A LEGENDary Ploy

edit: The Anderer injunction discussed in this post has been denied as of September 22, 2014, as suspected.

Over many years of observing the methods by which suspect companies artificially control their stock price, we’ve seen many tricks employed.   Today we will examine one of those timeless tactics and see how it might have been applied in the case of Sphere 3D. It goes like this:

(1) Target certain industry-related companies for acquisition – growing your Company and increasing the number of promotional press releases you can distribute.

(2) Pay for the acquisition using some cash and your own restricted shares.

(3) Fail to lift the restrictions on those shares on an as-promised and timely basis, preventing their owners from profiting from the sale while maintaining a tight grip on your share float.

We’ve seen this play out time and again. And now we may be seeing it with Sphere 3D (S3D). They sourced V3 Systems and paid for the acquisition in part using their own restricted shares (1,089,867 of them). They agreed that the shares would be free trading in four months. Then when the four months passed, S3D management refused to allow the restriction to be lifted.   And in a closely related strategy, S3D also failed to qualify the units issued in their June private placement, in spite of the “intends to file a short-form prospectus”, as declared in the press release. In essence, these tactics allowed the company to keep as many shares as possible out of the market, thereby making it easier to keep the shares floating at a lofty price for as long as possible.

Thanks to a series of recently filed court documents, we now know much more about the distressed V3 Systems that S3D purchased, and know that the liquidators of V3 are making every attempt to sell their S3D shares and distribute the proceeds to a long list of V3 debtors.   The company is essentially bankrupt with the only remaining asset being the S3D shares.   We believe they could have begun selling on September 23, being the expiry of the six month hold period as prescribed by US Rule 144, but it’s unclear if S3D has any further tricks up its sleeve to further delay the sale of those shares. Certainly time is running out. Read on for more details, as we piece together the story based on information gleaned from recently filed court documents.

When Sphere 3D bought the assets of V3 Systems on February 11th, the deal was heralded by the Company as a transformative acquisition adding “breadth to our (S3D’s) product portfolio, and fast tracks our transition to commercial operations with accretive revenue from day one.” Now we won’t argue with whether V3 Systems was all those things to S3D, but the fact is that V3 Systems at the time of its asset sale was a very troubled company.

As detailed in recent statements (Lindstrom StatementKesselring statement, Shields Statement), by the fall of 2013 V3 Systems was in desperate shape. It had unpaid bills and payroll stretching back over a year, raised preferred share (superior to any common shares) capital on two separate occasions worth more than $5mm, and as of September 2013 was on the verge of being forced into bankruptcy by its former CFO, Catherine Voutaz. She sought repayment of bridge loans in the amount of $1.9mm! (Lindstrom Statement, Page 5)

The president of V3, Eric Lindstrom, was in a quandary. How could he keep the Company from being forced into bankruptcy? The business had failed, revenues and profits were nowhere to be found and employees were leaving on account of not being paid. He and V3 found their savior in S3D. After a lengthy negotiation process, during which time S3D actually “began fulfilling orders for V3 products…as a result of V3’s…lack of funding” (ANY F4 July 23 2014, Page 51) S3D agreed to acquire all of V3 Systems assets for $4,000,000 cash, 1,089,867 shares, and an earn out provision based on revenue.

Following closing the $4mm in cash (actually only $3.2mm due to an $800k loan from Sphere 3D prior to closing) was immediately distributed to “as many creditors as possible.” The only assets owned by V3 Systems (since renamed to U.D. Dissolution Corp, but we will continue to refer to it as V3) were the 1.1mm shares of S3D received in partial consideration for its asset sale, and the possibility of earn-out payments.

