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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or            
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________________________to ___________________________
Commission File Number: 001-36532
__________________________________
Sphere 3D Corp.
(Exact name of Registrant as specified in its charter)
__________________________________
Ontario, Canada
98-1220792
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
895 Don Mills Road, Bldg 2, Suite 900
Toronto, Ontario Canada
M3C 1W3
(Address of principal executive offices)
(Zip Code)
647 952-5049
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Shares
ANY
NASDAQ Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐             Accelerated filer ☐
Non-accelerated filer                 Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒
As of November 7, 2023, there were 14,355,336 shares of the registrant’s common shares 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)
September 30,
2023
December 31,
2022
Assets
Current assets:
Cash and cash equivalents$613 $1,337 
Digital assets425 1,695 
Restricted cash202 206 
Accounts receivable, net164 174 
Note receivable, net of allowance for credit losses of $3,821 and $0, respectively
 3,821 
Other current assets3,829 3,051 
Total current assets5,233 10,284 
Property and equipment, net26,682 34,259 
Intangible assets, net6,678 9,477 
Funds held in trust account 10,297 
Other assets20,503 18,699 
Total assets$59,096 $83,016 
Liabilities, Temporary Equity and Shareholders’ Equity
Current liabilities:
Accounts payable$2,442 $2,993 
Accrued liabilities1,723 1,537 
Accrued payroll and employee compensation744 696 
Warrant liabilities221  
Other current liabilities1,557 974 
Total current liabilities6,687 6,200 
Deferred underwriting fee4,554 4,554 
Warrant liabilities 864 
Other non-current liabilities269 366 
Total liabilities11,510 11,984 
Commitments and contingencies (Note 13)
Series H preferred shares, no par value, unlimited shares authorized, 47,604 and 60,000 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively
15,597 26,469 
Redeemable non-controlling interest 9,998 
Total temporary equity15,597 36,467 
Shareholders’ equity:
Common shares, no par value; unlimited shares authorized, 14,222,194 and 9,804,609 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively
472,628 456,402 
Accumulated other comprehensive loss(1,805)(1,799)
Accumulated deficit(438,604)(419,732)
Total Sphere 3D Corp. shareholders’ equity32,219 34,871 
Non-controlling interest(230)(306)
Total shareholders’ equity31,989 34,565 
Total liabilities, temporary equity, and shareholders’ equity$59,096 $83,016 
See accompanying notes to condensed consolidated financial statements.



Sphere 3D Corp.
Condensed Consolidated Statements of Operations
(in thousands of U.S. dollars, except share and per share amounts)
(unaudited)
Three Months
Ended September 30,
Nine Months
Ended September 30,
2023202220232022
Revenues:
Digital mining revenue$5,102 $787 $12,592 $2,745 
Service and product revenue622 569 1,624 1,904 
Total revenues5,724 1,356 14,216 4,649 
Operating costs and expenses:
Cost of digital mining revenue4,292 553 10,331 1,527 
Cost of service and product revenue221 296 728 996 
Sales and marketing217 236 768 731 
Research and development362 139 859 392 
General and administrative3,399 2,930 10,504 19,687 
Depreciation and amortization2,028 7,408 4,428 21,257 
Impairment of acquired intangible assets1,231  1,231  
Loss on disposal of property and equipment315  566  
Realized gain on sale of digital assets(136)(10)(908)(10)
Impairment of digital assets199 138 549 908 
Total operating expenses12,128 11,690 29,056 45,488 
Loss from operations(6,404)(10,334)(14,840)(40,839)
Other income (expense):
Interest expense(10) (1,183) 
Interest income and other expense, net100 (68)1,464 677 
Provision for losses on deposit for mining equipment (10,000) (10,000)
Forgiveness of note receivable   (13,145)
Impairment of investments   (12,429)
Net loss before taxes(6,314)(20,402)(14,559)(75,736)
Provision for income taxes 121 4 121 
Net loss(6,314)(20,523)(14,563)(75,857)
Less: Non-controlling interest - (loss) income(7) 76  
Net loss available to common shareholders$(6,307)$(20,523)$(14,639)$(75,857)
Net loss per share:
Net loss per share basic and diluted$(0.50)$(2.14)$(1.29)$(8.08)
Shares used in computing net loss per share:
Basic and diluted12,653,413 9,574,867 11,340,973 9,383,266 
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 September 30,
Nine Months
Ended September 30,
2023202220232022
Net loss$(6,314)$(20,523)$(14,563)$(75,857)
Other comprehensive (loss) income:
Foreign currency translation adjustment(1)(3)(6)(2)
Total other comprehensive (loss) income(1)(3)(6)(2)
Comprehensive loss$(6,315)$(20,526)$(14,569)$(75,859)
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 SharesAccumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Non-controlling InterestTotal
Shareholders'
Equity
SharesAmount
Balance at January 1, 20239,804,609 $456,402 $(1,799)$(419,732)$(306)$34,565 
Cumulative adjustment from adoption of
     ASU 2016-13
— — — (3,821)— (3,821)
Issuance of common shares for
     conversion of preferred shares
