PROPOSAL ONETHE MERGER
The following is a discussion of the proposed merger and the merger agreement. This is a summary only and may not contain all of the
information that is important to a reader. This summary is subject to, and qualified in its entirety by reference to, the merger agreement, a copy of which is attached to this proxy statement/prospectus as Annex A and is incorporated by reference
herein. Overland shareholders are urged to read this entire proxy statement/prospectus carefully, including the merger agreement, for a more complete understanding of the merger.
Effects of the Merger
In order to effect the business combination of Overland and Sphere 3D, Merger Sub will merge with and into Overland. Overland will be the
surviving corporation in the merger and will become a wholly-owned subsidiary of Sphere 3D.
Pursuant to the merger agreement, at
Effective Time, each issued and outstanding Overland common share will be canceled and extinguished and automatically converted into the right to receive a fraction of a fully paid and nonassessable Sphere 3D common share equal to the Exchange
Ratio. The Exchange Ratio shall be equal to 0.510594 plus the number of Sphere 3D common shares equal to the quotient obtained by dividing (x) the number of common shares of Sphere 3D held by Overland immediately prior to the
closing of the Merger by (y) 18,495,865 plus the quotient obtained by dividing (A) (i)105% of the principal amount of any indebtedness of Overland to the Cyrus Funds repaid by Overland on or after the date of the merger agreement and prior
to the closing of the Merger divided by (ii) 8.675 by (B) 18,495,865.
Background of the Merger
The board of directors of each of Sphere 3D and Overland has from time to time separately engaged with the management of its respective
companies in reviews and discussions of potential strategic alternatives, and has considered ways to enhance its respective performance and prospects. These reviews and discussions have focused on, among other things, the business environment facing
the industry generally and each company in particular. For each company, these reviews have also included periodic discussions with respect to potential transactions that would further its strategic objectives and enhance shareholder value, and the
potential benefits and risks of those transactions. In addition, in light of the nature of Sphere 3Ds and Overlands respective businesses and the existing supply and license agreements between the two companies, management of each of
Sphere 3D and Overland has been and continues to be generally familiar with the others business.
In the fall of 2012, Sphere 3D was
contemplating an initial public offering of its securities. Mr. Tassiopoulos, only a shareholder of Sphere 3D at the time, reached out to Mr. Kelly, whom he had met socially on several previous occasions, to discuss the possibility of
Sphere 3D being acquired by Overland. Overland did not make an offer to pursue such a transaction at the time.
Meanwhile, in November
2012, Overland formally engaged Roth to serve as its financial advisor in connection with a potential strategic transaction and/or capital raising transaction with third parties (which did not specifically include Sphere 3D). This engagement was
initiated based on Overlands then current need for additional capital to fund its operating activities and the Boards interest in pursuing strategic transactions in light of the fact that Overlands business was not growing at a
significant rate. Throughout the last calendar quarter of 2012 and until May 2013, Overland had multiple discussions regarding both strategic and capital raising transactions with a large number of entities regarding the potential acquisition of
entities by Overland, the possible sale of Overland and Overlands possible sale of equity and debt securities. None of these discussions resulted in Overlands agreement to terms of any such transaction. However, Overlands
discussions continued with Cyrus Capital, the investment manager of the Cyrus Funds that owned Tandberg.
47
In December 2012, Mr. Tassiopoulos contacted Mr. Kelly to inform him that Sphere 3D was
very close to completing a reverse merger with a publicly traded company pursuant to which Sphere 3D would become a public company listed on the TSXV and OTCQX. Mr. Kelly indicated that he thought an opportunity to combine the two companies
existed and suggested that Sphere 3D delay its plans to complete the reverse merger transaction. Without a formal offer to enter into negotiations, Sphere 3D elected to continue its initial public offering transaction. On December 21, 2012,
Sphere 3D became a public company by acquiring TB Mining Inc. through a reverse take-over by Sphere 3D Inc., a company incorporated under the Canadian Business Corporation Act. In conjunction with this transaction, TB Mining changed its name to
Sphere 3D Corporation and Sphere 3D Inc. became a wholly-owned subsidiary of such company.
On December 28, 2012, Sphere 3D and
Overland entered into a Mutual Non-Disclosure Agreement for the purpose of discussing a potential strategic transaction.
In January 2013,
Mr. Tassiopoulos and Mr. Kelly continued to further discuss a potential strategic relationship between Overland and Sphere 3D.
On January 15, 2013, Mr. Kelly, Kurt Kalbfleisch, Chief Financial Officer of Overland, and Tony DaCosta, a consultant to Overland,
met with Mr. Tassiopoulos, representatives of Jennings Capital Inc. (investment bankers for Sphere 3D in connection with its initial public offering transaction) and the Sphere 3D board of directors, which, at the time, included Jason D.
Meretsky, Glenn M. Bowman, Mario Biasini, John Morelli and Peter Ashkin, to discuss a potential strategic relationship between Overland and Sphere 3D or an acquisition of Sphere 3D by Overland. During this meeting, the parties were unable to agree
on a valuation of Sphere 3D, as the Sphere 3D representatives indicated that Sphere 3D would require a premium in excess of Sphere 3Ds current market capitalization, particularly so shortly after Sphere 3Ds first becoming a public
company. Although Sphere 3D and Overland were unable to agree on valuation, they agreed to consider a commercial partnership and prepared a memorandum of understanding on or about January 29, 2013. The memorandum of understanding was not signed
by Overland and Sphere 3D. In parallel, on January 23, 2013, Overland provided a draft term sheet to Daniel Bordessa of Cyrus Capital for the issuance and sale of up to $15 million of preferred stock to funds affiliated with Cyrus Capital in a
private placement transaction. From January 23, 2013 to January 29, 2013, Messrs. Kelly and Bordessa continued to discuss a potential financing of Overland through both equity and convertible note structures, which ultimately culminated in
Overlands entry into a Note Purchase Agreement with the Cyrus Funds and certain other investors pursuant to which Overland agreed to sell to such investors convertible promissory notes in an aggregate original principal amount of $13.25
million in exchange for the payment of the purchase price of equivalent amount, $12 million of which was to be invested by the Cyrus Funds. This transaction closed on February 13, 2013.
In February 2013, Sphere 3D and Overland prepared a co-marketing video to present to investors at Roths annual investor conference to be
held in March 2013 in Orange County, California. At this conference, Mr. Kelly, on behalf of Overland, presented the video as Overlands strategic vision and aspirational product focus, the full realization of which likely would require
Overland to obtain technology from Sphere 3D or another unidentified party. Mr. Kelly received positive feedback on the presentation from investors at the conference. Mr. Kelly communicated this reaction to Mr. Tassiopoulos shortly
thereafter and they continued to discuss a potential relationship between the two companies.
On March 4, 2013, Mr. Tassiopoulos
was named Chief Executive Officer of Sphere.
On April 11, 2013, Mr. Kelly provided a preliminary draft term sheet for the
purchase by Overland of all of the assets of Sphere 3D in exchange for shares of Overlands common stock and in connection with which the parties would enter into a joint venture relationship pursuant to which the transferred intellectual
property would be exclusively licensed by Overland to a jointly owned entity in certain agreed upon fields of use. Such transactions were subject to a number of conditions, including approval of both parties boards of directors. On
April 14, 2013, Mr. Tassiopoulos responded with two alternative transaction structures to achieve a similar result, albeit with economic terms more favorable to Sphere 3D than those originally proposed by Mr. Kelly.
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On April 16 and April 17, 2013, Mr. Tassiopoulos and Mr. Kelly met in
Overlands San Jose offices and then in the Menlo Park, California office of OMelveny & Myers LLP (
OMM
), Overlands legal counsel, to discuss the transactions described in the term sheet referred to above,
as well as a variety of other potential structures for a strategic relationship between the parties. After lengthy discussions, the parties tentatively agreed on a structure involving the establishment of a new company, 15% to 40% of which would be
owned by Overland and the remainder of which would be owned by Sphere 3D. Under such structure, Sphere 3D would contribute its assets to the new company and Overland would pay cash and issue shares of Overland to Sphere 3D in exchange for a portion
of its interest in the new company. Overland would also receive a portion of its interest in the new company as an in-kind payment for goods and services to be provided by Overland pursuant to a supply agreement. Further, Overland would receive a
license to all of the new companys intellectual property in the enterprise market (while the new company would pursue applications of the intellectual property in the consumer market). On April 17, 2013, OMM prepared and circulated an
initial term sheet based on this structure. On April 19, 2013, Sphere 3D responded with a revised term sheet reflecting a reduced Overland ownership position in the new company and significantly revising a number of the other proposed terms.
On May 1, 2013, Messrs. Kelly, Kalbfleisch, Tassiopoulos and their respective counsel further discussed the potential transaction
described above and Mr. Kelly provided a revised term sheet proposal thereafter. On May 8, 2013, Mr. Tassiopoulos provided a revised term sheet contemplating a significantly different structure, after which Messrs. Tassiopoulos and
Kelly continued to discuss potential transaction structures and alternatives.
On May 7, 2013, the Overland board of directors met to
discuss various strategic and financing-related matters, including Overlands current cash position, reduction in work force and other cash conservation alternatives. During such meeting, the board discussed the potential transaction with
Sphere 3D referred to above and authorized Mr. Kelly to move forward with discussions with Sphere 3D and to continue discussions with other potential strategic partners of Overland.
On May 13, 2013, Sphere 3D issued a letter to the TSXV requesting that the TSXV approve the structure described in the May 8, 2013
version of the term sheet, which the TSXV approved on May 24, 2013, subject to a number of conditions including approval by Sphere 3Ds shareholders of such transaction.
On May 15, 2013, Cyrus Capital provided Overland with a letter proposing a business combination between Overland and Tandberg in a
transaction pursuant to which Overland would acquire Tandberg in a merger of equals transaction which would provide Tandbergs shareholders with 50% of Overland following the transaction on a fully-diluted basis and in connection with which the
Overland shareholders might have the opportunity to receive cash for a portion of their shareholdings in Overland. On the same date, Cyrus Capital filed an amendment to its Schedule 13D reporting its submission of the proposal to Overland and
including a copy thereof.
The board of directors of Overland held a meeting on May 16, 2013 to discuss the Cyrus Capital proposal,
during which it was determined that the proposal received by Cyrus Capital did not contain sufficient details for the board to make an informed analysis of the proposal, that the Overland board of directors did not intend to go forward with a
transaction that was not supported by Overlands shareholders and that the Overland board of directors did not have enough information regarding the financial position of Tandberg (including historical financial statements) to adequately
analyze a proposed transaction. As a result, Mr. Kelly provided a written response to Cyrus Capital stating that the Overland board of directors would be interested in discussing a more detailed proposal but that it was unable to sign the
written proposal. Overland, Cyrus Capital and Tandberg continued to discuss a potential transaction over the course of the following months.
During the period from May 13, 2013 through June 21, 2013, Overland and Sphere 3D continued to engage in discussions regarding the
potential transaction. During the same period, Overland was engaged in discussions with Cyrus Capital and Tandberg regarding Overlands potential acquisition of Tandberg, which discussions increasingly became a focus for Overland.
49
Ultimately, Overlands board decided that it was not then in the best interests of Overland
or its shareholders to pursue the proposed transaction with Sphere 3D. Among the factors considered by the Overland board were concerns over investing its limited cash resources into a private joint venture entity and over potential tax implications
of the proposed transaction structure. Accordingly, Mr. Kelly provided Mr. Tassiopoulos with a revised term sheet setting forth the general terms of the parties existing supply and license agreements, pursuant to which Overland would
serve as Sphere 3Ds sole source supplier of storage solutions, equipment and related services for a pre-defined period of time, at a fixed gross margin, payable part in cash and part in stock of Sphere 3D, and Sphere 3D would license its
intellectual property to Overland for enterprise customers, in exchange for a cash payment, shares of Overlands common stock and a royalty on sales of products incorporating such intellectual property. He also provided at such time drafts of
the definitive supply agreement. Sphere 3D subsequently provided comments to the supply agreement, a draft license agreement and comments to the most recent term sheet, which agreements and term sheet were then further negotiated among the parties.
On June 26, 2013, the Overland board of directors met to, among other things, discuss the proposed Sphere 3D agreements. At this
meeting, the board authorized Mr. Kelly to enter into the term sheet and definitive license agreement and supply agreement on the terms discussed by the board and ultimately incorporated into the final versions of such agreements.
On July 3, 2013, the parties agreed upon and executed the aforementioned term sheet and the parties continued to negotiate the terms of
the supply and license agreements. The board of directors of Sphere 3D met and approved the terms of the agreements and authorized management to proceed with the signing of the agreements, in substantially the same form as the terms sheet.
On July 11, 2013, the Overland board of directors approved the supply agreement and the license agreement and the transactions between
Overland and Sphere 3D contemplated thereby, as well as the potential appointment of Mr. Kelly as chairman of the board of directors of Sphere 3D following the entry into the supply agreement and the license agreement.
On July 12, 2013, Overland and Sphere 3D entered into the supply agreement and the license agreement. Pursuant to such agreements,
Overland paid Sphere 3D $250,000 in cash and issued to Sphere 3D 213,220 shares of Overland common stock with a value at the time of issuance of approximately $250,000, and Sphere 3D issued 769,231 Sphere 3D shares to Overland having a value as of
the date of issuance equal to approximately $500,000 and representing approximately 4.6% of Sphere 3Ds outstanding common shares.
During the course of the above negotiations and discussions, Sphere 3D considered appointing Mr. Kelly as a member and chairman of Sphere
3Ds board of directors, which considerations were disclosed to, and discussed by, the members of the Overland board of directors. After the supply and license agreements were signed, Mr. Tassiopoulos requested that Mr. Kelly become
chairman of the board of directors of Sphere 3D. Mr. Tassiopoulos discussed such potential appointment with Scott McClendon, the chairman of Overlands board of directors on or about July 14, 2013, during which Mr. McClendon
confirmed that Mr. Kellys serving as a member and chairman of the Sphere 3D board of directors had been approved by the Overland board of directors, and agreed that the proposed compensation to Mr. Kelly in connection therewith
described below was acceptable to Overlands board of directors.
Mr. Kelly was then appointed as chairman of the board of
directors of Sphere 3D on July 16, 2013 and Sphere 3D announced the appointment on July 16, 2013 in a press release. On the same date, the Sphere 3D board awarded Mr. Kelly an option to purchase up to 850,000 common shares of Sphere
3D with an exercise price of C$0.65, or approximately $0.63, subject to approval by the Sphere 3D shareholders at an annual general and special meeting of the shareholders of Sphere 3D scheduled for September 16, 2013. Such grant was made as
compensation for Mr. Kellys serving as chairman of the Sphere 3D board and was subject to a three year vesting period based on his continued service. The Sphere 3D board determined such option was valued at approximately C$220,000 over a
3 vesting year period, or approximately C$70,000 per year, based on a Black-Scholes valuation methodology. No cash compensation was paid to Mr. Kelly in connection with serving on the Sphere 3D board.
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On September 16, 2013, Sphere 3D held a meeting of its shareholders at which its
shareholders approved the option grant to Mr. Kelly described above. Sphere 3D also introduced for the first time at this meeting a prototype of the Overland SNAP server integrated with Sphere 3Ds Glassware software. This prototype was
the result of significant engineering efforts from both parties pursuant to the supply and license agreements, and Sphere 3D received positive feedback on this prototype and its prospects at the meeting.
Overland continued to be engaged in discussions with Cyrus Capital and Tandberg regarding the acquisition of Tandberg and on November 1,
2013, Overland announced that it has entered into an acquisition agreement pursuant to which Overland agreed to acquire Tandberg in a transaction pursuant to which Overland would issue shares of its common stock to an entity owned by the Cyrus Funds
in exchange for all of the outstanding equity securities of Tandberg and after which such entity owned by the Cyrus Funds would own, by virtue of the issuance of thereof, approximately 54% of the common stock of Overland, subject to the approval of
the shareholders of Overland and certain other closing conditions.
In connection with the entry into the acquisition agreement, Overland
entered into an amended and restated Note Purchase Agreement dated November 1, 2013 (the
NPA
) with the Cyrus Funds and certain other note purchasers party thereto, which NPA amended and restated the Note Purchase Agreement
dated February 12, 2013 between Overland, the Cyrus Funds and the other note purchasers party thereto. Pursuant to the NPA, the Cyrus Funds and the other note holders agreed that all of convertible promissory notes previously issued pursuant to
the NPA in February 2013 would automatically convert into Overland common shares pursuant to their existing terms and at their existing conversion price of $6.50 per share, subject to a limitation prohibiting any such holder from holding more than
19.99% of Overlands outstanding common stock immediately following such conversion. After such conversion, approximately $2.5 million of such notes remain outstanding all of which are held by the Cyrus Funds. Pursuant to the NPA, the Cyrus
Funds also agreed to acquire, and Overland agreed to sell to the Cyrus Funds, additional convertible promissory notes in an aggregate original principal amount of $7.0 million which are convertible into shares of Overland common stock at a
conversion price of $5.00 per share.
On December 4, 2013, Sphere 3D signed a letter of intent to acquire certain intellectual
property assets, including Virtual Desktop Infrastructure technology, certain trademarks, patents and other intellectual property (the
V3 technology assets
) of V3 Systems, Inc. (
V3
); subject to Sphere 3Ds
obtaining appropriate financing to consummate such transaction. During December 2013, Overland and Sphere 3D discussed possible joint ownership of the V3 technology assets through a potential joint venture entity. Mr. Tassiopoulos approached
Mr. Kelly regarding such matters given that the acquisition of the V3 technology assets would require Sphere 3D to obtain significantly more manufacturing, logistics and operational support under its supply agreement with Overland than was
originally contemplated. Due to Overlands focus on completing and integrating its Tandberg acquisition, these discussions did not proceed to a definitive agreement, and the parties agreed that the joint Sphere 3D and V3 product would be
manufactured under the terms of the existing supply agreement between the parties.
In December 2013, Sphere 3D began fulfilling orders
for V3 products pursuant to an informal master distributor arrangement between Sphere 3D and V3, as a result of V3s inability to fulfil orders directly due to lack of funding.
In early January 2014, Mr. Kelly, as a board member of Sphere 3D, introduced Mr. Tassiopoulos to Daniel Bordessa and Cyrus Capital
because Sphere 3D was interested in obtaining financing to, among other things, close the acquisition of the V3 technology assets. At the same time, Mr. Tassiopoulos continued to have discussions with Cormark Securities Inc.
(
Cormark
), who had been the lead broker in Sphere 3Ds latest financing on November 12, 2013, about their possible participation in a new round of financing to support the V3 technology acquisition.
On January 16, 2014, the shareholders of Overland approved the acquisition of Tandberg at a special meeting of shareholders, and on
January 21, 2014, Overland closed the acquisition of Tandberg and an entity owned by the Cyrus
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Funds became the majority holder of Overlands capital stock. The Tandberg acquisition was expected to significantly expand Overlands global channel and service partners and to expand
its product lines and service offerings in the enterprise storage industry and to enable Overland to improve its operational efficiencies.
On February 3, 2014, Overland engaged Emerging Growth Equities (
EGE
) to assist Overland in obtaining additional
financing. The financing was intended to take the form of a private placement of equity securities.
In February 2014, Overland requested
that Sphere 3D waive any rights to terminate the license agreement that may have been triggered by Overlands consummation of its acquisition of Tandberg. Overland and Sphere 3D discussed whether such a waiver was necessary and also discussed
Sphere 3Ds desire to amend the supply agreement given its acquisition of the V3 technology assets. The parties did not agree on the provision of such a waiver or any amendment of the supply agreement. The parties did however confirm that under
the existing supply agreement, Overland would include the Overland NAS products in a bundle with the V3 product line once the proposed acquisition of the V3 technology assets was completed by Sphere 3D, and that Overland would also offer these
products to its channel partners.
During Overlands financing efforts, Overland (through Mr. Kelly) approached Mr.
Tassiopoulos regarding Sphere 3Ds potential participation in Overlands contemplated financing, and on February 13, 2014, he provided Sphere 3D with a draft summary term sheet for a $5 million private placement of Overland common
shares to Sphere 3D to be priced at the closing price of the Overland common stock at the time of entry into a definitive agreement.
On
February 24, 2014, Sphere 3D held a board meeting, from which Mr. Kelly was recused. At the meeting, the Sphere 3D board discussed various options to obtain the financing necessary to close the acquisition of the V3 technology assets, the
matters discussed above regarding the amendment of the supply agreement and waiver under the license agreement and the potential opportunity to participate in Overlands contemplated financing as an investor. At this meeting, Sphere 3Ds
board of directors approved in principal Sphere 3D raising approximately $10 million of total capital (inclusive of the $4 million it needed to complete its acquisition of the V3 technology assets plus an additional $1 million for working capital)
and investing such excess into Overland in its contemplated financing transaction.
Mr. Tassiopoulos approached Cormark about its
involvement in financing this plan but ultimately, Sphere 3D did not believe that the timing was appropriate for an equity financing. As a result, Mr. Tassiopoulos approached Cyrus Capital to seek alternative options regarding Sphere 3Ds
financing.
On February 19 and 20, 2014 as well as March 4, 5 and 6, 2014, Messrs. Kelly, Kalbfleisch and Gast of Overland,
together with representatives of EGE, met with potential investors in New York City. After limited progress with such fundraising efforts, Overland and EGE agreed to engage Roth, who had assisted Overland with prior financing transactions and, most
recently, the Tandberg acquisition, to assist them in identifying potential investors. Roth was engaged during the week of March 3, 2014.
In March 2014, at the annual conference held by Roth in Orange County, California, Roth offered to assist Sphere 3D in obtaining the financing
it required to close its acquisition of the V3 technology assets. Sphere 3D did not engage Roth in such capacity.
Also at the annual
conference held by Roth, based on Overlands need for significant additional cash to fund its operations Messrs. Kelly and Kalbfleisch met and discussed a potential financing of Overland with representatives of a third party investment
fund (the
Potential Lead Investor
), who were introduced by EGE. Messrs. Kelly and Kalbfleisch held further meetings with potential investors in New York City on March 18 through March 21, 2014 and in San Francisco on
March 25, 2014, all of which were coordinated by representatives of EGE and Roth. In total, they met with more than twenty potential investors during such meetings.
52
In March 2014, Mr. Tassiopoulos met with Mr. Bordessa in New York to discuss a
potential financing of Sphere 3D by the Cyrus Funds. At this meeting, Mr. Tassiopoulos told Mr. Bordessa and another representative of Cyrus Capital that Sphere 3D was seeking between $5 million to $15 million, the first $5 million of
which would be used to finance its acquisition and commercialization of the V3 technology assets with an additional amount possible for an investment in Overland. However, Sphere 3D ultimately sought only $5 million from the Cyrus Funds and decided
not to invest in Overland at the time. Sphere 3D made this determination out of concern that any investment in Overland would be diluted by a potential follow-on financing by Overland on terms that were unknown to Sphere 3D at the time.
On March 21, 2014, Sphere 3D closed the $5 million financing with the Cyrus Funds, and closed the acquisition of the V3 technology assets
with V3.
The financing to Sphere 3D from the Cyrus Funds was in the form of a debenture with a four year term, maturing on March 21,
2018, bearing interest at 8% per annum, to be paid semi-annually in cash or shares at the option of Sphere 3D. The debenture is convertible at any time into common shares in the capital of Sphere 3D (the
Conversion
Right
) at a price of $7.50 (the
Conversion Price
). Sphere 3D shall have the right to force the conversion of the debenture if the trading price of the common shares for 10 successive days in which the shares actually
trade on the TSXV or other principal exchange, exceeds 150% of the Conversion Price, being $11.25. In addition, Sphere 3D shall have the right to repay in full the outstanding balance owing under the debenture at any time during the first 12 months
of the term for an amount equal 120% of the balance then outstanding and at any time during the second year of the term for an amount equal 125% of the balance then outstanding.
On March 20, 2014, Overland received a term sheet from the Potential Lead Investor for a potential private placement of preferred stock
of a minimum of $15 million, of which the Potential Lead Investor would invest no more than $5 million. The Potential Lead Investor confirmed in the term sheet and verbally to Messrs. Kelly and Kalbfleisch that it would not close such transaction
unless the full $15 million was raised contemporaneously with the Potential Lead Investors potential investment. The terms of such proposed financing were particularly onerous to Overland because, among other things, the transaction would be
priced at closing rather than at signing and announcement, the conversion price of the preferred stock would be at a discount to the market price of Overlands common stock on the date of conversion, the investors would hold certain blocking
rights over key transactions involving Overland, the financing would include the issuance of warrants by Overland and the proposal included price-based anti-dilution protection.
Overlands board of directors met on March 26, 2014 to discuss the status of its financing efforts, as well as the terms proposed by
the Potential Lead Investor, at which meeting the board directed Mr. Kelly to continue negotiations with the Potential Lead Investor and to continue to seek financing from other investors.
Overland provided the Potential Lead Investor with a revised version of the proposed term sheet which addressed certain of the foregoing
issues on April 1, 2014 and received the Potential Lead Investors final proposed term sheet the following day, which did not address most of Overlands substantive comments. On April 4, 2014, given Overlands lack of other
financing and strategic alternatives, Overland entered into the Potential Lead Investors non-binding term sheet.
On April 30,
2014, Overland received draft financing agreements from the Potential Lead Investors counsel. Overland and its counsel, OMM, reviewed such drafts and determined that they contained terms substantially more favorable to the Potential Lead
Investor and the other investors than those contained in the term sheet. Revised drafts of such documents were provided by OMM to the Potential Lead Investors counsel on May 7 and May 9, 2014.
In late April 2014, Mr. Kelly advised Mr. Tassiopoulos of the potential terms of the contemplated Overland financing with the
Potential Lead Investor and asked that Sphere 3D consider participating in the financing. With an understanding of the potential dilution faced by Overland, Mr. Tassiopoulos enlisted Cormark on May 2, 2014 to assist Sphere 3D in
determining the viability of an acquisition of Overland by Sphere 3D.
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Sphere 3D then held a meeting of its board of directors on May 5, 2014, from which Eric
Kelly was recused. At this meeting, Mr. Tassiopoulos circulated a draft PowerPoint presentation that he prepared together with Cormark providing an overview of what the combination of Sphere 3D and Overland would look like from a strategic,
public market and financial perspective. Mr. Tassiopoulos also shared a financial model prepared by Cormark showing the pro forma financials and potential valuation of the two combined companies. He also discussed with the board that the
closing by Overland of an alternative financing of the magnitude contemplated by Overland would likely preclude Sphere 3D from ever entering into a strategic transaction with Overland. As a result, Sphere 3Ds board agreed to enter into
discussions to seek a merger with Overland and the board of directors appointed Mr. Bowman, an independent board member with considerable expertise in valuation and transactional matters, to be the lead director for the negotiation of a
potential transaction with Overland. The board also determined that a special committee would not be required and that the board (other than Mr. Kelly) would act directly in overseeing all aspects of the negotiations. Based on the financial
model, Sphere 3D and Cormark agreed C$10 million was an appropriate amount for a potential bought deal financing.
On
May 6, 2014, the financing committee of Overlands board of directors met with representatives of Roth and EGE to discuss the status of discussions and negotiations with potential investors in the proposed financing. As part of its
discussions, the financing committee discussed conversations between Overland and Sphere 3D regarding Sphere 3Ds participation in the financing and noted that Sphere 3D would likely not participate in the financing if the transaction resulted
in Sphere 3D holding only a small percentage of Overlands outstanding shares. The financing committee then directed Messrs. Kelly and Kalbfleish to continue investor meetings related to the financing and to seek alternative financing
arrangements.
On May 7, 2014, Mr. Tassiopoulos, Mr. Kalbfleisch and Mr. Bordessa met in Salt Lake City, Utah to
discuss a potential transaction between Overland and Sphere 3D, as previously directed by the financing committee of the Overland board of directors on May 6, 2014. Sphere 3D initially proposed acquiring all of the outstanding equity of
Overland via merger in an all-stock deal with the consideration to be $3.10 worth of Sphere 3D shares to be issued for each Overland share. The closing price of Overlands common stock on such date was $2.81 per share.
In response, Messrs. Kalbfleisch and Bordessa proposed consideration of $5.10 worth of Sphere 3D shares to be issued for each Overland share.
Eventually, during such meeting, the participants focused on a framework providing that Sphere 3D would acquire all of the shares of Overland via merger in consideration of the issuance of 10.2 million shares of common stock of Sphere 3D to the
Overland shareholders and holders of convertible debt, which valued the Overland shares at approximately $4.24 per Overland share based on Sphere 3Ds closing price of C$9.46 as of such date, subject to various potential adjustments, including
an upward adjustment, on a share for share basis, for any shares of Sphere 3D held by Overland at the time of the closing of the transaction (which would result in an additional $0.36 per share based on the number of Sphere 3D shares held by
Overland at such time and the market price of Sphere 3D shares at such time). In addition, Overland and Sphere 3D agreed that Overlands obligations to close the merger after signing of the definitive merger agreement would be subject to a
fiduciary out provision and that Sphere 3D would loan Overland between $5 million and $10 million concurrently with the signing of a definitive agreement to fund Overlands operations prior to the closing of the transaction.
Such loan would not become immediately payable if the merger did not occur and was to be secured against certain assets of Overland.
On
May 9, 2014, Mr. Kelly and Mr. Kalbfleisch participated in a presentation to investors in New York relating to the potential Overland financing. Such presentations did not result in additional investor interest in the proposed
financing.
On May 9, 2014, representatives of Dorsey & Whitney LLP (
Dorsey
), U.S. counsel to Sphere 3D,
together with Meretsky Law Firm, Canadian counsel to Sphere 3D and a director of Sphere 3D, discussed the terms of the proposed merger with OMM. Dorsey prepared and circulated a draft merger agreement to Overland and OMM. That weekend,
Mr. Tassiopoulos agreed with Mr. Kalbfleisch to increase the number of Sphere 3D shares to be issued under the Merger Agreement to 10.6 million (subject to the same adjustments described above).
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On May 11, 2014, Overland held a special board meeting, at which the board discussed the
fact that the contemplated financing with the Potential Lead Investor was significantly undersubscribed at an amount well below the minimum required by the Potential Lead Investor to close the transaction, the proposed terms of the contemplated
financing, and that the terms being required by the Potential Lead Investor would subject a future financing or sale of Overland to the vote of the Potential Lead Investor, which would not be in the best interests of Overlands shareholders.
The Board further discussed Overlands need for significant additional cash to fund its operations. Mr. Bordessa then outlined the terms of the proposed merger with Sphere 3D. The Overland board then discussed the terms of the
proposed merger with Sphere 3D, noting the potential conflicts of interest of Mr. Kelly in the transaction due to his relationships with Sphere 3D and the potential conflicts of interest of Mr. Bordessa due to the lending relationship of
the Cyrus Funds, which are managed by Mr. Bordessas employer, Cyrus Capital, with Sphere 3D. There was also a discussion of whether there were any other strategic or financial sponsor parties who might be interested in acquiring Overland,
which discussion included the fact that Overland had contacted a large group of potential acquirers prior to the consummation of the Tandberg transaction. The Overland board also discussed the fact that the parties existing business
relationship through the supply and license agreements had made Overlands management very knowledgeable regarding Sphere 3D and its business. Based on the potential conflicts of Messrs. Bordessa and Kelly described above, the Overland board
then established a special committee of the board of directors, consisting of Joseph De Perio (as chairman), Scott McClendon, Robert Degan and Vic Mahadevan, each of whom are independent directors of Overland, to review and evaluate the terms of the
proposed merger and to make a recommendation to the full board.
On the same date, the special committee of the Overland board met to
discuss, among other things, the proposed merger and the retention of a financial advisor to evaluate the proposed transaction, to provide the special committee with advice and potentially to provide a fairness opinion. The special committee also
discussed the due diligence to be performed on Sphere 3D, the potential conflicts of interest of Messrs. Kelly and Bordessa described above and the proposed terms of the merger and potential revisions to those terms that would benefit the Overland
shareholders.
Shortly thereafter, OMM circulated a summary of the terms of the merger to the Overland board of directors and the special
committee and also provided a revised draft of the merger agreement to representatives of Sphere 3D.
On May 12, 2014, Overland,
Sphere 3D and their respective counsel held multiple discussions regarding the terms of the merger and the merger agreement, as well as the related documents. Drafts of each of the related documents were circulated by the various parties. On the
same date, the Overland special committee held a meeting and appointed Roth as its financial advisor for the purpose of rendering an opinion in connection with the proposed merger, based in part on Roths familiarity with Overland and knowledge
about Sphere 3D, the urgency of Overlands situation and the potential loss of value for public stockholders if a transaction could not be reached given the unsuccessful efforts to raise capital, as well as Roths willingness to
engage immediately. Representatives of Roth then joined the meeting and updated the special committee regarding their ongoing efforts and OMM reviewed the terms of the definitive agreements.
In addition, on May 12, 2014, Overland received an email from the Potential Lead Investor stating that none of the comments proposed by
Overland to the draft financing documents on May 7, 2014 and May 9, 2014 were acceptable to the Potential Lead Investor and that the Potential Lead Investor was not willing to move forward until and unless its documents would be accepted.
Overland directed EGE to respond that Overland was willing to discuss its comments but that the documents provided by the Potential Lead Investor were significantly more onerous than the terms contained in the term sheet and that the documents, as
written, were not acceptable to Overland.
On May 13, 2014, Mr. Bowman contacted Mr. Kalbfleisch and members of his staff,
to obtain and discuss various due diligence information, including Overlands powerpoint presentation and forecasts, which had been prepared for the potential alternative financing.
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On May 13, 2014, Mr. De Perio met with Mr. Tassiopoulos, Mr. Worthington and
Mr. Bowman, Sphere 3Ds lead director for the transaction, at its headquarters in Ontario, Canada, with representatives of Roth participating by telephone. He also met with representatives of Cormark regarding Sphere 3Ds
business and operations, shareholder and trading information related to Spheres common stock, as well as the potential stock market reaction to the public announcement and ultimate closing of the proposed transaction between Overland and
Sphere 3D.
On the same day, the Overland board of directors held a meeting at which, among other things, at the boards
request, Mr. Kelly provided a detailed review of Sphere 3Ds business and technology, its operations, historical performance, competitive positioning, products and other matters. He also reviewed the potential synergies, expanded business
prospects, pipeline, forecasts and financial metrics expected by management, and Sphere 3Ds management of the combined entity after the proposed transaction between the two companies, including the possibility that Mr. Kelly and
Mr. Kalbfleisch might serve as CEO and CFO, respectively, of the combined entity.
On May 13, 2014, Overland, Sphere 3D and
their respective counsel held multiple discussions regarding the terms of the merger and the merger agreement, as well as the related documents. Drafts of each of the related documents were circulated by the various parties.
On the same date, the Overland special committee met with representatives of Roth present, at which Mr. De Perio and Roths
representatives described the ongoing due diligence efforts and OMM reviewed the status of open issues in the merger agreement and related documents.
On May 14, 2014, the representatives of Cormark presented to the Sphere 3D board (with Mr. Kelly absent) a proposed engagement
letter for their services in regard to the merger, a draft fairness opinion related to the merger and a proposal for a bought deal financing to finance the merger. The board discussed the various proposals in the engagement letter and,
subject to certain changes, agreed in principal to the terms.
On May 14, 2014, Overland, Sphere 3D and their respective counsel held
multiple discussions regarding the terms of the merger and the merger agreement, as well as the related documents. Drafts of each of the related documents were circulated by the various parties. On the same date, the Overland special committee met
twice to obtain updates regarding the efforts of Roth with respect to the analysis underlying its potential opinion and the due diligence efforts of Mr. De Perio, as well as an update regarding the open issues in the merger agreement and
related documents.
On the morning of May 15, 2014, Roth issued its opinion to the special committee to the effect that, as of that
date, and based upon and subject to the various considerations set forth in its opinion, the consideration to be received by shareholders of Overland (other than the shareholders that are also shareholders of Sphere 3D (or holders of securities
exercisable or convertible for shares of Sphere) in their capacity as such pursuant to the proposed merger agreement was fair, from a financial point of view, to such holders. The special committee then discussed the value of Sphere 3D and its
prospects at such meetings, as well as a number of factors related to the potential transaction, including, without limitation, Overlands urgent capital requirements, Overlands inability to raise additional financing on reasonable terms
or at all, the lack of another strategic alternative for Overland, the potential impact on Overlands public shareholders under these circumstances once the quarterly results were released, potential conflicts of interest of Messrs. Kelly and
Bordessa, as described above, Sphere 3Ds agreement that Eric Kelly and Kurt Kalbfleisch would serve as the CEO and CFO, respectively, of Sphere 3D following the merger and that two members of the Overland board would be appointed as members of
the board of Sphere 3D in connection with the merger (in addition to Mr. Kelly, already serving as a member of the Sphere 3D board), the fiduciary out provisions of the proposed definitive merger agreement, and the fact that Sphere
was willing to provide Overland with a $5 million loan in connection with the signing of a definitive agreement, which loan would not be payable by Overland for a period of four years, subject to customary events of defaults (which would not be
triggered by the failure to consummate the merger). The committee also noted that the Cyrus Funds had agreed that, instead of triggering a change of control repayment option under the outstanding
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convertible debt of Overland held by the Cyrus Funds upon the consummation of the transaction, which would result in payment in full in cash of the amounts then due thereunder, the Cyrus Funds
would receive an additional payment equal to 5% of the principal balance of the Overland notes held by the Cyrus Funds payable in Sphere 3D shares. The special committee further reviewed the proposed transaction then-current drafts of the merger
agreement, the voting agreements pursuant to which the Cyrus Funds, an entity owned by the Cyrus Funds and the directors of Overland, excluding Eric Kelly, would agree to vote their Overland shares in favor of the merger and other related documents,
as well as financial terms of the merger. The board also discussed whether a majority of the minority provision was necessary or advisable under the circumstances and the potential risk to the consummation of the transaction if the
special committee insisted upon such a provision. Following discussion, the special committee of the Overland board of directors unanimously recommended that the Overland board of directors approve the proposed merger.
Immediately thereafter, the Overland board of directors met to discuss the matters described in the preceding paragraph. Based in part on the
recommendation of the Overland special committee, and following discussion, the Overland board of directors unanimously approved (with Messrs. Kelly and Bordessa abstaining) the proposed merger and authorized Overland to enter into the merger
agreement and the transactions contemplated thereby.
On May 15, 2014, the Sphere 3D board of directors met to review the final
fairness opinion, presented by Cormark, and the updated terms and conditions for both the merger and the bought deal financing. After discussion, the board authorized the approval of the retainer of Cormark pursuant to the engagement
letter, the bought deal financing letter from Cormark relating to a C$10 million financing, the execution of the merger agreement and all necessary disclosures, including the press release.
On May 15, 2014, Sphere 3D entered into the bought deal financing letter with Cormark relating to a C$10 million financing.
On May 15, 2014, Overland and Sphere 3D entered into an agreement and plan of merger pursuant to which Overland will merge with a
newly-formed subsidiary of Sphere 3D and, upon the consummation of the merger, will become a wholly-owned subsidiary of Sphere 3D. In addition, Sphere 3D agreed to loan $5 million to Overland on a four year term pursuant to a note dated May 15, 2014
issued to Sphere 3D by Overland to be drawn in two equal tranches, with the first to be drawn by no later than May 20, 2014, and the second to be drawn by no later than June 1, 2014. The note is secured by certain assets of Overland.
On May 15, 2014, Overland and Sphere jointly announced the merger in a press release and further discussed the merger during
Overlands investor conference call discussing its quarterly results.
On May 16, 2014 Sphere 3D issued a press release
announcing the merger and the bought deal financing by Cormark for C$10 million. The Sphere 3D press release included additional details as is required by the regulations of the TSXV.
On May 22, 2014, the Cyrus Funds and Overland formalized their agreement that the Cyrus Funds would waive certain covenants in the note
purchase agreement between the Cyrus Funds and Overland in connection with the entry into the merger agreement and the issuance of notes to Sphere 3D by Overland.
Recommendations of the Sphere 3D Board of Directors; Sphere 3Ds Reasons for the Merger
On May 15, 2014, at a meeting of the Sphere 3D board of directors, by unanimous vote (with Eric Kelly, Chairman of the Board of Sphere 3D
and President and CEO of Overland recused from such meeting), the Sphere 3D board of directors determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable and in the best
interests of Sphere 3D and its shareholders.
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Sphere 3D believes that the combination of these two businesses will benefit shareholders of both Sphere 3D and Overland by creating a strong platform for growth with the following
characteristics and synergies:
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The creation of a large and diverse combined company to immediately gain the scale, infrastructure and resources required to become a leading global virtualization company and strengthens Spheres ability to
service and support partners and customers globally;
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The combination provides greater certainty in leveraging Overlands existing global distribution network of reseller, integrators and significant Tier One OEMs, along with Overlands global
manufacturing, delivery and support networks;
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The complementary nature of the respective products brings together next generation technologies for virtualization and cloud computing coupled with end-to-end scalable storage offerings enabling the combined company to
address the larger and growing virtualization and cloud markets;
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The additional revenue growth opportunities presented by the expanded product offerings of the combined company allowing Sphere 3D to access the large and diverse customer base of Overland, including government,
education and business enterprises worldwide;
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The expected market capitalization, balance sheet and capital structure of the combined company relative to Sphere 3D on a stand-alone basis, including the potential for the combined company to participate in strategic
opportunities that otherwise might not be available to Sphere 3D;
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The opportunity for the combined company to retain Overlands executive management and other key personnel, including Mr. Kelly and Mr. Kalbfleisch, which together with key management of Sphere 3D,
including Mr. Tassiopoulos, potentially leading to enhanced financial performance.
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Based on the foregoing analysis, Sphere
3Ds board of directors has unanimously determined that the merger agreement and the transactions contemplated thereby are advisable and in the best interests of Sphere 3D and its shareholders.
Recommendations of the Overland Board of Directors; Overlands Reasons for the Merger
On May 14, 2014, at a special meeting of the Overland board of directors, by unanimous vote (with Eric Kelly, the President and CEO of
Overland, and the Chairman of the Board of Sphere 3D, as well as Daniel Bordessa, an employee of Cyrus Capital, abstaining from voting) and based upon the unanimous recommendation of a special committee of independent directors of Overland
consisting of Messrs. DePerio, Degan, Mahadevan and McClendon, the Overland board of directors determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable and in the best
interests of Overland and its shareholders.
The Overland board of directors recommends that Overland shareholders vote FOR the adoption of the merger agreement and FOR the adjournment of the Overland special meeting if
necessary or appropriate to solicit additional proxies in favor of such adoption.
In considering the proposed business combination
with Sphere 3D and in making its determination that the merger is advisable and in the best interests of Overland and its shareholders, the Overland board of directors consulted with its management and financial, legal and other advisors, and
considered a variety of factors weighing in favor of or relevant to the merger, including the factors discussed below.
Strategic
Benefits of the Merger
. The Overland board of directors believes that the combination of Overland and Sphere 3D should result in significant strategic benefits to the combined company, which would benefit Overland and its shareholders as
shareholders of the combined company. These strategic benefits include the following:
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The creation of a larger and more diversified combined company than Overland currently is alone, including a significantly expanded presence in Canada and a more diversified business in the U.S.;
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The advantages presented by the larger scale and expanded scope of the combined company in meeting the challenges facing the storage industry in light of current and potential future changes in regulatory, financial and
economic conditions affecting the industry, including possible industry consolidation;
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The complementary nature of the respective products and geographic markets of Overland and Sphere 3D, and the opportunity created by the transaction to enhance the capabilities of both companies to operate more
effectively and efficiently;
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The additional revenue growth opportunities presented by the expanded product offerings of the combined company;
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The expected market capitalization, balance sheet and capital structure of the combined company relative to Overland on a stand-alone basis, including the potential for the combined company to participate in strategic
opportunities that otherwise might not be available to Overland;
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The opportunity for the combined company to achieve significant synergy benefits;
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The opportunity for the combined company to retain Sphere 3Ds corporate structure, potentially leading to enhanced financial performance; and
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The opportunity for the combined company to enhance its senior management led by Mr. Kelly and Mr. Tassiopoulos, relative to that of Overland and Sphere 3D separately.
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Financial Benefits of the Merger
. The Overland board of directors believes that the combination of Overland and Sphere 3D should
result in significant financial benefits to Overlands shareholders and the combined company. These financial benefits include the following:
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The fact that the Exchange Ratio of Sphere 3D common shares for each Overland share is fixed and would not fluctuate based upon changes in the market price of Overland or Sphere 3D common shares between the date of the
merger agreement and the date of the consummation of the proposed merger, as well as the opportunity that Overland shareholders may have as a result of the fixed Exchange Ratio to benefit from any increase in the trading price of Sphere 3D common
shares between the announcement and completion of the merger;
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The fact that Overland shareholders would receive the merger consideration (excluding any cash received in lieu of fractional shares) in the form of Sphere 3D common shares, which would allow Overland shareholders to
share in value-creation opportunities of the combined company, including the realization of synergies;
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The significant value to Overland shareholders represented by the potential earnings improvement of the combined company and the views of Overlands management as to the expected realization of synergies by the
combined company;
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The belief that, after closing, the combined company will have a stronger financial profile, relative to that of Overland and Sphere 3D separately; and
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The business operations and prospects of the combined company and each of Overland and Sphere 3D, and the then-current financial market conditions and historical market prices, volatility and trading information with
respect to common shares of Overland and Sphere 3D.
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Corporate Governance Benefits of the Merger
. During the
course of its deliberations relating to the merger, the Overland board of directors also considered factors related to the corporate governance of the combined company, including the following benefits:
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The initial composition of Sphere 3Ds board of directors comprised of 7 directors, including 2 representatives of Overland and Mr. Kelly, who currently serves on Overlands board of directors and
Sphere 3Ds board of directors;
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The fact that directors of Overland, who have an in-depth knowledge of Overland and its business, would have substantial representation on the board of directors of Sphere 3D following the merger;
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The fact that the executive management of Overland who have an in-depth knowledge of Overland and its business would continue as part of the executive management team of Sphere 3D following the merger.
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Other Factors Considered
. During the course of its deliberations relating to the merger, the Overland board of
directors considered the following factors in addition to the benefits described above:
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The Overland board of directors and managements analysis and understanding of the business, operations, financial performance, financial condition, liquidity earnings, strategy and future prospects of
Overland on a stand-alone basis (including Overlands need to raise significant additional capital if it were to continue on a stand-alone basis, which could be highly dilutive to its shareholders, and its recent inability to do so), and the
assessment, based on such analysis and understanding, that the merger would be more favorable to Overland and its shareholders in the long-term in light of the potential rewards, risks and uncertainties associated with Overland continuing to operate
as a stand-alone entity;
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The alternatives available to Overland if it continued on a stand-alone basis;
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The fact that a significant portion of the future compensation of the executives of the combined company will be in the form of equity in the combined company and will accordingly be contingent on the performance of the
combined companys common shares;
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The financial analyses reviewed and discussed with the special committee of the Overland board of directors by representatives of Roth, as well as the opinion rendered by Roth to such special committee to the effect
that, as of May 15, 2014 and based upon and subject to the various considerations set forth in its opinion, the consideration to be received by shareholders of Overland (other than the shareholders that are also shareholders of Sphere 3D (or
holders of securities exercisable or convertible for shares of Sphere)) in their capacity as such pursuant to the proposed merger agreement was fair, from a financial point of view, to such holders;
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The fact that the shareholders of Overland would vote on approval of the transaction, including the fact that the required vote of Overland shareholders for the adoption of the merger agreement is a majority of the
Overland shares outstanding and entitled to vote;
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The fact that the Cyrus Funds and an entity owned by the Cyrus Funds, owning approximately 63% of the Overland shares outstanding as of the date of the merger agreement, which will receive the same per share
consideration as all other Overland shareholders, entered into voting agreements with Sphere 3D to vote in favor of the merger and the merger agreement (see Agreements Entered into in Connection with the Merger AgreementVoting
Agreements beginning on page 108);
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The results of the due diligence investigations of Sphere 3D by Overlands management and financial, legal and other advisors;
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The structure of the merger and terms and conditions of the merger agreement, including the commitment by Overland and Sphere 3D to take all actions to complete the merger as soon as reasonably possible (see The
Agreement and Plan of MergerCommercially Reasonable Efforts to Complete the Merger beginning on page 102); and
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The fact that the merger agreement does not preclude a third party from making a proposal for an acquisition of or business combination with Overland and that, under certain circumstances more fully described in the
sections The Agreement and Plan of MergerOverland is Prohibited from Soliciting Other Offers beginning on page 100 of this proxy statement/prospectus, Overland may provide information to and negotiate with such a third party
and the Overland board may change its recommendation to Overland shareholders regarding the transaction with Sphere 3D.
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The
Overland board of directors weighed these factors against a number of uncertainties, risks and potentially negative factors relevant to the merger, including:
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The challenges inherent in the combination of companies of the size and geographic scope of Overland and Sphere 3D, the risk of not capturing all of the anticipated synergies and the risk that other anticipated benefits
might not be fully realized or may take longer than expected to achieve;
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The risk that integration of the two businesses, including the transaction expenses associated with the merger, may be more costly, and may divert management attention for a greater period of time, than anticipated and
that it may be difficult to retain key employees;
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The risk of not maintaining Overlands product revenues given the challenges facing the storage industry in light of changes in regulatory, financial and economic conditions affecting the industry, including
possible industry consolidation;
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The fact that because the merger consideration is a fixed Exchange Ratio of Sphere 3D shares to Overland shares, Overland shareholders could be adversely affected by a decrease in the trading price of Sphere 3D shares
during the period leading up to the completion of the merger and the fact that the merger agreement does not provide Overland with a price-based termination right or similar protection;
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The restrictions on the conduct of Overlands business during the period between execution of the merger agreement and the completion of the merger;
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The risk that regulatory agencies may not approve the proposed merger or may impose terms and conditions on their approvals that adversely affect the business and financial results of the combined company;
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The risk that the merger may not be completed despite the parties efforts or that completion may be unduly delayed, even if the requisite approval is obtained from Overlands shareholders, and the risk that
one or more of such shareholders might seek to enjoin the merger;
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The fact that the voting agreements and certain provisions of the merger agreement may have the effect of discouraging alternative acquisition transactions involving Overland, including: (1) the restrictions on
Overlands ability to solicit proposals for alternative transactions; (2) the requirement that the Overland board of directors submit the merger agreement to the Overland shareholders for adoption in certain circumstances, even if it
withdraws its recommendation for the merger; and (3) the requirement that Overland pay a termination fee of $3.5 million to Sphere 3D in certain circumstances following the termination of the merger agreement;
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The risk that changes in the regulatory, competitive or technological landscape may adversely affect the business benefits anticipated to result from the proposed merger;
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The fact that, although the merger is intended to qualify as a reorganization for U.S. federal income tax purposes, the ultimate tax treatment of the merger is not certain and depends on the application of complex
U.S. federal income tax rules and there is no authority directly on point dealing with relevant issues; and
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The other risks described in the sections entitled Risk Factors beginning on page 25 and Cautionary Statement Concerning Forward-Looking Information beginning on page 39.
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The Overland board of directors concluded that the uncertainties, risks and potentially negative factors relevant to the
merger were outweighed by the potential benefits that it expected Overland and the Overland shareholders would achieve as a result of the merger.
The special committee of the Overland board of directors and the Overland board of directors itself also took into account the fact that
Roths opinion addressed only the fairness, from a financial point of view, of the value of the consideration to be paid to the Overland shareholders and did not address the value of the Sphere 3Ds common shares or strategic
considerations or the other reasons the Overland board of directors supported the transaction discussed above.
This discussion of the
information and factors considered by the Overland board of directors includes the principal positive and negative factors considered by the board of directors, but is not intended to be exhaustive and may not include all of the factors considered.
The Overland board of directors did not quantify or assign any relative or specific weights to the various factors that it considered in reaching its determination that the merger agreement and the merger are advisable and in the best interests of
Overland and its shareholders. Rather, the
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Overland board of directors viewed its position and recommendation as being based on the totality of the information presented to it and the factors it considered. In addition, individual members
of the Overland board of directors may have given differing weights to different factors. It should be noted that this explanation of the reasoning of the board of directors of Overland and certain information presented in this section is
forward-looking in nature and, therefore, that information should be read in light of the factors discussed in the section entitled Cautionary Statement Concerning Forward-Looking Information in this proxy statement/prospectus, beginning
on page 39.
Opinion of Roth, the Special Committees Financial Advisor
Pursuant to an engagement letter dated May 12, 2014, the special committee of Overlands board retained Roth to provide an opinion to
the special committee as to whether, as of the date of the opinion, the per share consideration to be received by shareholders of Overland (other than the Excluded Holders) in their capacity as such pursuant to the merger agreement was fair, from a
financial point of view, to such holders.
On May 15, 2014, Roth rendered its oral opinion, subsequently confirmed in writing, to the
special committee that, as of such date, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in the opinion, the per share consideration to be received by
the shareholders of Overland (other than the Excluded Holders) in their capacity as such pursuant to the merger agreement was fair, from a financial point of view, to such holders.
The full text of Roths written opinion, dated May 15, 2014, which sets forth, among other things, the assumptions made,
procedures followed, matters considered and qualifications and limitations on the review undertaken by Roth in rendering its opinion, is attached to this proxy statement/prospectus as Annex D and is incorporated by reference herein. The summary of
the Roth opinion provided in this proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion. Shareholders of Overland are urged to read the opinion carefully and in its entirety. The opinion addresses only
the fairness of the per share consideration, from a financial point of view, to the shareholders of Overland (other the Excluded Holders) in their capacity as such pursuant to the merger agreement, as of the date of the opinion, and does not address
the relative merits of the merger as compared to any alternative business strategies or transactions that might exist for Overland, Overlands underlying business decision to proceed with the merger or the effects of any other transaction in
which Overland will or might engage. Roths opinion was directed to the special committee in connection with its consideration of the merger and was not intended to be, and does not constitute, an opinion or recommendation to any shareholder as
to how such shareholder should vote with respect to the merger, any related matter or any other transactions.
In arriving at its
opinion, Roth:
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reviewed and analyzed the financial terms of the draft merger agreement provided to Roth on May 15, 2014 (the
Latest Draft Agreement
);
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reviewed certain internal financial statements and other financial and operating data concerning Overland prepared by the management of Overland;
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reviewed certain financial projections for Overland prepared by the management of Overland (the
Forecasts
);
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compared selected market valuation metrics of certain publicly-traded companies with those same metrics for Overland;
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compared the financial terms, to the extent publicly available, of certain comparable acquisition transactions with those same metrics implied by the merger;
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compared the financial performance of Overland with that of certain other publicly-traded companies Roth deemed comparable with Overland and its securities;
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participated in certain discussions with management of Overland and Sphere 3D, and with representatives of the special committee and its legal advisor, including, without limitation, discussions with Overland with
respect to Overlands capital requirements and the bridge loan to be provided by Sphere 3D to Overland in connection with execution of the merger agreement; and
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performed such other analyses, reviewed such other information and considered such other factors as Roth deemed appropriate.
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For its opinion, Roth did not independently verify any of the foregoing information, and assumed and relied upon such information being
accurate and complete in all material respects, and further relied upon the assurances of management of Overland that they were not aware of any facts that would make any of the information reviewed by Roth inaccurate, incomplete or misleading in
any material respect. Roth assumed, upon the direction of the management of Overland, that the Forecasts have been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of Overland
as to the future financial performance of Overland. Roth was not provided with, and did not have access to, customary information about, and customary access to management of Sphere 3D. Accordingly, Roth assumed, at Overlands direction, that
(i) the published estimates of third party research analysts were a reasonable basis upon which to evaluate the future financial performance of Sphere 3D, (ii) Sphere 3D will perform substantially in accordance with such estimates and
(iii) the value of the per share merger consideration to be received by the shareholders of Overland in their capacity as such pursuant to the merger agreement is the product of the Exchange Ratio and the closing price of Sphere 3D common
shares on May 14, 2014 (which product equals $4.43). Roth was not engaged to assess the achievability of any projections or the assumptions on which they were based, and expresses no view as to such projections or assumptions. In addition, Roth
does not assume any responsibility for any independent valuation or appraisal of the assets or liabilities, including any ongoing litigation and administrative investigations, of Overland or Sphere 3D, nor was Roth furnished with any such valuation
or appraisal, nor did Roth made any physical inspection of the properties or assets of Overland or Sphere 3D. Roth did not evaluate the solvency or creditworthiness of Overland or Sphere 3D under any applicable law relating to bankruptcy,
insolvency, fraudulent transfer or similar matters. Roth expresses no opinion regarding the liquidation value of Overland, Sphere 3D or any other entity. Roth did not undertake any independent analysis of any pending or threatened litigation,
regulatory action, possible unasserted claims or other contingent liabilities, to which Overland, Sphere 3D or any of their affiliates is a party or may be subject, and at the direction of the special committee and with its consent, the Roth opinion
makes no assumption concerning, and does not consider, the possible assertion of claims, outcomes or damages arising out of any such matters.
Roth assumed, at the special committees direction, that the merger will be consummated in accordance with the terms set forth in the
Latest Draft Agreement and any related documents (collectively, the
Transaction Documents
) without waiver, modification or amendment of any material term, and in compliance with applicable federal, state and local statutes, rules,
regulations and ordinances, that such Transaction Documents are enforceable against each of the parties thereto in accordance with their respective terms, that the representations and warranties of each party in the Transaction Documents are true
and correct, that each party will perform on a timely basis all covenants and agreements required to be performed by it under the Transaction Documents and that all conditions to the consummation of the merger will be satisfied without waiver
thereof. Additionally, Roth assumed, at the special committees direction, that all necessary governmental, regulatory and other approvals, consents, releases and waivers required for the merger will be obtained and that in the course of
obtaining any of the foregoing, no modification, delay, limitation, restriction or condition will be imposed or waivers made that would have an adverse effect on Overland or Sphere 3D or on the contemplated benefits of the merger. Roth further
assumed, at the Special Committees direction, that the Transaction Documents when signed will conform to the last drafts of the Transaction Documents provided to Roth in all respects material to its analysis.
Roths opinion addresses only the fairness, from a financial point of view, to the shareholders of Overland (other than the Excluded
Holders) of the per share consideration to be received by such holders in their capacity
63
as such pursuant to the merger agreement, and no opinion or view is expressed with respect to any other consideration paid or received in connection with the merger or any other transaction by
the holders of any class of securities, creditors or other constituencies of any party. Roths opinion does not in any manner address any term, condition, aspect or implication of the merger or the merger agreement (other than the consideration
to be received by the shareholders of Overland in their capacity as such pursuant to the merger agreement to the extent expressly specified herein), including, without limitation, the form or structure of the merger, the timing or other terms or
conditions related to the merger, any distributions to the shareholders or other security holders of Overland, or any other transaction, agreement, arrangement or understanding referenced in the merger agreement or related to the merger, the merger
agreement or otherwise, including, without limitation, the fairness of the amount or nature of, or any other aspect relating to any compensation to any officers, directors or employees of any party to the merger or any related transaction, or any
class of such persons. Roth was not requested to, and did not, participate in the negotiation of the terms of the merger, nor was Roth requested to, and did not, provide any advice or services in connection with the merger other than the delivery of
this opinion. Roth expresses no view or opinion as to any such matters. In addition, Roth was not requested to, and did not, solicit indications of interest or proposals from third parties. The issuance of Roths opinion was approved by a
committee of the Board of Overland authorized to approve opinions of this nature.
