any-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from___________________________to ___________________________

Commission File Number: 001-36532

__________________________________

Sphere 3D Corp.

(Exact name of Registrant as specified in its charter)

__________________________________


Ontario, Canada						98-1220792
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification No.)

4 Greenwich Office Park, 1st Floor
Greenwich, Connecticut						06831
(Address of principal executive offices)						(Zip Code)

647 952-5049

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares	ANY	NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☐ Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 4, 2023, there were 77,266,595 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements:

Page

Condensed Consolidated Balance Sheets (unaudited) - March 31, 2023 and December 31, 2022

Condensed Consolidated Statements of Operations (unaudited) - Three Months Ended March 31, 2023 and 2022

Condensed Consolidated Statements of Comprehensive Loss (unaudited) - Three Months Ended March 31, 2023 and 2022

Condensed Consolidated Statements of Shareholders’ Equity (unaudited)- Three Months Ended March 31, 2023 and 2022

Condensed Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 2023 and 2022

Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II — OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

Signature

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

Sphere 3D Corp.

Condensed Consolidated Balance Sheets

(in thousands of U.S. dollars, except shares)

(unaudited)


	March 31, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	2,713	$	1,337
Digital assets	590		1,695
Restricted cash	206		206
Accounts receivable, net	139		174
Note receivable, net of allowance for credit losses of $3,821 and $0, respectively	—		3,821
Other current assets	2,685		3,051
Total current assets	6,333		10,284
Property and equipment, net	30,534		34,259
Intangible assets, net	9,066		9,477
Funds held in trust account	10,576		10,297
Other assets	18,393		18,699
Total assets	$	74,902	$	83,016
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	1,565	$	2,993
Accrued liabilities	1,856		1,537
Accrued payroll and employee compensation	523		696
Other current liabilities	1,196		974
Total current liabilities	5,140		6,200
Deferred underwriting fee	4,554		4,554
Warrant liabilities	662		864
Other non-current liabilities	341		366
Total liabilities	10,697		11,984
Commitments and contingencies (Note 12)
Series H preferred shares, no par value, unlimited shares authorized, 54,761 and 60,000 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	24,158		26,469
Redeemable non-controlling interest	10,374		9,998
Total temporary equity	34,532		36,467

Shareholders’ equity:

Common shares, no par value; unlimited shares authorized, 73,944,714 and 68,631,104 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	459,198		456,402
Accumulated other comprehensive loss	(1,801)		(1,799)
Accumulated deficit	(427,434)		(419,732)
Total Sphere 3D Corp. shareholders’ equity	29,963		34,871
Non-controlling interest	(290)		(306)
Total shareholders’ equity	29,673		34,565
Total liabilities, temporary equity, and shareholders’ equity	$	74,902	$	83,016

See accompanying notes to condensed consolidated financial statements.

Sphere 3D Corp.

Condensed Consolidated Statements of Operations

(in thousands of U.S. dollars, except share and per share amounts)

(unaudited)


	Three Months Ended March 31,
		2023		2022

Revenues:
Digital mining revenue		$	2,524	$	747
Service and product revenue		502		625
Total revenues		3,026		1,372

Operating costs and expenses:
Cost of digital mining revenue		1,965		355
Cost of service and product revenue		298		359
Sales and marketing		274		231
Research and development		270		114
General and administrative		3,471		8,969
Depreciation and amortization		1,025		6,364
Realized gain on sale of digital assets		(633)		(3)
Impairment of digital assets		96		91
Total operating expenses		6,766		16,480
Loss from operations		(3,740)		(15,108)
Other income (expense):



Interest income and other, net		251		461
Net loss		(3,489)		(14,647)


Less: Non-controlling interest - income		16		—
Net loss available to common shareholders		$	(3,505)	$	(14,647)

Net loss per share:
Net loss per share basic and diluted		$	(0.05)	$	(0.23)
Shares used in computing net loss per share:
Basic and diluted		72,042,612		63,841,403

See accompanying notes to condensed consolidated financial statements.

Sphere 3D Corp.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands of U.S. dollars)

(unaudited)


	Three Months Ended March 31,
		2023		2022

Net loss		$	(3,489)	$	(14,647)
Other comprehensive (loss) income:
Foreign currency translation adjustment		(2)		9
Total other comprehensive (loss) income		(2)		9
Comprehensive loss		$	(3,491)	$	(14,638)

See accompanying notes to condensed consolidated financial statements.