Given V3 had nothing else in the Company and no operations, it began a dissolution process. William Kesselring, a consultant who had helped negotiate the sale of V3 to S3D, was appointed manager of the dissolution. On August 5, 2014 he transmitted a letter (Kesselring statement, Exhibit A) to the shareholders of V3 outlining his work and among other things, listing the current liabilities of the Company. A screenshot of this section of the letter is reproduced below:

Kesselring Letter excerpt

Kesselring’s plan, as outlined in the letter, was to begin liquidating its 1.1mm S3D shares, which he believed had become free trading on July 23, four months after the asset sale. V3 had already “…opened a securities account with a brokerage firm which is capable of selling the stock in a rational manner to maximize its value and to avoid depressing the price. Sales should be under way by the second week in August.”

But soon after this letter was sent, one of Sphere 3D’s directors and lawyer, Jason Meretsky (also a director of the ignominious Biosign Technologies), threw a wrench into V3’s best laid plans. According to a statement by one of V3 Systems’ lawyers, Jeffrey Shields (Shields Statement, Page 4), S3D refused to allow the legend on their share certificate to be lifted following expiration of the four month hold period. The objection “was made by Jason Meretsky, through an email to the transfer agent dated July 31, 2014.” This came as a shock to V3 Systems as they understood the selling restriction was to last only four months. We don’t think this was an unreasonable position given that S3D itself gave four months as the hold period in the press release announcing the acquisition.

Shields’ statement continued: “While V3 takes issue with S3D’s motives and good faith in making the objection, nevertheless the legend has not been lifted and V3 has not sold any of its shares and cannot do so until the legend is lifted, probably after the US restricted period.” Essentially, V3 was under the impression (based on their agreement) that S3D would allow V3 to take advantage of the Regulation S/Rule 904 exemption allowing them to sell restricted securities after four months as opposed to six months as prescribed by US Rule 144. But, knowing of V3 Systems’ dire financial situation, S3D knew that it was in no position to take legal action. As it were, S3D seems to have promised V3 liquidity by July 23 and taken that away at the last minute. Tough break guys.

Regardless, the six month hold period ended on September 23rd. One final roadblock was raised by Michael Anderer, a former business partner of the V3 Systems’ founders. He has been suing V3 and its directors for over a year claiming monies owed. The court filings (Anderer Ammended Complaint ) associated with this proceeding have provided much of the background for this post: all the gory details of V3’s failure as a business, its distressed sale to S3D and subsequent manoeuvrings have been found in its pages. Most recently, Anderer filed a request for a temporary restraining order against V3 Systems (TRO Request) – preventing its management from proceeding with the plan to sell V3’s remaining asset: S3D shares.  We don’t believe this injunction has been successful. But even if it is, it appears that this will only delay the inevitable (distressed) selling of S3D shares.

So here we are: V3 Systems, a company in liquidation, with millions of dollars in unpaid bills, is about to begin selling its only assets: S3D shares. S3D management has delayed this moment for as long as they could but their time appears to be up.

Along with the 1.2mm shares issued in S3D’s last bought deal that will become free-trading on October 6th (which should have been unrestricted several months ago had management filed their paperwork correctly) there may be a great deal of stock hitting the market. Current shareholders may want to take note of this dynamic, or at the very least peruse some of Anderer documents (a full listing is available here). A quick glance at Sphere’s website shows how important the V3 acquisition has been to their business – understanding its history is in our opinion, critical due diligence. And finally, shareholders should ask themselves: why did S3D management go to such lengths on two separate occasions to maintain selling restrictions on its own stock?

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Peter Tassiopoulos and Nova Growth

In 1996, Nova Growth Corp. (NGCO) was a shell company trading on the lowly Canadian Dealer Network, a defunct OTC market for unlisted securities. NGCO was taken over by Brian Hamm, and within weeks began issuing press releases announcing the acquisition of various gaming/casino projects owned by Andrzej Kepinski.   The stock soared from pennies to the $6 area in a matter of months, but the company never actually closed any acquisitions despite a series of upbeat PR’s, and returned to pennies within two years. Hamm and Kepinski suffered a major falling out, eventually ending up in a court case that spanned two decades. Here’s where it gets interesting: recent court documents reveal the central role that Sphere 3D CEO, Peter Tassiopoulos, played in this financial quagmire.