Summary of Material Financial Analysis
The following is a summary of the material financial analyses performed by Roth and reviewed by the special committee in connection with
Roths opinion relating to the merger and does not purport to be a complete description of the financial analyses performed by Roth. The rendering of an opinion is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, this summary does not purport to be a complete description of the analyses performed by Roth or of its
presentation to the special committee on May 15, 2014. The order of analyses described below does not represent the relative importance or weight given to those analyses by Roth. Some of the summaries of the financial analyses include
information presented in tabular format. In order to fully understand Roths financial analyses, the tables must be read together with the text of each summary, as the tables alone do not constitute a complete description of the financial
analyses. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Roths
financial analyses.
In performing its analyses, Roth made numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of Overland or any other parties to the merger agreement. Roth does not assume any responsibility if future results are materially different from those discussed. Any
estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below.
64
Selected Publicly Traded Comparable Companies.
In order to assess how the public market
values shares of publicly traded companies similar to Overland, Roth reviewed and compared certain financial information relating to Overland with selected companies, which, in the exercise of its professional judgment and based on its knowledge of
the industry, Roth deemed relevant to Overland. Although none of the selected companies is identical to Overland, Roth selected these companies because they had publicly traded equity securities and were deemed to be similar to Overland in one or
more respects including the nature of their business, size, financial performance, geographic concentration and listing jurisdiction. The selected comparable companies were:
|
U.S.-Listed Computer Storage Device
and Computer Peripheral Equipment Companies
|
Qualstar Corporation
Imation Corp.
Falconstor Software, Inc.
Dot Hill Systems Corp.
Emulex Corporation
Quantum Corporation
QLogic Corporation
Netgear Inc.
NetApp, Inc.
Seagate Technology plc
|
For Overland and each of the selected companies, Roth calculated and compared various financial multiples and
ratios of Overland and the selected comparable companies based on each respective companys public filings for historical information and third-party research estimates from Capital IQ for forecasted information.
In its review of the selected companies, Roth considered, among other things, (i) market capitalizations (computed using closing stock
prices as of May 14, 2014), (ii) enterprise values (market capitalization plus net debt) (
EV
), (iii) EV as a multiple of estimated revenue for fiscal year 2014 and fiscal year 2015, (iv) EV as a multiple of
estimated earnings before interest, taxes, depreciation and amortization (
EBITDA
) for fiscal year 2014 and fiscal year 2015, and (v) price as a multiple of estimated earnings for fiscal year 2015. The results of these
analyses are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
|
Company at
$4.43 per share
|
EV to Revenue for 2014
|
|
|
0.1x
|
|
|
|
0.7x
|
|
|
|
0.8x
|
|
|
|
1.2x
|
|
|
|
1.3x
|
|
|
0.8x
|
EV to Revenue for 2015
|
|
|
0.1x
|
|
|
|
0.7x
|
|
|
|
0.8x
|
|
|
|
1.1x
|
|
|
|
1.3x
|
|
|
0.7x
|
|
|
|
|
|
|
|
EV to EBITDA for 2014
|
|
|
4.4x
|
|
|
|
4.7x
|
|
|
|
5.4x
|
|
|
|
6.3x
|
|
|
|
6.9x
|
|
|
not meaningful
(
NM
)
|
EV to EBITDA for 2015
|
|
|
3.9x
|
|
|
|
4.4x
|
|
|
|
5.2x
|
|
|
|
5.3x
|
|
|
|
6.6x
|
|
|
8.9x
|
|
|
|
|
|
|
|
Price-to-Earnings for 2015
|
|
|
10.0x
|
|
|
|
12.7x
|
|
|
|
15.4x
|
|
|
|
16.2x
|
|
|
|
17.0x
|
|
|
NM
|
Roth noted that although the selected companies were used for comparison purposes, no business of any selected
company was either identical or directly comparable to Overlands business. Accordingly, Roths comparison of selected companies to Overland and analyses of the results of such comparisons was not purely mathematical, but instead
necessarily involved complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the relative values of the selected companies and Overland.
65
Selected Comparable Transaction Analysis.
Roth reviewed and compared the purchase prices
and financial multiples paid in selected other transactions primarily in the computer storage devices and computer peripheral equipment sectors from July 22, 2009 to present that Roth, in the exercise of its professional judgment, determined to
be relevant. The selected transactions analyzed are set out in the following table:
|
|
|
|
|
Closed Date
|
|
Target
|
|
Buyer
|
March 31, 2014
|
|
Xyratex Ltd.
|
|
Seagate Technology
|
January 21, 2014
|
|
Tandberg Data
|
|
Overland Storage
|
December 19, 2013
|
|
LaCie SA
|
|
Seagate Technology
|
September 17, 2013
|
|
Intermec, Inc.
|
|
Honeywell
|
September 12, 2013
|
|
STEC, Inc.
|
|
HGST, Inc.
|
March 25, 2013
|
|
Lite-On Information Technology
|
|
Lite-On Technology
|
January 1, 2013
|
|
Proware Technology Corp.
|
|
Unifosa Corp.
|
October 18, 2012
|
|
LaCie SA
|
|
Seagate Singapore
|
August 3, 2012
|
|
LaCie SA
|
|
Seagate Technology
|
February 29, 2012
|
|
Teac Corporation
|
|
ONKYO Corporation
|
November 1, 2011
|
|
Lite-On Information Technology
|
|
|
September 2, 2011
|
|
BlueArc Corporation
|
|
Hitachi Data Systems
|
May 6, 2011
|
|
The Engenio Storage Group
|
|
NetApp, Inc.
|
December 17, 2010
|
|
Isilon Systems, Inc.
|
|
EMC Corporation
|
July 22, 2009
|
|
Data Domain, Inc.
|
|
EMC Corporation
|
For each of the selected transactions, Roth calculated and compared the resulting enterprise value in the
transaction as a multiple of last twelve months (
LTM
) revenue and LTM EBITDA and the transaction price as a multiple of LTM earnings. Such multiples for the selected transactions were based on publicly available information
at the time of the relevant transaction. The results of these analyses are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
25
th
Percentile
|
|
|
Median
|
|
|
75
th
Percentile
|
|
|
Maximum
|
|
|
Company at
$4.43 per share
|
|
EV to LTM Revenue
|
|
|
0.2x
|
|
|
|
0.4x
|
|
|
|
0.6x
|
|
|
|
1.1x
|
|
|
|
13.7x
|
|
|
|
0.8x
|
|
EV to LTM EBITDA
|
|
|
2.0x
|
|
|
|
3.7x
|
|
|
|
4.2x
|
|
|
|
10.6x
|
|
|
|
22.3x
|
|
|
|
NM
|
|
Price to LTM Earnings
|
|
|
8.2x
|
|
|
|
9.6x
|
|
|
|
10.7x
|
|
|
|
11.4x
|
|
|
|
11.5x
|
|
|
|
NM
|
|
66
Illustrative Premium Paid Analysis
. Roth reviewed the premium paid in transactions
involving computer storage device, computer peripheral equipment and computer communications equipment space companies that have been subject to a change of control from May 12, 2009 to the present and where the transaction size is greater than
$10 million. The selected transactions analyzed are set out in the following table.
|
|
|
|
|
Closed Date
|
|
Target/Issuer
|
|
Buyers/Investors
|
March 31, 2014
|
|
Xyratex Ltd.
|
|
Seagate
|
February 19, 2014
|
|
Performance Technologies Inc.
|
|
Sonus Networks, Inc.
|
January 9, 2014
|
|
Resource Generation Limited
|
|
Noble Resources
|
September 17, 2013
|
|
Intermec, Inc.
|
|
Honeywell
|
September 12, 2013
|
|
STEC, Inc.
|
|
HGST, Inc.
|
June 26, 2013
|
|
Technical Electron Co., Ltd
|
|
Daiwa Lease Co.
|
March 28, 2013
|
|
Acme Packet, Inc.
|
|
Oracle Corporation
|
March 25, 2013
|
|
Lite-On Information Technology
|
|
Lite-On Technology Corp.
|
January 11, 2013
|
|
SBM Co., Ltd
|
|
True Triumph
|
October 18, 2012
|
|
LaCie SA
|
|
Seagate Singapore
|
October 1, 2012
|
|
Psion PLC
|
|
Motorola Solutions
|
August 24, 2012
|
|
Network Equipment Technologies
|
|
Sonus Networks, Inc.
|
August 3, 2012
|
|
LaCie SA
|
|
Seagate
|
February 29, 2012
|
|
Teac Corporation
|
|
ONKYO Corporation
|
February 15, 2012
|
|
Blue Coat Systems Inc.
|
|
Thoma Bravo, LLC
|
December 20, 2011
|
|
Showa Information Systems
|
|
Canon Marketing Japan
|
October 7, 2011
|
|
silex technology, Inc.
|
|
Murata Machinery, Ltd.
|
January 28, 2011
|
|
LaserCard Corporation
|
|
Assa Abloy, Inc.
|
December 17, 2010
|
|
Isilon Systems, Inc.
|
|
EMC Corporation
|
September 24, 2010
|
|
3PAR, Inc.
|
|
Hewlett-Packard
|
July 23, 2010
|
|
SonicWALL L.L.C.
|
|
Thoma Bravo, LLC
|
April 12, 2010
|
|
3Com Corporation
|
|
Hewlett-Packard
|
March 23, 2010
|
|
Avaplas Ltd.
|
|
Cal-Comp Electronics
|
February 24, 2010
|
|
Franklin Electronic Publishers
|
|
|
December 11, 2009
|
|
Avocent Corporation
|
|
Emerson Electric Co.
|
September 25, 2009
|
|
Delta Networks, Inc.
|
|
Delta Networks
|
July 22, 2009
|
|
Data Domain, Inc.
|
|
EMC Corporation
|
May 28, 2009
|
|
Gemalto NV
|
|
Bpifrance Participations SA
|
For each transaction, Roth calculated the premium per share paid by the buyer or investor by comparing the
announced transaction value per share to the target companys closing stock price one day prior to the announcement of the transaction, one week prior to the announcement of the transaction and one month prior to the announcement of the
transaction. The results of these transaction premium analyses are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Transactions Premium Paid
|
|
|
|
1 Day Prior
|
|
|
1 Week Prior
|
|
|
1 Month Prior
|
|
Minimum
|
|
|
(21.4
|
)%
|
|
|
0.0
|
%
|
|
|
2.0
|
%
|
25th Percentile
|
|
|
23.6
|
%
|
|
|
23.6
|
%
|
|
|
30.8
|
%
|
Median
|
|
|
33.3
|
%
|
|
|
38.8
|
%
|
|
|
42.4
|
%
|
75th Percentile
|
|
|
75.6
|
%
|
|
|
74.3
|
%
|
|
|
75.6
|
%
|
Maximum
|
|
|
138.1
|
%
|
|
|
131.5
|
%
|
|
|
247.4
|
%
|
Overlands implied premium based on $4.43 offer price
|
|
|
52.7
|
%
|
|
|
57.6
|
%
|
|
|
13.0
|
%
|
General.
The summary set forth above does not contain a complete description of the analyses performed by Roth, but does summarize the material analyses
performed by Roth in rendering its opinion. The preparation of a
67
fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Roth believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses or of the summary, without considering the analyses as a whole or all of the factors included in its analyses, would create an incomplete view of the processes underlying the analyses
set forth in the Roth opinion. In arriving at its opinion, Roth considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Instead, Roth made its determination as to fairness on the basis of
its experience and financial judgment after considering the results of all of its analyses. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that this analysis was given greater weight than any
other analysis. In addition, the ranges of valuations resulting from any particular analysis described above should not be taken to be Roths view of the actual value of Overland.
As described above, Roths opinion was only one of many factors considered by Overlands special committee and the board of
directors in making its determination to approve the merger. Roth was not requested to, and did not solicit any expressions of interest from any other parties with respect to any business combination with Overland.
Roths opinion is based on financial, economic, monetary and other conditions and circumstances as in effect on, and the information made
available to it as of, the date of the opinion. Although subsequent developments may affect the opinion, Roth does not have any obligation to update, revise, reaffirm or withdraw the opinion, or otherwise comment on or consider events occurring
after the date thereof, and Roth expressly disclaims any responsibility to do so.
Roth, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Roth and its affiliates have in the past have provided, are currently providing, and may continue in the future provide investment banking and other financial services to Overland and Sphere 3D for which Roth and its
affiliates have received and would expect to receive compensation (including compensation from Overland that has been earned but not yet paid), including serving as issuer agent, underwriter and/or financial advisor on public or private capital
raises and/or mergers and acquisitions and serving as the Principal Advisor Liaison for Sphere 3D on the TSXV. Roth is a full service securities firm engaged in securities trading and brokerage activities, as well as providing investment banking and
other financial services. Roth may, in the future, provide investment banking and other financial services to entities that are affiliated with Overland, or other parties to the merger agreement, for which Roth would expect to receive compensation.
In the ordinary course of business, Roth and its affiliates may acquire, hold or sell, for itself and its affiliates own accounts and for the accounts of customers, equity, debt and other securities and financial instruments (including bank
loans and other obligations) of Overland and the other parties to the merger agreement, and, accordingly, may at any time hold a long or a short position in such securities.
Roth is acting as financial advisor to the special committee solely to render the opinion and was paid a fee of $225,000 for Roths
services in connection with the rendering of the opinion. In addition, Overland has agreed to indemnify Roth for certain liabilities and other items arising out Roths engagement and to reimburse Roth for certain expenses in connection with its
services.
Board of Directors and Management After the Merger
Upon completion of the merger, the Sphere 3D board of directors will be comprised of seven members. In addition to five individuals serving on
the Sphere 3D board of directors at the effective time of the merger, upon the closing of the merger two additional board members to be designated by Overland will be appointed to the Sphere 3D board of directors. In accordance with the provisions
of the OBCA and the Sphere 3D Bylaws, the directors may appoint one or more additional directors, who shall hold office for a term expiring not later than the close of the next annual meeting of shareholders, provided that the total number of
directors so appointed does not exceed one-third of the number of directors elected at the previous annual meeting of shareholders.
68
In addition, Mr. Peter Tassiopoulos, current Chief Executive Officer of Sphere 3D shall
become the President and Vice Chairman of Sphere 3D; Mr. Eric Kelly, current President and Chief Executive Officer of Overland will be appointed as the Chief Executive Officer of Sphere 3D and remain as Chairman of the Board of Sphere 3D;
Mr. Kurt Kalbfleisch, current Senior Vice President and Chief Financial Officer of Overland will be appointed as the Chief Financial Officer of Sphere 3D; and, it is anticipated, that the senior management teams from both organizations shall
continue in their existing capacity.
The directors of Overland will resign as of the effective time of the merger. Information about
Messrs. Tassiopoulos, Kelly and Kalbfleisch and the current Sphere 3D directors and executive officers can be found in the documents listed under the heading Where You Can Find More Information beginning on page 189 and Sphere
3Ds BusinessDirectors and Executive Officers on page 189.
Treatment of Overland Restricted Stock Units
and Options
Restricted Stock Units
Accelerating Units.
Any Overland restricted stock unit award that is outstanding on the effective time of the merger and that, in
accordance with its existing terms, provides for vesting, in whole or in part, upon a change in control (the
accelerated restricted stock units
) will vest at the level provided for under the terms of the award immediately prior to
the effective time of the merger. In addition, a total of 50% of all Overland restricted stock unit awards that are outstanding and unvested on the closing date of the merger (including any units that accelerate upon a change in control in
accordance with their terms) will accelerate and vest immediately prior to the effective time of the merger (and such accelerated stock units will also be
accelerated restricted stock units
). In connection with the merger, the
accelerated restricted stock units will be cancelled in exchange for a number of Overland common shares equal to the number of shares underlying the cancelled units. Upon closing, the Overland common shares issued in exchange for the accelerated
restricted stock units will be exchanged for Sphere 3D common shares at the Exchange Ratio.
Continuing Units.
Any portion of
an Overland restricted stock unit award that is outstanding and unvested immediately prior to the closing of the merger (after giving effect to any accelerated vesting of the award in connection with the merger as described above) (the
continuing restricted stock unit awards
) will be converted into an award to acquire Sphere 3D common shares, on the same vesting and other terms and conditions as were applicable to the award prior to the merger. The number of
common shares of the combined company subject to the award following the merger will be determined by multiplying the number of shares of Overland common stock underlying the continuing restricted stock unit award by the Exchange Ratio. Assuming the
merger occurs on ,
, restricted stock units will be converted into awards to acquire an aggregate of
Sphere 3D common shares.
Stock Options
At the Effective Time,
each outstanding Overland option will be converted into an option to acquire common shares of the combined company, on the same terms and conditions as were applicable to the stock option prior to the merger, except that the number of shares subject
to the option and the exercise price of the option will be adjusted as described below. The number of common shares subject to the option following the merger will be determined by multiplying the number of shares of Overland common stock subject to
the Overland stock option by the Exchange Ratio, and the per share exercise price of the option will be determined by dividing the per share exercise price of the Overland stock option by the Exchange Ratio. Assuming the merger occurs on
and that no options are exercised prior to the merger, an aggregate of options to acquire Overland
common shares, including stock options held by Overlands executive officers and non-employee directors, will be converted into options to acquire an aggregate of Sphere
3D common shares, of which options will be unvested.
Stock Appreciation Rights
All outstanding awards of stock appreciation rights with respect to Overland common shares will be cancelled at the effective time of the
merger.
69
Financial Interest of Sphere 3D Directors and Officers in the Merger
Please see those interests of Eric Kelly described in the following section.
Financial Interest of Overland Directors and Officers in the Merger
When considering the recommendation of Overlands board of directors, you should be aware that certain of Overlands executive
officers and directors have interests in the merger other than their interests as Overland shareholders generally, pursuant to individual agreements with certain officers and directors. These interests are different from your interests as an
Overland shareholder, however, the members of Overlands board of directors have taken these additional interests into consideration. In addition, certain members of Overlands board will serve on the board of Sphere 3D following the
merger, including Mr. Kelly, who will continue to serve as Chairman of Sphere 3D, and Eric Kelly and Kurt Kalbfleisch will serve as Chief Executive Officer and Chief Financial Officer of Sphere 3D, respectively, following the merger.
The table below shows, for each of Overlands directors and executive officers who beneficially own Overland stock, the number of shares
of stock held by such person:
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number of Shares of
Overland
Common
Stock
Beneficially
Owned
(3)
|
|
|
Percent of
Overland
Class
(1)
|
|
|
Value of Such
Stock in
Merger
(2)
|
|
Eric Kelly,
|
|
|
293,780
|
|
|
|
1.66
|
%
|
|
$
|
1,339,637
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph A. De Perio,
|
|
|
15,745
|
|
|
|
0.09
|
%
|
|
$
|
71,797
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert A. Degan,
|
|
|
24,233
|
|
|
|
0.14
|
%
|
|
$
|
110,502
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vivekanand Mahadevan,
|
|
|
6,200
|
|
|
|
0.04
|
%
|
|
$
|
28,272
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott McClendon,
|
|
|
197,917
|
|
|
|
1.13
|
%
|
|
$
|
902,502
|
|
Director and Executive Chairperson of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nils Hoff,
|
|
|
15,000
|
|
|
|
0.09
|
%
|
|
$
|
68,400
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Randall Gast,
|
|
|
59,946
|
|
|
|
0.34
|
%
|
|
$
|
273,354
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kurt Kalbleisch,
|
|
|
76,531
|
|
|
|
0.44
|
%
|
|
$
|
348,981
|
|
Senior Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Based on the merger consideration to be issued in the merger and the closing sale price of $8.93 for Sphere 3D common shares on the NASDAQ Global Market on July 21, 2014 (the last full trading day prior to the date of
this proxy statement/prospectus).
|
(3)
|
The share totals include shares of common stock currently owned and shares acquirable within 60 days. Does not include issued and outstanding awards of stock appreciation rights which will terminate on the
effective date of the merger.
|
A change in control for purposes of the individual award agreements, employment
agreements, and Overland plans discussed below is deemed to occur if, among other things, Overland consummates a merger with or into any person. The closing of the merger with Merger Sub will trigger a change in control for purposes of these
agreements and plans.
70
Each of Overlands non-employee directors holds stock options to acquire Overland shares.
Pursuant to their award agreements under Overlands equity compensation plans, any stock options issued to the non-employee directors in their capacity as non-employee directors and that remain unvested as of the date of a change in control of
Overland will become fully vested and exercisable as of the date of the change in control. As of July 21, 2014, Overlands non-employee directors did not hold any unvested stock options to purchase Overland shares.
As of July 21, 2014, Nils Hoff held 60,000 RSUs, 45,000 of which are unvested, and none of which shall accelerate and become fully vested
as of the change of control. No other non-employee directors of Overland hold any RSUs of Overland.
Employment, Severance and Change in Control
Agreements
The following discussion describes the different contractual arrangements and other rights of Overlands executive
officers that could be triggered in connection with a change of control and, with respect to double trigger arrangements, in the event that a termination of the executives employment were to occur in connection with a change of control.
Eric L. Kelly. Overland entered into an employment agreement with Mr. Kelly, Overlands President and Chief Executive Officer, on
June 24, 2009, which was amended and restated on June 29, 2011 (the
Kelly Agreement
). Pursuant to the Kelly Agreement, Mr. Kelly is entitled to a base salary of $400,000. Mr. Kelly is eligible to receive an
annual bonus upon the achievement of financial and management objectives reasonably established by our Board of Directors or an authorized committee of Overlands Board of Directors. His annual bonus target is 100% of the greater of $400,000 or
his base salary as of the end of the applicable fiscal quarter or year in which the bonus is earned, and he has the opportunity to earn an annual bonus of up to 150% of the target bonus. If Overland terminates Mr. Kellys employment
without cause or he resigns for good reason, or if he dies or becomes disabled, before the end of a fiscal quarter or year, he will be eligible to receive a prorated amount of the target bonus for the fiscal quarter or year in which his employment
terminates. For purposes of the Kelly Agreement, the terms cause and good reason are defined in the agreement, and a termination of employment by us without cause includes a termination by us at the end of the term then in
effect. To the extent that any travel, lodging, or auto expense reimbursements are taxable to Mr. Kelly, Overland will provide him with a tax restoration payment so that he will be put in the same after-tax position as if such reimbursements
had not been subject to tax. The Kelly Agreement has a three-year term and automatically renews for additional one-year terms. Overland may unilaterally modify Mr. Kellys cash compensation at any time, subject to Mr. Kellys
right to terminate his employment for good reason.
The Kelly Agreement also provides that if Overland terminates Mr. Kellys
employment without cause or if Mr. Kelly resigns from employment for good reason, then Overland will be obligated to pay him an aggregate severance payment equal to the sum of (i) 150% of the greater of his base salary then in effect or
his original base salary, (ii) a portion of his target bonus prorated based on the number of days he was employed during the period on which the target bonus is based, (iii) an amount equal to the premiums he would be required to pay to
continue health insurance coverage under Overlands insurance plans for himself and his eligible dependents under the Consolidated Omnibus Budget Reconciliation Act (
COBRA
) for 18 months following the date of his termination,
and (iv) an amount necessary for him to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his
termination for a period of 18 months following his termination (reduced by the amount of any reimbursement for COBRA premiums as described in clause (iii) above). The severance payment will be made in equal monthly installments over 18 months
in accordance with our regular payroll practices. In addition, Mr. Kelly will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards that would otherwise have vested
during the 12-month period following his termination. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year of the date of his termination, subject to earlier termination
upon the expiration of the maximum term of the applicable options under the applicable plan or upon
71
a change in control. The severance benefits described above are contingent upon Mr. Kelly providing Overland with a general release of all claims.
In addition, Overland entered into a retention agreement with Mr. Kelly on June 24, 2009, which provides that he will receive a lump
sum severance payment if, within 60 days before or two years following a change of control of Overland, his employment is terminated by Overland without cause or he resigns for good reason (as such terms are defined in the agreement). The severance
payment will equal 150% of the sum of Mr. Kellys base salary at the time of the consummation of the change of control or termination date or $400,000, whichever is higher, plus any annual target bonus. The retention agreement provides
that (i) if Mr. Kelly elects to continue insurance coverage as provided by COBRA, Overland will reimburse him for an amount equal to the premiums he would be required to pay to continue health insurance coverage under our insurance plans
for himself and his eligible dependents under COBRA for 18 months following the date of his termination, and (ii) Overland will reimburse him for an amount necessary for him to continue life, accident, medical and dental insurance benefits for
himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his termination for a period of 18 months following his termination (reduced by the amount of any reimbursements for
COBRA premiums as described in clause (i) above). Overland is required to reimburse Mr. Kelly for the estimated costs of these benefits in one lump sum payment on his termination date. In addition, Mr. Kelly will be entitled to
accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time within one year
of the date of his termination, subject to earlier termination upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change of control. If any portion of any payment under the retention agreement would
constitute an excess parachute payment within the meaning of Section 280G of the Internal Revenue Code, then that payment will be reduced to an amount that is one dollar less than the threshold for triggering the tax imposed by
Section 4999 of the Internal Revenue Code if such reduction would result in a greater benefit for Mr. Kelly on an after-tax basis. The consideration payable to Mr. Kelly under the retention agreement is contingent upon him providing
us a general release of claims.
Kurt L. Kalbfleisch. Overland entered into an employment and severance agreement with
Mr. Kalbfleisch, our Senior Vice President of Finance, Chief Financial Officer and Corporate Secretary on September 29, 2009, which was amended and restated on June 29, 2011 (the
Kalbfleisch Agreement
). Pursuant to
the Kalbfleisch Agreement, Mr. Kalbfleisch earned a base salary of $266,000 effective as of May 2011. In November 2013, Mr. Kalbfleischs base salary increased to $300,000. If Overland terminates Mr. Kalbfleischs employment
without cause or he resigns his employment for good reason before the end of a fiscal quarter or year, he will be eligible to receive a prorated amount of the target bonus for the fiscal quarter or year in which his employment terminates. For
purposes of the Kalbfleisch Agreement, the terms cause and good reason are defined in the agreement, and a termination of employment by Overland without cause includes a termination by Overland at the end of the term then in
effect. The Kalbfleisch Agreement has a three-year term and automatically renews for additional one-year terms. Overland may unilaterally modify Mr. Kalbfleischs cash compensation at any time, subject to Mr. Kalbfleischs right
to terminate his employment for good reason.
The Kalbfleisch Agreement also provides that if Overland terminates
Mr. Kalbfleischs employment without cause or if Mr. Kalbfleisch resigns from employment for good reason, Overland will be obligated to pay him an aggregate severance payment equal to the sum of (i) the greater of his annual base
salary then in effect or his original base salary of $266,000, (ii) a portion of any target bonus prorated based on the number of days he was employed during the period on which the target bonus is based, (iii) an amount equal to the
premiums he would be required to pay to continue health insurance coverage under our insurance plans for himself and his eligible dependents under COBRA for 12 months following the date of his termination, and (iv) an amount necessary for him
to continue life, accident, medical and dental insurance benefits for himself and his eligible dependents in amounts substantially similar to those which he received immediately prior to the date of his termination for a period of 12 months
following his termination (reduced by the amount of any reimbursement for COBRA premiums as described in clause (iii) above). The severance payment will be made in equal monthly
72
installments over the 12 months following termination of employment. In addition, Mr. Kalbfleisch will be entitled to accelerated vesting for any unvested portion of his then outstanding
stock options and any other equity-based awards that would otherwise have vested during the 12-month period following his termination. In the case of vested stock options, he will be permitted to exercise such options in whole or in part at any time
within one year of the date of his termination, subject to earlier termination upon the expiration of the maximum term of the applicable options under the applicable plan or upon a change in control. If such a termination of employment occurs within
two years following a change in control of our company, then the severance benefits will generally be the same as described above except that the cash severance will be paid in a single lump sum on the sixtieth day after termination of employment
and Mr. Kalbfleisch will be entitled to accelerated vesting for any unvested portion of his then outstanding stock options and any other equity-based awards. If any payment under the Kalbfleisch Agreement would constitute an excess
parachute payment within the meaning of Section 280G of the Internal Revenue Code, then that payment will be reduced to an amount that is one dollar less than the threshold for triggering the tax imposed by Section 4999 of the
Internal Revenue Code if such reduction would result in a greater benefit for Mr. Kalbfleisch on an after-tax basis. The severance benefits described above are contingent upon Mr. Kalbfleisch providing us with a general release of all
claims.
As noted above under Treatment of Overland Restricted Stock Units and Options, under the terms of the merger, a
portion of the outstanding and unvested Overland restricted stock unit awards will automatically accelerate and vest in connection with the merger.
Golden Parachute Compensation
The
following table sets forth the estimated amounts of golden parachute compensation (for purposes of Item 402(t) of Regulation S-K) that each of Overlands named executive officers could receive in connection with the merger.
Under the award agreements, outstanding restricted stock units held by Messrs. Kelly and Kalbfleisch will fully vest upon a change in control of Overland. While we do not expect that Mr. Kellys or Mr. Kalbfleischs employment
will terminate in connection with the merger, amounts in the table assume, where applicable (and except as expressly noted), that the named executive officers employment is terminated in circumstances that would trigger the right to receive
severance benefits in connection with a change in control of Overland under the agreements described above (a
qualifying termination
), and that such a qualifying termination of the executives employment occurred on
July 21, 2014. The actual amounts that would be paid upon a named executive officers termination of employment can be determined only at the time of such executives separation from Overland. As a result, the actual amounts received
by a named executive officer may differ in material respects from the amounts set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Cash
Severance
($)
(1)
|
|
|
Equity
($)
(2)
|
|
|
Perquisites/
Benefits
($)
(3)
|
|
|
Tax
Reimbursement
($)
|
|
|
Total
|
|
Eric L. Kelly
|
|
|
1,200,000
|
|
|
|
2,632,500
|
|
|
|
29,525
|
|
|
|
|
|
|
|
3,862,025
|
|
Kurt L. Kalbfleisch
|
|
|
396,658
|
|
|
|
1,134,000
|
|
|
|
23,407
|
|
|
|
|
|
|
|
1,554,065
|
|
(1)
|
The amounts reported in this column represent the potential cash severance payments that would be made to the named executive officer assuming a qualifying termination of the executives employment in connection
with the merger. We do not, however, expect Mr. Kellys or Mr. Kalbfleischs employment to be terminated in connection with the merger.
|
(2)
|
The amounts reported in this column reflect the value of each executives outstanding RSUs as of July 21, 2014 that would vest in connection with the merger. These amounts were calculated based on the closing
price of Overlands common stock on July 21, 2014, which was $4.34 per share.
|
(3)
|
The amounts reported in this column represent the estimated cost to provide the health and welfare benefits described above (including reimbursement of COBRA premiums for the applicable period) to the executive
following a qualifying termination in connection with the merger.
|
73
Effect of the Merger on Overlands Notes and Warrants
Warrants
. At the effective time of the merger, each outstanding Overland warrant will be deemed to be exchanged for a substitute warrant
that will entitle its holder to acquire, in lieu of one Overland share, a number of Sphere 3D common shares equal to the Exchange Ratio, upon exercise in accordance with the terms of the original Overland warrant. The per share exercise price for
the Sphere 3D shares issuable upon exercise of an assumed Overland warrant shall be equal (rounded up to the nearest whole cent) to the per-share exercise price of the Overland warrant immediately prior to the Effective Time divided by the Exchange
Ratio. In the event a holder of the warrants exercises its warrants and receives Overland common shares pursuant to the terms of the warrant prior to the effective time of the merger, those shares will be treated in the merger like all other
Overland common shares.
Convertible Notes.
At the effective time of the merger, each outstanding convertible promissory note of
Overland will be assumed by Sphere 3D. In addition, Sphere 3D will issue to the Cyrus Funds additional Sphere 3D shares equal to 5% of the aggregate principal amount of the convertible promissory notes held by the Cyrus Funds immediately prior to
the Effective Time.
Effect of the Merger on Sphere 3Ds Note to Overland
In connection with the merger agreement, Sphere 3D loaned Overland up to $5 million dollars (the
Financing
) pursuant to
a note to be issued to Sphere 3D by Overland (the
Note
). The Note is subordinated to certain existing indebtedness of Overland and is secured by inventory of Overland and common shares of Sphere 3D owned by Overland. The Financing
was made in two installments, with the first borrowing on May 19, 2014 and the second borrowing on or about June 3, 2014. Overlands obligations to Sphere 3D under the Financing will remain outstanding following the completion of the
merger without adjustment to the Exchange Ratio.
Effect of the Merger on Overland Shares Owned by Sphere 3D
As of the record date, Sphere 3D held 42,644 Overland shares. At the Effective Time, these shares shall convert into Sphere 3D shares in
accordance with the Exchange Ratio and immediately be cancelled.
Material U.S. Federal Income Tax Consequences of the
Merger to U.S. Holders
General
The following general discussion sets forth the anticipated material U.S. federal income tax consequences of the merger and the ownership and
disposition of Sphere 3D common shares to U.S. holders (as defined below) of Overland common stock. This discussion does not address the U.S. federal income tax consequences of transactions taking place prior or subsequent to, or concurrently with,
the merger, whether or not in connection with the merger. This discussion is based on the Code, applicable Treasury regulations, judicial authority, and administrative rulings, and the Canada-U.S. Tax Treaty, all as of the date of this proxy
statement/prospectus, and all of which are subject to change, possibly with retroactive effect.
This discussion is for general
information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. holder as a result of the merger or as a result of the ownership and disposition of
Sphere 3D common shares. This discussion does not take into account the individual facts and circumstances of any particular U.S. holder that may affect the U.S. federal income tax consequences to the U.S. holder, including specific tax consequences
to a U.S. holder under an applicable tax treaty. Accordingly, this discussion is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. holder. In addition, this discussion does not
address the U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, or non-U.S. tax consequences of the merger or the ownership and disposition of Sphere 3D common shares.
This discussion addresses only U.S. holders (as defined below) who hold their Overland common stock, and, after the Effective Time, their
Sphere 3D common shares, as a capital asset within the meaning of
74
Section 1221 of the Code. It does not address U.S. holders subject to special tax rules, such as:
|
|
|
banks, financial institutions, underwriters, or insurance companies;
|
|
|
|
real estate investment trusts and regulated investment companies;
|
|
|
|
tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts;
|
|
|
|
U.S. expatriates or former long-term residents of the United States;
|
|
|
|
entities or arrangements that are treated as partnerships for U.S. federal income tax purposes and investors in such partnerships;
|
|
|
|
dealers or traders in securities, commodities or currencies;
|
|
|
|
U.S. holders subject to the alternative minimum tax;
|
|
|
|
U.S. holders whose functional currency is not the U.S. dollar;
|
|
|
|
U.S. holders who received Overland common stock, or, after the merger, Sphere 3D common shares, through the exercise of options or otherwise as compensation or through a tax-qualified retirement plan;
|
|
|
|
U.S. holders who own (directly, indirectly or through attribution) 5% or more by vote or value of the outstanding Overland common stock, or, after the merger, of the outstanding Sphere 3D common shares; or
|
|
|
|
U.S. holders holding Overland common stock, or, after the merger, Sphere 3D common shares, as part of a straddle, synthetic security, hedge, conversion transaction or other integrated investment.
|
U.S. holders that are subject to special provisions under the Code, including U.S. holders described immediately above, should consult their
tax advisors regarding the U.S. federal income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences of the merger and the ownership and disposition of Sphere 3D common shares.
As used in this discussion, a U.S. holder means a holder of Overland common stock or, after the merger, Sphere 3D common shares
who is for U.S. federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any state or
political subdivision thereof, (iii) a trust that (A) is subject to the primary jurisdiction of a court within the United States and the control of one or more U.S. persons with respect to all of its substantial decisions or (B) has a
valid election in effect under applicable Treasury regulations to be treated as a U.S. person, or (iv) an estate that is subject to U.S. federal income tax on its income, regardless of source.
Please consult your own tax advisor as to the specific tax consequences of the merger and the ownership and disposition of Sphere 3D common
shares, including the applicable U.S. federal, state, local and foreign tax consequences to you of the merger and the ownership and disposition of Sphere 3D common shares.
It is a condition to the completion of the merger that Overland and Sphere 3D each receive an opinion from its respective counsel that, for
U.S. federal income tax purposes, (i) the merger should qualify as a reorganization within the meaning of Section 368(a) of the Code and (ii) no gain should be recognized by U.S. holders upon the exchange of Overland common stock for
Sphere 3D common shares in the merger (other than by a U.S. holder who is a five-percent transferee shareholder within the meaning of the rules under Treasury regulations Section 1.367(a)-3(c) and who does not file the agreement
with the U.S. Internal Revenue Service, or the IRS, as described in Treasury regulations Section 1.367(a)-3(c)(l)(iii)(B)). Each counsels opinion will be based on qualifications, representations and covenants noted in the opinion
(including representations and covenants
75
regarding the absence of changes in existing facts and that the merger will be completed in accordance with the terms and conditions of the merger agreement and as described in this proxy
statement/prospectus and on factual representations contained in officers certificates of Overland and Sphere 3D. After Overland shareholder approval is obtained, neither Overland nor Sphere 3D may waive the receipt of its counsels
opinion as a condition to the completion of the merger, unless this document is recirculated in order to resolicit shareholder approval. None of the tax opinions or this summary are binding on the IRS or the courts. In addition, neither Sphere 3D
nor Overland intends to request a ruling from the IRS with respect to the U.S. federal income tax consequences of the merger and, as a result, there can be no assurance that the IRS will not disagree with any of the conclusions described below.
Future legislative, judicial, or administrative changes or interpretations, which may or may not be retroactive, or the failure of any factual representation to be true, correct and complete in all material respects, or the breach of any of the
covenants, may adversely affect the accuracy of the statements and conclusions described in this summary.
Material U.S. Federal Income Tax
Consequences of the Merger
Dorsey & Whitney LLP, tax counsel to Sphere3D, and OMelveny & Myers LLP, tax
counsel to Overland, are each of the opinion that for U.S. federal income tax purposes, (i) the merger should qualify as a reorganization within the meaning of Section 368(a) of the Code and (ii) no gain should be
recognized by U.S. holders upon the exchange of Overland common stock for Sphere 3D common shares in the merger (other than by a U.S. holder who is a five-percent transferee shareholder within the meaning of the rules under Treasury
regulations Section 1.367(a)-3(c) and who does not file the agreement with the IRS as described in Treasury regulations Section 1.367(a)-3(c)(l)(iii)(B)). This non-recognition treatment is not certain, however, and there is risk that U.S.
holders will be required to recognize gain (but not loss) in the merger because non-recognition treatment depends on the application of complex rules under Section 367(a) of the Code and there is no authority directly on point dealing with
relevant issues. If the merger qualifies as a reorganization under Section 368(a) of the Code and Section 367(a) of the Code does not apply, then:
|
|
|
A U.S. holder of Overland common stock will not recognize income, gain or loss upon the U.S. holders receipt of Sphere 3D common shares in exchange for the U.S. holders Overland common stock in the merger,
except with respect to cash that is received instead of a fractional share of Sphere 3D common shares;
|
|
|
|
The aggregate tax basis of the Sphere 3D common shares received by a U.S. holder in the merger, including the basis allocable to any fractional share for which cash is ultimately received, will be the same as the
aggregate tax basis of the Overland common stock surrendered in exchange therefor; and
|
|
|
|
The holding period for Sphere 3D common shares that a U.S. holder receives in the merger will include the holding period of the Overland common stock surrendered in exchange therefor.
|
If a U.S. holder acquired different blocks of Overland common stock at different times and at different prices, the U.S. holders tax
basis and holding period in the Sphere 3D common shares received will be determined by reference to each block of Overland common stock surrendered.
If a U.S. holder receives cash instead of a fractional share of Sphere 3D common shares, the U.S. holder will generally be treated as having
received the fractional share pursuant to the merger and then as having sold that fractional share of Sphere 3D common shares for cash. As a result, a U.S. holder will generally recognize gain or loss equal to the difference, if any, between the
amount of cash received and the tax basis allocated to the fractional share of Sphere 3D common shares. Gain or loss recognized with respect to cash received in lieu of a fractional share of Sphere 3D common shares will generally be capital gain or
loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the holding period for such shares is greater than one year. The deductibility of capital losses is subject to limitations.
If the merger were to fail to qualify as a reorganization within the meaning of Section 368(a) of the Code as a result of the application
of Section 367(a) of the Code, then a U.S. holder of Overland common stock would recognize taxable gain or loss on the merger equal to the difference, if any, between the fair market value of the
76
Sphere 3D common shares received in the merger and the U.S. holders tax basis in the Overland common stock surrendered in the merger. Such gain or loss would be capital gain or loss and
would be long-term capital gain or loss if the U.S. holders holding period for the U.S. holders Overland common stock is greater than one year. Long-term capital gain of non-corporate stockholders is subject to reduced rates of taxation.
The deductibility of capital losses is subject to limitations.
Five Percent Transferee Shareholders
Even if the merger is afforded non-recognition treatment, a U.S. holder who is a five-percent transferee shareholder, as defined in the
applicable Treasury regulations under Section 367(a) of the Code, with respect to Sphere 3D after the merger will qualify for non-recognition treatment as described in this proxy statement/prospectus only if the U.S. holder files a gain
recognition agreement, as defined in the regulations, with the IRS. Any U.S. holder of Overland common stock who will be a five-percent transferee shareholder with respect to Sphere 3D after the merger is urged to consult with his or her tax
advisor concerning the decision to file a gain recognition agreement and the procedures to be followed in connection with that filing.
Dissenting U.S.
Holders
A U.S. holder who exercises dissenters rights and is paid in cash for all of the U.S. holders Overland common
stock will generally recognize gain or loss equal to the difference, if any, between the amount of cash received and the U.S. holders tax basis in the Overland common stock. Gain or loss recognized with respect to cash received pursuant to the
exercise of dissenters rights will generally be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the holding period for the Overland common stock is greater than one year. The
deductibility of capital losses is subject to limitations.
Reporting Requirements
A U.S. holder who is required to file a U.S. federal income tax return and who is a significant holder that receives Sphere 3D
common shares in the merger will be required to attach a statement to the U.S. holders U.S. federal income tax return for the taxable year in which the merger is completed that contains the information set forth in Section 1.368-3(b) of
the Treasury regulations. The statement attached by the U.S. holder must include the fair market value of, and the U.S. holders tax basis in, the Overland common stock surrendered in the merger. A significant holder generally is a
holder of Overland common stock who, immediately before the merger, owned at least 5% by vote or value of the total outstanding stock of Overland.
MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying annual consolidated financial statements of Sphere 3D Corporation (Sphere 3D or the Company) have been prepared by
management in accordance with International Financial Reporting Standards and contain estimates based on managements judgment. Management maintains an appropriate system of internal controls to provide assurance that transactions are
authorized, assets safeguarded and proper records maintained.
The Audit Committee of the Board of Directors has reviewed with the Companys
independent auditors the scope and results of the annual audit and the financial statements and related financial reporting matters prior to submitting the financial statements to the Board for approval.
The Companys independent auditors, Collins Barrow Toronto LLP are appointed by the shareholders to conduct an audit in accordance with Canadian
generally accepted auditing standards and their report follows.
MANAGEMENTS ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL
REPORTING (ICFR) AND DISCLOSURE CONTROLS AND PROCEDURES (DCP)
Management is also responsible for establishing and maintaining
adequate internal control over the Companys financial reporting. The internal control system was designed to provide reasonable assurance to the Companys management regarding the preparation and presentation of the financial statements.
As the Company is a Venture Issuer (as defined under National Instrument 52-109
Certification of Disclosure in Issuers Annual and Interim
Filings
) (NI 52-109), the Company and management are not required to include representations relating to the establishment and/or maintenance of DCP and/or ICFR, as defined in NI 52-109.
|
|
|
|
|
Peter Tassiopoulos
|
|
Scott Worthington
|
Peter Tassiopoulos
|
|
Scott Worthington
|
Chief Executive Officer
|
|
Chief Financial Officer
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|
Mississauga, Ontario
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Mississauga, Ontario
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April 28, 2014
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|
April 28, 2014
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F-3
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|
Collins Barrow Toronto LLP
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|
Collins Barrow Place
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11 King Street West
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Suite 700, Box 27
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|
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Toronto, Ontario
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M5H 4C7 Canada
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T. 416.480.0160
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INDEPENDENT AUDITORS REPORT
|
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F. 416.480.2646
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To the Shareholders of Sphere 3D Corporation
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www.collinsbarrow.com
|
We have audited the accompanying consolidated financial statements of Sphere 3D Corporation and its subsidiaries which comprise
the consolidated financial position as at December 31, 2013 and December 31, 2012 and the consolidated statements of comprehensive loss, changes in equity and cash flows for the years ended December 31, 2013 and December 31, 2012
and a summary of significant accounting policies and other explanatory information.
Managements Responsibility for the Consolidated Financial
Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is
to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An
audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of Sphere 3D Corporation as at December 31, 2013 and December 31, 2012, and its financial performance and its cash flows for the years ended December 31, 2013
and December 31, 2012 in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board.
Licensed Public Accountants
Chartered Accountants
April 25, 2014
Toronto, Ontario
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This office is independently owned and operated by Collins Barrow Toronto LLP
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The Collins Barrow trademarks are used under License.
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F-4
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Consolidated Statements of
Financial Position
As at
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,550,788
|
|
|
$
|
1,633,334
|
|
Investments
|
|
|
312,823
|
|
|
|
10,203
|
|
Loans
|
|
|
203,641
|
|
|
|
|
|
Subscriptions receivable
|
|
|
|
|
|
|
150,035
|
|
Sales tax recoverable
|
|
|
95,088
|
|
|
|
78,319
|
|
Amounts receivable
|
|
|
|
|
|
|
54,729
|
|
Inventory
|
|
|
136,591
|
|
|
|
|
|
Advance equipment payments
|
|
|
397,702
|
|
|
|
|
|
Prepaid and sundry assets
|
|
|
142,361
|
|
|
|
105,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,838,994
|
|
|
|
2,032,021
|
|
Capital assets (note 5)
|
|
|
389,119
|
|
|
|
358,127
|
|
Investment
|
|
|
|
|
|
|
101,821
|
|
Intangible assets (note 6)
|
|
|
1,668,079
|
|
|
|
718,750
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,896,192
|
|
|
$
|
3,210,719
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Trade and other payables (note 7)
|
|
$
|
478,282
|
|
|
$
|
303,218
|
|
Deferred revenue
|
|
|
504,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
982,770
|
|
|
|
303,218
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common share capital (note 9)
|
|
|
12,085,781
|
|
|
|
5,409,488
|
|
Other equity (note 10)
|
|
|
1,715,151
|
|
|
|
1,007,500
|
|
Deficit
|
|
|
(5,887,510
|
)
|
|
|
(3,509,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
7,913,422
|
|
|
|
2,907,501
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,896,192
|
|
|
$
|
3,210,719
|
|
|
|
|
|
|
|
|
|
|
Nature of operations (note 1)
Commitment and contingencies (note 12)
Subsequent events (note
16)
|
|
|
|
|
|
|
Approved by the Board
|
|
Glenn Bowman
|
|
|
|
Peter Tassiopoulos
|
|
|
Director
|
|
|
|
Director
|
See accompanying notes, which are an integral part of these financial statements
F-5
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Consolidated Statements of
Comprehensive Loss
For the years ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
December 31
2013
|
|
|
December 31
2012
|
|
Revenue
|
|
$
|
|
|
|
$
|
409,347
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
356,688
|
|
Salaries and consulting
|
|
|
1,433,993
|
|
|
|
1,179,711
|
|
Professional fees
|
|
|
143,362
|
|
|
|
380,762
|
|
General and administrative
|
|
|
283,707
|
|
|
|
291,745
|
|
Technology development
|
|
|
28,985
|
|
|
|
41,773
|
|
Listing fees (note 8)
|
|
|
|
|
|
|
382,777
|
|
Regulatory fees
|
|
|
221,676
|
|
|
|
42,405
|
|
Amortization of patents
|
|
|
3,492
|
|
|
|
1,250
|
|
Amortization of property and equipment
|
|
|
222,124
|
|
|
|
174,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,337,339
|
|
|
|
2,851,502
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,337,339
|
)
|
|
|
(2,442,155
|
)
|
|
|
|
|
|
|
|
|
|
Finance income (expenses)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,206
|
|
|
|
117
|
|
Interest expense
|
|
|
(2,770
|
)
|
|
|
(19,267
|
)
|
Investment holding loss
|
|
|
(36,947
|
)
|
|
|
|
|
Foreign exchange loss
|
|
|
(5,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,684
|
)
|
|
|
(19,150
|
)
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss for the year
|
|
$
|
(2,378,023
|
)
|
|
$
|
(2,461,305
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
17,330,942
|
|
|
|
11,918,124
|
|
See accompanying notes, which are an integral part of these financial statements
F-6
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Consolidated Statements of
Changes in Equity
For the years ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
common
shares
|
|
|
Number of
preferred
shares
|
|
|
Common
share capital
|
|
|
Preferred
share
capital
|
|
|
Other
Equity
|
|
|
Deficit
|
|
|
Total
|
|
Balance at December 31, 2011
1
|
|
|
10,600,000
|
|
|
|
500,000
|
|
|
$
|
2,411,832
|
|
|
$
|
2,500
|
|
|
$
|
25,000
|
|
|
$
|
(1,048,182
|
)
|
|
$
|
1,391,150
|
|
Issuance of common shares
|
|
|
4,116,913
|
|
|
|
|
|
|
|
3,431,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,431,792
|
|
Share issuance costs
|
|
|
|
|
|
|
|
|
|
|
(373,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(373,511
|
)
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
(712,500
|
)
|
|
|
|
|
|
|
712,500
|
|
|
|
|
|
|
|
|
|
Share-based payments
|
|
|
23,529
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
Share based compensation Employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270,000
|
|
|
|
|
|
|
|
270,000
|
|
Conversion of debt
|
|
|
117,647
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Conversion of preferred shares
|
|
|
500,000
|
|
|
|
(500,000
|
)
|
|
|
2,500
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for acquisition of T.B. Mining Ventures Inc.
|
|
|
756,250
|
|
|
|
|
|
|
|
529,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529,375
|
|
Comprehensive loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,461,305
|
)
|
|
|
(2,461,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
1
|
|
|
16,114,339
|
|
|
|
|
|
|
$
|
5,409,488
|
|
|
$
|
|
|
|
$
|
1,007,500
|
|
|
$
|
(3,509,487
|
)
|
|
$
|
2,907,501
|
|
Issuance of common shares
|
|
|
1,250,000
|
|
|
|
|
|
|
|
4,187,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,187,500
|
|
Share issuance costs
|
|
|
|
|
|
|
|
|
|
|
(441,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(441,178
|
)
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
(860,000
|
)
|
|
|
|
|
|
|
860,000
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
2,784,840
|
|
|
|
|
|
|
|
3,844,720
|
|
|
|
|
|
|
|
(1,154,528
|
)
|
|
|
|
|
|
|
2,690,192
|
|
Issuance of warrants on exercise
|
|
|
|
|
|
|
|
|
|
|
(703,000
|
)
|
|
|
|
|
|
|
703,000
|
|
|
|
|
|
|
|
|
|
Exercise of options
|
|
|
180,001
|
|
|
|
|
|
|
|
148,251
|
|
|
|
|
|
|
|
(20,500
|
)
|
|
|
|
|
|
|
127,751
|
|
Share-based payments
|
|
|
769,231
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Share based compensation Employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319,679
|
|
|
|
|
|
|
|
319,679
|
|
Comprehensive loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,378,023
|
)
|
|
|
(2,378,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
21,098,411
|
|
|
|
|
|
|
$
|
12,085,781
|
|
|
$
|
|
|
|
$
|
1,715,151
|
|
|
$
|
(5,887,510
|
)
|
|
$
|
7,913,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Represents the legal capital of Sphere 3D Inc. (the accounting acquirer). The legal capital of T.B. Mining Ventures Inc. (the legal acquirer) was 3,025,000 common shares.
|
See accompanying notes, which are an integral part of these financial statements
F-7
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Consolidated Statements of
Cash Flows
For the years ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
Net comprehensive loss for the period
|
|
$
|
(2,378,023
|
)
|
|
$
|
(2,461,305
|
)
|
|
|
|
Items not affecting cash:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
225,616
|
|
|
|
175,641
|
|
Listing fee
|
|
|
|
|
|
|
382,777
|
|
Stock based compensation
|
|
|
319,679
|
|
|
|
270,000
|
|
Expenses paid through stock issuances
|
|
|
102,298
|
|
|
|
120,000
|
|
Investment holding loss
|
|
|
36,947
|
|
|
|
|
|
Accrued interest
|
|
|
(4,179
|
)
|
|
|
(110
|
)
|
Change in working capital:
|
|
|
|
|
|
|
|
|
Change in sales tax recoverable
|
|
|
(16,769
|
)
|
|
|
44,415
|
|
Change in amounts receivables
|
|
|
54,729
|
|
|
|
178,596
|
|
Change in inventory
|
|
|
(136,591
|
)
|
|
|
21,078
|
|
Change in prepaid and sundry assets
|
|
|
(36,960
|
)
|
|
|
49,427
|
|
Change in trade and other payables
|
|
|
175,064
|
|
|
|
(14,269
|
)
|
Change in deferred revenue
|
|
|
270,921
|
|
|
|
(30,070
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,153,701
|
)
|
|
|
(1,263,820
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
Reverse take-over of T.B. Mining Ventures Inc.
|
|
|
|
|
|
|
51,277
|
|
Acquisition of capital assets
|
|
|
(253,116
|
)
|
|
|
(145,063
|
)
|
Loans
|
|
|
(203,641
|
)
|
|
|
|
|
Investment in technology
|
|
|
(952,821
|
)
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,643,145
|
)
|
|
|
(118,786
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
Exercise of warrants and options
|
|
|
2,817,943
|
|
|
|
|
|
Proceeds from sale of common shares, net of issue costs
|
|
|
3,896,357
|
|
|
|
2,857,846
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
6,714,300
|
|
|
|
2,857,846
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
3,917,454
|
|
|
|
1,475,240
|
|
Cash and cash equivalents at opening
|
|
|
1,633,334
|
|
|
|
158,094
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at closing
|
|
$
|
5,550,788
|
|
|
$
|
1,633,334
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes, which are an integral part of these financial statements
F-8
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Notes to the Consolidated
Financial Statements
For the years ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
Sphere 3D Corporation (the Company) was incorporated
under the
Business Corporations Act (Ontario)
on May 2, 2007 as T.B. Mining Ventures Inc. The Company is listed on the TSXV, under the trading symbol ANY and the OTC-QX, under the trading symbol SPIHF and has its
main and registered office of the Company located at 240 Matheson Blvd. East, Mississauga, Ontario, L4Z 1X1.
On December 21, 2012,
the Company completed its Qualifying transaction (the Transaction) with Sphere 3D Inc. (Sphere 3D) and changed its name to Sphere 3D Corporation. The Transaction resulted in the Company acquiring 100% of the issued and
outstanding securities of Sphere 3D through a securities exchange (see note 8). Accordingly, the former security-holders of Sphere 3D acquired control of the Company through a reverse takeover. The accounting parent in the reverse takeover was
Sphere 3D. Therefore, the consolidated financial statements are presented from the perspective of Sphere 3D and the comparative figures presented prior to December 21, 2012 are those of Sphere 3D. The results of operations of the legal parent,
Sphere 3D Corporation (formerly T.B. Mining Ventures Inc.), are included from the date of the reverse takeover.
Sphere 3D Inc. is a
technology development company focused on establishing its patent pending emulation and virtualization technology. These consolidated statements include the financial statements of the Company, its wholly-owned subsidiary, Sphere 3D Inc., which was
incorporated under the
Canada Business Corporation Act
on October 20, 2009, and its wholly owned subsidiary, Frostcat Technologies Inc., which was incorporated under the
Business Corporations Act (Ontario)
on February 13,
2012.
The Company will have to raise additional capital to fund operations until such point that revenues from products and technology are
able to fund operations. If the Company is not able to raise sufficient capital then there is the risk that the Company will not be able to realize the value of its assets and discharge its liabilities. To date the Company has been successful
raising capital in fiscal 2012 and 2013. These proceeds are used to fund operations of the Company.
2.
|
STATEMENT OF COMPLIANCE
|
The Financial Statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
The Financial Statements were approved by the Companys Board of Directors on April 18, 2014.
3.
|
Significant Accounting Policies
|
The accounting policies set out below have been applied
consistently to all periods presented in these financial statements as at and for the periods ended December 31, 2013 and 2012, unless otherwise indicated.
The consolidated financial statements comprise the accounts of the Company, and its controlled subsidiaries. The financial statements of
subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Consolidated financial statements are prepared using uniform accounting policies for like transactions and
other events in similar circumstances.
F-9
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
All transactions and balances between the Company and its subsidiaries are eliminated on
consolidation, including unrealized gains and losses on transactions between companies. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Companys interest in
the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
|
(a)
|
Use of estimates and judgements
|
The preparation of the financial statements in
conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these
estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the
period in which the estimates are revised and in any future periods affected.
Information about significant areas of estimation
uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are noted below with further details of the assumptions in the following notes:
When charges for share-based payments are based on the equity instrument
granted, the fair value is calculated at the date of the award. The equity instruments are valued using Black-Scholes; inputs to the model include assumptions on share price volatility, discount rates and expected life outstanding.
|
(ii)
|
Investment in technology
|
The recoverability of the investment in technology is dependent on
the future realization of cash flows from amounts spent.
|
(iii)
|
Property and equipment
|
The useful lives of property and equipment is estimated based on the
length of use of the assets by the Company.
Tax interpretations, regulations and legislation in the jurisdiction in which
the Company operates are subject to change. As such, income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood that they will be realised
from future taxable earnings.
F-10
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
The functional currency of the Company and its subsidiaries is the
Canadian dollar. Transactions in foreign currencies are translated to the functional currency of the Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to
Canadian dollars at the period end exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value
was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
|
(c)
|
Financial instruments
|
|
(i)
|
Non-derivative financial assets
|
Non-derivative financial instruments comprise of cash and
cash equivalents, investments, loans, subscriptions receivable and trade and other payables. Non-derivatives financial instruments are recognised initially at the fair value plus, for instruments not at fair value through profit and loss, any
directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below.
|
(ii)
|
Cash, cash equivalents and investments
|
Cash and cash equivalents comprise cash on hand, term
deposits with banks, other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Companys cash management, whereby management has
the ability and intent to net bank overdrafts against cash, are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Investments comprise highly liquid investments, in the form of guaranteed investment certificates, with maturities greater than three months
but with cashable features. Investments have been used to secure the Companys credit rating and are therefore separated from cash and cash equivalents for the purpose of the statement of cash flows.
|
(iii)
|
Financial assets at fair value through profit or loss
|
An instrument is classified at fair
value through profit or loss if it is held or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions
based on their fair value in accordance with the Companys documented risk management or investment strategy. Upon initial recognition the transaction costs are recognized in profit or loss when incurred. Financial instruments at fair value
through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. The Company has designated cash and cash equivalents and investments at fair value.