748,427 2,311 — — — 2,311 
Issuance of common shares pursuant to the
     vesting of restricted stock units
10,656 — — — — — 
Share-based compensation— 485 — — — 485 
Remeasurement of redeemable
     non-controlling interest
— — — (376)— (376)
Other comprehensive loss— — (2)— — (2)
Net loss— — — (3,505)16 (3,489)
Balance at March 31, 202310,563,692 459,198 (1,801)(427,434)(290)29,673 
Issuance of common shares for
     conversion of preferred shares
682,856 2,109 — — — 2,109 
Exercise of stock options94,701 200 — — — 200 
Issuance of common shares for vested
     restricted stock units, net of shares
     withheld for income taxes
82,061 — — — — — 
Share-based compensation— 719 — — — 719 
Remeasurement of redeemable
     non-controlling interest
— — — (36)— (36)
Other comprehensive loss— — (3)— — (3)
Net loss— — — (4,827)67 (4,760)
Balance at June 30, 202311,423,310 462,226 (1,804)(432,297)(223)27,902 
Issuance of common share warrants, net— 1,130 — — — 1,130 
Issuance of common shares for
     conversion of preferred shares
2,699,136 8,335 — — — 8,335 
Issuance of common shares for the
     settlement of liabilities
44,450 64 — — — 64 
Issuance of common shares pursuant to the
     vesting of restricted stock units
10,000 — — — — — 
Exercise of stock options45,298 117 — — — 117 
Share-based compensation— 756 — — — 756 
Other comprehensive loss— — (1)— — (1)
Net loss— — — (6,307)(7)(6,314)
Balance at September 30, 202314,222,194 $472,628 $(1,805)$(438,604)$(230)$31,989 

See accompanying notes to condensed consolidated financial statements.
6


Sphere 3D Corp.
Condensed Consolidated Statements of Shareholders’ Equity (continued)
(in thousands of U.S. dollars, except shares)
(unaudited)
Common SharesAccumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Non-controlling InterestTotal
Shareholders'
Equity
SharesAmount
Balance at January 1, 20229,080,915 $444,265 $(1,794)$(215,195)$ $227,276 
Issuance of common shares and warrants for
     the settlement of liabilities
135,714 1,957 — — — 1,957 
Share-based compensation— 117 — — — 117 
Other comprehensive income— — 9 — — 9 
Net loss— — — (14,647)— (14,647)
Balance at March 31, 20229,216,629 446,339 (1,785)(229,842) 214,712 
Issuance of common shares for
     the purchase of intangible assets
192,857 1,721 — — — 1,721 
Issuance of common shares for vested
     restricted stock units, net of shares
     withheld for income taxes
91,338 — — — — — 
Share-based compensation— 7,199 — — — 7,199 
Other comprehensive loss— — (8)— — (8)
Net loss— — — (40,687)— (40,687)
Balance at June 30, 20229,500,824 455,259 (1,793)(270,529) 182,937 
Issuance of common shares for vested
     restricted stock units, net of shares
     withheld for income taxes
85,762 — — — — — 
Share-based compensation— 592 — — — 592 
Other comprehensive loss— — (3)— — (3)
Net loss— — — (20,523)— (20,523)
Balance at September 30, 20229,586,586 $455,851 $(1,796)$(291,052)$ $163,003 

See accompanying notes to condensed consolidated financial statements.
7


Sphere 3D Corp.
Condensed Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
(unaudited)
Nine Months
Ended September 30,
20232022
Operating activities:
Net loss$(14,563)$(75,857)
Adjustments to reconcile net loss to cash used in operating activities:
Digital currency issued for services1,263 385 
Depreciation and amortization4,428 21,257 
Impairment of acquired intangible assets1,231  
Share-based compensation1,960 7,908 
Change in fair value of warrant liabilities(1,371) 
Warrants issued with convertible debt976  
Realized gain on sale of digital assets(908)(10)
Impairment of digital assets549 908 
Loss on disposal of property and equipment566  
Extinguishment of debt63  
Noncash lease cost40  
Forgiveness of note receivable 13,145 
Impairment of investments 12,429 
Provision for losses on deposit for mining equipment 10,000 
Issuance of common shares and warrants for settlement of liabilities 1,957 
Change in fair value of crypto asset payable (1,535)
Changes in operating assets and liabilities:
Proceeds from sale of digital assets12,958  
Digital assets(12,592)(2,745)
Accounts receivable10 (37)
Accounts payable and accrued liabilities1,336 30 
Accrued payroll and employee compensation48 (41)
Other assets and liabilities, net(2,018)(15,900)
Net cash used in operating activities(6,024)(28,106)
Investing activities:
Proceeds from sale of property and equipment4,111  
Redemption of non-controlling interest(10,410) 
Redemption of cash in trust account10,297  
Payments for purchase of property and equipment(1,561)(17,323)
Notes receivable (4,265)
Purchase of intangible assets (306)
Net cash provided by (used in) investing activities2,437 (21,894)
Financing activities:
Proceeds from issuance of preferred shares and warrants3,048  
Payments for convertible debt(1,285) 
Proceeds from convertible debt, net of debt issuance costs779  
Proceeds from exercise of stock options317  
Net cash provided by financing activities2,859  
Net decrease in cash, cash equivalents and restricted cash(728)(50,000)
Cash, cash equivalents and restricted cash, beginning of period1,543 54,355 
Cash, cash equivalents and restricted cash, end of period$815 $4,355 
See accompanying notes to condensed consolidated financial statements.
