UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2023
or
For the transition period from___________________________to ___________________________
Commission File Number: 001-36532
__________________________________
(Exact name of Registrant as specified in its charter)
__________________________________
647 952-5049
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
(Address of principal executive offices) | (Zip Code) | |||||||
(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 | ||||||
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 ☐
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
| Item 1. | Page | |||||||||||||
| 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 | $ | $ | |||||||||
| Digital assets | |||||||||||
| Restricted cash | |||||||||||
| Accounts receivable, net | |||||||||||
Note receivable, net of allowance for credit losses of $ | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Funds held in trust account | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Accrued payroll and employee compensation | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Deferred underwriting fee | |||||||||||
| Warrant liabilities | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 12) | |||||||||||
Series H preferred shares, | |||||||||||
| Redeemable non-controlling interest | |||||||||||
| Total temporary equity | |||||||||||
| Shareholders’ equity: | |||||||||||
Common shares, | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total Sphere 3D Corp. shareholders’ equity | |||||||||||
| Non-controlling interest | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| Total liabilities, temporary equity, and shareholders’ equity | $ | $ | |||||||||
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 | $ | $ | |||||||||
| Service and product revenue | |||||||||||
| Total revenues | |||||||||||
| Operating costs and expenses: | |||||||||||
| Cost of digital mining revenue | |||||||||||
| Cost of service and product revenue | |||||||||||
| Sales and marketing | |||||||||||
| Research and development | |||||||||||
| General and administrative | |||||||||||
| Depreciation and amortization | |||||||||||
| Realized gain on sale of digital assets | ( | ( | |||||||||
| Impairment of digital assets | |||||||||||
| Total operating expenses | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Other income (expense): | |||||||||||
| Interest income and other, net | |||||||||||
| Net loss | ( | ( | |||||||||
| Less: Non-controlling interest - income | |||||||||||
| Net loss available to common shareholders | $ | ( | $ | ( | |||||||
| Net loss per share: | |||||||||||
| Net loss per share basic and diluted | $ | ( | $ | ( | |||||||
| Shares used in computing net loss per share: | |||||||||||
| Basic and diluted | |||||||||||
See accompanying notes to condensed consolidated financial statements.
4
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 | $ | ( | $ | ( | |||||||
| Other comprehensive (loss) income: | |||||||||||
| Foreign currency translation adjustment | ( | ||||||||||
| Total other comprehensive (loss) income | ( | ||||||||||
| Comprehensive loss | $ | ( | $ | ( | |||||||
See accompanying notes to condensed consolidated financial statements.
5
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 | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||
| Issuance of common shares for conversion of preferred shares | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common shares pursuant to the vesting of restricted stock units | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||
| Remeasurement of redeemable non-controlling interest | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | ( | ||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Common Shares | Accumulated Other Comprehensive Loss | Accumulated Deficit | Non-controlling Interest | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| Issuance of common shares and warrants for the settlement of liabilities | — | — | — | ||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
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 | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Impairment of digital assets | |||||||||||
| Digital currency issued for services | |||||||||||
| Realized gain on sale of digital assets | ( | ( | |||||||||
| Change in fair value of warrant liabilities | ( | ||||||||||
| Noncash lease cost | |||||||||||
| Issuance of common shares and warrants for settlement of liabilities | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Proceeds from sale of digital assets | |||||||||||
| Digital assets | ( | ( | |||||||||
| Accounts receivable | ( | ||||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Accrued payroll and employee compensation | ( | ||||||||||
| Other assets and liabilities, net | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Investing activities: | |||||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Payments for purchase of property and equipment | ( | ( | |||||||||
| Notes receivable | ( | ||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
| Supplemental disclosures of non-cash investing activities: | |||||||||||
| Remeasurement of redeemable non-controlling interest | $ | $ | |||||||||
| Reclassification from deposit for mining equipment to mining equipment | $ | $ | |||||||||
See accompanying notes to condensed consolidated financial statements.
7
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.
8
2.Summary of Significant Accounting Policies
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.
Cash and Cash Equivalents
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.
9
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
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 | $ | ||||
| Addition of digital assets | |||||
| Digital assets sold for cash | ( | ||||
| Digital assets issued for services | ( | ||||
| Impairment loss | ( | ||||
| Balance at March 31, 2023 | $ | ||||
10
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 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.
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.
11
Redeemable Non-controlling Interest
Redeemable non-controlling interest is interest in a subsidiary of the Company that are redeemable outside of the Company’s control either for cash or other assets. This interest is classified as temporary equity and measured at the estimated redemption value at the end of each reporting period. The resulting increases or decreases in the estimated redemption amount are effected by corresponding charges to accumulated deficit. At March 31, 2023, redeemable non-controlling interest recorded within the Company’s consolidated balance sheets relates to its subsidiary, MEOA.
Revenue Recognition
The Company accounts for revenue pursuant to ASU 2014-09, Revenue from Contracts with Customers and all the related amendments (“Topic 606”). Under Topic 606, an entity is required to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and contract consideration will be recognized on a “sell-in basis” or when control of the purchased goods or services transfer to the distributor.
The Company is engaged with digital asset mining pool operators to provide computing power to the mining pools. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives for successfully adding a block to the blockchain, plus a fractional share of the transaction fees attached to that blockchain. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. The Company satisfies its performance obligation at the point in time that the Company is awarded a unit of digital currency through its participation in the applicable network and network participants benefit from the Company’s verification service. The transaction price is the fair value of the digital asset mined, being the fair value per the prevailing market rate for that digital asset on the transaction date, and this is allocated to the number of digital assets mined. The transaction consideration the Company receives is noncash consideration, in the form of digital currency, which the Company measures at fair value on the date received which is not materially different than the fair value at contract inception or time the Company has earned the award from the mining pools. Fair value of the digital currency award received is determined using the spot price of the related digital currency on the date earned. The Company cannot determine, during the course of solving for a block, that a reversal of revenue is not probable and therefore revenue is recognized when the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive.
Expenses associated with running the digital asset mining operations, such as rent, operating supplies, utilities and monitoring services are recorded as cost of revenues.
12
The Company also generates revenue from: (i) solutions for standalone storage and integrated hyper-converged storage; (ii) professional services; and (iii) warranty and customer services. The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers the Company performs the following five steps: (i) identify the promised goods or services in the contract; (ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligations.
The majority of the Company’s product and service revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied at a point in time. These contracts are generally comprised of a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when change of control has been transferred to the customer, generally at the time of shipment of products. The Company sells its products both directly to customers and through distributors generally under agreements with payment terms typically less than 45 days. Revenue on direct product sales, excluding sales to distributors, are not entitled to any specific right of return or price protection, except for any defective product that may be returned under our standard product warranty. Product sales to distribution customers that are subject to certain rights of return, stock rotation privileges and price protections, contain a component of “variable consideration.” Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and is generally based upon a negotiated fixed price and is net of estimates for variable considerations.
For performance obligations related to warranty and customer services, such as extended product warranties, the Company transfers control and recognizes revenue on a time-elapsed basis. The performance obligations are satisfied as services are rendered typically on a stand-ready basis over the contract term, which is generally 12 months.
