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Sphere 3D: A Ticking Time Bomb Set to Self-Destruct?

by Melissa Davis - 7/24/2014 11:48:17 AM

* Editor's Note: The following article is the latest of four investigative reports that TheStreetSweeper has published on Sphere 3D, as it continues to move forward with its ongoing investigation of the company. TheStreetSweeper plans to share any major, new discoveries that it uncovers during the course of the research process.

Sphere 3D (Nasdaq: ANY; TSXV: ANY.V) can thank a former regulatory target with a lousy trading record for much of the buying pressure that has allowed its highflying stock to resist the pesky forces of gravity.

With Sphere 3D ranking as a standout performer in the miserable portfolio that determines the size of his annual bonus, Pinetree Capital CEO Sheldon Inwentash has repeatedly stepped forward to bolster the value of that risky investment by purchasing much of the stock that others have understandably chosen to sell. Just go back a few weeks ago for a particularly striking example. When TheStreetSweeper published the latest in a string of disturbing reports on Sphere 3D earlier this month, Inwentash responded by purchasing so much stock that he literally wound up buying more than half of all the shares that changed hands on the open market that day. (The next section of this report presents a full account of those trades in graphic detail.)

A former penny stock that barely topped the 50-cent mark as recently as last summer, Sphere 3D rocketed all the way to a record-breaking high above $11 a share with the help of that powerful buying spree.

Sphere 3D better hope that it fares a whole lot better than most of the other stocks that Inwentash has purchased after Pinetree blew millions on their ill-fated shares, however. Just look at the dismal performance of the investments that cost Pinetree the most. Even with Inwentash splurging on all of those stocks himself – often at prices well above those fetched on the open market today – most of them still trade in the low end of their 52-week range.

Check out the chart below for a vivid snapshot.

Symbol

Prices Paid by CEO

Current Price

52-Week Range

MGA.TO

$0.12 - $0.18

$0.20

$0.06 - $0.42

GCU.V 

$0.26 - $0.37

$0.33

$0.19 - $0.53

UWE.TO

$0.12 - $0.21 *

$0.11

$0.08 - $0.26

YEL.V

$0.07 - $0.13 *

$0.06

$0.06 - $0.16

MMS.TO

$0.15 - $0.31

$0.17

$0.10 - $0.35

LAC.TO

$0.25 - $0.26

$0.25

$0.19 - $0.52

KEK

$0.13 - $0.28

$0.16

$0.06 - $0.35

MGP.V

$0.08 - $0.18 *

$0.12

$0.09 - $0.27

UGD.V

$0.08 - $0.10

$0.04

$0.03 - $0.11

LAT.V 

$0.10 *

$0.18

$0.06 - $0.25

* Includes private transactions

Pinetree did not respond to questions for this story

Dangerous Firepower?

With its share price recently exploding into the double digits and its stock currently trading near the top of its 52-week range – an incredibly wide span that stretches all the way from 52 cents to $11.20 a share – Sphere 3D easily stands out as a rare winner in the crowd of losing penny stocks that Pinetree has stuffed into its scary portfolio. Unable to maintain its breathless momentum, however, Sphere 3D has finally started to display some early signs of vulnerability itself. Down almost 20% from the lofty high that it set just a few weeks ago, Sphere has fallen back into the single digits and now trades below the prices that Inwentash paid when executing all six of his last open-market trades.

Pinetree itself sure has racked up steady gains throughout that frenetic buying spree, though. Since Pinetree paid barely $5 a share for its original stake in Sphere 3D – already trading 50% higher on the day that it first announced that multimillion-dollar position – the firm has managed to practically double the value of that lucrative investment (on paper, at least), with its CEO relentlessly buying the stock and supporting its share price along the way.

Look how much of the stock Inwentash needed to buy from others willing to sell, though.