In summary, a judgement released last month covering hearings this spring show that Marco Durante (also involved with Koda Resources and Playandwin) and Tassiopoulos were promoters of Nova Growth and central figures in the dispute. Tassiopoulos “acted as market maker” (Paragraph 99), was issued options at $.15 and warrants at $.75 (101), and personally profited to the tune of at least $500,000 (102). He acted as the investor relations contact, traveled and conducted business on the company’s behalf (262, 266), and simultaneously sold shares into the whisper campaign of alleged casino developments (101, 276-281).

Court documents bring into question the testimony of Tassioupoulos.  Justice Newbould felt that his testimony was “…in large part reconstruction” (99), “suffered from overstatement” (103) and needed to be considered “with caution” (106).   Furthermore, in a classic Catch 22, the judge states that “If Mr. Tassiopoulos and Mr. Durante are to be believed, these trades were based on inside information which Mr. Tassiopoulos and Mr. Durante had to know was illegal.” (102)

Tassiopoulos’ role took a turn for the sinister as the Nova Growth dispute reached a crescendo: “Mr. Kepinski testified that on the day after his resignation letter, Mr. Tassiopoulos, Mr. Hamm and a burly man came to his office…(where they) went to the filing cabinet and took files and some boxes, including his personal documents such as tax returns and documents of A. Kepinski & Associates that he has not recovered. They also took privileged documents.” (301)

Justice Newbould’s entire ruling can be studied here.  It includes a full chronology of the case for more interested readers (including a brief appearance by Sphere 3D director, Jason Meretsky). Those concerned only with Tassiopoulos’ role will find 73 references to the Sphere 3D CEO.

 

How much stock do Sphere 3D founders own?

In our last post we discussed the undisclosed sale of 300,000 shares by Sphere 3D’s co-founder, Giovanni Morelli.  In a recent tweet Peter Bookman, the co-founder of V3 Systems and current Head of Global Strategy and Chief Marketing Officer at Sphere 3D, said that even after the Morelli stock sale Sphere 3D is still  “40% still owned by founders ;)”.

BookmanTwitter

We find that comment quite interesting, given the fact that the two acknowledged founders, namely Mario Biasini and Giovanni Morelli, are on record as owning only about four million shares between them:

Mario Biasini                      2,746,429

Giovanni Morelli                 1,228,571

Total                                     3,975,000

You will recall that Peter Tassiopoulos is not a founder, according to filings, but has referred to himself as such, discussed here.

So let’s consider him a founder with 100,000 shares bringing the total to 4,075,000.  There were 23,268,935 Sphere 3D shares outstanding according to the most recent AGM filing.   By our calculation and based on disclosed positions, founders control 17.5% of the shares.  If Mr. Bookman’s comment was accurate, founders would need to be in control of a further 5 million shares to reach the 40% level.

Did Mr. Bookman make a simple mistake in his tweet?

Are there other undisclosed founders?  Recall that anyone owning more than 10% of Sphere 3D stock would have been required to disclose this ownership.  At the time of listing that would have amounted to about 1.5M shares.

Would the 5 million undeclared founders shares just happen to be the $.005 shares that were sold to undisclosed subscribers on the same day that Sphere 3D acquired its Glassware 2.0 technology from Promotion Depot?

Shouldn’t the full 40% founder share position (taking the Bookman tweet at face value) be filed with the regulators?

One might want to recall that the OSC requires insiders to report ownership and transactions not just in shares they own directly, but, “any … control or direction over, securities of the reporting issuer,” as outlined here.

For the record, we take no further issue with Mr. Bookman, and acknowledge that he is an established and successful technology player in the VDI space. In fact, we think that Biasini, Morelli, and Tassiopoulos made a smart move to bring him and his company into the Sphere 3D fold, thereby giving their story credibility.

