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Sphere 3D Seeks Bitcoin Miner Ramp As Gryphon Merger Deal Ends (NASDAQ:ANY)

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A Quick Take On Sphere 3D

Sphere 3D (NASDAQ:ANY) recently reported its Q1 2022 financial results on May 16, 2022 after mutually agreeing to terminate its proposed merger with Gryphon Digital Mining.

The company is seeking to grow itsBitcoin (BTC-USD) mining operations and will continue to work with Gryphon as it builds out its mining capabilities.

Until we see more data on the firm’s installation of additional miners and on the outlook for a rally in the price of Bitcoin, I’m on Hold for Sphere in the near term.

Sphere 3D Overview

Toronto, Canada based Sphere 3D was founded to provide a range of data center products and services.

It has since changed its focus to become a net carbon neutral Bitcoin and other cryptocurrency mining company with operations in North America.

The firm is headed by Chief Executive Officer Patricia Trompeter, who was previously co-founder and Managing Partner of Ceres Capital Ventures.

The global market for Bitcoin mining is currently in significant flux, with the recent bans on mining in China having caused a large amount of that country’s hashpower to exit the network while those operators look for more suitable locations.

Many mining concerns have relocated to the United States, due to its largely predictable regulatory and legal environment and pro-business approaches in a number of states.

The market value for mining depends on the price of Bitcoin, since the majority of value going to the miner is a function of the current Bitcoin reward rate of 6.25 Bitcoin per successfully mined block.

At a price of $25,000 per Bitcoin, the annual mining rewards for the entire industry would be approximately $8.21 billion.

Major industry participants include:

  • Bitfarms (BITF)

  • Argo Blockchain (OTCQX:ARBKF)

  • DMG Blockchain (OTCQB:DMGGF)

  • Hive Blockchain (HIVE)

  • Hut 8 Mining (HUT)

  • HashChain Technology

  • DPW Holdings

  • Layer1 Technologies

  • Riot Blockchain (RIOT)

  • Marathon Digital Holdings (MARA)

  • Others

Sphere 3D’s Recent Financial Performance

  • Total revenue per quarter has been uneven as the firm has operated a relatively small number of mining computers:

5 Quarter Total Revenue

5 Quarter Total Revenue (Seeking Alpha)

  • Gross profit by quarter has followed approximately the same trajectory as that of total revenue:

5 Quarter Gross Profit

5 Quarter Gross Profit (Seeking Alpha)

  • Selling, G&A expenses as a percentage of total revenue per quarter have remained quite high:

5 Quarter Selling, G&A % Of Revenue

5 Quarter Selling, G&A % Of Revenue (Seeking Alpha)

  • Operating losses have worsened as the firm has pursued capital and expense intensive cryptocurrency mining operations:

5 Quarter Operating Income

5 Quarter Operating Income (Seeking Alpha)

  • Earnings per share (Diluted) have remained negative as the chart shows below:

5 Quarter Earnings Per Share

5 Quarter Earnings Per Share (Seeking Alpha)

(All data in above charts is GAAP)

In the past 12 months, ANY’s stock price has fallen 80.7% vs. the US S&P 500 index’s drop of around 5.9%, as the chart below indicates:

52 Week Stock Price

52-Week Stock Price (TradingView)

Valuation And Other Metrics For Sphere 3D

Below is a table of relevant capitalization and valuation figures for the company:

Measure

amount

Enterprise Value

$56,690,000

Market Capitalization

$40,000,000

Enterprise Value / Sales [TTM]

13.65

Revenue Growth Rate [TTM]

-13.10%

Operating Cash Flow [TTM]

-$43,500,000

Earnings Per Share (Fully Diluted)

-$0.64

(Source – Seeking Alpha)

Commentary On Sphere 3D

In its last earnings announcement (Source – Seeking Alpha), covering Q1 2022’s results, management highlighted its expansion plans for receiving contracted delivery of 60,000 Antminer S19j Pro mining computers by the end of 2022.

It’s likely the company will receive these miners on time as the overall supply of miners has increased in recent months due to a downturn in Bitcoin price reducing demand in some respects.

At the earnings announcement date (May 16, 2022), the firm had not received its initial test shipment of 12 NM440s Bitcoin miners as part of its 60,000 NM440 order. The company has contract termination rights.

As to its financial results, total revenue was $1.4 million, of which digital mining revenue represented half for its first quarter of operating Bitcoin mining computers.

Sphere generated high and increasing operating losses during the quarter as it sought to ramp up installation of its received miners. It also purchased an additional 125,000 Certified Emission Reductions credits.

Notably, the firm will not be directly managing its data center activities, but using Gryphon Digital Mining pursuant to a Master Services Agreement.

For the balance sheet, the company finished the quarter with $25.7 million in cash and equivalents and $7.8 million in liabilities, of which $1.1 million were long-term.

Looking ahead, management’s primary goal is to bring online as many miners as it can while operating in an efficient manner through its relationship with Gryphon.

There is some question as to whether having your mining computers managed by an outside party produces the most efficient results.

Regarding valuation, the market is still valuing the company at an EV/Revenue multiple of nearly 13.7x despite a bear market in cryptocurrency prices.

The primary risks to the company’s outlook is how quickly it can bring its previously ordered mining computers online and dealing with the volatility in the price of cryptocurrencies.

A potential upside catalyst would be a rally in the price of Bitcoin, buoying the stock price in the process.

Another question is whether management intends to hold its mined Bitcoin as much as possible in its treasury, to sell a significant portion of it or sell all of it, minimizing exposure to holding risks.

Until we see more data on the firm’s installation of additional miners and on the outlook for a rally in the price of Bitcoin, I’m on Hold for Sphere in the near term.

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