Good morning. My name is Pat [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to Sphere 3D's Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Lauren [ph], you may begin your conference.

Thank you, operator and good morning everyone and thank you for joining me on Sphere 3D's earnings conference call for the third quarter of 2015. With me on the call today are Eric Kelly, Chairman and Chief Executive Officer; Kurt Kalbfleisch, our Chief Financial Officer; and Peter Tassiopoulos, our Vice Chairman and President. Prior to the call we released our Q3 2015 earnings release over the wire posted on our website at investors.sphere3d.com and filed with the SEC on Form 6-K. This call is also available as a webcast and a replay is available on the Investor Relations website of our website for 30 days. Before we begin, I would also like to note that management during the course of our discussion today including the Q&A section of this call, will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may discuss future plans and prospects for revenue, product introductions, market conditions, competitive conditions, gross profit margins, spending levels, other financial metrics and our relationships with third parties. We caution you that forward-looking statements related to these and other subjects we may discuss involve risks, uncertainties and information that are difficult to predict and are not guaranties of performance and the company's actual results could differ materially from those contained in such statements. There are many factures that could cause or contribute to such differences. We refer you to the risk factors and cautionary language contained in today's press release announcing Sphere 3D's results as well as the company's financial filings with the securities and exchange commission including the risk factors, management's discussion and announcements of other sections of the company's periodical report currently on file with the SEC. We remind you that the company's forward-looking statements are based on current expectations and speak only as of this date. Sphere 3D undertakes no obligation to publicly update any forward-looking statements to refer to new information, events or circumstances after the date of this release and conference call. And with that, I will turn the call over to Sphere 3D's CEO, Eric Kelly. Please go ahead, Eric.

Thank you, Lauren and good morning everyone and thank you for joining us today. During this call, I am excited to share with you the industry trends and the thesis why and how we got here, our vision and business strategy, our key partnerships and the progress we have made towards our key initiatives and milestones. First, let me start by saying what we are focused on achieving and what drives us on a daily basis. There are hundreds of billions of dollars spent on shrink wrapped software every year that will be migrating to the cloud and needs to maintain access to the data that makes the software usable. We assembled the technology stack from end-to-end to accomplish that. It is driven in the front end by our Glassware Container technology. This new and innovative approach to application delivery makes cloud migration for software truly attainable. On the back end we have our own operating systems for storage which came from the acquisition of Overland and has allowed us to create a pure, virtual storage solution in our cloud that innovates [ph] with our container technology. We are initially focused on Microsoft bundled applications from the last 20 years, primarily because there are significant opportunities to address that the shortcomings of our competitor technologies cannot. They can't either support desktop applications or can't provide them economically. I'd add that these applications make up approximately 90% of the total end user application market. A simple exercise of validating the demand can be found by taking a look at Microsoft Azure's results. They are adding over 90,000 Azure customers per month, most of them are taking some of their on-premise software and moving it to the cloud. Lastly, to create greater value and flexibility for us customers we partner with Microsoft…

Thank you Eric, good morning everyone. Let me provide some detail on our financial results for the third quarter. Please note, the following financial highlights reflect the addition of the Overland business and operations for the full three months as well as the addition of the RDX products acquired August 10 for the partial quarter. Total revenue for the third quarter of 2015 was $18.8 million up from $18.4 million in the second quarter 2015 and $1.5 million in the same quarter of 2014. OEM revenue for the quarter was $3 million up from $2.7 million in the preceding quarter with branded product revenue of $13.1 million up from $12.9 million in the second quarter. Work-in-service revenue was $2.7million in the third quarter compared to $2.8 million in the second quarter 2015 and $0.2 million in same quarter of 2014. Regionally the branded product revenue was 14% in APAC, 27% in the Americas and 59% in EMEA. As Eric mentioned in his remarks, there was a continued reduction OEM shipments during the third quarter from our historically largest OEM which we believe was due primarily to their ongoing company transitions of splitting their business into two separate entities. This reduction in shipments during the third quarter was $1.3 million or 69% lower when compared to the second quarter. While we expected reduced revenue from the this OEM customer in the third quarter the amount of the reduction was larger than forecast. We have however, already seen recovery in the fourth quarter and as of today bookings for this customer in Q4 are well ahead of the same point in Q3. We expect to see this OEM customer’s volume increase during Q4 and move back towards their historical run-rate in the first half of 2016. This shortfall was offset during the…