Co-Founder of Sphere 3D sells 300,000 shares

Following the standard stock promotion script we have observed countless times in the past, we can now add insider sales as an important reason for investors to be concerned about their die-hard commitment to Sphere 3d.  Based on filings, John Morelli, the co-founder, former CTO and director (he resigned on March 6) of Sphere 3D, has sold 300,000 shares.  More importantly, it is quite clear that there has been a violation of securities rules in the process.  Let’s start with the sales:

1) Sphere 3D’s listing document, from December 2012 gave Morelli’s stake in Sphere 3D at 1,528,571 shares.

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2) Morelli’s only insider filing since then was a September 16, 2013 statement that he had received 50,000 options as director compensation. (screenshot from sedi.ca)

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3) On Friday, May 30th, Sphere 3D filed irrevocable proxies (giving Sphere 3D the right to vote their shares in favor of the Overland Storage merger) for each member of its board of directors and Giovanni Morelli. It states that he owned 1,228,571, or 300,000 shares less.

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One wonders why the founder and technology “guru”, as he has been referred to by a certain stock tout letter, would be selling stock in this alleged transformational company.  In any event, his selling is a likely answer to a question we have had for some time: why have there been reported marker sellers in Sphere stock (a total of 162,300 starting on January 2, 2014 according to INK Research) with no follow-up insider sales reports?  There are no satisfactory answers to this question.  If indeed it was Morelli, then he broke securities laws by not reporting sales while he was still a director.  And if it wasn’t him, then exactly who was it, and why are those sales not being reported?  As the OSC website states:

What are the deadlines for filing an insider report?

A reporting insider is generally required to file an initial insider report within 10 calendar days of becoming a reporting insider. Any subsequent insider reports reflecting changes in their holdings must be filed within five calendar days. See here.

We think Sphere shareholders should be asking:

1)  Why did Morelli sell 300,000 shares?

2)  When did he sell those shares?

3)  He can now sell without reporting.  Was this the primary reason that the founding visionary left the board?

4)  If it wasn’t him selling, who was it, and why have there been no insider reports filed?

Questions (2) and (4) should be of interest to the regulators.

What is a Microvisor ANYway?

Sphere 3D described its Glassware 2.0 technology in its April 3, 2014 press release as follows:

“Glassware 2.0™ is a platform that was designed utilizing a proprietary microvisor and revolutionary topology to achieve application virtualization in the most demanding of circumstances. Utilized in conjunction with hypervisor-based virtualization deployments, it enables true end-to-end virtualization of physical infrastructure.”

And in its Annual MD&A:

“Over the last five years, Sphere 3D has designed a proprietary platform, namely Glassware 2.0™, for the delivery of applications from a server-based computing architecture. The Company has taken a unique approach in that it has built its technology platform without the use of a hypervisor and instead has designed its own microvisor.”

So what’s the issue with their use of the term microvisor (emphasis ours)?  If you go back through Sphere 3D’s previous press releases, financial statements, presentations, and listing applications over the last year and a half you can’t find a single mention of microvisor in any of them. That’s right, the very core of Sphere 3D’s Glassware 2.0 technology wasn’t mentioned until about a month ago. Doesn’t that seem odd?

So what is a “microvisor”? The term has been used by the companies Bromium  and General Dynamics.   Bromium describes their microvisor in this whitepaper  as a “small, security-focused hypervisor” used to isolate operating systems from potential attacks. Bromium even attempted to trademark the term (although the application was eventually abandoned).   General Dynamics’ version is used in mobile phones as described here.   They have not, as far as we know, attempted to trademark the term.

So there you go, Sphere 3D’s Glassware 2.0 product was designed utilizing a proprietary microvisor, a term used by only two other companies (one of which attempted to trademark it). One is for virus protection and the other is for mobile phones. Bromium and General Dynamics provide extensive documentation as to what their product does, how it works, and what it is used for. As usual, Sphere 3D’s documentation is a little less in depth. It consists of two sentences across a press release and Annual MD&A released in the last month.