8


Sphere 3D Corp.
Condensed Consolidated Statements of Cash Flows (continued)
(in thousands of U.S. dollars)
(unaudited)
Nine Months
Ended September 30,
20232022
Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets:
Cash and cash equivalents$613 $4,355 
Restricted cash202  
Total cash, cash equivalents and restricted cash$815 $4,355 
Supplemental disclosures of non-cash investing and financing activities:
Remeasurement of redeemable non-controlling interest$412 $ 
Preferred shares and warrants accrued issuance cost$34 $ 
Reclassification from deposit for mining equipment to mining equipment$ $37,304 
Issuance of common shares for purchase of intangible assets$ $1,721 
See accompanying notes to condensed consolidated financial statements.
9


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 $14.6 million for the nine months ended September 30, 2023. Management has projected that based on our hashing rate at September 30, 2023, cash on hand may not be sufficient to allow the Company to continue operations beyond the next 12 months from the date the financial statements are issued 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 mining earning levels; (ii) increases in operating costs; (iii) fluctuations in the value of cryptocurrency; and (iv) 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 beyond the next 12 months from the date the financial statements are issued. 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.
10


Share Consolidation
On June 28, 2023, the Company filed Articles of Amendment to effect a share consolidation (also known as a reverse stock split) of its issued and outstanding common shares on a one-for-seven basis. The share consolidation became effective on June 28, 2023. All share and per share amounts have been restated for all periods presented to reflect the share consolidation.
2.Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements of the Company have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”), applied on a basis consistent for all periods. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set of financial statements. These condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 31, 2023. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. These condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been appropriately eliminated in consolidation.
Use of Estimates
The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified for consistency with the current period presentation. The reclassifications did not have a material impact on the Company's condensed interim consolidated financial statements and related disclosures.
Foreign Currency Translation
The financial statements of the Company’s foreign subsidiary, for which the functional currency is the local currency, is translated into U.S. dollars using the exchange rate at the consolidated balance sheet date for assets and liabilities and a weighted-average exchange rate during the year for revenue, expenses, gains and losses. Translation adjustments are recorded as accumulated other comprehensive income (loss) within shareholders’ equity. Gains or losses from foreign currency transactions are recognized in the condensed consolidated statements of operations. Such transactions resulted in minimal gains or losses for the three and nine months ended September 30, 2023 and 2022.
Cash and Cash Equivalents
Highly liquid investments with insignificant interest rate risk and original maturities of three months or less, when purchased, are classified as cash equivalents. Cash equivalents are composed of money market funds. The Company maintains cash and cash equivalent balances with financial institutions that exceed federally insured limits. The Company has not experienced any losses related to these balances and believes credit risk to be minimal.
11


Restricted Cash
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.
Digital Assets
The Company accounts for digital assets, primarily Bitcoins, as indefinite-lived intangible assets. The digital assets are recorded at cost less impairment.
An impairment analysis is performed at each reporting period or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. The fair value of digital assets is determined on a nonrecurring basis based on the lowest intraday quoted price on the active exchange(s) that the Company has determined as the principal market for digital assets (Level 1 inputs). If the carrying value of the digital asset exceeds the fair value based on the lowest price quoted in the active exchanges during the period, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the price determined.
Impairment losses are recognized in operating expenses in the consolidated statements of operations in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale or disposition.
Digital assets awarded to the Company through its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of digital assets are included within operating activities in the accompanying condensed consolidated statements of cash flows and any realized gains or losses from such sales are included in operating costs and expenses in the condensed consolidated statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
The following table presents the activities of the digital assets (in thousands):
Balance at January 1, 2023$1,695 
Addition of digital assets12,592 
Digital assets sold for cash(12,050)
Digital assets issued for services(1,263)
Impairment loss(549)
Balance at September 30, 2023$425 
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.
12


Leases
The Company has entered into an operating lease for real estate. The lease has a contractual term of 5 years. The Company determines if an arrangement contains a lease at inception. Right of use (“ROU”) assets and liabilities resulting from operating leases are included in property and equipment, other current liabilities and other non-current liabilities on our consolidated balance sheets. Operating lease ROU assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the leases typically do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the discount rate to calculate the present value of future payments. The operating lease ROU asset may also include any lease payments made and exclude lease incentives and initial direct costs incurred. The Company’s lease does not include options to extend the lease. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Property and Equipment
Property and equipment primarily consists of mining equipment and is stated at cost, including purchase price and all shipping and custom fees, and depreciated using the straight-line method over the estimated useful lives of the assets, generally five years.