Sphere 3D Corp.

Condensed Consolidated Statements of Shareholders’ Equity

(in thousands of U.S. dollars, except shares)

(unaudited)


	Common Shares		Accumulated Other Comprehensive Loss		Accumulated Deficit			Non-controlling Interest		Total Shareholders' Equity
		Shares					Amount
Balance at January 1, 2023		68,631,104	$	456,402	$	(1,799)		$	(419,732)	$	(306)	$	34,565
Cumulative adjustment from adoption of ASU 2016-13		—	—		—			(3,821)		—		(3,821)
Issuance of common shares for conversion of preferred shares		5,239,000	2,311		—			—		—		2,311

Issuance of common shares pursuant to the vesting of restricted stock units		74,610	—		—			—		—		—
Share-based compensation			485		—			—		—		485
Remeasurement of redeemable non-controlling interest		—	—		—			(376)		—		(376)
Other comprehensive loss		—	—		(2)			—		—		(2)
Net loss		—	—		—			(3,505)		16		(3,489)
Balance at March 31, 2023		73,944,714	$	459,198	$	(1,801)		$	(427,434)	$	(290)	$	29,673







	Common Shares		Accumulated Other Comprehensive Loss		Accumulated Deficit			Non-controlling Interest		Total Shareholders' Equity
		Shares					Amount
Balance at January 1, 2022		63,566,403	$	444,265	$	(1,794)		$	(215,195)	$	—	$	227,276
Issuance of common shares and warrants for the settlement of liabilities		950,000	1,957		—			—		—		1,957
Share-based compensation		—	117		—			—		—		117
Other comprehensive income		—	—		9			—		—		9
Net loss		—	—		—			(14,647)		—		(14,647)
Balance at March 31, 2022		64,516,403	$	446,339	$	(1,785)		$	(229,842)	$	—	$	214,712

See accompanying notes to condensed consolidated financial statements.

Sphere 3D Corp.

Condensed Consolidated Statements of Cash Flows

(in thousands of U.S. dollars)

(unaudited)


	Three Months Ended March 31,
	2023		2022
Operating activities:
Net loss	$	(3,489)	$	(14,647)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	1,025		6,364



Share-based compensation	485		117

Impairment of digital assets	96		91
Digital currency issued for services	312		229
Realized gain on sale of digital assets	(633)		(3)
Change in fair value of warrant liabilities	(202)		—
Noncash lease cost	10		—
Issuance of common shares and warrants for settlement of liabilities	—		1,957


Changes in operating assets and liabilities:
Proceeds from sale of digital assets	3,854		—
Digital assets	(2,524)		(730)
Accounts receivable	35		(24)
Accounts payable and accrued liabilities	452		995
Accrued payroll and employee compensation	(173)		16
Other assets and liabilities, net	588		(10,225)
Net cash used in operating activities	(164)		(15,860)
Investing activities:
Proceeds from sale of property and equipment	3,101		—
Payments for purchase of property and equipment	(1,561)		(9,999)
Notes receivable	—		(2,837)

Net cash provided by (used in) investing activities	1,540		(12,836)











Net increase (decrease) in cash, cash equivalents and restricted cash	1,376		(28,696)
Cash, cash equivalents and restricted cash, beginning of period	1,543		54,355
Cash, cash equivalents and restricted cash, end of period	$	2,919	$	25,659









Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets:
Cash and cash equivalents	$	2,713	$	25,659
Restricted cash	206		—
Total cash, cash equivalents and restricted cash	$	2,919	$	25,659

Supplemental disclosures of non-cash investing activities:
Remeasurement of redeemable non-controlling interest	$	376	$	—
Reclassification from deposit for mining equipment to mining equipment	$	—	$	4,386

See accompanying notes to condensed consolidated financial statements.

