DarkHorse Technologies Inc.

Previous wording

The following quarterly management’s discussion and analysis (“MD&A”) should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes of Sphere 3D Corp. (the “Company”) for the three and nine months ended September 30, 2024. The condensed consolidated financial statements have been presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Unless the context otherwise requires, any reference to the “Company,” “Sphere 3D,” “we,” “our,” “us” or similar terms refers to Sphere 3D Corp. and its subsidiaries. Unless otherwise indicated, all references to “$” and “dollars” in this discussion and analysis mean U.S. dollars.

Current wording

The following quarterly management’s discussion and analysis (“MD&A”) should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes of Sphere 3D Corp. (the “Company”) for the three months ended March 31, 2025. The condensed consolidated financial statements have been presented in United States (“U.S.”) dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Unless the context otherwise requires, any reference to the “Company,” “Sphere 3D,” “we,” “our,” “us” or similar terms refers to Sphere 3D Corp. and its subsidiaries. Unless otherwise indicated, all references to “$” and “dollars” in this discussion and analysis mean U.S. dollars.

Previous wording

In January 2022, we commenced operations of our Bitcoin mining business and are dedicated to becoming a leader in the Blockchain and Crypto Industry. We have established and continue to grow an enterprise-scale mining operation through the procurement of mining equipment and partnering with experienced service providers. In addition to Bitcoin mining, through December 28, 2023, we delivered data management and desktop and application virtualization solutions through hybrid cloud, cloud and on premise implementations by its reseller network. We achieved this through a combination of containerized applications, virtual desktops, virtual storage and physical hyper-converged platforms. On December 28, 2023, we sold our service and product segment which included HVE ConneXions and Unified ConneXions.

Current wording

In January 2022, we commenced operations of our Bitcoin mining business and are dedicated to becoming a leader in the blockchain and cryptocurrency industry. We have established and continue to grow an enterprise-scale mining operation through the procurement of mining equipment and partnering with experienced service providers.

Previous wording

We obtain Bitcoin as a result of our mining operations, and we sell Bitcoin to support our operations and strategic growth. We currently mine Bitcoin in Missouri, Texas and Iowa, which these states do not have any material state-specific regulatory restrictions on the mining of Bitcoin. However, it is possible that these states or other states in which we may seek to operate may create laws that would impede Bitcoin mining. We do not currently plan to engage in regular trading of Bitcoin other than sales to convert our Bitcoin into U.S. dollars. Decisions to hold or sell Bitcoins are currently determined by management by analyzing forecasts and monitoring the market in real time. We have a hybrid treasury strategy to hold Bitcoin when possible, and sell to fund working capital requirements.

Current wording

We obtain Bitcoin as a result of our mining operations, and when necessary we sell Bitcoin to support our operations and strategic growth. We mine Bitcoin in Missouri, Texas and Iowa, which these states do not have any material state-specific regulatory restrictions on the mining of Bitcoin. However, it is possible that these states or other states in which we may seek to operate may create laws that would impede Bitcoin mining. We do not currently plan to engage in regular trading of Bitcoin other than sales to convert our Bitcoin into U.S. dollars. Decisions to hold or sell our Bitcoin is currently determined by management by analyzing forecasts and monitoring the market in real time. We have a hybrid treasury strategy to hold Bitcoin when possible, and sell to fund working capital requirements.

Previous wording

As of September 30, 2024, we owned approximately 15,000 miners, of which approximately 6,400 were in service. We do not have scheduled downtime for our miners. During the third quarter of 2024, we have started the process of removing our older machines and replacing them with newer generation machines, and expect this to continue through the first quarter of 2025. In addition, we plan to continue to acquire new generation miners as we expand our exahash. We periodically perform both scheduled and unscheduled maintenance on our miners, but such downtime has not historically been significant. Depending on the type of repair, the miner may run at a reduced speed or be taken offline. We use multiple software programs to monitor the performance of our machines. The miners owned as of September 30, 2024 have a range of energy efficiency (joules per terahash – “J/th”) of 21.5 to 38 J/th with an average energy efficiency of 28.4 J/th. The miner efficiency is an indication of how efficient we can earn Bitcoin and minimize cost to run the miner. At this time, we intend only to mine Bitcoin and we hold no other cryptocurrency other than Bitcoin. We do not have any power purchase agreements for the supply of power.

Current wording

In the first quarter of 2025, we mined 30.5 Bitcoin, which represented a slight decrease of 5.0% over the 32.1 Bitcoin we mined in the last quarter of 2024. The decrease was primarily due to our transition to lower-cost hosting sites and refreshing our fleet with newer-generation machines. Based on our existing operations and expected deployment of miners we have purchased, we anticipate having approximately 1.5 EH/s of total hashrate in operation during 2025. We plan to continue to acquire new generation miners as we expand our exahash. We do not have scheduled downtime for our miners. We periodically perform both scheduled and unscheduled maintenance on our miners. Depending on the type of repair, the miner may run at a reduced speed or be taken offline. We use multiple software programs to monitor the performance of our machines. The miners owned as of March 31, 2025 have an average efficiency (joules per terahash – “J/th”) of 26.9 J/th. The miner efficiency is an indication of how efficiently we can earn Bitcoin and minimize cost to run the miner. Currently, we intend only to mine Bitcoin and we hold no other cryptocurrency other than Bitcoin. We do not have any power purchase agreements for the supply of power.