The Company reviews the carrying amounts of property and equipment when events or changes in circumstances indicate the assets may not be recoverable. If any such indication exists, the fair value of the asset is estimated in order to determine the extent of the impairment loss, if any.
Intangible Assets
For intangible assets purchased in a business combination, the estimated fair values of the assets received are used to establish their recorded values. For intangible assets acquired in a non-monetary exchange, the estimated fair values of the assets transferred (or the estimated fair values of the assets received, if more clearly evident) are used to establish their recorded values. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value.
Purchased intangible assets are amortized on a straight-line basis over their economic lives of 5 years to 15 years for supplier agreements, six years for channel partner relationships, and seven years for customer relationships as this method most closely reflects the pattern in which the economic benefits of the assets will be consumed.
The Company has purchased carbon credits. As it intends to use these carbon credits, the assets have been classified as intangible assets. When the carbon credit is used, it will be expensed as an operating expense.
Impairment of Intangible Assets
The Company performs regular reviews of intangible assets to determine if any event has occurred that may indicate that intangible assets with finite useful lives and other long-lived assets are potentially impaired. Triggering events for impairment reviews may be indicators such as adverse industry or economic trends, restructuring actions, lower projections of profitability, or a sustained decline in our market capitalization. Intangible assets are quantitatively assessed for impairment, if necessary, by comparing their estimated fair values to their carrying values. If the carrying value exceeds the fair value, the difference is recorded as an impairment.
13


Convertible Debt
The Company accounts for convertible debt in accordance with the applicable authoritative guidance and has elected to apply the fair value option. The convertible debt is reflected at fair value in the condensed consolidated balance sheets and changes in fair value are recorded in the condensed consolidated statements of operations as a fair value adjustment to the convertible debt each reporting period (with the portion of the change that results from a change in the instrument-specific credit risk recorded separately in other comprehensive income, if applicable). The Company expenses any issuance costs allocated to a freestanding or an embedded financial instrument that is subsequently measured at fair value through earnings as of the issuance date.
Warrant Liabilities
Warrant liabilities are for a common share purchase warrant issued in connection with the Company’s convertible debt and warrants for shares of MEOA’s common stock that are not indexed to its own stock. Warrants are presented as liabilities at fair value on the consolidated balance sheets. The warrants are subject to remeasurement at each balance sheet date and any change in fair value is recognized in interest income and other expense, net, in the consolidated statements of operations. The fair value of the warrants at December 31, 2022 issued in connection with MEOA's public offering were measured based on the listed market price of such warrants. The fair value of the LDA Warrant was measured using a Monte Carlo valuation model.
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.
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 Bitcoin 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 over time with daily settlement in Bitcoin. The transaction price is the fair value of the digital asset mined, Bitcoin, being the fair value per the prevailing market rate for that digital asset on the date earned. The transaction consideration the Company receives is noncash consideration, in the form of Bitcoin, which the Company measures at fair value on the date earned which is not materially different from the fair value at contract inception. Fair value of the Bitcoin received is determined using the spot price of the Bitcoin 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.
14


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.
Research and Development Costs
Research and development expenses include payroll, employee benefits, share-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Research and development expenses are charged to operating expenses as incurred when these expenditures relate to the Company’s research and development efforts and have no alternative future uses.
15


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.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding the method to allocate resources and assess performance. The Company has two operating segments.
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, however it did not have an effect on its financial position, results of operations or cash flows.
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3.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.
The following tables provide a summary of the financial instruments that are measured at fair value on a recurring basis (in thousands):
September 30, 2023
Fair ValueLevel 1Level 2Level 3
Warrant liabilities$221 $ $ $221 
December 31, 2022
Fair ValueLevel 1Level 2Level 3
Warrant liabilities$864 $864 $ $ 
The following table presents the activities of warrant liabilities that are measured at fair value (in thousands):
Warrant liability as of January 1, 2023$864 
Change in fair value MEOA warrant(202)
Warrant liability as of March 31, 2023662 
Issuance of LDA warrant976 
Change in fair value MEOA warrant(662)
Change in fair value LDA warrant(397)
Warrant liability as of June 30, 2023579 
Retired LDA warrant(248)
Change in fair value LDA warrant(110)
Warrant liability as of September 30, 2023$221 
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.
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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). As discussed in Note 6 - Intangible Assets, at September 30, 2023, the Company recorded impairment charges associated with acquired intangible assets and reduced the carrying amount of such assets subject to the impairment to their estimated fair value.