The Company also enters into revenue arrangements that may consist of multiple performance obligations of its product and service offerings such as for sales of hardware devices and extended warranty services. The Company allocates contract fees to the performance obligations on a relative stand-alone selling price basis. The Company determines the stand-alone selling price based on its normal pricing and discounting practices for the specific product and/or service when sold separately. When the Company is unable to establish the individual stand-alone price for all elements in an arrangement by reference to sold separately instances, the Company may estimate the stand-alone selling price of each performance obligation using a cost plus a margin approach, by reference to third party evidence of selling price, based on the Company’s actual historical selling prices of similar items, or based on a combination of the aforementioned methodologies; whichever management believes provides the most reliable estimate of stand-alone selling price.
Extended Warranty
Separately priced extended on-site warranties and service contracts are offered for sale to customers on all product lines. Extended warranty and service contract revenue and recognized as service revenue over the period of the service agreement. The Company will typically apply the practical expedient to agreements wherein the period between transfer of any good or service in the contract and when the customer pays for that good or service is one year or less.
13
Comprehensive Income (Loss)
Comprehensive income (loss) and its components encompass all changes in equity other than those arising from transactions with shareholders, including net loss and foreign currency translation adjustments, and is disclosed in a separate condensed consolidated statement of comprehensive loss.
Share-based Compensation
The Company accounts for share-based awards, and similar equity instruments, granted to employees, non-employee directors, and consultants in accordance with the authoritative guidance for share-based compensation. Share-based compensation award types include stock options, restricted stock units (“RSUs”) and restricted stock awards (“RSAs”). Share-based compensation expense is recognized on a straight-lined basis over the requisite service period (usually the vesting period) except for options with graded vesting which is recognized pursuant to an accelerated method. Forfeitures are recognized as a reduction in share-based compensation expense as they occur.
Non-controlling Interest
The Company accounts for its non-controlling interest in accordance with the authoritative guidance for consolidation which governs the accounting for and reporting of non-controlling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of the guidance indicate, among other things, that NCIs be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. The net income (loss) attributed to the NCI is separately designated in the accompanying consolidated statements of operations.
Recently Issued and Adopted Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. If not discussed, the Company believes that the impact of recently issued standards will not have a material impact on the Company’s consolidated financial statements upon adoption.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Entities will no longer be permitted to consider the length of time that fair value has been less than amortized cost when evaluating when credit losses should be recognized. The Company adopted ASU 2016-13 on January 1, 2023 on a modified retrospective basis which resulted in a $3.8 million increase to the opening balance of accumulated deficit, representing the cumulative allowance for credit losses for the Company’s note receivable.
In October 2021, the FASB issued Accounting Standards Update No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). ASU 2021-08 amends ASC 805 to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The Company adopted the new standard beginning January 1, 2023 and did not have an effect on its financial position, results of operations or cash flows.
14
3. Note Receivable
Rainmaker Promissory Note
In September 2020, the Company entered into a Senior Secured Convertible Promissory Note with Rainmaker (the “Rainmaker Note”), pursuant to which the Company loaned Rainmaker the principal amount of $3.1 million. The Rainmaker Note is secured as a registered lien under the Uniform Commercial Code and the Personal Property Security Act (Ontario) against the assets of Rainmaker and bears interest at the rate of 10.0 % per annum. The principal and interest accrue monthly and are due and payable in full on September 14, 2023 . The Company has the right, at any time, to convert all or any portion of the then outstanding and unpaid Rainmaker Note and interest into non-assessable shares of Rainmaker common stock, or any shares of capital stock or other securities of Rainmaker, at the conversion price as defined in the Rainmaker Note. During the three months ended March 31, 2023, as a result of adopting ASU 2016-13, the Company recorded an allowance for credit losses of $3.8 million and reversed accrued interest of $0.1 million. As of March 31, 2023 and December 31, 2022, the Rainmaker Note balance, including accrued interest, was nil and $3.8 million, respectively.
4. Certain Balance Sheet Items
The following table summarizes other current assets (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Prepaid digital hosting services | $ | $ | |||||||||
| Prepaid services | |||||||||||
| Prepaid insurance | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
The following table summarizes property and equipment, net (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Mining equipment | $ | $ | |||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Subtotal | |||||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation expense for property and equipment was $0.6 million and $0.1 million during the three months ended March 31, 2023 and 2022, respectively, inclusive of ROU asset amortization of $10,000 and nil , respectively.
15
During the three months ended March 31, 2023, the Company sold 2,066 miners that were included in mining equipment, for cash proceeds of $3.1 million.
The following table summarizes other assets (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Prepaid digital hosting services | $ | $ | |||||||||
| Prepaid insurance and services | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
The following table summarizes other current liabilities (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Advance from target for SPAC | $ | $ | |||||||||
| Taxes payable for SPAC | |||||||||||
| Deferred revenue | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
5. Intangible Assets
The following table summarizes intangible assets, net (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Supplier agreements | $ | $ | |||||||||
| Developed technology | |||||||||||
| Channel partner relationships | |||||||||||
| Customer relationships | |||||||||||
| Capitalized development costs | |||||||||||
| Accumulated amortization: | |||||||||||
| Supplier agreements | ( | ( | |||||||||
| Developed technology | ( | ( | |||||||||
| Channel partner relationships | ( | ( | |||||||||
| Customer relationships | ( | ( | |||||||||
| Capitalized development costs | ( | ( | |||||||||
| ( | ( | ||||||||||
| Total finite-lived intangible assets, net | |||||||||||
| Carbon credits held for future use | |||||||||||
| Total intangible assets, net | $ | $ | |||||||||
Amortization expense for intangible assets was $0.4 million and $6.2 million during the three months ended March 31, 2023 and 2022, respectively. Estimated amortization expense for intangible assets is expected to be approximately $1.2 million for the remainder of 2023 and $1.6 million, $1.6 million, $1.6 million, $0.2 million, and $0.1 million in fiscal 2024, 2025, 2026, 2027 and 2028, respectively.
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6.Investments
Special Purpose Acquisition Company
In April 2021, the Company sponsored a special purpose acquisition company (“SPAC”), Minority Equality Opportunities Acquisition Inc. (“MEOA”), through the Company’s wholly owned subsidiary, Minority Equality Opportunities Acquisition Sponsor, LLC (“SPAC Sponsor”). MEOA’s purpose is to focus initially on transactions with companies that are minority owned businesses. MEOA’s IPO was completed on August 30, 2021. As of both March 31, 2023 and December 31, 2022, the Company held an aggregate of 3,162,500
In August 2022, MEOA entered into a business combination agreement with MEOA Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of MEOA (“Merger Sub”), and Digerati Technologies, Inc., a Nevada corporation (“Digerati”), pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Merger Sub will merge with and into Digerati (the “Digerati Merger”), with Digerati surviving the Digerati Merger as a wholly owned subsidiary of MEOA, and with Digerati’s equity holders receiving shares of MEOA common stock.
