tenant’s Pro-Rata Share.”
9.
Parking . Notwithstanding anything to the contrary set forth in the Lease, Tenant’s allocation of parking spaces in the parking area located in the Common Area shall be proportionately reduced to three (3) parking spaces per one thousand (1000) rentable square feet occupied by Tenant pursuant to the Lease.
10.
Taxes . Section 10 of the Lease is hereby deleted in its entirety and replaced with “Intentionally Omitted.” All Real Property Taxes for the Premises shall be paid as part of Tenant’s Share of R&D Building Expenses.
11.
Repairs .
(a) Section 11.1 of the Lease is hereby deleted in its entirety and the following shall be inserted in lieu thereof:
“Except for Landlord’s obligations described in Section 11.2, Tenant, at its sole cost and expense, will keep and maintain the Premises in good, clean, sanitary, neat and fully operative condition and repair, reasonable wear and tear excepted. Tenant’s obligations under this section include, without limitation, maintenance and repair (including replacements) of all: (a) non-structural interior portions, systems and equipment; (b) interior surfaces of exterior walls; (b) interior moldings, partitions and ceilings; (c) slabs, floors and structural columns; (d) windows, plate glass, and doors; and (e) electrical, lighting, mechanical, plumbing, heating and air conditioning systems, facilities, fixtures and components serving exclusively the Premises. Any repairs or replacements performed by Tenant





must be at least equal in quality and workmanship to the original work and be in accordance with all applicable laws, regulations and restrictions, including but not limited to all Declarations, Building Regulations, and Environmental Permits. Tenant will at all times and at Tenant’s sole cost and expense keep a preventative maintenance and repair contract in force and effect for the heating, air conditioning and ventilation system serving the Premises. For the avoidance of doubt, Tenant shall maintain and repair, at its sole cost and expense, the HVAC units servicing the Premises that are marked on the plan to be delivered by Landlord to Tenant upon completion of the Demising Work. Such contract (including without limitation the schedule and scope of services provided and the identity and capabilities of the contractor) must be acceptable to Landlord in Landlord’s reasonable discretion. Tenant will not commit any nuisance or waste in, on or about the Premises, the Common Area, or the Property. Notwithstanding anything to the contrary above, if any Tenant Damage occurs Landlord may, at Landlord’s option and in Landlord’s sole discretion, require Tenant to (a) pay to or reimburse Landlord for the actual reasonable cost of any repairs or replacements necessitated by such Tenant Damage which are performed by Landlord, and/or (b) perform, at Tenant’s sole cost and expense, any repairs or replacements necessitated by such Tenant Damage which are not performed by Landlord. Tenant is liable to Landlord for all Claims arising from Tenant Damage. “Tenant Damage” means any loss, destruction or damage to the Premises, Property or Landlord’s personal property caused by (a) any misuse, abuse, neglect, improper maintenance, or unauthorized modifications or alterations caused or permitted by Tenant; (b) any negligent, careless, reckless or intentionally wrongful acts, omissions or conduct of Tenant; or (c) any waste or excessive or unreasonable wear and tear caused or permitted by Tenant. “Claims” means all claims, actions, demands, liabilities, damages, costs, penalties, forfeitures, losses or expenses, including, without limitation, reasonable attorneys’ fees and the costs and expenses of enforcing any indemnification, defense or hold harmless obligation under this Lease.”
(b) The following is hereby added at the end of Section 11.2 of the Lease:
“Notwithstanding anything to the contrary in this Section 11.2, Landlord will keep and maintain in good order, condition and repair, reasonable wear and tear excepted, the (a) exterior surfaces of the exterior walls (excluding windows and plate glass) and roof of the R&D Building, (b) structural integrity of the footings, foundation, exterior walls and roof of the R&D Building, and the (c) Common Area. Landlord will also perform any repairs or replacements to the Premises or Property necessitated by damage or destruction of the Property, subject to the provisions of Section 18 of the Lease. Neither Monthly Rent nor Additional Rent will be reduced, nor will Landlord be liable, for loss or injury to or interference with Tenant’s property, profits or business arising from or in connection with Landlord’s performance of its obligations under this Section 11.2. If any governmental authority requires any alterations, additions, improvements, or decorations (collectively “ Alterations ”) to the Property or the Premises as a result of Tenant’s particular use of the Premises (whether or not it is a Permitted Use) or as a result of any Alteration to the Premises made by or on behalf of Tenant or if Tenant’s particular use of the Premises subjects Landlord or the Property to any obligation under any applicable laws or regulations, Tenant will pay the cost of all such Alterations or the cost of compliance, as the