4.    Note Receivable
Rainmaker Promissory Note
In September 2020, the Company entered into a Senior Secured Convertible Promissory Note with Rainmaker Worldwide Inc. (the “Rainmaker Note”), pursuant to which the Company loaned Rainmaker Worldwide Inc. (“Rainmaker”) the principal amount of $3.1 million and bears interest at the rate of 10.0% per annum. The principal and interest accrued monthly and was 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. 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.
On January 1, 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.
In September 2023, the Company and Rainmaker entered into Amendment No. 1 to the Rainmaker Note and the due date was extended to March 14, 2024, at which time all principal and accrued interest is due and payable. All amounts have been fully reserved. As of September 30, 2023 and December 31, 2022, the Rainmaker Note balance, including accrued interest, was nil and $3.8 million, respectively.
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5.    Certain Balance Sheet Items
The following table summarizes other current assets (in thousands):
September 30,
2023
December 31,
2022
Prepaid digital hosting services$2,062 $880 
Prepaid services549 927 
Prepaid insurance690 783 
Other528 461 
$3,829 $3,051 
The following table summarizes property and equipment, net (in thousands):
September 30,
2023
December 31,
2022
Mining equipment$30,873 $35,550 
Accumulated depreciation(4,569)(1,709)
Subtotal26,304 33,841 
Right of use asset378 418 
Property and equipment, net$26,682 $34,259 
Depreciation expense for property and equipment was $1.3 million and $0.5 million during the three months ended September 30, 2023 and 2022, respectively, inclusive of ROU asset amortization of $15,000 and nil, respectively. Depreciation expense for property and equipment was $2.9 million and $1.1 million during the nine months ended September 30, 2023 and 2022, respectively, inclusive of ROU asset amortization of $40,000 and nil, respectively.
During the nine months ended September 30, 2023, the Company sold 2,925 miners that were included in mining equipment, for cash proceeds of $4.1 million. The Company had a loss on the sale of miners of $0.3 million and $0.6 million during the three and nine months ended September 30, 2023, respectively.
The following table summarizes other assets (in thousands):
September 30,
2023
December 31,
2022
Prepaid digital hosting services$20,476 $18,514 
Prepaid insurance and services16 116 
Other11 69 
$20,503 $18,699 
The following table summarizes other current liabilities (in thousands):
September 30,
2023
December 31,
2022
Advance from target for SPAC $898 $449 
Taxes payable for SPAC270254
Deferred revenue154160
Other235111
$1,557 $974 
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6.    Intangible Assets
The following table summarizes intangible assets, net (in thousands):
September 30,
2023
December 31,
2022
Supplier agreements$37,854 $39,084 
Channel partner relationships730 730 
Customer relationships380 380 
Developed technology150 150 
Capitalized development costs103 103 
39,217 40,447 
Accumulated amortization:
Supplier agreements(32,901)(31,708)
Channel partner relationships(730)(720)
Customer relationships(376)(366)
Developed technology(150)(150)
Capitalized development costs(103)(103)
(34,260)(33,047)
Total finite-lived intangible assets, net4,957 7,400 
Carbon credits held for future use, net1,721 2,077 
Total intangible assets, net$6,678 $9,477 
Amortization expense for intangible assets was $0.8 million and $7.0 million during the three months ended September 30, 2023 and 2022, respectively. Amortization expense for intangible assets was $1.6 million and $20.1 million during the nine months ended September 30, 2023 and 2022, respectively. Estimated amortization expense for intangible assets is expected to be approximately $0.4 million for the remainder of 2023 and $1.5 million, $1.5 million, $1.5 million, and $0.1 million in fiscal 2024, 2025, 2026, and 2027, respectively.
Impairment of Intangible Assets
During the third quarter of 2023, adverse changes in the business climate indicated that an impairment triggering event occurred for one supplier agreement, and the Company determined the carrying value of the finite-lived intangible asset exceeded its estimated fair value. The Company compared the indicated fair value to the carrying value of its finite-lived asset, and as a result of the analysis, an impairment charge of $1.2 million was recorded for the supplier agreement for the three and nine months ended September 30, 2023.
7.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 September 30, 2023 and December 31, 2022, the Company held an aggregate of 3,162,500 shares of MEOA’s Class B common stock.
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On July 3, 2023, MEOA announced that it did not complete an initial business combination on or prior to June 30, 2023, the deadline by which it must have completed an initial business combination, and intends to dissolve and liquidate in accordance with the provisions of its amended charter. As of the close of business on July 3, 2023, MEOA’s public shares were deemed cancelled and represent only the right to receive the redemption amount. MEOA instructed Continental Stock Transfer & Trust Company, the trustee of the trust account, to take all necessary actions to liquidate the securities held in the trust account. The redemption of MEOA’s public shares was completed during the third quarter of 2023.
The SPAC Sponsor agreed to waive its redemption rights with respect to its outstanding Class B common stock issued prior to MEOA’s initial public offering. There were no redemption rights or liquidating distributions with respect to MEOA’s warrants, which expired worthless.