Thank you, Kurt. Good morning everyone. For those of you that have either participated in our call from the past or reviewed some of the transcripts from previous quarterly calls, you know that I spend a fair bit of time covering our technology accomplishment on these calls. Today, I’m going to touch a little less on that and instead try to give you an idea of some of the opportunities that we're working on and how this tech is actually creating opportunities for the company. So first off our technology starts upwards of the opportunity work with some of the stalwarts of IT. For example, let's take a look at some of the progress we have made from the collaboration with Microsoft. I’d like to take a minute to convey the significant milestones we have achieved with our first cloud partner. First off we launched our enterprise version of Glassware 2.0 which we branded as Exosphere as well as our cloud based network attached story technology called SnapCLOUD. As Eric alluded to earlier in the call, another innovation of Glassware available through Azure’s marketplace will be up sometime next week, I believe the week of the 23. By moving to Azure, first we benefit from a product that has invested many billions of dollars to create their data centers, but what’s even more important, Microsoft is the leader in software applications, everything from office suite to databases and we are the only partner with applications containerization technology that can deliver this packet when those software and Non-Windows applications as well as enterprise feature virtual storage from Microsoft Azure cloud today. We are leveraging their cloud infrastructure, their sales force and marketing power to drive our business. We can now provide multi-tenanted applications on a consumption basis globally and with the…

[Operator Instructions] Your first question comes from Krishna Shankar from Roth Capital. Your line is open.

Yes, can you give us some sense for how these design wins are going to transmit to revenues over the next few quarters, especially they could mean both your healthcare and the Texas education design win and some of the other wins that you have at Microsoft Azure, can you give us some sense for the cadence of all revenues are going ramp for the next few quarters.

Hey, Krishna. This is Eric, good morning.

Hi Eric, how are you.

Great, thanks for getting up so earlier this morning. Yes, so if you looked kind of the and Peter said kind of briefly, if you look at the wins that we have got with let's say ESC6 or iPro, iPro, is a three-year deal where they have over 300 healthcare facilities. They have decided to put that our product, our virtualization product in 200 of their facilities to start and that represents a little over $13 million win for us over three years. One of the things that we are looking at is how do we accelerate that just by adjusting them by going from location to location. The other one which we are excited about Krishna, is that ESC6, one with the school region in Texas where they have about 1.1 million students and we signed an agreement with them, not only are they are deploying it within their region, but they are now we have a partnership with them where they are actually developing at throughout Texas where they have a little over 5 million students. Again, just a 20% adoption rate with that one Krishna, represents over $20 million over the next three years. So, again, as you look at where we are deploying our resources really making sure we support them and try to accelerate that from three years to less than three-year implementation. So, when I look at it over, kind of product a timeframe it is easy for me to pencil in quarter-by-quarter. Depends on how quickly we can move through the installation. So, the great news is we already have the contracts, now the execution and implementation by our services and support team. I don’t know if that…

Yes, that's helpful and then, Peter you have talked about the other wins at ISVs, can you talk about how some of the new ISVs and software companies that you are looking at when will those translate to revenues in terms of SaaS models?

Yes, absolutely Krishna, as you know, I mean the beautiful thing about the cloud from a user perspective is the consumption model. With any consumption model it is not front-end loaded right, so it’s takes time to build. We have been working with a couple of ISV's. I mean one of which from back I guess a year ago has gone out and looked that every cloud provider and when they looked at our literally pennies per user per hour, I mean there is nothing that can go near it. And so, we believe that that will start to contribute if not later this quarter definitely in the first quarter of 2016, in the sense of building it when again with the recurring revenue model as it build it is the business you want to be in but it does take a little bit of time if it is not front end loaded. And we do have a number of customers that are hybrid based which will see EMEA [ph] revenue impact when they buy the appliance for the local side and then again continue to see build up as they take the consumption side of the cloud and marry the two together.