Sphere 3D Corp.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.Organization and Business

Sphere 3D Corp. was incorporated under the Business Corporations Act (Ontario) on May 2, 2007 as T.B. Mining Ventures Inc. On March 24, 2015, the Company completed a short-form amalgamation with a wholly-owned subsidiary. In connection with the short-form amalgamation, the Company changed its name to “Sphere 3D Corp.” Any reference to the “Company”, “Sphere 3D”, “we”, “our”, “us”, or similar terms refers to Sphere 3D Corp. and its subsidiaries. In January 2022, the Company commenced operations of its digital mining operation dedicated to becoming a leading carbon-neutral Bitcoin mining company. The Company is establishing an enterprise-scale mining operation through procurement of next-generation mining equipment and partnering with experienced service providers. In addition, the Company delivers data management and desktop and application virtualization solutions through hybrid cloud, cloud and on premise implementations by its global reseller network. The Company achieves this through a combination of containerized applications, virtual desktops, virtual storage and physical hyper-converged platforms. The Company’s products allow organizations to deploy a combination of public, private or hybrid cloud strategies while backing them up with the latest storage solutions. The Company’s brands include HVE ConneXions (“HVE”) and Unified ConneXions (“UCX”).

Liquidity and Going Concern

The Company has recurring losses from operations and incurred a net loss of approximately $3.5 million for the three months ended March 31, 2023. Management has projected that based on our hashing rate at March 31, 2023, cash on hand may not be sufficient to allow the Company to continue operations beyond the next 12 months if we are unable to raise additional funding for operations. We expect our working capital needs to increase in the future as we continue to expand and enhance our operations. Our ability to raise additional funds for working capital through equity or debt financings or other sources may depend on the financial success of our then current business and successful implementation of our key strategic initiatives, financial, economic and market conditions and other factors, some of which are beyond our control. No assurance can be given that we will be successful in raising the required capital at a reasonable cost and at the required times, or at all. Further equity financings may have a dilutive effect on shareholders and any debt financing, if available, may require restrictions to be placed on our future financing and operating activities. We require additional capital and if we are unsuccessful in raising that capital, we may not be able to continue our business operations in the cryptocurrency mining industry or we may be unable to advance our growth initiatives, either of which could adversely impact our business, financial condition and results of operations.

Significant changes from the Company’s current forecasts, including but not limited to: (i) shortfalls from projected sales levels; (ii) unexpected increases in product costs; (iii) increases in operating costs; (iv) fluctuations in the value of cryptocurrency; and (v) inability to maintain compliance with the requirements of the NASDAQ Capital Market and/or inability to maintain listing with the NASDAQ Capital Market could have a material adverse impact on the Company’s ability to access the level of funding necessary to continue its operations at current levels. If any of these events occurs or the Company is unable to generate sufficient cash from operations or financing sources, the Company may be forced to liquidate assets where possible and/or curtail, suspend or cease planned programs or operations generally or seek bankruptcy protection or be subject to an involuntary bankruptcy petition, any of, which would have a material adverse effect on the Company’s business, results of operations, financial position and liquidity.

These factors, among others, raise substantial doubt that the Company will be able to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of this uncertainty.

2.Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”), applied on a basis consistent for all periods. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set of financial statements. These condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 31, 2023. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. These condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been appropriately eliminated in consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Reclassifications

Certain prior period amounts have been reclassified for consistency with the current period presentation. The reclassifications did not have a material impact on the Company's condensed interim consolidated financial statements and related disclosures.

Foreign Currency Translation

The financial statements of the Company’s foreign subsidiary, for which the functional currency is the local currency, is translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as accumulated other comprehensive income (loss) within shareholders’ equity. Gains or losses from foreign currency transactions are recognized in the condensed consolidated statements of operations. Such transactions resulted in minimal losses for the three months ended March 31, 2023 and 2022.

Cash and Cash Equivalents

Highly liquid investments with insignificant interest rate risk and original maturities of three months or less, when purchased, are classified as cash equivalents. Cash equivalents are composed of money market funds. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances and believes credit risk to be minimal.

Restricted Cash and Cash Equivalents

Restricted cash is cash held in a separate bank account with restrictions on withdrawal. The Company’s restricted cash classified as current, is pledged as collateral for a standby letter of credit used for the bonding purpose necessary for the Company to receive mining machines.

Funds held in trust account are restricted and invested in U.S. government treasury money market funds. Except with respect to interest earned on the funds held in the trust account that may be released to MEOA, to pay its franchise and income tax obligations (less up to $100,000 of interest to pay dissolution expenses), the proceeds will not be released from the trust account to MEOA until the earliest of: (a) the completion of MEOA’s initial business combination; or (b) the redemption of the public shares if MEOA is unable to complete the initial business combination on or prior to May 30, 2023, subject to applicable law.