8.    Convertible Debt
On April 17, 2023, the Company entered into a Securities Purchase Agreement (the “LDA Purchase Agreement”) pursuant to which the Company issued to an investor, LDA Capital Limited (the “Investor”), a senior convertible promissory note having an aggregate principal amount of $1.0 million (the “LDA Note”), as amended April 25, 2023, and a common share purchase warrant (the “LDA Warrant”) to purchase up to 455,927 common shares of the Company (the “LDA Warrant Shares”). The Company received proceeds of approximately $0.8 million, which were net of fees associated with the transaction, on April 18, 2023 (the “Closing Date”). The LDA 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) $2.0832 per share, or (ii) 85% of the VWAPS (as defined in the LDA Note) during the trading five days prior to delivery of a conversion notice by the Investor, subject to adjustment for certain stock splits, stock combinations and dilutive share issuances.
On August 14, 2023, in accordance with the terms of the LDA Purchase Agreement prepayment option, the Company repaid the full amount of the LDA Note, including interest and fees, in the amount of $1.3 million. As a result of the repayment, the Company redeemed from the holder of the LDA Warrant 40% of the then outstanding LDA Warrant, or 182,371 LDA Warrant Shares. At September 30, 2023, the balance of the LDA Note was nil . The Company recognized a loss on debt extinguishment of $63,000 which is included in the consolidated statement of operations in interest income and other expense, net.
The LDA Warrant is exercisable at an initial exercise price of $3.29 per share and expires three years from the date of issuance or earlier if the closing of a Fundamental Transaction occurs (defined as merger or consolidation, any sale of substantially all of the Company’s assets, any tender offer or exchange offer pursuant to which common shareholders can tender or exchange their shares for other securities, cash or property, as well as any reclassification of common shares into other securities, cash or property). On the date that is six months from the date of issuance of the LDA Warrant, the exercise price will be adjusted to the lower of (i) $3.29, and (ii) a price equal to 110% of the average of the VWAPS (as defined in the LDA Warrant) of the Company's common shares over five days of trading preceding such date. Additionally, the exercise price of the LDA Warrant is subject to adjustment for certain stock splits, stock combinations and dilutive share issuances. Pursuant to the terms of the LDA 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 LDA Note and exercise in full of the LDA Warrant at any time.
The LDA Warrant contains a contingent put option. In the event of a Fundamental Transaction, the Investor may, at the Investor’s option, require the Company to purchase the LDA Warrant for an amount of cash equal to the Black Scholes value of the remaining unexercised portion of the warrant on the date of consummation of such Fundamental Transaction. The Company has recorded the warrant as a liability and will adjust the warrant liability to fair value each reporting period until settled.
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On April 17, 2023, upon issuance of the LDA Note and LDA Warrant, which are accounted for as freestanding financial instruments, the Company determined that the aggregate fair value of $2.0 million for the instruments issued exceeds the net proceeds received under the transaction. Accordingly, the excess of the fair value over the proceeds received of $1.0 million was recognized as interest expense. The fair value of the LDA Warrant was measured using a Monte Carlo valuation model with the following assumptions:
April 17,
2023
September 30,
2023
Common share price$2.98 $1.33 
Expected volatility120.0 %120.0 %
Risk-free interest rate3.8 %4.9%
9.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 142.857 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. These features include, in the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, deemed liquidation or any other distribution of the assets of the Company among its shareholders for the purpose of winding-up its affairs, the Series H Preferred Shares shall entitle each of the holders thereof to receive an amount equal to the Series H subscription price per Series H Preferred Share, as defined in the agreement, to be paid before any amount is paid or any assets of the Company are distributed to the holders of its common shares.
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.
In August 2023, the Company entered into an Amended and Restated Agreement (the “Hertford Amendment”) with Hertford Advisors Ltd. and certain other parties listed in the Hertford Amendment (together, the “Hertford Group”), which amends and restates in its entirety the purchase agreement between the Company and Hertford Advisors Ltd. dated July 31, 2021, as modified by the amendment to such agreement dated November 7, 2022 (together, the “Original Hertford Agreement”). As an inducement to enter into the Hertford Amendment, the Company issued to Hertford 1,376 Series H Preferred Shares and 800,000 warrants with an aggregate fair value of $1.0 million.
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Hertford shall have the right to exchange 14,980 Series H Preferred Shares for Series H Preferred Shares held by other persons (the “Exchanged Series H Preferred Shares”), provided that at no time shall any recipient of Exchanged Series H Preferred Shares be permitted to convert Series H Preferred Shares that, when aggregated with any common shares beneficially owned by the recipient of Exchanged Series H Preferred Shares prior to such conversion, would result in exceeding 9.99% of the common shares outstanding immediately after giving effect to such conversion.
The offer and sale of the Series H Preferred Shares and the warrants have not been registered under the Securities Act and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements, and in each case in compliance with applicable state securities laws.
