Sphere 3D Corp: A Crypto Winter Survivor? (NASDAQ:ANY)

The Bitcoin (BTC-USD) mining industry had a tough 2022. Many companies were over-leveraged and blew themselves up when BTC fell below levels that made operations unsustainable. Sphere 3D (NASDAQ:ANY) is a BTC mining company that once had lofty goals that, to this point, have failed somewhat spectacularly. Sphere 3 only recently got into crypto mining after previously operating as a data storage and management business. Bitcoin mining commenced in January 2022.

NuMiner and Gryphon Setbacks

Shortly after mining operations began, Sphere 3D announced an order of 60,000 mining rigs from a company called NuMiner Global. The rigs, called the NM440, would have reportedly generated an astounding level of efficiency that would have enabled a dramatic reduction in energy used to mine – thus, improving the gross margins for Sphere 3D. You can see a picture of the NM440 below:

But beyond the efficiency of the machines, when fully energized the amount of reported exahash capacity enabled by the NM440 would have given Sphere 3D a stunning 32 EH/s. This would have certainly made Sphere 3D the top public miner by monthly production and likely by a wide margin. Unfortunately, the NM440 never panned out for Sphere 3D. Skeptics at the time alleged the NM440 was nothing more than a photoshopped mockup of a Cerebras Systems CS-2 machine built for AI compute; sentiment Cerebras Systems seemed to corroborate according to Bitcoin.com.

During the same time, Sphere 3D was working on a merger with the private mining company Gryphon Digital Mining. Gryphon is led by Rob Chang who has previous public mining experience at Riot Platforms (RIOT). Chang was to be the CEO of the new company post-merger. The Gryphon deal subsequently fell apart shortly after the NuMiner situation with both Gryphon and Sphere 3D amicably agreeing to part ways in April 2022:

After careful consideration by both management teams and their respective boards of directors, the parties amicably agreed to the termination due to changing market conditions, the passage of time, and the relative financial positions of the companies, among other factors.

The day after the Gryphon deal ended, then Sphere 3D CEO Peter Tassiopoulos moved into a different consultant role with Sphere 3D and current CEO Patricia Trompeter took over. Things haven’t gotten easier for Sphere 3D since the NuMiner/Gryphon situations as the company has dealt with all sorts of issues related to US customs shipping delays, deposits stuck in third party bankruptcy proceedings, and reliance on hosting services to bring rigs online. Finally, Sphere 3D recently sued Gryphon Digital Mining for what the company claims to be a breach of contract pertaining to fiduciary and operational obligations as part of a Master Services Agreement. Sphere 3D’s new hosting arrangement is with Rebel Mining Company.

Production is Actually Improving

Despite the numerous issues pertaining to Sphere 3D’s operations, the company has been able to bring more machines online this year. In May, the company mined nearly 78 BTC. While this is very small compared to other mining peers, it is more than double what the company was able to produce in the month of April and a 600% improvement over May 2022. At the end of May 2023, operating exahash per second reached 1.0 EH/s. It’s the highest level of production Sphere 3D has attained but it should be noted that the company’s January investor deck was guiding for 1.66 EH/s by April.

In January, Sphere 3D liquidated approximately 121.6 BTC when accounting for what was sold out of treasury and from January’s production. Bitcoin’s price in January was between $17-24k. Using a $20k BTC price as a baseline estimate, we can reasonably estimate Sphere 3D brought in about $2.4 million from liquidations in January – though the company may have actually been able to bring in more than that if it timed sales well.

Path to Profitability?

The biggest issue going forward for Sphere 3D is the company is running out of cash and scaling options are limited without debt or dilution. Quarterly revenue has averaged just $1.9 million over the last 4 quarters while opex has generally increased well ahead of what the company is bringing in.

When we factor in both opex and cost of revenue against just $7.7 million in TTM revenue, Sphere 3D’s negative net income has totaled almost $182 million over the last 4 quarters:

A large factor in the Q4-22 negative net income was a result of impairment of intangible assets and investments related to vendor bankruptcies and the performance of FileCoin (FIL-USD). As of quarter ended March 2023, Sphere 3D had just $2.7 million remaining in cash and $74.9 million in total assets against 10.7 million in total liabilities. In the January investor deck, the company laid out some scenarios for where the quarterly revenue could be if it can achieve 1.66 EH/s in 2023:

Even if Sphere was able to achieve 1.66 EHS, which it has yet to do, Sphere’s internal upside estimate may be overly optimistic. In the May Production update, Trompeter said this:

By the end of June, we expect to be close to completing our near-term goal of 1.3 EH/s installed hash rate by energizing an additional 2,400+ miners that are currently in-transit and are expected to arrive at our hosting sites within the next few weeks. Once all 1.5 EH/s are fully operational in the month following, we expect to be delivering positive operating cash flows on a run-rate basis at current market levels.

Bitcoin was closer to $25k when that press release came out but it’s possible Trompeter was referring to end of May BTC levels which were closer to $27k. At the current $30k level, Sphere 3D could be cash flow positive next quarter but I have doubts about that. If we assume a BTC per EH/s figure of 80, which would be in line with what the company reported between April and May, I see a breakeven figure closer to $37k for Sphere 3D:

Click to enlarge

Source: Author Estimates

My table above assumes production capacity of 1.5 EH/s averaged for the full quarter and opex remaining flat from Q1. This also assumes network hashrate remains constant which would be a counter-trend assumption. But to be clear, this is just my estimate and not necessarily indicative of the reality of Sphere 3D.

Risks

The next Bitcoin halving event is projected for April 2024. When this happens, the block reward for mining BTC will drop from roughly 6.2 BTC to 3.1 BTC. This means all miners will effectively see their cost of revenue double. While we saw transaction fees boost miner revenue in May, the Ordinals-driven trend in Bitcoin’s fee market hasn’t had follow throw into the summer months.

Even though the company doesn’t have debt, there has been dilution in recent quarters. Sphere 3D just finished a reverse-split to remain compliant with listing policies. And there was $8.5 million in stock-based compensation in 2022. Which means stock-based compensation exceeded revenue for the year. In my view, that’s a red flag.

Summary

If everything goes right from here and Sphere 3D can scale production capacity goals without taking on debt, the company could theoretically get bought out by a bigger entity that wants to consolidate hashrate. But I don’t know that I would bank on that given the macro uncertainty and the high cost of credit. ANY is an interesting hold, but I think there are better Bitcoin proxies in the mining sector. And I’ll reiterate once again what I’ve said in many articles in the past; the best way to bet on Bitcoin is to just buy BTC.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.