case may be. If any such Alterations involve either (a) the structural, mechanical, electrical, plumbing, fire/life safety or heating, ventilating and air conditioning systems of the Building, or (b) any portion of the Property outside of the interior of the Premises (collectively “ Structural Alterations ”), Landlord will make such Structural Alterations, provided that Landlord may first require Tenant to deposit with Landlord an amount sufficient to pay the cost of such Structural Alterations (including, without limitation, reasonable overhead and administrative costs). If the Alterations are not Structural Alterations, Tenant will make the Alterations at Tenant’s sole cost and expense in accordance with Section 12 of the Lease.
12.
Alterations . The following shall be added at the end of Section 12.1(a) of the Lease:
“Notwithstanding anything to the contrary in Section 12.1(a) of the Lease, a Pre-Approved Change shall not include any Tenant Changes that consist of Structural Alterations.”
13.
Utilities . The following shall be added at the end of Section 16 of the Lease:
“Landlord shall, at its sole cost and expense, perform the work necessary to provide meters or submeters to measure Tenant’s consumption of utilities at the Premises. Notwithstanding anything to the contrary herein, Landlord shall, in Landlord’s reasonable discretion, bill Tenant for such charges directly or require Tenant to pay charges directly (in which event such charges shall be deemed Additional Rent under the Lease) or to the applicable utility companies. Furthermore, until the date Landlord procures a third party tenant for any portion of the Surrendered Premises and the term of the lease with such third-party tenant commences (the “ Demising Effective Date ”), Tenant shall be responsible for direct payment to the applicable utility companies of all charges related to steam, electricity, water, sewer, gas and other utility charges for the entire R&D Building (and not solely limited to the Overland Premises).”
14.
Damage or Destruction .
(a) Section 18.1 of the Lease is hereby deleted in its entirety and the following shall be inserted in lieu thereof:
“Except as specifically provided in Section 18.2 below, in case of damage to or destruction of the Premises, whether or not by a risk required to be covered by insurance as set forth in Section 20 of this Lease, this Lease shall not terminate and Landlord shall promptly restore, rebuild, replace or repair (hereinafter referred to as “Restore” or “Restoration”) the Premises to substantially the same condition as existed immediately prior to such damage or destruction, subject, in any event, to Landlord’s receipt of all applicable insurance proceeds pertaining to the insurance maintained by Landlord hereunder. Such Restoration shall be commenced promptly, subject to Landlord’s receipt of all governmental approvals and/or insurance and/or condemnation proceeds required to proceed with the restoration (which Landlord shall use diligent efforts to obtain) and subject to Force Majeure.”