Digital Assets

The Company accounts for digital assets as indefinite-lived intangible assets. The digital assets are recorded at cost less impairment.

An impairment analysis is performed at each reporting period or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. The fair value of digital assets is determined on a nonrecurring basis based on the lowest intraday quoted price on the active exchange(s) that the Company has determined as the principal market for digital assets (Level 1 inputs). If the carrying value of the digital asset exceeds the fair value based on the lowest price quoted in the active exchanges during the period, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the price determined.

Impairment losses are recognized in operating expenses in the consolidated statements of operations in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale or disposition.

Digital assets awarded to the Company through its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of digital assets are included within operating activities in the accompanying condensed consolidated statements of cash flows and any realized gains or losses from such sales are included in operating costs and expenses in the condensed consolidated statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.

The following table presents the activities of the digital assets (in thousands):


Balance at January 1, 2023	$	1,695
Addition of digital assets	2,524
Digital assets sold for cash	(3,221)
Digital assets issued for services	(312)
Impairment loss	(96)
Balance at March 31, 2023	$	590

Allowance for Credit Losses

The Company’s assessment of its allowance for credit losses requires it to incorporate considerations of historical information, current conditions and reasonable and supportable forecasts. The Company manages credit risk through review of available public company information. For the Company’s note receivable, the Company has recorded an allowance for credit losses and elected to write off accrued interest receivables by reversing interest income.

Leases

The Company has entered into operating leases primarily for real estate. These leases have contractual terms which range from 12 months to 5 years. The Company determines if an arrangement contains a lease at inception. Right of use (“ROU”) assets and liabilities resulting from operating leases are included in property and equipment, other current liabilities and other non-current liabilities on our consolidated balance sheets. Operating lease ROU assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the leases typically do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the discount rate to calculate the present value of future payments. The operating lease ROU asset may also include any lease payments made and exclude lease incentives and initial direct costs incurred. The Company’s leases do not include options to extend the lease. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Property and Equipment

Property and equipment primarily consists of mining equipment and is stated at cost, including purchase price and all shipping and custom fees, and depreciated using the straight-line method over the estimated useful lives of the assets, generally five years.

The Company reviews the carrying amounts of property and equipment when events or changes in circumstances indicate the assets may not be recoverable. If any such indication exists, the fair value of the asset is estimated in order to determine the extent of the impairment loss, if any.

Intangible Assets

For intangible assets purchased in a business combination, the estimated fair values of the assets received are used to establish their recorded values. For intangible assets acquired in a non-monetary exchange, the estimated fair values of the assets transferred (or the estimated fair values of the assets received, if more clearly evident) are used to establish their recorded values. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value.

Purchased intangible assets are amortized on a straight-line basis over their economic lives of 5 years to 15 years for supplier agreements, six years for channel partner relationships, and seven years for customer relationships as this method most closely reflects the pattern in which the economic benefits of the assets will be consumed.

The Company has purchased carbon credits that it intends to use. As it intends to use these carbon credits, the assets have been classified as intangible assets. When the carbon credit is used, it will be expensed as an operating expense.

Impairment of Intangible Assets

The Company performs regular reviews of intangible assets to determine if any event has occurred that may indicate that intangible assets with finite useful lives and other long-lived assets are potentially impaired. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. Intangible assets are quantitatively assessed for impairment, if necessary, by comparing their estimated fair values to their carrying values. If the carrying value exceeds the fair value, the difference is recorded as an impairment.

Warrant Liabilities

Warrant liabilities are for warrants for shares of MEOA’s common stock that are not indexed to its own stock and are presented as liabilities at fair value on the consolidated balance sheets. The warrants are subject to remeasurement at each balance sheet date and any change in fair value is recognized in interest income and other, net, on the consolidated statements of operations. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the consolidated statements of cash flows. The fair value of the public warrants issued in connection with MEOA's public offering has been measured based on the listed market price of such warrants. The Company recorded a fair value adjustment for warrant liabilities of $

SEC Form 10-Q filed by Sphere 3D Corp.