On November 29, 2022, MEOA held a special meeting of stockholders (the “MEOA Meeting”). At the MEOA Meeting, MEOA’s stockholders approved an amendment (the “Extension Amendment”) to MEOA’s amended and restated certificate of incorporation to extend the date by which MEOA must consummate its initial business combination from November 30, 2022 to May 30, 2023, or such earlier date as determined by MEOA’s board of directors. On November 30, 2022, after giving effect to the redemption of public shares of MEOA, the Company’s subsidiary owns a controlling interest of MEOA and it has been consolidated in the Condensed Consolidated Financial Statements.
7.Fair Value Measurements
The authoritative guidance for fair value measurements establishes a three tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The Company’s consolidated financial instruments include cash equivalents, accounts receivable, notes receivable, accounts payable, accrued liabilities, and warrant liabilities. Fair value estimates of these instruments are made at a specific point in time, based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The carrying amount of cash equivalents, accounts receivable, notes receivable, accounts payable and accrued liabilities are generally considered to be representative of their respective fair values because of the short-term nature of those instruments.
Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis
As discussed in Note 2, Summary of Significant Accounting Policies, to the Condensed Consolidated Financial Statements, the Company accounts for its bitcoin as indefinite-lived intangible assets, which are subject to impairment losses if the fair value of its bitcoin held decreases below their carrying value during the reporting period.
The Company's non-financial assets such as property and equipment and intangible assets are recorded at fair value when an impairment is recognized or at the time acquired in an asset acquisition or business combination measured using significant unobservable inputs (Level 3).
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8.Preferred Shares
Series H Preferred Shares
On October 1, 2021, the Company filed articles of amendment to create a series of preferred shares, being, an unlimited number of Series H Preferred Shares and to provide for the rights, privileges, restrictions and conditions attaching thereto. The Series H Preferred Shares are convertible provided (and only if and to the extent) that prior shareholder approval of the issuance of all Sphere 3D common shares issuable upon conversion of the Series H Preferred Shares has been obtained in accordance with the rules of the Nasdaq Stock Market, at any time from time to time, at the option of the holder thereof, into 1,000 Sphere 3D common shares for every Series H Preferred Share. Each holder of the Series H Preferred Shares, may, subject to prior shareholder approval, convert all or any part of the Series H Preferred Shares provided that after such conversion the common shares issuable, together with all the common shares held by the shareholder in the aggregate would not exceed 9.99% of the total number of outstanding common shares of the Company. Each Series H Preferred Share has a stated value of $1,000 . The Series H Preferred Shares are non-voting and do not accrue dividends.
In November 2022, the Company entered into the Modified Hertford Agreement. The Modified Hertford Agreement provides for certain resale restrictions applicable to the common shares that are issuable upon the conversion of the remaining Series H Preferred Shares during the two-year period ending on December 31, 2024, which are different from the restrictions contained in the Hertford Agreement, as well, commencing January 1, 2023 and terminating on December 31, 2023, holders of Series H Preferred Shares are permitted to (a) convert Series H Preferred Shares in an aggregate amount up to or equal to 3.0 % of the aggregate number of Series H Preferred Shares outstanding on the first day of each such month and (b) sell the resulting number (and no greater number) of such converted common shares within such month. Commencing January 1, 2024 and terminating on December 31, 2024, holders of Series H Preferred Shares are permitted to (a) convert Series H Preferred Shares in an aggregate amount up to or equal to 10.0 % of the aggregate number of Series H Preferred Shares outstanding on the first day of each such month and (b) sell the resulting number (and no greater number) of such converted common shares within such month.
During the three months ended March 31, 2023, pursuant to the Modified Hertford Agreement, the Company issued 5,239,000 common shares for the conversion of 5,239 Series H Preferred Shares.
9.Share Capital
In April 2022, the Company issued 1,350,000 unregistered common shares, with a fair value of $1.7 million, to Bluesphere Ventures Inc. for the right to acquire up to 1,040,000 carbon credits. As of March 31, 2023, none of the carbon credits have been retired.
In March 2022, in connection with the Merger Agreement, the Company issued into escrow 850,000 common shares with a fair value of $1.2 million. On April 4, 2022, the Merger Agreement with Gryphon Digital Mining, Inc. (“Gryphon”) was terminated by the Company and the common shares were released to Gryphon as stated by the escrow agreement.
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| Date issued | Contractual life (years) | Exercise price | Number outstanding | Expiration | ||||||||||||||||||||||
| April 2018 | $ | |||||||||||||||||||||||||
| July 2021 | $ | |||||||||||||||||||||||||
| August 2021 | $ | |||||||||||||||||||||||||
| August 2021 | $ | |||||||||||||||||||||||||
| September 2021 | $ | |||||||||||||||||||||||||
| October 2021 | $ | |||||||||||||||||||||||||
| February 2022 | $ | |||||||||||||||||||||||||
| February 2022 | $ | |||||||||||||||||||||||||
| February 2022 | $ | |||||||||||||||||||||||||
10.Equity Incentive Plans
Stock Options
The following table summarizes option activity:
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Options outstanding — January 1, 2023 | $ | ||||||||||||||||||||||
| Granted | $ | ||||||||||||||||||||||
| Exercised | $ | ||||||||||||||||||||||
| Forfeited | ( | $ | |||||||||||||||||||||
| Options outstanding — March 31, 2023 | $ | $ | |||||||||||||||||||||
| Vested and expected to vest — March 31, 2023 | $ | $ | |||||||||||||||||||||
| Exercisable — March 31, 2023 | $ | $ | |||||||||||||||||||||
Restricted Stock
The following table summarizes RSU activity:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Outstanding — January 1, 2023 | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested and released | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
| Outstanding — March 31, 2023 | $ | ||||||||||
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The estimated fair value of RSUs was based on the market value of the Company’s common shares on the date of grant. RSUs typically vest over a period of to three years from the original date of grant. The total grant date fair value of RSUs vested during the three months ended March 31, 2023 and 2022 was approximately $59,000 and nil , respectively. The fair value of RSUs vested during the three months ended March 31, 2023 and 2022 was approximately $29,000 and nil , respectively.
Share-Based Compensation Expense
The Company recorded the following compensation expense related to its share-based compensation awards (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Sales and marketing | $ | $ | |||||||||
| General and administrative | |||||||||||
| Total share-based compensation expense | $ | $ | |||||||||
Total unrecognized estimated compensation cost by type of award and the weighted-average remaining requisite service period over which such expense is expected to be recognized (in thousands, unless otherwise noted):
| March 31, 2023 | |||||||||||
| Unrecognized Expense | Remaining Weighted-Average Recognition Period (years) | ||||||||||
| RSUs | $ | ||||||||||
| Stock options | $ | ||||||||||
11.Net Loss per Share
Basic net loss per share is computed by dividing net loss applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Preferred shares, outstanding common share purchase warrants, and outstanding options are considered common stock equivalents and are only included in the calculation of diluted earnings per common share when net income is reported and their effect is dilutive.