And have you gotten the revenues for the SnapCLOUD initiative already, is SnapCLOUD starting to get revenues now?

Yes, Krishna yes it has. The good thing about the SnapCLOUD is we're really leveraging the SnapServer installed base and we launched that a couple of weeks ago. And I can tell you that the adoption rate is exceeding our internal expectations in terms of customers that already have our SnapServers on-premise looking for a way to either have it, that recovery or a backup solution in the Microsoft Azure cloud. So it's working just as we had anticipated hoped. The other thing just to add what Peter was saying to help accelerate some of the programs we have, we just launched a leasing program with NEC for North America. So now allows the large deal that we put together to have them - have a different financial structure, so they actually can do implementations a lot faster. So I mean, the combination of that, the combination of the SnapCLOUD and the traction we are getting we are pretty getting excited about. As Peter said, as a consumption model that is a brick by brick revenue stream. So yes, so that’s thanks for the question, I appreciate it.

Okay and then Kurt, given that you expect this large customer OEM after the restructuring to come back you've seen a pickup of others, would expect their revenues to grow sequentially and for Sphere 3D as a whole would you expect sequential growth in the revenues in the December quarter?

Yes, Krishna, I think the large OEM that we referenced obviously that $1.3 million reduction was significant in the quarter. But as I stated we’ve already seen recovery this quarter, so yes I do expect them to start coming back sequentially and we do expect to see benefit this quarter from that, so we do expect to see some growth.

And then gross margins were kind of depressed in the September quarter, what will be the trajectory of gross margins for December?

We do expect to see some recovering gross margins. The impact to gross margins was primarily associated with the acquired RDX business and warehousing costs associated with that during the quarter.

Okay and any significant changes to OpEx relative to Q3?

Not relative to Q3. During the Q2 call we laid out some targets that we felt we'd reach by Q4. We actually reach those in Q3 and I do not expect significant changes to the OpEx number in Q4.

Okay and then can you talk about the cash burn, what do you expect in Q4 and both the line of credit and the debt when that is due and just give us an update on the balance sheet.

Yes, in regards to the cash burn we were better this quarter in regards to the cash that we used in operation significantly better than prior quarter. I think we will be in that range in Q4 with continued improvement going forward from there. As far as the debt currently, we have $10.3 million on our current debt that’s split with $5 million on the one revolver and $5.3 million with Silicon Valley Bank. As you will recall, that, that revolver is actually $10 million revolver that we have $5 million drawn on with FBC.

Okay and the convert note?

I’m sorry what?

You also have the convert note right?

Yes, the convert note is still out there, it is due at the end of March in 2018.

March 2018, okay. Got it. Thank you.

Your next question comes from the line of Hubert Mak, Cormark. Your line is open.

Hi, guys, yes, what I think I guess this I a bit challenging in terms of just regarding I saw your sales pipeline, where you revenue is just going to grow next year and also as we enter into Q4. So is there any way like you can quantify sort of sales pipeline for us whether or how many deals or how many deals or how many deals are close to signing that you think are over the next sort of six to 12 months and maybe you can quantify you are here to kind of give us a sense of how things are progressing as you guys roll out these integrated technologies here? And then secondly, just a follow-up on that as well as in terms of the revenue that impact on OEM, what was the cumulative impact on a quarterly basis that you would expect to be picked up? I guess I’m just trying to just figure out what is sort of the one-time quarterly pick up that we think we get to?

So Kurt, why don’t you just take the lead and I'll follow-up I guess?