 

 

Date

Stock Price

Shares Purchased

Volume

% of Volume

March 11

$8.18 - $8.23

33,200

114,700

29%

March 12

$7.86

20,000

125,300

16%

March 13

$7.90

10,000

72,000

14%

March 17

$7.85

5,000

54,200

9.2%

March 26

$7.15 - $7.60

18,800

81,200

23%

April 1

$6.68

9,000

146,400

6.2%

April 3

$7.67

44,000

223,800

20%

April 4

$7.80 - $7.90

81,600

264,700

31%

April 7

$7.80 - $7.95

5,200

170,800

03%

April 8

$7.90

40,000

164,200

24%

April 9

$7.60

1,300

137,400

.95%

April 10

$7.73

78,200

131,200

60%

April 11

$7.74 - $7.84

27,000

73,700

37%

April 14

$7.44

104,900

892,000

12%

April 15

$6.95

5,000

263,400

1.9%

April 16

$7.30

5,500

123,300

4.5%

April 21

$8.40

3,100

102,000

03%

April 22

$8.44

11,000

127,100

8.7%

April 23

$8.43

19,900

138,500

14%

April 24

$8.82

18,100

185,600

9.8%

April 25

$9.19

8,000

219,300

3.7%

May 5 *

$8.89

55,000

208,000

26%

May 6

$9.26

9,100

81,000

11%

May 26

$9.13

3,500

21,300

16%

May 28 *

$9.30

36,500

89,600

41%

June 4

$8.64

10,000

84,100

12%

June 6

$9.06

4,900

24,800

20%

June 19

$8.02

38,100

198,300

19%

June 30

$10.85

4,600

104,900

4.4%

July 2 *

$10.95

72,700

141,900

51%

July 3

$10.76

15,000

51,400

29%

July 8

$10.46

7,000

51,300

14%

July 10

$9.94

24,100

72,400

33%

July 11

$9.71

18,700

50,000

37%

* Dates when TheStreetSweeper published articles about the company

 

Thanks to that relentless buying spree, Sphere 3D has bolstered the confidence of retail investors who feel reassured to see the CEO purchase so much of that highflying stock – without fully appreciating his likely influence on the rising share price -- and even inspired them enough to follow his potentially dangerous lead. Despite all of the losing bets that Pinetree and its leader have placed on the risky stocks in its hammered portfolio, the firm still manages to win plenty of respect from admirers who obviously never bothered to do their homework.

Take The Midas Letter, a promotional “research” publication that caters to gullible retail investors with favorable coverage of risky microcap companies. While The Midas Letter included Sphere 3D in a bullish report designed to highlight the 10 most promising Canadian technology stocks, it actually seemed rather unimpressed with the bleeding rollup company until it noticed that Pinetree had gambled a fortune on its highflying shares.  

“Frankly, I can’t understand why the valuation and its technology is esoteric, to say the least, with a value proposition that strikes me as modest at best,” The Midas Letter conceded.  “That being said, I will be conducting a CEO pod-cast with the company’s president, Peter Tassiopolous, later this week. And I’ll see if I can begin to wrap my head around what’s got Pinetree Capital sufficiently intrigued to buy 12% of the company if it exercises all options and warrants.

“To see Pinetree buying stock in the market at this high valuation is a very bullish signal in my mind,” it then concluded, “as the fund is not known for making foolish wagers.”

Talk about a generous compliment. Displaying either a remarkable level of ignorance or – even worse -- a reckless disregard for the truth, as evidenced by the figures that Pinetree has published on its own website (and TheStreetSweeper has further dissected below), The Midas Letter sure offered some rather high praise for an investment firm with such a horrible track record.

In striking contrast, The Midas Letter boldly ridiculed TheStreetSweeper after it published a well-researched investigative report on another overhyped Canadian stock that managed to stage a decent comeback (thanks to some rather curious buying pressure of its own) but has long since lost that useless war. An overhyped graphite miner that peaked at $5 a share last summer, back when Sphere 3D itself still traded as a lowly penny stock, Zenyatta (TSXV: ZEN.V) sells for less than half of that price right now.