Finally, given the focus both Bromium and General Dynamics’ microvisors place on security we were surprised to see the following disclosure in Sphere 3D’s latest “risk factors”:

“Plans of Sphere 3D for implementing its business strategy and achieving profitability are based upon the experience, judgment and assumptions of its key management personnel, and upon available information concerning the communications and technology industries. Management does not have experience in the anti-virus industry. If management’s assumptions prove to be incorrect, Sphere 3D will not be successful in establishing its technology business.”

Emphasis ours.

Peter T. and the mystery half penny shares

According to this press release, Tassiopoulos joined Sphere 3D as CEO on March 4, 2013.  We see no earlier mention of his name in any company filings or pr’s. Yet, at an investor conference in early 2014 he describes himself as “the CEO and one of the original founders of Sphere 3D”  (0:50):

The original founders (as mentioned in the qualifying transaction dated December 14, 2012 for T.B. Mining Ventures/Shpere 3D merger) were Mario Biasini with 2,746,429 shares and John Morelli with 1,528,571 shares. Tassiopoulos is not listed as a shareholder, which includes “proposed directors, officers, and Insiders of the Resulting Issuer and their Associates and Affiliates as of the date of this Filing Statement”. Tassiopoulos claims to have owned just 200,000 shares when he became CEO.

We find it hard to rationalize Tassiopoulos and his self-described status as a “founder” with his small share position, and are surprised that he would be satisfied in such an inequitable arrangement with the other founders. We also notice, however, on page 30 of Sphere 3D’s 155 page filing document, that on the same day that Sphere acquired IP from Biasini’s Promotion Depot for a deemed consideration of $695,000 (1M shares at $.65) the Company also sold 7,499,900 shares for $.005 for total consideration of only $37,500. This transaction caught the eye of an editor at stockwatch.com.

We’ll avoid further speculation on who holds those shares but is it not a fair and reasonable question that Sphere shareholders ask of management?

Aside from the issue of ownership of these shares, one might also ask: Why give away 7,499,000 shares if indeed Sphere had just come into possession of a ground-breaking technology?

Peter Tassiopoulos Part 3

In this post we examine his role with Biosign Technologies (BIO.V $.04), a highly promotional TSX Venture Company that ended in disaster for shareholders.

2009 – 2011 Biosign Technologies

Biosign LinkIn

The travails of Biosign are told well elsewhere.  Needless to say it was not a pretty story. The Company issued dozens of press releases which are included at the end of this post announcing a myriad of international deals over a period of nearly two years (coinciding with Tassiopoulos’ employment) that amounted to nothing but massive losses for shareholders that bought into the hype.

Tassiopoulos’ “version” of this history (as described on his LinkedIn page) differs materially from reality in several ways:

“TORONTO, April 19 /CNW/ – During a scheduled meeting yesterday, the board of directors of Biosign Technologies (TSXV: BIO) has accepted the resignation of Alfonse D’Amato as director of the company, relieved Peter Tassiopoulos of his duties as CEO, and resolved to start searching for a new chief executive.

Radu Leca, Biosign’s President, has been named CEO on an interim basis.”

Biosign, despite trading at a peak near $3/sh in February 2011, now trades for pennies. Is it possible that Tassiopoulos did everything right and was forced out by an incompetent board? Sure, you can believe that if you want. But if Tassiopoulos himself isn’t willing to tell current Sphere 3D shareholders (and journalists) the real story of what happened at Biosign, how likely does that really sound?

 

Conclusion

Since 1995 Peter Tassiopoulos has been involved with stock promoters, stock promotions, a bankrupt electronics manufacturer, a failed shell company, a bankrupt health care technology company, and a stock promotion and failed technology company. He has misrepresented his past on several occasions and repeatedly made big promises while failing to deliver actual results. Take a read through the Biosign press releases issued while he was with the Company. Now compare their content and tone to those released by Sphere 3D over the last 18 months.

Maybe Sphere 3D is the venture that finally works for Tassiopoulos. We doubt it.


Biosign press releases

Below are links to the majority of Biosign Technology press releases issued during Peter Tassiopoulos’ employment with the company. Occasional comments, excerpts, or summaries are included.

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