(b) The clause “in which event Tenant shall have no obligation to Restore the Premises” in the first sentence of Section 18.2 of the Lease and the last sentence of Section 18.2 of the Lease are hereby deleted in their entirety.
(c) Section 18.3 of the Lease is hereby deleted in its entirety and replaced with “Intentionally Omitted.”
15.
Surviving Obligations . Notwithstanding anything to the contrary contained herein, Tenant remains liable to Landlord with respect to any obligation that survives the termination of the Lease including, but not limited to any obligation under the Lease with respect to the Surrendered Premises.
16.
Termination as to Surrendered Premises . Landlord agrees that as of the Fourth Amendment Effective Date, Landlord and Tenant agree that the Lease shall terminate as to the Surrendered Premises and Landlord and Tenant shall have no further obligation to each other with respect thereto except as expressly set forth in Section 13 above or in any other provision of this Amendment or the Lease; provided however, Tenant shall have until November 30, 2013 to vacate the Surrendered Premises and deliver the Surrendered Premises to Landlord pursuant to Section 9.1 of the Lease, free and clear of any subtenants or other occupants. Landlord and Tenant acknowledge and agree that there shall be no prorations or refunds of Rent paid as of the Fourth Amendment Effective Date.
17.
Partial Early Termination Option . Provided that Tenant (i) is not then in default under the terms of the Lease beyond any applicable notice and cure period, (ii) is not then the subject of any bankruptcy or state insolvency proceeding, and (iii) has not assigned this Lease to an unrelated third party, then Tenant shall have the one-time right to terminate this Lease with respect to the first (1 st ) floor of the Overland Premises as cross-hatched on Exhibit “C” attached hereto (the “ First Floor Space ”), such termination to be effective as of October 31, 2015 (the “ First Floor Surrender Date ”), provided and conditioned upon Tenant giving Landlord prior written notice of its election to exercise this termination option under this Section 17 not later than April 30, 2015, time being of the essence with respect to such notice. If Tenant exercises its option to terminate this Lease with respect to the First Floor Space, Tenant shall, on the First Floor Surrender Date, surrender the First Floor Space in accordance with Section 9.1 of the Lease free and clear of any subtenants or other occupants, and this Lease shall terminate with respect to the First Floor Space other than any obligations pertaining to the First Floor Space that are intended to survive termination, including but not limited to any indemnification obligations under the Lease. In the event Tenant does not surrender the First Floor Space free of any subtenants or other occupants and in accordance with Section 9.1 of the Lease, then Tenant shall be deemed to be holding over without Landlord’s consent and Tenant shall be subject to the provisions of Section 9.2 of the Lease (with respect to the First Floor Space only), including, without limitation, an increase in the Monthly Base Rent to 150% or 200%, as applicable, of 59.83% of the Monthly Base Rent then in effect. Upon and expressly conditioned upon Tenant’s surrender of the First Floor Space in accordance with Section 9.1 of the Lease, the modifications set forth on Exhibit “E” attached hereto shall apply from and after November 1, 2015 with respect to the balance of the Overland Premises that remains after the surrender of the First Floor Space, as shown on Exhibit “D” attached hereto (the “ Remaining Overland Premises ”).





18.
Landlord Recapture Option . Landlord shall have the right to terminate this Lease with respect to the First Floor Space, such termination to be effective at any time from and after December 31, 2014 (any such date, the “ Recapture Date ”), provided and conditioned upon Landlord giving Tenant prior written notice of its election to exercise this termination option under this Section 18 no later than six (6) months prior to such Recapture Date, time being of the essence with respect to such notice. If Landlord exercises its option to terminate this Lease with respect to the First Floor Space, Tenant shall, on the Recapture Date, surrender the First Floor Space in accordance with Section 9.1 of the Lease free and clear of any subtenants or other occupants, and this Lease shall terminate with respect to the First Floor Space other than any obligations pertaining to the First Floor Space that are intended to survive termination, including but not limited to any indemnification obligations under the Lease. In the event Tenant does not surrender the First Floor Space free and clear of any subtenants or other occupants and in accordance with Section 9.1 of the Lease, then Tenant shall be deemed to be holding over without Landlord’s consent and Tenant shall be subject to the provisions of Section 9.2 of the Lease (with respect to the First Floor Space only), including, without limitation, an increase in the Monthly Base Rent to 150% or 200%, as applicable, of 59.83% of the Monthly Base Rent then in effect. Upon and expressly conditioned upon Tenant’s surrender of the First Floor Space in accordance with Section 9.1 of the Lease, the modifications set forth on Exhibit “F” attached hereto shall apply from and after the first (1 st ) day immediately following the Recapture Date with respect to the Remaining Overland Premises.
19.
Tenant Default . Notwithstanding anything to the contrary contained herein, Landlord and Tenant’s execution and delivery of this Amendment shall not be deemed a waiver of any default by Tenant under the Lease including, but not limited to, any default with respect to the Surrendered Premises that remains uncured after the date hereof and Landlord maintains its right to exercise any and all remedies under the Lease in connection with such default.
20.
Recitals . Landlord and Tenant agree that the recitals to this Amendment are a part of this Amendment and Landlord and Tenant expressly agree to the provisions thereof.
21.
Modification . Except as expressly set forth herein, nothing herein is intended to or shall be deemed to modify or amend any of the other terms or provisions of the Lease and all of the terms, covenants and conditions of the Lease are hereby ratified and confirmed and shall continue to be and remain in full force and effect.
22.
Counterparts . This Amendment may be executed in any number of counterparts and by the different parties thereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all counterparts shall constitute but one and the same instrument.
23.
Entire Agreement . This Amendment and the Lease together contain the entire understanding between the parties hereto and supersedes all prior agreements and understandings, if any, relating to the subject matter hereof or thereof. Any promises, representations, warranties or guarantees not herein or therein contained and hereinafter made shall have no force and effect unless in writing, and executed by the party or parties making such representations, warranties or guarantees. Neither this Amendment nor the Lease nor any portion or provisions hereof or thereof may be changed, modified, amended, waived,