Other non-derivative financial instruments, such as trade and other payables, are
measured at amortized cost using the effective interest method, less any impairment losses.
F-11
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(i)
|
Recognition and measurement
|
Items of property and equipment are measured at cost less
accumulated amortization and accumulated impairment losses. Costs include expenditure that is directly attributable to the acquisition of the asset.
When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of
property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the
proceeds from disposal with the carrying amount of property and equipment, and are recognized net within other income in profit or loss.
The cost of replacing a part of an item of property and equipment is
recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The
costs of the day-to-day servicing of property and equipment are recognized in profit (loss) as incurred.
Amortization is calculated as the cost of the asset less its residual value.
Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property
and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the assets.
The estimated useful lives for the current and comparative periods are as follows:
|
|
|
Computer hardware
|
|
- 3 years
|
Furniture and fixtures
|
|
- 5 years
|
Marketing and Web Development
|
|
- 2 years
|
Leasehold improvements
|
|
- over the term of the lease
|
This most closely reflects the expected pattern of consumption of the future economic benefits embodied in the
asset.
Estimates for amortization methods, useful lives and residual values are reviewed at each reporting period-end and adjusted if
appropriate.
Inventories are measured at the lower of cost and net realizable value. The
cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Net
realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses.
F-12
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(f)
|
Trade and other payables
|
Trade and other payables are stated at cost.
Assets and liabilities expected to be realised in, or intended for sale
or consumption in, the Companys normal operating cycle, usually equal to 12 months, are recorded as current assets or liabilities.
|
(h)
|
Statement of cash flows
|
The Company prepares its Statement of Cash Flows using the
indirect method.
A financial asset is assessed at each reporting date to determine whether
there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and
the present value of the estimated future cash flows discounted at the original effective interest rate.
Individually significant
financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in the statement of comprehensive loss.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For
financial assets measured at amortized cost the reversal is recognized in the statement of comprehensive loss.
|
(ii)
|
Non-financial assets
|
The carrying amounts of the Companys non-financial assets, other
than deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the assets recoverable amount is estimated.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that
generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets referred to as a cash generating unit (CGU). The recoverable amount of an asset or a CGU is the greater of its value in
use and its fair value less cost to disposal.
F-13
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(i)
|
Impairment
(continued)
|
|
(ii)
|
Non-financial assets (continued)
|
In assessing value in use, the estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value in use is generally computed by reference to the present value of the future cash flows expected to be
derived from sales.
Fair value less costs of disposal to sell is determined as the amount that would be obtained from the sale of a CGU
in an arms length transaction between knowledgeable and willing parties. The fair value less cost of disposal is generally determined as the net present value of the estimated future cash flows expected to arise from the continued use of the
CGU, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account. These cash flows are discounted by an appropriate discount rate which would be applied by such a
market participant to arrive at a net present value of the CGU.
An impairment loss is recognized if the carrying amount of an asset or
its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in the statement of comprehensive loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of the other assets in
the unit (group of units) on a pro rata basis.
An impairment loss in respect of other assets is assessed at each reporting date for any
indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the assets
carrying amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation or amortization, if no impairment loss had been recognized.
Costs to obtain patents are capitalized and are amortized to operations on a
straight-line basis over the underlying term of the patents, which is 20 years, commencing upon the registration of the patent.
|
(ii)
|
Investment in Technology
|
The investment in technology consists of consideration paid for the
acquisition of the technology. Amortization commences with the successful commercial production or use of the product or process. These costs are being amortized over a period of four years from commencement of commercial use, which has not yet
commenced.
F-14
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(j)
|
Intangible assets
(continued)
|
|
(iii)
|
Research and Development Costs
|
Research costs are charged to income when incurred.
Development costs are capitalized as intangible assets when the Company can demonstrate that the technical feasibility of the project has been
established; the Company intends to complete the asset for use or sale and has the ability to do so; the asset can generate probable future economic benefits; the technical and financial resources are available to complete the development; and the
Company can reliably measure the expenditure attributable to the intangible asset during its development. As of July, 2013, the Company has met the requirements for deferral of these expenses and has commenced capitalization of development costs
incurred relating to its investment in technology. Amortization commences with the successful commercial production or use of the product or process. These costs are being amortized over a period of four years from commencement of commercial use,
which has not yet commenced.
Investment Tax Credits (ITCs) earned as a result of incurring Scientific Research and
Experimental Development (SRED) expenditures are recorded as a reduction of the related current period expense, the related deferred development costs or related capital assets. Management records ITCs when there is reasonable
assurance of collection. To date, management has not recorded any amounts related to ITCs.
|
(k)
|
Share capitalcommon shares
|
Common shares are classified as equity. Incremental
costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects.
The grant date fair value of options awarded to employees,
directors, and service providers is measured using the Black-Scholes option pricing model and recognised in the statement of comprehensive loss, with corresponding increase in contributed surplus over the vesting period. A forfeiture rate is
estimated on the grant date and is adjusted to reflect the actual number of options that vest. Upon exercise of the option, consideration received, together with the amount previously recognised in contributed surplus, is recorded as an increase to
share capital.
Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the
goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders
the service.
Revenue is recorded when persuasive evidence of an agreement exists, usually in
the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, price is fixed and determinable, recovery of the consideration is probable, the associated costs and possible return of
goods can be estimated reliably, there is no continuing management
F-15
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
involvement with the goods, the distribution of the media has occurred and collectability is reasonably assured and the amount of revenue can be measured reliably. If it is probable that
discounts will be granted and the amount can be measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized. Revenue is deferred when the Company has received the cash and has a further obligation to the
customer. The revenue is then recognized when the Company has fulfilled that obligation.
|
(n)
|
Finance income and expenses
|
Finance expenses comprise interest expense on borrowings,
changes in the fair value of financial assets at fair value through profit or loss and impairment losses recognized on financial assets.
Interest income is recognised as it accrues in profit or loss, using the effective interest method.
Foreign currency gain and losses, reported under finance income and expenses, are reported on a net basis.
Income tax expense comprises current and deferred tax. Income tax expense
is recognized in profit or loss except to the extent that it relates to items recognized directly in equity.
Current tax is the expected
tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. Deferred tax is not recognised on the initial recognition of assets or liabilities in a transaction that is not a business combination. Deferred tax is measured at the tax rates that are expected
to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and
they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised
simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against
which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Basic earnings per share is calculated by dividing the profit or loss
attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to common shareholders and the
weighted average number of common shares outstanding for the effects
F-16
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(o)
|
Loss per share
(continued)
|
of dilutive instruments such as options and warrants. The dilutive effect on earnings per share is recognised on the use of the proceeds that could be obtained upon exercise of options, warrants
and similar instruments. It assumes that the proceeds would be used to purchase common shares at the average market price during the period. At year end, the effect of stock options and warrants was anti-dilutive.
A provision is recognized if, as a result of a past event, the Company has a
present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognised for future operating losses.
A contingent liability is a possible obligation that arises from
past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company; or a present obligation that arises from past events (and
therefore exists), but is not recognized because it is not probable that a transfer or use of assets, provision of services or any other transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot
be estimated reliably.
|
(r)
|
Change in accounting policies
|
Certain pronouncements were issued by the IASB or the
IFRIC that are mandatory for accounting periods after December 31, 2013. Many are not applicable to, or do not have a significant impact on, the Corporation and have been excluded from the table below.
|
(i)
|
IFRS 10Consolidated financial statements (IFRS 10) was issued by the IASB in May 2011. IFRS 10 is a new standard that identifies the concept of control as the determining factor in assessing whether an
entity should be included in the consolidated financial statements of the parent company. Control consists of three elements: power over an investee; exposure to variable returns from an investee; and the ability to use power to affect the reporting
entitys returns. At January 1, 2013, the Company adopted this pronouncement and there was no material impact on the Companys financial statements.
|
|
(ii)
|
IFRS 11Joint arrangements (IFRS 11) was issued by the IASB in May 2011. IFRS 11 is a new standard that focuses on classifying joint arrangements by their rights and obligations rather than their legal
form. Entities are classified into two groups: parties having rights to the assets and obligations for the liabilities of an arrangement, and rights to the net assets of an arrangement. Entities in the former case account for assets, liabilities,
revenues and expenses in accordance with the arrangement, whereas entities in the latter case account for the arrangement using the equity method. At January 1, 2013, the Company adopted this pronouncement and there was no material impact on
the Companys financial statements.
|
F-17
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(r)
|
Change in accounting policies
(continued)
|
|
(iii)
|
IFRS 12Disclosure of interests in other entities (IFRS 12) was issued by the IASB in May 2011. IFRS 12 is a new standard that provides disclosure requirements for entities reporting interests in other
entities, including joint arrangements, special purpose vehicles, and of balance sheet vehicles. At January 1, 2013, the Company adopted this pronouncement and there was no material impact on the Companys financial statements.
|
|
(iv)
|
IFRS 13Fair value measurement (IFRS 13) was issued by the IASB in May 2011. IFRS 13 is a new standard that provides a precise definition of fair value and a single source of fair value measurement
considerations for use across IFRS. The key points of IFRS 13 are as follows:
|
Fair value is measured using the price in a
principal market for the asset or liability, or in the absence of a principal market, the most advantageous market;
Financial assets and
liabilities with offsetting positions in market risks or counterparty credit risks can be measured on the basis of an entitys net risk exposure;
Disclosure regarding the fair value hierarchy has been moved from IFRS 7 to IFRS 13 and further guidance has been added to the determination
of classes of assets and liabilities;
A quantitative sensitivity analysis must be provided for financial instruments measured at fair
value;
A narrative must be provided discussing the sensitivity of fair value measurement categorized under Level 3 of the fair value
hierarchy to significant unobservable inputs; and
Information must be provided on an entitys valuation processes for fair value
measurements categorized under Level 3 of the fair value hierarchy.
At January 1, 2013, the Company adopted this pronouncement and
there was no material impact on the Companys financial statements given the existing asset and liability mix of the Company to which fair value accounting applies.
|
(v)
|
IAS 1Presentation of financial statements (IAS 1) was amended by the IASB in June 2011 in order to align the presentation of items in other comprehensive income with US GAAP standards. Items in
other comprehensive income will be required to be presented in two categories: items that will be reclassified into profit or loss and those that will not be reclassified. The flexibility to present a statement of comprehensive income as one
statement or two separate statements of profit and loss and other comprehensive income remains unchanged. At January 1, 2013, the Company adopted this pronouncement and there was no material impact on the Companys financial statements.
|
|
(vi)
|
IAS 27Separate Financial Statements
|
IAS 27 has the objective of setting standards to be
applied in accounting for investments in subsidiaries, joint ventures, and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements. This standard is effective for annual
periods beginning on or after January 1, 2013, with early application permitted. At January 1, 2013, the Company adopted this pronouncement and there was no material impact on the Companys financial statements.
F-18
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(r)
|
Change in accounting policies
(continued)
|
|
(vii)
|
IAS 28Investments in Associates and Joint Ventures
|
IAS 28 prescribes the accounting for
investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. IAS 28 applies to all entities that are investors with joint control of, or
significant influence over, an investee (associate or joint venture). At January 1, 2013, the Company adopted this pronouncement and there was no material impact on the Companys financial statements.
|
(s)
|
Future accounting pronouncements
|
The accounting pronouncements detailed in this note
have been issued but are not yet effective. The Company has not early adopted any of these standards and is currently evaluating the impact, if any, that these standards might have on its consolidated financial statements.
|
(i)
|
IFRS 9Financial Instruments
|
IFRS 9 was issued by the IASB in October 2010 and will
replace IAS 39Financial Instruments: Recognition and Measurement (IAS 39). IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39.
The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and
measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39.
The effective date of IFRS 9 was deferred to years beginning on or after January 1, 2018. Earlier application is permitted.
|
(ii)
|
IAS 32Financial Instruments
|
IAS 32 Financial Instruments: Presentation was amended by
the IASB in December 2011. Offsetting Financial Assets and Financial Liabilities amendment addresses inconsistencies identified in applying some of the offsetting criteria. The amendment is effective for annual periods beginning on or after
January 1, 2014. Earlier application is permitted.
|
(iii)
|
IAS 36Impairment of Assets
|
IAS 36 Impairment of Assets was amended by the IASB in June
2013. Recoverable Amount Disclosures for Non-Financial Assets amendment modifies certain disclosure requirements about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. The amendment is effective
for annual periods beginning on or after January 1, 2014. Earlier application is permitted when the entity has already applied IFRS 13.
F-19
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
4.
|
Determination of Fair Value
|
A number of the Companys accounting policies and
disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further
information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
|
(a)
|
Cash and cash equivalents, investments and trade and other payables.
|
The fair value of cash
and cash equivalents, investments and trade and other payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. At December 31, 2013 and December 31, 2012, the fair
value of these balances approximated their carrying value due to their short term to maturity.
|
(b)
|
The fair value of stock options and warrants are measured using a Black-Scholes, option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility
(based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option and warrant holder behaviour)
and the risk-free interest rate (based on government bonds).
|
The carrying value of amounts receivable, loans and trade and
other payables included in the financial position approximate fair value due to the short term nature of those instruments.
The following
tables provide fair value measurement information for financial assets and liabilities as of December 31, 2013 and 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
December 31, 2013
|
|
Carrying
amount
|
|
|
Fair value
|
|
|
Quoted
prices in
Active
Market
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,550,788
|
|
|
$
|
5,550,788
|
|
|
$
|
5,550,788
|
|
|
$
|
|
|
|
$
|
|
|
Investments
|
|
$
|
312,823
|
|
|
$
|
312,823
|
|
|
$
|
312,823
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
December 31, 2012
|
|
Carrying
amount
|
|
|
Fair value
|
|
|
Quoted
prices in
Active
Market
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,633,334
|
|
|
$
|
1,633,334
|
|
|
$
|
1,633,334
|
|
|
$
|
|
|
|
$
|
|
|
Investments
|
|
$
|
10,203
|
|
|
$
|
10,203
|
|
|
$
|
10,203
|
|
|
$
|
|
|
|
$
|
|
|
Long term Investments
|
|
$
|
101,821
|
|
|
$
|
101,821
|
|
|
$
|
101,821
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 fair value measurements are based on unadjusted quoted market prices.
Level 2 fair value measurements are based on valuation models and techniques where the significant inputs are derived from quoted indices.
Level 3 fair value measurements are those with inputs for the asset or liability that are not based on observable market data.
F-20
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Computer
Hardware
|
|
|
Furniture
and
Fixtures
|
|
|
Marketing &
Web
Development
|
|
|
Leaseholds
|
|
|
Total
|
|
Balance at December 31, 2011
|
|
$
|
372,506
|
|
|
$
|
2,463
|
|
|
$
|
|
|
|
$
|
75,009
|
|
|
$
|
449,978
|
|
Additions
|
|
|
137,178
|
|
|
|
4,000
|
|
|
|
|
|
|
|
3,885
|
|
|
|
145,063
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
509,684
|
|
|
|
6,463
|
|
|
|
|
|
|
|
78,894
|
|
|
|
595,041
|
|
Additions
|
|
|
148,895
|
|
|
|
|
|
|
|
104,220
|
|
|
|
|
|
|
|
253,115
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
658,579
|
|
|
$
|
6,463
|
|
|
$
|
104,220
|
|
|
$
|
78,894
|
|
|
$
|
848,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation
|
|
Computer
Hardware
|
|
|
Furniture
and
Fixtures
|
|
|
Marketing &
Web
Development
|
|
|
Leaseholds
|
|
|
Total
|
|
Balance at December 31, 2011
|
|
$
|
57,240
|
|
|
$
|
123
|
|
|
$
|
|
|
|
$
|
5,160
|
|
|
$
|
62,523
|
|
Additions
|
|
|
157,851
|
|
|
|
826
|
|
|
|
|
|
|
|
15,714
|
|
|
|
174,391
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
215,091
|
|
|
|
949
|
|
|
|
|
|
|
|
20,874
|
|
|
|
236,914
|
|
Additions
|
|
|
183,977
|
|
|
|
1,293
|
|
|
|
21,075
|
|
|
|
15,778
|
|
|
|
222,123
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
399,068
|
|
|
$
|
2,242
|
|
|
$
|
21,075
|
|
|
$
|
36,652
|
|
|
$
|
459,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2012
|
|
$
|
294,593
|
|
|
$
|
5,514
|
|
|
$
|
|
|
|
$
|
58,020
|
|
|
$
|
358,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2013
|
|
$
|
259,511
|
|
|
$
|
4,221
|
|
|
$
|
83,145
|
|
|
$
|
42,242
|
|
|
$
|
389,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Investment in technology
|
On December 31, 2010, the Company acquired all rights and
assets related to the emulation and virtualization technology from Promotion Depot Inc., in a non-arms length transaction, in exchange for 1,000,000 shares of the Companys common stock. Since the fair value of the assets received are not
readily determinable, the investment was valued based on the $695,000 fair value of the shares received by Promotion Depot Inc. The technology acquired is still in the development stage and not in commercial use. As such, amortization of this asset
has not commenced.
As of July 2013, the Company met the requirements for the deferral of development costs, under IFRS, and has commenced
capitalizing the development costs incurred during the period. The technology acquired is still in the development stage and not in commercial use. As such, amortization of this asset has not commenced.
F-21
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
6.
|
Intangible assets
(continued)
|
During the year ended December 31, 2013, the Company filed 6 patents based
on its technology, in addition to the 3 preliminary patents, filed on January 16, 2012, based on the technology acquired in the investment in technology.
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Investment in
technology
|
|
|
Patents
|
|
|
Total
|
|
Balance at December 31, 2011
|
|
$
|
695,000
|
|
|
$
|
|
|
|
$
|
695,000
|
|
Additions
|
|
|
|
|
|
|
25,000
|
|
|
|
25,000
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
695,000
|
|
|
|
25,000
|
|
|
|
720,000
|
|
Additions
|
|
|
885,250
|
|
|
|
67,571
|
|
|
|
952,821
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
1,580,250
|
|
|
$
|
92,571
|
|
|
$
|
1,672,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
Investment in
technology
|
|
|
Patents
|
|
|
Total
|
|
Balance at December 31, 2011
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Additions
|
|
|
|
|
|
|
1,250
|
|
|
|
1,250
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
|
|
|
|
1,250
|
|
|
|
1,250
|
|
Additions
|
|
|
|
|
|
|
3,492
|
|
|
|
3,492
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
|
|
|
$
|
4,742
|
|
|
$
|
4,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2012
|
|
$
|
695,000
|
|
|
$
|
23,750
|
|
|
$
|
718,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2013
|
|
$
|
1,580,250
|
|
|
$
|
87,829
|
|
|
$
|
1,668,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Trade and other payables
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2013
|
|
|
December 31
2012
|
|
Trade payables
|
|
$
|
161,337
|
|
|
$
|
251,845
|
|
Non-trade payables and accrued expenses
|
|
|
316,945
|
|
|
|
51,373
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
478,282
|
|
|
$
|
303,218
|
|
|
|
|
|
|
|
|
|
|
F-22
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
The Company completed the Transaction on December 21, 2012,
pursuant to a definitive amalgamation agreement dated August 31, 2012. The Transaction constitutes a reverse takeover of the Company but does not meet the definition of a business combination, and therefore,
IFRS 3 Business Combinations
is not applicable. As a result and in accordance with reverse take-over accounting for a transaction that is not considered a business combination:
Sphere 3D Corporation (formerly T.B. Mining Ventures) is treated as the acquiree and Sphere 3D Inc. is treated as the acquirer. As a result,
the amalgamated entity is deemed to be a continuation of Sphere 3D Inc. and Sphere 3D Inc. is deemed to have acquired control of the assets and business of the Company with the consideration of the issuance of capital, and therefore
IFRS 2
Share-based Payment
, is applicable.
Under the terms of the Amalgamation Agreement, T.B. Mining Ventures was required to consolidate
(the Consolidation) its securities on a four (4) for one (1) exchange ratio. As of the date of the Transaction there were 756,250 T.B. Mining Shares issued and outstanding as fully paid and non-assessable, after giving effect
to the Consolidation.
The fair value of the consideration issued for the net assets of the Company is as follows:
|
|
|
|
|
756,250 common shares valued at $0.70 per share
|
|
|
$529,375
|
|
|
|
|
|
|
Allocated to net asset value (at December 21, 2012):
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,277
|
|
Long term investment
|
|
|
101,821
|
|
Accounts payable
|
|
|
(6,500
|
)
|
|
|
|
|
|
Net assets
|
|
|
146,598
|
|
Cost of listing (expensed)
|
|
|
382,777
|
|
|
|
|
|
|
|
|
|
529,375
|
|
|
|
|
|
|
The purchase price is recorded as an increase in share capital of $529,375
Transaction costs associated with the Reverse Takeover Transaction which amounted to $124,126 and the cost of listing of $382,777 have been
recorded as an expense.
F-23
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
Authorized
an unlimited number of common shares
Issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Value
|
|
Balance, December 31, 2011
|
|
|
10,600,000
|
|
|
$
|
2,411,832
|
|
Issued for cash (net of cash fees of $373,541)
|
|
|
4,116,913
|
|
|
|
3,058,281
|
|
Less: Proceeds allocated to warrants
|
|
|
|
|
|
|
(600,000
|
)
|
Brokers warrants
|
|
|
|
|
|
|
(112,500
|
)
|
Issued for services rendered
|
|
|
23,529
|
|
|
|
20,000
|
|
Issued on conversion of debt
|
|
|
117,647
|
|
|
|
100,000
|
|
Issued on conversion of preferred shares
|
|
|
500,000
|
|
|
|
2,500
|
|
Reverse takeover transaction (note 8)
|
|
|
756,250
|
|
|
|
529,375
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
16,114,339
|
|
|
$
|
5,409,488
|
|
|
|
|
Issued for cash (net of cash fees of $441,178)
|
|
|
1,250,000
|
|
|
|
3,746,322
|
|
Less: Proceeds allocated to warrants
|
|
|
|
|
|
|
(775,000
|
)
|
Brokers warrants
|
|
|
|
|
|
|
(85,000
|
)
|
Issued on exercise of warrants
|
|
|
2,784,840
|
|
|
|
3,844,720
|
|
Warrants issued on exercise
|
|
|
|
|
|
|
(703,000
|
)
|
Issued on exercise of options
|
|
|
180,001
|
|
|
|
148,251
|
|
Issued for future services
|
|
|
769,231
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
21,098,411
|
|
|
$
|
12,085,781
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
On January 13, 2012, the Company issued 450,571 shares of common stock for cash proceeds of $315,400, less cash fees of $29,650. In connection with this transaction, the Company issued broker warrants to purchase
65,028 shares of common stock, at $0.70 per share, for a period of three years. The broker warrants were valued at $19,000. The brokers warrants have been valued based on the equity instruments granted.
|
|
(ii)
|
As a condition to the Amalgamation, Sphere 3D completed a private placement of Sphere 3D Units (the Financing) with gross proceeds of $3,116,642. Each Sphere 3D Unit consisted of one Sphere 3D Share and one
Sphere 3D Warrant, entitling the holder to purchase one Sphere 3D Share at an exercise price of $1.00 per Sphere 3D Share within two years of the completion of the Qualifying Transaction.
|
F-24
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Issued and outstanding
(continued)
The Financing was completed in five tranches, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Number
of Units
|
|
|
Gross
Proceeds
|
|
|
Cash
Fees
|
|
|
Value of
Warrants
|
|
(i)
|
|
July 26, 2012
|
|
|
1,141,976
|
|
|
$
|
970,680
|
|
|
$
|
147,800
|
|
|
$
|
180,000
|
|
(ii)
|
|
October 30, 2012
|
|
|
1,540,003
|
|
|
|
1,309,003
|
|
|
|
132,588
|
|
|
|
245,000
|
|
(iii)
|
|
November 13, 2012
|
|
|
324,300
|
|
|
|
275,655
|
|
|
|
28,282
|
|
|
|
70,000
|
|
(iv)
|
|
December 13, 2012
|
|
|
476,163
|
|
|
|
404,739
|
|
|
|
21,800
|
|
|
|
75,746
|
|
(v)
|
|
December 14, 2012
|
|
|
183,900
|
|
|
|
156,315
|
|
|
|
13,421
|
|
|
|
29,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,666,342
|
|
|
$
|
3,116,392
|
|
|
$
|
343,891
|
|
|
$
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, at the same time as the November 13, 2012 closing, Sphere 3D issued 117,647 Units in
settlement of a debt of $100,000. The value of the Sphere 3D PP Warrants issued in this debt conversion was $19,000.
In connection with
the Financing, the Company paid to the Agent, Jennings Capital Ltd., commissions in the amount of 8% of gross proceeds, and issued 325,925 Sphere 3D Broker Unit Warrants (10% of the brokered securities sold in the Financing). The brokers warrants
have been valued based on the equity instruments granted. In addition, the Company paid the Agent a corporate finance fee of $20,000 (through the issue of 23,529 shares of Sphere 3D).
The Broker Unit Warrants are exercisable into Sphere 3D Units at an exercise price of $0.85 per unit within two years of closing of the
Financing. Each Sphere 3D Unit consists of a Sphere 3D Share and a Sphere 3D PP Warrant. The Sphere 3D Broker Unit Warrants issued for the five tranches were valued at $33,000, $44,500, $8,000, $4,000 and $4,000 respectively, using the Black-Scholes
model.
The fair value of the warrants issued were estimated at the date of grant using the Black-Scholes model with the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker
Warrants
|
|
|
Investor
Warrants
|
|
|
Broker
Unit
Warrants
|
|
(I)
|
|
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
(II)
|
|
expected volatility
|
|
|
60
|
%
|
|
|
60
|
%
|
|
|
60
|
%
|
(III)
|
|
a risk free interest
|
|
|
1.71
|
%
|
|
|
1.28
|
%
|
|
|
1.07
|
%
|
(IV)
|
|
an expected life
|
|
|
3 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
(V)
|
|
a share price
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
|
$
|
0.85
|
|
(VI)
|
|
an exercise price
|
|
$
|
0.70
|
|
|
$
|
1.00
|
|
|
$
|
0.85
|
|
Expected volatility was based on comparable companies.
|
(iii)
|
On July 15, 2013, in connection with a supply agreement (the Supplier Agreement) with Overland Storage, Inc., the Company issued
769,231 shares of common stock, with a value of $500,000, to Overland Storage Inc. (Overland) as a prepayment for systems infrastructure. Pursuant to the Supplier Agreement entered into between Overland and the Company, the Company has
agreed to pay for up to $1.5 million of cloud infrastructure equipment purchases from Overland in the form of
|
F-25
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Issued and outstanding
(continued)
|
common shares in the capital of the Company (the Common Shares) as follows: (i) 769,231 Common Shares at a fair value of $0.65, having a value of $500,000 were issued on Closing;
and (ii) that number of Common Shares equal to $500,000 divided by the 10 trading day average of the closing price per share of Common Shares ending 3 trading days prior to each of the first and second year anniversary date of the Supply
Agreement, to a maximum of 769,231 Common Shares on each date having a value of $500,000. Such Sphere 3D shares are subject to a four months and one day hold period from the date of issuance in accordance with applicable Canadian securities laws.
The equipment purchased has been included in inventory and advance equipment payments.
|
|
(iv)
|
On November 12, 2013, the Company closed an underwritten financing for the sale of 1,250,000 units, at a price of $3.35 per unit of gross proceeds of $4,187,500.
|
Each Unit consisted of one common share of the Company (a Common Share) and one-half of one Common Share purchase warrant (each
full warrant, a Warrant), each full Warrant being exercisable to acquire one Common Share at a purchase price of $4.50 for a period of 24 months following the closing of the Offering. The Warrants are subject to an acceleration clause
whereby should the Common Shares trade at $6.00 or more for more than 10 consecutive trading days on the TSX Venture Exchange or other principal exchange, the Company has the right to issue notice to the warrant holders to accelerate the exercise
period to a period ending 20 trading days from the date of notice. The warrants were valued at $775,000.
The Underwriters received a cash
commission equal to 6% of the gross proceeds of the Offering, were reimbursed for fees and expenses incurred in connection with the Offering, and received compensation warrants (the Broker Warrants) to acquire Common Shares equal to 8%
of the number of Units sold under the Offering. Each Broker Warrant is exercisable at $3.35 per common share for a period of 24 months from the closing date. The broker warrants were valued at $85,000.
The fair value of the warrants issued were estimated at the date of grant using the Black-Scholes model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor
Warrants
|
|
|
Broker
Unit
Warrants
|
|
(I)
|
|
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
(II)
|
|
expected volatility
|
|
|
60
|
%
|
|
|
60
|
%
|
(III)
|
|
a risk free interest
|
|
|
1.71
|
%
|
|
|
1.71
|
%
|
(IV)
|
|
an expected life
|
|
|
2 years
|
|
|
|
2 years
|
|
(V)
|
|
a share price
|
|
$
|
4.73
|
|
|
$
|
3.35
|
|
(VI)
|
|
an exercise price
|
|
$
|
4.50
|
|
|
$
|
3.35
|
|
Expected volatility was based on comparable companies.
F-26
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Escrowed shares
With the completion of the Transaction and the Companys subsequent listing on the TSXV, certain common shares of the Company are subject
to escrow in accordance with TSXV policies. There are two separate escrow agreements in place which are subject to different rates of release. The following table summarizes the common shares that were issued by the Company and are subject to and
held under each escrow and the dates of release therefrom:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surplus Share
Escrow
|
|
|
Value Share
Escrow
|
|
|
Total
|
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
Balance at December 21, 2012
|
|
|
4,655,000
|
|
|
|
100
|
|
|
|
4,306,250
|
|
|
|
100
|
|
|
|
8,961,250
|
|
|
|
100
|
|
Released December 27, 2012
(1)
|
|
|
232,750
|
|
|
|
5
|
|
|
|
430,625
|
|
|
|
10
|
|
|
|
663,375
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
4,422,250
|
|
|
|
95
|
|
|
|
3,875,625
|
|
|
|
90
|
|
|
|
8,297,875
|
|
|
|
93
|
|
Released June 27, 2013
|
|
|
232,750
|
|
|
|
5
|
|
|
|
645,937
|
|
|
|
15
|
|
|
|
878,687
|
|
|
|
10
|
|
Released December 27, 2013
|
|
|
465,500
|
|
|
|
10
|
|
|
|
645,937
|
|
|
|
15
|
|
|
|
1,111,437
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subject to escrow at December 31, 2013
|
|
|
3,724,000
|
|
|
|
80
|
|
|
|
2,583,751
|
|
|
|
60
|
|
|
|
6,307,751
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future releases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2014
|
|
|
465,500
|
|
|
|
10
|
|
|
|
645,937
|
|
|
|
15
|
|
|
|
1,111,437
|
|
|
|
13
|
|
December 27, 2014
|
|
|
698,250
|
|
|
|
15
|
|
|
|
645,938
|
|
|
|
15
|
|
|
|
1,344,188
|
|
|
|
15
|
|
June 27, 2015
|
|
|
698,250
|
|
|
|
15
|
|
|
|
645,938
|
|
|
|
15
|
|
|
|
1,344,188
|
|
|
|
15
|
|
December 27, 2015
|
|
|
1,862,000
|
|
|
|
40
|
|
|
|
645,938
|
|
|
|
15
|
|
|
|
2,507,938
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future releases
|
|
|
3,724,000
|
|
|
|
80
|
|
|
|
2,583,751
|
|
|
|
60
|
|
|
|
6,307,751
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Date of issuance of TSXV exchange bulletin announcing the commencement of trading of the Companys stock.
|
Escrowed shares are subject to release every six months from the date of the exchange bulletin, at the rate shown. Release dates can change if
the Company were to move to the TSX Tier 1 Exchange. As well, if the operations or development of the Intellectual Property or the business are discontinued then the unreleased securities held in the QT Escrow will be cancelled.
Stock Options
|
i.
|
On January 16, 2012, the shareholders of the Company approved the establishment of an Employee Stock Option Plan. The directors are authorized to grant options to directors, employees and consultants, to acquire up
to 10% of the issued and outstanding common stock. The exercise price of each option is based on the market price of the Companys stock at the date of grant. The options can be granted for a maximum term of 10 years and vest as determined by
the board of directors.
|
|
ii.
|
On January 16, 2012 and February 15, 2012, the directors of the Company approved the award of 715,000 and 75,000 options, respectively, with
a value of $200,000. The fair value of the options issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk
free interest
|
F-27
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Stock Options
(continued)
|
rate of 1.71% (IV) an expected life of 3 years; (V) an exercise price of $0.70 and (VI) a share price of $0.70. Expected volatility was based on comparable companies. 540,000 of these
options vested immediately. The remaining vested as follows: 125,000 vested on February 29, 2012; 25,000 vested on May 31, 2012; 75,000 on July 26, 2012; and 25,000 on August 31, 2012.
|
|
iii.
|
On September 19, 2012, the directors of the Company approved the award of 300,000 options, with a value of $70,000. The fair value of the options issued was estimated at the date of grant using the
Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years; (V) an exercise price of $0.85
and (VI) a share price of $0.69. Expected volatility was based on comparable companies. 100,000 of these options vested immediately. The remaining options vest as follows: 25,000 vested on November 30, 2012; 25,000 vested on February 28,
2013; 25,000 vested on May 31, 2013; 25,000 vested on August 31, 2013; 33,333 vested on September 2013; 33,333 will vest on September 2014; and 33,333 will vest on September 2015.
|
|
iv
.
|
O
n September 19, 2012, the directors of the Company revised the exercise price of the 615,000 options issued to the officers and directors of the Company on January 16, 2012 from $0.70 to $0.85
per share, in keeping with the offering price for the Financing. The revision had no impact on the financial results of the Company.
|
|
v.
|
As
at the date of the Amalgamation, there were 75,000 T.B. Mining Shares reserved for issuance under the T.B. Mining Option Plan, after giving effect to the Consolidation. These options continued on under
the same terms.
|
|
vi.
|
O
n March 4, 2013, the directors of the Company approved the award of 100,000 options, which vest in 4 equal quarterly amounts, exercisable for 5 years, with a value of $18,500. The fair value of the options
issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life
of 3 years; (V) an exercise price of $0.85 and (VI) a share price of $0.60. Expected volatility was based on comparable companies.
|
|
vii
.
|
O
n March 5, 2013, the directors of the Company approved the award of 320,000 options, which vest in 4 equal quarterly amounts, exercisable for 5 years, with a value of $79,000. The fair value of the
options issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an
expected life of 3 years; (V) an exercise price of $0.60 and (VI) a share price of $0.60. Expected volatility was based on comparable companies.
|
|
viii.
|
O
n April 17, 2013, the directors of the Company approved a fiscal 2013 compensation plan for the independent directors of the
Company. The plan calls for the payment of $7,500 per quarter to the independent directors, which can be paid by cash or the issuance of common stock, at the Companys discretion, subject to TSXV approval. In addition, each of the independent
directors was awarded options to purchase 25,000 shares of the Companys common shares. The award of 75,000 fully vested options, exercisable for 10 years, was valued at $14,000. The fair value of the options issued was estimated at the date of
grant using the Black-Scholes model with the following weighted average
|
F-28
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Stock Options
(continued)
|
assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years; (V) an exercise price of $0.85 and
(VI) a share price of $0.60. Expected volatility was based on comparable companies.
|
|
ix.
|
On July 3, 2013, the directors of the Company approved the award of 300,000 options, which vest in 4 equal quarterly amounts, exercisable for 5 years, with a value of $50,000. The fair value of the options issued
was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3
years; (V) an exercise price of $0.65 and (VI) a share price of $0.51. Expected volatility was based on comparable companies.
|
|
x.
|
On July 3, 2013, the directors of the Company approved the award of 50,000 options, which vested immediately, exercisable for 5 years, with a value of $8,000. The fair value of the options issued was estimated at
the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years; (V) an
exercise price of $0.65 and (VI) a share price of $0.51. Expected volatility was based on comparable companies.
|
|
xi.
|
In connection with the appointment of Mr. Eric Kelly to the Board of Directors of the Company and his undertaking to become the Chairman, on July 3, 2013, the directors of the Company approved the award to
Mr. Eric Kelly of 850,000 options, which vest quarterly over three years, exercisable for 10 years, with a value of $215,000. The options were subject to: (i) the completion of the Agreements with Overland Storage, (ii) the
agreement by the shareholders of the Company to amend the Companys Option Plan to a 20% fixed plan; and, (iii) the ratification of the award by the Shareholders at the Annual and Special Meeting of Shareholders, held September 16,
2013. The fair value of the options issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest
rate of 1.71% (IV) an expected life of 3 years; (V) an exercise price of $0.65 and (VI) a share price of $0.64. Expected volatility was based on comparable companies.
|
|
xii.
|
On August 30, 2013, the directors of the Company approved the award of 100,000 options, which vest in 4 equal quarterly amounts, exercisable for 10 years, with a value of $100,000. The fair value of the options
issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life
of 3 years; (V) an exercise price of $2.50 and (VI) a share price of $2.50. Expected volatility was based on comparable companies.
|
|
xiii.
|
On September 16, 2013, at the annual and special meeting of the shareholders of the Company, the shareholders ratified the adoption of a fixed stock option plan, authorizing the award of up to 3,375,000 shares,
being approximately 20% of the common shares outstanding at the record date for the meeting.
|
|
xiv.
|
One September 16, 2013, the directors of the Company approved the award of 450,000 options, which vest in 4 equal quarterly amounts, exercisable
for 10 years, with a value of $500,000. The fair value of the options issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of
60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years; (V) an exercise price of $2.68 and (VI) a
|
F-29
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Stock Options
(continued)
|
share price of $2.68. Expected volatility was based on comparable companies. In connection with the awards made to the independent directors of the Company, the directors agreed to waive future
quarterly fees until the Company achieves commercialization.
|
|
xv.
|
On November 1, 2013, the directors of the Company approved the award of 50,000 options, which vest in 4 equal quarterly amounts, exercisable for 10 years, with a value of $88,000. The fair value of the options
issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life
of 3 years; (V) an exercise price of $4.28 and (VI) a share price of $4.28. Expected volatility was based on comparable companies.
|
As at December 31, 2013 the Company had 435,000 additional options available for issuance. A continuity of the unexercised options to
purchase common shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted average
exercise price
|
|
|
Number
|
|
Balance at December 31, 2011
|
|
$
|
0.00
|
|
|
|
|
|
Granted
|
|
|
0.82
|
|
|
|
1,090,000
|
|
Issued on Transaction
|
|
|
0.80
|
|
|
|
75,000
|
|
Expired
|
|
|
0.70
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
0.83
|
|
|
|
1,015,000
|
|
Granted
|
|
|
1.24
|
|
|
|
2,295,001
|
|
Exercised
|
|
|
0.71
|
|
|
|
(180,001
|
)
|
Expired
|
|
|
0.60
|
|
|
|
(320,000
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
$
|
1.18
|
|
|
|
2,810,000
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013
|
|
$
|
1.03
|
|
|
|
1,176,666
|
|
|
|
|
|
|
|
|
|
|
The weighted average share price on the date of exercise was $3.69.
F-30
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Stock Options
(continued)
The following table provides further information on the outstanding options as at
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiry Date
|
|
Number
exercisable
|
|
|
Number
outstanding
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
years
remaining
|
|
March 4, 2018
|
|
|
75,000
|
|
|
|
100,000
|
|
|
$
|
0.85
|
|
|
|
4.25
|
|
July 3, 2018
|
|
|
|
|
|
|
225,000
|
|
|
|
0.65
|
|
|
|
4.50
|
|
September 8, 2020
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
0.80
|
|
|
|
6.66
|
|
January 16, 2022
|
|
|
640,000
|
|
|
|
640,000
|
|
|
|
0.83
|
|
|
|
8.04
|
|
September 19, 2022
|
|
|
158,333
|
|
|
|
300,000
|
|
|
|
0.85
|
|
|
|
8.71
|
|
April 16, 2023
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
0.85
|
|
|
|
9.29
|
|
July 2, 2023
|
|
|
70,833
|
|
|
|
850,000
|
|
|
|
0.65
|
|
|
|
9.50
|
|
August 29, 2023
|
|
|
25,000
|
|
|
|
100,000
|
|
|
|
2.50
|
|
|
|
9.67
|
|
September 15, 2023
|
|
|
112,500
|
|
|
|
450,000
|
|
|
|
2.68
|
|
|
|
9.71
|
|
October 31, 2023
|
|
|
|
|
|
|
50,000
|
|
|
|
4.28
|
|
|
|
9.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,176,666
|
|
|
|
2,810,000
|
|
|
$
|
1.18
|
|
|
|
8.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
The Company had the following warrants outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2011
|
|
|
87,500
|
|
|
$
|
0.70
|
|
Granted
|
|
Broker Warrants
|
|
|
65,028
|
|
|
|
0.70
|
|
|
|
Investor Warrants
|
|
|
3,783,989
|
|
|
|
1.00
|
|
|
|
Broker Unit Warrants
(1)
|
|
|
325,925
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
|
|
4,262,442
|
|
|
$
|
0.98
|
|
Exercised
|
|
Broker Warrants
|
|
|
(152,528
|
)
|
|
|
0.70
|
|
|
|
Investor Warrants
|
|
|
(1,980,462
|
)
|
|
|
1.00
|
|
|
|
Broker Unit Warrants
|
|
|
(325,925
|
)
|
|
|
0.85
|
|
Issued on exercise of Broker Unit Warrants
|
|
|
325,925
|
|
|
|
1.00
|
|
Exercise of warrants issued
|
|
|
(325,925
|
)
|
|
|
1.00
|
|
Granted
|
|
Investor Warrants
|
|
|
625,000
|
|
|
|
4.50
|
|
|
|
Broker Unit Warrants
(2)
|
|
|
100,000
|
|
|
|
3.35
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
2,528,527
|
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average share price on the date of exercise was $3.46
|
(1)
|
The Broker Unit Warrants were exercisable into Sphere 3D Units at an exercise price of $0.85 per unit within two years of closing of the Financing. Each Sphere 3D Unit consists of a Sphere 3D Share and a Sphere 3D
Investor Warrant, exercisable at $1.00.
|
F-31
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Warrants
(continued)
|
|
Upon exercise of the Broker Unit Warrants Sphere 3D Investor Warrants were issued, at a cumulative value of $703,000. The fair value of the warrants issued was estimated at the date of exercise of the Broker Unit
Warrant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an average expected life of less than 1 year;
(V) an exercise price of $1.00 and (VI) an average share price of $3.13. Expected volatility was based on comparable companies.
|
|
(2)
|
The Broker Unit Warrants were exercisable into Sphere 3D Units at an exercise price of $3.35 per unit within two years of closing of the Financing. Each Sphere 3D Unit consists of a Sphere 3D Share and a Sphere 3D
Investor Warrant, exercisable at $4.50.
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Other equity beginning of period
|
|
$
|
1,007,500
|
|
|
$
|
25,000
|
|
Value of warrants issued
|
|
|
1,563,000
|
|
|
|
712,500
|
|
Value of options issued
|
|
|
319,679
|
|
|
|
270,000
|
|
Value of warrants exercised
|
|
|
(1,154,528
|
)
|
|
|
|
|
Value of options exercised
|
|
|
(20,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant capital end of period
|
|
$
|
1,715,151
|
|
|
$
|
1,007,500
|
|
|
|
|
|
|
|
|
|
|
11.
|
Related Party Transactions
|
Related parties of the Company include the Companys
key management personnel and independent directors.
Key management personnel are those persons having authority and responsibility for
planning, directing and controlling the activities of the Company, directly or indirectly, including any director (whether executive or otherwise).
The compensation paid or payable to key management personnel is shown below:
|
|
|
|
|
|
|
|
|
|
|
December 31
2013
|
|
|
December 31
2012
|
|
Salaries, management fees and benefits
|
|
$
|
875,000
|
|
|
$
|
444,181
|
|
Share-based payments management
|
|
|
240,722
|
|
|
|
66,813
|
|
Share-based payments directors
|
|
|
340,111
|
|
|
|
134,976
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,455,833
|
|
|
$
|
645,970
|
|
|
|
|
|
|
|
|
|
|
Legal services of $110,428 (2012 $209,288) were provided by a legal firm affiliated with a director of
the Company.
Amounts owing to related parties at year end included in accounts payable total $207,042 (2012 $141,658)
F-32
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
12.
|
Commitment and Contingencies
|
The Company entered into a five year lease, for a 6,000
square foot, free standing building, on May 1, 2011. In addition to the minimum lease payments, the Company is required to pay operating costs estimated at $27,000 per year. The minimum lease payments for the Companys facility in
Mississauga, are as follows:
|
|
|
|
|
2014
|
|
$
|
58,000
|
|
2015
|
|
|
59,500
|
|
2016
|
|
|
20,000
|
|
Refer to note 9(ii) for additional commitments to issue shares.
13.
|
Deferred Income Taxes
|
Reconciliation between tax expense and the amount of tax on net
accounting income at the Companys statutory rate of 26.5% (2012 26.5%) percent is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
2013
|
|
|
December 31
2012
|
|
Loss before tax from continuing operations
|
|
$
|
(2,378,023
|
)
|
|
$
|
(2,461,305
|
)
|
|
|
|
|
|
|
|
|
|
Income tax using corporation statutory tax rate
|
|
|
(630,200
|
)
|
|
|
(652,200
|
)
|
Adjustment for share issue costs
|
|
|
|
|
|
|
(99,000
|
)
|
Loss carry forward adjustment
|
|
|
(78,137
|
)
|
|
|
|
|
Change in tax rate and other
|
|
|
63,237
|
|
|
|
164,300
|
|
Deferred income taxes not recognized
|
|
|
645,100
|
|
|
|
586,900
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
2013
|
|
|
December 31
2012
|
|
Non-capital loss carry-forwards
|
|
$
|
1,347,300
|
|
|
$
|
717,100
|
|
Property and equipment
|
|
|
10,300
|
|
|
|
62,900
|
|
Share issue costs
|
|
|
165,000
|
|
|
|
97,200
|
|
Less: Deferred income taxes not recognized
|
|
|
(1,522,600
|
)
|
|
|
(877,200
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Loss Carry Forwards
As at December 31, 2013, unused loss carry-forwards expire in the following taxation years:
|
|
|
|
|
2030
|
|
$
|
1,004,807
|
|
2031
|
|
|
1,513,862
|
|
2032
|
|
|
482,352
|
|
2033
|
|
|
2,082,926
|
|
F-33
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
14.
|
Capital Risk Management
|
The Company includes equity, comprised of issued common share
capital, other equity and deficit, in the definition of capital.
The Companys primary objective with respect to its capital
management is to ensure that it has sufficient cash resources to further develop and market its digital media distribution systems, and to maintain its ongoing operations. To secure the additional capital necessary to pursue these plans, the Company
may attempt to raise additional funds through the issuance of equity and warrants, debt or by securing strategic partners.
The Company is
not subject to externally imposed capital requirements and there has been no change with respect to the overall capital risk management strategy during the years ended December 31, 2013 and 2012.
15.
|
Financial Risk Management
|
The Company is exposed to a variety of financial risks by
virtue of its activities: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse
effects on financial performance.
Risk management is carried out by management under policies approved by the Board of Directors.
Management is charged with the responsibility of establishing controls and procedures to ensure that financial risks are mitigated in accordance with the approved policies.
The Company is still in its pre-commercialization phase and as such has
limited exposure to foreign exchange risk. Foreign exchange risk arises from purchase transactions as well as recognized financial assets and liabilities denominated in foreign currencies.
Interest rate risk is the risk that the future cash flows of a financial
instrument will fluctuate because of changes in market interest rates.
Financial assets and financial liabilities with variable interest
rates expose the Company to cash flow interest rate risk. The Companys cash and cash equivalents and investments earn interest at market rates.
The Company manages its interest rate risk by maximizing the interest income earned on excess funds while maintaining the liquidity necessary
to conduct operations on a day-to-day basis. Fluctuations in market rates of interest do not have a significant impact on the Companys results of operations as interest expense represents approximately 0.1% (2012 0.7%) of total
expenses. A 1.0% change in interest rates would not have a significant impact on the interest income.
The Company is subject to risk of non-payment of loans receivable. The
Company mitigates this risk by monitoring the credit worthiness of its customers.
F-34
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
15.
|
Financial Risk Management
(continued)
|
Liquidity risk is the risk that the Company will not be able to meet its
obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. Senior management is also actively involved in the review and approval of planned
expenditures.
As at December 31, 2013, the Company has trade and other payables of $478,282 (2012 $303,218) due within 12
months and has cash and cash equivalents of $5,550,788 (2012 $1,633,334) to meet its current obligations.
|
(a)
|
Convertible Debenture
|
On March 21, 2014, the Company completed a financing with
FBC Holdings S.a r.l., a wholly-owned subsidiary of private investment funds (collectively, the Cyrus Funds) the investment manager of which is Cyrus Capital Partners, L.P., whereby the Cyrus Funds subscribed for a convertible
secured debenture of the Company in the principal amount of U.S. $5,000,000 (the Debenture).
The Debenture has a four year
term maturing on March 21, 2018, bears interest at 8% per annum, to be paid semi-annually in cash or shares at the option of the Company. The Debenture is convertible at any time into common shares in the capital of the Company (the
Conversion Right) at a price of U.S. $7.50 (the Conversion Price). The Company shall have the right to force the conversion of the Debenture if the trading price of the common shares for 10 successive days in which the shares
actually trade on the TSX Venture Exchange (the TSXV) or other principal exchange, exceeds 150% of the Conversion Price. In addition, the Company shall have the right to repay in full the outstanding balance owing under the Debenture at
any time during the first 12 months of the term for an amount equal 120% of the balance then outstanding and at any time during the second year of the term for an amount equal 125% of the balance then outstanding.
The Company and each subsidiary has granted a first ranking security interest in favour of the Cyrus Funds against all of their assets, save
and except that the Cyrus Funds have agreed to subordinate the security interest in favour of a loan facility to be provided to the Company by a bank or commercial lender not to exceed U.S. $3,000,000. There are no restrictions on the Company
entering into additional unsecured indebtedness.
|
(b)
|
V3 Asset Purchase Agreement
|
On March 21, 2014, the Company closed an Asset
Purchase Agreement to acquire all the assets, including patents, trademarks and other intellectual property of V3 Systems, Inc., a leader in providing VDI architecture, software and hybrid Desktop-as-a-Service solutions.
The Company paid a purchase price of U.S. $9.7 million with $4.0 million in cash (less any amounts received on an interim basis prior to
closing) and issued 1,089,867 common shares of the common stock of the Company. At December 31, 2013, the amounts provided on an interim basis prior to closing amounted to $203,641.
F-35
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2013 and 2012
(Expressed in Canadian Dollars)
16.
|
Subsequent Events
(continued)
|
|
(b)
|
V3 Asset Purchase Agreement (continued)
|
In addition, V3 Systems shall be entitled to receive an earn-out based on achieving certain
milestones in revenue and gross margin of up to a further U.S. $5.0 million (the Earn-Out), payable at the discretion of Sphere 3D in cash or shares (up to a maximum of 1,051,414 common shares), to be priced at a 20-day weighted average
price calculated at the time(s) the Earn-Out is realized. The Earn-Out is based on a sliding scale of revenue of the V3 Systems business (subject to minimum margin realization), subject to a maximum payment of U.S. $5.0 million upon earn-out revenue
of U.S. $12.5 million.
F-36
SPHERE 3D CORPORATION
(Formerly T.B. Mining Ventures Inc.)
For the Years Ended
December 31, 2012, and December 31, 2011
(Expressed in Canadian Dollars)
F-37
MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying annual consolidated financial statements of Sphere 3D Corporation (Sphere 3D or the Company) have been prepared by
management in accordance with International Financial Reporting Standards and contain estimates based on managements judgment. Management maintains an appropriate system of internal controls to provide assurance that transactions are
authorized, assets safeguarded and proper records maintained.
The Audit Committee of the Board of Directors has reviewed with the Companys
independent auditors the scope and results of the annual audit and the financial statements and related financial reporting matters prior to submitting the financial statements to the Board for approval.
The Companys independent auditors, Collins Barrow Toronto LLP are appointed by the shareholders to conduct an audit in accordance with Canadian
generally accepted auditing standards and their report follows.
MANAGEMENTS ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL
REPORTING
(ICFR) AND DISCLOSURE CONTROLS AND PROCEDURES (DCP)
Management is also responsible for establishing and maintaining adequate internal control over the Companys financial reporting. The internal control
system was designed to provide reasonable assurance to the Companys management regarding the preparation and presentation of the financial statements.
As the Company is a Venture Issuer (as defined under National Instrument 52-109
Certification of Disclosure in Issuers Annual and Interim
Filings
) (NI 52-109), the Company and management are not required to include representations relating to the establishment and/or maintenance of DCP and/or ICFR, as defined in NI 52-109.
|
|
|
Peter Tassiopoulos
|
|
Scott Worthington
|
Peter Tassiopoulos
|
|
Scott Worthington
|
Chief Executive Officer
|
|
Chief Financial Officer
|
|
|
Mississauga, Ontario
|
|
Mississauga, Ontario
|
April 10, 2013
|
|
April 10, 2013
|
F-38
|
|
|
|
|
Collins Barrow Toronto LLP
|
|
|
Collins Barrow Place
|
|
|
11 King Street West
|
|
|
Suite 700, Box 27
|
|
|
Toronto, Ontario
|
|
|
M5H 4C7 Canada
|
|
|
|
|
T. 416.480.0160
|
INDEPENDENT AUDITORS REPORT
|
|
F. 416.480.2646
|
To the Shareholders of Sphere 3D Corporation
|
|
www.collinsbarrow.com
|
We have audited the accompanying consolidated financial statements of Sphere 3D Corporation which comprise the consolidated
balance sheets as at December 31, 2012 and December 31, 2011 and the consolidated statements of loss and comprehensive loss, changes in equity and cash flows for the years ended December 31, 2012 and 2011 and a summary of significant
accounting policies and other explanatory information.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to
express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit
involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of Sphere 3D Corporation as at December 31, 2012 and December 31, 2011, and its financial performance and its cash flows for the years ended December 31, 2012
and 2011 in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board.
Licensed Public Accountants
Chartered Accountants
April 10, 2013
Toronto, Ontario
|
|
|
|
|
This office is independently owned and operated by Collins Barrow Toronto LLP
|
|
|
|
|
The Collins Barrow trademarks are used under License.
|
|
F-39
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Consolidated Statements of
Financial Position
As at
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,633,334
|
|
|
$
|
158,094
|
|
Investments
|
|
|
10,203
|
|
|
|
10,093
|
|
Subscriptions receivable
|
|
|
150,035
|
|
|
|
|
|
Sales tax recoverable
|
|
|
78,319
|
|
|
|
122,734
|
|
Amounts receivable
|
|
|
54,729
|
|
|
|
233,325
|
|
Inventory
|
|
|
|
|
|
|
21,078
|
|
Prepaid and sundry assets
|
|
|
105,401
|
|
|
|
154,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,032,021
|
|
|
|
700,152
|
|
Property and equipment (note 5)
|
|
|
358,127
|
|
|
|
387,455
|
|
Investment
|
|
|
101,821
|
|
|
|
|
|
Intangible assets (note 6)
|
|
|
718,750
|
|
|
|
695,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,210,719
|
|
|
$
|
1,782,607
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Trade and other payables (note 7)
|
|
$
|
303,218
|
|
|
$
|
310,987
|
|
Deferred revenue
|
|
|
|
|
|
|
30,070
|
|
Subscriptions received
|
|
|
|
|
|
|
50,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303,218
|
|
|
|
391,457
|
|
|
|
|
|
|
|
|
|
|
Shareholders Deficiency
|
|
|
|
|
|
|
|
|
Common share capital (note 9)
|
|
|
5,409,488
|
|
|
|
2,411,832
|
|
Preferred share capital (note 9)
|
|
|
|
|
|
|
2,500
|
|
Other equity (note 10)
|
|
|
1,007,500
|
|
|
|
25,000
|
|
Deficit
|
|
|
(3,509,487
|
)
|
|
|
(1,048,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,917,501
|
|
|
|
1,391,150
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,210,719
|
|
|
$
|
1,782,607
|
|
|
|
|
|
|
|
|
|
|
Nature of operations (note 1)
Commitment and contingencies (note 12)
|
|
|
|
|
|
|
|
|
|
Approved by the Board
|
|
Glenn Bowman
|
|
|
|
Mario Biasini
|
|
|
Director
|
|
|
|
Director
|
See accompanying notes, which are an integral part of these financial statements
F-40
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Consolidated Statements of
Comprehensive Loss
For the years ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
December 31
2012
|
|
|
December 31
2011
|
|
Revenue
|
|
$
|
409,347
|
|
|
$
|
261,210
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
356,688
|
|
|
|
127,131
|
|
Salaries and consulting
|
|
|
1,179,711
|
|
|
|
562,312
|
|
Professional fees
|
|
|
380,762
|
|
|
|
281,591
|
|
General and administrative
|
|
|
291,745
|
|
|
|
194,014
|
|
Technology development
|
|
|
41,773
|
|
|
|
81,348
|
|
Listing fees (note 8)
|
|
|
382,777
|
|
|
|
|
|
Regulatory fees
|
|
|
42,405
|
|
|
|
|
|
Amortization of patents
|
|
|
1,250
|
|
|
|
|
|
Amortization of property and equipment
|
|
|
174,391
|
|
|
|
62,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,851,502
|
|
|
|
1,308,919
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,442,155
|
)
|
|
|
(1,047,709
|
)
|
|
|
|
|
|
|
|
|
|
Finance income (expenses)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
117
|
|
|
|
298
|
|
Interest expense
|
|
|
(19,267
|
)
|
|
|
(771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,150
|
)
|
|
|
(473
|
)
|
|
|
|
|
|
|
|
|
|
Net comprehensive loss for the period
|
|
$
|
(2,461,305
|
)
|
|
$
|
(1,048,182
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(0.11
|
)
|
Weighted average number of common shares
|
|
|
11,918,124
|
|
|
|
9,189,030
|
|
See accompanying notes, which are an
integral part of these financial statements
F-41
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Consolidated Statements of
Changes in Equity
For the years ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
common
shares
|
|
|
Number of
preferred
shares
|
|
|
Common
share capital
|
|
|
Preferred
share
capital
|
|
|
Other
Equity
|
|
|
Deficit
|
|
|
Total
|
|
Balance at December 31, 2010
|
|
|
8,000,000
|
|
|
|
500,000
|
|
|
|
730,000
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
732,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
2,600,000
|
|
|
|
|
|
|
|
1,820,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,820,000
|
|
Share issuance costs
|
|
|
|
|
|
|
|
|
|
|
(113,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113,168
|
)
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,048,182
|
)
|
|
|
(1,048,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
(1)
|
|
|
10,600,000
|
|
|
|
500,000
|
|
|
$
|
2,411,832
|
|
|
$
|
2,500
|
|
|
$
|
25,000
|
|
|
$
|
(1,048,182
|
)
|
|
$
|
1,391,150
|
|
Issuance of common shares
|
|
|
4,116,913
|
|
|
|
|
|
|
|
3,431,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,431,792
|
|
Share issuance costs
|
|
|
|
|
|
|
|
|
|
|
(373,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(373,511
|
)
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
(712,500
|
)
|
|
|
|
|
|
|
712,500
|
|
|
|
|
|
|
|
|
|
Share-based payments
|
|
|
23,529
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
Share based compensation Employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270,000
|
|
|
|
|
|
|
|
270,000
|
|
Conversion of debt
|
|
|
117,647
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Conversion of preferred shares
|
|
|
500,000
|
|
|
|
(500,000
|
)
|
|
|
2,500
|
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for acquisition of T.B. Mining Ventures Inc.
|
|
|
756,250
|
|
|
|
|
|
|
|
529,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529,375
|
|
Comprehensive loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,461,305
|
)
|
|
|
(2,451,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
16,114,339
|
|
|
|
|
|
|
$
|
5,409,488
|
|
|
$
|
|
|
|
$
|
1,007,500
|
|
|
$
|
(3,509,487
|
)
|
|
$
|
2,917,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the legal capital of Sphere 3D Inc. (the accounting acquirer). The legal capital of T.B. Mining Ventures Inc. (the legal acquirer) was 3,025,000 common shares.
|
See accompanying notes, which are an integral part of these financial statements
F-42
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Consolidated Statements of
Cash Flows
For the years ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
December 31
2012
|
|
|
December 31
2011
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
Net comprehensive loss for the period
|
|
$
|
(2,461,305
|
)
|
|
$
|
(1,048,182
|
)
|
Items not affecting cash:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
175,641
|
|
|
|
62,523
|
|
Listing fee
|
|
|
382,777
|
|
|
|
|
|
Stock based compensation
|
|
|
270,000
|
|
|
|
|
|
Expenses paid through stock issuances
|
|
|
120,000
|
|
|
|
|
|
Accrued interest
|
|
|
(110
|
)
|
|
|
(93
|
)
|
Change in working capital:
|
|
|
|
|
|
|
|
|
Change in sales tax recoverable
|
|
|
44,415
|
|
|
|
(122,734
|
)
|
Change in accounts receivables
|
|
|
178,596
|
|
|
|
(233,325
|
)
|
Change in inventory
|
|
|
21,078
|
|
|
|
(21,078
|
)
|
Change in prepaid and sundry assets
|
|
|
(49,427
|
)
|
|
|
(154,828
|
)
|
Change in trade and other payables
|
|
|
(14,269
|
)
|
|
|
310,987
|
|
Change in deferred revenue
|
|
|
(30,070
|
)
|
|
|
30,070
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,263,820
|
)
|
|
|
(1,176,660
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
Reverse take-over of T.B. Mining Ventures Inc.
|
|
|
51,277
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(145,063
|
)
|
|
|
(449,978
|
)
|
Investment in technology
|
|
|
(25,000
|
)
|
|
|
|
|
Purchase of investments
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(118,786
|
)
|
|
|
(459,978
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from common shares, net of issue costs
|
|
|
2,857,846
|
|
|
|
1,794,632
|
|
|
|
|
|
|
|
|
|
|
Net cash used financing activities
|
|
|
2,857,846
|
|
|
|
1,794,632
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
1,475,240
|
|
|
|
157,994
|
|
Cash and cash equivalents at opening
|
|
|
158,094
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at closing
|
|
$
|
1,633,334
|
|
|
$
|
158,094
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes, which are an integral part of these financial statements
F-43
Sphere 3D Corporation
(Formerly T.B. Mining Ventures Inc.)