In August 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company issued to two investors a total of 13,764 of the Company’s Series H Preferred Shares and a total of 1,966,293 common share purchase warrants (the “Warrants”), each of which entitled the holder to purchase one common share of the Company (the “Warrant Shares”). Pursuant to the terms of the Purchase Agreement, the Company received gross proceeds of $3.0 million. The Company issued a total of 1,377 Series H Preferred Shares and 196,629 warrants as a finder’s fee for the transaction with an aggregate fair value of $0.5 million.
Pursuant to the terms of the Purchase Agreement, the Company will reserve for issuance the maximum aggregate number of common shares that are issuable upon exercise in full of the Warrants at any time.
The Warrants issued in connection with the Hertford Agreement and the Purchase Agreement are exercisable beginning February 12, 2024 and February 23, 2024, respectively, at an initial exercise price of $2.75 per share and have a term of three years from the date of issuance. The exercise price of the Warrants are subject to adjustment for certain stock splits, stock combinations and dilutive share issuances.
In accordance with the authoritative guidance for distinguishing liabilities from equity, the Company has determined that its Series H preferred shares carry certain redemption features beyond the control of the Company. Accordingly, the Series H Preferred Shares are presented as temporary equity. During the nine months ended September 30, 2023, the Company issued 4,130,419 common shares for the conversion of 28,913 Series H Preferred Shares.
10.Share Capital
On June 28, 2023, the Company filed an Articles of Amendment to effect a share consolidation (also known as a reverse stock split) of its issued and outstanding common shares on a one-for-seven basis. The share consolidation became effective on June 28, 2023. All share and per share amounts have been restated for all periods presented to reflect the share consolidation.
In April 2022, the Company issued 192,857 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 September 30, 2023, none of the carbon credits have been retired.
In March 2022, in connection with the Merger Agreement, the Company issued into escrow 121,428 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.
In February 2022, the Company issued 14,286 common shares and 42,858 warrants to purchase up to 42,858 common shares, with a combined fair value of $0.7 million to PGP Capital Advisors for financial advisory services provided.
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Unlimited authorized common shares at no par value are available to the Company. At September 30, 2023, the Company had the following outstanding warrants to purchase common shares:
Date issuedContractual life (years)Exercise priceNumber outstandingExpiration
July 20213$28.00285,716 December 22, 2024
August 20213$45.50370,787 August 25, 2024
August 20213$52.50370,787 August 25, 2024
September 20215$66.501,614,299 September 8, 2026
October 20213$42.00121,429 October 1, 2024
February 20225$28.0014,286 February 7, 2027
February 20225$35.0014,286 February 7, 2027
February 20225$42.0014,286 February 7, 2027
April 20233$3.29273,556 April 17, 2026
August 20233$2.75800,000 August 11, 2026
August 20233$2.752,162,922 August 23, 2026
6,042,354 
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11.Equity Incentive Plans
Stock Options
The fair value of option awards are estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility was based on historical volatility of the Company’s common shares. The expected term of options granted was based on the simplified formula. The risk-free interest rate was based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. The dividend yield assumption was based on the expectation of no future dividend payments.
The assumptions used in the Black-Scholes model were as follows:
Three Months
Ended September 30,
Nine Months
Ended September 30,
2023202220232022
Expected volatility81.8%
81.8-84.0%
124.0%
Expected term (in years)0.50.54.2
Risk-free interest rate
5.52%
5.27-5.52%
2.71-3.25%
Dividend yield
The following table summarizes option activity:
Shares 
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value 
Options outstanding — January 1, 2023389,604 $7.07 
Granted250,000 $2.43 
Exercised(139,999)$2.27 
Forfeited(14,364)$20.36 
Options outstanding — September 30, 2023485,241 $5.66 4.0$ 
Vested and expected to vest — September 30, 2023485,241 $5.66 4.0$ 
Exercisable — September 30, 2023234,184 $6.83 2.8$ 
Restricted Stock
The following table summarizes RSU activity:
 Number of
Shares
Weighted Average
Grant Date Fair Value
Outstanding — January 1, 2023125,182 $8.89 
Granted454,697 $2.89 
Vested and released(111,873)$5.12 
Forfeited(20,953)$6.78 
Outstanding — September 30, 2023447,053 $3.83 
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 one to three years from the original date of grant. The total grant date fair value of RSUs vested during the nine months ended September 30, 2023 and 2022 was approximately $0.6 million and $3.4 million, respectively. The fair value of RSUs vested during the nine months ended September 30, 2023 and 2022 was approximately $0.2 million and $1.8 million, respectively.
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The Company granted restricted stock awards (“RSAs”) in lieu of cash payment for services performed. The estimated fair value of the RSAs was based on the market value of the Company’s common shares on the date of grant. The Company granted fully vested RSAs of 44,450 with a fair value of $64,000 during the nine months ended September 30, 2023. There were no RSAs granted during the nine months ended September 30, 2022.