supplemented, discharged, cancelled or terminated orally or by any course of dealing, or in any manner other than by an agreement in writing, signed by the party to be charged.
24.
Binding Agreement . This Amendment shall not be binding upon Landlord and Tenant until executed and delivered by both Landlord and Tenant.
25.
Broker . Landlord and Tenant represent that they have dealt with no broker(s) in connection with this Amendment other than Cassidy Turley (San Diego Office) (“ Tenant’s Broker ”), as Tenant’s broker, and and Avison and Young, as Landlord’s broker (“ Landlord’s Broker ”), each of Landlord and Tenant agrees to indemnify, defend, hold and save the other harmless from and against any and all liabilities, damages and expenses arising from or relating to any breach or inaccuracy of the foregoing representation, warranty and agreement, which shall survive expiration, cancellation or other termination of the Lease. Landlord agrees to pay any commission due to Tenant’s Broker and Landlord’s Broker pursuant to a separate agreement
26.
Enforceability . If any provision of this Amendment or its application to any person or circumstances is invalid or unenforceable to any extent, the remainder of this Amendment, or the applicability of such provision to other persons or circumstances, shall be valid and enforceable to the fullest extent permitted by law and shall be deemed to be separate from such invalid or unenforceable provisions and shall continue in full force and effect.
27.
Definitions . All capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed thereto in the Lease.
    





IN WITNESS WHEREOF, Landlord and Tenant have caused this Amendment to be duly executed as of the date first above written.
LANDLORD

OVERTAPE (CA) QRS 15-14, INC., a Delaware corporation


By:
/s/ Brooks G. Gordon     
Name: Brooks G. Gordon
Title: Executive Director


TENANT:

OVERLAND STORAGE, INC., a California corporation


By:
/s/ Kurt Kalbfleisch     
Name: Kurt Kalbfleisch     
Title: SVP & CFO     






EXHIBIT A
OVERLAND PREMISES
[see attached]















EXHIBIT B
DEMISING WORK CONSTRUCTIONS PLANS AND SCOPE OF WORK
[see attached]











EXHIBIT C
FIRST FLOOR SPACE





EXHIBIT D
REMAINING OVERLAND PREMISES











EXHIBIT E
TENANT EARLY TERMINATION OPTION
Provided Tenant exercises its option to terminate the Lease as to the First Floor Space in accordance with Section 17 of this Amendment, the following amendments to the Lease shall be made effective as of November 1, 2015:
1.
Premises . All references in the Lease to the “Premises” or the “Overland Premises” shall mean the “Remaining Premises” as shown on Exhibit “D” attached hereto and which contains approximately 20,515 rentable square feet in the R&D Building.
2.
Rent . Section 1.6(a) of the Lease shall be deleted in its entirety and the following shall be inserted in lieu thereof:
EFFECTIVE DATES OF RENT
Monthly Base Rent
Annual Base Rent
November 1, 2015
$35,631.46
$427,577.52
November 1, 2016
$36,878.56
$442,542.72
November 1, 2017
$38,169.31
$458,031.72
November 1, 2018
$39,505.24
$474,062.88
November 1, 2019
$40,887.92
$490,655.04