Notes to the Consolidated
Financial Statements
For the years ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
Sphere 3D Corporation (the Company) was incorporated
under the
Business Corporations Act (Ontario)
on May 2, 2007 as T.B. Mining Ventures Inc. The Company is listed on the TSXV, under the trading symbol ANY and has its main and registered office of the Company is located at 240
Matheson Blvd. East, Mississauga, Ontario, L4Z 1X1.
On December 21, 2012, the Company completed its Qualifying transaction (the
Transaction) with Sphere 3D Inc. (Sphere 3D) and changed its name to Sphere 3D Corporation. The Transaction resulted in the Company acquiring 100% of the issued and outstanding securities of Sphere 3D through a securities
exchange (see note 8). Accordingly, the former security-holders of Sphere 3D acquired control of the Company through a reverse takeover. The accounting parent in the reverse takeover was Sphere 3D. Therefore, the consolidated financial statements
are presented from the perspective of Sphere 3D and the comparative figures presented prior to December 21, 2012 are those of Sphere 3D. The results of operations of the legal parent, Sphere 3D Corporation (formerly T.B. Mining Ventures Inc.),
are included from the date of the reverse takeover.
Sphere 3D Inc. is a technology development company focused on establishing its patent
pending emulation and virtualization technology. These annual consolidated statements include the financial statements of the Company, its wholly-owned subsidiary, Sphere 3D Inc., which was incorporated under the
Canada Business Corporation
Act
on October 20, 2009, and its wholly owned subsidiary, Frostcat Technologies Inc., which was incorporated under the
Business Corporations Act (Ontario)
on February 13, 2012.
The Company will have to raise additional capital to fund operations until such point that revenues from products and technology are able to
fund operations. If the Company is not able to raise sufficient capital then there is the risk that the Company will not be able to realize the value of its assets and discharge its liabilities. These financial statements do not give effect to
adjustments that would be necessary to the carrying values and classification of assets and liabilities should the going concern assumption not be appropriate. To date the Company has been successful raising capital in fiscal 2011 and 2012. These
proceeds are used to fund operations of the Company.
At December 31, 2012, the Company had working capital of $1,728,803 and an
accumulated deficit of $3,509,487. Management believes that the Company has sufficient funds to pay its ongoing operating expenses and other commitments and to meet its liabilities for the ensuing year as they fall due.
2.
|
STATEMENT OF COMPLIANCE
|
The Financial Statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
The Financial Statements were approved by the Companys Board of Directors on April 10, 2013.
3.
|
Significant Accounting Policies
|
The accounting policies set out below have been applied
consistently to all periods presented in these financial statements as at and for the periods ended December 31, 2012 and 2011, unless otherwise indicated.
F-44
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
The consolidated financial statements comprise the accounts of the Company, and its
controlled subsidiary. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Consolidated financial statements are prepared using
uniform accounting policies for like transactions and other events in similar circumstances.
All transactions and balances between the
Company and its subsidiaries are eliminated on consolidation, including unrealized gains and losses on transactions between companies. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment
to the extent of the Companys interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
|
(a)
|
Use of estimates and judgements
|
The preparation of the financial statements in
conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these
estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the
period in which the estimates are revised and in any future periods affected.
Information about significant areas of estimation
uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are noted below with further details of the assumptions in the following notes:
When charges for share-based payments are based on the equity instrument
granted, the fair value is calculated at the date of the award. The equity instruments are valued using Black-Scholes; inputs to the model include assumptions on share price volatility, discount rates and expected life outstanding.
|
(ii)
|
Investment in technology
|
The recoverability of the investment in technology is dependent on
the future realization of cash flows from amounts spent.
|
(iii)
|
Property and equipment
|
The useful lives of property and equipment is estimated based on the
length of use of the assets by the Company.
F-45
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(a)
|
Use of estimates and judgements
(continued)
|
Tax interpretations, regulations and legislation in the jurisdiction in which
the Company operates are subject to change. As such, income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood that they will be realised
from future taxable earnings.
The functional currency of the Company and its subsidiaries is the
Canadian dollar. Transactions in foreign currencies are translated to the functional currency of the Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to
Canadian dollars at the period end exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value
was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
|
(c)
|
Financial instruments
|
|
(i)
|
Non-derivative financial assets
|
Non-derivative financial instruments comprise of amounts
receivable, cash and cash equivalents, investments and trade and other payables. Non-derivatives financial instruments are recognised initially at the fair value plus, for instruments not at fair value through profit and loss, any directly
attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below.
|
(ii)
|
Cash, cash equivalents and investments
|
Cash and cash equivalents comprise cash on hand, term
deposits with banks, other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Companys cash management, whereby management has
the ability and intent to net bank overdrafts against cash, are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Investments comprise highly liquid investments, in the form of guaranteed investment certificates, with maturities greater than three months
but with cashable features. Investments have been used to secure the companys credit rating and are therefore separated from cash and cash equivalents for the purpose of the statement of cash flows.
F-46
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(c)
|
Financial instruments
(continued)
|
|
(iii)
|
Financial assets at fair value through profit or loss
|
An instrument is classified at fair
value through profit or loss if it is held or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions
based on their fair value in accordance with the Companys documented risk management or investment strategy. Upon initial recognition the transaction costs are recognized in profit or loss when incurred. Financial instruments at fair value
through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. The Company has designated cash and cash equivalents and investments at fair value.
Other non-derivative financial instruments, such as amounts receivable and trade and
other payables, are measured at amortized cost using the effective interest method, less any impairment losses.
|
(d)
|
Property and equipment
|
|
(i)
|
Recognition and measurement
|
Items of property and equipment are measured at cost less
accumulated amortization and accumulated impairment losses. Costs include expenditure that is directly attributable to the acquisition of the asset.
When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of
property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the
proceeds from disposal with the carrying amount of property and equipment, and are recognized net within other income in profit or loss.
The cost of replacing a part of an item of property and equipment is
recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The
costs of the day-to-day servicing of property and equipment are recognized in profit (loss) as incurred.
Amortization is calculated as the cost of the asset less its residual value.
Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property
and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the assets.
F-47
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(d)
|
Property and equipment
(continued)
|
|
(iii)
|
Amortization (continued)
|
The estimated useful lives for the current and comparative periods are as follows:
|
|
|
Computer hardware
|
|
- 3 years
|
|
|
Furniture and fixtures
|
|
- 5 years
|
|
|
Leasehold improvements
|
|
- over the term of the lease
|
This most closely reflects the expected pattern of consumption of the future economic benefits embodied in the
asset.
Estimates for amortization methods, useful lives and residual values are reviewed at each reporting period-end and adjusted if
appropriate.
|
(e)
|
Trade and other payables
|
Trade and other payables are stated at cost.
Assets and liabilities expected to be realised in, or intended for sale
or consumption in, the Companys normal operating cycle, usually equal to 12 months, are recorded as current assets or liabilities.
|
(g)
|
Statement of cash flows
|
The Company prepares its Statement of Cash Flows using the
indirect method.
A financial asset is assessed at each reporting date to determine whether
there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and
the present value of the estimated future cash flows discounted at the original effective interest rate.
Individually significant
financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in the statement of comprehensive loss.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For
financial assets measured at amortized cost the reversal is recognized in the statement of comprehensive loss.
F-48
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(h)
|
Impairment
(continued)
|
|
(ii)
|
Non-financial assets
|
The carrying amounts of the Companys non-financial assets, other
than deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the assets recoverable amount is estimated.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that
generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets referred to as a cash generating unit (CGU). The recoverable amount of an asset or a CGU is the greater of its value in
use and its fair value less cost to sell.
In assessing value in use, the estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value in use is generally computed by reference to the present value of the future cash flows expected to be
derived from sales.
Fair value less cost to sell is determined as the amount that would be obtained from the sale of a CGU in an
arms length transaction between knowledgeable and willing parties. The fair value less cost to sell of an asset is generally determined as the net present value of the estimated future cash flows expected to arise from the continued use of the
CGU, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account. These cash flows are discounted by an appropriate discount rate which would be applied by such a
market participant to arrive at a net present value of the CGU.
An impairment loss is recognized if the carrying amount of an asset or
its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in the statement of comprehensive loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of the other assets in
the unit (group of units) on a pro rata basis.
An impairment loss in respect of other assets is assessed at each reporting date for any
indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the assets
carrying amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation or amortization, if no impairment loss had been recognized.
Costs to obtain patents are capitalized and are amortized to operations on a
straight-line basis over the underlying term of the patents, which is 20 years, commencing upon the registration of the patent.
F-49
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(i)
|
Intangible assets
(continued)
|
|
(ii)
|
Investment in Technology
|
The investment in technology consists of consideration paid for the
acquisition of the technology. Amortization commences with the successful commercial production or use of the product or process. These costs are being amortized over a period of four years from commencement of commercial use, which has not yet
commenced.
|
(iii)
|
Research and Development Costs
|
Research costs are charged to income when incurred.
Development costs are expensed in the year incurred unless they meet the criteria for deferral and amortization. Amortization commences with the successful commercial production or use of the product or process. These costs are being amortized over
a period of four years from commencement of commercial use, which has not yet commenced.
Investment Tax Credits (ITCs) earned
as a result of incurring Scientific Research and Experimental Development (SRED) expenditures are recorded as a reduction of the related current period expense, the related deferred development costs or related capital assets. Management
records ITCs when there is reasonable assurance of collection. To date, management has not recorded any amounts related to ITCs.
|
(j)
|
Share capitalcommon shares
|
Common shares are classified as equity. Incremental
costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects.
The grant date fair value of options awarded to employees,
directors, and service providers is measured using the Black-Scholes option pricing model and recognised in the statement of comprehensive income, with corresponding increase in contributed surplus over the vesting period. A forfeiture rate is
estimated on the grant date and is adjusted to reflect the actual number of options that vest. Upon exercise of the option, consideration received, together with the amount previously recognised in contributed surplus, is recorded as an increase to
share capital.
Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the
goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders
the service.
Revenue is recorded when persuasive evidence of an agreement exists, usually in
the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to
F-50
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
the buyer, price is fixed and determinable, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing
management involvement with the goods, the distribution of the media has occurred and collectability is reasonably assured and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be
measured reliably, then the discount is recognized as a reduction of revenue as the sales are recognized. Revenue is deferred when the Company has received the cash and has a further obligation to the customer. The revenue is then recognized when
the Company has fulfilled that obligation.
|
(m)
|
Finance income and expenses
|
Finance expenses comprise interest expense on borrowings,
changes in the fair value of financial assets at fair value through profit or loss and impairment losses recognized on financial assets.
Interest income is recognised as it accrues in profit or loss, using the effective interest method.
Foreign currency gain and losses, reported under finance income and expenses, are reported on a net basis.
Income tax expense comprises current and deferred tax. Income tax expense
is recognized in profit or loss except to the extent that it relates to items recognized directly in equity.
Current tax is the expected
tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. Deferred tax is not recognised on the initial recognition of assets or liabilities in a transaction that is not a business combination. Deferred tax is measured at the tax rates that are expected
to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and
they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised
simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against
which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Basic earnings per share is calculated by dividing the profit or loss
attributable to common shareholders of the Company by the weighted average number of common shares outstanding during
F-51
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(o)
|
Loss per share
(continued)
|
the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the
effects of dilutive instruments such as options and warrants. The dilutive effect on earnings per share is recognised on the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments. It assumes that the
proceeds would be used to purchase common shares at the average market price during the period. At year end diluted earnings per share has not been presented as the effect of stock options and warrants would be anti-dilutive.
A provision is recognized if, as a result of a past event, the Company has a
present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognised for future operating losses.
A contingent liability is a possible obligation that arises from
past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company; or a present obligation that arises from past events (and
therefore exists), but is not recognized because it is not probable that a transfer or use of assets, provision of services or any other transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot
be estimated reliably.
|
(r)
|
New standards and interpretations not yet adopted
|
The following pronouncements issued
by the IASB and interpretations published by IFRIC will become effective for annual periods beginning on or after January 1, 2013, with earlier adoption permitted, with the exception of amendment to IFRS 7. IFRS 10, IFRS 11 and IFRS 12 permit
early adoption if all of the standards are collectively adopted.
IFRS 7Financial Instruments: Disclosures was amended to provide
additional information about offsetting of financial assets and financial liabilities. Additional disclosures will be required to enable users of financial statements to evaluate the effect or potential effect of netting arrangements on the
entitys financial position.
IFRS 10Consolidated Financial Statements establishes principles for the presentation and
preparation of consolidated financial statements when an entity controls one or more other entities. A new definition of control has been established. IFRS 10 replaces the consolidation requirements in SIC-12 ConsolidationSpecial
Purpose Entities and IAS 27 Consolidated and Separate Financial Statements.
IFRS 11Joint Arrangements establishes the principles for
joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. IFRS 11 requires a venturer to
F-52
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(r)
|
New standards and interpretations not yet adopted
(continued)
|
classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method whereas for a joint operation the venture will be
accounted for using the proportionate consolidation method.
IFRS 12Disclosure of Interests in Other Entities is a new and
comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities.
IFRS 13Fair Value Measurement defines fair value, requires disclosure about fair value measurements and provides a framework for
measuring fair value when it is required or permitted within the IFRS standards.
IAS 19Employee Benefits amends the existing
standard to eliminate options to defer the recognition of gains and losses in defined benefit plans, requires remeasurement of a defined benefit plans assets and liabilities to be presented in other comprehensive income and increases the
disclosure.
The IASB also amended the following standards which is effective as per the date identified.
IAS 1Presentation of Financial Statements was amended and requires companies to group items presented within Other Comprehensive Income
based on whether they may be subsequently reclassified to profit or loss. This amendment is effective for annual periods beginning on or after July 1, 2012, with earlier adoption permitted.
IAS 12Income Taxes was amended to provide a practical approach for measuring deferred tax liabilities and deferred tax assets when
investment property is measured using the fair value model, as well as incorporating the consensus from SIC-21. This amendment is effective for annual periods beginning on or after January 1, 2012. Earlier application is permitted.
IFRS 10Consolidated Financial Statements was amended to require investment entities to measure subsidiaries at fair value through profit
or loss. The amendment is effective for annual periods beginning on or after January 1, 2014. Earlier application is permitted.
IFRS
9Financial Instruments addresses the classification and measurement of financial assets. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value. The new standard also requires a single
impairment method to be used. The IASB has extended the effective date to January 1, 2015, with earlier application permitted.
The
Company has not yet completed its evaluations of the effect of adopting the above standards and the impact it may have on its consolidated financial statements.
F-53
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
4.
|
Determination of Fair Value
|
A number of the Companys accounting policies and
disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further
information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
|
(a)
|
Cash and cash equivalents, amounts receivable, investments and trade and other payables.
|
The
fair value of cash and cash equivalents, amounts receivable, investment and trade and other payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. At December 31, 2012
and December 31, 2011, the fair value of these balances approximated their carrying value due to their short term to maturity.
|
(b)
|
The fair value of stock options and warrants are measured using a Black-Scholes, option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility
(based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option and warrant holder behaviour)
and the risk-free interest rate (based on government bonds).
|
The carrying value of cash and cash equivalents, amounts
receivable, investment and trade and other payables included in the financial position approximate fair value due to the short term nature of those instruments.
The following tables provide fair value measurement information for financial assets and liabilities as of December 31, 2012 and 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
December 31, 2012
|
|
Carrying
amount
|
|
|
Fair value
|
|
|
Quoted prices
in Active
Market
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,633,334
|
|
|
$
|
1,633,334
|
|
|
$
|
1,633,334
|
|
|
$
|
|
|
|
$
|
|
|
Investments
|
|
$
|
10,203
|
|
|
$
|
10,203
|
|
|
$
|
10,203
|
|
|
$
|
|
|
|
$
|
|
|
Long term Investments
|
|
$
|
101,821
|
|
|
$
|
101,821
|
|
|
$
|
101,821
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
December 31, 2011
|
|
Carrying
amount
|
|
|
Fair value
|
|
|
Quoted prices
in Active
Market
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
158,094
|
|
|
$
|
158,094
|
|
|
$
|
158,094
|
|
|
$
|
|
|
|
$
|
|
|
Investments
|
|
$
|
10,093
|
|
|
$
|
10,093
|
|
|
$
|
10,093
|
|
|
$
|
|
|
|
$
|
|
|
Level 1 fair value measurements are based on unadjusted quoted market prices.
Level 2 fair value measurements are based on valuation models and techniques where the significant inputs are derived from quoted indices.
Level 3 fair value measurements are those with inputs for the asset or liability that are not based on observable market data.
F-54
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
5.
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Computer
Hardware
|
|
|
Furniture
and
Fixtures
|
|
|
Leasehold
Improvements
|
|
|
Total
|
|
Balance at December 31, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Additions
|
|
|
372,506
|
|
|
|
2,463
|
|
|
|
75,009
|
|
|
|
449,978
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
372,506
|
|
|
|
2,463
|
|
|
|
75,009
|
|
|
|
449,978
|
|
Additions
|
|
|
137,178
|
|
|
|
4,000
|
|
|
|
3,885
|
|
|
|
145,063
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
509,684
|
|
|
$
|
6,463
|
|
|
$
|
78,894
|
|
|
$
|
595,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation
|
|
Computer
Hardware
|
|
|
Furniture
and
Fixtures
|
|
|
Leasehold
Improvements
|
|
|
Total
|
|
Balance at December 31, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Additions
|
|
|
57,240
|
|
|
|
123
|
|
|
|
5,160
|
|
|
|
62,523
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
57,240
|
|
|
|
123
|
|
|
|
5,160
|
|
|
|
62,523
|
|
Additions
|
|
|
157,851
|
|
|
|
826
|
|
|
|
15,714
|
|
|
|
174,391
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
215,091
|
|
|
$
|
949
|
|
|
$
|
20,874
|
|
|
$
|
236,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2011
|
|
$
|
315,266
|
|
|
$
|
2,340
|
|
|
$
|
69,849
|
|
|
$
|
387,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2012
|
|
$
|
294,593
|
|
|
$
|
5,514
|
|
|
$
|
58,020
|
|
|
$
|
358,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Investment in technology
|
On December 31, 2010, the Company acquired all rights and
assets related to the emulation and virtualization technology from Promotion Depot Inc., in a non-arms length transaction, in exchange for 1,000,000 shares of the Companys common stock. Since the fair value of the assets received are not
readily determinable, the investment was valued based on the $695,000 fair value of the shares received by Promotion Depot Inc. The technology acquired is still in the development stage and not in commercial use. As such, amortization of this asset
has not commenced.
F-55
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
6.
|
Intangible assets
(continued)
|
On January 16, 2012, the Company filed 3 preliminary patents based on the
technology acquired in the investment in technology.
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Investment in
technology
|
|
|
Patents
|
|
|
Total
|
|
Balance at December 31, 2010
|
|
$
|
695,000
|
|
|
$
|
|
|
|
$
|
695,000
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
695,000
|
|
|
|
|
|
|
|
695,000
|
|
Additions
|
|
|
|
|
|
|
25,000
|
|
|
|
25,000
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
695,000
|
|
|
$
|
25,000
|
|
|
$
|
720,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
Investment in
technology
|
|
|
Patents
|
|
|
Total
|
|
Balance at December 31, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
1,250
|
|
|
|
1,250
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
|
|
|
$
|
1,250
|
|
|
$
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2011
|
|
$
|
695,000
|
|
|
$
|
|
|
|
$
|
695,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2012
|
|
$
|
695,000
|
|
|
$
|
23,750
|
|
|
$
|
718,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Trade and other payables
|
|
|
|
|
|
|
|
|
|
|
|
December 31
2012
|
|
|
December 31
2011
|
|
Trade payables
|
|
$
|
251,845
|
|
|
$
|
144,967
|
|
Non-trade payables and accrued expenses
|
|
|
51,373
|
|
|
|
166,200
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
303,218
|
|
|
$
|
310,987
|
|
|
|
|
|
|
|
|
|
|
F-56
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
The Company completed the Transaction on December 21, 2012,
pursuant to a definitive amalgamation agreement dated August 31, 2012. The Transaction constitutes a reverse takeover of the Company but does not meet the definition of a business combination, and therefore,
IFRS 3 Business Combinations
is not applicable. As a result and in accordance with reverse take-over accounting for a transaction that is not considered a business combination:
Sphere 3D Corporation (formerly T.B. Mining Ventures) is treated as the acquiree and Sphere 3D Inc. is treated as the acquirer. As a result,
the amalgamated entity is deemed to be a continuation of Sphere 3D Inc. and Sphere 3D Inc. is deemed to have acquired control of the assets and business of the Company with the consideration of the issuance of capital, and therefore
IFRS 2
Share-based Payments
, is applicable.
Under the terms of the Amalgamation Agreement, T.B. Mining Ventures was required to consolidate
(the Consolidation) its securities on a four (4) for one (1) exchange ratio. As of the date of the Transaction there were 756,250 T.B. Mining Shares issued and outstanding as fully paid and non-assessable, after giving effect
to the Consolidation.
The fair value of the consideration issued for the net assets of the Company is as follows:
|
|
|
|
|
|
|
|
$
|
|
756,250 common shares valued at $0.70 per share
|
|
|
529,375
|
|
|
|
|
|
|
Allocated to net asset value (at December 21, 2012):
|
|
|
$
|
|
|
|
Cash and cash equivalents
|
|
|
51,277
|
|
Long term investment
|
|
|
101,821
|
|
Accounts payable
|
|
|
(6,500
|
)
|
|
|
|
|
|
Net assets
|
|
|
146,598
|
|
Cost of listing (expensed)
|
|
|
382,777
|
|
|
|
|
|
|
|
|
|
529,375
|
|
|
|
|
|
|
The purchase price is recorded as an increase in share capital of $529,375
Transaction costs associated with the Reverse Takeover Transaction which amounted to $124,126 and the cost of listing of $382,777 have been
recorded as an expense.
an unlimited number of common shares
500,000 shares, without nominal or par value, of a class designated as multiple voting preferred
shares
F-57
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Common shares
Issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
Value
|
|
Balance, December 31, 2010
|
|
|
8,000,000
|
|
|
$
|
730,000
|
|
Issued for cash (net of cash fees of $113,168)
|
|
|
2,600,000
|
|
|
|
1,706,832
|
|
Less: Proceeds allocated to warrants
|
|
|
|
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
10,600,000
|
|
|
$
|
2,411,832
|
|
Issued for cash (net of cash fees of $373,541)
|
|
|
4,116,913
|
|
|
|
3,058,281
|
|
Less: Proceeds allocated to warrants
|
|
|
|
|
|
|
(600,000
|
)
|
Brokers warrants
|
|
|
|
|
|
|
(112,500
|
)
|
Issued for services rendered
|
|
|
23,529
|
|
|
|
20,000
|
|
Issued on conversion of debt
|
|
|
117,647
|
|
|
|
100,000
|
|
Issued on conversion of preferred shares
|
|
|
500,000
|
|
|
|
2,500
|
|
Reverse takeover transaction (note 8)
|
|
|
756,250
|
|
|
|
529,375
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
16,114,339
|
|
|
$
|
5,409,488
|
|
|
|
|
|
|
|
|
|
|
On July 22, 2011, the Company issued 1,750,000 shares of common stock for cash proceeds of $1,225,000,
less cash fees of $72,618. In connection with this transaction, the Company issued broker warrants to purchase 87,500 shares of common stock, at $0.70 per share, for a period of three years. The broker warrants were valued at $25,000. The brokers
warrants have been valued based on the equity instruments granted.
On December 15, 2011, the Company issued 850,000 shares of common
stock for cash proceeds of $595,000, less cash fees of $40,550.
On January 13, 2012, the Company issued 450,571 shares of common
stock for cash proceeds of $315,400, less cash fees of $29,650. In connection with this transaction, the Company issued broker warrants to purchase 65,028 shares of common stock, at $0.70 per share, for a period of three years. The broker warrants
were valued at $19,000. The brokers warrants have been valued based on the equity instruments granted.
As a condition to the Amalgamation,
Sphere 3D completed a private placement of Sphere 3D Units (the Financing) with gross proceeds of $3,116,642. Each Sphere 3D Unit consisted of one Sphere 3D Share and one Sphere 3D Warrant, entitling the holder to purchase one Sphere 3D
Share at an exercise price of $1.00 per Sphere 3D Share within two years of the completion of the Qualifying Transaction.
F-58
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Common shares
(continued)
The Financing was completed in five tranches, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Number of
Units
|
|
|
Gross
Proceeds
|
|
|
Cash Fees
|
|
|
Value of
Warrants
|
|
(i) July 26, 2012
|
|
|
1,141,976
|
|
|
$
|
970,680
|
|
|
$
|
147,800
|
|
|
$
|
180,000
|
|
(ii) October 30, 2012
|
|
|
1,540,003
|
|
|
|
1,309,003
|
|
|
|
132,588
|
|
|
|
245,000
|
|
(iii) November 13, 2012
|
|
|
324,300
|
|
|
|
275,655
|
|
|
|
28,282
|
|
|
|
70,000
|
|
(iv) December 13, 2012
|
|
|
476,163
|
|
|
|
404,739
|
|
|
|
21,800
|
|
|
|
75,746
|
|
(v) December 14, 2012
|
|
|
183,900
|
|
|
|
156,315
|
|
|
|
13,421
|
|
|
|
20,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,666,342
|
|
|
$
|
3,116,392
|
|
|
$
|
343,891
|
|
|
$
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, at the same time as the November 13, 2012 closing, Sphere 3D issued 117,647 Units in
settlement of a debt of $100,000. The value of the Sphere 3D PP Warrants issued in this debt conversion was $19,000.
In connection with
the Financing, the Company paid to the Agent, Jennings Capital Ltd., commissions in the amount of 8% of gross proceeds, and issued 325,925 Sphere 3D Broker Unit Warrants (10% of the brokered securities sold in the Financing). The brokers warrants
have been valued based on the equity instruments granted. In addition, the Company paid the Agent a corporate finance fee of $20,000 (through the issue of 23,529 shares of Sphere 3D).
The Broker Unit Warrants are exercisable into Sphere 3D Units at an exercise price of $0.85 per unit within two years of closing of the
Financing. Each Sphere 3D Unit consists of a Sphere 3D Share and a Sphere 3D PP Warrant. The Sphere 3D Broker Unit Warrants issued for the five tranches were valued at $33,000, $44,500, $8,000, $4,000 and $4,000 respectively, using the Black-Scholes
model.
The fair value of the warrants issued were estimated at the date of grant using the Black-Scholes model with the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker
Warrants
|
|
|
Investor
Warrants
|
|
|
Broker
Unit
Warrants
|
|
(I) dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
(II) expected volatility
|
|
|
60
|
%
|
|
|
60
|
%
|
|
|
60
|
%
|
(III) a risk free interest
|
|
|
1.71
|
%
|
|
|
1.28
|
%
|
|
|
1.07
|
%
|
(IV) an expected life
|
|
|
3 years
|
|
|
|
2 years
|
|
|
|
2 years
|
|
(V) a share price
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
|
$
|
0.85
|
|
(VI) an exercise price
|
|
$
|
0.70
|
|
|
$
|
1.00
|
|
|
$
|
0.85
|
|
Expected volatility was based on comparable companies.
F-59
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Preferred shares
Issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
Number
Of Shares
|
|
|
Value
|
|
Balance, December 31, 2010 and 2011
|
|
|
500,000
|
|
|
$
|
2,500
|
|
Converted to common shares in Transaction
|
|
|
(500,000
|
)
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
On December 21, 2012, the preferred shares of the Company automatically converted to shares of common
stock on a one for one basis as part of the Transaction.
Escrowed shares
With the completion of the Transaction and the Companys subsequent listing on the TSXV, certain common shares of the Company are subject
to escrow in accordance with TSXV policies. There are two separate escrow agreements in place which are subject to different rates of release. The following table summarizes the common shares that were issued by the Company and are subject to and
held under each escrow and the dates of release therefrom:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
QT Escrow
Number %
|
|
|
Value Share Escrow
Number %
|
|
|
Total
Number %
|
|
Common Shares
|
|
|
4,786,250
|
|
|
|
100
|
|
|
|
3,925,000
|
|
|
|
100
|
|
|
|
8,711,250
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2012
(1)
|
|
|
239,312
|
|
|
|
5
|
|
|
|
392,500
|
|
|
|
10
|
|
|
|
631,812
|
(2)
|
|
|
7
|
|
June 27, 2013
|
|
|
239,312
|
|
|
|
5
|
|
|
|
588,750
|
|
|
|
15
|
|
|
|
828,062
|
|
|
|
10
|
|
December 27, 2013
|
|
|
478,625
|
|
|
|
10
|
|
|
|
588,750
|
|
|
|
15
|
|
|
|
1,067,375
|
|
|
|
12
|
|
June 27, 2014
|
|
|
478,625
|
|
|
|
10
|
|
|
|
588,750
|
|
|
|
15
|
|
|
|
1,067,375
|
|
|
|
12
|
|
December 27, 2014
|
|
|
717,938
|
|
|
|
15
|
|
|
|
588,750
|
|
|
|
15
|
|
|
|
1,306,688
|
|
|
|
15
|
|
June 27, 2015
|
|
|
717,938
|
|
|
|
15
|
|
|
|
588,750
|
|
|
|
15
|
|
|
|
1,306,688
|
|
|
|
15
|
|
December 27, 2015
|
|
|
1,914,500
|
|
|
|
40
|
|
|
|
588,750
|
|
|
|
15
|
|
|
|
2,503,250
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subject to escrow
|
|
|
4,786,250
|
|
|
|
100
|
|
|
|
3,925,000
|
|
|
|
100
|
|
|
|
8,711,250
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Date of issuance of TSXV exchange bulletin announcing the commencement of trading of the Companys stock.
|
(2)
|
These shares were released from escrow during the year ended December 31, 2012.
|
Escrowed
shares are subject to release every six months from the date of the exchange bulletin, at the rate shown. Release dates can change if the Company were to move to the TSX Tier 1 Exchange. As well, if the operations or development of the Intellectual
Property or the business are discontinued then the unreleased securities held in the QT Escrow will be cancelled.
F-60
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Stock Options
|
(
i.)
|
On January 16, 2012, the shareholders of the Company approved the establishment of an Employee Stock Option Plan. The directors are authorized to grant options to directors, employees and consultants, to
acquire up to 10% of the issued and outstanding common stock. The exercise price of each option is based on the market price of the Companys stock at the date of grant. The options can be granted for a maximum term of 10 years and vest as
determined by the board of directors.
|
|
(
ii.)
|
On January 16, 2012 and February 15, 2012, the directors of the Company approved the award of 715,000 and 75,000 options, respectively, with a value of $200,000. The fair value of the options issued was
estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years;
(V) an exercise price of $0.70 and (VI) a share price of $0.70. Expected volatility was based on comparable companies. 540,000 of these options vested immediately. The remaining vested as follows: 125,000 vested on February 29, 2012;
25,000 vested on May 31, 2012; 75,000 on July 26, 2012; and 25,000 on August 31, 2012.
|
|
(iii.)
|
On September 19, 2012, the directors of the Company approved the award of 300,000 options, with a value of $70,000. The fair value of the options issued was estimated at the date of grant using the
Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years; (V) an exercise price of $0.85 and
(VI) a share price of $0.69. Expected volatility was based on comparable companies. 100,000 of these options vested immediately. The remaining options vest as follows: 25,000 vested on November 30, 2012; 25,000 vested on February 28, 2013;
25,000 will vest on May 31, 2013; 25,000 will vest on August 31, 2013; 33,333 will vest on September 2013; 33,333 will vest on September 2014; 33,333 will vest on September 2015.
|
|
(iv.)
|
On September 19, 2012, the directors of the Company revised the exercise price of the 615,000 options issued to the officers and directors of the Company on January 16, 2012 from $0.70 to $0.85 per
share, in keeping with the offering price for the Financing. The revision had no impact on the financial results of the Company.
|
|
(v.)
|
As at the date of the Amalgamation, there were 75,000 T.B. Mining Shares reserved for issuance under the T.B. Mining Option Plan, after giving effect to the Consolidation. These options continues on under the
same terms.
|
F-61
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Stock Options
(continued)
As at December 31, 2012 the Company had 596,434 additional options available for
issuance. A continuity of the unexercised options to purchase common shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted average
exercise price
$
|
|
|
Number
|
|
Balance at December 31, 2010 and 2011
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0.82
|
|
|
|
1,090,000
|
|
Issued on Transaction
|
|
|
0.80
|
|
|
|
75,000
|
|
Expired
|
|
|
0.70
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
0.83
|
|
|
|
1,015,000
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
0.83
|
|
|
|
840,000
|
|
|
|
|
|
|
|
|
|
|
The following table provides further information on the outstanding options as at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiry Date
|
|
Number
exercisable
|
|
|
Number
outstanding
|
|
|
Weighted average
exercise price
$
|
|
|
Weighted average
years remaining
|
|
September 8, 2020
|
|
|
75,000
|
(1)
|
|
|
75,000
|
|
|
|
0.80
|
|
|
|
7.75
|
|
January 16, 2022
|
|
|
640,000
|
|
|
|
640,000
|
|
|
|
0.83
|
|
|
|
9.0
|
|
September 19, 2022
|
|
|
125,000
|
|
|
|
300,000
|
|
|
|
0.85
|
|
|
|
9.75
|
|
|
|
|
840,000
|
|
|
|
1,015,000
|
|
|
|
0.83
|
|
|
|
9.13
|
|
|
(1)
|
Reflects the 1 for 4 option exchange made pursuant to the Transaction (note 8).
|
(b)
Warrants
The Company had the following warrants outstanding:
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2010
|
|
|
|
|
|
|
|
|
GrantedBroker Warrants
|
|
|
87,500
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
87,500
|
|
|
$
|
0.70
|
|
GrantedBroker Warrants
|
|
|
65,028
|
|
|
|
0.70
|
|
Investor Warrants
|
|
|
3,783,989
|
|
|
|
1.00
|
|
Broker Unit Warrants
(1)
|
|
|
325,925
|
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
4,262,442
|
|
|
$
|
0.98
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Broker Unit Warrants are exercisable into Sphere 3D Units at an exercise price of $0.85 per unit within two years of closing of the Financing. Each Sphere 3D Unit consists of a Sphere 3D Share and a Sphere 3D
Warrant.
|
F-62
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Other equity beginning of period
|
|
$
|
25,000
|
|
|
$
|
|
|
Value of warrants issued
|
|
|
712,500
|
|
|
|
25,000
|
|
Value of options issued
|
|
|
270,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant capital end of period
|
|
$
|
1,007,500
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
11.
|
Related Party Transactions
|
Related parties of the Company include the Companys
key management personnel and independent directors.
Key management personnel are those persons having authority and responsibility for
planning, directing and controlling the activities of the Company, directly or indirectly, including any director (whether executive or otherwise).
The compensation paid or payable to key management personnel is shown below:
|
|
|
|
|
|
|
|
|
|
|
December 31
2012
|
|
|
December 31
2011
|
|
Salaries, fees and benefits
|
|
$
|
444,181
|
|
|
$
|
301,134
|
|
Share-based paymentsmanagement
|
|
|
66,813
|
|
|
|
|
|
Share-based paymentsdirectors
|
|
|
134,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
645,970
|
|
|
$
|
301,134
|
|
|
|
|
|
|
|
|
|
|
Legal services of $209,288 (2011 $49,065) were provided by a legal firm affiliated with a director of
the Company.
Amounts owing to related parties at year end included in accounts payable total $141,658 (2011 $44,520)
12.
|
Commitment and Contingencies
|
The Company entered into a five year lease, for a 6,000
square foot, free standing building, on May 1, 2011. In addition to the minimum lease payments, the Company is required to pay operating costs estimated at $27,000 per year. The minimum lease payments for the Companys facility in
Mississauga, are as follows:
|
|
|
|
|
2013
|
|
$
|
56,500
|
|
2014
|
|
|
58,000
|
|
2015
|
|
|
59,500
|
|
2016
|
|
|
20,000
|
|
F-63
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
13.
|
Deferred Income Taxes
|
Reconciliation between tax expense and the amount of tax on net
accounting income at the Companys statutory rate of 26.5% (2011 28.00%) percent is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
2012
|
|
|
December 31
2011
|
|
Loss before tax from continuing operations
|
|
$
|
(2,461,305
|
)
|
|
$
|
(1,048,182
|
)
|
|
|
|
|
|
|
|
|
|
Income tax using corporation statutory tax rate
|
|
|
(652,200
|
)
|
|
|
(293,500
|
)
|
Adjustment for share issue costs
|
|
|
(99,000
|
)
|
|
|
(28,300
|
)
|
Change in tax rate and other
|
|
|
164,300
|
|
|
|
31,500
|
|
Deferred income taxes not recognized
|
|
|
586,900
|
|
|
|
290,300
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
December 31
2012
|
|
|
December 31
2011
|
|
Non-capital loss carry-forwards
|
|
$
|
717,100
|
|
|
$
|
252,100
|
|
Property and equipment
|
|
|
62,900
|
|
|
|
15,600
|
|
Share issue costs
|
|
|
97,200
|
|
|
|
22,600
|
|
Less: Deferred income taxes not recognized
|
|
|
(877,200
|
)
|
|
|
(290,300
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Loss Carry Forwards
Loss carry-forwards represent significant tax savings of $1,697,871 and $1,008,293 as at December 31, 2012 and December 31, 2011
respectively. As at December 31, 2012, unused loss carry-forwards expire in the following taxation years:
|
|
|
|
|
2021
|
|
$
|
1,008,293
|
|
2022
|
|
|
1,697,871
|
|
14.
|
Capital Risk Management
|
The Company includes equity, comprised of issued common share
capital, other equity and deficit, in the definition of capital.
The Companys primary objective with respect to its capital
management is to ensure that it has sufficient cash resources to further develop and market its digital media distribution systems, and to maintain its ongoing operations. To secure the additional capital necessary to pursue these plans, the Company
may attempt to raise additional funds through the issuance of equity and warrants, debt or by securing strategic partners.
The Company is
not subject to externally imposed capital requirements and there has been no change with respect to the overall capital risk management strategy during the years ended December 31, 2012 and 2011.
F-64
Sphere 3D Corporation
Notes to the Consolidated Financial Statements
For the years
ended December 31, 2012 and 2011
(Expressed in Canadian Dollars)
15.
|
Financial Risk Management
|
The Company is exposed to a variety of financial risks by
virtue of its activities: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse
effects on financial performance.
Risk management is carried out by management under policies approved by the Board of Directors.
Management is charged with the responsibility of establishing controls and procedures to ensure that financial risks are mitigated in accordance with the approved policies.
The Company is still in its pre-commercialization phase and as such has
limited exposure to foreign exchange risk. Foreign exchange risk arises from purchase transactions as well as recognized financial assets and liabilities denominated in foreign currencies.
Interest rate risk is the risk that the future cash flows of a financial
instrument will fluctuate because of changes in market interest rates.
Financial assets and financial liabilities with variable interest
rates expose the Company to cash flow interest rate risk. The Companys cash and cash equivalents and investments earn interest at market rates.
The Company manages its interest rate risk by maximizing the interest income earned on excess funds while maintaining the liquidity necessary
to conduct operations on a day-to-day basis. Fluctuations in market rates of interest do not have a significant impact on the Companys results of operations as interest income represents approximately 0.7% (2011 0.3%) of total expenses.
A 1.0% change in interest rates would not have a significant impact on the interest income.
The Company is subject to risk of non-payment of amounts receivable. The
Company mitigates this risk by monitoring the credit worthiness of its customers. As at December 31, 2012 Nil (December 31, 2011 92%) of amounts receivable and 100% (December 31, 2011
-
91%) of
revenue is from one customer.
Liquidity risk is the risk that the Company will not be able to meet its
obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. Senior management is also actively involved in the review and approval of planned
expenditures.
As at December 31, 2012, the Company has trade and other payables of 303,218 (2011 $310,987) due within 12
months and has cash and cash equivalents and amounts receivable of $1,688,063 (2011 319,419) to meet its current obligations.
F-65
SPHERE 3D CORPORATION
Condensed Consolidated Financial Statements (Unaudited)
For
the Three Months Ended March 31, 2014 and 2013
(Expressed in Canadian Dollars)
F-66
NOTICE TO READERS
Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be
accompanied by a notice indicating that the interim financial statements have not been reviewed by an auditor.
The accompanying unaudited condensed
consolidated interim financial statements of the Company have been prepared by and are the responsibility of the Companys management. The unaudited condensed consolidated interim financial statements have been prepared using accounting
policies in compliance with International Financial Reporting Stands for the preparation of the condensed consolidated interim financial statements and are in accordance with IAS 34Interim Financial Reporting.
The Companys independent auditor has not performed a review of these unaudited condensed consolidated interim financial statements in accordance with
standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entitys auditor.
F-67
Sphere 3D Corporation
Condensed Consolidated Statements of Financial Position (Unaudited)
As at
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,141,004
|
|
|
$
|
5,550,788
|
|
Investments
|
|
|
295,850
|
|
|
|
312,823
|
|
Loans
|
|
|
|
|
|
|
203,641
|
|
Sales tax recoverable
|
|
|
155,602
|
|
|
|
95,088
|
|
Amounts receivable
|
|
|
201,100
|
|
|
|
|
|
Inventory
|
|
|
29,377
|
|
|
|
136,591
|
|
Advance equipment prepayment
|
|
|
336,165
|
|
|
|
397,702
|
|
Prepaid and sundry assets
|
|
|
126,894
|
|
|
|
142,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,285,992
|
|
|
|
6,838,994
|
|
Capital assets (note 5)
|
|
|
534,549
|
|
|
|
389,119
|
|
Intangible assets (note 6)
|
|
|
18,419,505
|
|
|
|
1,668,079
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,240,046
|
|
|
$
|
8,896,192
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Trade and other payables (note 7)
|
|
$
|
818,871
|
|
|
$
|
478,282
|
|
Current portion of contingent liability (note 6)
|
|
|
2,097,722
|
|
|
|
|
|
Deferred Revenue
|
|
|
343,137
|
|
|
|
504,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,259,730
|
|
|
|
982,770
|
|
Contingent liability (note 6)
|
|
|
1,933,498
|
|
|
|
|
|
Derivative liability
|
|
|
325,521
|
|
|
|
|
|
Convertible debenture (note 8)
|
|
|
5,205,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,723,829
|
|
|
|
982,770
|
|
|
|
|
|
|
|
|
|
|
Shareholders Deficiency
|
|
|
|
|
|
|
|
|
Common share capital (note 9)
|
|
|
20,802,468
|
|
|
|
12,085,781
|
|
Other equity (note 10)
|
|
|
1,985,660
|
|
|
|
1,715,151
|
|
Deficit
|
|
|
(6,271,911
|
)
|
|
|
(5,887,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
16,516,217
|
|
|
|
7,913,422
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,240,046
|
|
|
$
|
8,896,192
|
|
|
|
|
|
|
|
|
|
|
Nature of operations (note 1)
Commitment and contingencies (note 12)
Subsequent events (note
15)
|
|
|
|
|
|
|
|
|
|
Approved by the Board
|
|
Glenn Bowman
|
|
|
|
Peter Tassiopoulos
|
|
|
Director
|
|
|
|
Director
|
See accompanying notes, which are an integral part of these financial statements
F-68
Sphere 3D Corporation
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
March 31,
2014
|
|
|
Three Months
Ended
March 31,
2013
|
|
Revenue
|
|
$
|
1,005,334
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
433,538
|
|
|
|
|
|
Salaries and consulting
|
|
|
611,856
|
|
|
|
394,469
|
|
Professional fees
|
|
|
49,283
|
|
|
|
78,480
|
|
General and administrative
|
|
|
144,518
|
|
|
|
82,965
|
|
Technology development
|
|
|
|
|
|
|
9,698
|
|
Public company expenses
|
|
|
58,610
|
|
|
|
32,899
|
|
Amortization of intangibles
|
|
|
873
|
|
|
|
873
|
|
Amortization of property and equipment
|
|
|
79,278
|
|
|
|
47,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,377,956
|
|
|
|
646,700
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(372,622
|
)
|
|
|
(646,700
|
)
|
|
|
|
|
|
|
|
|
|
Finance income (expenses)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
841
|
|
|
|
1,682
|
|
Interest expense
|
|
|
(14,289
|
)
|
|
|
(269
|
)
|
Foreign exchange gain
|
|
|
19,483
|
|
|
|
|
|
Investment holding loss
|
|
|
(17,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,779
|
)
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive loss for the period
|
|
$
|
(384,401
|
)
|
|
$
|
(645,287
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
Weighted average number of common shares
|
|
|
21,691,980
|
|
|
|
16,114,339
|
|
See accompanying notes, which are an integral part of these financial statements
F-69
Sphere 3D Corporation
Condensed Consolidated Statements of Changes in Equity (Unaudited)
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
common
shares
|
|
|
Common
share capital
|
|
|
Other
Equity
|
|
|
Deficit
|
|
|
Total
|
|
Balance at December 31, 2012
|
|
|
16,114,339
|
|
|
$
|
5,409,488
|
|
|
$
|
1,007,500
|
|
|
$
|
(3,509,487
|
)
|
|
$
|
2,907,501
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
20,306
|
|
|
|
|
|
|
|
20,306
|
|
Comprehensive loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(645,287
|
)
|
|
|
(645,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
|
16,114,339
|
|
|
$
|
5,409,488
|
|
|
$
|
1,027,806
|
|
|
$
|
(4,154,774
|
)
|
|
$
|
2,282,520
|
|
Issuance of common shares
|
|
|
1,250,000
|
|
|
|
4,187,500
|
|
|
|
|
|
|
|
|
|
|
|
4,187,500
|
|
Share issuance costs
|
|
|
|
|
|
|
(441,178
|
)
|
|
|
|
|
|
|
|
|
|
|
(441,178
|
)
|
Issuance of warrants
|
|
|
|
|
|
|
(860,000
|
)
|
|
|
860,000
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
2,784,840
|
|
|
|
3,844,720
|
|
|
|
(1,154,528
|
)
|
|
|
|
|
|
|
2,690,192
|
|
Issuance of warrants on exercise
|
|
|
|
|
|
|
(703,000
|
)
|
|
|
703,000
|
|
|
|
|
|
|
|
|
|
Exercise of options
|
|
|
180,001
|
|
|
|
148,251
|
|
|
|
(20,500
|
)
|
|
|
|
|
|
|
127,751
|
|
Share-based payments
|
|
|
769,231
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
299,373
|
|
|
|
|
|
|
|
299,373
|
|
Comprehensive loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,732,736
|
)
|
|
|
(1,732,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
21,098,411
|
|
|
$
|
12,085,781
|
|
|
$
|
1,715,151
|
|
|
$
|
(5,887,510
|
)
|
|
$
|
7,913,422
|
|
Issuance of common shares on acquisition of intangible assets
|
|
|
1,089,867
|
|
|
|
7,133,179
|
|
|
|
|
|
|
|
|
|
|
|
7,133,179
|
|
Exercise of warrants
|
|
|
874,743
|
|
|
|
1,501,783
|
|
|
|
(262,415
|
)
|
|
|
|
|
|
|
1,239,368
|
|
Exercise of options
|
|
|
96,250
|
|
|
|
81,725
|
|
|
|
(13,625
|
)
|
|
|
|
|
|
|
68,100
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
546,549
|
|
|
|
|
|
|
|
546,549
|
|
Comprehensive loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(384,401
|
)
|
|
|
(384,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
|
23,159,271
|
|
|
$
|
20,802,468
|
|
|
$
|
1,985,660
|
|
|
$
|
(6,271,911
|
)
|
|
$
|
16,516,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes, which are an integral part of these financial statements
F-70
Sphere 3D Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
March 31,
2014
|
|
|
Three Months
Ended
March 31,
2013
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
Net comprehensive loss for the period
|
|
$
|
(384,401
|
)
|
|
$
|
(645,287
|
)
|
Items not affecting cash:
|
|
|
|
|
|
|
|
|
Adjustment for depreciation
|
|
|
79,278
|
|
|
|
47,316
|
|
Adjustment for amortization
|
|
|
873
|
|
|
|
873
|
|
Stock compensation expenses
|
|
|
334,640
|
|
|
|
20,306
|
|
Interest on long term investments
|
|
|
|
|
|
|
(1,658
|
)
|
Unrealized foreign exchange gain
|
|
|
(136,601
|
)
|
|
|
|
|
Change in working capital:
|
|
|
|
|
|
|
|
|
Change in investments
|
|
|
16,973
|
|
|
|
(24
|
)
|
Change in sales tax recoverable
|
|
|
(60,514
|
)
|
|
|
(43,230
|
)
|
Change in amounts receivable
|
|
|
(201,100
|
)
|
|
|
|
|
Change in inventory
|
|
|
107,214
|
|
|
|
|
|
Change in prepaid and sundry assets
|
|
|
122,348
|
|
|
|
(4,763
|
)
|
Change in trade and other payables
|
|
|
116,467
|
|
|
|
(30,575
|
)
|
Change in deferred revenue
|
|
|
(187,676
|
)
|
|
|
|
|
Change in subscriptions received
|
|
|
|
|
|
|
150,035
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(192,499
|
)
|
|
|
(507,007
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(224,708
|
)
|
|
|
(27,621
|
)
|
Repayment of loans receivable
|
|
|
203,641
|
|
|
|
|
|
Acquisition of intangible assets.
|
|
|
(4,612,063
|
)
|
|
|
|
|
Investment in technology
|
|
|
(488,623
|
)
|
|
|
(44,843
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,121,753
|
)
|
|
|
(72,464
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from warrant exercises
|
|
|
1,239,368
|
|
|
|
|
|
Proceeds from options exercises
|
|
|
68,100
|
|
|
|
|
|
Debenture financing
|
|
|
5,597,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated in financing activities
|
|
|
6,904,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase / (decrease) in cash and cash equivalents
|
|
|
1,590,216
|
|
|
|
(579,471
|
)
|
Cash and cash equivalents at opening
|
|
|
5,550,788
|
|
|
|
1,633,334
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at closing
|
|
$
|
7,141,004
|
|
|
$
|
1,053,863
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Issuance of common shares on acquisition of intangible assets
|
|
|
(7,133,179
|
)
|
|
|
|
|
Contingent liability for the acquisition of intangible assets
|
|
|
(4,031,220
|
)
|
|
|
|
|
Holdback on the acquisition of intangible assets
|
|
|
(223,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,388,279
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes, which are an integral part of these financial statements
F-71
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
Sphere 3D Corporation (the Company or Sphere
3D) was incorporated under the
Business Corporations Act (Ontario)
on May 2, 2007 and is listed on the TSXV, under the trading symbol ANY and the OTC-QX, under the trading symbol SPIHF and has its main and
registered office of the Company located at 240 Matheson Blvd. East, Mississauga, Ontario, L4Z 1X1.
Sphere 3D is a virtualization
technology solution provider company focused on the commercialization and further development of its patent pending emulation and virtualization technology. These consolidated statements include the financial statements of the Company, its
wholly-owned subsidiaries, V3 Systems Holdings, Inc., which was incorporated under the laws of the State of Delaware on January 14, 2014 and Sphere 3D Inc., which was incorporated under the
Canada Business Corporation Act
on
October 20, 2009, and its wholly owned subsidiary, Frostcat Technologies Inc., which was incorporated under the
Business Corporations Act (Ontario)
on February 13, 2012.
The Company will have to raise additional capital to fund operations until such point that revenues from products and technology are able to
fund operations. If the Company is not able to raise sufficient capital then there is the risk that the Company will not be able to realize the value of its assets and discharge its liabilities. To date the Company has been successful raising
capital in fiscal 2013 and 2014. These proceeds are used to fund operations of the Company.
2.
|
Statement of Compliance
|
These condensed consolidated interim financial statements have
been prepared using the same accounting policies and methods of computation as were applied in our most recent audited consolidated annual financial statements for the year ended December 31, 2013.
These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standards
(IAS) 34 Interim Financial Reporting (IAS 34) using accounting policies consistent with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board
(IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC).
These
condensed consolidated interim financial statements do not include all of the information required of a full annual financial report and are intended to provide users with an update in relation to events and transactions that are significant to an
understanding of the changes in financial position and performance of the Company since the end of the last annual reporting period. It is therefore recommended that these condensed consolidated interim financial statements be read in conjunction
with the most recent audited consolidated annual financial statements of the Company for the year ended December 31, 2013, which are available at www.sedar.com.
These condensed consolidated interim financial statements were approved by the Board of Directors on May 27, 2014.
3.
|
Significant Accounting Policies
|
The accounting policies set out below have been applied
consistently to all periods presented in these financial statements as at and for the periods ended March 31, 2014 and 2013, unless otherwise indicated.
F-72
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
The consolidated financial statements comprise the accounts of the Company, and its
controlled subsidiaries. The financial statements of the wholly owned subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Consolidated financial statements are
prepared using uniform accounting policies for like transactions and other events in similar circumstances.
All transactions and balances
between the Company and its subsidiaries are eliminated on consolidation, including unrealized gains and losses on transactions between companies. Unrealized gains arising from transactions with equity accounted investees are eliminated against the
investment to the extent of the Companys interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
|
(a)
|
Use of estimates and judgements
|
The preparation of the financial statements in
conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these
estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the
period in which the estimates are revised and in any future periods affected.
Information about significant areas of estimation
uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are noted below with further details of the assumptions in the following notes:
When charges for share-based payments are based on the equity instrument
granted, the fair value is calculated at the date of the award. The equity instruments are valued using Black-Scholes; inputs to the model include assumptions on share price volatility, discount rates and expected life outstanding.
|
(ii)
|
Investment in technology
|
The recoverability of the investment in technology is dependent on
the future realization of cash flows from amounts spent.
|
(iii)
|
Property and equipment
|
The useful lives of property and equipment are estimated based on the
length of use of the assets by the Company.
F-73
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(a)
|
Use of estimates and judgements
(continued)
|
Tax interpretations, regulations and legislation in the jurisdiction in which
the Company operates are subject to change. As such, income taxes are subject to measurement uncertainty. Deferred income tax assets are assessed by management at the end of the reporting period to determine the likelihood that they will be realised
from future taxable earnings.
The functional currency of the Company and its subsidiaries is the
Canadian dollar. Transactions in foreign currencies are translated to the functional currency of the Company at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to
Canadian dollars at the period end exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value
was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
|
(c)
|
Financial instruments
|
|
(i)
|
Non-derivative financial assets
|
Non-derivative financial instruments comprise of cash and
cash equivalents, investments, loans, subscriptions receivable and trade and other payables. Non-derivatives financial instruments are recognised initially at the fair value plus, for instruments not at fair value through profit and loss, any
directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below.
|
(ii)
|
Cash, cash equivalents and investments
|
Cash and cash equivalents comprise cash on hand, term
deposits with banks, other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Companys cash management, whereby management has
the ability and intent to net bank overdrafts against cash, are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Investments comprise highly liquid investments, in the form of guaranteed investment certificates, with maturities greater than three months
but with cashable features. Investments have been used to secure the Companys credit rating and are therefore separated from cash and cash equivalents for the purpose of the statement of cash flows.
|
(iii)
|
Financial assets at fair value through profit or loss
|
An instrument is classified at fair
value through profit or loss if it is held or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if
F-74
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(c)
|
Financial instruments
(continued)
|
|
(iii)
|
Financial assets at fair value through profit or loss (continued)
|
the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Companys documented risk management or investment strategy. Upon
initial recognition the transaction costs are recognized in profit or loss when incurred. Financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. The Company has
designated cash and cash equivalents, investments, contingent liability and derivative liability at fair value.