Anti-dilutive common share equivalents excluded from the computation of diluted net loss per share were as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Preferred shares issued and outstanding | |||||||||||
| Common share purchase warrants | |||||||||||
| Options and RSUs outstanding | |||||||||||
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12.Commitments and Contingencies
Service Agreements
On February 8, 2023, the Company entered into a Hosting Agreement with Lancium FS 25, LLC (the “Lancium Hosting Agreement”) for rack space, network services, electrical connections, routine facility maintenance, and technical support of certain of the Company’s mining equipment. The Lancium Hosting Agreement has a term of two years with subsequent one year renewal periods. Within 90 days of commencement of operations of the bitcoin miners, the Company will pay a deposit representing the last two months of service fees. As of March 31, 2023, there have been no costs incurred or deposits made under the Lancium Hosting Agreement.
On June 3, 2022, the Company entered into a Master Agreement with Compute North LLC (the “Compute North MA”) for, the colocation, management and other services of certain of the Company’s mining equipment. In September 2022, Compute North filed for Chapter 11 bankruptcy. In December 2022, the Compute North MA was assigned to GC Data Center Granbury, LLC (the “GC Data Center MA”) and has a term of five years from such assignment date. Under the GC Data Center MA, the monthly service fee is payable based on the actual hashrate performance of the equipment per miner type per location as a percentage of the anticipated monthly hashrate per miner type. A deposit of $0.5 million previously paid to Compute North for the last two months of monthly service fees was remitted to GC Data Center on behalf of the Company and is included in prepaid digital hosting services at March 31, 2023. During the three months ended March 31, 2023 and 2022, the Company incurred costs under the GC Data Center MA of $1.3 million and nil , respectively.
On August 19, 2021, the Company entered into a Master Services Agreement with Gryphon (the “Gryphon MSA”). To provide greater certainty as to the term of the Gryphon MSA, on December 29, 2021, the Company and Gryphon entered into Amendment No. 1 to the Gryphon MSA (the “Gryphon MSA Amendment”) which extended the initial term of the Gryphon MSA to five years , as the Company did not receive delivery of a specified minimum number of digital mining machines during 2022. Subject to written notice from the Company and an opportunity by Gryphon to cure for a period of up to 180 days, the Company shall be entitled to terminate the Gryphon MSA in the event of: (i) Gryphon’s failure to perform the services under the Gryphon MSA in a professional and workmanlike manner in accordance with generally recognized digital mining industry standards for similar services, or (ii) Gryphon’s gross negligence, fraud or willful misconduct in connection with performing the services. Gryphon shall be entitled to specific performance or termination for cause in the event of a breach by the Company, subject to written notice and an opportunity to cure for a period of up to 180 days. As consideration for the Gryphon MSA, Gryphon shall receive the equivalent of 22.5% of the net operating profit, as defined in the Gryphon MSA, of all of the Company’s blockchain and digital currency related operations as a management fee . In addition, any costs Gryphon incurs on the Company's behalf are to be reimbursed to Gryphon as defined in the Gryphon MSA. The Company incurred costs under this agreement of $0.4 million and $0.3 million during the three months ended March 31, 2023 and 2022, respectively.
On April 7, 2023, the Company filed litigation against Gryphon citing several breaches to the Gryphon MSA, including but not limited to, several fiduciary and operational breaches.
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Digital Mining Hosting Sub-License
On October 5, 2021, the Company entered into a Sub-License and Delegation Agreement (“Hosting Sub-Lease”) by and between Gryphon and the Company, which assigned to the Company certain Master Services Agreement, dated as of September 12, 2021 (the “Core Scientific MSA”), by and between Core Scientific, Inc. (“Core Scientific”), and Gryphon and Master Services Agreement Order #2 (“Order 2”). On December 29, 2021, the Company and Gryphon entered into Amendment No. 1 to the Sub-Lease Agreement (the “Sub-Lease Amendment”) to provide Gryphon the right to recapture the usage of up to 50% of the hosting capacity to be managed by Core Scientific. The agreement allows for approximately 230 MW of net carbon neutral digital mining hosting capacity to be managed by Core Scientific as hosting partner. As part of the agreement, Core Scientific will provide digital mining fleet management and monitoring solution, Minder™, data analytics, alerting, monitoring, and miner management services. The Hosting Sub-Lease shall automatically terminate upon the termination of the Core Scientific MSA and/or Order 2 in accordance with their respective terms. On October 31, 2022, the Company filed an arbitration request against Core Scientific regarding the Hosting Sub-Lease. The Company has requested that certain advanced deposits paid be refunded back to it as a result of the modification to the Company’s machine purchase agreement with FuFu Technology Limited (now Ethereal Tech Pte. Ltd.). In December 2022, Core Scientific filed Chapter 11 bankruptcy. The Company incurred costs under this agreement of $0.2 million and $29,000 during the three months ended March 31, 2023 and 2022, respectively.
Underwriting Agreement
Subject to the terms of the underwriting agreement for MEOA’s initial public offering, as amended on August 30, 2022, the underwriter is entitled to a deferred underwriting fee of $4.6
Letters of credit
During the ordinary course of business, the Company provides standby letters of credit to third parties as required for certain transactions initiated by the Company. As of March 31, 2023, the Company had one outstanding standby letter of credit to be used for the bond necessary for the Company to receive mining machines.
Extended Warranty
Changes in the liability for deferred revenue associated with extended warranties and service contracts were as follows (in thousands):
| Deferred Revenue | |||||
| Liability at January 1, 2023 | $ | ||||
| Revenue recognized during the period | ( | ||||
| Change in liability for warranties issued during the period | |||||
| Liability at March 31, 2023 | $ | ||||
| Current liability, included in other current liabilities | |||||
| Non-current liability, included in other non-current liabilities | |||||
| Liability at March 31, 2023 | $ | ||||
Litigation
22
13.Segment Information
The Company has two operating segments, (1) Digital Mining and (2) Service and Product. The relevant guidance requires that segment disclosures present the measure(s) used by the chief operating decision maker to decide how to allocate resources and for purposes of assessing such segments’ performance.
The Digital Mining segment generates revenue from the digital currency the Company earns through its bitcoin mining activities. The Service and Product segment generates revenue from customer contracts for service and extended service contract and the sale of products related to the Company’s data storage product line.
Digital Mining Segment
The Company generates its digital mining revenue from one mining pool operator. The Company’s revenue from digital mining is generated in the United States.
For the three months ended March 31, 2023 and 2022, the Company had one
Service and Product Segment
Service and product had the following customers that represented more than 10% of revenue.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Customer A | % | % | |||||||||
| Customer B | % | % | |||||||||
| Customer C | % | % | |||||||||
The Company’s revenue from service and product is generated in the United States.
Service and product had the following receivable’s that represented more than 10% of accounts receivable.
| March 31, 2023 | December 31, 2022 | ||||||||||
| Customer A | % | % | |||||||||
| Customer B | % | % | |||||||||
| Customer C | % | % | |||||||||
| Customer D | % | % | |||||||||
| Customer E | % | % | |||||||||
14.Subsequent Events
Subsequent to March 31, 2023, the Company issued 3,235,000 common shares for the conversion of 3,235 Series H Preferred Shares.
On April 4, 2023, the Company entered into a Master Hosting Services Agreement with Rebel Mining Company, LLC (the “Rebel Hosting Agreement”) for rack space, network services, electrical connections, routine facility maintenance, and technical support of certain of the Company’s mining equipment. The Rebel Hosting Agreement has a term of three years with subsequent one year renewal periods. As required by the Rebel Hosting Agreement, the Company paid a deposit of $1.4 million representing the last two months of estimated service fees.