Yes related to the OEM revenue as we stated there were two primary things on the revenue side, we specifically stated that we’re going to exit some of the low margin non-core businesses, the number on that was $1 million in reduction on our non-core business with the majority of that being related to tech media [ph] which is low margin to which we’re making a strategic decision to exit. In regards to the OEM customers I'd say we expect to see pickup this quarter and back to expected run rate in 2016, but I don’t want to specifically quantify how much of that $1.3 million we'll get back, but I do expect to see progress with that building back up. In specifics to areas you can see the 17% growth quarter-over-quarter in disk systems and that’s where we expect to see the growth going forward is related to that disk systems offerings.

Sorry, I just want to jump in there, so you talked about $1.3 million reduction this quarter and I think you guys also had a Q2 impact as well. So like was it minimal in Q2 or is that similar sort of magnitude?

It wasn’t of that magnitude. I don’t think we disclosed the specifics, but it was about 30% of that reduction in Q2 and so Q3 was the significant reduction, but like I said we are already seeing that recover and we expect to see some recovery in this quarter and back to historical run rates in the first half of 2016.

And I just want to jump in one more time in this non-core revenue is that complete, like do you see any more, you guys will be shedding?

There may be some shedding on a quarter-to-quarter basis, for the most part tape automation and some of those higher margin products on those will remain steady, we expected to remain steady but we do expect to continue to shed of the lower margin businesses as appropriate as the other areas of the business continue to grow.

Okay. And I guess on the sales pipeline, I think Peter I’m not sure we are going to talk about that.

Hi this is Eric, hi Hubert how are you doing?

Okay good.

So we don’t really forecast our sales pipeline, but I can’t kind of give you put some context to the pipeline. I mean what we’re seeing now is much larger deals because we’re selling solution versus disk [ph] products. We’re seeing with the partners over at Microsoft clearly build that we probably wouldn’t foresee ourselves, the partnership is working extremely well. So it’s growing and the key areas that we’re focused on are virtualization products, our storage products and you kind of see in that reflected in the numbers but we don’t really give guidance on pipelines, but hopefully that answers your question Hubert.

Yes and maybe just – maybe another way of asking, you announced two deals in that $13 million to $20 million range or couple of years, are those types of deals, are these larger deals or these are be in size, I'm just trying to get what type of deals are they.

Hubert it is Peter. I mean it’s all over the map. We’ve seen everything from deals that have been locations to companies who spent 1 or 200 locations to companies who spent $300 million on just building their app that are looking for a way to get to the cloud or we see everything in between. So it’s pretty hard to quantify the key is though we didn’t see these six months or eight months ago. We didn’t see this range that’s sort of new to us because these deals are big and quite frankly we’ve added some new skill over the last quarter to manage that kind of business. So we’re pretty excited to answer your question directly, the one way of seeing that we’ve announced those are now turning into the midrange, whereas originally we are looking at those, that the large ones that are actually now in the middle of the path.

And based on these deals are growing in size and sounds like you've got more solutions from a technology standpoint I know either there always comes in improvements in R&D, but always you guys have companies combined together a resort of close like pretty much complete in terms of the technology stock or you it’s kind of go and sell one solutions with all different products?

Yes, so I think a follow up from Kurt from last quarter you have mentioned that R&D we see some reduction from the synergies between the two companies, so which we did from last quarter and this quarter. So, from an R&D perspective it’s not as exploratory as it was. The lot of the R&D is actually specific to customer requests now. And so the product is pretty backed as we have mentioned Glassware in market place is staged, certified and so it’s ready to go. Exosphere is already up and so, it’s fully baked. The appliances are up Hubert, I don’t know if know, but we did an install where we actually taped that wire so short simple it is. So, it’s there – it’s backed, of course we're - is always going to be improving it. As SnapCLOUD and also our SnapScale products we are always going to be improving, but for the most part I mean we have got some solid products there already to be in the field which took a little longer than they would like, but they are gone.

Okay, just two more questions just on the Microsoft, are you looking with an idea how much resources they are putting behind your partnership, just so that we can get feel of how aggressive they are?