Other non-derivative financial instruments, such as trade and other payables and
convertible debentures, are measured at amortized cost using the effective interest method, less any impairment losses.
|
(d)
|
Convertible debenture
|
The proceeds received on issue of the Companys convertible
debenture have been recorded as a liability included in borrowings on the consolidated statement of financial position. The convertible debenture contains an embedded derivative. The Company values the embedded derivative using an option pricing
model and the residual amount is allocated to the debenture liability.
On conversion of the convertible debt to common shares the value of
the convertible option is taken into share capital with any gain or loss flowing through profit or loss.
|
(i)
|
Recognition and measurement
|
Items of property and equipment are measured at cost less
accumulated amortization and accumulated impairment losses. Costs include expenditure that is directly attributable to the acquisition of the asset.
When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of
property, plant and equipment.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the
proceeds from disposal with the carrying amount of property and equipment, and are recognized net within other income in profit or loss.
The cost of replacing a part of an item of property and equipment is
recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The
costs of the day-to-day servicing of property and equipment are recognized in profit (loss) as incurred.
F-75
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(e)
|
Capital assets
(continued)
|
Amortization is calculated as the cost of the asset less its residual value.
Amortization is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property
and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the assets.
The estimated useful lives for the current and comparative periods are as follows:
|
|
|
Computer hardware
|
|
- 3 years
|
|
|
Furniture and fixtures
|
|
- 5 years
|
|
|
Marketing and Web Development
|
|
- 2 years
|
|
|
Leasehold improvements
|
|
- over the term of the lease
|
This most closely reflects the expected pattern of consumption of the future economic benefits embodied in the
asset.
Estimates for amortization methods, useful lives and residual values are reviewed at each reporting period-end and adjusted if
appropriate.
Inventories are measured at the lower of cost and net realizable value. The
cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Net
realizable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses.
|
(g)
|
Trade and other payables
|
Trade and other payables are stated at cost.
Assets and liabilities expected to be realised in, or intended for sale
or consumption in, the Companys normal operating cycle, usually equal to 12 months, are recorded as current assets or liabilities.
|
(i)
|
Statement of cash flows
|
The Company prepares its Statement of Cash Flows using the
indirect method.
F-76
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
A financial asset is assessed at each reporting date to determine whether
there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and
the present value of the estimated future cash flows discounted at the original effective interest rate.
Individually significant
financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in the statement of comprehensive loss.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For
financial assets measured at amortized cost the reversal is recognized in the statement of comprehensive loss.
|
(ii)
|
Non-financial assets
|
The carrying amounts of the Companys non-financial assets, other
than deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the assets recoverable amount is estimated.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that
generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets referred to as a cash generating unit (CGU). The recoverable amount of an asset or a CGU is the greater of its value in
use and its fair value less cost to disposal.
In assessing value in use, the estimated future cash flows are discounted to their present
value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value in use is generally computed by reference to the present value of the future cash flows expected to be
derived from sales.
Fair value less costs of disposal to sell is determined as the amount that would be obtained from the sale of a CGU
in an arms length transaction between knowledgeable and willing parties. The fair value less cost of disposal is generally determined as the net present value of the estimated future cash flows expected to arise from the continued use of the
CGU, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account. These cash flows are discounted by an appropriate discount rate which would be applied by such a
market participant to arrive at a net present value of the CGU.
An impairment loss is recognized if the carrying amount of an asset or
its CGU exceeds its estimated recoverable amount. Impairment losses are recognized in the statement of
F-77
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(j)
|
Impairment
(continued)
|
|
(ii)
|
Non-financial assets (continued)
|
comprehensive loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.
An impairment loss in respect of other assets is assessed at each reporting date for any indications that the loss has decreased or no
longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying
amount that would have been determined, net of depletion and depreciation or amortization, if no impairment loss had been recognized.
Costs to obtain patents are capitalized and are amortized to operations on a
straight-line basis over the underlying term of the patents, which is 20 years, commencing upon the registration of the patent.
|
(ii)
|
Investment in Technology
|
The investment in technology consists of consideration paid for the
acquisition of the technology. Amortization commences with the successful commercial production or use of the product or process. These costs are being amortized over a period of four years from commencement of commercial use, which has not yet
commenced.
|
(iii)
|
Research and Development Costs
|
Research costs are charged to income when incurred.
Development costs are capitalized as intangible assets when the Company can demonstrate that the technical feasibility of the project has been
established; the Company intends to complete the asset for use or sale and has the ability to do so; the asset can generate probable future economic benefits; the technical and financial resources are available to complete the development; and the
Company can reliably measure the expenditure attributable to the intangible asset during its development. As of July, 2013, the Company has met the requirements for deferral of these expenses and has commenced capitalization of development costs
incurred relating to its investment in technology. Amortization commences with the successful commercial production or use of the product or process. These costs are being amortized over a period of four years from commencement of commercial use,
which has not yet commenced.
Investment Tax Credits (ITCs) earned as a result of incurring Scientific Research and
Experimental Development (SRED) expenditures are recorded as a reduction of the related current period expense, the related deferred development costs or related capital assets. Management records ITCs when there is reasonable
assurance of collection. To date, management has not recorded any amounts related to ITCs.
F-78
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(l)
|
Share capitalcommon shares
|
Common shares are classified as equity. Incremental
costs directly attributable to the issue of common shares and share options are recognized as a deduction from equity, net of any tax effects.
The grant date fair value of options awarded to employees,
directors, and service providers is measured using the Black-Scholes option pricing model and recognised in the statement of comprehensive loss, with corresponding increase in contributed surplus over the vesting period. A forfeiture rate is
estimated on the grant date and is adjusted to reflect the actual number of options that vest. Upon exercise of the option, consideration received, together with the amount previously recognised in contributed surplus, is recorded as an increase to
share capital.
Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the
goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders
the service.
Revenue from sales of products is recognized when persuasive evidence of an
arrangement exists, the price is fixed or determinable, collectability is reasonably assured and delivery has occurred. Under this policy, revenue on direct product sales is recognized upon shipment of products to customers. These customers are not
entitled to any specific right of return or price protection, except for any defective product that may be returned under the Companys warranty policy. Generally, title and risk of loss transfer to the customer when the product leaves the
Companys dock.
Warranty and Extended Services
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 warranties and service contracts are offered for sale to customers on
all product lines. Extended warranty and service contract revenue is deferred and recognized as service revenue, over the period of the service agreement.
|
(o)
|
Finance income and expenses
|
Finance expenses comprise interest expense on borrowings,
changes in the fair value of financial assets at fair value through profit or loss and impairment losses recognized on financial assets.
Interest income is recognised as it accrues in profit or loss, using the effective interest method.
Foreign currency gain and losses, reported under finance income and expenses, are reported on a net basis.
F-79
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
Income tax expense comprises current and deferred tax. Income tax expense
is recognized in profit or loss except to the extent that it relates to items recognized directly in equity.
Current tax is the expected
tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purposes. Deferred tax is not recognised on the initial recognition of assets or liabilities in a transaction that is not a business combination. Deferred tax is measured at the tax rates that are expected
to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and
they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised
simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against
which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Basic earnings per share is calculated by dividing the profit or loss
attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to common shareholders and the
weighted average number of common shares outstanding for the effects of dilutive instruments such as options and warrants. The dilutive effect on earnings per share is recognised on the use of the proceeds that could be obtained upon exercise of
options, warrants and similar instruments. It assumes that the proceeds would be used to purchase common shares at the average market price during the period. At year end, the effect of stock options, warrants and conversion feature on debt was
anti-dilutive.
A provision is recognized if, as a result of a past event, the Company has a
present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognised for future operating losses.
A contingent liability is a possible obligation that arises from
past events and of which the existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company; or a present obligation that arises from past events (and
therefore exists), but is not recognized because it is not probable that a transfer or use of assets, provision of services or any other transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot
be estimated reliably.
F-80
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
3.
|
Significant Accounting Policies
(continued)
|
|
(t)
|
Change in accounting policies
|
Certain pronouncements were issued by the IASB or the
IFRIC that are mandatory for accounting periods after December 31, 2014. Many are not applicable to, or do not have a significant impact on, the Corporation and have been excluded.
|
(i)
|
IAS 32Financial Instruments
|
IAS 32 Financial Instruments: Presentation was amended by
the IASB in December 2011. Offsetting Financial Assets and Financial Liabilities amendment addresses inconsistencies identified in applying some of the offsetting criteria. At January 1, 2014, the Company adopted this pronouncement and there
was no material impact on the Companys financial statements.
|
(ii)
|
IAS 36Impairment of Assets
|
IAS 36 Impairment of Assets was amended by the IASB in June
2013. Recoverable Amount Disclosures for Non-Financial Assets amendment modifies certain disclosure requirements about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. The amendment is effective
for annual periods beginning on or after January 1, 2014. Earlier application is permitted when the entity has already applied IFRS 13. At January 1, 2014, the Company adopted this pronouncement and there was no material impact on the
Companys financial statements.
|
(u)
|
Future accounting pronouncements
|
The accounting pronouncements detailed in this note
have been issued but are not yet effective. The Company has not early adopted any of these standards and is currently evaluating the impact, if any, that these standards might have on its consolidated financial statements.
IFRS 9Financial Instruments
IFRS 9 was issued by the IASB in October 2010 and will replace IAS 39Financial Instruments: Recognition and Measurement (IAS
39). IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments
in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The
new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39.
The effective date
of IFRS 9 was deferred to years beginning on or after January 1, 2018. Earlier application is permitted.
F-81
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
4.
|
Determination of Fair Value
|
A number of the Companys accounting policies and
disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further
information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
|
(a)
|
Cash and cash equivalents, investments and trade and other payables.
|
The fair value of cash
and cash equivalents, investments and trade and other payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. At March 31, 2014 and March 31, 2013, the fair value of
these balances approximated their carrying value due to their short term to maturity.
|
(b)
|
The fair value of stock options and warrants are measured using a Black-Scholes, option pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility
(based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option and warrant holder behaviour)
and the risk-free interest rate (based on government bonds).
|
The carrying value of amounts receivable, loans and trade and
other payables included in the financial position approximate fair value due to the short term nature of those instruments.
The following
tables provide fair value measurement information for financial assets and liabilities as of March 31, 2014 and December 31, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
March 31, 2014
|
|
Carrying
amount
|
|
|
Fair value
|
|
|
Quoted prices
in Active
Market
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,141,004
|
|
|
$
|
7,141,004
|
|
|
$
|
7,141,004
|
|
|
$
|
|
|
|
$
|
|
|
Investments
|
|
$
|
295,850
|
|
|
$
|
295,850
|
|
|
$
|
295,850
|
|
|
$
|
|
|
|
$
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
325,521
|
|
|
$
|
325,521
|
|
|
$
|
|
|
|
$
|
325,521
|
|
|
$
|
|
|
Contingent liability
|
|
$
|
4,031,220
|
|
|
$
|
4,031,220
|
|
|
$
|
|
|
|
$
|
4,031,220
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements using
|
|
December 31, 2013
|
|
Carrying
amount
|
|
|
Fair value
|
|
|
Quoted prices
in Active
Market
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,550,788
|
|
|
$
|
5,550,788
|
|
|
$
|
5,550,788
|
|
|
$
|
|
|
|
$
|
|
|
Investments
|
|
$
|
312,823
|
|
|
$
|
312,823
|
|
|
$
|
312,823
|
|
|
$
|
|
|
|
$
|
|
|
F-82
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
4.
|
Determination of Fair Value
(continued)
|
Level 1 fair value measurements are based on unadjusted quoted market prices.
Level 2 fair value measurements are based on valuation models and techniques where the significant inputs are derived from quoted indices.
Level 3 fair value measurements are those with inputs for the asset or liability that are not based on observable market data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Computer
Hardware
|
|
|
Furniture
and
Fixtures
|
|
|
Marketing &
Web
Development
|
|
|
Leaseholds
|
|
|
Total
|
|
Balance at December 31, 2012
|
|
$
|
509,684
|
|
|
$
|
6,463
|
|
|
$
|
|
|
|
$
|
78,894
|
|
|
$
|
595,041
|
|
Additions
|
|
|
148,895
|
|
|
|
|
|
|
|
104,220
|
|
|
|
|
|
|
|
253,115
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
658,579
|
|
|
$
|
6,463
|
|
|
$
|
104,220
|
|
|
$
|
78,894
|
|
|
$
|
848,156
|
|
Additions
|
|
|
183,578
|
|
|
|
26,171
|
|
|
|
15,096
|
|
|
|
3,243
|
|
|
|
228,088
|
|
Disposals
|
|
|
(4,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
838,101
|
|
|
$
|
32,634
|
|
|
$
|
119,316
|
|
|
$
|
82,137
|
|
|
$
|
1,072,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation
|
|
Computer
Hardware
|
|
|
Furniture
and
Fixtures
|
|
|
Marketing &
Web
Development
|
|
|
Leaseholds
|
|
|
Total
|
|
Balance at December 31, 2012
|
|
$
|
215,091
|
|
|
$
|
949
|
|
|
$
|
|
|
|
$
|
20,874
|
|
|
$
|
236,914
|
|
Additions
|
|
|
183,977
|
|
|
|
1,293
|
|
|
|
21,075
|
|
|
|
15,778
|
|
|
|
222,123
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
399,068
|
|
|
$
|
2,242
|
|
|
$
|
21,075
|
|
|
$
|
36,652
|
|
|
$
|
459,037
|
|
Additions
|
|
|
60,779
|
|
|
|
828
|
|
|
|
13,656
|
|
|
|
4,015
|
|
|
|
79,278
|
|
Disposals
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
459,171
|
|
|
$
|
3,070
|
|
|
$
|
34,731
|
|
|
$
|
40,667
|
|
|
$
|
537,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2013
|
|
$
|
259,511
|
|
|
$
|
4,221
|
|
|
$
|
83,145
|
|
|
$
|
42,242
|
|
|
$
|
389,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at March 31, 2014
|
|
$
|
378,930
|
|
|
$
|
29,564
|
|
|
$
|
84,585
|
|
|
$
|
41,470
|
|
|
$
|
534,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
Emulation and virtualization technology
|
On December 31, 2010, the Company acquired
all rights and assets related to the emulation and virtualization technology from Promotion Depot Inc., in a non-arms length transaction, in exchange for 1,000,000 shares of the Companys common stock. Since the fair value of the assets
received are not readily determinable, the investment was valued based on the $695,000 fair value of the shares received by Promotion Depot Inc. The technology acquired is still in the development stage and not in commercial use. As such,
amortization of this asset has not commenced.
F-83
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
6.
|
Intangible assets
(continued)
|
|
(i)
|
Emulation and virtualization technology
(continued)
|
As of July 2013, the Company met the requirements for the deferral of development costs,
under IFRS, and has commenced capitalizing the development costs incurred during the period. The technology acquired is still in the development stage and not in commercial use. As such, amortization of this asset has not commenced.
|
(ii)
|
Virtual Desktop Infrastructure (VDI) technology
|
On March 21, 2014, the
Company closed an Asset Purchase Agreement to acquire the VDI technology, Desktop Cloud Orchestrator software, patents, trademarks and certain other intellectual property of V3 Systems, Inc.
At closing, the Company paid a purchase price of $11,829,505, in the form of USD$4M in cash and 1,089,867 shares of common stock.
In addition, the Company shall pay an earn-out (the Earn-Out), based on achieving certain milestones in revenue and gross margin,
related to the VDI technology, of up to a further U.S. $5.0 million, payable at the discretion of Sphere 3D in cash or shares (up to a maximum of 1,051,414 common shares), to be priced at a 20-day weighted average price calculated at the time(s) the
Earn-Out is realized. The Earn-Out is based on a sliding scale of revenue of the VDI technology (subject to minimum margin realization), subject to a maximum payment of U.S. $5.0 million upon earn-out revenue of U.S. $12.5 million. The Earn-Out was
valued on a discounted cash flow basis using a discount rate of 35%.
The fair value of the consideration issued for the VDI technology. is
as follows:
|
|
|
|
|
Cash consideration paid
|
|
$
|
4,472,446
|
|
Cash consideration owingcurrent holdback
|
|
|
223,880
|
|
1,089,867 common shares valued at $6.545 per share
|
|
|
7,133,179
|
|
Fair value of Earn-Out
|
|
|
4,082,645
|
|
|
|
|
|
|
Total consideration
|
|
|
15,912,150
|
|
Cost of acquisition
|
|
|
139,617
|
|
|
|
|
|
|
Allocated to intangible assets
|
|
$
|
16,051,767
|
|
|
|
|
|
|
F-84
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
6.
|
Intangible assets
(continued)
|
During the three months ended March 31, 2014, the Company converted 3
provisional patents to full patent filings; bringing the total number of full patent filings to 12.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Emulation and
virtualization
technology
|
|
|
VDI
technology
|
|
|
Patents
|
|
|
Total
|
|
Balance at December 31, 2012
|
|
$
|
695,000
|
|
|
$
|
|
|
|
$
|
25,000
|
|
|
$
|
720,000
|
|
Additions
|
|
|
885,250
|
|
|
|
|
|
|
|
67,571
|
|
|
|
952,821
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
1,580,250
|
|
|
|
|
|
|
|
92,571
|
|
|
|
1,672,821
|
|
Additions
|
|
|
697,967
|
|
|
|
16,051,767
|
|
|
|
2,565
|
|
|
|
16,752,299
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
2,278,217
|
|
|
$
|
16,051,767
|
|
|
$
|
95,136
|
|
|
$
|
18,425,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
Emulation and
virtualization
technology
|
|
|
VDI
technology
|
|
|
Patents
|
|
|
Total
|
|
Balance at December 31, 2012
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,250
|
|
|
$
|
1,250
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
3,492
|
|
|
|
3,492
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,742
|
|
|
$
|
4,742
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
873
|
|
|
|
873
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,615
|
|
|
$
|
5,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at December 31, 2013
|
|
$
|
1,580,250
|
|
|
$
|
|
|
|
$
|
87,829
|
|
|
$
|
1,668,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value as at March 31, 2014
|
|
$
|
2,278,217
|
|
|
$
|
16,051,767
|
|
|
$
|
89,521
|
|
|
$
|
18,419,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Trade and other payables
|
|
|
|
|
|
|
|
|
|
|
|
March 31
2014
|
|
|
December 31
2013
|
|
Trade payables
|
|
$
|
204,154
|
|
|
$
|
161,337
|
|
Non-trade payables and accrued expenses
|
|
|
614,717
|
|
|
|
316,945
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
818,871
|
|
|
$
|
478,282
|
|
|
|
|
|
|
|
|
|
|
On March 21, 2014, the Company issued a senior secured
convertible debenture for USD$5,000,000. Simple interest is payable semi-annually at an annual rate of 8%. The note is convertible into common shares of the Company, at any time at the option of the holders, at a conversion rate of USD$7.50 per
share.
F-85
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
8.
|
Convertible debenture
(continued)
|
The Company has the option, up to March 21, 2015, and upon ten days notice, to
repay the debenture at 120% of the outstanding principal and interest and the option, from March 21, 2015 to March 21, 2016, to repay the debenture at 125% of the outstanding principal and interest. In addition, the Company has the right
to force the conversion of the debenture at any time that the weighted average price of the Companys common stock for ten consecutive days has exceeded USD$11.25.
The note is secured by a general security interest in all of the assets of the Company. Any unconverted principal and accrued interest balance
is payable at maturity, on March 21, 2018.
The debenture represents a hybrid instrument that needs to be bifurcated between its
liability and derivative components. The liability component was determined by reference to the fair value of a similar stand-alone debt instrument, excluding the derivative components, with the residual amount allocated to the derivative
components.
The fair value of a similar stand-alone debenture excluding the equity components was determined using an estimated discount
rate of 9.25%. The estimated discount rate was derived based on the evaluation of other longer term debt offerings and is subject to estimation uncertainty.
|
|
|
|
|
|
|
|
|
As at
|
|
March 31,
2014
|
|
|
December 31
2013
|
|
Debenture
|
|
$
|
5,597,000
|
|
|
$
|
|
|
Less: Derivative liability
|
|
|
(325,521
|
)
|
|
|
|
|
Less: Currency translation adjustment
|
|
|
(66,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,205,080
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-86
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
Authorized
an unlimited number of common shares
Issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Value
|
|
Balance, December 31, 2012
|
|
|
16,114,339
|
|
|
$
|
5,409,488
|
|
Issued for cash (net of cash fees of $441,178)
(ii)
|
|
|
1,250,000
|
|
|
|
3,746,322
|
|
Less: Proceeds allocated to warrants
|
|
|
|
|
|
|
(775,000
|
)
|
Brokers warrants
|
|
|
|
|
|
|
(85,000
|
)
|
Issued on exercise of warrants
|
|
|
2,784,840
|
|
|
|
3,844,720
|
|
Warrants issued on exercise
|
|
|
|
|
|
|
(703,000
|
)
|
Issued on exercise of options
|
|
|
180,001
|
|
|
|
148,251
|
|
Issued for future services
(i)
|
|
|
769,231
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
21,098,411
|
|
|
$
|
12,085,781
|
|
Issuance of common shares on acquisition of intangible assets (note 6)
|
|
|
1,089,867
|
|
|
|
7,133,179
|
|
Issued on exercise of warrants
|
|
|
874,743
|
|
|
|
1,501,783
|
|
Issued on exercise of options
|
|
|
96,250
|
|
|
|
81,725
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2014
|
|
|
23,159,271
|
|
|
$
|
20,802,468
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
On July 15, 2013, in connection with a supply agreement (the Supplier Agreement) with Overland Storage, Inc., the Company issued 769,231 shares of common stock, with a value of $500,000, to Overland
Storage Inc. (Overland) as a prepayment for systems infrastructure. Pursuant to the Supplier Agreement entered into between Overland and the Company, the Company has agreed to pay for up to $1.5 million of cloud infrastructure equipment
purchases from Overland in the form of common shares in the capital of the Company (the Common Shares) as follows: (i) 769,231 Common Shares at a fair value of $0.65, having a value of $500,000 were issued on Closing; and
(ii) that number of Common Shares equal to $500,000 divided by the 10 trading day average of the closing price per share of Common Shares ending 3 trading days prior to each of the first and second year anniversary date of the Supply Agreement,
to a maximum of 769,231 Common Shares on each date having a value of $500,000. Such Sphere 3D shares are subject to a four months and one day hold period from the date of issuance in accordance with applicable Canadian securities laws. The equipment
purchased has been included in inventory and advance equipment payments.
|
|
(ii)
|
On November 12, 2013, the Company closed an underwritten financing for the sale of 1,250,000 units, at a price of $3.35 per unit of gross proceeds of $4,187,500.
|
Each Unit consisted of one common share of the Company (a Common Share) and one-half of one Common Share purchase warrant (each
full warrant, a Warrant), each full Warrant being exercisable to acquire one Common Share at a purchase price of $4.50 for a period of 24 months following the closing of the Offering. The Warrants are subject to an acceleration clause
whereby should the Common Shares trade at $6.00 or more for more than 10 consecutive trading days on the TSX Venture Exchange or other principal exchange, the Company has the right to issue notice to the warrant holders to accelerate the exercise
period to a period ending 20 trading days from the date of notice. The warrants were valued at $775,000.
F-87
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Issued and outstanding
(continued)
The Underwriters received a cash commission equal to 6% of the gross proceeds of the
Offering, were reimbursed for fees and expenses incurred in connection with the Offering, and received compensation warrants (the Broker Warrants) to acquire Common Shares equal to 8% of the number of Units sold under the Offering. Each
Broker Warrant is exercisable at $3.35 per common share for a period of 24 months from the closing date. The broker warrants were valued at $85,000.
The fair value of the warrants issued were estimated at the date of grant using the Black-Scholes model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Investor
Warrants
|
|
|
Broker
Unit
Warrants
|
|
(I) dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
(II) expected volatility
|
|
|
60
|
%
|
|
|
60
|
%
|
(III) a risk free interest
|
|
|
1.71
|
%
|
|
|
1.71
|
%
|
(IV) an expected life
|
|
|
2 years
|
|
|
|
2 years
|
|
(V) a share price
|
|
$
|
4.73
|
|
|
$
|
3.35
|
|
(VI) an exercise price
|
|
$
|
4.50
|
|
|
$
|
3.35
|
|
Expected volatility was based on comparable companies.
F-88
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Escrowed shares
With the completion of the Transaction and the Companys subsequent listing on the TSXV, certain common shares of the Company are subject
to escrow in accordance with TSXV policies. There are two separate escrow agreements in place which are subject to different rates of release. The following table summarizes the common shares that were issued by the Company and are subject to and
held under each escrow and the dates of release therefrom:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surplus Share
Escrow
|
|
|
Value Share
Escrow
|
|
|
Total
|
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
Balance at December 21, 2012
|
|
|
4,655,000
|
|
|
|
100
|
|
|
|
4,306,250
|
|
|
|
100
|
|
|
|
8,961,250
|
|
|
|
100
|
|
ReleasedDecember 27, 2012
(1)
|
|
|
232,750
|
|
|
|
5
|
|
|
|
430,625
|
|
|
|
10
|
|
|
|
663,375
|
|
|
|
7
|
|
ReleasedJune 27, 2013
|
|
|
232,750
|
|
|
|
5
|
|
|
|
645,937
|
|
|
|
15
|
|
|
|
878,687
|
|
|
|
10
|
|
ReleasedDecember 27, 2013
|
|
|
465,500
|
|
|
|
10
|
|
|
|
645,937
|
|
|
|
15
|
|
|
|
1,111,437
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subject to escrow at March 31, 2014 and December 31, 2013
|
|
|
3,724,000
|
|
|
|
80
|
|
|
|
2,583,751
|
|
|
|
60
|
|
|
|
6,307,751
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future releases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2014
|
|
|
465,500
|
|
|
|
10
|
|
|
|
645,937
|
|
|
|
15
|
|
|
|
1,111,437
|
|
|
|
13
|
|
December 27, 2014
|
|
|
698,250
|
|
|
|
15
|
|
|
|
645,938
|
|
|
|
15
|
|
|
|
1,344,188
|
|
|
|
15
|
|
June 27, 2015
|
|
|
698,250
|
|
|
|
15
|
|
|
|
645,938
|
|
|
|
15
|
|
|
|
1,344,188
|
|
|
|
15
|
|
December 27, 2015
|
|
|
1,862,000
|
|
|
|
40
|
|
|
|
645,938
|
|
|
|
15
|
|
|
|
2,507,938
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total future releases
|
|
|
3,724,000
|
|
|
|
80
|
|
|
|
2,583,751
|
|
|
|
60
|
|
|
|
6,307,751
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Date of issuance of TSXV exchange bulletin announcing the commencement of trading of the Companys stock.
|
Escrowed shares are subject to release every six months from the date of the exchange bulletin, at the rate shown. Release dates can change if
the Company were to move to the TSX Tier 1 Exchange. As well, if the operations or development of the Intellectual Property or the business are discontinued then the unreleased securities held in the QT Escrow will be cancelled.
Stock Options
|
i.
|
On March 4, 2013, the directors of the Company approved the award of 100,000 options, which vest in 4 equal quarterly amounts, exercisable for 5 years, with a value of $18,500. The fair value of the options issued
was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3
years; (V) an exercise price of $0.85 and (VI) a share price of $0.60. Expected volatility was based on comparable companies.
|
|
ii.
|
On March 5, 2013, the directors of the Company approved the award of 320,000 options, which vest in 4 equal quarterly amounts, exercisable
for 5 years, with a value of $79,000. The fair value of the options issued was estimated at the date of grant using the Black-Scholes model with the following
|
F-89
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Stock Options
(continued)
|
weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years; (V) an exercise price
of $0.60 and (VI) a share price of $0.60. Expected volatility was based on comparable companies.
|
|
iii.
|
On April 17, 2013, the directors of the Company approved a fiscal 2013 compensation plan for the independent directors of the Company. The plan calls for the payment of $7,500 per quarter to the independent
directors, which can be paid by cash or the issuance of common stock, at the Companys discretion, subject to TSXV approval. In addition, each of the independent directors was awarded options to purchase 25,000 shares of the Companys
common shares. The award of 75,000 fully vested options, exercisable for 10 years, was valued at $14,000. The fair value of the options issued was estimated at the date of grant using the Black-Scholes model with the following weighted average
assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years; (V) an exercise price of $0.85 and (VI) a share price of $0.60. Expected volatility was
based on comparable companies.
|
|
iv.
|
On July 3, 2013, the directors of the Company approved the award of 300,000 options, which vest in 4 equal quarterly amounts, exercisable for 5 years, with a value of $50,000. The fair value of the options
issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life
of 3 years; (V) an exercise price of $0.65 and (VI) a share price of $0.51. Expected volatility was based on comparable companies.
|
|
v.
|
On July 3, 2013, the directors of the Company approved the award of 50,000 options, which vested immediately, exercisable for 5 years, with a value of $8,000. The fair value of the options issued was
estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years;
(V) an exercise price of $0.65 and (VI) a share price of $0.51. Expected volatility was based on comparable companies.
|
|
vi.
|
In connection with the appointment of Mr. Eric Kelly to the Board of Directors of the Company and his undertaking to become the Chairman, on July 3, 2013, the directors of the Company approved the award to
Mr. Eric Kelly of 850,000 options, which vest quarterly over three years, exercisable for 10 years, with a value of $215,000. The fair value of the options issued was estimated at the date of grant using the Black-Scholes model with the
following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an expected life of 3 years; (V) an exercise price of $0.65 and (VI) a share price of $0.64.
Expected volatility was based on comparable companies.
|
|
vii.
|
On August 30, 2013, the directors of the Company approved the award of 100,000 options, which vest in 4 equal quarterly amounts, exercisable for 10 years, with a value of $100,000. The fair value of the
options issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an
expected life of 3 years; (V) an exercise price of $2.50 and (VI) a share price of $2.50. Expected volatility was based on comparable companies.
|
F-90
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Stock Options
(continued)
|
viii.
|
On September 16, 2013, at the annual and special meeting of the shareholders of the Company, the shareholders ratified the adoption of a fixed stock option plan, authorizing the award of up to 3,375,000
shares, being approximately 20% of the common shares outstanding at the record date for the meeting.
|
|
ix.
|
One September 16, 2013, the directors of the Company approved the award of 450,000 options, which vest in 4 equal quarterly amounts, exercisable for 10 years, with a value of $500,000. The fair value of the
options issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an
expected life of 3 years; (V) an exercise price of $2.68 and (VI) a share price of $2.68. Expected volatility was based on comparable companies. In connection with the awards made to the independent directors of the Company, the directors
agreed to waive future quarterly fees until the Company achieves commercialization.
|
|
x.
|
On November 1, 2013, the directors of the Company approved the award of 50,000 options, which vest in 4 equal quarterly amounts, exercisable for 10 years, with a value of $88,000. The fair value of the
options issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an
expected life of 3 years; (V) an exercise price of $4.28 and (VI) a share price of $4.28. Expected volatility was based on comparable companies.
|
|
xi.
|
On February 5, 2014, the directors of the Company approved the award of 50,000 options, which vest in 4 equal quarterly amounts, exercisable for 10 years, with a value of $212,493. The fair value of the
options issued was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 102.39%; (III) a risk free interest rate of 1.71% (IV) an
expected life of 3 years; (V) an exercise price of $6.54 and (VI) a share price of $6.54. Expected volatility was based on the Companys historical stock price.
|
As at March 31, 2014 the Company had 388,749 additional options available for issuance. A continuity of the unexercised options to
purchase common shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted average
exercise price
|
|
|
Number
|
|
Balance at December 31, 2012
|
|
$
|
0.83
|
|
|
|
1,015,000
|
|
|
|
|
Granted
|
|
|
1.24
|
|
|
|
2,295,001
|
|
Exercised
|
|
|
0.71
|
|
|
|
(180,001
|
)
|
Expired
|
|
|
0.60
|
|
|
|
(320,000
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
$
|
1.18
|
|
|
|
2,810,000
|
|
|
|
|
Granted
|
|
|
6.54
|
|
|
|
50,000
|
|
Exercised
|
|
|
0.71
|
|
|
|
(96,250
|
)
|
Expired
|
|
|
2.68
|
|
|
|
(3,750
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
$
|
1.39
|
|
|
|
2,760,000
|
|
|
|
|
|
|
|
|
|
|
The weighted average share price on the date of exercise was $7.05 (December 31, 2013 $3.69).
F-91
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Stock Options
(continued)
The following table provides further information on the outstanding options as at
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiry Date
|
|
Number
exercisable
|
|
|
Number
outstanding
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
years
remaining
|
|
March 4, 2018
|
|
|
100,000
|
|
|
|
100,000
|
|
|
$
|
0.85
|
|
|
|
4.00
|
|
July 3, 2018
|
|
|
50,000
|
|
|
|
150,000
|
|
|
|
0.65
|
|
|
|
4.25
|
|
January 16, 2022
|
|
|
640,000
|
|
|
|
640,000
|
|
|
|
0.83
|
|
|
|
7.79
|
|
September 19, 2022
|
|
|
183,333
|
|
|
|
300,000
|
|
|
|
0.85
|
|
|
|
8.46
|
|
April 16, 2023
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
0.85
|
|
|
|
9.04
|
|
July 2, 2023
|
|
|
212,499
|
|
|
|
850,000
|
|
|
|
0.65
|
|
|
|
9.25
|
|
August 29, 2023
|
|
|
50,000
|
|
|
|
100,000
|
|
|
|
2.50
|
|
|
|
9.42
|
|
September 15, 2023
|
|
|
222,500
|
|
|
|
445,000
|
|
|
|
2.68
|
|
|
|
9.46
|
|
October 31, 2023
|
|
|
12,500
|
|
|
|
50,000
|
|
|
|
4.28
|
|
|
|
9.58
|
|
February 4, 2024
|
|
|
|
|
|
|
50,000
|
|
|
|
6.54
|
|
|
|
9.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,545,832
|
|
|
|
2,760,000
|
|
|
$
|
1.16
|
|
|
|
8.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
The Company had the following warrants outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise
Price
|
|
Outstanding at December 31, 2012
|
|
|
4,262,442
|
|
|
$
|
0.98
|
|
|
|
|
|
Exercised
|
|
Broker Warrants
|
|
|
(152,528
|
)
|
|
|
0.70
|
|
|
|
Investor Warrants
|
|
|
(1,980,462
|
)
|
|
|
1.00
|
|
|
|
Broker Unit Warrants
(1)
|
|
|
(325,925
|
)
|
|
|
0.85
|
|
|
|
|
Issued on exercise of Broker Unit Warrants
|
|
|
325,925
|
|
|
|
1.00
|
|
Exercise of warrants issued
|
|
|
(325,925
|
)
|
|
|
1.00
|
|
|
|
|
|
Granted
|
|
Investor Warrants
|
|
|
625,000
|
|
|
|
4.50
|
|
|
|
Broker Unit Warrants
(2)
|
|
|
100,000
|
|
|
|
3.35
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
|
|
2,528,527
|
|
|
$
|
1.96
|
|
|
|
|
|
Exercised
|
|
Broker Unit Warrants
|
|
|
(90,000
|
)
|
|
|
3.35
|
|
|
|
Investor Warrants
|
|
|
(784,743
|
)
|
|
|
1.20
|
|
Granted
|
|
Investor Warrants
|
|
|
45,000
|
|
|
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
1,698,784
|
|
|
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average share price on the dates of exercise was $6.84 (December 31, 2013 $3.46).
|
(1)
|
The Broker Unit Warrants were exercisable into Sphere 3D Units at an exercise price of $0.85 per unit within two years of closing of the Financing. Each Sphere 3D Unit consists of a Sphere 3D Share and a Sphere 3D
Investor Warrant, exercisable at $1.00.
|
F-92
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
9.
|
Share Capital
(continued)
|
Warrants
(continued)
|
|
Upon exercise of the Broker Unit Warrants Sphere 3D Investor Warrants were issued, at a cumulative value of $703,000. The fair value of the warrants issued was estimated at the date of exercise of the Broker Unit
Warrant using the Black-Scholes model with the following weighted average assumptions: (I) dividend yield of 0%; (II) expected volatility of 60%; (III) a risk free interest rate of 1.71% (IV) an average expected life of less than 1 year;
(V) an exercise price of $1.00 and (VI) an average share price of $3.13. Expected volatility was based on comparable companies.
|
|
(2)
|
The Broker Unit Warrants were exercisable into Sphere 3D Units at an exercise price of $3.35 per unit within two years of closing of the Financing. Each Sphere 3D Unit consists of a Sphere 3D Share and a Sphere 3D
Investor Warrant, exercisable at $4.50.
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
Other equity beginning of period
|
|
$
|
1,715,151
|
|
|
$
|
1,007,500
|
|
Value of warrants issued
|
|
|
|
|
|
|
1,563,000
|
|
Stock based compensation
|
|
|
546,549
|
|
|
|
319,679
|
|
Value of warrants exercised
|
|
|
(262,415
|
)
|
|
|
(1,154,528
|
)
|
Value of options exercised
|
|
|
(13,625
|
)
|
|
|
(20,500
|
)
|
|
|
|
|
|
|
|
|
|
Other equity end of period
|
|
$
|
1,985,660
|
|
|
$
|
1,715,151
|
|
|
|
|
|
|
|
|
|
|
11.
|
Related Party Transactions
|
Related parties of the Company include the Companys
key management personnel and independent directors.
Key management personnel are those persons having authority and responsibility for
planning, directing and controlling the activities of the Company, directly or indirectly, including any director (whether executive or otherwise).
The compensation paid or payable to key management personnel is shown below:
|
|
|
|
|
|
|
|
|
|
|
March 31
2014
|
|
|
March 31
2013
|
|
Salaries, management fees and benefits
|
|
$
|
122,500
|
|
|
$
|
142,500
|
|
Share-based paymentsmanagement
|
|
|
|
|
|
|
18,500
|
|
Share-based paymentsdirectors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,500
|
|
|
$
|
161,000
|
|
|
|
|
|
|
|
|
|
|
Legal services of $114,877 (2013 $16,691) were provided by a legal firm affiliated with a director of
the Company.
Amounts owing to related parties at period end included in trade and other payables total $176,025 (2013 $22,500)
F-93
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
12.
|
Commitment and Contingencies
|
The Company entered into a five year lease, for a 6,000
square foot, free standing building, on May 1, 2011. In addition to the minimum lease payments, the Company is required to pay operating costs estimated at $27,000 per year. The minimum lease payments for the Companys facility in
Mississauga, are as follows:
|
|
|
|
|
2014
|
|
$
|
43,500
|
|
2015
|
|
|
59,500
|
|
2016
|
|
|
20,000
|
|
Refer to note 9(i) for additional commitments to issue shares.
Legal Matters
The
Company has been named as a defendant in actions that arose as a result of the announcement of the agreement to merge with Overland Storage, Inc. (note 15 (a)) With respect to these matters, based on the managements current knowledge, the
Company believes that the amount or range of reasonable possible loss, if any, will not, either individually or in the aggregate, have a material adverse effect on the Companys business, consolidated financial position, results of operations
or cash flows.
13.
|
Capital Risk Management
|
The Company is not subject to externally imposed capital
requirements and there has been no change with respect to the overall capital risk management strategy during the period ended March 31, 2014 and December 31, 2013.
14.
|
Financial Risk Management
|
The Company is exposed to a variety of financial risks by
virtue of its activities: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse
effects on financial performance.
Risk management is carried out by management under policies approved by the Board of Directors.
Management is charged with the responsibility of establishing controls and procedures to ensure that financial risks are mitigated in accordance with the approved policies.
The Company is still in its pre-commercialization phase and as such has
limited exposure to foreign exchange risk. Foreign exchange risk arises from purchase transactions as well as recognized financial assets and liabilities denominated in foreign currencies.
Interest rate risk is the risk that the future cash flows of a financial
instrument will fluctuate because of changes in market interest rates.
F-94
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
14.
|
Financial Risk Management
(continued)
|
|
(a)
|
Market risk
(continued)
|
Financial assets and financial liabilities with variable interest rates expose the Company
to cash flow interest rate risk. The convertible debenture is at a fixed rate. The Companys cash and cash equivalents and investments earn interest at market rates.
The Company manages its interest rate risk by maximizing the interest income earned on excess funds while maintaining the liquidity necessary
to conduct operations on a day-to-day basis. Fluctuations in market rates of interest do not have a significant impact on the Companys results of operations as interest expense represents approximately 0.1% (2012 0.7%) of total
expenses. A 1.0% change in interest rates would not have a significant impact on the interest income.
The Company is subject to risk of non-payment of amounts receivable. The
Company mitigates this risk by monitoring the credit worthiness of its customers.
Liquidity risk is the risk that the Company will not be able to meet its
obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. Senior management is also actively involved in the review and approval of planned
expenditures.
As at March 31, 2014, the Company has trade and other payables of $883,129 (December 31, 2013 $478,282) due
within 12 months and has cash and cash equivalents of $7,141,004 (December 31, 2013 $5,550,788) to meet its current obligations.
On May 15, 2014, the Company entered into a definitive merger
agreement (the Merger Agreement) with Overland Storage, Inc. (Overland), pursuant to which Overland and a wholly-owned subsidiary of Sphere 3D would combine (the Transaction). After completion of the Transaction,
it is expected that current holders of Overland securities will own approximately 28.8% of Sphere 3D, on a fully diluted basis, as a result of their exchange of securities in the Transaction.
Under the terms of the Merger Agreement, the Company will issue a total of 9,443,882 common shares (Common Shares) on closing,
subject to adjustment, for all of the outstanding share capital of Overland (Overland Shares) on the basis of one Overland Share for 0.510594 Common Shares of Sphere 3D (the Exchange Ratio). In addition, Sphere 3D will issue
1,467,906 warrants, 143,325 options and 505,321 restricted share units, or equivalents, in exchange for the outstanding convertible securities of Overland, calculated on the basis of the Exchange Ratio. All issued and outstanding stock appreciation
rights of Overland will terminate on closing. The average exercise price of the options and warrants are US$22.62 and US17.28, respectively. At current pricing, the Company believes it is unlikely that any of these options and warrants will be
exercised.
F-95
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
15.
|
Subsequent Events
(continued)
|
|
(a)
|
Overland Merger
(continued)
|
On May 14, 2014, the last trading day prior to the announcement of the transaction, the
closing price of the Overland Shares, on the NASDAQ, was US$2.90 and the closing price of the Common Shares of Sphere 3D, on the TSX Venture Exchange (the TSXV), was C$9.46 (or US$8.68). Based on the closing price of the Common Shares of
Sphere 3D on May 14, 2014, the total consideration payable to holders of Overland shareholders has an implied value of approximately US$81.13 million or approximately US$4.43 per Overland Share.
Both companies boards of directors have unanimously approved the Merger Agreement. The Transaction is subject customary closing
conditions, shareholder approval of Overland and receipt of all necessary regulatory approvals, including the approval of the TSXV.
The
completion of the financing (see Note 15 b) is integral to the consummation of the Merger Agreement. A minimum of USD $5,000,000 of the financing will used to cover advances to Overland as contemplated by the Merger Agreement. In addition, subject
to further board approval, the Company may advance further funds to support Overlands working capital requirements. To date the Company has advanced Overland USD $4,000,000, under a secured promissory note, repayable on May 15, 2018 and
bearing interest at prime plus 2%.
The Company has entered into an agreement with a syndicate of investment
dealers led by Cormark Securities Inc., and including Jacob Securities Inc. and Paradigm Capital Inc. (collectively, the Underwriters) pursuant to which the Underwriters have agreed to purchase, on a bought deal basis, 1,176,500 special
warrants of the Company (Special Warrants) at a price of $8.50 per Special Warrants (the Issue Price), resulting in gross proceeds of $10,000,250 to the Company (the Offering). Each Special Warrant is exercisable
into one unit of the Company (a Unit) with each Unit being comprised of one Common Share of the Company and one-half of a Common Share purchase warrant of the Company (a Warrant). Each whole Warrant is exercisable at an
exercise price of $11.50 for a period of two years from the closing date.
The Underwriters will have the option (the
Underwriters Option) to arrange for the purchase of up to an additional 15% of Special Warrants (being up to 176,475 Special Warrants) sold under the Offering at the Issue Price. The Underwriters Option shall be exercisable,
in whole or in part, until the time of closing. The Underwriters shall be entitled to the same commission provided for below in respect of any Special Warrants issued and sold upon exercise of the Underwriters Option.
The Underwriters are entitled to receive a cash commission equal to 6% of the gross proceeds of the Offering. The Company will also reimburse
the Underwriters for reasonable fees and expenses incurred in connection with the Offering.
The Offering is scheduled to close on or
before June 3, 2014. All securities issued in connection with the Offering are subject to a four-month hold period from the issuance date in accordance with the policies of the TSXV and applicable Canadian securities laws. The Offering is
subject to all required regulatory approvals, including the approval of the TSXV.
F-96
Sphere 3D Corporation
Notes to the Condensed Consolidated Interim Financial Statements
March 31, 2014 and 2013
(Expressed in Canadian Dollars)
15.
|
Subsequent Events
(continued)
|
|
(b)
|
Financing
(continued)
|
Sphere 3D intends to file a short-form prospectus in each of the Provinces of British
Columbia, Alberta and Ontario (and such other provinces and territories of Canada as may be agreed to by Cormark Securities Inc. and the Corporation) qualifying the Units issuable upon exercise or deemed exercise of the Special Warrants by
July 31, 2014, failing which the holder would be entitled to receive 1.05 Units upon exercise or deemed exercise of the Special Warrants.
F-97
Annex A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
MAY 15, 2014
BY
AND AMONG
SPHERE 3D CORPORATION
OVERLAND STORAGE, INC.
AND
S3D ACQUISITION
COMPANY
TABLE OF CONTENTS
|
|
|
|
|
|
|
ARTICLE I The Merger
|
|
|
A-2
|
|
|
|
|
1.1
|
|
The Merger
|
|
|
A-2
|
|
1.2
|
|
Closing
|
|
|
A-2
|
|
1.3
|
|
Effective Time
|
|
|
A-2
|
|
1.4
|
|
Effects of the Merger
|
|
|
A-2
|
|
1.5
|
|
Organizational Documents of the Surviving Corporation
|
|
|
A-2
|
|
1.6
|
|
Directors and Officers of the Surviving Corporation
|
|
|
A-3
|
|
1.7
|
|
Governance of Parent
|
|
|
A-3
|
|
1.8
|
|
Tax Consequences
|
|
|
A-3
|
|
|
|
ARTICLE II Effects of the Merger; Exchange of Certificates
|
|
|
A-3
|
|
|
|
|
2.1
|
|
Effect on Capital Stock
|
|
|
A-3
|
|
2.2
|
|
Exchange of Shares and Certificates
|
|
|
A-5
|
|
2.3
|
|
Dissenting Shareholders
|
|
|
A-7
|
|
|
|
ARTICLE III Representations and Warranties of the Company
|
|
|
A-8
|
|
|
|
|
3.1
|
|
Corporate Organization
|
|
|
A-8
|
|
3.2
|
|
Authorization
|
|
|
A-9
|
|
3.3
|
|
Capitalization
|
|
|
A-9
|
|
3.4
|
|
Consents
|
|
|
A-9
|
|
3.5
|
|
Delivery of SEC Filings; Business
|
|
|
A-10
|
|
3.6
|
|
Absence of Certain Changes
|
|
|
A-10
|
|
3.7
|
|
SEC Filings
|
|
|
A-11
|
|
3.8
|
|
No Conflict, Breach, Violation or Default
|
|
|
A-11
|
|
3.9
|
|
Tax Matters
|
|
|
A-11
|
|
3.10
|
|
Title to Properties
|
|
|
A-12
|
|
3.11
|
|
Certificates, Authorities and Permits
|
|
|
A-12
|
|
3.12
|
|
Labor Matters.
|
|
|
A-12
|
|
3.13
|
|
Intellectual Property
|
|
|
A-12
|
|
3.14
|
|
Environmental Matters
|
|
|
A-13
|
|
3.15
|
|
Litigation
|
|
|
A-14
|
|
3.16
|
|
Financial Statements
|
|
|
A-14
|
|
3.17
|
|
Insurance Coverage
|
|
|
A-14
|
|
3.18
|
|
Compliance with Nasdaq Continued Listing Requirements
|
|
|
A-14
|
|
3.19
|
|
Brokers and Finders
|
|
|
A-14
|
|
3.20
|
|
Opinion of Financial Advisor
|
|
|
A-14
|
|
3.21
|
|
Questionable Payments
|
|
|
A-14
|
|
3.22
|
|
Board Approval
|
|
|
A-15
|
|
3.23
|
|
Proxy Statement
|
|
|
A-15
|
|
3.24
|
|
Internal Controls
|
|
|
A-15
|
|
3.25
|
|
Related Party Transactions
|
|
|
A-15
|
|
3.26
|
|
Investment Company
|
|
|
A-16
|
|
3.27
|
|
Compliance with Laws
|
|
|
A-16
|
|
3.28
|
|
No Other Representations or Warranties
|
|
|
A-16
|
|
A-i
|
|
|
|
|
|
|
|
|
ARTICLE IV Representations and Warranties of Parent and Merger Sub
|
|
|
A-16
|
|
|
|
|
4.1
|
|
Organization, Good Standing and Qualification
|
|
|
A-16
|
|
4.2
|
|
Authorization
|
|
|
A-16
|
|
4.3
|
|
Capitalization
|
|
|
A-17
|
|
4.4
|
|
Valid Issuance
|
|
|
A-17
|
|
4.5
|
|
Consents
|
|
|
A-17
|
|
4.6
|
|
Delivery of Parent Filings; Business
|
|
|
A-18
|
|
4.7
|
|
Absence of Certain Changes
|
|
|
A-18
|
|
4.8
|
|
No Conflict, Breach, Violation or Default
|
|
|
A-19
|
|
4.9
|
|
Tax Matters
|
|
|
A-19
|
|
4.10
|
|
Title to Properties
|
|
|
A-20
|
|
4.11
|
|
Certificates, Authorities and Permits
|
|
|
A-20
|
|
4.12
|
|
Labor Matters
|
|
|
A-20
|
|
4.13
|
|
Intellectual Property
|
|
|
A-21
|
|
4.14
|
|
Environmental Matters
|
|
|
A-21
|
|
4.15
|
|
Litigation
|
|
|
A-21
|
|
4.16
|
|
Financial Statements
|
|
|
A-21
|
|
4.17
|
|
Insurance Coverage
|
|
|
A-22
|
|
4.18
|
|
Compliance with Continued Listing Requirements
|
|
|
A-22
|
|
4.19
|
|
Brokers and Finders
|
|
|
A-22
|
|
4.20
|
|
Opinion of Financial Advisor
|
|
|
A-22
|
|
4.21
|
|
Questionable Payments
|
|
|
A-22
|
|
4.22
|
|
Form F-4
|
|
|
A-22
|
|
4.23
|
|
Internal Controls
|
|
|
A-23
|
|
4.24
|
|
Related Party Transactions
|
|
|
A-23
|
|
4.25
|
|
Investment Company
|
|
|
A-23
|
|
4.26
|
|
Compliance with Laws
|
|
|
A-23
|
|
4.27
|
|
No Other Representations or Warranties
|
|
|
A-23
|
|
|
|
ARTICLE V Covenants Relating to Conduct of Business
|
|
|
A-24
|
|
|
|
|
5.1
|
|
Conduct of Business of the Company
|
|
|
A-24
|
|
5.2
|
|
Conduct of Business of Parent
|
|
|
A-26
|
|
5.3
|
|
No Solicitation
|
|
|
A-28
|
|
5.4
|
|
Board of Directors Recommendation
|
|
|
A-29
|
|
5.5
|
|
Company Shareholders Meeting
|
|
|
A-30
|
|
|
|
ARTICLE VI Additional Agreements
|
|
|
A-30
|
|
|
|
|
6.1
|
|
Preparation of SEC Documents; Shareholders Meeting
|
|
|
A-30
|
|
6.2
|
|
Access to Information; Confidentiality
|
|
|
A-32
|
|
6.3
|
|
Commercially Reasonable Efforts
|
|
|
A-32
|
|
6.4
|
|
Indemnification and Insurance
|
|
|
A-33
|
|
6.5
|
|
Fees and Expenses
|
|
|
A-33
|
|
6.6
|
|
Announcements
|
|
|
A-33
|
|
6.7
|
|
Listing and TSXV Acceptance
|
|
|
A-34
|
|
6.8
|
|
Tax-Free Reorganization Treatment
|
|
|
A-34
|
|
6.9
|
|
Conveyance Taxes
|
|
|
A-34
|
|
6.10
|
|
Equity Awards
|
|
|
A-34
|
|
6.11
|
|
Employee Benefits
|
|
|
A-35
|
|
A-ii
|
|
|
|
|
|
|
6.12
|
|
Consents of Accountants
|
|
|
A-36
|
|
6.13
|
|
Affiliate Legends
|
|
|
A-36
|
|
6.14
|
|
Notification of Certain Matters
|
|
|
A-36
|
|
6.15
|
|
Section 16 Matters
|
|
|
A-36
|
|
6.16
|
|
State Takeover Laws
|
|
|
A-36
|
|
6.17
|
|
Further Assurances
|
|
|
A-37
|
|
6.18
|
|
Shareholder Litigation
|
|
|
A-37
|
|
6.19
|
|
Debt Assignment or Assumption
|
|
|
A-37
|
|
6.20
|
|
Bridge Loans
|
|
|
A-37
|
|
|
|
ARTICLE VII Conditions Precedent
|
|
|
A-37
|
|
|
|
|
7.1
|
|
Conditions to Each Partys Obligation to Effect The Merger
|
|
|
A-37
|
|
7.2
|
|
Conditions to Obligations of Parent and Merger Sub
|
|
|
A-38
|
|
7.3
|
|
Conditions to Obligations of the Company
|
|
|
A-39
|
|
|
|
ARTICLE VIII Termination, Amendment and Waiver
|
|
|
A-40
|
|
|
|
|
8.1
|
|
Termination
|
|
|
A-40
|
|
8.2
|
|
Effect of Termination
|
|
|
A-41
|
|
8.3
|
|
Payments by the Company
|
|
|
A-41
|
|
8.4
|
|
Interest and Costs; Other Remedies
|
|
|
A-42
|
|
8.5
|
|
Amendment
|
|
|
A-42
|
|
8.6
|
|
Extension; Waiver
|
|
|
A-42
|
|
|
|
ARTICLE IX General Provisions
|
|
|
A-42
|
|
|
|
|
9.1
|
|
Nonsurvival of Representations and Warranties
|
|
|
A-42
|
|
9.2
|
|
Notices
|
|
|
A-42
|
|
9.3
|
|
Interpretation
|
|
|
A-43
|
|
9.4
|
|
Knowledge
|
|
|
A-43
|
|
9.5
|
|
Counterparts
|
|
|
A-43
|
|
9.6
|
|
Entire Agreement; No Third-Party Beneficiaries
|
|
|
A-43
|
|
9.7
|
|
Governing Law
|
|
|
A-44
|
|
9.8
|
|
Assignment
|
|
|
A-44
|
|
9.9
|
|
Consent to Jurisdiction
|
|
|
A-44
|
|
9.10
|
|
Headings, etc
|
|
|
A-44
|
|
9.11
|
|
Severability
|
|
|
A-44
|
|
9.12
|
|
Failure or Indulgence Not a Waiver; Remedies Cumulative
|
|
|
A-44
|
|
9.13
|
|
Waiver of Jury Trial
|
|
|
A-44
|
|
9.14
|
|
Specific Performance
|
|
|
A-44
|
|
9.15
|
|
Remedy for Breach of Bridge Loan Documentation
|
|
|
A-45
|
|
A-iii
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of May 15, 2014 (the
Agreement
), is by and among Overland Storage, Inc., a
California corporation (the
Company
), Sphere 3D Corporation, an Ontario corporation (
Parent
), and S3D Acquisition Company, a California corporation and wholly owned subsidiary of Parent (
Merger
Sub
).
WHEREAS, each of the respective Boards of Directors of Parent, Merger Sub and the Company have approved the business
combination between the Company and Parent on the terms and subject to the conditions set forth in this Agreement;
WHEREAS, in
furtherance thereof, the Board of Directors of each of Parent, Merger Sub and the Company have approved this Agreement and the merger of Merger Sub with and into the Company (the
Merger
) so that the Company continues as the
surviving corporation in the Merger (sometimes referred to in such capacity as the
Surviving Corporation
), upon the terms of and subject to the conditions set forth in this Agreement and in accordance with the provisions of the
California Corporations Code (the
CCC
);
WHEREAS, the Board of Directors of the Company has determined to recommend to
its shareholders the approval of this Agreement and the Merger;
WHEREAS, certain shareholders of the Company have entered into a
shareholder support agreement with Parent pursuant to which they have agreed to vote their shares of the Company in favor of the Merger;
WHEREAS, Parent, as the sole stockholder of Merger Sub, has adopted and approved this Agreement and the Merger, and the Board of Directors of
Parent has authorized the issuance of common shares of the Parent (the
Parent Common Shares
) in connection with this Agreement (the
Parent Share Issuance
);
WHEREAS, for United States federal income tax purposes, it is intended that the Merger shall (i) qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
Code
) and (ii) to not result in gain being recognized under Section 367(a)(1) of the Code (other than for any stockholder
that would be a five-percent transferee shareholder (within the meaning of United States Treasury Regulations Section 1.367(a)-3(c)(5)(ii)) of the Company following the Merger that does not enter into a five-year gain recognition
agreement in the form provided in United States Regulations Section 1.367(a)-8(c)) (the
Intended Tax Treatment
), and this Agreement is intended to be, and is adopted as, a plan of reorganization for purposes of
Sections 354 and 361 of the Code;
WHEREAS, Parent and Company shall concurrent with the execution of this Agreement enter into bridge
loan documentation mutually agreeable to each party setting forth the terms of a bridge loan to be made by Parent to Company (the Bridge Loan Documentation); and
WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe
certain conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties,
covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
A-1
ARTICLE I
The Merger
1.1
The
Merger
. Upon the terms of and subject to the conditions set forth in this Agreement, and in accordance with the CCC, at the Effective Time, Merger Sub shall be merged with and into the Company, the separate corporate existence of Merger Sub
shall cease and the Company shall continue as the Surviving Corporation and shall succeed and assume all the property, rights, privileges, powers and franchises of Merger Sub in accordance with the CCC.
1.2
Closing
. The closing of the Merger (the
Closing
) shall take place at 10:00 a.m., Eastern Daylight Time, on
a date to be specified by the parties, which shall be no later than the second Business Day after satisfaction or waiver of all of the conditions set forth in Article VII (
other than
delivery of items to be delivered at the Closing and
other than
those conditions that by their nature are to be satisfied at the Closing, it being understood that the occurrence of the Closing shall remain subject to the delivery of such items and the satisfaction or waiver of such conditions
at the Closing) at the offices of OMelveny & Myers LLP, 2765 Sand Hill Road, Menlo Park, California 94025, unless another time, date or place is agreed to in writing by the parties hereto; provided, however, that in no event shall the
Closing or the Effective Time occur prior to August 1, 2014. The date on which the Closing occurs is referred to herein as the
Closing Date
. A
Business Day
means any day except any Saturday, any Sunday, any
day which is a federal legal holiday in the United States or a statutory holiday in the Province of Ontario, Canada or any day on which banking institutions in the State of California or in the Province of Ontario, Canada are authorized or required
by law or other governmental action to close.