23
On April 17, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company issued to an institutional accredited investor, LDA Capital Limited (the ”Investor”), a senior convertible promissory note having an aggregate principal amount of $1.0 million (the “Note”), as amended April 25, 2023, and a common share purchase warrant (the “Warrant”) to purchase up to 3,191,489 common shares of the Company (the ”Warrant Shares”). The Company received proceeds of approximately $780,000 , which were net of fees associated with the transaction, on April 18, 2023 (the “Closing Date”), with an additional tranche of up to $2.0 million (the “Second Tranche”) to be provided to the Company, subject to certain conditions precedent, within business days of the date on which an effective registration statement is filed to cover the resale of the conversion shares (as defined below) and the Warrant Shares. Upon receipt of the Second Tranche, the Company shall issue an additional senior convertible promissory note with a principal amount equal to the amount of the Second Tranche, and a common share purchase warrant.
The Note matures 24 months after issuance, bears interest at a rate of 7.5 % per annum and is convertible into the Company's common shares (the “Conversion Shares”), at the Investor's election, at an initial conversion price equal to the greater of (i) $0.2976 per share, or (ii) 85 % of the VWAPS (as defined in the Note) during the trading days prior to delivery of a conversion notice by the Investor, subject to adjustment for certain stock splits, stock combinations and dilutive share issuances. Commencing on the date that is 12 months from the date of issuance, the Company is required to pay the Investor back the amount of the outstanding principal in twelve consecutive monthly installments. The Company may prepay all, but not less than all, of the then outstanding principal amount of the Note plus an additional prepayment amount equal to the greater of (i) the total amount of interest that would have been payable in respect of initial principal amount under the Note from the issuance date through (A) its original maturity date or (B) if the date of applicable prepayment is prior to the date that is 120 days from the issuance date, the date that is 12 months from the issuance date, and (ii) the amount of interest that would have been payable in respect of initial principal amount under the Note from the date of the applicable prepayment through (A) its original maturity date or (B) if the date of applicable prepayment is prior to the date that is 120 days from the issuance date, the date that is 12 months from the issuance date, at any time prior to the maturity date. The Note contains a number of customary events of default. Additionally, the Note is secured by certain property and equipment owned by the Company, pursuant to a security agreement between the Company and the Investor dated as of April 17, 2023.
The Warrant is exercisable at an initial exercise price of $0.47 per share and expires three years from the date of issuance. On the date that is six months from the date of issuance of the Warrant, the exercise price will be adjusted to the lower of (i) $0.47 , and (ii) a price equal to 110 % of the average of the VWAPS (as defined in the Warrant) of the Company's common shares over trading days preceding such date. Additionally, the exercise price of the Warrant is subject to adjustment for certain stock splits, stock combinations and dilutive share issuances. Pursuant to the terms of the Purchase Agreement, the Company will reserve for issuance 200 % of the maximum aggregate number of common shares as are issuable upon repayment or conversion in full of the Note and exercise in full of the Warrant at any time.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following quarterly management’s discussion and analysis (“MD&A”) should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes of Sphere 3D Corp. (the “Company”) for the three months ended March 31, 2023. The condensed consolidated financial statements have been presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Unless the context otherwise requires, any reference to the “Company,” “Sphere 3D,” “we,” “our,” “us” or similar terms refers to Sphere 3D Corp. and its subsidiaries. Unless otherwise indicated, all references to “$” and “dollars” in this discussion and analysis mean U.S. dollars.
This report includes forward-looking statements that involves risks and uncertainties. This forward-looking information includes, but is not limited to, statements with respect to management’s expectations regarding the future growth, results of operations, performance and business prospects of Sphere 3D. This forward-looking information relates to, among other things, future business plans and business planning process, uses of cash, and may also include other statements that are predictive in nature, or that depend upon or refer to future events or conditions. The words “could”, “expects”, “may”, “will”, “anticipates”, “assumes”, “intends”, “plans”, “believes”, “estimates”, “guidance”, and similar expressions are intended to identify statements containing forward-looking information, although not all forward-looking statements include such words. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events.
Many factors could cause actual results, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements, including, but not limited to: the inability to maintain compliance with the requirements of the NASDAQ Capital Market and/or inability to maintain listing with the NASDAQ Capital Market; the impact of competition; the investment in technological innovation; the retention or maintenance of key personnel; the possibility of significant fluctuations in operating results; the ability of Sphere 3D to maintain business relationships; financial, political or economic conditions; financing risks; future acquisitions; the ability of Sphere 3D to protect its intellectual property; third party intellectual property rights; volatility in the market price for the common shares of the Company; compliance by Sphere 3D with financial reporting and other requirements as a public company; conflicts of interests; future sales of common shares by Sphere 3D’s directors, officers and other shareholders; dilution and future sales of common shares. For more information on these risks, you should refer to the Company’s filings with the securities regulatory authorities, including the Company’s most recently filed Annual Report on Form 10-K, which is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov. In evaluating such statements, we urge you to specifically consider various factors identified in this report, any of which could cause actual results to differ materially from those indicated by such forward-looking statements. Forward-looking statements speak only as of the date of this report and we undertake no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this report. Actual events or results may differ materially from such statements.
Overview
Sphere 3D was incorporated under the Business Corporations Act (Ontario) on May 2, 2007 as T.B. Mining Ventures Inc. On March 24, 2015, we completed a short-form amalgamation with a wholly-owned subsidiary. In connection with the short-form amalgamation, we changed our 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 December 2014, we completed the acquisition of Overland Storage, Inc. (“Overland”) to grow our business in the containerization and virtualization technologies along with data management products that enabled workload-optimized solutions. In November 2018, we sold our Overland business. In January 2022, we commenced operations of our digital mining operation and are dedicated to becoming a leading carbon-neutral Bitcoin mining company. We are establishing an enterprise-scale mining operation through procurement of next-generation mining equipment and partnering with experienced service providers.
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Digital assets and blockchain
Bitcoin is a digital asset issued by and transmitted through an open source protocol maintained by a peer-to-peer network of decentralized user nodes. This network hosts a public transaction ledger blockchain where the digital assets and their corresponding transactions are recorded. The digital assets are stored in individual wallets with public addresses and a private key that controls access. The blockchain is updated without a single owner or operator of the network. New digital assets are generated and mined rewarding users after transactions are verified in the blockchain.
Digital assets and their corresponding markets emulate foreign exchange markets of fiat currencies, such as the U.S. dollar, where they can be exchanged to said fiat currencies trading exchanges. In addition to these exchanges, additional trading markets for digital assets exist, such as derivative markets.
Since the nature of digital assets is such that it exists solely in electronic form, they are exposed to risks similar to that of any data held solely in electronic form such as power failure, data corruption, cyber security attacks, protocol breaches, and user error, among others. Similar to data centers, these risks put the digital assets subject to the aforementioned threats which might not necessarily affect a physical fiat currency. In addition, blockchain relies on open source developers to maintain the digital asset protocols. Blockchain as such may be subject to design changes, governance disputes such as “forked” protocols, and other risks associated with open source software.