Well thank you, I mean trials yes the Microsoft executive team all the way through their sales and marketing teams, they have put in a tremendous amount of resources behind what we are doing basically as a strategic move for them in terms of enable their customers to migrate from on premise to the cloud. But a good example of that Hubert is just what we did 30 days ago. When we did the October 15th announcement that has their worldwide sales team and their key partners being introduced to the products, being trained other products we are follow on these after that, we are - our sales teams, their marketing teams, their executive team are working hand-in-hand to just drive the business. So, their – I couldn't add pretty more resources that they are providing us. So, I am extremely pleased with that kind of partnership that we have.

And I would like to add to that Hubert we have multiple levels of engaging with them. Right, when their part of inline side, we have even a better relationship we have the Azure place. So, this multiple agreements we are working with so many different profits so that I think it’s really important that everybody understand this is not intact in the iTunes App store whatever that’s not what we do. I mean we are really are putting our tech into the Microsoft tech for everybody to actually able to be utilize. So, it’s pretty in that.

Okay, great and then just on the OpEx guys want to clarify one thing here in terms of you are talking about $4 million in cost savings for 2016 and that sounds like that you've picked up some Q3 was the full amount realized in the Q3 or is there still some directory in Q4.

We are very close to realizing the target and I think we have stayed in between 8% and 12% and we have actually achieved a little over 13%, almost 14% in that reduction. Obviously, there is a little bit of flux quarter-to-quarter but for the most part we have – we have been able to hit that target. Having said that, we are reviewing and looking at our spending to make sure that we are spending the dollars in the best possible way and monitoring that spending.

So, there is still more flexibility on the OpEx?

I think we are continuing monitoring it, and I don’t want to put another target out there at this time for additional reduction. And I think we have over achieved the one that we had put out there with your coupled where it is right now was your coupled where is right put out there we are feel comfortable where it is right now.

Okay, great. Thanks.

Your next question comes from the line of Scott Shafer [ph] Private Investor. Your line is open.

Hey, guys can you elaborate a bit on the different between Exosphere and Glassware in market place like who, what each product is for, who each we marketed too and by whom.

Yeah, sure Scott it’s Peter. Thank you, great questions. So, let me start off by just what Exosphere is. Exosphere is actually how we started. We sort of code named it internally as routing [ph], but Exosphere is how we started. It is a highly distributed solution where there is a number of components to it. So you have different size virtual machines inside of Azure running different parts of the overall workflow within your solution. And you can even have connections to others like Rackspace or Amazon. So you can actually fire up other data centers to work along with your core data center. And it is really designed for large deployments. Right? We were able to stand up an infrastructure for 10,000 users in two weeks and which is not heard of, but it does require certain technical sophistication to do it. It is not something - it is not pushing a button. Glassware coming in at the marketplace, that's pushing a button. All those little micro small virtual servers that are located and spread out in Exosphere, they are shrunk down into one package so that you can go online, go into their store, pull the image, go download your client from one of the app stores whoever it is, put in the address for your virtual machine and connect to that virtual machine in Azure. So it is more geared towards, and I wouldn’t say necessarily it is small medium businesses because that is not the only target, because it can't do thousands of users, it is actually geared towards a more simple approach, less distributed, but can also cater for somebody who just needs access. I mean if you needed access to Microsoft Office for the weekend, you could literally turnaround and fire up for a weekend. And in terms of Glassware remove everything and in about half an hour into the cloud and then come back and turn it off on Monday. Right? So it is two different sort of market use cases and the bigger difference between the two is really scale and flexibility as well as the amount of specification you need to actually run.

Okay, who or how it will be marketed and by whom? How the product will be marketed and by whom?

Well absolutely, so both products are done jointly between us and Microsoft. And so this is again to be very, very clear and I've heard these questions from a couple of other shareholders, I'll be as clear as I can, they are out marketing this think in many cases without us and they are patrolling leads over the fence saying, hey guys here is what I have come across, can you help, et cetera, et cetera, et cetera. So their sales force is working this. Understand this is an Azure and I cannot speak to this, but from outside looking in if you look at all the push they've put on Azure, this is a major initiative for them, their cloud and that's why they grew I think 130% quarter-over-quarter last quarter. So they are definitely incentivized to go out there and this gives them a huge advantage over whomever else is out there right now when it comes to applications. I mean where we can deliver stuff no one else can and their sales folks know it, so they are in the front line.