1.3
Effective Time
. Upon the terms of and subject to the conditions of this
Agreement, as soon as practicable on the Closing Date, the parties shall cause the Merger to be consummated by filing an agreement of merger executed in accordance with the relevant provisions of the CCC (the
California Merger
Agreement
) with the Secretary of State of the State of California (the
CA Secretary of State
) and shall make all other filings or recordings required under the CCC. The Merger shall become effective at such time as the
California Merger Agreement is duly filed with the CA Secretary of State, or at such subsequent date or time as the Company and Parent shall agree and specify in the California Merger Agreement. The date and time at which the Merger becomes
effective as set forth in the California Merger Agreement is referred to herein as the
Effective Time
.
1.4
Effects
of the Merger
. At the Effective Time, the Merger shall have the effects set forth in this Agreement and in the applicable provisions of the CCC. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all
the rights, properties, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of
the Surviving Corporation in the same manner as if the Surviving Corporation had itself incurred them.
1.5
Organizational Documents of
the Surviving Corporation
. At the Effective Time, the Companys Amended and Restated Articles of Incorporation, as amended, and Bylaws (the
Organizational Documents
) shall be amended and restated in its entirety to be in
a form that is mutually agreed upon by Parent and the Company in their reasonable judgment, and such amended Company Organizational Documents shall be the articles of incorporation of the Surviving Corporation until thereafter amended in accordance
with the CCC and as provided in such articles of incorporation (the
Surviving Charter
). After the Effective Time, the authorized capital stock of the Surviving Corporation shall consist of 1,000 shares of common stock, $0.001 par
value. At the Effective Time, the bylaws of the Company shall be amended and restated in their entirety to be in a form that is mutually agreed upon by Parent and the Company, and such bylaws shall be the bylaws of the Surviving Corporation until
thereafter amended in accordance with the CCC and as provided in such bylaws (the (
Surviving Bylaws
).
A-2
1.6
Directors and Officers of the Surviving Corporation
. The directors and officers of
Merger Sub shall be, from and after the Effective Time, the directors and officers of the Surviving Corporation until their successors are duly elected and qualified or until their earlier death, resignation or removal in accordance with the
Surviving Charter, the Surviving Bylaws and the CCC.
1.7
Governance of Parent
. The Company, Parent, Merger Sub and the Surviving
Corporation shall take all actions necessary so that the matters set forth on
Exhibit A
occur on the Closing Date.
1.8
Tax
Consequences
. It is intended by the parties hereto that the Merger shall qualify for the Intended Tax Treatment for all relevant Tax purposes and the parties shall not take any position inconsistent therewith in any Tax filing or proceeding. In
the event the parties determine that the Merger may not qualify as a reorganization within the meaning of Section 368(a) of the Code, they will cooperate in restructuring the transaction, to the extent reasonably possible, to cause
the Merger to so qualify.
Tax
(and, with correlative meaning,
Taxes
) means (i) any federal,
state, provincial, local or foreign net income, alternative or add-on minimum, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation,
premium, property, environmental, estimated or windfall profit tax, custom duty, national insurance tax, health tax or other tax or other like assessment or charge of any kind whatsoever, including social security contributions, in each case
together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Authority responsible for the imposition of any such tax (domestic or foreign), whether disputed or not, (ii) any Liability for the
payment of any amounts of the type described in clause (i) of this sentence as a result of being a member of an affiliated, consolidated, combined, unitary or aggregate group for any Tax period, and (iii) any Liability for the payment of
any amounts of the type described in clause (i) or (ii) of this sentence as a result of being a transferee of or successor to any Person or as a result of any express or implied obligation to indemnify any other Person, by contract or
otherwise.
Governmental Authority
means any court or tribunal, governmental, quasi-governmental or regulatory body,
administrative agency or bureau, commission or authority or other body exercising similar powers or authority, including any regulatory body, administrative agency or bureau, commission or authority or other body.
Liabilities
means debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or
unmatured, determined or determinable, known or unknown, including those arising under any Law, action or governmental order and those arising under any contract.
ARTICLE II
Effects of
the Merger; Exchange of Certificates
2.1
Effect on Capital Stock
. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub, the Company or the holders of any shares of common stock, no par value, of the Company (
Company Common Stock
):
(a)
Company Common Stock
. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time, other
than Dissenting Shares, shall automatically be converted into and represent the right to receive a fraction of a fully paid and nonassessable Parent Common Share equal to the Exchange Ratio upon surrender of the Certificate or Uncertificated Shares
which immediately prior to the Effective Time represented such share of Company Common Stock in the manner provided in Section 2.2(b) (or, in the case of a lost, stolen or destroyed Certificate, Section 2.2(i)). As used in this Agreement,
Exchange Ratio shall mean 0.510594 plus the quotient obtained by dividing (x) the number of Parent Common Shares held by the Company immediately prior to the Effective Time by (y) 18,495,865.20 plus the quotient obtained by
dividing (A) (i)105%
A-3
of the principal amount of any indebtedness of the Company to Cyrus (designated in U.S. dollars) repaid by the Company on or after the date hereof and prior to the Effective Time divided by
(ii) 8.675 by (B) 18,495,865.20. The Parent Common Shares to be issued to holders of Company Common Stock pursuant to this Agreement, together with any cash to be paid to such holders in lieu of fractional shares pursuant to
Section 2.2(f), are referred to as the
Merger Consideration
. As a result of the Merger, at the Effective Time, each holder of a Certificate shall cease to have any rights with respect thereto,
except
the right to
receive the Merger Consideration payable in respect of the shares of Company Common Stock represented by such Certificate immediately prior to the Effective Time, any cash in lieu of fractional shares payable pursuant to Section 2.1(f) and any
dividends or other distributions payable pursuant to Section 2.2(d), all to be issued or paid, without interest, in consideration therefor upon the surrender of such Certificate in accordance with Section 2.2(b) (or, in the case of a lost,
stolen or destroyed Certificate, Section 2.2(i)).
(b)
Capital Stock of Merger Sub
. Each issued and outstanding share of
common stock, par value $0.0001 per share, of Merger Sub shall be converted into one fully paid and nonassessable share of common stock, no par value, of the Surviving Corporation.
(c)
Company Equity Awards
. At the Effective Time, all issued and outstanding options to purchase Company Common Stock (
Company
Options
), and all issued and outstanding awards of restricted stock units with respect to Company Common Stock (
Company RSUs
), in each case granted under any Company Stock Plan and whether vested or unvested in
accordance with their terms, shall be treated as provided in Section 6.10. For purposes hereof,
Company Stock Plans
shall mean the Companys 2009 Equity Incentive Plan, the Companys 2003 Equity Incentive Plan and
the Companys 2000 Stock Option Plan, and each individual award agreement that covers an outstanding equity award granted by the Company under the inducement grant exception provided in NASDAQ Rule 5635(c)(4). Prior to the Effective
Time, the rights of participants in the Companys 2006 Employee Stock Purchase Plan, as amended (the
ESPP
) and all issued and outstanding awards of stock appreciation rights with respect to Company Common Stock
(
Company SARs
), shall terminate as provided in Section 6.10.
(d)
Company Warrants
. At the Effective Time,
and in accordance with the terms of each warrant to purchase shares of Company Common Stock (collectively, the
Company Warrants
) that are issued and outstanding immediately prior to the Effective Time, Parent shall issue a
replacement warrant to each holder thereof providing that such replacement warrant shall be exercisable for a number of Parent Common Shares equal to the product of (x) the aggregate number of shares of Company Common Stock issuable in respect
of such Company Warrant immediately prior to the Effective Time multiplied by (y) the Exchange Ratio (the
Replacement Warrants
). Each Replacement Warrant shall contain appropriate provision such that the provisions of each
Company Warrant (including the exercise period and the exercise price and provision for adjustment of the exercise price) shall thereafter be maintained in each such Replacement Warrant as nearly equivalent as may be practicable in relation to such
Company Warrant. From and after the Effective Time, Parent shall comply with all of the terms and conditions set forth in each such Replacement Warrant, including the obligation to issue the Parent Common Shares contemplated thereby upon exercise
thereof.
(e)
Fractional Shares
. No fraction of a Parent Common Share will be issued by virtue of the Merger, but in lieu thereof
each holder of shares of Company Common Stock who would otherwise be entitled to receive a fraction of a Parent Common Share (after aggregating all fractional Parent Common Shares that otherwise would be received by such holder) shall, upon
surrender of such holders Certificate(s), receive from Parent an amount of cash (rounded to the nearest whole cent), without interest, equal to the product of: (i) such fraction, multiplied by (ii) the closing trading price of the
Parent Common Shares on the TSX Venture Exchange (the
TSXV
) or such other stock exchange where the Parent Common Shares principally trade on the second trading day immediately preceding the Closing Date (the
Parent Share
Price
).
(f)
Adjustments to Exchange Ratio
. Notwithstanding any provision of this Article II to the contrary (but
without in any way limiting the covenants in Section 5.1), the Exchange Ratio shall be adjusted to reflect fully
A-4
the appropriate effect of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Share or Company Common Stock),
reorganization, recapitalization, reclassification or other like change with respect to Parent Common Share or Company Common Stock having a record date on or after the date hereof and prior to the Effective Time.
2.2
Exchange of Shares and Certificates
.
(a)
Exchange Agent
. Prior to the Effective Time, Parent shall appoint an exchange agent (the
Exchange Agent
) for the
purpose of exchanging for the Merger Consideration (i) certificates representing shares of Company Common Stock (the
Certificates
) and (ii) uncertificated shares of Company Common Stock (the
Uncertificated
Shares
). As of the Effective Time, Parent shall deposit with the Exchange Agent the aggregate Merger Consideration to be paid in respect of the Certificates and Uncertificated Shares, including any shares of Company Common Stock issuable
upon the vesting of any Company RSUs at the Effective Time (the
Exchange Fund
). Promptly after the Effective Time, Parent shall send, or shall cause the Exchange Agent to send, to each record holder of shares of Company Common
Stock at the Effective Time a letter of transmittal and instructions (which shall specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the Certificates or transfer of the Uncertificated
Shares to the Exchange Agent) for use in such exchange.
(b)
Exchange Procedures
. Each holder of shares of Company Common Stock
that have been converted into the right to receive the Merger Consideration shall be entitled to receive the Merger Consideration in respect of the Company Common Stock represented by a Certificate or Uncertificated Share, upon (i) surrender to
the Exchange Agent of a Certificate, together with a duly completed and validly executed letter of transmittal and such other documents as may reasonably be requested by the Exchange Agent, or (ii) receipt of an agents message
by the Exchange Agent (or such other evidence, if any, of transfer as the Exchange Agent may reasonably request) in the case of a book-entry transfer of Uncertificated Shares. Until so surrendered or transferred, as the case may be, each such
Certificate or Uncertificated Share shall represent after the Effective Time for all purposes only the right to receive such Merger Consideration. No interest shall be paid or accrued on any amount payable upon the surrender or transfer of any such
Certificate or Uncertificated Share.
(c) If any portion of the Merger Consideration is to be paid to a Person other than the Person in
whose name the surrendered Certificate or the transferred Uncertificated Share is registered, it shall be a condition to such payment that (i) either such Certificate shall be properly endorsed or shall otherwise be in proper form for transfer
or such Uncertificated Share shall be properly transferred and (ii) the Person requesting such payment shall pay to the Exchange Agent any transfer or other Tax required as a result of such payment to a Person other than the registered holder
of such Certificate or Uncertificated Share or establish to the satisfaction of the Exchange Agent that such Tax has been paid or is not payable.
(d)
Distributions with Respect to Unexchanged Shares
. No dividends or other distributions with respect to a Parent Common Share with a
record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate or non-transferred Uncertificated Shares with respect to the right to receive Parent Common Shares represented thereby, and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 2.1(f), until (i) such Certificate has been surrendered, or (ii) such Uncertificated Share has, in each case, been transferred in accordance with this
Article II. Subject to all applicable laws, statutes, orders, rules, regulations, policies or guidelines promulgated, or judgments, decisions or orders entered by any federal, state, provincial, local or foreign government, any court,
administrative, regulatory or other governmental agency, commission or authority or any non-governmental self-regulatory agency, commission or authority (
Governmental Entity
) (all such laws, statutes, orders, rules, regulations,
policies, guidelines, judgments, decisions and orders, collectively,
Laws
or
Law
), following surrender of any such Certificate or transfer of Uncertificated Shares, there shall be paid to the recordholder
thereof, without interest, (i) promptly after such surrender and transfer, the number of whole Parent Common Shares issuable in exchange therefor pursuant to this Article II, together with any cash payable in lieu of a fractional Parent
Common Share to which such holder is entitled pursuant to Section 2.1(f) and the amount of dividends or other distributions with a record
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date after the Effective Time theretofore paid with respect to such whole Parent Common Shares, and (ii) at the appropriate payment date, the amount of dividends or other distributions with
a record date after the Effective Time and prior to the date of such surrender and a payment date subsequent to the date of such surrender payable with respect to such whole Parent Common Shares.
(e)
No Further Ownership Rights in Company Common Stock
. All Parent Common Shares issued upon the surrender for exchange of
Certificates, or transfer of Uncertificated Shares, in accordance with the terms of this Article II and any cash paid pursuant to Section 2.1(f) or Section 2.2(d) shall be deemed to have been issued (and paid) in full satisfaction of
all rights pertaining to the shares of Company Common Stock previously represented by such Certificates or Uncertificated Shares. At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further
registration of transfers on the stock transfer books of the Surviving Corporation of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented or
Uncertificated Shares are transferred to the Surviving Corporation or the Exchange Agent for any reason, they shall be canceled and exchanged as provided in this Article II.
(f)
Termination of Exchange Fund
. Any portion of the Exchange Fund which remains undistributed to the holders of Certificates or
Uncertificated Shares one year after the Effective Time shall be delivered to Parent, upon demand, and any holders of Certificates or Uncertificated Shares who have not theretofore complied with this Article II shall thereafter look only to
Parent for payment of their claim for the Merger Consideration, and any dividends or distributions pursuant to Section 2.2(d).
(g)
Escheat; No Liability
. None of Parent, Merger Sub, Surviving Corporation or the Exchange Agent shall be liable to any Person in respect of any Parent Common Shares (or dividends or distributions with respect thereto) or cash from the Exchange
Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law. If any Certificate shall not have been surrendered or Uncertificated Shares shall not have been transferred immediately prior to the date on
which any Parent Common Share, any cash in lieu of fractional Parent Common Shares or any dividends or distributions with respect to a Parent Common Share issuable in respect of such Certificate or Uncertificated Shares would escheat to or otherwise
become the property of any Governmental Entity, any such shares, cash, dividends or distributions in respect of such Certificate or Uncertificated Shares shall, to the extent permitted by applicable Law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any Person previously entitled thereto.
(h)
Withholding Rights
. Parent or
the Exchange Agent shall be entitled to deduct and withhold from any consideration payable pursuant to this Agreement to any Person who was a holder of Company Common Stock, options or other securities or rights immediately prior to the Effective
Time such amounts as Parent or the Exchange Agent may be required to deduct and withhold with respect to the making of such payment under the Code, or any provision of federal, state, local or foreign Tax law. To the extent that amounts are so
withheld by Parent or the Exchange Agent and paid over to the applicable tax authority, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Person to whom such consideration would otherwise have been
paid. If any deduction or withholding is required as contemplated by this Section 2.2(h), then the parties shall take all reasonable steps to reduce the rate of withholding Tax as provided under relevant Tax Law and practice. The parties shall
cooperate reasonably in completing and filing documents required under the provisions of any applicable Law in connection with reducing the rate of withholding Tax due under the laws of the relevant territory or relevant double tax treaties, or in
connection with any claim to a refund of, or credit for, any required deduction or withholding. In the event that any consideration payable in Parent Common Shares pursuant to this Agreement is subject to tax withholding, Parent agrees that it shall
withhold from such payment the minimum number of whole Parent Common Shares required to satisfy such tax withholding obligations at the minimum applicable withholding rates and remit the amount of such tax withholding to the applicable tax
authority.
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(i)
Lost, Stolen or Destroyed Certificates
. In the event any Certificate shall have been
lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such Parent Common Shares as may be required pursuant to
Section 2.1(a), cash for fractional shares pursuant to Section 2.1(f) and any dividends or distributions payable pursuant to Section 2.2(d);
provided
,
however
, that Parent may, in its reasonable discretion and as a
condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificate to deliver an agreement of indemnification in form reasonably satisfactory to Parent, or a bond in such sum as Parent may reasonably direct
as indemnity, against any claim that may be made against Parent or the Exchange Agent in respect of the Certificate or Certificates alleged to have been lost, stolen or destroyed.
(j)
Investment of Exchange Fund
. The Exchange Agent shall invest any cash included in the Exchange Fund as directed by Parent on a
daily basis;
provided
, that no such investment or loss thereon shall affect the amounts payable to former shareholders of the Company after the Effective Time pursuant to this Article II. Any interest and other income resulting from such
investment shall become a part of the Exchange Fund and any amounts in excess of the amounts payable pursuant to this Article II shall promptly be paid to Parent.
2.3
Dissenting Shareholders
.
(a) Notwithstanding anything in this Agreement to the contrary, in the event that the applicable requirements of Section 1300(b) of the
CCC have been satisfied, shares of Company Common Stock which were outstanding on the date for the determination of shareholders entitled to vote on the Merger and which were voted against the Merger and the holders of which have demanded that the
Company purchase such shares at their fair market value in accordance with Section 1301 of the CCC and have submitted such shares for endorsement in accordance with Section 1302 of CCC and have not otherwise failed to perfect or shall not
have effectively withdrawn or lost their rights to require such shares to be purchased for cash under the CCC (collectively,
Dissenting Shares
), shall not be converted into or represent the right to receive any Parent Common
Shares pursuant to Section 2.1(a), but, instead, the holders thereof shall be entitled to have their shares purchased by Parent for cash at the fair market value of such Dissenting Shares as agreed upon or determined in accordance with the
provisions of Section 1300 et seq. of the CCC.
(b) If any shareholder who holds Dissenting Shares as of the Effective Time
effectively withdraws or loses (through passage of time, failure to demand or perfect, or otherwise) the right to demand and perfect dissenters rights under the CCC, then, as of the later of the Effective Time and the occurrence of such event,
such holders shares that were Dissenting Shares shall automatically be converted into and represent only the right to receive the Merger Consideration pursuant to and subject to Section 2.1 without interest thereon upon surrender of the
Certificates representing such holders shares.
(c) The Company shall give Parent (i) prompt written notice of any written
demands for purchase of any shares of Company Common Stock pursuant to the exercise of dissenters rights, withdrawals of such demands, and any other instruments or notices served pursuant to the CCC on the Company and (ii) the opportunity
to participate in all negotiations and proceedings with respect to demands for purchase of any shares of Company Common Stock pursuant to the exercise of dissenters rights under the CCC. The Company shall not, except with the prior written
consent of Parent, voluntarily make or agree to make any payment with respect to any demands for purchase of any shares of Company Common Stock pursuant to the exercise of dissenters rights under the CCC, or settle or offer to settle any such
demands.
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ARTICLE III
Representations and Warranties of the Company
Subject to the exceptions set forth in a numbered or lettered section of the disclosure letter of the Company addressed to Parent, dated as of
the date hereof and delivered to Parent with the parties execution of this Agreement (the
Company Disclosure Schedule
) specifically referencing a representation or warranty herein, the Company represents and warrants to
Parent and Merger Sub that the statements contained in this Article III (each of which exceptions and disclosures set forth in any section or subsection of the Company Disclosure Schedule will apply to any other section or subsection of the Company
Disclosure Schedule to the extent the relevance to such other section or subsection is reasonably apparent from a reading of the text of such disclosure to a reader unfamiliar with the business of the Company and its Subsidiaries, taken as a whole)
are true and correct on and as of the date hereof. For purposes of this Agreement, a document shall be deemed to have been made available by the Company to Parent if it is publicly available through the Electronic Data Gathering,
Analysis, and Retrieval system (
EDGAR
):
3.1
Corporate Organization
.
(a) Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the Laws of the
jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted and to own or lease its properties, in each case as described in the SEC Filings. Each of the Company and its
Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property makes such qualification or leasing necessary unless the
failure to so qualify has not had and could not reasonably be expected to have a Material Adverse Effect.
As used in this Agreement, the
terms
Material Adverse Change
or
Material Adverse Effect
mean, with respect to Parent or the Company, as the case may be, any change, effect, event, occurrence or state of facts that has or has had a material
adverse effect (i) on the business, properties, financial condition or results of operations of such party and its subsidiaries, taken as a whole,
provided
,
however
, that a Material Adverse Effect/Material Adverse Change will be
deemed not to include effects to the extent resulting from: (A) any change, after the date hereof, in Law, U.S. generally accepted accounting principles (
GAAP
) with respect to the Company, or International Financial Reporting
Standards, as issued by the International Accounting Standards Board (
IFRS
) with respect to the Parent, or the accounting rules and regulations of the Securities and Exchange Commission (the
SEC
) or the Canadian
Securities Commissions, (B) any change in the market price or trading volume of Parent Common Shares or Company Common Stock (it being understood that any change, effect, event, occurrence or state of facts that is an underlying cause of such
change in price or trading volume shall not be excluded by virtue of this exception), (C) any change, effect, event, occurrence or state of facts exclusively relating to any acts of terrorism, sabotage, military action or war, (D) any
change in or relating to the United States or Canadian economy or United States or Canadian financial, credit or securities markets in general, or (E) any change in or relating to the industry in which such party operates or the markets for any
of such partys products or services in general, which change in the case of clauses (D) and (E) does not affect such party to a materially disproportionate degree relative to other entities operating in such markets or industries or
serving such markets, (F) the filing of any shareholder class action, derivative or similar litigation arising from an alleged breach of fiduciary duty or misrepresentation in public disclosure relating to this Agreement;
provided
, that
the facts underlying such litigation may constitute a Material Adverse Effect or Material Adverse Change; or (ii) on the ability of such party to consummate the transactions contemplated by this Agreement in substantially the manner
contemplated hereby.
As used in this Agreement, the term
Subsidiary
means with respect to any Person, any corporation,
association, business entity, partnership, limited liability company or other Person of which such Person, either alone or together with one or more Subsidiaries or by one or more other Subsidiaries (i) directly or indirectly owns or controls
securities or other interests representing at least fifty percent (50%) of the voting power of such
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Person, or (ii) is entitled, by Contract or otherwise, to elect, appoint or designate directors or other members constituting a majority of the members of such Persons board of
directors, board of managers or other governing body.
3.2
Authorization
. The Company has the corporate power and authority to
enter into this Agreement and, subject only to the approval of the Merger by the holders of a majority of the shares of the Company Common Stock at the Company Shareholders Meeting (the
Company Shareholder Approval
), has taken all
requisite action on its part, its officers, directors and shareholders necessary for (i) the authorization, execution and delivery of this Agreement and (ii) the authorization of the performance of all obligations of the Company hereunder.
This Agreement constitutes the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of
general applicability, relating to or affecting creditors rights generally and to general equitable principles.
3.3
Capitalization
. The Company has set forth on Schedule 3.3 a description of all duly and validly authorized capital stock. All of the issued and outstanding shares of the Companys capital stock have been duly authorized and validly
issued and are fully paid, nonassessable and free of pre-emptive rights and were issued in full compliance with applicable Law and any rights of third parties. All of the issued and outstanding shares of capital stock of each Subsidiary of the
Company have been duly authorized and validly issued and are fully paid, nonassessable and free of pre-emptive rights, were issued in full compliance with applicable state and federal securities Law and any rights of third parties and are owned by
the Company, beneficially and of record, subject to no Lien. No Person is entitled to pre-emptive or similar statutory or contractual rights with respect to any securities of the Company. There are no outstanding warrants, options, convertible
securities or other rights, agreements or arrangements of any character under which the Company or any of its Subsidiaries is or may be obligated to issue any equity securities of any kind and except as set forth in Schedule 3.3, neither the Company
nor any of its Subsidiaries is currently in negotiations for the issuance of any equity securities of any kind. Except as described in the SEC Filings there are no voting agreements, buy-sell agreements, option or right of first purchase agreements
or other agreements of any kind among the Company and any of the security holders of the Company relating to the securities of the Company held by them. Except as described in the SEC Filings no Person has the right to require the Company to
register any securities of the Company under the Securities Act, whether on a demand basis or in connection with the registration of securities of the Company for its own account or for the account of any other Person. No securities that are
exchangeable or exercisable for, or convertible into, capital stock of the Company are outstanding, other than as set forth on Schedule 3.3 hereto.
Except as described in the SEC Filings, the Company does not have outstanding any shareholder purchase rights or poison pill or
any similar arrangement in effect giving any Person the right to purchase any equity interest in the Company upon the occurrence of certain events (a Rights Plan).
Lien
means, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest, encumbrance,
claim, infringement, right of first refusal, preemptive right, community property right or other adverse claim of any kind in respect of such property or asset. For purposes of this Agreement, a Person shall be deemed to own subject to a Lien any
property or asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such property or asset.
3.4
Consents
. The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions
contemplated hereby require no consent of, action by or in respect of, or filing with, any Person, Governmental Entity or official other than filings that have been made pursuant to applicable state securities Laws and filings pursuant to applicable
state and federal securities Laws which the Company undertakes to file within the applicable time periods, including the filing of the Proxy Statement with the SEC in accordance with the Exchange Act and such reports under the United States
Securities Exchange Act of 1934, as amended (the
Exchange Act
), as may be required in connection with this Agreement and the other transactions contemplated by this Agreement.
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3.5
Delivery of SEC Filings; Business
. The Company has made available to Parent through
the EDGAR system, true and complete copies of the Companys most recent Annual Report on Form 10-K for the fiscal year ended July 1, 2013 (as amended prior to the date of this Agreement, the 10-K), and all other reports filed
by the Company pursuant to Sections 13(a), 13(e), 14 and 15(d) of the Exchange Act since the filing of the 10-K and during the twelve (12) months preceding the date of this Merger Agreement (collectively, the
SEC Filings
).
The SEC Filings are the only filings required of the Company pursuant to the Exchange Act for such period. The Company and its Subsidiaries are engaged in all material respects only in the business described in the SEC Filings and the SEC Filings
contain a complete and accurate description in all material respects of the business of the Company and its Subsidiaries, taken as a whole.
3.6
Absence of Certain Changes
. Between July 1, 2013 and the date of this Agreement, except as described in the SEC Filings, there
has not been with respect to the Company, any:
(a) Material Adverse Change or any change, event, circumstance, condition or effect that
would reasonably be expected to result in a Material Adverse Change;
(b) amendment or change in the Companys Charter Documents;
(c) incurrence, creation or assumption of (i) any Lien on any of its assets or properties (other than Permitted Liens) or
(ii) any Liability as a guarantor or surety with respect to the obligations of any Person other than a Subsidiary of the Company;
Permitted Liens
means (i) Liens disclosed on the Company balance sheet, (ii) Liens for Taxes that are
(A) not yet due and payable as of the Closing Date or (B) being contested in good faith (and for which adequate accruals or reserves have been established on the Company balance sheet), and (iii) landlords, mechanics,
carriers, workmens, repairmens or other like liens or other similar encumbrances arising or incurred in the ordinary course of business consistent with past practice that, in the aggregate, do not materially impair the value or the
present or intended use and operation of the assets to which they relate.
(d) material damage, destruction or loss of any property or
asset, whether or not covered by insurance;
(e) declaration, setting aside or payment of any dividend on, or the making of any other
distribution in respect of, its capital stock;
(f) any material change with respect to its senior management or other key personnel;
(g) any actual or threatened material employee strikes, work stoppages, slowdowns or lockouts or, to the Knowledge of the Company, any labor
union organization activity;
(h) making or entering into of any agreement with respect to any acquisition, sale or transfer of all or
substantially all of the assets of the Company;
(i) any change in accounting methods or practices (including any change in depreciation
or amortization policies or rates or revenue recognition policies) or any revaluation of any of its assets;
(j) commencement of any
action, suit, arbitration, mediation, proceeding, claim or investigation, or receipt notice of or, to the Knowledge of the Company, a threat of any action, suit, arbitration, mediation, proceeding, claim or investigation against a the Company
relating to any of its business, properties or assets;
(k) any negotiation with respect to, or any entry into, any agreement to do any of
the things described in the preceding clauses (a) - (j) (other than negotiations and agreements with the Company and its representatives regarding the transactions contemplated by this Agreement).
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3.7
SEC Filings
.
(a) At the time of filing thereof, each of the SEC Filings complied as to form in all material respects with the requirements of the Exchange
Act and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made,
not misleading.
(b) Each registration statement and any amendment thereto filed by the Company since January 1, 2011 pursuant to the
Securities Act and the rules and regulations thereunder, as of the date such statement or amendment became effective, complied as to form in all material respects with the Securities Act and did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in order to make the statements made therein not misleading; and each prospectus filed pursuant to Rule 424(b) under the Securities Act, as of its issue date and as of the
closing of any sale of securities pursuant thereto did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of
the circumstances under which they were made, not misleading.
3.8
No Conflict, Breach, Violation or Default
. The execution,
delivery and performance of this Agreement by the Company will not (a) conflict with or result in a breach or violation of (i) any of the terms and provisions of, or constitute a default under the Company Organizational Documents, or
(ii) any statute, rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company, any of its Subsidiaries or any of their respective assets or properties, or
(b) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries
or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any material contract, except in the case of clauses (a)(i) and (b) above, such as could not reasonably be
expected to have a Material Adverse Effect, individually or in the aggregate.
3.9
Tax Matters
. The Company and each of its
Subsidiaries have prepared and filed (or filed applicable extensions therefor) all returns, declarations, reports, claims for refund, information returns or statements relating to Taxes, including any schedule or attachment thereto, and including
any amendment thereof (the
Tax Returns
) required to have been filed by the Company or any such Subsidiary with all Governmental Authorities and paid all Taxes shown thereon or otherwise due for payment, other than any such Taxes
which the Company or any Subsidiary are contesting in good faith and for which adequate reserves have been provided and reflected in the Companys financial statements included in the SEC Filings. The charges, accruals and reserves on the books
of the Company in respect of Taxes for all fiscal periods are adequate in all material respects, and there are no material unpaid assessments against the Company or any of its Subsidiaries nor, to the Companys Knowledge, any basis for the
assessment of any additional Taxes, penalties or interest for any fiscal period or audits by any federal, state or local taxing authority except for any assessment which is not material to the Company and its Subsidiaries, taken as a whole. All
Taxes and other assessments and levies that the Company or any of its Subsidiaries is required to withhold or to collect for payment have been duly withheld and collected and paid to the proper Governmental Authorities or third party when due, other
than any such Taxes which the Company or any of its Subsidiaries are contesting in good faith and for which adequate reserves have been provided and reflected in the Companys financial statements included in the SEC Filings. There are no Tax
liens or claims pending or, to the Companys Knowledge, threatened in writing against the Company or any of its Subsidiaries or any of their respective assets or property. Except as described in the SEC Filings, there are no outstanding Tax
sharing agreements or other such arrangements between the Company and any of its Subsidiaries, on the one hand, and any other corporation or entity, on the other hand. The Company has not taken any other action or knows of any other fact relating to
the Merger that would reasonably be expected to prevent the Merger from qualifying for the Intended Tax Treatment.
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3.10
Title to Properties
. Except as disclosed in the SEC Filings, the Company and each of
its Subsidiaries have good and marketable title to all real properties and all other properties and assets owned by it, in each case free from Liens that would materially affect the value thereof or materially interfere with the use made or
currently planned to be made thereof by them; and except as disclosed in the SEC Filings, the Company and each of its Subsidiaries holds any leased real or personal property under valid and enforceable leases with no exceptions that would materially
interfere with the use made or currently planned to be made thereof by them. Such assets are sufficient for the continued operation of the business of the Company as currently conducted.
3.11
Certificates, Authorities and Permits
. The Company and each of its Subsidiaries possess adequate certificates, authorities or
permits issued by appropriate Governmental Authorities necessary to conduct the business now operated by it, except to the extent failure to possess such certificates, authorities or permits could not reasonably be expected to have a Material
Adverse Effect, individually or in the aggregate, and neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined
adversely to the Company or such Subsidiary, could reasonably be expected to have a Material Adverse Effect, individually or in the aggregate.
3.12
Labor Matters
.
(a)
Except as set forth in the SEC Filings, the Company is not a party to or bound by any collective bargaining agreements or other agreements with labor organizations. The Company has not violated in any material respect any Laws, regulations, orders
or contract terms, affecting the collective bargaining rights of employees, labor organizations or any Laws, regulations or orders affecting employment discrimination, equal opportunity employment, or employees health, safety, welfare, wages
and hours.
(b) (i) There are no labor disputes existing, or to the Companys Knowledge, threatened, involving strikes, slow-downs,
work stoppages, job actions, disputes, lockouts or any other disruptions of or by the Companys employees, (ii) there are no unfair labor practices or petitions for election pending or, to the Companys Knowledge, threatened before
the National Labor Relations Board or any other federal, state or local labor commission relating to the Companys employees, (iii) no demand for recognition or certification heretofore made by any labor organization or group of employees
is pending with respect to the Company and (iv) to the Companys Knowledge, the Company enjoys good labor and employee relations with its employees and labor organizations.
(c) The Company is, and at all times has been, in compliance with all applicable Laws respecting employment (including Laws relating to
classification of employees and independent contractors) and employment practices, terms and conditions of employment, wages and hours, and immigration and naturalization, except where the failure to so comply could not reasonably be expected to
have a Material Adverse Effect, individually or in the aggregate. There are no claims pending against the Company before the Equal Employment Opportunity Commission or any other administrative body or in any court asserting any violation of Title
VII of the Civil Rights Act of 1964, the Age Discrimination Act of 1967, 42 U.S.C. §§ 1981 or 1983 or any other federal, state or local Law, statute or ordinance barring discrimination in employment.
(d) To the Companys Knowledge, the Company has no liability for the improper classification by the Company of its employees as
independent contractors or leased employees prior to the date of this Agreement.
3.13
Intellectual Property
. The Company and its
Subsidiaries own, or have obtained valid and enforceable licenses for, or other rights to use, the Intellectual Property necessary for the conduct of the business of the Company and its Subsidiaries as currently conducted and as described in the SEC
Filings, except where the failure to own, license or have such rights could not reasonably be expected to result in a Material Adverse Effect, individually or in the aggregate. Except as described in the SEC Filings, (i) to the Companys
Knowledge, there are no third parties who have or will be able to establish rights to any Intellectual Property, except for the ownership rights of the owners of the Intellectual Property which is licensed to the Company or where such
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rights could not reasonably be expected to result in a Material Adverse Effect, individually or in the aggregate; (ii) there is no pending or, to the Companys Knowledge, threat of any,
action, suit, proceeding or claim by others challenging the Company or any of its Subsidiaries rights in or to, or the validity, enforceability, or scope of, any Intellectual Property owned by or licensed to the Company or any of its
Subsidiaries or claiming that the use of any Intellectual Property by the Company or any Subsidiary in their respective businesses as currently conducted infringes, violates or otherwise conflicts with the intellectual property rights of any third
party; and (iii) to the Companys Knowledge, the use by the Company or any of its Subsidiaries of any Intellectual Property by the Company or any of its Subsidiaries in their respective businesses as currently conducted does not infringe,
violate or otherwise conflict with the intellectual property rights of any third party.
As used in this Agreement, the term
Intellectual
Property
means all the United States and foreign intellectual property and other proprietary rights, arising under statutory, common, or other law and whether or not perfected, owned by or licensed to the Company or its Subsidiaries or
Parent or its Subsidiaries, as applicable, including (a) registered and unregistered trademarks, service marks, brand names, certification marks, collective marks, d/b/as, Internet domain names, social media accounts and names, logos,
symbols, trade dress, industrial designs, assumed names, fictitious names, trade names, and other indicia of origin, all applications and registrations for all of the foregoing, and all goodwill associated therewith and symbolized thereby, including
all extensions, modifications and renewals of same; (b) patents, patent applications, patent disclosures and inventions and discoveries which may be patentable and improvements thereto, industrial designs, invention disclosures, and any and all
divisions, continuations,
continuations-in-part,
reissues, continuing patent applications, reexaminations, and extensions thereof, any counterparts claiming priority
therefrom and like statutory rights related to the foregoing (collectively,
Patents
);
(c) know-how
or other trade secrets, whether or not reduced to practice, including processes,
schematics, databases, formulae, drawings, prototypes, models and designs (collectively,
Trade Secrets
); (d) published and unpublished works of authorship (including computer software, mask works and databases) whether
copyrightable or not, copyrights therein and thereto, and registrations and applications therefor, and all renewals, extensions, restorations and reversions thereof (collectively,
Copyrights
); and (e) computer programs,
including any and all software implementation of algorithms, models and methodologies, whether in source or object code form, user interfaces, databases and compilations, including any and all data and collections of data, and all manuals and other
specifications and Documentation and all
know-how
relating thereto (including all computer programs, object code, source code, user interface, and databases and all rights under Patents, Trade Secrets and
Copyrights embodied therein).
3.14
Environmental Matters
. To the Companys Knowledge, neither the Company nor any of its
Subsidiaries is in violation of any Environmental Laws, owns or operates any real property contaminated with any substance that is subject to any Environmental Laws, is liable for any off-site disposal or contamination pursuant to any Environmental
Laws, or is subject to any claim relating to any Environmental Laws, which violation, contamination, liability or claim has had or could reasonably be expected to have a Material Adverse Effect, individually or in the aggregate; and there is no
pending or, to the Companys Knowledge, threatened investigation that might lead to such a claim.
Environmental
Law
means any supranational, international, national (of any jurisdiction), federal, provincial, state or local statute, law, regulation, guideline, rule, standard or other legal requirement relating to pollution or protection of human
health or the environment (including ambient air, surface water, ground water, land surface or subsurface strata), including any law or regulation relating to emissions, discharges, releases or threatened releases of Materials of Environmental
Concern or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern.
Materials of Environmental Concern
include chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products and any other substance that is currently regulated by an Environmental Law or that is otherwise a danger to health, reproduction or the environment.
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3.15
Litigation
. There are no pending actions, suits or proceedings against or affecting
the Company, any of its Subsidiaries or any of its or their properties; and to the Companys Knowledge, no such actions, suits or proceedings are threatened, except (i) as described in the SEC Filings or (ii) any such proceeding,
which if resolved adversely to the Company or any of its Subsidiaries, could not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate. Neither the Company nor any of its Subsidiaries, nor any director or officer
thereof, is or since January 1, 2005 has been the subject of any action involving a claim of violation of or liability under federal or state securities Laws or a claim of breach of fiduciary duty. There has not been, and to the Companys
Knowledge, there is not pending or contemplated, any investigation by the SEC involving the Company or any current or former director or officer of the Company. The SEC has not issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Securities Act or the Exchange Act.
3.16
Financial
Statements
. The financial statements included in each SEC Filing comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the time of filing (or to the
extent corrected by a subsequent restatement) and present fairly, in all material respects, the consolidated financial position of the Company as of the dates shown and its consolidated results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with GAAP (except as may be disclosed therein or in the notes thereto, and, in the case of quarterly financial statements, as permitted by Form 10-Q under the Exchange Act). Except as set
forth in the SEC Filings, neither the Company nor any of its Subsidiaries has incurred any Liabilities, contingent or otherwise, except those incurred in the ordinary course of business, consistent (as to amount and nature) with past practices since
the date of such financial statements, none of which, individually or in the aggregate, have had or could reasonably be expected to have a Material Adverse Effect.
3.17
Insurance Coverage
. The Company and each of its Subsidiaries maintains in full force and effect insurance coverage that is
customary for comparably situated companies for the business being conducted and properties owned or leased by the Company and its Subsidiaries.
3.18
Compliance with Nasdaq Continued Listing Requirements
. Except as disclosed in the SEC Filings, (a) the Company is in
compliance with applicable NASDAQ Capital Market (the
NASDAQ
) continued listing requirements, (b) there are no proceedings pending or, to the Companys Knowledge, threatened against the Company relating to the continued
listing of the Company Common Stock on NASDAQ, and (c) the Company has not received any currently pending notice of the delisting of the Company Common Stock from NASDAQ.
3.19
Brokers and Finders
. Except for fees and expenses of Roth Capital Partners, LLC and of the Companys legal counsel and
independent auditors, no Person will have, as a result of the transactions contemplated by this Agreement, any valid right, interest or claim against or upon the Company or any of its Subsidiaries for any commission, fee or other compensation
pursuant to any agreement, arrangement or understanding entered into by or on behalf of the Company.
3.20
Opinion of Financial
Advisor
. The Company has received the opinion of its financial advisor, Roth Capital Partners, LLC, as of the date of this Agreement, to the effect that subject to the limitations set forth in the opinion, as of such date, the per share
consideration to be received by the shareholders of the Company (other than shareholders of the Company that are also shareholders of Parent (or holders of securities exercisable or convertible into Parent Common Shares)) pursuant to this Agreement
is fair, from a financial point of view, to such holders.
3.21
Questionable Payments
. Neither the Company nor any of its
Subsidiaries nor, to the Companys Knowledge, any of their respective current or former shareholders, directors, officers, employees, agents or other Persons acting on behalf of the Company or any of its Subsidiaries, has on behalf of the
Company or any of its Subsidiaries or in connection with their respective businesses: (a) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (b) made any
direct or
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indirect unlawful payments to any governmental officials or employees from corporate funds; (c) established or maintained any unlawful or unrecorded fund of corporate monies or other assets;
(d) made any false or fictitious entries on the books and records of the Company or any of its Subsidiaries; or (e) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any nature.
3.22
Board Approval
. The Board of Directors of the Company, by resolutions duly adopted by a vote at a meeting duly called and held of
all directors of the Company present at the meeting (except for such directors as recused themselves from the vote due to an interest in the transaction) and, as of the date hereof, not subsequently rescinded or modified in any way, has, as of the
date hereof (i) determined that this Agreement and the transactions contemplated hereby are fair to, and in the best interests of, the Company and the Companys shareholders, (ii) directed that the Merger be submitted to the
Companys shareholders for approval, and (iii) resolved to recommend that the Companys shareholders approve the Merger pursuant to and in accordance with this Agreement and directed that such matter be submitted for consideration of
the shareholders of the Company at the Company Shareholders Meeting.
3.23
Proxy Statement
. The Proxy Statement will comply
in all material respects with the requirements of the Exchange Act and, on the date filed with the SEC, on the date first published, sent or given to the Companys shareholders and at the time of the Company Shareholders Meeting, the
Proxy Statement will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were
made, not misleading, except that no representation or warranty is made by the Company with respect to any information provided in writing by or on behalf of the Parent for inclusion in the Proxy Statement.
3.24
Internal Controls
. The Company is in material compliance with the provisions of the Sarbanes-Oxley Act of 2002 currently
applicable to the Company. The Company and its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with managements general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with
managements general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has
established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) for the Company and designed such disclosure controls and procedures to ensure that material information relating to the Company,
including its Subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which the Companys most recently filed periodic report under the Exchange Act, as the case may be, is being
prepared. The Companys certifying officers have evaluated the effectiveness of the Companys controls and procedures as of December 31, 2013 (such date, the
Evaluation Date
) and concluded that such controls and
procedures are effective to ensure that material information relating to the Company, including its Subsidiaries, is made known to certifying officers in a timely, accurate and complete manner. Since the Evaluation Date, there have been no
significant changes in the Companys internal controls (as such term is defined in Item 308 of Regulation S-K) or, to the Companys Knowledge, in other factors that could significantly affect the Companys internal controls. The
Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with GAAP and the applicable requirements of the Exchange Act.
3.25
Related Party Transactions
. Except as disclosed in the SEC Filings, the Company has not, and, to the Knowledge of the Company, has
not been deemed to have for purposes of any applicable Law, engaged in or been party to any transaction with any of its officers, directors, employees or direct or indirect shareholders or, to the Knowledge of the Company, any member of their
immediate families (i) acquired or have the use of property for proceeds greater than the fair market value thereof, (ii) received services or have the use of property for consideration other than the fair market value thereof, or
(iii) received interest or any other amount other than at a fair market value rate from any person with whom it does not deal at arms length within the meaning of applicable taxation acts. Except as disclosed in the SEC Filings, the
Company has not, and, to the Knowledge of
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the Company, has not been deemed to have for purposes of any applicable Law, engaged in or been party to any transaction with any of its officers, directors, employees or direct or indirect
shareholders or, to the Knowledge of the Company, any member of their immediate families (i) disposed of the property for proceeds less than the fair market value thereof, (ii) performed services for consideration other than the fair
market value thereof or (iii) paid interest or any other amount other than at a fair market value rate to any person with whom it does not deal at arms length within the meaning of applicable acts. Except as disclosed in the SEC Filings,
to the Knowledge of the Company, none of the officers, directors and employees of any the Company, no shareholder of the Company and no immediate family member of an officer, director, employee or such beneficial owner, has a direct ownership
interest of more than five percent (5%) of the equity ownership of any firm or corporation that competes with, or does business with, or has any contractual arrangement with, the Company.
3.26
Investment Company
. The Company is not required to be registered as, and is not an Affiliate of, an investment company
within the meaning of the Investment Company Act of 1940, as amended.
3.27
Compliance with Laws
. The Company and each of its
Subsidiaries is in compliance in all material respects with all requirements imposed by Law, regulation or rule, whether foreign, federal, state or local, that are applicable to it, its operations, or its properties and assets, including applicable
requirements of the Foreign Corrupt Practices Act of 1977 (FCPA) (15 U.S.C. § 78dd-1, et seq.).
3.28
No Other Representations or
Warranties
. Parent hereby acknowledges and agrees that neither the Company nor any of its Subsidiaries has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in
this Article III.
ARTICLE IV
Representations and Warranties of Parent and Merger Sub
Subject to the exceptions set forth in a numbered or lettered section of the disclosure letter of Parent addressed to the Company, dated as of
the date hereof and delivered to the Company with the parties execution of this Agreement (the
Parent Disclosure Schedule
) specifically referencing a representation or warranty herein, Parent represents and warrants to the
Company that the statements contained in this Article IV (each of which exceptions and disclosures set forth in any section or subsection of the Parent Disclosure Schedule will apply to any other section or subsection of the Parent Disclosure
Schedule to the extent the relevance to such other section or subsection is reasonably apparent from a reading of the text of such disclosure to a reader unfamiliar with the business of Parent and its Subsidiaries, taken as a whole) are true and
correct on and as of the date hereof. For purposes of this Agreement, a document shall be deemed to have been made available by Parent to the Company if it is publicly available under the profile of Parent on the System for Electronic
Document Analysis and Retrieval (
SEDAR
).
4.1
Organization, Good Standing and Qualification
. Parent is a
corporation duly organized, validly existing and in good standing under the laws of the Province of Ontario. Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Merger Sub has
not engaged and will not engage in any activities
other than
in connection with or as contemplated by this Agreement and the transactions contemplated hereby. Parent and Merger Sub have the corporate power and authority, and all
authorizations, licenses, permits and certifications, to own, lease and operate all of their properties and assets and to carry on their business as it is now being conducted,
except
where the failure to do so would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect on Parent.
4.2
Authorization
. Each of Parent and Merger
Sub has the corporate power and authority to enter into this Agreement and has taken all requisite action on its part, its officers, directors and shareholders necessary for (i) the authorization, execution and delivery of this Agreement,
(ii) the authorization of the performance of all obligations of Parent and Merger Sub hereunder and (iii) the authorization, issuance and delivery of the Parent Common Shares. No approval from any security holders of Parent, including the
holders of shares of Parent
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Common Shares, is necessary to authorize this Agreement or to consummate the transactions contemplated hereby. The Parent Common Shares issuable pursuant to this Agreement have been reserved for
issuance by the Parent Board of Directors. This Agreement constitutes the legal, valid and binding obligations of Parent and Merger Sub, enforceable against each of Parent and Merger Sub in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar Laws of general applicability, relating to or affecting creditors rights generally and to general equitable principles.
4.3
Capitalization
. The Parent has set forth on Schedule 4.3 a description of all duly and validly authorized capital stock. All of the
issued and outstanding Parent Common Shares have been duly authorized and validly issued and are fully paid, nonassessable and free of pre-emptive rights, are not subject to any shareholders agreement, and were issued in full compliance with
applicable Law and any rights of third parties. Except as described in the Parent Filings, all of the issued and outstanding common shares of each Subsidiary of Parent have been duly authorized and validly issued and are fully paid, nonassessable
and free of pre-emptive rights, are not subject to any shareholders agreement, were issued in full compliance with applicable federal, state or provincial securities Laws and any rights of third parties and are owned by Parent, beneficially
and of record, subject to no Lien. Except as described in the Parent Filings, no Person is entitled to pre-emptive or similar statutory or contractual rights with respect to any securities of Parent. Except as described in the Parent Filings, there
are no outstanding warrants, options, convertible securities or other rights, agreements or arrangements of any character under which Parent or any of its Subsidiaries is or may be obligated to issue any equity securities of any kind and except as
contemplated by this Agreement neither Parent nor any of its Subsidiaries is currently in negotiations for the issuance of any equity securities of any kind, except in connection with a bought deal offering of securities resulting in minimum
proceeds of CDN$10,000,000 which shall be commenced on the date hereof pursuant to the commitment letter provided by Parent to the Company. Except as described in the Parent Filings, there are no voting agreements, buy-sell agreements, option or
right of first purchase agreements or other agreements of any kind among Parent and any of the security holders of Parent relating to the securities of Parent held by them. Except as described in the Parent Filings, no Person has the right to
require Parent to register any securities of Parent under the Securities Act or file any prospectus or qualify any securities of Parent for sale to the public under Canadian Securities Laws or any other provincial securities Laws, whether on a
demand basis or in connection with any registration of securities of Parent or filing of a prospectus or qualification of any securities of Parent for sale to the public, for its own account or for the account of any other Person.
Except as described in the Parent Filings, the consummation of the Merger will not obligate Parent to issue shares of Parent Common Shares or
other securities to any other Person and will not result in the adjustment of the exercise, conversion, exchange or reset price of any outstanding security.
Except as described in the Parent Filings, Parent does not have outstanding any Rights Plan.
4.4
Valid Issuance
. Upon the issuance of the Parent Common Shares pursuant to this Agreement, the shares constituting such Parent
Common Shares will be validly issued, fully paid and nonassessable, and shall be free and clear of all Liens (other than any Liens created by applicable Law or the holders of such Parent Common Shares).
4.5
Consents
. The execution, delivery and performance by Parent of this Agreement and the consummation of the transactions contemplated
hereby require no consent of, action by or in respect of, or filing with, any Governmental Entity, agency, or official
except for
:
(i) the registration statement on Form F-4 to be filed with the SEC by Parent in connection with the issuance of Parent Common
Shares in the Merger (including any amendments or supplements, the
Form F-4
);
(ii) the filing of a Form
5C Transaction Summary Form with the TSXV and the conditional and final acceptance of the TSXV in respect of the transactions contemplated by this Agreement, and the approval for listing on the TSXV of the Parent Common Shares issuable
pursuant to this Agreement and Parent Common Shares issuable to Cyrus Capital Partners, L.P. pursuant to Section 6.19;
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(iii) the filing of a Supplemental Listing Application with the NASDAQ, if
applicable, in connection with the Parent Share Issuance;
(iv) the filing with the SEC of such reports under
Section 13(a), 13(d), 15(d) or 16(a) of the Exchange Act and communications under Rules 165 and 425 under the Securities Act, in each case, as may be required in connection with this Agreement and the transactions contemplated hereby;
(v) the filing of the California Merger Agreement with the CA Secretary of State and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business;
(vi) the filing of any Hart
Scott-Rodino Antitrust Improvement Act of 1976 (the
HSR Act)
filing, if applicable; and
(vii)
filings, if any, required by state securities Laws or other blue sky laws.
Parent reported no net sales (as such term is defined in 16 C.F.R.
§ 801.11 and interpreted by the Premerger Notification Office) on its last regularly prepared annual statement of income and expense, and Buyers total assets (as such term is defined in 16 C.F.R. § 801.11 and interpreted by the
Premerger Notification Office) as stated on its last regularly prepared balance sheet are less than U.S. $15.2 million.
4.6
Delivery
of Parent Filings; Business
. Parent has timely filed all reports, registrations, schedules, forms, statements and other documents, together with any amendments required to be made with respect thereto, including all reports, schedules,
registration statements or other documents that it was required to file since January 1, 2012 with the TSXV, OTCQX
,
the Ontario Securities Commission, the Alberta Securities Commission or the British Columbia Securities Commission
(collectively, the
Canadian Securities Commissions
), or with other Governmental Authorities or pursuant to applicable federal, state or provincial securities Laws (the
Parent Filings
), and has paid all fees
and assessments due and payable in connection therewith,
except
in each case where the failure to file such report, registration, schedule, form, statement or other document, or to pay such fees and assessments, would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect on Parent. No publicly available final registration statement, prospectus, report, form, schedule, release or proxy material (including any financial statements or schedules
included or incorporated by reference therein) filed since January 1, 2014 and prior to the close of business on the date hereof (the
Parent Measurement Date
) by Parent with the Canadian Securities Commissions or pursuant to
the applicable securities Laws of each of the provinces of Ontario, Alberta and British Columbia and the respective regulations and rules made thereunder , including the regulations and rules of the TSXV, together with all applicable published
policy statements, notices, blanket orders and rulings and all discretionary orders or rulings, if any, of the Canadian Securities Commissions and the TSXV (collectively,
Canadian Securities Laws
) (collectively, the
Parent Securities Documents
), as of their respective dates or, if amended or superseded prior to the date of this Agreement, as of the date of such amendment or applicable subsequent filing, contained a misrepresentation (as
defined under Canadian Securities Laws). As of their respective filing dates, or if amended or superseded prior to the date of this Agreement, as of the date of the last such amendment or applicable subsequent filing, all Parent Securities Documents
complied as to form in all material respects with the applicable requirements of Canadian Securities Laws. Parent and its Subsidiaries are engaged in all material respects only in the business described in the Parent Filings and the Parent Filings
contain a complete and accurate description in all material respects of the business of Parent and its Subsidiaries, taken as a whole. Parent has not filed any confidential material change report with any Canadian Securities Commissions which as of
the date hereof remains confidential.
4.7
Absence of Certain Changes
. Between December 31, 2013 and the date of this
Agreement, except as described in the Parent Filings, there has not been with respect to Parent, any:
(a) Material Adverse Change or any
change, event, circumstance, condition or effect that would reasonably be expected to result in a Material Adverse Change;
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(b) amendment or change in the Articles of Incorporation or in the Bylaws of Parent;
(c) incurrence, creation or assumption of (i) any Lien on any of its assets or properties (other than Permitted Liens) or (ii) any
Liability as a guarantor or surety with respect to the obligations of any Person other than a Subsidiary of Parent;
(d) material damage,
destruction or loss of any property or asset, whether or not covered by insurance;
(e) declaration, setting aside or payment of any
dividend on, or the making of any other distribution in respect of, its securities;
(f) any material change with respect to its senior
management or other key personnel;
(g) any actual or threatened material employee strikes, work stoppages, slowdowns or lockouts or, to
the Knowledge of Parent, any labor union organization activity;
(h) making or entering into of any agreement with respect to any
acquisition, sale or transfer of all or substantially all of the assets of Parent;
(i) any change in accounting methods or practices
(including any change in depreciation or amortization policies or rates or revenue recognition policies) or any revaluation of any of its assets;
(j) commencement of any action, suit, arbitration, mediation, proceeding, claim or investigation, or receipt notice of or, to the Knowledge of
Parent, a threat of any action, suit, arbitration, mediation, proceeding, claim or investigation against a Parent relating to any of its business, properties or assets;
(k) any negotiation with respect to, or any entry into, any agreement to do any of the things described in the preceding clauses (a) -
(j) (other than negotiations and agreements with Parent and its representatives regarding the transactions contemplated by this Agreement).
4.8
No Conflict, Breach, Violation or Default
. The execution, delivery and performance of this Agreement by Parent will not
(a) conflict with or result in a breach or violation of (i) any of the terms and provisions of, or constitute a default under the Articles of Incorporation or the Bylaws of Parent, or (ii) any statute, rule, regulation or order of any
governmental agency or body or any court, domestic or foreign, having jurisdiction over Parent, any of its Subsidiaries or any of their respective assets or properties, or (b) conflict with, or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of Parent or any of its Subsidiaries or give to others any rights of termination, amendment, acceleration or cancellation
(with or without notice, lapse of time or both) of, any material contract, except in the case of clauses (a)(i) and (b) above, such as could not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate.
4.9
Tax Matters
. Parent and each of its Subsidiaries have prepared and filed (or filed applicable extensions therefor) all Tax Returns
required to have been filed by Parent or any such Subsidiary with all appropriate Governmental Authorities and paid all Taxes shown thereon or otherwise due for payment, other than any such Taxes which Parent or any Subsidiary are contesting in good
faith and for which adequate reserves have been provided and reflected in Parents financial statements included in the Parent Filings. The charges, accruals and reserves on the books of Parent in respect of Taxes for all fiscal periods are
adequate in all material respects, and there are no material unpaid assessments against Parent or any of its Subsidiaries nor, to Parents Knowledge, any basis for the assessment of any additional Taxes, penalties or interest for any fiscal
period or audits by any federal, state, provincial, local or foreign taxing authority except for any assessment which is not material to Parent and its Subsidiaries, taken as a whole. All Taxes and other assessments and levies that Parent or any of
its Subsidiaries is required to withhold or to collect for payment have been duly withheld and collected and paid to
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the proper Governmental Authority or third party when due, other than any such Taxes which Parent or any of its Subsidiaries are contesting in good faith and for which adequate reserves have been
provided and reflected in Parents financial statements included in the Parent Filings. There are no Tax liens or claims pending or, to Parents Knowledge, threatened in writing against Parent or any of its Subsidiaries or any of their
respective assets or property. Except as described in the Parent Filings, there are no outstanding Tax sharing agreements or other such arrangements between Parent and any of its Subsidiaries, on the one hand, and any other corporation or entity, on
the other hand. Parent has not taken any other action or knows of any other fact relating to the Merger that would reasonably be expected to prevent the Merger from qualifying for the Intended Tax Treatment.
4.10
Title to Properties
. Except as disclosed in the Parent Filings, Parent and each of its Subsidiaries have good and marketable title
to all real properties and all other properties and assets owned by it, in each case free from Liens that would materially affect the value thereof or materially interfere with the use made or currently planned to be made thereof by them; and except
as disclosed in the Parent Filings, Parent and each of its Subsidiaries holds any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or currently planned to be
made thereof by them. Such assets are sufficient for the continued operation of the business of Parent as currently conducted.
4.11
Certificates, Authorities and Permits
. Parent and each of its Subsidiaries possess adequate certificates, authorities or permits issued by appropriate Governmental Authorities necessary to conduct the business now operated by it, except to
the extent failure to possess such certificates, authorities or permits could not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate, and neither Parent nor any of its Subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to Parent or such Subsidiary, could reasonably be expected to have a Material Adverse Effect, individually or in the
aggregate.
4.12
Labor Matters
.