Digital currencies serve multiple purposes - a medium of exchange, store of value or unit of account. Examples of digital currencies include: bitcoin, bitcoin cash, Ethereum, and Litecoin. Digital currencies are decentralized currencies that facilitate instant transfers. Transactions occur on an open source platform using peer-to-peer direct technology with no single owner. Blockchain is a public transaction ledger where transactions occur, are recorded and tracked, however not owned nor managed by one single entity. Blockchain, accessible and open to all, contains records of all existing and historical transactions. All accounts on the blockchain have a unique public key and is secured with a private key that is only known to the individual. The combination of private and public keys results in a secure digital “fingerprint” which results in a strong control of ownership.
We believe cryptocurrencies have many advantages over traditional, physical fiat currencies, including immediate settlement, fraud deterrent as they are unable to be duplicated or counterfeited, lower fees, mass accessibility, decentralized nature, identity theft prevention, physical loss prevention, no counterparty risk, no intermediary facilitation, no arduous exchange rate implications and a strong confirmation transaction process.
Service and product
In addition to digital mining, we provide network operations center (“NOC”) services to our customers. NOC revenues are for monthly services performed for the customer that are performed either in-house or at the customer’s site. We also deliver data management and desktop and application virtualization solutions through hybrid cloud, cloud and on premise implementations by a reseller network. We achieve this through a combination of containerized applications, virtual desktops, virtual storage and physical hyper-converged platforms. Our products allow organizations to deploy a combination of public, private or hybrid cloud strategies while backing them up with the latest storage solutions. Our brands include HVE ConneXions (“HVE”) and Unified ConneXions (“UCX”).
Investment in Special Purpose Acquisition Company
In April 2021, we sponsored a special purpose acquisition company (“SPAC”), Minority Equality Opportunities Acquisition Inc. (“MEOA”), through our wholly owned subsidiary, Minority Equality Opportunities Acquisition Sponsor, LLC (“SPAC Sponsor”). MEOA’s purpose is to focus initially on transactions with companies that are minority owned businesses. In April 2021, SPAC Sponsor paid $25,000 of deferred offering costs on behalf of MEOA in exchange for 2,875,000 shares of MEOA’s Class B common stock (the “Founder Shares”). On August 30, 2021, MEOA consummated its initial public offering (the “IPO”) and issued units which were comprised of one share of Class A common stock and one redeemable warrant. Also in August 2021, and simultaneously with the consummation of the IPO, SPAC Sponsor participated in the private sale of an aggregate of 5,395,000 Warrants (the “Private Placement Warrants”) at a purchase price of $1.00 per Private Placement Warrant. The SPAC Sponsor paid $5.4 million to MEOA,
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which included $1.0 million from an investor participating in MEOA Sponsor. The Private Placement Warrants are not transferable, assignable or saleable until 30 days after MEOA completes a business combination. On October 18, 2021, the securities comprising the units begin separate trading, the Class A common stock and warrants are listed on the NASDAQ Capital Market under the symbols “MEOA” and “MEOAW,” respectively.
In August 2022, MEOA entered into a business combination agreement with MEOA Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of MEOA (“Merger Sub”), and Digerati Technologies, Inc., a Nevada corporation (“Digerati”), pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Merger Sub will merge with and into Digerati (the “Digerati Merger”), with Digerati surviving the Digerati Merger as a wholly owned subsidiary of MEOA, and with Digerati’s equity holders receiving shares of MEOA common stock.
In November 2022, MEOA held a special meeting of stockholders (the “MEOA Meeting”). At the MEOA Meeting, MEOA’s stockholders approved an amendment (the “Extension Amendment”) to MEOA’s amended and restated certificate of incorporation to extend the date by which MEOA must consummate its initial business combination from November 30, 2022 to May 30, 2023, or such earlier date as determined by MEOA’s board of directors. In connection with the MEOA Meeting, the holders of MEOA’s shares of its Class A common stock exercised their right to redeem such shares for a pro rata portion of the funds in the trust account. After giving effect to the redemption of MEOA’s public shares, on November 30, 2022, the Company owned a controlling interest of MEOA and since such time MEOA has been recorded on a consolidated basis.
SPAC Sponsor, along with MEOA’s initial stockholders, MEOA’s executive officers and directors have entered into a letter agreement with MEOA, pursuant to which we have agreed to (i) waive our redemption rights with respect to our founder shares and public shares in connection with the completion of the initial business combination; (ii) waive our redemption rights with respect to our founder shares and public shares in connection with a stockholder vote to approve an amendment to the certificate of incorporation: (A) to modify the substance or timing of MEOA’s obligation to redeem 100% of the public shares if MEOA does not complete an initial business combination within the combination period; or (B) with respect to any other material provision relating to stockholders’ rights or pre-initial business combination activity; and (iii) waive our rights to liquidating distributions from the trust account with respect to our founder shares if MEOA fails to complete an initial business combination within the Combination Period.
As of March 31, 2023, we hold an aggregate of 3,162,500 shares of MEOA’s Class B common stock.
Nasdaq Listing
On July 25, 2022, we received a notice from the Nasdaq Listing Qualifications Department of the Nasdaq Stock Market LLC (“Nasdaq”) stating that the bid price of our common stock for the last 30 consecutive trading days had closed below the minimum $1.00 per share required for continued listing under Listing Rule 5550(a)(2) (the “Listing Rule”). We had a period of 180 calendar days, or until January 23, 2023, to regain compliance with the Listing Rule.
On January 24, 2023, we received notification from Nasdaq indicating that we will have an additional 180-day grace period, or until July 24, 2023, to regain compliance with the Listing Rule's $1.00 minimum bid requirement. The notification indicated that we did not regain compliance during the initial 180-day grace period provided under the Listing Rule. In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we are eligible for the additional grace period because we meet the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Nasdaq Capital Market with the exception of the bid price requirement, and our written notice to Nasdaq of our intentions to cure the deficiency by effecting a reverse stock split, if necessary.
If we do not regain compliance by July 24, 2023, or if we fail to satisfy another Nasdaq requirement for continued listing, Nasdaq staff could provide notice that our common shares will become subject to delisting. In such event, Nasdaq rules permit us to appeal any delisting determination to a Nasdaq Hearings Panel. Accordingly, there can be no guarantee that we will be able to maintain our Nasdaq listing. We intend to actively monitor the closing bid price for our common shares and will consider available options to resolve the deficiency and regain compliance with the Listing Rule.
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Recent Key Events
•On April 17, 2023, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) pursuant to which we issued to an institutional accredited investor, LDA Capital Limited (the ”Investor”), a Senior Convertible Promissory Note having an aggregate principal amount of $1.0 million (the “Note”) and a Common Share Purchase Warrant (the “Warrant”) to purchase up to 3,191,489 common shares of the Company (the ”Warrant Shares”). We received proceeds of approximately $780,000, which were net of fees associated with the transaction, on April 18, 2023 (the “Closing Date”), with an additional tranche of up to $2,000,000 (the “Second Tranche”) to be provided to us, subject to certain conditions precedent. Upon receipt of the Second Tranche, we shall issue an additional Senior Convertible Promissory Note with a principal amount equal to the amount of the Second Tranche, and a Common Share Purchase Warrant.