The same critic recently blasted TheStreetSweeper after reading its latest report on Sphere 3D, too.

 

Total Meltdown

While Zenyatta has obviously endured a brutal correction, many of the companies that Pinetree owns have actually fared a whole lot worse. Of the 20 stocks that Pinetree identifies as its largest investments right, in fact, only Sphere 3D and two other companies (one of them a volatile microcap name and the other a bleeding technology firm that seems worthy of intense scrutiny, too) have managed to avoid significant losses -- most of them downright horrific -- since landing in that seemingly cursed portfolio

Look how much those big-ticket investments have plummeted in value to date.

 

 

Symbol

Initial Cost

Listed Value (March 31)

Current Estatimate (Based on recent stock prices)

Change

MGA.TO

$15 Million

$3.8 Million

$3.3  Million

- 78%

GCU.V

$13 Million

$5.8 Million

$6.3 Million

- 52%

UWE.TO

$12 Million

$4.9 Million

$3 Million

- 75%

YEL.V

$11 Million

$1.9 Million

$1.2 Million

- 89%

MMS.TO

$9.7 Million

$1.8 Million

$1.5 Million

- 85%

LAC.TO

$9.5 Million

$2.8 Million

$2.8 Million

- 71%

KEK.V

$9.2 Million

$6.7 Million

$6 Million

- 35%

MGP.V

$7.8 Million

$3.3 Million

$2 Million

- 74%

UGD.V

$7 Million

$1.7 Million

$970,000

- 86%

LAT.V

$6.9 Million

$1.8 Million

$3.6 Million

- 48%

COP.TO

$6.6 Million

$1.7 Million

$1.3 Million

- 80%

AGG.V

$6.5 Million

$2.6 Million

$2.1 Million

- 68%

PTK.V

$6.1 Million

$20 Million

$25 Million

+ 310%

ANY.V

$6 Million

$8.7 Million

$11 Million

+ 83%

AAO.V

$5.3 Million

$7.5 Million

$7 Million

+ 32%

SPI.V

$4 Million

$2.5 Million

$2.2 Million

- 45%

TLO.TO

$3.9 Million

$1.4 Million

$2 Million

- 49%

PRK.TO

$3.1 Million

$4.4 Million

$2.6 Million

- 16%

CXT.V

$3.1 Million

$1.7 Million

$1.7 Million

- 45%

INM.V

$3 Million

$1 Million

$923,000

- 69%

                                                                                                    

No wonder an astute portfolio manager has labeled Pinetree “possibly the worst closed-end fund – ever.” In a scathing review published just a few months before Pinetree announced that it had established sizable positions in both Sphere 3D and Poet Technologies (TSXV: PTK.V) – the latter since exploding into its biggest winner of all despite its total absence of revenue – that Canadian fund manager declared the firm an outright “train wreck” after scrutinizing its horrible track record.

“The company functionally operates as a closed-end fund that invests in extremely risky microcap ventures in the mining sector,” he explained last November. “I’ve analyzed this one many, many years ago and dismissed the idea for obvious reasons. Nothing much has changed since then, other than that management has blown about half-a-billion dollars. This is an accomplishment that very few non-fraud artists can claim …

“Management is entrenched in the company, and they make a pretty profit from simply being there … Suffice it to say, pulling a cool million a year out of this train wreck is rivaling what Robert Mugabe has done to Zimbabwe over the past few decades. (So) management has a clear incentive to seeing that this train wreck continues as long as possible.

“It is a million-dollar-per-year vehicle to extract capital out of unwitting investors. (But) it is clear that nobody rational would ever want to own the common shares of the business.”

 

Simmering Threat?

Sane investors might see no reason to place risky bets on Sphere 3D, either. To be sure, Cyrus Capital hardly seems inclined to follow in the footsteps of Pinetree when it soon emerges as the largest shareholder of the overvalued technology company.