(a) Except as set forth in the Parent Filings, Parent is not a party to or bound by any collective bargaining agreements or other agreements
with labor organizations. Parent has not violated in any material respect any Laws, regulations, orders or contract terms, affecting the collective bargaining rights of employees, labor organizations or any Laws, regulations or orders affecting
employment discrimination, equal opportunity employment, or employees health, safety, welfare, wages and hours.
(b) (i) There are
no labor disputes existing, or to Parents Knowledge, threatened, involving strikes, slow-downs, work stoppages, job actions, disputes, lockouts or any other disruptions of or by Parents employees, (ii) there are no unfair labor
practices or petitions for election pending or, to Parents Knowledge, threatened before any other federal, state, provincial or local labor commission relating to Parents employees, (iii) no demand for recognition or certification
heretofore made by any labor organization or group of employees is pending with respect to Parent and (iv) to Parents Knowledge, Parent enjoys good labor and employee relations with its employees and labor organizations.
(c) Parent is, and at all times has been, in compliance with all applicable Laws respecting employment (including Laws relating to
classification of employees and independent contractors) and employment practices, terms and conditions of employment, wages and hours, and immigration and naturalization, except where the failure to so comply could not reasonably be expected to
have a Material Adverse Effect, individually or in the aggregate. There are no claims pending against Parent before any federal, state, provincial or local Law, statute or ordinance barring discrimination in employment.
(d) To Parents Knowledge, Parent has no liability for the improper classification by Parent of its employees as independent contractors
or leased employees prior to the date of this Agreement.
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4.13
Intellectual Property
. Parent and its Subsidiaries own, or have obtained valid and
enforceable licenses for, or other rights to use, the Intellectual Property necessary for the conduct of the business of Parent and its Subsidiaries as currently conducted and as described in the Parent Filings, except where the failure to own,
license or have such rights could not reasonably be expected to result in a Material Adverse Effect, individually or in the aggregate. Except as described in the Parent Filings, (i) to Parents Knowledge, there are no third parties who
have or will be able to establish rights to any Intellectual Property, except for the ownership rights of the owners of the Intellectual Property which is licensed to Parent or where such rights could not reasonably be expected to result in a
Material Adverse Effect, individually or in the aggregate; (ii) there is no pending or, to Parents Knowledge, threat of any, action, suit, proceeding or claim by others challenging Parent or any of its Subsidiaries rights in or to,
or the validity, enforceability, or scope of, any Intellectual Property owned by or licensed to Parent or any of its Subsidiaries or claiming that the use of any Intellectual Property by Parent or any Subsidiary in their respective businesses as
currently conducted infringes, violates or otherwise conflicts with the intellectual property rights of any third party; and (iii) to Parents Knowledge, the use by Parent or any of its Subsidiaries of any Intellectual Property by Parent
or any of its Subsidiaries in their respective businesses as currently conducted does not infringe, violate or otherwise conflict with the intellectual property rights of any third party.
4.14
Environmental Matters
. To Parents Knowledge, neither Parent nor any of its Subsidiaries is in violation of any Environmental
Laws, owns or operates any real property contaminated with any substance that is subject to any Environmental Laws, is liable for any off-site disposal or contamination pursuant to any Environmental Laws, or is subject to any claim relating to any
Environmental Laws, which violation, contamination, liability or claim has had or could reasonably be expected to have a Material Adverse Effect, individually or in the aggregate; and there is no pending or, to Parents Knowledge, threatened
investigation that might lead to such a claim.
4.15
Litigation
. There are no pending actions, suits or proceedings against or
affecting Parent, any of its Subsidiaries or any of its or their properties; and to Parents Knowledge, no such actions, suits or proceedings are threatened, except (i) as described in the Parent Filings or (ii) any such proceeding,
which if resolved adversely to Parent or any of its Subsidiaries, could not reasonably be expected to have a Material Adverse Effect, individually or in the aggregate. Neither Parent nor any of its Subsidiaries, nor any director or officer thereof,
is or since January 1, 2013 has been the subject of any action involving a claim of violation of or liability under Canadian Securities Laws or federal, state or provincial securities Laws or a claim of breach of fiduciary duty. There has not
been, and to Parents Knowledge, there is not pending or contemplated, any investigation by any Canadian Securities Commission or the SEC involving Parent or any current or former director or officer of Parent. No Canadian Securities Commission
nor the SEC has issued any stop order or other order suspending the effectiveness of any prospectus or registration statement filed by Parent or any Subsidiary. Parent is a reporting issuer in the provinces of Ontario, Alberta and British Columbia
and is not a reporting issuer in default under Canadian Securities Laws.
4.16
Financial Statements
. The audited financial
statements and unaudited interim financial statements of Parent included or incorporated by reference in the Parent Securities Documents, as of their respective dates, and giving effect to any amendments or supplements thereto filed prior to the
date of this Agreement, comply as to form with the then applicable accounting requirements and applicable Canadian Securities Laws and the rules and regulations of the SEC (if applicable) with respect thereto, were prepared in accordance with IFRS
applied on a consistent basis, and fairly present, in all material respects, the financial position of Parent as of the dates thereof and its results of operations, changes in shareholders equity and cash flows for the periods then ended
(subject, in the case of any unaudited interim financial statements, to normal year-end adjustments, none of which have been and are reasonably likely to be material to Parent). The financial statements of Parent included in each publicly available
final registration statement, prospectus, report, form, schedule, release or proxy material to be filed with the SEC (if applicable) or the Canadian Securities Commissions pursuant to applicable Canadian Securities Laws or federal or state
securities Laws after the date hereof until the Effective Time will comply, as of their respective dates of filing with the SEC (if applicable) or the Canadian Securities
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Commissions, as the case may be, in all material respects with accounting requirements and the published rules and regulations of the SEC (if applicable) or the Canadian Securities Commissions,
as applicable with respect thereto, will be prepared in accordance with IFRS applied on a consistent basis during the periods involved (
except
as may be indicated in the notes thereto) and will fairly present the financial position of Parent
as of the dates thereof and the results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments which are not, individually or in the aggregate, expected to be
material). Except as reflected or reserved against in the balance sheet of Parent dated December 31, 2013 filed by Parent with the Canadian Securities Commission (including the notes thereto, the
Parent Balance Sheet
), Parent
does not have any liabilities (absolute, accrued, contingent or otherwise) which are required by IFRS to be set forth on a balance sheet of Parent or in the notes thereto,
other than
liabilities and obligations incurred since
December 31, 2013 in the ordinary course of business which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Parent.
4.17
Insurance Coverage
. Parent and each of its Subsidiaries maintains in full force and effect insurance coverage that is customary
for comparably situated companies for the business being conducted and properties owned or leased by Parent and its Subsidiaries.
4.18
Compliance with Continued Listing Requirements
. Except as disclosed in the Parent Filings, (a) Parent is in compliance with applicable TSXV and OTCQX listing requirements, (b) there are no proceedings pending or, to Parents
Knowledge, threatened against Parent relating to the continued listing of shares of Parent Common Shares on TSXV or OTCQX, and (c) Parent has not received any currently pending notice of the delisting of Parent Common Shares from TSXV or OTCQX.
4.19
Brokers and Finders
. Except for fees and expenses of Cormark Securities Inc. and of Parents legal counsel and
independent auditors, no Person will have, as a result of the transactions contemplated by this Agreement, any valid right, interest or claim against or upon Parent or any of its Subsidiaries for any commission, fee or other compensation pursuant to
any agreement, arrangement or understanding entered into by or on behalf of Parent.
4.20
Opinion of Financial Advisor
. Parent has
received the opinion of its financial advisor, Cormark Securities Inc., as of the date of this Agreement, to the effect that subject to the limitations set forth in the opinion, as of such date, the Exchange Ratio is fair, from a financial point of
view, to the holders of the Parent Common Shares.
4.21
Questionable Payments
. Neither Parent nor any of its Subsidiaries nor, to
Parents Knowledge, any of their respective current or former shareholders, directors, officers, employees, agents or other Persons acting on behalf of Parent or any of its Subsidiaries, has on behalf of Parent or any of its Subsidiaries or in
connection with their respective businesses: (a) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity; (b) made any direct or indirect unlawful payments to any
governmental officials or employees from corporate funds; (c) established or maintained any unlawful or unrecorded fund of corporate monies or other assets; (d) made any false or fictitious entries on the books and records of Parent or any
of its Subsidiaries; or (e) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment of any nature.
4.22
Form F-4
. The Form F-4 will comply in all material respects with the requirements of the Exchange Act and, on the date filed with
the SEC, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were
made, not misleading, except that no representation or warranty is made by Parent with respect to any information provided in writing by or on behalf of the Company for inclusion in the Form F-4.
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4.23
Internal Controls
. Parent has established and maintains disclosure controls and
procedures (as such term is defined in National Instrument 52-109
Certification of Disclosure in Issuers Annual and Interim Filings
) to provide reasonable assurance that: (i) material information relating to Parent is made known to
Parents management, including its chief financial officer and chief executive officer, particularly during the periods in which Parents interim filings and annual filings (as such terms are defined in National Instrument 52-109
Certification of Disclosure in Issuers Annual and Interim Filings
) are being prepared; and (ii) information required to be disclosed by Parent in such annual or interim filings or other reports filed or submitted by it under
Canadian Securities Laws, is recorded, processed, summarized and reported within the time periods specified in Canadian Securities Laws. Parent has established and maintains a system of internal control over financial reporting (as such term is
defined in National Instrument 52-109
Certification of Disclosure in Issuers Annual and Interim Filings
) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with IFRS. To the knowledge of Parent, none of Parent, any of its Subsidiaries or any director, officer, employee, auditor, accountant or other representative of Parent or any of its Subsidiaries has received or
otherwise obtained knowledge of any complaint, allegation, assertion, or claim, whether written or oral, regarding accounting, internal accounting controls or auditing matters, including any complaint, allegation, assertion, or claim that Parent or
any of its Subsidiaries has engaged in questionable accounting or auditing practices, or any expression of concern from its employees regarding questionable accounting or auditing matters.
4.24
Related Party Transactions
. Except as disclosed in the Parent Filings, Parent has not, and, to the Knowledge of Parent, has not
been deemed to have for purposes of any applicable Law, engaged in or been party to any transaction with any of its officers, directors, employees or direct or indirect shareholders or, to the Knowledge of Parent, any member of their immediate
families (i) acquired or have the use of property for proceeds greater than the fair market value thereof, (ii) received services or have the use of property for consideration other than the fair market value thereof, or
(iii) received interest or any other amount other than at a fair market value rate from any person with whom it does not deal at arms length within the meaning of applicable taxation acts. Except as disclosed in the Parent Filings, Parent
has not, and, to the Knowledge of Parent, has not been deemed to have for purposes of any applicable Law, engaged in or been party to any transaction with any of its officers, directors, employees or direct or indirect shareholders or, to the
Knowledge of Parent, any member of their immediate families (i) disposed of the property for proceeds less than the fair market value thereof, (ii) performed services for consideration other than the fair market value thereof or
(iii) paid interest or any other amount other than at a fair market value rate to any person with whom it does not deal at arms length within the meaning of applicable acts. Except as disclosed in the Parent Filings, to the Knowledge of
Parent, none of the officers, directors and employees of Parent, no shareholder of Parent and no immediate family member of an officer, director, employee or such beneficial owner, has a direct ownership interest of more than ten percent
(10%) of the equity ownership of any firm or corporation that competes with, or does business with, or has any contractual arrangement with, Parent.
4.25
Investment Company
. Parent is not required to be registered as, and is not an Affiliate of, and immediately following the Closing
will not be required to register as, an investment company within the meaning of the Investment Company Act of 1940, as amended.
4.26
Compliance with Laws
. Parent and each of its Subsidiaries is in compliance in all material respects with all requirements imposed
by Law, regulation or rule, whether foreign, federal, state, provincial or local, that are applicable to it, its operations, or its properties and assets, including applicable requirements of the Corruption of Foreign Public Officials Act (Canada).
4.27
No Other Representations or Warranties
. The Company hereby acknowledges and agrees that neither Parent nor any of its
Subsidiaries has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Article IV.
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ARTICLE V
Covenants Relating to Conduct of Business
5.1
Conduct of Business of the Company
.
(a)
Ordinary Course
. Except as otherwise expressly required by, or provided for, in this Agreement, as set forth in
Schedule 5.1(a) of the Company Disclosure Schedule or as consented to by Parent in writing, during the period from the date of this Agreement to the Effective Time, the Company shall and shall cause its Subsidiaries to:
(i) carry on its business in the ordinary course of its business consistent with past practice in accordance with applicable
Laws and maintain its existence in good standing under applicable Law.
(ii) (A) use commercially reasonable efforts
to preserve its business organization and goodwill, keep available the services of its officers, employees and consultants and maintain reasonably satisfactory relationships with vendors, customers and others having business relationships with it,
and (B) unless prohibited by Law, notify Parent of any Governmental Authority or third party complaint, investigations or hearings (or communications indicating that the same may be contemplated) if such complaint, investigation or hearing
would have a Material Adverse Effect on the Company or Parent.
(b)
Required Consent
. Except as otherwise expressly approved in
writing by Parent, as expressly contemplated or specifically permitted by this Agreement or as set forth in Schedule 5.1(b) of the Company Disclosure Schedule, and without limiting the generality of the foregoing, from the date hereof until the
Effective Time or the date, if any, on which this Agreement is terminated:
(i) The Company and its Subsidiaries shall not
adopt any change in the Company Organizational Documents;
(ii) The Company and its Subsidiaries shall not acquire or agree
to acquire or lease (i) by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business organization
or division thereof or (ii) any assets
other than
assets that are used in the ordinary course of business consistent with past practice;
(iii) The Company and its Subsidiaries shall not sell, lease, mortgage or otherwise encumber or subject to any Lien or
otherwise dispose of any material properties or assets, or stock or other ownership interests in any of its properties other than (i) in the ordinary course of business substantially consistent with past practice, (ii) any Permitted Liens
and (iii) the Company shall be entitled to sell, transfer or otherwise dispose of the Parent Common Shares held by the Company as of the date of this Agreement either (A) in such manner and in such forms as shall be mutually agreed by
Parent and the Company (with Parents agreement not to be unreasonably withheld) regarding the manner and form of any such sale or (B) if the parties have not mutually agreed upon a proposed transaction in accordance with clause
(A) above, Company may on any given trading day, sell in open market sales, which sales in the aggregate on any given day shall not exceed 10% of the average daily trading volume of the Parent Common Shares on the TSXV for the 30 trading days
ending on the trading day immediately preceding such date (and the Company shall not solicit any such sale, transfer or other disposition that is not an open market sale other than through, and shall direct any unsolicited offers to purchase Parent
Common Shares to, either Cormark Securities or Jacobs Securities, unless otherwise agreed by Parent in writing);
(iv) The
Company and its Subsidiaries shall not declare, set aside, or pay any dividends or make any distributions on shares of its capital stock;
(v) Except for issuances consistent with this Agreement, the Company and its Subsidiaries shall not (i) issue, deliver or
sell, or authorize or propose the issuance, delivery or sale of, any capital stock of the Company or its Subsidiaries, or any security convertible into or exercisable for either of the foregoing,
other
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than
the issuance of shares upon the exercise or vesting and delivery of Company Options, Company SARs, Company Warrants or Company RSUs that have been granted prior to the date of this
Agreement, (ii) split, combine or reclassify any capital stock of the Company or its Subsidiaries or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of the Company
or its Subsidiaries or (iii) repurchase, redeem or otherwise acquire any shares of capital stock of the Company or its Subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other
securities;
(vi) The Company and its Subsidiaries shall not enter into any contract or agreement that limits or otherwise
restrains the Company or its Subsidiaries from competing in or conducting any line of business or engaging in business in any significant geographic area;
(vii) Other than as approved by the Parent, the Company and its Subsidiaries shall not (i) incur any indebtedness for
borrowed money or guarantee any indebtedness of another Person, issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or its Subsidiaries, enter into any keep well or other agreement
to maintain any financial condition of another Person, except for borrowings under its existing line of credit or under its other existing debt arrangements for working capital purposes, indebtedness under any material contract, and, for the
avoidance of doubt, trade, revolving corporate card accounts and other similar credit in the ordinary course of business, or (ii) make any loans, advances or capital contributions to, or investments in, any other Person in which the Company or
its Subsidiaries does not hold directly or indirectly all of the outstanding equity interests;
(viii) Except as set forth
in the Company Disclosure Schedule and except as may be required by applicable Law or existing contractual obligations, the Company and its Subsidiaries shall not (i) materially increase the compensation payable or to become payable to any of
its officers, directors or employees (except, with respect to non-executive officer employees, annual merit increases in the ordinary course of business) (ii) grant any severance or termination pay to any officers or directors, (iii) enter
into or materially modify or amend any employment, severance or consulting agreement with any of its shareholders or any of its directors or officers or (iv) establish, adopt, enter into or amend in any material respect, any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of
any of its directors or officers;
(ix) except as may be required as a result of a change in applicable Law or in GAAP or a
change in order to comply with SEC requirements, the Company or its Subsidiaries shall not change in any material respect any of its accounting or Tax accounting policies or its procedures;
(x) Company and its Subsidiaries shall use its commercially reasonable efforts to ensure that it keeps in force its material
insurance policies (or substantial equivalents thereof);
(xi) The Company and its Subsidiaries shall not adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(xii) The Company and its Subsidiaries shall not engage in any transaction with, or enter into any agreement, arrangement, or
understanding with, directly or indirectly, any of its affiliates, including any transactions, agreements, arrangements or understandings with any affiliate or other Person covered under Item 404 of Regulation S-K under the Securities Act, that
would be required to be disclosed under Item 404;
(xiii) The Company and its Subsidiaries shall not effectuate a
plant closing
or
mass layoff
, as those terms are defined in the Worker Adjustment and Retraining Notification Act of 1988, affecting in whole or in part any site of employment, facility, operating unit or
employee of the Company;
(xiv) The Company and its Subsidiaries shall use commercially reasonable efforts not to take any
action that would prevent or impede the Merger from qualifying as a reorganization under Section 368(a) of the Code;
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(xv) The Company and its Subsidiaries shall not agree or commit to do any of the
foregoing; and
(xvi) The Company and its Subsidiaries shall not take any action that would result in the breach of any
representation and warranty of the Company hereunder (
except for
representations and warranties made as of a specific date) such that Parent would have the right to terminate this Agreement, or that could be reasonably expected to prevent or
delay the Closing or the consummation of the transactions contemplated by this Agreement.
Nothing contained in this Agreement shall give
Parent, directly or indirectly, rights to control or direct the Companys operations prior to the Effective Time.
5.2
Conduct of
Business of Parent
.
(a)
Ordinary Course
. Except as otherwise expressly required by, or provided for, in this Agreement, as set
forth in Schedule 5.2(a) of the Parent Disclosure Schedule or as consented to by the Company in writing, during the period from the date of this Agreement to the Effective Time, Parent shall and shall cause its Subsidiaries to:
(i) carry on its business in the ordinary course of its business consistent with past practice in accordance with applicable
Laws and maintain its existence in good standing under applicable Law.
(ii) (A) use commercially reasonable efforts
to preserve its business organization and goodwill, keep available the services of its officers, employees and consultants and maintain reasonably satisfactory relationships with vendors, customers and others having business relationships with it,
and (B) unless prohibited by Law, notify the Company of any Governmental Authority or third party complaint, investigations or hearings (or communications indicating that the same may be contemplated) if such complaint, investigation or hearing
would have a Material Adverse Effect on the Company or Parent.
(b)
Required Consent
. Except as otherwise expressly approved in
writing by the Company, as expressly contemplated or specifically permitted by this Agreement or as set forth in Schedule 5.2(b) of the Company Disclosure Schedule, and without limiting the generality of the foregoing, from the date hereof
until the Effective Time or the date, if any, on which this Agreement is terminated:
(i) Parent and its Subsidiaries shall
not adopt any change in its Articles of Incorporation or Bylaws;
(ii) Parent and its Subsidiaries shall not acquire or
agree to acquire or lease (i) by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business
organization or division thereof or (ii) any assets
other than
assets that are used in the ordinary course of business consistent with past practice;
(iii) Parent shall not sell, lease, mortgage or otherwise encumber or subject to any Lien or otherwise dispose of any material
properties or assets, or stock or other ownership interests in any of its properties
other than
(i) in the ordinary course of business substantially consistent with past practice, and (ii) any Permitted Liens;
(iv) Parent shall not declare, set aside, or pay any dividends or make any distributions on its securities;
(v) Parent and its Subsidiaries shall not (i) issue, deliver or sell, or authorize or propose the issuance, delivery or
sale of, any equity securities of Parent or its Subsidiaries, or any security convertible into or exercisable for either of the foregoing,
other than
the issuance of shares upon the exercise or vesting and delivery of options or warrants of
the Parent that have been granted prior to the date of this Agreement, (ii) split, combine or reclassify any equity securities of Parent or its Subsidiaries or issue or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for equity securities of Parent or its Subsidiaries or (iii) repurchase, redeem or otherwise acquire any equity securities of Parent or its Subsidiaries or any other securities thereof or any rights, warrants or options to
acquire any such shares or other securities, or (iv) grant of options under a stock option plan of the Parent in the ordinary course of
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business, or (v) exercise of outstanding warrants or convertible debt, (including for greater certainty, the convertible debentures issued by the Company to Cyrus Capital L.P. and/or its
affiliates (collectively,
Cyrus
) on March 21, 2014), (vi) issue securities under the supply agreement dated July 12, 2013 between the Company and the Parent; (vii) issue securities pursuant to the acquisition
of V3 Systems Inc. and transactions related thereto, (viii) issue securities pursuant to the acquisition of the Company and transactions related thereto as more particularly set forth in this Agreement including, for greater certainty, in
connection with issuance of or assumption of the convertible debentures issued by the Company to Cyrus.
(vi) Parent and
its Subsidiaries shall not enter into any contract or agreement that limits or otherwise restrains Parent or its Subsidiaries from competing in or conducting any line of business or engaging in business in any significant geographic area;
(vii) Other than as approved by the Company, Parent and its Subsidiaries shall not (i) incur any indebtedness for borrowed
money or guarantee any indebtedness of another Person, issue or sell any debt securities or warrants or other rights to acquire any debt securities of Parent or its Subsidiaries, enter into any keep well or other agreement to maintain
any financial condition of another Person, except for borrowings under its existing line of credit for working capital purposes or under its other existing debt arrangements, indebtedness under any material contract, and, for the avoidance of doubt,
trade, revolving corporate card accounts and other similar credit in the ordinary course of business, or (ii) make any loans, advances or capital contributions to, or investments in, any other Person in which Parent or its Subsidiaries does not
hold directly or indirectly all of the outstanding equity interests,;
(viii) Except as set forth in the Parent Disclosure
Schedule and except as may be required by applicable Law or existing contractual obligations, Parent and its Subsidiaries shall not (i) materially increase the compensation payable or to become payable to any of its officers, directors or
employees (except, with respect to non-executive officer employees, annual merit increases in the ordinary course of business) (ii) grant any severance or termination pay to any officers or directors, (iii) enter into, modify or amend any
employment, severance or consulting agreement with any of its shareholders or any of its directors or officers or (iv) establish, adopt, enter into or amend in any material respect, any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any of its directors or officers;
(ix) except as may be required as a result of a change in applicable Law or in IFRS or a change in order to comply with
applicable requirements of the SEC or of Canadian Securities Commissions, Parent or its Subsidiaries shall not change in any material respect any of its accounting or Tax accounting policies or its procedures;
(x) Parent and its Subsidiaries shall use its commercially reasonable efforts to ensure that they keep in force its material
insurance policies (or substantial equivalents thereof);
(xi) Parent and its Subsidiaries shall not adopt a plan of
complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or reorganization;
(xii) Parent and its Subsidiaries shall not engage in any transaction with, or enter into any agreement, arrangement, or
understanding with, directly or indirectly, any of its affiliates, including any transactions, agreements, arrangements or understandings with any Affiliate or other Person that would not be at arms length within the meaning of the
Income
Tax Act (Canada);
(xiii) Parent and its Subsidiaries shall use commercially reasonable efforts not to take any action
that would prevent or impede the Merger from qualifying as a reorganization under Section 368(a) of the Code;
(xiv)
Parent and its Subsidiaries shall not agree or commit to do any of the foregoing; and
(xv) Parent and its Subsidiaries
shall not take any action that would result in the breach of any representation and warranty of the Company hereunder (except for representations and warranties made as of a specific date) such that the Company would have the right to terminate this
Agreement, or that could be
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reasonably expected to prevent or delay the Closing or the consummation of the transactions contemplated by this Agreement.
Nothing contained in this Agreement shall give Company the right, directly or indirectly, to control or direct the Parents operations
prior to the Effective Time.
5.3
No Solicitation
.
(a) The following terms will have the definitions set forth below:
(i) An
Alternative Transaction
shall mean any of the following transactions: (i) any transaction or
series of related transactions with one or more third Persons involving: (A) any purchase from the Company or acquisition by any Person or group (as defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) of more than a 25% interest in the total outstanding voting securities of the Company or any tender offer or exchange offer that if consummated would result in any Person or group beneficially owning 25% or more of the total outstanding
voting securities of the Company or any merger, consolidation or business combination involving the Company as a whole, or (B) any sale, lease, exchange, transfer, license, acquisition or disposition of more than 25% of the assets of the
Company (including equity securities of any Subsidiary of such party) on a consolidated basis, or (ii) any liquidation or dissolution of such party;
(ii) An
Alternative Transaction Proposal
shall mean any unsolicited, bona fide offer or proposal relating to
an Alternative Transaction not resulting from a breach of this Section 5.3;
(iii) A
Superior
Proposal
means a written Alternative Transaction Proposal made by a third Person (
except
that references to 25% in clauses (i)(A) and (i)(B) of the definition of Alternative Transaction shall be deemed to be references to 50%),
which the Board of Directors of the Company has in good faith determined (taking into account, among other things, (1) the advice of its outside legal counsel, and (2) the terms of such Alternative Transaction Proposal and this Agreement,
to be more favorable to the Companys shareholders (in their capacities as shareholders) than the terms of this Agreement (as it may be proposed to be amended by Parent), and to be reasonably capable of being consummated on the terms proposed,
taking into account, all other legal, financial, regulatory and other aspects of such Alternative Transaction Proposal and the Person making such Alternative Transaction Proposal including, if such Alternative Transaction Proposal involves any
financing, the likelihood of obtaining such financing and the terms on which such financing may be secured.
(b) Except as specifically
permitted by Section 5.3(c) or 5.3(d), the Company shall not, nor shall it authorize or permit any of its officers, directors or employees or any investment banker, financial advisor, attorney, accountant or other representative retained by it
or any of its Subsidiaries to, directly, or indirectly, (i) solicit, initiate or intentionally encourage (including by way of furnishing any information), or take any other action intended to facilitate, induce or encourage any inquiries with
respect to, or the making, submission or announcement of, any Alternative Transaction, (ii) participate in any discussions or negotiations regarding, or furnish to any Person any information with respect to, any, or any possible, Alternative
Transaction (
except
to disclose the existence of the provisions of this Section 5.3), (iii) approve, endorse or recommend any Alternative Transaction (
excep
t to the extent specifically permitted pursuant to Section 5.4),
or (iv) prior to termination, if any, of this Agreement pursuant to Section 8.1, enter into any letter of intent or similar document or any contract, agreement or commitment contemplating or otherwise relating to any possible or proposed
Alternative Transaction. The Company will immediately cease, and will cause its officers, directors and employees and any investment banker, financial adviser, attorney, accountant or other representative retained by it to cease, any and all
existing activities, discussions or negotiations with any third Persons conducted heretofore with respect to any possible or proposed Alternative Transaction, and will use its reasonable best efforts to enforce (and not waive any provisions of) any
confidentiality and standstill agreement (or any similar agreement) relating to any such possible or proposed Alternative Transaction.
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(c) As promptly as practicable (and in any event within 48 hours) after receipt of any
Alternative Transaction Proposal or any request for nonpublic information or any inquiry relating to any Alternative Transaction, the Company shall provide Parent with oral and written notice of the terms and conditions of such Alternative
Transaction Proposal, request or inquiry, and the identity of the Person or group making any such Alternative Transaction Proposal, request or inquiry. In addition, the Company shall provide Parent as promptly as practicable (and in any event within
48 hours) with oral and written notice setting forth all such information as is reasonably necessary to keep Parent informed of all material regarding the status and terms (including amendments or proposed amendments) of, any such Alternative
Transaction Proposal, request or inquiry, and, without limitation of the other provisions of this Section 5.3, shall promptly provide Parent a copy of all written materials (including written materials provided by e-mail or otherwise in
electronic format) subsequently provided by or to it in connection with such Alternative Transaction Proposal, request or inquiry. The Company shall provide Parents with 24 hours prior notice (or such lesser prior notice as is provided to the
members of its Board of Directors) or any meeting of its Board of Directors at which is Board of Directors is reasonably likely to consider any Alternative Transaction Proposal or Alternative Transaction.
(d) Notwithstanding anything to the contrary contained in Section 5.3(b), in the event that the Company receives an Alternative
Transaction Proposal which is determined by its Board of Directors to be, or to be reasonably likely to lead to, a Superior Proposal, it may then take the following actions (but only (1) if and to the extent that (x) its Board of Directors
concludes in good faith, after receipt of advice of its outside legal counsel, that the failure to do so is reasonably likely to result in a breach of its fiduciary obligations to its shareholders under applicable Law and (y) the Company has
given Parent at least three Business Days prior written notice of its intention to take any of the following actions and of the identity of the Person or group making such Superior Proposal and the terms and conditions of such Superior
Proposal and (2) if it shall not have breached in any material respect any of the provisions of this Section 5.4 or Section 5.5):
(i) furnish nonpublic information to the Person or group making such Superior Proposal,
provided that
(A) prior to
furnishing any such nonpublic information, it receives from such Person or group an executed confidentiality agreement containing customary terms (the
CA
); and (B) contemporaneously with furnishing any such nonpublic
information to such person or group, it furnishes such nonpublic information to Parent (to the extent such nonpublic information has not been previously furnished to Parent); and
(ii) engage in negotiations with such Person or group with respect to such Superior Proposal; provided, however, in no event
shall such party enter into any definitive agreement to effect such Superior Proposal.
5.4
Board of Directors Recommendation
.
(a) In response to (i) the receipt of an Alternative Transaction Proposal which is determined by the Board of Directors of the Company to
be a Superior Proposal or (ii) any material event, development, circumstance, occurrence or change in circumstances or facts (including any material change in probability or magnitude of circumstances), not related to an Alternative Transaction
Proposal, and that first occurred following the execution of this Agreement that was neither known to nor reasonably foreseeable by the Company as of or prior to the date hereof, that materially improves the financial condition or results of
operations of the Company (excluding the fact that the Company meets or exceeds any internal or published projections, forecasts or estimates of its revenue, earnings or other financial performance or results of operations for any period ending on
or after the date hereof, or changes after the date of this Agreement in the market price or trading volume of the Company Common Stock or any credit rating of the Company) (an
Intervening Event
), such Board of Directors may,
after fully complying with Section 5.4(b) (A) withhold, withdraw or qualify (or amend or modify in a manner adverse to Parent) or publicly propose to withhold, withdraw or qualify (or amend or modify in a manner adverse to Parent), the
approval, recommendation or declaration of advisability by such Board of Directors or any committee thereof of this Agreement, the Merger or the other transactions contemplated by this Agreement, or (B) recommend, adopt or approve, or publicly
propose to recommend, adopt or approve, any Superior Proposal (any of the foregoing actions, whether by a Board of Directors or a committee thereof, a
Change of Recommendation
), if the Board of Directors of the Company has
concluded in good faith, after receipt of advice
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of its outside legal counsel, that, in light of such Superior Proposal or Intervening Event, as applicable, the failure of the Board of Directors to effect a Change of Recommendation is
reasonably likely to result in a breach of its fiduciary obligations to the shareholders of the Company under applicable Law.
(b) Prior
to announcing any Change of Recommendation pursuant to Section 5.4(a), the Company shall, to the extent applicable, (A) provide to Parent three Business Days prior written notice which shall (x) state expressly that it intends
to effect a Change of Recommendation, and (y) in connection with a Change of Recommendation resulting from receipt of a Superior Proposal, describe any modifications to the terms and conditions of the Superior Proposal and the identity of
the Person or group making the Superior Proposal from the description of such terms and conditions and such Person contained in the notice required under Section 5.3(d), or in the case of an Intervening Event written information describing the
Intervening Event in reasonable detail and shall keep Parent reasonably informed of material events with respect to such Intervening Event, (B) make available to Parent all materials and information made available to the Person or group making
the Superior Proposal in connection with such Superior Proposal or the materials provided to the Board of Directors in connection with its evaluation of an Intervening Event and (C) during the three Business Day period commencing upon receipt
of the notice described in Section 5.4(b)(A), if requested by Parent, engage in good faith negotiations to amend this Agreement in such a manner that (i) the Alternative Transaction Proposal which was determined to be a Superior Proposal
no longer is a Superior Proposal, and if there is any material revision to the terms of the Alternative Transaction Proposal which was determined to be a Superior Proposal, including, any revision in price, the notice period shall be extended, if
applicable, to provide for an additional three Business Day period subsequent to the time the Company notifies Parent of any such material revision (it being understood that there may be multiple extensions) or (ii) the failure of the Board of
Directors to effect a Change in Recommendation in response to an Intervening Event would no longer be reasonably likely to result in a breach of its fiduciary obligations to the shareholders of the Company under applicable Law.
(c) If the Board of Directors of the Company has effected a Change of Recommendation, the Company, as applicable, shall promptly notify Parent
in writing of such Change in Recommendation, including the specific subparagraph, but not more than one subparagraph, of Section 5.4 in reliance upon which such Change in Recommendation is made. If Parent thereafter terminates this Agreement in
accordance with Section 8.1 based upon such notice, then the termination effects with respect to the specific subparagraph identified in such notice that are set forth in Section 8.3 shall apply.
5.5
Company Shareholders Meeting
. Notwithstanding anything to the contrary contained in this Agreement, unless this Agreement
shall have been terminated pursuant to Section 8.1, the obligation of the Company to call, give notice of, convene and hold the Company Shareholders Meeting shall not be limited or otherwise affected by the commencement, disclosure,
announcement or submission to it of any Alternative Transaction Proposal with respect to it, or by any Change of Recommendation. At any such meeting, the Company shall not submit to the vote of its respective shareholders any Alternative
Transaction, whether or not a Superior Proposal has been received by it.
ARTICLE VI
Additional Agreements
6.1
Preparation of SEC Documents; Shareholders Meeting
.
(a) As soon as practicable following the date of this Agreement, the
Company and Parent shall agree upon the terms of, prepare and file with the SEC a proxy statement, in substance and form compliant with the requirements of the Exchange Act to be sent to the shareholders of the Company relating to the Company
Shareholders Meeting (together with any amendments or supplements thereto, the
Proxy Statement
), and Parent shall prepare and file with the SEC the Form F-4, in which the Proxy Statement will be included as a prospectus.
Each of the Company and Parent shall use commercially reasonable efforts to have the Form F-4 declared effective under the Securities Act as promptly as practicable after such filing. The Company will use
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commercially reasonable efforts to cause the Proxy Statement to be mailed to the Companys shareholders as promptly as practicable after the Form F-4 is declared effective under the
Securities Act. Parent shall also take any action (
other than
qualifying to do business in any jurisdiction in which it is not now so qualified or to file a general consent to service of process) reasonably required to be taken under any
applicable state securities Laws in connection with the Parent Share Issuance and, and the Company shall furnish all information concerning the Company and the holders of the Company Common Stock as may be reasonably requested in connection with any
such action. Each party shall cooperate and provide the other party with a reasonable opportunity to review and comment on any amendment or supplement to the Form F-4 or the Proxy Statement or any filing with the SEC incorporated by reference in the
Form F-4 or the Proxy Statement, in each case prior to filing such with the SEC,
except
where doing so would cause the filing to not be filed timely, without regard to any extension pursuant to Rule 12b-25 of the Exchange Act;
provided
,
however
, that each party shall be deemed to have consented to the inclusion in the Form F-4, the Proxy Statement or any filing with the SEC incorporated by reference in the Form F-4 or the Proxy Statement of any information,
language or content specifically agreed to by such party or its counsel on or prior to the date hereof for inclusion therein. Parent will advise the Company promptly after it receives notice of (i) the time when the Form F-4 has become
effective or any supplement or amendment has been filed, (ii) the issuance or threat of any stop order, (iii) the suspension of the qualification of the Parent Common Share issuable in connection with this Agreement for offering or sale in
any jurisdiction, or (iv) any request by the SEC for amendment of the Proxy Statement or the Form F-4 or comments thereon and responses thereto or requests by the SEC for additional information (and shall deliver a copy of such comments and
requests to the Company). Parent will advise the Company promptly after it receives notice of the issuance by any Canadian Securities Commission, any other securities regulatory authority, the TSXV, OTCQX or by any other competent authority of any
order to cease or suspend trading of any securities of Parent or of the institution or threat of institution of any proceedings for that purpose. If at any time prior to the Effective Time any information (including any Change of Recommendation)
relating to the Company or Parent, or any of their respective affiliates, officers or directors, should be discovered by the Company or Parent which should be set forth in an amendment or supplement to either of the Form F-4 or the Proxy Statement,
so that any of such documents would not include any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, the party
which discovers such information shall promptly notify the other parties hereto and an appropriate amendment or supplement, including, where appropriate, a filing pursuant to Rules 165 and 425 of the Securities Act, describing such information
shall promptly be filed with the SEC and, to the extent required by law, disseminated to the shareholders of the Company or Parent.
(b)
The Company shall, as promptly as practicable after receiving notice from Parent that the Form F-4 has been declared effective under the Securities Act, take all action necessary in accordance with applicable Law and the Company Organizational
Documents duly to give notice of, convene and hold a meeting of its shareholders to be held as promptly as practicable to consider the approval of this Agreement and the Merger (the
Company Shareholders Meeting
). Except in
the case of a Change of Recommendation in accordance with Section 5.4, the Company will use commercially reasonable efforts to solicit from its shareholders proxies in favor of the approval of this Agreement and the Merger and will take all
other action reasonably necessary or advisable to secure the vote of its shareholders required by the rules of the NASDAQ or applicable Law to obtain such approvals. Notwithstanding anything to the contrary contained in this Agreement, the Company
may adjourn or postpone the Company Shareholders Meeting to the extent necessary to ensure that any necessary supplement or amendment to the Proxy Statement is provided to its shareholders in advance of a vote on the approval of this Agreement
and the Merger, or, if, as of the time for which the Company Shareholders Meeting, is originally scheduled, there are insufficient shares of Company Common Stock, as the case may be, represented (either in person or by proxy) to constitute a
quorum necessary to conduct the business of such meeting. The Company shall use commercially reasonable efforts such that the Company Shareholders Meeting is called, noticed, convened, held and conducted, and that all proxies solicited in
connection with the Company Shareholders Meeting are solicited in compliance with applicable Law, the rules of the NASDAQ and the Company Organizational Documents. Notwithstanding anything contained herein to the contrary, the Company shall
not be required to hold the Company Shareholders Meeting if this Agreement is terminated before the meeting is held.
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(c) Except to the extent expressly permitted by Section 5.4: (i) the Board of Directors
of the Company shall recommend that its shareholders vote in favor of the approval of this Agreement and the Merger at the Company Shareholders Meeting, (ii) the Proxy Statement shall include a statement to the effect that the Board of
Directors of the Company has recommended that the Companys shareholders vote in favor of approval of this Agreement and the Merger at the Company Shareholders Meeting, and (iii) neither the Board of Directors of the Company nor any
committee thereof shall withdraw, amend or modify, or propose or resolve to withdraw, amend or modify in a manner adverse to Parent, its recommendation that the shareholders of the Company vote in favor of the approval of this Agreement and the
Merger.
6.2
Access to Information; Confidentiality
.
(a) Subject to any confidentiality agreement which may be entered into by Parent and the Company, and applicable Law, from the date of this
Agreement through the Closing Date, Parent and the Company will afford to the Company and Parent, as applicable, and their respective authorized representatives reasonable access at all reasonable times and upon reasonable notice to the facilities,
offices, properties, technology, processes, books, business and financial records, officers, employees, business plans, budget and projections, customers, suppliers and other information of the Company, and the work papers of its independent
accountants, and otherwise provide such assistance as may be reasonably requested by such party in order that the other party has a reasonable opportunity to make such investigation and evaluation as it reasonably desires to make of the business and
affairs of the other party.
(b) Each of Parent and the Company will hold, and will cause its respective officers, directors, employees,
accountants, counsel, financial advisors and other representatives and affiliates to hold, any nonpublic information received from the other in confidence in accordance with the terms of any confidentiality agreement which may be entered into by
Parent and the Company.
6.3
Commercially Reasonable Efforts
.
(a) Upon the terms and subject to the conditions set forth in this Agreement but subject to Section 5.4, each of the parties agrees to
use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective,
in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including commercially reasonable efforts to accomplish the following: (i) the taking of all acts necessary to cause the
conditions to the Closing to be satisfied (but in no event shall a party be required to waive any such condition) as promptly as practicable; (ii) the obtaining of all necessary actions or nonactions, waivers, consents, clearances and approvals
from Governmental Authorities and the making of all necessary registrations and filings, and the taking of all steps as may be necessary to obtain an approval, clearance or waiver from, or to avoid an action or proceeding by, any Governmental
Authority, including under the HSR Act, or any foreign competition laws, in each case to the extent determined to be applicable to the Merger and the parties hereto, (iii) the obtaining of all necessary consents, approvals or waivers from third
parties, (iv) taking all steps as may be necessary to obtain all such waiting period expirations or terminations, consents, clearances, waivers, licenses, registrations, permits, authorizations, orders and approvals.
(b) Subject to applicable Laws relating to the exchange of information, each of the Company and Parent shall keep the other reasonably
apprised of the status of matters relating to the completion of the transactions contemplated hereby and work cooperatively in connection with obtaining all required approvals, consents or clearances of any Governmental Authority.
(c) In connection with and without limiting the foregoing, the Company and Parent shall (i) take all action necessary to ensure that no
state takeover statute or similar statute or regulation is or becomes applicable to this Agreement or any of the transactions contemplated hereby and (ii) if any state takeover statute or similar statute or regulation becomes applicable to this
Agreement or any of the transactions contemplated hereby, take all action necessary to ensure that such transactions may be consummated as promptly as practicable on the terms required by, or provided for, in this Agreement and otherwise to minimize
the effect of such statute or regulation on the Merger and the other transactions contemplated by this Agreement.
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6.4
Indemnification and Insurance
.
From and after the Effective Time, Parent shall, and shall cause the Surviving Corporation to, indemnify, defend and hold harmless, and shall
itself indemnify, defend and hold harmless as if it were the Surviving Corporation, in each case, to the fullest extent permitted by applicable Law, the present and former officers, directors and agents (each an
Indemnified Party
)
of the Company against all losses, claims, damages, fines, penalties and liability in respect of acts or omissions occurring at or prior to the Effective Time (including acts or omissions occurring in connection with this Agreement and the
transactions contemplated hereby) including amounts paid in settlement or compromise with the approval of Parent (which approval shall not be unreasonably withheld or delayed). Parent and Merger Sub agree that all rights to exculpation and
indemnification for acts or omissions occurring prior to the Effective Time now existing in favor of the Indemnified Parties, as provided in the CCC and the certificate of incorporation and bylaws of the Surviving Corporation will contain provisions
with respect to exculpation, indemnification and the advancement of expenses that are at least as favorable to the Indemnified Parties as those contained in the Company Organizational Documents as in effect on the date hereof, which provisions will
not, except as required by Law, be amended or modified until expiration of the applicable statute of limitations in any manner that would adversely affect the rights thereunder of the Indemnified Parties. Without limiting the generality of the
preceding sentence, in the event that any Indemnified Party becomes involved in any actual or threatened action, suit, claim, proceeding or investigation covered by this Section 6.4 after the Effective Time, Parent shall, or shall cause the
Surviving Corporation to, to the fullest extent permitted by law, promptly advance to such Indemnified Party his or her legal or other expenses (including the cost of any investigation and preparation incurred in connection therewith), subject to
the providing by such Indemnified Party of an undertaking to reimburse all amounts so advanced in the event of a non-appealable determination of a court of competent jurisdiction that such Indemnified Party is not entitled thereto. For at least six
years after the Effective Time, Parent will cause the Surviving Corporation to, and Surviving Corporation will, without any lapse in coverage, provide officers and directors liability insurance in respect of acts or omissions occurring
prior to the Effective Time covering each such Person currently covered by the Companys officers and directors liability insurance policy on terms with respect to coverage and amount no less favorable than those of such policy in
effect on the date hereof;
provided
, that, the Surviving Corporation shall not be obligated to expend annual premiums during such period in excess of 200% of the per annum rate of the aggregate annual premium currently paid by the Company for
such insurance on the date of this Agreement,
provided
that if the annual premium for such insurance shall exceed such 200% in any year, the Surviving Corporation shall be obligated to obtain a policy with the greatest coverage available for
a cost not exceeding such amount;
provided
further
, that in the event Parent shall, directly or indirectly, sell all or substantially all of the assets or capital stock of the Surviving Corporation, prior to such sale, Parent shall
either assume such obligation or cause a subsidiary of Parent having a net worth substantially equivalent to, or in excess of the net worth of, the Surviving Corporation immediately prior to such sale, to assume such obligation. Parent shall cause
the Surviving Corporation to reimburse all expenses, including reasonable attorneys fees, incurred by any Person to enforce the obligations of Parent and Surviving Corporation under this Section 6.4.
6.5
Fees and Expenses
. Except as otherwise set forth in this Section 6.5 and in Section 8.3 and Section 8.4, all fees
and expenses incurred in connection with the Merger, this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such fees or expenses, provided, that each of Parent and the Company shall pay one-half of
the total costs associated with the printing and mailing of the Proxy Statement to the Company shareholders, whether or not the Merger is consummated.
6.6
Announcements
. Except with respect to any Change of Recommendation made in accordance with the terms of this Agreement, Parent and
the Company shall consult with each other before issuing, and give each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by this Agreement, including the
Merger, and shall not issue any such press release or make any such public statement prior to such consultation, except as such party may reasonably conclude may be required by applicable Law, court process or by obligations pursuant to any listing
agreement with any national securities exchange or national securities quotation system. Parent and the Company agree that the initial
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press release to be issued with respect to the transactions contemplated by this Agreement shall be in a form agreed to by the parties.
6.7
Listing and TSXV Acceptance
. As soon as possible prior to the Closing, Parent shall use all commercially reasonable efforts to
obtain the conditional and final acceptance of the TSXV in respect of the transactions contemplated by this Agreement and to cause the Parent Common Shares issuable pursuant to this Agreement to be approved for listing on the TSXV and, if Parent is
then listed on the NASDAQ, the NASDAQ, upon notice of issuance, exercise or conversion, as applicable, subject, in the case of the TSXV, to the making of certain prescribed filings as soon as possible following the Effective Time. Without limiting
the generality of the foregoing, Parent shall use all commercially reasonable efforts to obtain any required security holder approval in connection with the transactions contemplated by this Agreement and the listing of the Parent Common Shares
issuable pursuant to this Agreement.
6.8
Tax-Free Reorganization Treatment
. None of Parent, the Company or Merger Sub shall
knowingly take any action, cause any action to be taken, fail to take any commercially reasonable action or cause any commercially reasonable action to fail to be taken, which action or failure to act would reasonably be expected to cause the
Company, Merger Sub or Parent to be unable to sign the representation letters necessary for counsel to render the tax opinions referred to in Section 7.2(e) and Section 7.3(e).
6.9
Conveyance Taxes
. Parent and the Company shall cooperate in the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp Taxes, any transfer, recording, registration and other fees or any similar Taxes which become payable in
connection with the transactions contemplated by this Agreement that are required or permitted to be filed on or before the Effective Time, and any such Taxes shall be paid by the Company.
6.10
Equity Awards
.
(a)
At the Effective Time, each then outstanding Company Option, whether or not vested or exercisable at the Effective Time, shall be assumed by Parent and shall be converted into an option with respect to a number of Parent Common Shares (rounded down
to the nearest whole share) equal to the product of the number of shares of Company Common Stock subject to such Company Option immediately prior to the Effective Time multiplied by the Exchange Ratio. The per-share exercise price for the Parent
Common Shares issuable upon exercise of an assumed Company Option shall be equal (rounded up to the nearest whole cent) to the per-share exercise price of the Company Option immediately prior to the Effective Time divided by the Exchange Ratio.
Except as provided above, the assumed Company Option shall be subject to the same terms and conditions (including expiration date, vesting and exercise provisions) as were applicable to the award immediately prior to the Effective Time. As soon as
practicable after the Effective Time, Parent shall deliver to the holder of each Company Option that is so assumed appropriate notices setting forth the number of Parent Common Shares subject to such assumed award and the exercise of the assumed
award, each as adjusted pursuant to this paragraph.
(b) At the Effective Time, each then outstanding Company RSU, whether or not vested
at the Effective Time, shall be assumed by Parent and shall be converted into the right to receive a number of Parent Common Shares (rounded down to the nearest whole share) equal to the product of the number of shares of Company Common Stock
subject to such Company RSU immediately prior to the Effective Time multiplied by the Exchange Ratio, provided that 50% of the Company RSUs outstanding immediately prior to the Effective Time (as determined based on contractual obligations existing
prior to the date hereof and as otherwise determined by the Company) shall vest and be paid in Company Common Stock immediately prior to the Effective Time (with such 50% acceleration applied to each remaining vesting installment of such Company
RSU) and the remaining 50% of the Company RSUs shall be assumed by Parent as provided above, and further provided that if prior the Effective Time Parent shall not have adopted a restricted stock unit plan the terms of which are materially similar
to terms of the Company Stock Plan that evidences the applicable Company RSU plan as in effect immediately
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prior to the Effective Time, all then outstanding Company RSUs shall vest and be paid in Company Common Stock immediately prior to the Effective Time and the holders thereof shall receive Parent
Common Shares. Except as provided above, the assumed Company RSUs shall be subject to the same terms and conditions (including vesting provisions) as were applicable to the award immediately prior to the Effective Time. As soon as practicable after
the Effective Time, Parent shall deliver to the holder of each Company RSU that is so assumed appropriate notices setting forth the number of Parent Common Shares subject to such assumed award, as adjusted pursuant to this paragraph.
(c) The Company shall terminate all Company SARs outstanding at the Effective Time which termination shall be conditioned upon closing of the
Merger.
(d) As soon as reasonably practicable after the Effective Time (and in any event not more than 30 business days after the
Closing, subject to the availability of Form S-8 for use by Parent), assuming that the Effective Time Parent is required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, Parent shall file a registration statement on Form
S-8 (or any successor or other appropriate form) with respect to the shares of Parent Common Stock subject to Company Options and Company RSUs and shall use its reasonable best efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such Company Options or Company RSUs remain outstanding.
(e) The rights of participants in the ESPP with respect to any offering period underway immediately prior to the Effective Time under the ESPP
shall be determined by treating the last business day prior to the Effective Time as the last day of such offering period and by making such other pro-rata adjustments as may be necessary to reflect the shortened offering period but otherwise
treating such shortened offering period as a fully effective and completed offering period for all purposes under the ESPP. After the date of this Agreement, no new participants shall be permitted to enroll in the ESPP, no participant may increase
the rate of his or her participation in the ESPP from the level in effect on the date of this Agreement, and no new offering or purchase period shall commence under the ESPP. The Company shall terminate the ESPP prior to the Effective Time.
6.11
Employee Benefits
. On and after the Closing, until at least the first anniversary of the Closing, Parent shall cause the
Surviving Corporation to provide each employee of the Company or any of its affiliates who continues employment with Parent, the Surviving Corporation or any of their affiliates following the Closing (each, a
Continuing Employee
)
with (i) salary that is not less than the Continuing Employees salary immediately prior to the Closing, and (ii) benefit plans, programs and arrangements that are substantially comparable in the aggregate to those currently provided
to the Continuing Employee under the Companys benefit plans, programs and arrangements (
except
as otherwise required under the terms and conditions of any collective bargaining agreement covering union employees of the Company). If any
employee of the Company or any of its affiliates becomes a participant in any employee benefit plan of Parent or any of its affiliates, such employee shall be given credit under such plan for the last continuous period of service with the Company
and its affiliates prior to the Closing for purposes of determining eligibility to participate, vesting in benefits and vacation and severance benefits, but for no other purpose (including, without limiting the generality of the foregoing, the
accrual of benefits).
(a) Parent agrees that, upon the Closing, each Continuing Employee shall be immediately eligible to participate in
a group health plan (as defined in Section 5000(b)(1) of the Code) (and Parent shall cause to be waived any eligibility waiting periods, any evidence of insurability requirements and the application of any pre- existing condition limitations
under such plan), and such Continuing Employee shall be credited towards the deductibles, coinsurance and maximum out-of-pocket provisions, imposed under such group health plan, for the calendar year during which the Closing Date occurs, with any
applicable expenses already incurred during the portion of the year preceding the Closing Date under the applicable group health plans of the Company;
provided
,
however
, such obligation of Parent is contingent on the Company furnishing
sufficient information in sufficiently usable form to enable Parent to reasonably administer its plan. As of the Closing Date, Parent shall,
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or shall cause the Surviving Corporation or relevant affiliate to, credit to the Continuing Employees the amount of vacation time that such employees had accrued under any the Companys
vacation policies as of the Closing Date.
(b) Parent shall, or shall cause the Surviving Corporation or relevant affiliate to, assume and
honor in accordance with their terms all deferred compensation plans, agreements and arrangements, severance and separation pay plans, agreements and arrangements, and written employment, severance, retention, incentive, change in control and
termination agreements (including any change in control provisions therein) set forth in Section 6.11(c) of the Company Disclosure Schedule applicable to employees of the Company, in the same manner and to the same extent that the Company would
be required to perform and honor such plans, agreements and arrangements if the transactions contemplated by this Agreement had not been consummated.
(c) The Company shall provide Parent with such documents, employee data and other information as may be reasonably required to carry out the
provisions of this Section 6.11.
6.12
Consents of Accountants
. The Company and Parent will each use commercially reasonable
efforts to cause to be delivered to each other consents from their respective independent auditors, dated the date on which the Form F-4 is filed with the SEC, is amended or supplemented, or becomes effective or a date not more than two days prior
to such date, in form reasonably satisfactory to the recipient and customary in scope and substance for consents delivered by independent public accountants in connection with registration statements on Form F-4 under the Securities Act.
6.13
Affiliate Legends
. Schedule 6.13 to this Agreement sets forth a list of those Persons who are, in the Companys
reasonable judgment, affiliates of the Company within the meaning of Rule 145 promulgated under the Securities Act (
Rule 145 Affiliates
). The Company shall notify Parent in writing regarding any change in the
identity of its Rule 145 Affiliates prior to the Closing Date. Parent shall be entitled to issue appropriate stop transfer instructions to the transfer agent for the Parent Common Shares.
6.14
Notification of Certain Matters
. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the
Company, of the occurrence, or failure to occur, of any event, which is in the Companys Knowledge or Parents Knowledge, as applicable, and as to which the occurrence or failure to occur would reasonably be likely to result in the failure
of any of the conditions set forth in Article VII to be satisfied. The Company shall give Parent prompt written notice of any material correction to any of the SEC Filings, as the case may be, from and after the date hereof. Parent shall give
the Company prompt written notice of any material correction to any of the Parent Filings, as the case may be, from and after the date hereof. Notwithstanding the above, the delivery of any notice pursuant to this Section 6.14 will not limit or
otherwise affect the remedies available hereunder to the party receiving such notice or the conditions to such partys obligation to consummate the Merger.
6.15
Section 16 Matters
. Prior to the Effective Time, the Company shall take all such steps as may be required to cause any
dispositions of Company Common Stock (including derivative securities with respect to Company Common Stock) or acquisitions of Parent Common Shares (including derivative securities with respect to Parent Common Shares) resulting from the
transactions contemplated by Article II or III by each individual who is subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to the Company, to be exempt under Rule 16b-3 promulgated under the
Exchange Act.
6.16
State Takeover Laws
. Prior to the Effective Time, the Company shall not take any action to render
inapplicable, or to exempt any third Person from, any state takeover law or state law that purports to limit or restrict business combinations or the ability to acquire or vote shares of capital stock unless (i) required to do so by order of a
court of competent jurisdiction or (ii) the Companys Board of Directors has concluded in good faith, after receipt of advice of its outside legal counsel, that, in light of a Superior Proposal with respect to it, the failure to take such
action is reasonably likely to result in a breach of its Board of Directors fiduciary obligations to its shareholders under applicable Law. The Company and its directors shall take all action necessary to waive
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the application of any shareholder rights plan or similar device or arrangement, commonly or colloquially known as a
poison pill
or anti-takeover
plan or any
similar plan, device or arrangement that the Company has adopted or authorized.
6.17
Further Assurances
. At and after the
Effective Time, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of the Company, any deeds, bills of sale, assignments or assurances and to take any other actions and do any
other things, in the name and on behalf of the Company, reasonably necessary to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or
assets of the Company acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. If, at any time after the Effective Time, any of the parties hereto reasonably believes or is advised that any further
instruments, deeds, assignments or assurances are reasonably necessary to consummate the Merger or to carry out the purposes and intent of this Agreement at or after the Effective Time, then the Company, Parent, the Surviving Corporation and their
respective officers and directors shall execute and deliver all such proper deeds, assignments, instruments and assurances and do all other things reasonably necessary to consummate the Merger and to carry out the purposes and intent of this
Agreement.
6.18
Shareholder Litigation
. The Company shall provide prompt oral notice to the Parent of any litigation brought by
any shareholder of the Company against the Company, any of its subsidiaries and/or any of their respective directors relating to the Merger and this Agreement. The Company shall give the Parent the opportunity to participate (at the Parents
expense) in the defense or settlement of any such litigation, and no such settlement shall be agreed to without the Parents prior written consent, which consent shall not be unreasonably withheld or delayed, except that the Parent shall not be
obligated to consent to any settlement which does not include a full release of Parent and its affiliates or which imposes an injunction or other equitable relief after the Effective Time upon Parent or any of its affiliates. Parent shall provide
prompt oral notice to the Company of any litigation brought by any shareholder of the Parent against the Parent, any of its Subsidiaries and/or any of their respective directors relating to the Merger and this Agreement. Parent shall give the
Company the opportunity to participate (at the Companys expense) in the defense or settlement of any such litigation.
6.19
Debt
Assignment or Assumption
. The Company shall use its reasonable best efforts to cause Cyrus Capital Partners, L.P. and its affiliates that hold convertible promissory notes issued by the Company (collectively, Cyrus) to consent to the
assumption by or assignment to Parent of such notes in favor of Cyrus outstanding immediately prior to the Effective Time, and such notes shall be assigned to or assumed by Parent as of the Effective Time.
6.20
Bridge Loans
. Parent shall comply with its obligations under the Bridge Loan Documentation.