•On April 7, 2023, we filed litigation against Gryphon Digital Mining, Inc. (“Gryphon”) citing several breaches to the Gryphon MSA, including but not limited to, several fiduciary and operational breaches.
•On April 4, 2023, we entered into a Master Hosting Services Agreement with Rebel Mining Company, LLC (the “Rebel Hosting Agreement”) for rack space, network services, electrical connections, routine facility maintenance, and technical support of certain of our mining equipment. The Rebel Hosting Agreement has a term of three years with subsequent one year renewal periods. As required by the Rebel Hosting Agreement, we paid a deposit of $1.4 million representing the last two months of estimated service fees.
•On February 8, 2023, we entered into a Hosting Agreement with Lancium FS 25, LLC (the “Lancium Hosting Agreement”) for rack space, network services, electrical connections, routine facility maintenance, and technical support of certain of our mining equipment. The Lancium Hosting Agreement has a term of two years with subsequent one year renewal periods. Within 90 days of commencement of operations of the bitcoin miners, we will pay a deposit representing the last two months of service fees. As of March 31, 2023, there have been no costs incurred or deposits made under the Lancium Hosting Agreement.
•In the first three months of 2023, we issued 5,239,000 common shares for the conversion of 5,239 Series H Preferred Shares. Subsequent to March 31, 2023, we issued 3,235,000 common shares for the conversion of 3,235 Series H Preferred Shares.
•In the first three months of 2023, we sold 2,066 miners for cash proceeds of $3.1 million.
Results of Operations
The First Quarter of 2023 Compared with the First Quarter of 2022
Revenue
We generated revenues of $3.0 million and $1.4 million during the first quarter of 2023 and 2022, respectively. The $1.6 million increase in revenue is primarily due to the increase of $1.8 million in revenues from our digital mining operation, offset by a slight decrease in product and service.
During the first quarter of 2023, the majority of our revenue was derived from digital currency mining and data management services. Income from our mining segment is a result of bitcoin mining activities in the United States. Income from our product and services segment is generated in the United States.
Direct cost of revenues during the first quarter of 2023 and 2022 were $2.3 million and $0.7 million, respectively, representing an increase of $1.6 million, or 216.9%, primarily due to the addition of our digital mining operation.
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Operating Expenses
Sales and Marketing Expense
Sales and marketing expenses were $0.3 million and $0.2 million for the first quarter of 2023 and 2022, respectively.
Research and Development Expense
Research and development expenses were $0.3 million and $0.1 million for the first quarter of 2023 and 2022, respectively. The increase of approximately $0.2 million was primarily due to an increase in employee and related expenses associated with internal projects.
General and Administrative Expense
General and administrative expenses were $3.5 million and $9.0 million for the first quarter of 2023 and 2022, respectively. The decrease of $5.5 million was due to a decrease of approximately $7.4 million of which $5.7 million was primarily associated with outside services related to our 2022 expansion into the digital mining industry and $1.7 million for costs related to former proposed merger transactions that were terminated in 2022. These decreases were offset by an increase of approximately $1.9 million which was comprised of $0.4 million for employee and related expenses primarily associated with a higher average headcount, $0.4 million for legal expenses associated with our digital mining operation, $0.4 million in share-based compensation related to awards, $0.3 million of additional insurance cost primarily related to our director and officers’ insurance, $0.2 million related to formation and operating costs for our SPAC (MEOA), and $0.2 million of costs related to audit services.
Depreciation and Amortization Expense
Depreciation and amortization expense was $1.0 million and $6.4 million for the first quarter of 2023 and 2022, respectively. The decrease of $5.4 million was primarily due to fully amortized supplier agreements related to our digital mining machines.
Interest Income and Other Income, Net
Interest income and other income, net was $0.3 million and $0.5 million for the first quarter of 2023 and 2022, respectively. The first three months of 2023 interest income and other income, net, primarily related to a $0.2 million fair value adjustment for warrant liabilities and $0.1 million in interest income from restricted funds held in trust. The first three months of 2022 primarily related to $0.4 million in interest income from notes receivable.
Liquidity and Capital Resources
We have recurring losses from operations. Our primary source of cash flow is generated from digital mining revenue and service revenue. We have financed our operations through proceeds from private and public sales of securities. At March 31, 2023, we had cash and cash equivalents of $2.7 million compared to cash and cash equivalents of $1.3 million at December 31, 2022. The increase in cash results from proceeds received from the sale of mining equipment during the first quarter of 2023. As of March 31, 2023, we had working capital of $1.2 million reflecting a decrease of $2.9 million since December 31, 2022. Cash management continues to be a top priority. We expect to incur negative operating cash flows as we work to maintain and increase our digital mining revenue, product sales volume, and maintain operational efficiencies.
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Management has projected that based on our hashing rate at March 31, 2023, cash on hand may not be sufficient to allow us 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. If we require additional capital and 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 our current forecasts, including but not limited to: (i) shortfalls from projected sales levels; (ii) fluctuations in the value of cryptocurrency; (iii) unexpected increases in product costs; (iv) increases in operating costs; 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 our ability to access the level of funding necessary to continue our operations at current levels. If any of these events occurs or we are unable to generate sufficient cash from operations or financing sources, we 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 our business, results of operations, financial position and liquidity.
The following table shows a summary of our cash flows (used in) provided by operating activities and investing activities (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Net cash used in operating activities | $ | (164) | $ | (15,860) | ||||||||||
| Net cash provided by (used in) investing activities | $ | 1,540 | $ | (12,836) | ||||||||||
Net cash used in operating activities. The use of cash during the first three months of 2023 was primarily a result of our net loss of $3.5 million, offset by $1.1 million in non-cash items, which primarily included amortization of intangible assets, depreciation, realized gain on sale of digital assets, share-based compensation expense, and impairment of digital assets.
Net cash provided by (used in) investing activities. During the first three months of 2023, we sold 2,066 miners originally included in mining equipment, for cash proceeds of $3.1 million and we paid $1.6 million towards digital asset mining machines and shipping costs. During the first three months of 2022, we paid $10.0 million towards digital asset mining machines and shipping costs for which delivery started in January 2022, and we entered into promissory notes receivable with Gryphon and MEOA for $2.5 million and $337,000, respectively. The Gryphon note receivable was forgiven on April 4, 2022 upon termination of the Merger Agreement with Gryphon.
Off-Balance Sheet Information
During the ordinary course of business, we may provide standby letters of credit to third parties as required for certain transactions initiated by us. The Company has one standby letter of credit used for the bond necessary for the Company to receive mining machines. At March 31, 2023, there was restricted cash of $0.2 million pledged as collateral for the standby letter of credit.
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Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.
Our significant accounting policies are described in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The accounting estimates that are most critical to a full understanding and evaluation of our reported financial results are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There were no material changes to our critical accounting estimates during the three months ended March 31, 2023.
Recent Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our condensed consolidated financial statements for information for a discussion of recent accounting pronouncements and their effect, if any.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) or 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective to give reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is, from time to time, subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of such pending proceedings will not have a material effect on the Company’s results of operations, financial position or cash flows.