If anything, in fact, Cyrus looks fare more inclined to simply dump that expensive stock and bank the hefty proceeds instead.

A fund manager that specializes in debt financing for distressed companies, Cyrus has already wound up stuck with equity in two bleeding technology firms that needed help and fell under its control. After facilitating (if not orchestrating) an overhyped merger between Sphere 3D and the second of those struggling firms, Cyrus now stands to receive a hefty 18.2% stake in the resulting companygenerously valued at a combined $265 million by the market right now – as soon as that pending transaction officially closes sometime before the current quarter draws to an end.

Still paying for an old mistake that effectively forced the firm to accept stock in a company unable to pay its debts off in cash, Cyrus has spent the better part of a decade basically recycling equity that it never really wanted in the first place. So don’t feel surprised if Cyrus jumps at the chance to sell its lucrative stake in Sphere 3D – worth a tantalizing $50 million at current market prices – when presented with such an attractive exit strategy.  

After all, Cyrus has waited an awful long time for that sort of opportunity.

Start with the original transaction that left Cyrus in control of a broke technology company. Way back in the summer of 2006, Cyrus provided the funds that allowed Tandberg to purchase fading Exabytea former highflier well past its prime – in a deal that the media would later declare a “colossal mistake.” Already vulnerable enough on its own, Tandberg sank beneath the weight of that extra burden for several years before finally spiraling into bankruptcy when it ran out of money to cover its onerous debt load.

Inheriting the mess that it helped facilitate, Cyrus spent the next three years fruitlessly waiting for Tandgerg to recover and survive on its own. Clearly out of patience by early last year, Cyrus finally gave up and arranged for Tandberg to merge with Overland Storage (Nasdaq: OVRL) – yet another bleeding technology player unable to properly support itself – in an all-stock transaction that left the firm with a controlling interest in the latter company instead.

Even without the benefit of 20/20 hindsight, some experts regarded that merger as a dangerous plan.

“The two firms are not in good shape at all,” one industry publication emphasized ahead of that deal. “Will the combination of these two old U.S. and German storage companies reverse the trend? We doubt (it).”

Cyrus never bothered to wait around for an answer. Less than six months into that challenging marriage, Cyrus fell in love with a more attractive prospect instead. Rushing to capitalize on the cozy relationship that Overland had established with Sphere 3D – a recent penny stock rapidly soaring toward double-digit territory – Cyrus threw its powerful support behind an overhyped merger that would allow the firm to swap its majority interest in Overland for a smaller, but incredibly lucrative, stake in Sphere 3d worth a whole lot more.

Talk about a clever move. Stuck with equity in cash-strapped technology companies ever since Tandberg defaulted on that $23 million loan five years earlier, Cyrus had just struck a deal that would provide the firm with a valuable stake in Sphere 3D that’s now worth more than double that amount. Once that pending transaction officially closes, Cyrus might feel understandably tempted to start unloading that wildly expensive stock, since the firm stands to book a tidy profit even if it hammers the price of those lofty shares in the process.  

Pinetree better watch out. No matter how much stock that its CEO rushes out to buy on the open market, Pinetree cannot possibly offset the intense selling pressure that Sphere 3D would endure if Cyrus started liquidating a massive stake in the company that’s virtually twice as large as its own.

 

Regulatory Heat

Once a celebrated highflier itself, Pinetree actually caught the attention of authorities at the Ontario Securities Commission – who suspected both the firm and its CEO of manipulating stocks that it held in its portfolio – during the “glory days” that preceded its breathtaking collapse. Displaying the same kind of stubborn resilience that Sphere 3D would later enjoy, Pinetree survived jarring news of that investigation without any damage after a conflicted stock picker staged a dramatic rescue of its own pricey shares.