ARTICLE VII
Conditions
Precedent
7.1
Conditions to Each Partys Obligation to Effect The Merger
. The obligation of each party to effect the
Merger is subject to the satisfaction or waiver at or prior to the Closing of the following conditions:
(a)
Shareholder Approval
.
The Company Shareholder Approval shall have been obtained.
(b)
Governmental Consents and Approvals
. All filings with, and all
consents, approvals and authorizations of, any Governmental Authority required to be made or obtained by the Company, Parent or any of their subsidiaries to consummate the Merger shall have been made or obtained,
other than
those that if not
made or obtained would not, individually or in the aggregate, have a Material Adverse Effect on the Company or Parent or the Company and Parent, taken as a whole (determined, for purposes of this clause with respect to both the Company and Parent,
after giving effect to the Merger).
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(c)
No Injunctions or Restraints
. No judgment, order, decree, statute, law, ordinance,
rule or regulation, or other legal restraint or prohibition, entered, enacted, promulgated, enforced or issued by any court or other Governmental Authority of competent jurisdiction shall be in effect which prohibits, materially restricts, makes
illegal or enjoins the consummation of the transactions contemplated by this Agreement.
(d)
Governmental Action
. No action or
proceeding shall be instituted by any Governmental Authority challenging or seeking to prevent or delay consummation of or seeking to render unenforceable the Merger, asserting the illegality of the Merger or any material provision of this Agreement
or seeking material damages in connection with the transactions contemplated hereby which continues to be outstanding, nor shall any such action be pending.
(e)
Form F-4
. The Form F-4 shall have become effective under the Securities Act, and no stop order or proceedings seeking a stop order
shall have been initiated or, to the Knowledge of the Company or Parent, threatened by the SEC and Parent shall have received all state securities or blue sky authorizations necessary for the Parent Share Issuance.
(f)
Listing
. The Parent Common Shares issuable pursuant to this Agreement shall have been approved for listing on the TSXV and on the
NASDAQ upon notice of issuance, exercise or conversion, as applicable, subject, in the case of the TSXV, to the making of certain prescribed filings as soon as possible following the Effective Time.
(g)
TSXV Acceptance
. Parent shall have received the final acceptance of the TSXV in respect of the transactions contemplated by this
Agreement.
7.2
Conditions to Obligations of Parent and Merger Sub
. The obligation of Parent and Merger Sub to effect the Merger is
further subject to satisfaction or waiver at or prior to the Closing of the following conditions:
(a) Except as a result of action
expressly permitted under this Agreement or expressly consented to in writing by Parent pursuant to Section 5.1, (i) the representations and warranties of the Company contained in this Agreement (
other than
the representations and
warranties of the Company contained in Sections 3.1, 3.2, 3.3, 3.19 and 3.20) shall be true both when made and as of the Closing Date, as if made as of such time (
except
to the extent such representations and warranties are expressly
made as of a certain date, in which case such representations and warranties shall be true in all respects, as of such date),
except
where the failure of such representations and warranties to be so true (without giving effect to any
limitation as to materiality or Material Adverse Effect set forth therein) does not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Company, and
(ii) the representations and warranties of the Company contained in Sections 3.1, 3.2, 3.3, 3.19 and 3.20 shall be true in all respects both when made and as of the Closing Date, as if made as of such time (
except
to the extent such
representations and warranties are expressly made as of a certain date, in which case such representations and warranties shall be true in all respects, as of such date).
(b) The Company shall have performed, or complied with, in all material respects, all obligations required to be performed or complied with by
it under this Agreement at or prior to the Closing Date.
(c) No Material Adverse Change of the Company shall have occurred since the date
of this Agreement and be continuing.
(d) Parent shall have received an officers certificate duly executed by each of the Chief
Executive Officer and Chief Financial Officer of the Company to the effect that the conditions set forth in Sections 7.2(a), (b) and (c) have been satisfied.
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(e) Parent shall have received an opinion of Dorsey & Whitney LLP, counsel to Parent, or
such other Tax counsel reasonably satisfactory to the Company, on the basis of certain facts, representations and assumptions set forth in such opinion, dated the Closing Date, to the effect that the Merger to the effect that the Merger should
qualify for the Intended Tax Treatment. In rendering such opinion, such counsel may require and shall be entitled to rely upon reasonable and customary representations and covenants, including those contained in representation letters signed by
officers of Parent, the Company and Merger Sub. The opinion condition referred to in this Section 7.2(e) shall not be waivable after receipt of the Company Shareholder Approval unless further shareholder approval by the Company shareholders is
obtained with appropriate disclosure.
(f) Indebtedness of the Company in favor of Cyrus outstanding immediately prior to the Effective
Time debt shall be assigned to or assumed by Parent as of the Effective Time in accordance with the terms of Section 6.19.
7.3
Conditions to Obligations of the Company
. The obligations of the Company to effect the Merger are further subject to satisfaction or waiver at or prior to the Closing of the following conditions:
(a) Except as a result of action expressly permitted under this Agreement or expressly consented to in writing by the Company pursuant to
Section 5.1, (i) the representations and warranties of Parent contained in Sections 4.1, 4.2, 4.3, 4.19 and 4.20 shall be true both when made and as of the Closing Date, as if made as of such time (
except
to the extent such
representations and warranties are expressly made as of a certain date, in which case such representations and warranties shall be true in all respects, as of such date),
except
where the failure of such representations and warranties to be
so true (without giving effect to any limitation as to materiality or Material Adverse Effect set forth therein) does not have and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse
Effect on Parent, and (ii) the representations and warranties of Parent contained in Sections 4.1, 4.2, 4.3, 4.19 and 4.20 shall be true in all respects both when made and as of the Closing Date, as if made as of such time
(
except
to the extent such representations and warranties are expressly made as of a certain date, in which case such representations and warranties shall be true in all respects, as of such date).
(b) Each of Parent and Merger Sub shall have performed, or complied with, in all material respects all obligations required to be performed or
complied with by it under this Agreement at or prior to the Closing Date.
(c) No Material Adverse Change of Parent shall have occurred
since the date of this Agreement and be continuing.
(d) The Company shall have received an officers certificate duly executed by
each of the Chief Executive Officer and Chief Financial Officer of Parent to the effect that the conditions set forth in Sections 7.3(a), (b), and (c) have been satisfied.
(e) The Company shall have received an opinion of OMelveny & Myers LLP, counsel to the Company, or such other Tax counsel
reasonably satisfactory to Parent, on the basis of certain facts, representations and assumptions set forth in such opinion, dated the Closing Date, to the effect that the Merger should qualify for the Intended Tax Treatment. In rendering such
opinion, such counsel may require and shall be entitled to rely upon reasonable and customary representations and covenants, including those contained in representation letters signed by officers of Parent, the Company and Merger Sub. The opinion
condition referred to in this Section 7.3(e) shall not be waivable after receipt of the Company Shareholder Approval unless further shareholder approval by the Company shareholders is obtained with appropriate disclosure.
(f) The date of the Closing and the Effective Time shall not be prior to August 1, 2014.
(g) All necessary steps shall have been taken by the Parent to effectuate the governance matters contemplated by
Exhibit A
.
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ARTICLE VIII
Termination, Amendment and Waiver
8.1
Termination
. This Agreement may be terminated at any time prior to the Effective Time by action taken or authorized by the Board
of Directors of the terminating party or parties, and (except in the case of Sections 8.1(b)(iii), 8.1(e) or 8.1(f)) whether before or after the Company Shareholder Approval:
(a) by mutual written consent of Parent and the Company, if the Board of Directors of each so determines;
(b) by written notice of either Parent or the Company (as authorized by the Board of Directors of Parent or the Company, as applicable):
(i) if the Merger shall not have been consummated by December 31, 2014 (the
Outside Date
),
provided
,
however
, that if (x) the Effective Time has not occurred by such date by reason of nonsatisfaction of any of the conditions set forth in Section 7.1(b), Section 7.1(c), Section 7.1(d) or
Section 7.1(e) and (y) all other conditions set forth in Article VII have been satisfied or waived or are then capable of being satisfied, then such date shall automatically be extended to January 31, 2015 (which shall then be
the Outside Date);
provided
,
further
that the right to terminate this Agreement under this Section 8.1(b)(i) shall not be available to any party whose failure to fulfill in any material respect any obligation of such
party, or satisfy any condition to be satisfied by such party, under this Agreement has caused or resulted in the failure of the Effective Time to occur on or before the Outside Date;
(ii) if a Governmental Authority of competent jurisdiction shall have issued an order, decree or ruling or taken any other
action (including the failure to have taken an action), in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger, which order, decree, ruling or other action is final and nonappealable; or
(iii) if Company Shareholder Approval shall not have been obtained at the Company Shareholders Meeting, or at any
adjournment or postponement thereof, at which the vote was taken; provided, however, that the right to terminate this Agreement under this Section 8.1(b)(iii) shall not be available to the Company if the failure to obtain Company Shareholder
Approval shall have been caused by the action or failure to act of the Company and such action or failure to act constitutes a breach by the Company of this Agreement;
(c) by Parent (as authorized by its Board of Directors) upon (i) a breach of any representation or warranty on the part of the Company
set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in either case such that the conditions set forth in Section 7.2(a) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue and such inaccuracy in the Companys representations and warranties has not been or is incapable of being cured by the Company within 30 calendar days after its receipt of written
notice thereof from Parent or (ii) a failure to perform, or comply with any covenant or agreement of the Company set forth in this Agreement such that the condition set forth in Section 7.2(b) would not be satisfied and such failure by the
Company has not been or is incapable of being cured by the Company within 30 calendar days after its receipt of written notice thereof from Parent;
(d) by the Company (as authorized by its Board of Directors) upon (i) a breach of any representation or warranty on the part of Parent
set forth in this Agreement, or if any representation or warranty of Parent shall have become untrue, in either case such that the conditions set forth in Section 7.3(a) would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become untrue and such inaccuracy in Parents representations and warranties has not been or is incapable of being cured by Parent within 30 calendar days after its receipt of written notice thereof
from the Company or (ii) a failure to perform, or comply with any covenant or agreement of Parent set forth in this Agreement such that the conditions set forth in
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Section 7.3(b) would not be satisfied and such breach by Parent has not been or is incapable of being cured by Parent within 30 calendar days after its receipt of written notice thereof from
the Company;
(e) by Parent (as authorized by its Board of Directors), in the event the Company shall have (i) effected a Change of
Recommendation or (ii) failed to publicly reaffirm the recommendation of the Companys Board of Directors to the Companys shareholders to approve the Merger, or failed to publicly state that the Merger and this Agreement are in the
best interest of the Companys shareholders, within ten Business Days after Parent requests in writing to such Board of Directors that such action be taken; or (iii) failed to publicly announce, within ten Business Days after a tender
offer or exchange offer relating to the securities of the Company and, in each case, which is an Alternative Transaction Proposal, shall have been commenced, a statement disclosing that the Companys Board of Directors recommends rejection of
such tender or exchange offer; provided that Parent shall no longer be entitled to terminate this Agreement pursuant to this Section 8.1(e) if the Company Shareholder Approval has been obtained at the Company Shareholders Meeting; or
(f) by the Company, in the event the Company shall have effected a Change of Recommendation in connection with a determination that an
Alternative Transaction Proposal is Superior Proposal in accordance with the terms of this Agreement and, prior to such termination, has paid the Termination Fee;
provided that
the Company shall no longer be entitled to terminate this
Agreement pursuant to this Section 8.1(f) if the Company Shareholder Approval has been obtained at the Company Shareholders Meeting.
8.2
Effect of Termination
. In the event of termination of this Agreement as provided in Section 8.1, this Agreement shall
forthwith become void and there shall be no liability on the part of any of the parties, except that (i) Section 6.2(b), Section 6.5, this Section 8.2, Section 8.3, Section 8.4, the second sentence of Section 8.5
and Section 8.6, as well as Article IX shall survive termination of this Agreement and continue in full force and effect, and (ii) that nothing herein, shall relieve any party from liability for any willful breach of any
representation or warranty of such party contained herein or any willful breach of any covenant or agreement of such party contained herein. No termination of this Agreement shall affect the obligations of the parties contained in the CA, all of
which obligations shall survive termination of this Agreement in accordance with their terms.
8.3
Payments by the Company
.
(a) In the event that (A) this Agreement is terminated by the Company or Parent pursuant to Section 8.1(b)(i) or 8.1(b)(iii),
(B) following the date hereof and prior to such termination, any Person shall have made to the Company or its shareholders, or publicly announced, a proposal, offer or indication of interest relating to any Alternative Transaction with respect
to the Company, and (C) within 12 months following the termination of this Agreement, (1) an Alternative Transaction is consummated by the Company or (2) the Company enters into an agreement, arrangement or binding understanding
providing for an Alternative Transaction of the Company and such Alternative Transaction shall ultimately be consummated, then the Company shall pay Parent a fee equal to USD$3,500,000 (the Termination Fee) in immediately available
funds; such fee payment to be made within one (1) Business Day following consummation of such Alternative Transaction.
(b) In the
event that this Agreement is terminated by Parent pursuant to Section 8.1(e) then the Company shall pay Parent the Termination Fee in immediately available funds; such fee payment to made within one Business Day after termination in accordance
with such Section 8.1(e).
(c) In the event that this Agreement is terminated by the Company pursuant to Section 8.1(f) then the
Company shall pay Parent the Termination Fee in immediately available funds; such fee payment to made at or prior to the time of such termination in accordance with such Section 8.1(f).
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8.4
Interest and Costs; Other Remedies
. All payments under Section 8.3 shall be made
by wire transfer of immediately available funds to an account designated by Parent. The Company acknowledges that the agreements contained in Section 8.3 are an integral part of the transactions contemplated by this Agreement and that, without
these agreements, Parent would not enter into this Agreement; accordingly, if the Company fails to pay in a timely manner the amounts due pursuant to Section 8.3 and, in order to obtain such payment, Parent makes a claim that results in a
judgment against the Company for the amounts set forth in Section 8.3, the Company shall pay Parent its reasonable costs and expenses (including reasonable attorneys fees and expenses) in connection with such suit, together with interest
on the amounts set forth in Section 8.3 at the prime rate of interest per annum publicly announced by the Wall Street Journal, as in effect on the date such payment was required to be made. This Section 8.4 and the entire Section 8.3,
shall survive any termination of this Agreement.
8.5
Amendment
. Subject to compliance with applicable Law, this Agreement may be
amended by the parties in writing at any time before or after Company Shareholder Approval;
provided
,
however
, that after Company Shareholder Approval, there may not be, without further approval of the shareholders of the Company any
amendment of this Agreement that changes the amount or the form of the consideration to be delivered to the holders of Company Common Stock hereunder, or which by law or NASDAQ rule otherwise expressly requires the further approval of such
shareholders. This Agreement may not be amended
except
by an instrument in writing signed on behalf of each of the parties hereto and duly approved by the parties respective Boards of Directors or a duly designated committee thereof.
8.6
Extension; Waiver
. At any time prior to the Effective Time, a party may, subject to the proviso of Section 8.5 (and for
this purpose treating any waiver referred to below as an amendment), (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties of
the other parties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) waive compliance by the other party with any of the agreements or conditions contained in this Agreement. Any agreement on the part of
a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Any extension or waiver given in compliance with this Section 8.6 or failure to insist on strict compliance
with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.
ARTICLE IX
General
Provisions
9.1
Nonsurvival of Representations and Warranties
. None of the representations and warranties in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 9.1 shall not limit the survival of any covenant or agreement of the parties in the Agreement which by its terms contemplates performance
after the Effective Time.
9.2
Notices
. All notices, requests, claims, demands and other communications under this Agreement shall
be in writing and shall be deemed given if delivered personally, via facsimile (receipt confirmed) or by a nationally recognized overnight courier (providing proof of delivery) to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
|
(a)
|
if to the Company to:
|
Overland Storage, Inc.
9112 Spectrum Centre Boulevard
San Diego, California
92123
Attention: Kurt Kalbfleisch
Fax
No: 1 (858) 495 4267
A-42
with a copy (which shall not constitute notice to the Company) to:
OMelveny & Myers LLP
2765 Sand Hill Road
Menlo Park,
CA 94025
Attn: Steve Tonsfeldt and Paul Sieben
Facsimile: (650) 473-2601
|
(b)
|
if to Parent or Merger Sub, to:
|
Sphere 3D Corporation
240 Matheson Blvd. East
Mississauga, Ontario
L4Z 1X1
Attention: Scott Worthington
Fax No: 905-282-9966
with a copy
(which shall not constitute notice to Parent or Merger Sub) to:
Dorsey & Whitney LLP
161 Bay Street, Suite 4310
Toronto, Ontario
M5J 2S1
Attn: Richard Raymer
Facsimile:
(416) 367-7371
9.3
Interpretation
. When a reference is made in this Agreement to an Article, Section or Exhibit, such
reference shall be to an Article or Section of, or an Exhibit to, this Agreement unless otherwise indicated. Whenever the words include, includes or including are used in this Agreement, they shall be deemed to be
followed by the words without limitation. The words hereof, herein and hereunder and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. References to a
Person
shall include references to an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other
entity. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable
to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of
comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns. All references to dollar amounts or to cash shall be to the lawful
currency of the United States.
9.4
Knowledge
. References to the
Knowledge
of the Company shall mean the actual
knowledge of the executive officers of the Company. References to the Knowledge of Parent shall mean the actual knowledge of the executive officers of Parent.
9.5
Counterparts
. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.
9.6
Entire Agreement; No Third-Party Beneficiaries
. This Agreement (including the CA, the Company Disclosure Schedule, the Parent
Disclosure Schedule and the documents and instruments referred to herein)
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(a) constitutes the entire agreement, and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement
and (b)
except for
the provisions of Section 6.4 (which are intended to benefit the Indemnified Parties) is not intended to confer upon any Person
other than
the parties hereto any rights or remedies.
9.7
Governing Law
. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California,
regardless of the laws that might otherwise govern under applicable principles of conflict of laws thereof.
9.8
Assignment
.
Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by either of the parties hereto without the prior written consent of the other
party. Any assignment in violation of the preceding sentence shall be void. Subject to the preceding two sentences, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and
assigns.
9.9
Consent to Jurisdiction
. Each of the parties hereto (a) consents to submit itself to the personal jurisdiction
of any federal or state court located in the State of California in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court, and (c) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a
federal or state court sitting in the State of California.
9.10
Headings, etc
. The headings and table of contents contained in
this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
9.11
Severability
. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full
force and effect, insofar as the foregoing can be accomplished without materially affecting the economic benefits anticipated by the parties to this Agreement. Upon such determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable Law in an acceptable manner to the
end that the transactions contemplated hereby are fulfilled to the extent possible.
9.12
Failure or Indulgence Not a Waiver; Remedies
Cumulative
. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement
herein, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
9.13
Waiver of Jury Trial
. EACH OF PARENT, MERGER SUB AND THE COMPANY HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THE ACTIONS OF PARENT, MERGER SUB OR THE COMPANY
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT OF THIS AGREEMENT.
9.14
Specific Performance
. The parties agree
that irreparable damage would occur and that the parties would not have any adequate remedy at law in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce
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specifically the terms and provisions of this Agreement in any federal or state court located in the State of Delaware, this being in addition to any other remedy to which they are entitled at
law or in equity.
9.15
Remedy for Breach of Bridge Loan Documentation
. In the event of an Event of Default (as defined in the
Bridge Loan Documentation) Parent, at its option, may loan an additional amount to the Company sufficient to pay all then outstanding obligations of the Company to Silicon Valley Bank, which loan shall be pursuant to substantially the same terms
contained in the Bridge Loan Documentation, and shall be used to pay off the above above obligations to Silicon Valley Bank.
(Remainder
of Page Intentionally Left Blank)
IN WITNESS WHEREOF
, Parent, Merger Sub and the Company have caused this Agreement and Plan
of Merger to be executed by their respective officers thereunto duly authorized, all as of the date first written above.
|
|
|
SPHERE 3D CORPORATION
|
|
|
By:
|
|
/s/ Peter Tassiopoulos
|
Name: Peter Tassiopoulos
|
Title: Chief Executive Officer
|
|
OVERLAND STORAGE, INC.
|
|
|
By:
|
|
/s/ Kurt L. Kalbfleisch
|
Name: Kurt L. Kalbfleisch
|
Title: Senior Vice President and Chief Financial Officer
|
|
S3D ACQUISITION COMPANY
|
|
|
By:
|
|
/s/ Peter Tassiopoulos
|
Name: Peter Tassiopoulos
|
Title: Chief Executive Officer
|
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EXHIBIT A
GOVERNANCE MATTERS
(a) Parent
shall take all necessary action to cause, effective at the Effective Time, Eric L. Kelly to be appointed the Chief Executive Officer of Parent.
(b) Parent shall take all necessary action to cause, effective at the Effective Time, Kurt L. Kalbfleisch to be appointed the Chief Financial
Officer of Parent.
(c) Parent shall take all necessary action to cause, effective at the Effective Time, the Board of Directors of Parent
to consist of seven (7) members, two of whom shall be determined by the Company prior to the Closing and one (1) of whom shall be Eric Kelly (who is an existing member of such Board of Directors).
A-46
Annex B
F
ORM
OF
V
OTING
A
GREEMENT
AND
I
RREVOCABLE
P
ROXY
This
V
OTING
A
GREEMENT
A
ND
I
RREVOCABLE
P
ROXY
(this
Agreement
) is entered into as of , 2014, by and between
Sphere 3D Corporation, an Ontario corporation (
Parent
), and the undersigned stockholder (
Stockholder
) of Overland Storage, Inc., a California corporation (the
Company
).
Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to them in the Merger Agreement (as defined below).
R
ECITALS
W
HEREAS
, the execution and delivery of this Agreement by Stockholder is a material inducement to the
willingness of Parent to enter into that certain Agreement and Plan of Merger, dated as of the date hereof (the
Merger Agreement
), by and among
Parent, , a California corporation and wholly owned subsidiary of Parent (
Sub
), and the Company,
pursuant to which Sub will merge with and into the Company (the
Merger
), and the Company will survive the Merger and become a wholly owned subsidiary of Parent.
W
HEREAS
, Stockholder understands and acknowledges that the Company, Sub and Parent are entitled to rely
on (i) the truth and accuracy of Stockholders representations contained herein and (ii) Stockholders performance of the obligations set forth herein.
N
OW
, T
HEREFORE
, in consideration of the promises and the covenants and agreements set
forth in the Merger Agreement and in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1.
Restrictions on Shares
.
(a) Stockholder shall not, directly or indirectly, transfer (except as may be specifically required by court order, to comply with any
regulation applicable to the Stockholder or by operation of law), grant an option with respect to, sell, exchange, pledge or otherwise dispose of, reduce its economic risk in, or encumber, the Shares (as defined in
Section 4(a)
below) or
any New Shares (as defined in
Section 1(d)
below), or make any offer or enter into any agreement or binding arrangement or commitment providing for any of the foregoing, at any time prior to the Expiration Time (as defined below). As
used herein, the term
Expiration Time
shall mean the earliest to occur of (A) the Effective Time, (B) the date and time of the valid termination of the Merger Agreement in accordance with its terms, (C) the
Stockholder becomes aware that the Parent has committed fraud or made a fraudulent or negligent misrepresentation for the purposes of inducing the Stockholder to enter into the Merger Agreement and/or this Agreement (D) such date and time
designated by Parent in a written notice to Stockholder, (E) the written agreement of the parties hereto to terminate this Agreement, or (F) January 31, 2015.
(b) Except pursuant to the terms of this Agreement, Stockholder shall not, directly or indirectly, grant any proxies or powers of attorney
with respect to any of the Shares, deposit any of the Shares into a voting trust, or enter into a voting agreement or similar arrangement or commitment with respect to any of the Shares or make any public announcement that is in any manner
inconsistent with
Section 2
hereof.
(c) Except as otherwise provided herein, Stockholder shall not, in its capacity as a
stockholder of the Company, directly or indirectly, take any action that would make any representation or warranty contained herein untrue or incorrect in any material respect or be reasonably expected to have the effect of impairing the ability of
Stockholder to perform its obligations under this Agreement or preventing or delaying the consummation of any of the transactions contemplated hereby.
(d) Any shares of Company Capital Stock or other securities of the Company that Stockholder purchases or with respect to which Stockholder
otherwise acquires beneficial ownership (as defined in
B-1
Rule 13d-3
under the Exchange Act) after the date of this Agreement and prior to the Expiration Time, including by reason of any stock split, stock
dividend, reclassification, recapitalization or other similar transaction or pursuant to the exercise of Company Options and Other Rights (collectively, the
New Shares
) shall be subject to the terms and conditions of this
Agreement to the same extent as if they constituted Shares.
2.
Agreement to Vote Shares
.
(a) Prior to the Expiration Time, at every meeting of the stockholders of the Company called with respect to any of the following matters,
and at every adjournment or postponement thereof, and on every action or approval by written consent or resolution of the stockholders of the Company with respect to any of the following matters, Stockholder shall vote, to the extent not voted by
the person(s) appointed under the Proxy (as defined in
Section 3
below), the Shares and any New Shares in favor of approval of the Merger, approval and adoption of the Merger Agreement and the Certificate of Merger and any matter that
could reasonably be expected to facilitate the Merger, and against any Acquisition Proposal or Superior Offer and any other matter that could reasonably be expected to impede, interfere with, delay, postpone or adversely affect the Merger or any of
the transactions contemplated by the Merger Agreement.
(b) Notwithstanding the foregoing, nothing in this Agreement shall limit or
restrict any nominee of the Stockholder from (i) acting in such nominees capacity as a director or officer of the Company, to the extent applicable, it being understood that this Agreement shall apply to Stockholder solely in
Stockholders capacity as a stockholder of the Company or (ii) voting in Stockholders sole discretion on any matter other than matters referred to in
Section 2(a)
.
3.
Irrevocable Proxy
. Concurrently with the execution and delivery of this Agreement, Stockholder shall deliver to Parent a duly
executed proxy in the form attached hereto as
Exhibit A
(the
Proxy
), which proxy is coupled with an interest sufficient in law to support an irrevocable proxy, and, until the Expiration Time, shall be
irrevocable to the fullest extent permitted by law, with respect to each and every meeting of stockholders of the Company or action or approval by written resolution or consent of stockholders of the Company with respect to the matters contemplated
by
Section 2(a)
covering the total number of Shares and New Shares in respect of which Stockholder is entitled to vote at any such meeting or in connection with any such written consent. Upon the execution of this Agreement by
Stockholder, (i) Stockholder hereby revokes any and all prior proxies (other than the Proxy) given by Stockholder with respect to the subject matter contemplated by
Section 2(a)
, and (ii) Stockholder shall not grant any
subsequent proxies with respect to such subject matter, or enter into any agreement or understanding with any Person to vote or give instructions with respect to the Shares and New Shares in any manner inconsistent with the terms of
Section 2
, until after the Expiration Time.
4.
Representations, Warranties and Covenants of Stockholder
. Stockholder
hereby represents, warrants and covenants to Parent as follows:
(a) As of the date hereof, Stockholder is the beneficial or record owner
of, or exercises voting power over, that number of shares of Company Capital Stock set forth on Schedule 1 hereto (all such shares owned beneficially or of record by Stockholder, or over which Stockholder exercises voting power, on the date hereof,
collectively, the
Shares
). As of the date hereof, the Shares constitute Stockholders entire interest in the outstanding shares of Company Capital Stock and Stockholder is not the beneficial or record holder of, and
does not exercise voting power over, any other outstanding shares of capital stock of the Company. No Person not a signatory to this Agreement has a beneficial interest in or a right to acquire or vote any of the Shares (other than, if Stockholder
is a partnership or a limited liability company, the rights and interest of persons and entities that own partnership interests or units in Stockholder under the partnership agreement or operating agreement governing Stockholder and applicable
partnership law or limited liability company law, or if Stockholder is a married individual and resides in a state with community property laws, the community property interest of his or her spouse to the extent applicable under such community
property laws). The Shares are and will be at all times up until the Expiration Time free and clear of any security interests, liens, claims, pledges, options, rights of first
B-2
refusal, co-sale rights, agreements, limitations on Stockholders voting rights (other than to the extent disclosed to the Parent prior to the date of this Agreement), charges and other
encumbrances of any nature that would adversely affect the Merger or the exercise or fulfillment of the rights and obligations of Stockholder under this Agreement or of the parties to this Agreement. Stockholders principal residence or place
of business is set forth on the signature page hereto.
(b) As of the date hereof, Stockholder is the legal and beneficial owner of the
number of options, restricted stock units, stock appreciation rights, warrants and other rights to acquire, directly or indirectly, shares of Company Common Stock set forth on Schedule 1 hereto (collectively, the
Company Options and
Other Rights
). The Company Options and Other Rights are and will be at all times up until the Expiration Time free and clear of any security interests, liens, claims, pledges, options, rights of first refusal, co-sale rights,
agreements, limitations on Stockholders voting rights, charges and other encumbrances of any nature that would adversely affect the exercise or fulfillment of the rights and obligations of the parties to this Agreement.
(c) If Stockholder is a corporation, limited partnership or limited liability company, Stockholder is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is incorporated or constituted.
(d) Stockholder has all
requisite power, capacity and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Stockholder and the consummation by Stockholder of the transactions
contemplated hereby have been duly authorized by all necessary action, if any, on the part of Stockholder (or its board of directors or similar governing body, as applicable), and no other actions or proceedings on the part of Stockholder are
necessary to authorize the execution and delivery by Stockholder of this Agreement and the consummation by Stockholder of the transactions contemplated hereby. This Agreement has been duly executed and delivered by Stockholder and, assuming the due
authorization, execution and delivery of this Agreement by Parent, constitutes a valid and binding obligation of Stockholder, enforceable against Stockholder in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and similar laws affecting creditors rights and remedies generally and to general principles of equity.
(e) The execution and delivery of this Agreement does not, and the performance by Stockholder of its agreements and obligations hereunder
will not, conflict with, result in a breach or violation of or default under (with or without notice or lapse of time or both), or require notice to or the consent of any person under, any provisions of the organizational documents of Stockholder
(if applicable), or any agreement, commitment, law, rule, regulation, judgment, order or decree to which Stockholder is a party or by which Stockholder is, or any of its assets are, bound, except for such conflicts, breaches, violations or defaults
that would not, individually or in the aggregate, prevent or delay consummation of the Merger and the transactions contemplated by the Merger Agreement and this Agreement or otherwise prevent or delay Stockholder from performing his, her or its
obligations under this Agreement.
(f) Stockholder agrees that Stockholder will not in Stockholders capacity as a stockholder of
the Company bring, commence, institute, maintain, prosecute or voluntary aid any action, claim, suit or cause of action, in law or in equity, in any court or before any governmental entity, which (i) challenges the validity or seeks to enjoin
the operation of any provision of this Agreement or (ii) alleges that the execution and delivery of this Agreement by Stockholder, either alone or together with the other Company voting agreements and proxies to be delivered in connection with
the execution of the Merger Agreement, or the adoption and approval of the Merger Agreement by the Companys Board of Directors, breaches any fiduciary duty of the Companys Board of Directors or any member thereof.
5.
Dissenters or Appraisal Rights
. Stockholder agrees not to exercise any rights of appraisal or any dissenters rights that
Stockholder may have (whether under applicable law or otherwise) or could potentially have or acquire in connection with the Merger.
B-3
6.
Miscellaneous
.
(a)
Notices
. All notices and other communications hereunder shall be in writing and shall be deemed given on (i) the date of
delivery, if delivered personally or by commercial delivery service, or (ii) on the date of confirmation of receipt (or the next Business Day, if the date of confirmation of receipt is not a Business Day), if sent via facsimile (with
confirmation of receipt), to the parties hereto at the following address (or at such other address for a party as shall be specified by like notice):
with a copy (which shall not constitute notice) to:
Dorsey & Whitney LLP
TD Canada Trust Tower
161 Bay
Street, Suite 4310
Toronto, Ontario M5J 2S1
Attention: Richard B. Raymer
raymer.richard@dorsey.com
Telephone No.: (416) 367-7388
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(ii)
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if to Stockholder, to the address set forth for Stockholder on the signature page hereof.
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(b)
Interpretation
. When a reference is made in this Agreement to sections or exhibits, such reference shall be to a section of or an
exhibit to this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. The words include,
includes and including when used herein shall be deemed in each case to be followed by the words without limitation. The phrases the date of this Agreement, the date hereof, and terms of
similar import, unless the context otherwise requires, shall be deemed to refer to the date first above written. Unless the context of this Agreement otherwise requires: (i) words of any gender include each other gender; (ii) words using
the singular or plural number also include the plural or singular number, respectively; and (iii) the terms hereof, herein, hereunder and derivative or similar words refer to this entire Agreement.
(c)
Specific Performance; Injunctive Relief
. The parties hereto acknowledge that Parent will be irreparably harmed and that there will
be no adequate remedy at law for a violation of any of the covenants or agreements of Stockholder set forth herein or in the Proxy. Therefore, it is agreed that, in addition to any other remedies that may be available to Parent upon any such
violation of this Agreement or the Proxy, Parent shall have the right to enforce such covenants and agreements and the Proxy by specific performance, injunctive relief or by any other means available to Parent at law or in equity and Stockholder
hereby waives any and all defenses that could exist in its favor in connection with such enforcement and waives any requirement for the security or posting of any bond in connection with such enforcement.
(d)
Counterparts
. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same
instrument and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties hereto; it being understood that all parties need not sign the same counterpart. Delivery of an executed
counterpart of a signature page to this Agreement by telecopy or by electronic delivery in Adobe Portable Document Format or other electronic format based on common standards will be effective as delivery of a manually executed counterpart of this
Agreement.
(e)
Entire Agreement; Nonassignability; Parties in Interest; Death or Incapacity
. This Agreement and the documents and
instruments and other agreements specifically referred to herein or delivered pursuant hereto (including, without limitation, the Proxy) (i) constitute the entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (ii) are not intended to confer, and shall not be construed
B-4
as conferring, upon any person other than the parties hereto any rights or remedies hereunder. Except as provided in Section 1(a), neither this Agreement nor any of the rights, interests, or
obligations under this Agreement may be assigned or delegated, in whole or in part, by operation of law or otherwise, by Stockholder without the prior written consent of Parent, and any such assignment or delegation that is not consented to shall be
null and void. This Agreement, together with any rights, interests or obligations of Parent hereunder, may be assigned or delegated in whole or in part by Parent to any direct or indirect wholly owned subsidiary of Parent without the consent of or
any action by Stockholder upon notice by Parent to Stockholder as herein provided. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties hereto and their respective
successors and assigns (including, without limitation, any person to whom any Shares or New Shares are sold, transferred or assigned).
(f)
Severability
. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement shall continue in full force and effect and the application of such provision to other persons or circumstances shall be interpreted so as reasonably to
effect the intent of the parties hereto. The parties hereto further agree to use their commercially reasonable efforts to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that shall achieve, to
the extent possible, the purposes of such void or unenforceable provision.
(g)
Remedies Cumulative
. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party shall be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy shall not
preclude the exercise of any other remedy.
(h)
Governing Law
. This Agreement shall be governed by and construed in accordance
with the laws of the State of California without reference to such states principles of conflicts of law. The parties hereto hereby irrevocably submit to the exclusive jurisdiction of the state courts of the State of California and the Federal
district court of the United States of America located within San Jose in the State of California, in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in
respect of the transactions contemplated hereby and thereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or thereof, that it is not subject thereto or that
such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action, suit or proceeding shall be heard and determined in such state court in the State of California or Federal court. The parties hereby consent to and grant any such court jurisdiction over
the person of such parties and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action, suit or proceeding in the manner provided in Section 6(a) or in such other manner as
may be permitted by applicable Legal Requirements, shall be valid and sufficient service thereof.
(i)
Termination
. This Agreement
shall terminate and shall have no further force or effect from and after the Expiration Time, and thereafter there shall be no liability or obligation on the part of Stockholder, provided, that no such termination shall relieve any party from
liability for any willful breach of this Agreement prior to such termination.
(j)
Amendment
. Any provision of this Agreement may
be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by each of the parties hereto, or in the case of a waiver, by the party against which the waiver is to be effective.
Notwithstanding the foregoing, no failure or delay by any party hereto in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any right
hereunder.
(k)
Rules of Construction
. The parties hereto agree that they have been represented by counsel during the negotiation,
preparation and execution of this Agreement and, therefore, waive the application of any
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law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document shall be construed against the party drafting such agreement or document.
(l)
WAIVER OF JURY TRIAL
. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF ANY PARTY HERETO IN NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.
B-6
I
N
W
ITNESS
W
HEREAS
, the party
hereto has caused this
V
OTING
A
GREEMENT
AND
I
RREVOCABLE
P
ROXY
to be executed as of the date first above written.
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S
PHERE
3
D
C
ORPORATION
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By:
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Name:
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Title:
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[S
IGNATURE
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AGE
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OTING
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GREEMENT
AND
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RREVOCABLE
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ROXY
]
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I
N
W
ITNESS
W
HEREAS
, the party
hereto has caused this
V
OTING
A
GREEMENT
AND
I
RREVOCABLE
P
ROXY
to be executed as of the date first above written.
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TOCKHOLDER
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(Signature)
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(Print Address)
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(Print Address)
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(Print Fax Number)
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(Print Telephone Number)
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Shares and Company Options and Other Rights beneficially owned on the date hereof, or over which Stockholder exercises
voting power on the date hereof:
0
Company Common Stock
0
Company Options and Other Rights
0
Company RSUs
0
Company SARs
[S
IGNATURE
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AGE
TO
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OTING
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GREEMENT
AND
I
RREVOCABLE
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ROXY
]
B-8
EXHIBIT A
IRREVOCABLE PROXY
TO
VOTE STOCK OF
Overland Storage, Inc.
The undersigned stockholder (
Stockholder
) of Overland Storage, Inc., a California corporation (the
Company
), hereby irrevocably (to the fullest extent permitted by applicable law) appoints the Chief Financial Officer of Sphere 3D Corporation, an Ontario corporation (
Parent
), or any other
designee of Parent, as the sole and exclusive attorney and proxy of Stockholder, with full power of substitution and resubstitution, to vote and exercise all voting and related rights (to the fullest extent that Stockholder is entitled to do so)
with respect to all of the shares of capital stock of the Company that now are or hereafter may be beneficially owned by Stockholder, and any and all other shares or securities of the Company issued or issuable in respect thereof on or after the
date hereof (collectively, the
Shares
) in accordance with the terms of this Irrevocable Proxy. The Shares beneficially owned by Stockholder as of the date of this Irrevocable Proxy are listed on Schedule 1 of this
Irrevocable Proxy. Upon Stockholders execution of this Irrevocable Proxy, any and all prior proxies (other than this Irrevocable Proxy) given Stockholder with respect to the subject matter contemplated by this Irrevocable Proxy are hereby
revoked with respect to such subject matter and Stockholder agrees not to grant any subsequent proxies with respect to such subject matter or enter into any agreement or understanding with any Person (as defined in the Merger Agreement (as defined
below)) to vote or give instructions with respect to such subject matter in any manner inconsistent with the terms of this Irrevocable Proxy until after the Expiration Time (as defined below).
Until the Expiration Time, this Irrevocable Proxy is irrevocable (to the fullest extent permitted by applicable law), is coupled
with an interest sufficient in law to support an irrevocable proxy, is granted pursuant to that certain Voting Agreement and Irrevocable Proxy dated as of even date herewith by and between Parent and Stockholder (the
Voting
Agreement
), and is granted in consideration of Parent entering into that certain Agreement and Plan of Merger, dated as of the date hereof (the
Merger Agreement
), by and among Parent, Overland Storage, Inc., a
California corporation and wholly owned subsidiary of Parent (
Sub
) and the Company, pursuant to which Sub will merge with and into the Company (the
Merger
), and the Company will survive the Merger
and become a wholly owned subsidiary of Parent. As used herein, the term
Expiration Time
shall mean the earliest to occur of (A) the Effective Time, (B) the date and time of the valid termination of the Merger
Agreement in accordance with its terms, (C) the Stockholder becomes aware that the Parent has committed fraud or made a fraudulent or negligent misrepresentation for the purposes of inducing the Stockholder to enter into the Merger Agreement
and/or this Agreement (D) such date and time designated by Parent in a written notice to Stockholder, (E) the written agreement of the parties hereto to terminate this Agreement, or (F) January 31, 2105
The attorneys and proxies named above, and each of them, are hereby authorized and empowered by Stockholder, at any time prior to the
Expiration Time, to act as Stockholders attorney and proxy to vote the Shares, and to exercise all voting and other rights of Stockholder with respect to the Shares (including, without limitation, the power to execute and deliver written
consents pursuant to Section 603 of the California Corporations Code), at every annual, special or adjourned meeting of the stockholders of the Company and in every written consent in lieu of such meeting as follows: in favor of approval of the
Merger, approval and adoption of the Merger Agreement and the Certificate of Merger and any matter that could reasonably be expected to facilitate the Merger, and against any Alternative Transaction Proposal (as defined in
Section 5.3(a)(ii)
of the Merger Agreement) or Superior Offer (as defined in
Section 5.3(a)(iii])
of the Merger Agreement) and any other matter that could reasonably be expected to impede, interfere with, delay, postpone or
adversely affect the Merger or any of the transactions contemplated by the Merger Agreement.
The attorney and proxy named above may not
exercise this Irrevocable Proxy on any other matter except as provided above. Stockholder may vote the Shares on all other matters.
[S
IGNATURE
P
AGE
F
OLLOWS
]
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This Irrevocable Proxy is coupled with an interest as aforesaid and is irrevocable. This
Irrevocable Proxy may not be amended or otherwise modified without the prior written consent of Parent. This Irrevocable Proxy shall terminate, and be of no further force and effect, automatically upon the Expiration Time.
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Dated:
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STOCKHOLDER
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(Signature)
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Shares and Company Options and Other Rights beneficially owned on the date hereof, or over which Stockholder exercises voting power on the date hereof:
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0
Company Common Stock
0
Company Options and Other Rights
0
Company RSUs
0
Company SARs
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[S
IGNATURE
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AGE
TO
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OTING
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GREEMENT
AND
I
RREVOCABLE
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ROXY
]
B-10
Annex C
CALIFORNIA CORPORATIONS CODE SECTION 1300-1313
1300.
(a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day of, and immediately prior to, the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed reorganization or short-form merger, as adjusted for any stock split, reverse stock split, or share dividend that becomes effective
thereafter.
(b) As used in this chapter, dissenting shares means shares to which all of the following apply:
(1) That were not, immediately prior to the reorganization or short-form merger, listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any shares where the holder of those
shares is required, by the terms of the reorganization or short-form merger, to accept for the shares anything except: (A) shares of any other corporation, which shares, at the time the reorganization or short-form merger is effective, are
listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100; (B) cash in lieu of fractional shares described in the foregoing subparagraph (A); or (C) any combination
of the shares and cash in lieu of fractional shares described in the foregoing subparagraphs (A) and (B).
(2) That were outstanding
on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in paragraph (1), were voted against the reorganization, or were held of
record on the effective date of a short-form merger; provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) That the dissenting shareholder has demanded that the corporation purchase at their fair market value, in
accordance with Section 1301.
(4) That the dissenting shareholder has submitted for endorsement, in accordance with
Section 1302.
(c) As used in this chapter, dissenting shareholder means the recordholder of dissenting shares and
includes a transferee of record.
1301. (a) If, in the case of a reorganization, any shareholders of a corporation have a right under
Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares for cash, that corporation shall mail to each of those shareholders a notice of the
approval of the reorganization by its outstanding shares (Section 152) within 10 days after the date of that approval, accompanied by a copy of Sections 1300, 1302, 1303, and 1304 and this section, a statement of the price determined by the
corporation to represent the fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise the shareholders right under those sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any dissenting shares as defined in subdivision (b) of Section 1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase the shareholders shares for cash under Section 1300,
subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the corporation to purchase shares shall make written demand upon the corporation for the purchase of
C-1
those shares and payment to the shareholder in cash of their fair market value. The demand is not effective for any purpose unless it is received by the corporation or any transfer agent thereof
(1) in the case of shares described in subdivision (b) of Section 1300, not later than the date of the shareholders meeting to vote upon the reorganization, or (2) in any other case, within 30 days after the date on which
the notice of the approval by the outstanding shares pursuant to subdivision (a) or the notice pursuant to subdivision (h) of Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the
corporation purchase and shall contain a statement of what the shareholder claims to be the fair market value of those shares as determined pursuant to subdivision (a) of Section 1300. The statement of fair market value constitutes an
offer by the shareholder to sell the shares at that price.
1302. Within 30 days after the date on which notice of the approval by the outstanding shares
or the notice pursuant to subdivision (h) of Section 1110 was mailed to the shareholder, the shareholder shall submit to the corporation at its principal office or at the office of any transfer agent thereof, (a) if the shares are
certificated securities, the shareholders certificates representing any shares which the shareholder demands that the corporation purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the shares are uncertificated securities, written notice of the number of shares which the shareholder demands that the corporation purchase. Upon subsequent transfers of
the dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the
shares.
1303. (a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the
dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the
fair market value of dissenting shares shall be made within 30 days after the amount thereof has been agreed or within 30 days after any statutory or contractual conditions to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor, unless provided otherwise by agreement.
1304. (a) If the corporation
denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation,
within six months after the date on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision (h) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the
superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two or more such actions may
be consolidated.
(c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares
is in issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares.
1305. (a) If the court appoints an appraiser or appraisers, they shall proceed forthwith to determine the fair market value per
share. Within the time fixed by the court, the appraisers, or a majority of them, shall make and file a report in the office of the clerk of the court. Thereupon, on the motion of any party, the report shall be submitted to the court and considered
on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it.
C-2
(b) If a majority of the appraisers appointed fail to make and file a report within 10 days from
the date of their appointment or within such further time as may be allowed by the court or the report is not confirmed by the court, the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered against the corporation for payment of an amount equal to the
fair market value of each dissenting share multiplied by the number of dissenting shares which any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest thereon at the legal
rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to uncertificated
securities and, with respect to certificated securities, only upon the endorsement and delivery to the corporation of the certificates for the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as
the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys fees, fees of expert witnesses and interest at the legal
rate on judgments from the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301).
1306. To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under
the provisions of Chapter 5.
1307. Cash dividends declared and paid by the corporation upon the dissenting shares after the date of approval of the
reorganization by the outstanding shares (Section 152) and prior to payment for the shares by the corporation shall be credited against the total amount to be paid by the corporation therefor.
1308. Except as expressly limited in this chapter, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless the corporation consents thereto.
1309. Dissenting shares lose their status as dissenting shares and the holders thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization.
Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable
attorneys fees.
(b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or
are surrendered for conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the
corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the shares, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six months after the date
on which notice of the approval by the outstanding shares or notice pursuant to subdivision (h) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholders demand for purchase of the dissenting
shares.
1310. If litigation is instituted to test the sufficiency or regularity of the votes of the shareholders in authorizing a reorganization, any
proceedings under Sections 1304 and 1305 shall be suspended until final determination of such litigation.
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1311. This chapter, except Section 1312, does not apply to classes of shares whose terms and provisions
specifically set forth the amount to be paid in respect to such shares in the event of a reorganization or merger.
1312. (a) No shareholder of a
corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization
or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof; but any holder of shares of a class whose terms and
provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization
are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with,
another party to the reorganization or short-form merger, subdivision (a) shall not apply to any shareholder of such party who has not demanded payment of cash for such shareholders shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, the shareholder shall not thereafter have any right to demand payment of cash for the
shareholders shares pursuant to this chapter. The court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded shall not restrain or enjoin the
consummation of the transaction except upon 10 days prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which
such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by,
or under common control with, another party to the reorganization or short-form merger, in any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded,
(1) a party to a reorganization or short-form merger which controls another party to the reorganization or short-form merger shall have the burden of proving that the transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization shall have the burden of proving that the transaction is just and reasonable as to the shareholders of any party so controlled.
1313. A conversion pursuant to Chapter 11.5 (commencing with Section 1150) shall be deemed to constitute a reorganization for purposes of applying the
provisions of this chapter, in accordance with and to the extent provided in Section 1159.
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Annex D
May 15, 2014
CONFIDENTIAL
Special Committee of the Board of
Directors
Overland Storage, Inc.
4820 Overland Ave.
San Diego, California 92123-1599
Members of the Special
Committee:
Roth Capital Partners, LLC (Roth or we or us) understands that Overland Storage, Inc., a California
corporation (the Company), proposes to enter into an Agreement and Plan of Merger (the Merger Agreement) among the Company, Sphere 3D Corporation, an Ontario Corporation (Parent), and S3D Acquisition Company, a
California corporation and wholly owned subsidiary of Parent (Merger Sub), pursuant to which, among other things, Merger Sub will merge with and into the Company (the Merger) and each outstanding share of the common stock, no
par value, of the Company (Company Common Stock), other than any Dissenting Shares (as defined in the Merger Agreement), will be converted into the right to receive .510594, subject to upward adjustment pursuant to the terms of the
Merger Agreement (the Exchange Ratio), Parent Common Shares (as defined in the Merger Agreement). The terms and conditions of the Merger Agreement are more fully set forth in the Merger Agreement.
The Special Committee of the Board of Directors of the Company (the Special Committee) has requested that Roth provide an opinion to the Special
Committee as to whether, as of the date hereof, the per share consideration to be received by shareholders of the Company (other than shareholders of the Company that also are shareholders of Parent (or holders of securities exercisable or
convertible for Parent Common Shares) (the Excluded Holders)) in their capacity as such pursuant to the Merger Agreement is fair, from a financial point of view, to such holders.
For purposes of the opinion set forth herein, we have, among other things:
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(i)
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reviewed and analyzed the financial terms of the draft Merger Agreement provided to us on May 15, 2014 (the Latest Draft Agreement);
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(ii)
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reviewed certain internal financial statements and other financial and operating data concerning the Company prepared by the management of the Company;
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(iii)
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reviewed certain financial projections for the Company prepared by the management of the Company (the Forecasts);
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(iv)
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compared selected market valuation metrics of certain publicly-traded companies with those same metrics for the Company;
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(v)
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compared the financial terms, to the extent publicly available, of certain comparable acquisition transactions with those same metrics implied by the Merger;
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(vi)
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compared the financial performance of the Company with that of certain other publicly-traded companies we deemed comparable with the Company and its securities;
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(vii)
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participated in certain discussions with management of the Company and Parent, and with representatives of the Special Committee and its legal advisor, including, without limitation, discussions with the Company with
respect to the Companys capital requirements and the bridge loan to be provided by Parent to the Company in connection with execution of the Merger Agreement; and
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(viii)
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performed such other analyses, reviewed such other information and considered such other factors as we have deemed appropriate.
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In conducting our review and arriving at our opinion, at your direction, we have not independently verified any of the foregoing information, and we have
assumed and relied upon such information being accurate and complete in all material respects, and we have further relied upon the assurances of management of the Company that they are not aware of any facts that would make any of the information
reviewed by us inaccurate, incomplete or misleading in any material respect. With respect to the Forecasts, we have assumed, upon the direction of the management of the Company, that they have been reasonably prepared on bases reflecting the best
currently available estimates and good faith judgments of the management of the Company as to the future financial performance of the Company. As you are aware, we have not been provided with, and we did not have access to, customary information
about, and customary access to management of, Parent. Accordingly, we have assumed, at your direction, that (i) the published estimates of third party research analysts are a reasonable basis upon which to evaluate the future financial
performance of Parent, (ii) Parent will perform substantially in accordance with such estimates and (iii) the value of the per share merger consideration to be received by the shareholders of the Company in their capacity as such pursuant
to the Merger Agreement is the product of the Exchange Ratio and the closing price of Parent Common Shares on May 14, 2014. We have not been engaged to assess the achievability of any projections or the assumptions on which they were based, and
we express no view as to such projections or assumptions. In addition, we have not assumed any responsibility for any independent valuation or appraisal of the assets or liabilities, including any ongoing litigation and administrative
investigations, of the Company or Parent, nor have we been furnished with any such valuation or appraisal, nor have we made any physical inspection of the properties or assets of the Company or Parent. We have not evaluated the solvency or
creditworthiness of the Company or Parent under any applicable law relating to bankruptcy, insolvency, fraudulent transfer or similar matters. We express no opinion regarding the liquidation value of the Company, Parent or any other entity. Without
limiting the generality of the foregoing, we have undertaken no independent analysis of any pending or threatened litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Company, Parent or any of their
affiliates is a party or may be subject, and at the direction of the Special Committee and with its consent, our opinion makes no assumption concerning, and therefore does not consider, the possible assertion of claims, outcomes or damages arising
out of any such matters.
We also have assumed, at your direction, that the Merger will be consummated in accordance with the terms set forth in the
Latest Draft Agreement and any related documents (collectively the Transaction Documents) without waiver, modification or amendment of any material term, and in compliance with applicable federal, state and local statutes, rules,
regulations and ordinances, that such Transaction Documents are enforceable against each of the parties thereto in accordance with their respective terms, that the representations and warranties of each party in the Transaction Documents are true
and correct, that each party will perform on a timely basis all covenants and agreements required to be performed by it under the Transaction Documents and that all conditions to the consummation of the Merger will be satisfied without waiver
thereof. Additionally, we have assumed, at your direction, that all necessary governmental, regulatory and other approvals, consents, releases and waivers required for the Merger will be obtained and that in the course of obtaining any of the
foregoing, no modification, delay, limitation, restriction or condition will be imposed or waivers made that would have an adverse effect on the Company or Parent or on the contemplated benefits of the Merger. We have further assumed, at your
direction, that the Transaction Documents when signed will conform to the last drafts of the Transaction Documents provided to us in all respects material to our analysis.
Our opinion addresses only the fairness, from a financial point of view, to the shareholders of the Company (other than the Excluded Holders of the per share
consideration to be received by such holders in their capacity as such pursuant to the Merger Agreement, and no opinion or view is expressed with respect to any other consideration paid or received in connection with the Merger or any other
transaction by the holders of any class of securities, creditors or other constituencies of any party. Our opinion does not in any manner address any term, condition, aspect or implication of the Merger or the Merger Agreement (other than the
consideration to be
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received by the shareholders of the Company in their capacity as such pursuant to the Merger Agreement to the extent expressly specified herein), including, without limitation, the form or
structure of the Merger, the timing or other terms or conditions related to the Merger, any distributions to the shareholders or other security holders of the Company, or any other transaction, agreement, arrangement or understanding referenced in
the Merger Agreement or related to the Merger, the Merger Agreement or otherwise, including, without limitation, the fairness of the amount or nature of, or any other aspect relating to any compensation to any officers, directors or employees of any
party to the Merger or any related transaction, or any class of such persons. We were not requested to, and we did not, participate in the negotiation of the terms of the Merger, nor were we requested to, and we did not, provide any advice or
services in connection with the Merger other than the delivery of this opinion. We express no view or opinion as to any such matters. As you are aware, we were not requested to, and we did not, solicit indications of interest or proposals from third
parties regarding a possible acquisition of the Company. Our opinion also does not address the relative merits of the Merger as compared to any alternative business strategies or transactions that might exist for the Company, the underlying business
decision of the Company to proceed with the Merger, or the effects of any other transaction in which the Company will or might engage. Our opinion is necessarily based on economic, market and other conditions as they exist and can be evaluated on,
and the information made available to us on, the date hereof. We express no opinion as to the underlying valuation, future performance or long-term viability of the Company or Parent (either before or giving effect to the Merger and any related
transactions). We are not expressing any opinion as to what the value of Parent Common Shares actually will be when issued or the prices at which Company Common Stock or Parent Common Shares will trade at any time, including following announcement
or consummation of the Merger. In addition, we express no opinion or recommendation as to how any stockholder should vote or act in connection with the Merger, any related matter or any other transactions. No opinion, counsel or interpretation is
intended in matters that require legal, regulatory, accounting, tax or other similar professional advice. We have assumed that such opinions, counsel or interpretation have been or will be obtained by the Company from the appropriate professional
sources. Furthermore, we have relied, with your consent, on the assessments by the Company and its advisors, as to all legal, regulatory, accounting and tax matters with respect to the Company and the Merger, and accordingly we are not expressing
any opinion as to the value of the Companys tax attributes or the effect of the Merger thereon.
We have acted as financial advisor to the Special
Committee solely to render this Opinion and will receive a fee for our services in connection with the rendering of this opinion. In addition, the Company has agreed to indemnify us for certain liabilities and other items arising out our engagement
and to reimburse us for certain expenses in connection with our services.
Roth, as part of its investment banking business, is continually engaged in the
valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other
purposes. We and our affiliates have in the past have provided, are currently providing, and may continue in the future provide investment banking and other financial services to the Company and Parent for which we and our affiliates have received
and would expect to receive compensation (including compensation from the Company that has been earned but not yet paid), including serving as issuer agent, underwriter and/or financial advisor on public or private capital raises and/or mergers and
acquisitions and serving as the Principal Advisor Liaison for Parent on the TSX Venture Exchange. We are a full service securities firm engaged in securities trading and brokerage activities, as well as providing investment banking and other
financial services. Accordingly, we may, in the future, provide investment banking and other financial services to entities that are affiliated with the Company, or other parties to the Merger Agreement, for which we would expect to receive
compensation. In the ordinary course of business, we and our affiliates may acquire, hold or sell, for our and our affiliates own accounts and for the accounts of customers, equity, debt and other securities and financial instruments
(including bank loans and other obligations) of the Company and the other parties to the Merger Agreement, and, accordingly, may at any time hold a long or a short position in such securities.
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This opinion is furnished for the use of the Special Committee and the Board (in its capacity as such) in
connection with its consideration of the Merger and may not be used for any other purpose without our written consent. The opinion is not intended to be, and does not constitute advice or a recommendation to, the Special Committee, the Board, any
shareholder or any other person as to how to vote or act on any matter relating to the Merger or otherwise. This opinion may not be reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose without our prior
written consent, provided that it may be reproduced in its entirety in the proxy materials that the Company employs in connection with the solicitation of its stockholders for the approval of the Merger, with the understanding that Roth and its
advisors will be given a reasonable opportunity to review and comment on such proxy materials prior to their dissemination to the Companys stockholders. In furnishing this opinion, we do not admit that we are experts within the meaning of the
term experts as used in the Securities Act of 1933, as amended, and the rules and regulations thereunder (the Securities Act), nor do we admit that this opinion constitutes a report or valuation within the meaning of
Section 11 of the Securities Act. Furthermore, this opinion shall not be construed as creating or implying the existence of any fiduciary duty on Roths part to any party.
Our opinion is based on financial, economic, monetary and other conditions and circumstances as in effect on, and the information made available to us as of,
the date hereof. It should be understood that, although subsequent developments may affect our opinion, we do not have any obligation to update, revise, reaffirm or withdraw our opinion, or otherwise comment on or consider events occurring after the
date hereof, and we expressly disclaim any responsibility to do so. The issuance of this opinion was approved by a committee which is authorized to approve opinions of this nature.
On the basis of and subject to the foregoing, and such other factors as we deemed relevant, we are of the opinion as of the date hereof that the per share
consideration to be received by the shareholders of the Company (other than the Excluded Holders) in their capacity as such pursuant to the Merger Agreement is fair, from a financial point of view, to such holders.
Very truly yours,
ROTH Capital Partners
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