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Item 1A. Risk Factors.
An investment in our Company involves a high degree of risk. In addition to the risk factors and other information included or incorporated by reference to this report, you should carefully consider each of the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks actually occur, our business and financial results could be harmed and the trading price of our common shares could decline.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| Exhibit | Filed | Incorporated by Reference | |||||||||||||||
| Number | Description | Herewith | Form | File No. | Date Filed | ||||||||||||
| 3.1 | 6-K | 001-36532 | 3/25/2015 | ||||||||||||||
| 3.2 | 6-K | 001-36532 | 7/17/2017 | ||||||||||||||
| 3.3 | 8-K | 001-36532 | 10/2/2018 | ||||||||||||||
| 3.4 | 8-K | 001-36532 | 11/5/2018 | ||||||||||||||
| 3.5 | 8-K | 001-36532 | 11/14/2018 | ||||||||||||||
| 3.6 | 8-K | 001-36532 | 7/12/2019 | ||||||||||||||
| 3.7 | 8-K | 001-36532 | 11/8/2019 | ||||||||||||||
| 3.8 | 8-K | 001-36532 | 5/8/2020 | ||||||||||||||
| 3.9 | 8-K | 001-36532 | 9/29/2020 | ||||||||||||||
| 3.10 | 6-K | 001-36532 | 1/7/2021 | ||||||||||||||
| 3.11 | 6-K | 001-36532 | 7/15/2021 | ||||||||||||||
| 3.12 | 6-K | 001-36532 | 10/4/2021 | ||||||||||||||
| 3.13 | 6-K | 001-36532 | 7/17/2017 | ||||||||||||||
| 3.14 | 6-K | 001-36532 | 2/1/2022 | ||||||||||||||
| 3.15 | 8-K | 001-36532 | 1/13/2023 | ||||||||||||||
| 3.16 | 6-K | 001-36532 | 5/12/2017 | ||||||||||||||
| 10.1 | 8-K | 001-36532 | 4/21/2023 | ||||||||||||||
| 10.2 | 8-K | 001-36532 | 4/21/2023 | ||||||||||||||
| 10.3 | 8-K | 001-36532 | 4/21/2023 | ||||||||||||||
| 10.4 | X | ||||||||||||||||
| 31.1 | X | ||||||||||||||||
| 31.2 | X | ||||||||||||||||
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| 32.1 | X | ||||||||||||||||
| 32.2 | X | ||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | |||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | X | |||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | X | |||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | X | |||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | X | |||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase | X | |||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL as contained in Exhibit 101) | X | |||||||||||||||
___________
* The Company has omitted schedules and other similar attachments to such agreement pursuant to Item 601(b) of Regulation S-K. The Company will furnish a copy of such omitted document to the Securities and Exchange Commission upon request.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Sphere 3D Corp. | ||||||||||||||
| Date: | May 11, 2023 | By: | /s/ Patricia Trompeter | |||||||||||
| Patricia Trompeter | ||||||||||||||
| Chief Executive Officer | ||||||||||||||
| (Principal Executive Officer) | ||||||||||||||
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Exhibit 10.4
AMENDMENT NO. 1
TO
SENIOR CONVERTIBLE PROMISSORY NOTE
THIS AMENDMENT (this “Amendment”) is entered into as of April 25, 2023, by and among Sphere 3D Corp., a corporation organized under the laws of the Province of Ontario (“Sphere”) and LDA Capital Limited (“Holder”).
BACKGROUND
WHEREAS, Sphere and Holder are parties to a certain Senior Convertible Promissory Note due April 17, 2025 with a face amount of $1,000,000 (the “Promissory Note”), plus accrued interest thereon, as originally executed by and between the parties on April 17, 2023.
WHEREAS, Sphere and Holder have agreed to amend the Promissory Note and are willing to do so on the terms and conditions hereafter set forth.
NOW, THEREFORE, for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1.Amendment to Promissory Note. Section 3.1(b) of the Promissory Note is hereby deleted in its entirety and replaced with the following:
Conversion Price. The “Conversion Price” means, the greater of: (i) US$0.2976 (“Fixed Price”); or (ii) 85% of the average of the VWAPs during the five (5) Trading Days prior to delivery of the applicable Conversion Notice, and shall be subject to adjustment as provided herein. Notwithstanding the foregoing, until the Shareholder Approval shall have been obtained no conversion may be affected under this Note at a price per share less than the Fixed Price.
2.This Amendment constitutes the legal, valid and binding obligation of the parties and is enforceable in accordance with its terms.
3.Upon the effectiveness of this Amendment, each party hereby reaffirms all covenants, representations and warranties made in the Promissory Note to the extent the same are not amended.
4.Except as specifically amended herein, the Promissory Note and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed.
5.Counterparts; Facsimile. This Amendment may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. Any signature delivered by a party by pdf or facsimile transmission shall be deemed to be an original signature hereto.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first written above.
| SPHERE 3D CORP. | |||||
By: /s/ Patricia Trompeter Name: Patricia Trompeter Title: Chief Executive Officer | |||||
| LDA CAPITAL LIMITED | |||||
By:/s/ Warren Baker Name: Warren Baker Title: Managing Partner | |||||
[Signature Page to Amendment No. 1]
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Patricia Trompeter, Chief Executive Officer of Sphere 3D Corp. certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Sphere 3D Corp.; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; | ||||
| 4. | The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: | ||||
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||||||
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||||||
| (c) | Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||||||
| (d) | Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and | |||||||
| 5. | The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions): | ||||
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and | |||||||
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting. | |||||||
Date: May 11, 2023
| /s/ Patricia Trompeter | ||
Patricia Trompeter | ||
| Chief Executive Officer | ||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kurt L. Kalbfleisch, Chief Financial Officer of Sphere 3D Corp. certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Sphere 3D Corp.; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; | ||||
| 4. | The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: | ||||
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||||||
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||||||
| (c) | Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||||||
| (d) | Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and | |||||||
| 5. | The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions): | ||||
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and | |||||||
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting. | |||||||
Date: May 11, 2023
| /s/ Kurt L. Kalbfleisch | ||
| Kurt L. Kalbfleisch | ||
| Senior Vice-President and | ||
| Chief Financial Officer | ||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION. 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sphere 3D Corp. (the “Registrant”) on Form 10-Q for the quarterly period ended March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patricia Trompeter, Chief Executive Officer of the Registrant, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| • | The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and | |||||||
| • | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. | |||||||
Date: May 11, 2023
| /s/ Patricia Trompeter | ||
Patricia Trompeter | ||
| Chief Executive Officer | ||
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION. 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sphere 3D Corp. (the “Registrant”) on Form 10-Q for the quarterly period ended March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kurt L. Kalbfleisch, Senior Vice-President and Chief Financial Officer of the Registrant, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
| • | The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and | |||||||
| • | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. | |||||||
Date: May 11, 2023
| /s/ Kurt L. Kalbfleisch | ||
| Kurt L. Kalbfleisch | ||
| Senior Vice-President and | ||
| Chief Financial Officer | ||