Running Near Empty, Overland Storage May Be a Sign of The Times

12/3/08Follow @bvbigelow

I thought it was unusual when San Diego’s Overland Storage said Friday it had closed on a $9 million receivable financing agreement. All it means is that a finance company has agreed to lend Overland immediate cash for its customers’ IOUs—like one of those “payday loan” outfits.

So I arranged to talk with Vern LoForti, who was named as Overland’s CEO in 2007 after a two-year turnaround effort derailed. Amid the broader economic downturn, there’s little doubt that Overland Storage could be a harbinger of the painful effects the credit crisis is having on IT technology companies.

“It’s been difficult,” LoForti told me. “We’ve restructured once. We brought our expenses way down. But then we got caught in the buzz saw of this downturn.”

Overland’s available cash was down to $5.4 million at the end of September, and the company said at that time it needed about $10 million to fund its operations at current levels through next September.

Trying to raise money in what may be the nation’s worst-ever credit crisis proved exceptionally difficult, which LoForti says is what led Overland to finance its domestic accounts receivables.

“We think this is a short-term solution, rather than long-term, because it is very expensive,” LoForti says. “So, difficult times, and still a ways to go.”

But LoForti says Overland Storage is far from alone in seeking such unconventional sources of short-term credit. The finance companies he met before closing Overland’s deal told him they have been overwhelmed by requests from other companies.

I’ve known LoForti for a long time. We know a lot of the same people. He was named as Overland’s CFO in 1995, about the time I moved to the business desk at The San Diego Union-Tribune, and he played a key role in Overland’s IPO in 1997. We’ve had many discussions as the tech bubble popped and as much of the IT market bypassed the tape-based data backup and archiving machines that gave the company its start in 1981.

Overland still manufacturers tape libraries and autoloaders, along with network-attached storage servers, and fibre channel storage devices. But the company set out in a new direction in October by forming a strategic alliance with Mobotix Vision Systems, which makes high-resolution camera networks that provide Internet-based video surveillance systems equipped with data archiving capabilities.

The new strategy is intriguing, but Overland still needs cash and it must overcome a variety of problems.

The company’s last financial statement, for the three months that ended Sept. 30, lays out three years’ of recurring losses, negative cash flows and other woes that “raise substantial doubt about our ability to continue as a going concern.”

The company, which has about 350 employees worldwide, also says it has to get the price of its common stock to $1 a share (or higher) for 10 consecutive business days before March 30 to maintain its listing on NASDAQ. I’ll bet a lot of those notices have been going around.

Overland’s share price was unchanged yesterday at 34 cents a share. It traded as high as $1.91 earlier this year.

The company still has other options. Management put forward a proposal for a reverse stock split for shareholders to consider at the company’s annual meeting set for Tuesday at Overland’s corporate headquarters. That could increase its share price. The company could put itself up for sale. With a market value of less than $5 million, Overland’s board also could take the company private.

Asked about that, LoForti says, “I would say the board is considering various solutions.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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