They took the just to add to that, I mean I wouldn’t look at it, when I know their sales teams are compensated. Compensation plans are in line with our compensation plans and I know that they are focused.

Okay, so can you give me an example of how just something that's simple like we are perfect, how will it be used in marketplace, I would like to know that, if I want to use Exosphere, using Exosphere that way.

So well, I mean, I'll put it this way, if you were Corel [ph] or if you were a large employer with 20,000 or 50,000 or 80,000 workers you would probably deploy Word Perfect in Exosphere. And if you were the bank that we installed last week, you'd go to marketplace. And that would be the biggest difference, because Exosphere is network aware. Right? So Exosphere will literally switch from carrier to carrier. It will fire up backup instances without you getting involved. It is designed to literally deliver the world's software from the cloud. I mean it is a very unique application delivery platform.

Okay, how does that compared as far as the pennies per hour, what's the difference?

The cost efficiencies in both, that's a great questions Scott. They actually both perform when it comes to reducing the costs. We say penny per hour, it is penny per hour for Exosphere, pennies per hour for Azure marketplace [ph].

Okay, one last question, GPU we've been hearing about this for six weeks now. We are due to hear something formal about this. One is this, which we…?

So we do have a small GPU sitting in the GW2000. We do have a version which actually is in the field with is based on Dell hardware, the whole GPU access. So that's in the market and in the market and is available for sale today. We will support GPUs in the Azure cloud as soon as Microsoft releases that which I believe is Q1 2016. I think it is in pre-release today, no one quote me on that, but whenever it is available, it is available for us in the interim Exosphere can access GPU from appliances in other data centers so that you can actually deploy it today. In case of any hiccups with Azure it won't affect our ability to land GPU requirements from customers.

Okay, so with Exosphere you could actually virtualize the GPU application today?

No problem.

Okay.

Now, I believe we have to finish before the markets open, so I think we got like a minute.

Okay, thank you.

Thank you, Scott.

We have time for one more question from the line of Chris Wilson [ph], a Private Investor. Your line is open.

Hi guys, just real quick since you don’t have much time, I'm interested in with all the stable of products that you have brought to market or are bringing to market may revolutionary, many state-of-the-art, how does that relate to the 16,000 authorized resellers that you've got in your channel right now? Is there, are they aware of these products and if so, at what point are they going to start putting some numbers up?

So Chris, we've done it in stages, I mean, those are huge channels, but at the same time they are not actually all skilled or even interested to move to the virtualization portfolio. So we do have a number of that obviously are and so we started the process of training and introducing it. We've got a few, as always we've got a few great customers or partners that have signed up for it and we will continue to do that, but we expect putting up some numbers on the board for us, right. We did start in North America first. We'll work our way from there into Europe and then the rest of the world after that. So we'll do it in stages right? I mean we've got a great new skill set again supporting them all and we've got to do this little by little. We can't do them all at once.

Okay, thank you.

Thank you, Chris. And with that, operator I think we will have to wrap up the call.

Well, turning the call back to management for closing remarks.

First, I would like to thank everyone for joining the call today. I think you can hopefully hear from us our assignment that we are very pleased with the execution that we've been achieving and becoming the premier cloud infrastructure company. The partnership that we have we've talked a lot about Microsoft and we have other partnerships with companies like VMware, I mean our channel partnerships, our key partners Tech Data, et cetera are all being brought up to speed and supporting our vision and delivering our cloud infrastructure, specifically our virtualization and storage platforms. So with that, I look forward to updating everyone on our progress in the future and operator I'd like to conclude the call.

This concludes today's conference call. You may now disconnect. Thank you.