An influential promoter who trumpeted Pinetree as one of his favorite names at the time – and reportedly stood to profit from its winning streak – James Dines responded to news of that regulatory probe by urging his loyal followers to “back up the truck” and buy even more stock in the embattled firm. Thanks to that helpful intervention, Pinetree swiftly recovered from an early 30% plunge and actually ended the day with a healthy boost to its phenomenal gains.

Still, even some Pinetree shareholders who normally listened to Pines felt uneasy enough to act on their queasy gut feelings in this case instead.

“I’m bailing out till the dust settles from the investigation,” one shareholder decided a few weeks later. “I firmly believe that, where there is smoke, there is fire. I love the Dines newsletter, but you have to remember he is heavily invested (I’m sure) in both companies. I’m going to take my profits and look elsewhere.”

Instead of succumbing to the pressure that normally follows a regulatory bombshell, however, Pinetree actually stormed even higher in the months that followed – with Dines dutifully singing its praises along the way – before reality ever began to take its inevitable toll. While the stock would soon plunge into the low single digits and keep right on sinking to its current home below 50 cents a share, Pinetree managed to rocket all the way to a record-breaking high above $16 a share by the time that the company finally ran out of luck.

With Pinetree achieving such lofty highs even after the Ontario Securities Commission started investigating the firm and its CEO for suspicious trading, the media started hunting for potential motives behind the ringing endorsements that helped fuel those inexplicable gains. That exercise proved quite revealing, as illustrated by the striking conflicts exposed below.

“There’s nothing better than having someone influential recommending your stock to retail investors,” The Globe and Mail determined after completing its fruitful research. “Take James Dines, the man behind The Dines Letter – a stock-picking report with a sizable following …

“These days, (Dines) is touting a company called Mega Uranium Ltd., as well as Pinetree Capital Ltd., which holds a big stake in Mega and shares the same chairman and CEO … Why does Mr. Dines like Mega Uranium and Pinetree so much? He didn’t respond to requests for an interview, but he received 150,000 shares of a company called Maple Minerals Corp. in July 2005 for selling the rights to the name ‘Mega Uranium Ltd.’ Maple Minerals of course soon morphed into Mega Uranium, and the share price has climbed from around $1 since Mr. Dines received his stock to over $6” following his bullish touts.

In other words, by pumping that expensive stock to his dedicated fans, Dines helped push the value of his own stake in Mega Uranium – effectively received free of charge – all the way toward the $1 million mark. Who knows how much Dines scored on Pinetree itself? With that stock racking up even more phenomenal gains, Dines stood to make a serious fortune on any shares that he owned in Pinetree before convincing his avid fans to “back up the truck” and buy some more.

Too bad those stocks soon collapsed. Pinetree shifted into freefall mode the following year, with Mega Uranium promptly taking a similar plunge of its own.

Years later, Pinetree still lists Mega Uranium as the most expensive investment in its entire portfolio. After placing a $15 million bet on that risky stock and losing almost 80% of that, Pinetree needs Mega Uranium to explode out of penny-stock territory -- where it has by now remained stuck for years -- and stage a miraculous rally just to get its money back. 

Maybe Pinetree should have paid less attention to the intoxicating hype that helped drive Mega Uranium (and its own stock) to nosebleed levels -- where Sphere 3D hovers today -- and focused a little more on the sober voice of reason back when it had a chance.

"Make the money -- and take the money," a cautious broker advised near the height of the overblown commodities bubble that helped send Pinetree and Mega Uranium on such a powerful tear. "We are in the best boom since the 1970s. Don't waste it."

 

* Important disclosure: The owners of TheStreetSweeper established a short position in Sphere 3D (TSXV: ANY.V, Nasdaq: ANY) ahead of this article and stand to profit on any future declines in the share price. As a matter of policy, however, TheStreetSweeper prohibits members of its editorial team from taking financial positions in any of the companies that they cover. To contact Melissa Davis, the editor of this website and the author of this report, please send an email to editor@thestreetsweeper.org.

 


 

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