Share-Based Compensation Expense
The Company recorded the following compensation expense related to its share-based compensation awards (in thousands):
Three Months
Ended September 30,
Nine Months
Ended September 30,
2023202220232022
Sales and marketing$35 $ $86 $ 
General and administrative721 592 1,874 7,908 
Total share-based compensation expense$756 $592 $1,960 $7,908 
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):
September 30, 2023
Unrecognized ExpenseRemaining Weighted-Average Recognition Period (years)
RSUs$752 1.1
Stock options$309 1.3
12.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 and RSUs 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 September 30,
Nine Months
Ended September 30,
 2023202220232022
Preferred shares issued and outstanding6,800,565 13,714,286 6,800,565 13,714,286 
Common share purchase warrants6,042,354 2,826,220 6,042,354 2,826,220 
Options and RSUs outstanding932,294 551,235 932,294 551,235 
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13.Commitments and Contingencies
Service Agreements
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 paid costs under this agreement of $4.2 million and $0.3 million during the three months ended September 30, 2023 and 2022, respectively. The Company paid costs under this agreement of $8.1 million and $1.1 million during the nine months ended September 30, 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. On October 6, 2023, the Company terminated the Gryphon MSA.
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 September 30, 2023. During the three months ended September 30, 2023 and 2022, the Company incurred costs under the GC Data Center MA of $1.1 million and nil, respectively. During the nine months ended September 30, 2023 and 2022, the Company incurred costs under the GC Data Center MA of $3.6 million and nil, respectively. For the three and nine months ended September 30, 2023, $1.1 million and $1.9 million, respectively, of the costs incurred under the GC Data Center MA were paid through the Gryphon MSA and are included in the Gryphon MSA costs above.
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. During both the three and nine months ended September 30, 2023, the Company incurred costs under the Lancium Hosting Agreement of $0.7 million and $1.2 million, respectively. The costs incurred under the Lancium Hosting Agreement are paid through the Gryphon MSA and included in the Gryphon MSA costs above.
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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 deposits of $2.6 million representing the last two months of estimated service fees. During the three and nine months ended September 30, 2023, the Company incurred costs under the Rebel Hosting Agreement of $1.8 million and $3.0 million, respectively. The costs incurred under the Rebel Hosting Agreement are paid through the Gryphon MSA and included in the Gryphon MSA costs above.
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 during both the three months ended September 30, 2023 and 2022. The Company incurred costs under this agreement of $0.6 million and $0.4 million during the nine months ended September 30, 2023 and 2022, respectively. The costs incurred under the Sub-Lease Amendment are paid through the Gryphon MSA and included in the Gryphon MSA costs above.
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 million, which is recorded as deferred underwriting fee in the Company’s consolidated balance sheets.
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 September 30, 2023, the Company has one outstanding standby letter of credit used for the bond necessary for the Company to receive mining machines.
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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$139 
Revenue recognized during the period(72)
Change in liability for warranties issued during the period84 
Liability at September 30, 2023$151 
Current liability, included in other current liabilities116 
Non-current liability, included in other non-current liabilities35 
Liability at September 30, 2023$151 
Litigation
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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14.Segment Information
The Company has two operating segments, (1) Digital Mining and (2) Service and Product. The 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 Company generates its digital mining revenue from two mining pool operators. The Company’s revenue from digital mining is generated in the United States.
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. The Company’s revenue from service and product is generated in the United States.
Summary information by segment (in thousands):
Three Months Ended September 30, 2023Digital MiningService and ProductUnallocatedTotal Consolidated
Revenue$5,102 $622 $ $5,724 
Segment gross profit$810 $401 $ $1,211 
Segment loss from operations$(1,569)$(124)$(4,711)$(6,404)
Interest expense$ $ $10 $10 
Depreciation and amortization$1,999 $3 $26 $2,028 
Nine months ended September 30, 2023Digital MiningService and ProductUnallocatedTotal Consolidated
Revenue$12,592 $1,624 $ $14,216 
Segment gross profit$2,261 $896 $ $3,157 
Segment loss from operations$(2,281)$(866)$(11,693)$(14,840)
Capital expenditures$1,561 $ $ $1,561 
Interest expense$ $ $1,183 $1,183 
Depreciation and amortization$4,330 $20 $78 $4,428 
Three months ended September 30, 2022Digital MiningService and ProductUnallocatedTotal Consolidated
Revenue$787 $569 $ $1,356 
Segment gross profit$234 $273 $ $507 
Segment loss from operations$(7,311)$(273)$(2,750)$(10,334)
Capital expenditures$1,365 $ $ $1,365 
Depreciation and amortization$7,348 $34 $26 $7,408 
Nine months ended September 30, 2022Digital MiningService and ProductUnallocatedTotal Consolidated
Revenue$2,745 $1,904 $ $4,649 
Segment gross profit$1,218 $908 $ $2,126 
Segment loss from operations$(22,724)$(670)$(17,445)$(40,839)
Capital expenditures$17,629 $ $ $17,629 
Depreciation and amortization$21,078 $101 $78