Notwithstanding anything to the contrary herein, in the event Landlord does not commence the Demising Work by April 30, 2015, then Tenant shall notify Landlord in writing that the Demising Work has not been commenced (which notice shall be acknowledged and countersigned as by Landlord), in which event Section 1.6(a) of the Lease shall be deleted in its entirety and the following shall be inserted in lieu of the rent schedule above, effective as of November 1, 2015:
EFFECTIVE DATES OF RENT
Monthly Base Rent
Annual Base Rent
November 1, 2015
$31,176.59
$374,119.08
November 1, 2016
$32,267.77
$387,213.24
November 1, 2017
$33,397.14
$400,765.68
November 1, 2018
$34,566.04
$414,792.48
November 1, 2019
$35,775.85
$429,310.20

3.
Term . Section 1.5 of the Lease shall be deleted in its entirety and the following shall be inserted in lieu thereof:
“1.5      Lease Expiration Date: March 31, 2020.”





4.
Common Area and R&D Building Expenses . The following definitions in Section 4 of the Lease (as amended by this Amendment) shall be deleted in their entirety and the following shall be inserted in lieu thereof:
Tenant’s Pro Rata Share ” means 20.88%.
Tenants Share of Common Expenses ” means 12.94%.
Tenant’s Share of R&D Building Expenses ” means 20.88% of the R&D Building Expenses.





EXHIBIT F
LANDLORD RECAPTURE OPTION
Provided Landlord exercises its option to terminate the Lease as to the First Floor Space in accordance with Section 18 of this Amendment, the following amendments to the Lease shall be made effective as of the first (1 st ) day immediately following the Recapture Date:
1.
Premises . All references in the Lease to the “Premises” or the “Overland Premises” shall mean the “Remaining Premises” as shown on Exhibit “D” attached hereto and which contains approximately 20,515 rentable square feet in the R&D Building.
2.
Rent . Section 1.6(a) of the Lease shall be deleted in its entirety and the following shall be inserted in lieu thereof:
EFFECTIVE DATES OF RENT
Monthly Base Rent
Annual Base Rent
January 1, 2015
$25,987.74
$311,852.88
October 1, 2015
$26,897.31
$322,767.72
October 1, 2016
$27,838.72
$334,064.64
October 1, 2017
$28,813.07
$345,756.84
October 1, 2018
$29,821.53
$357,858.36

For the avoidance of doubt, notwithstanding the “Effective Dates of Rent” set forth the rent schedule above, Tenant shall only be entitled to pay the Monthly Base Rent as set forth above after the Recapture Date.
3.
Common Area and R&D Building Expenses . The following definitions in Section 4 of the Lease (as amended by this Amendment) shall be deleted in their entirety and the following shall be inserted in lieu thereof:
Tenant’s Pro Rata Share ” means means 20.88%.
Tenants Share of Common Expenses ” means 12.94%.
Tenant’s Share of R&D Building Expenses ” means 20.88% of the R&D Building Expenses.





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





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






Exhibit 32.1
CERTIFICATION REQUIRED BY
SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his capacity as an officer of Overland Storage, Inc. (the Company), that, to the best of his knowledge, the quarterly report of the Company on Form 10-Q for the fiscal quarter ended December 31, 2013 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.

Date: February 13, 2014
/s/ Eric L. Kelly
 
Eric L. Kelly
President and Chief Executive Officer
(Principal Executive Officer)

Date: February 13, 2014
/s/ Kurt L. Kalbfleisch
 
Kurt L. Kalbfleisch
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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