Previous wording

As of September 30, 2024, we held approximately 1.3 Bitcoin. The fair value of our Bitcoin as of September 30, 2024 was approximately $0.1 million on our consolidated balance sheet. We account for our Bitcoin as indefinite-lived intangible assets. Effective January 1, 2024, we early adopted ASU 2023-08, Intangibles - Goodwill - and Other - Crypto Assets (Subtopic 350-60): Accounting For and Disclosure of Crypto Assets(“ASU 2023-08”) and recorded a $20,000 decrease to the opening balance of accumulated deficit and an increase to digital assets. The new guidance requires Bitcoin to be valued at fair value each reporting period with changes in fair value recorded in operating expenses in the consolidated statement of operations. The fair value of Bitcoin is measured using the period-end closing price from the Company’s principal market. When Bitcoin is sold, the gains and losses from such transactions are measured as the difference between the cash proceeds and the carrying basis of the Bitcoin as determined on a first in-first out (“FIFO”) basis and are recorded within the same line item, Change in fair value of Bitcoin, in the consolidated statements of operations.

Current wording

As of March 31, 2025, we held approximately 22.7 Bitcoin. The fair value of our Bitcoin as of March 31, 2025 was approximately $1.9 million on our consolidated balance sheet.

Previous wording

We currently have service agreements with Foundry Digital LLC and Luxor Technology Corporation, each a cryptocurrency mining pool operator, to provide a service to perform hash calculations. In exchange for providing the service, we are entitled to Full Pay Per Share (“FPPS”), which is a fractional share of the fixed Bitcoin award the applicable mining pool operators receives, plus a fractional share of the transaction fees attached to that blockchain, less net cryptocurrency fees due to the mining pool operators over the measurement period, as applicable. The pay-outs that we receive are based on the expected value from the block reward plus the transaction fee reward, regardless of whether the applicable mining pool operators successfully records a block to the blockchain. Our fractional share is based on a contractual formula, which primarily calculates the hash rate provided to the mining pool as a percentage of total network hash rate and other inputs. The service agreements are terminable at any time by either party without compensation, and our enforceable right to compensation only begins when we begin providing hash calculation services to the applicable mining pool operators, which occurs daily at midnight Universal Time Coordinated (“UTC time”).

Current wording

We are engaged with a Bitcoin mining pool operator as our customer, to provide a service to perform hash calculations for the mining pool operator, which is our only performance obligation. Providing hash calculation services is an output of our ordinary activities. We have a service agreement with Foundry Digital LLC, a mining pool operator, to provide a service to perform hash calculations. In exchange for providing the service, we are entitled to Full Pay Per Share (“FPPS”), which is a fractional share of the fixed Bitcoin award the mining pool operator receives, plus a fractional share of the transaction fees attached to that blockchain less net Bitcoin fees due to the mining pool operator over the measurement period, as applicable. The pay-outs received are based on the expected value from the block reward plus the transaction fee reward, regardless of whether the mining pool operator successfully records a block to the blockchain. In the prior year, we also had a service agreement with an additional mining pool operator, Luxor Technology Corporation.

Previous wording

The Third Quarter of 2024 Compared with the Third Quarter of 2023

Current wording

The First Quarter of 2025 Compared with the First Quarter of 2024

Previous wording

We generated revenues of $2.4 million and $5.7 million during the third quarter of 2024 and 2023, respectively. The $3.3 million decrease in revenue is primarily due to one of our hosting providers taking approximately 3,300, or 22%, of our mining machines offline in the third quarter of 2024 to relocate them and such machines are pending redeployment. In addition, beginning the third quarter of 2024, we are in the process of removing our older mining equipment and replacing it with newer generation machines. This is expected to be an ongoing process through the first quarter of 2025 which may result in fluctuations in exahash. There was also a decrease in revenues of $0.6 million related to our former Service and Product segment which was sold in December 2023. During the third quarter of 2024, all of our revenue was derived from Bitcoin mining.

Current wording

For the first quarter of 2025 and 2024, we had revenues of $2.8 million and $6.9 million, respectively. The $4.1 million decrease in revenue is primarily due to one of our previous hosting providers taking approximately 3,300, or 22%, of our mining machines offline in the third quarter of 2024. In addition, beginning the third quarter of 2024, we are in the process of removing our older mining equipment and replacing them with newer generation machines. This is expected to be an ongoing process through the third quarter of 2025 which may result in further fluctuations in exahash. During the first quarter of 2025, all of our revenue was derived from Bitcoin mining.

Previous wording

Direct cost of revenues during the third quarter of 2024 and 2023 were $2.7 million and $4.5 million, respectively, representing a decrease of $1.8 million primarily due to lower hosting fees due to machines being taken offline to be relocated and the transition of removing older mining machines and replacing them with newer generation machines, as well the prior year disposal of our Service and Product segment.

Current wording

For the first quarter of 2025 and 2024, direct cost of revenues were $2.2 million and $4.3 million, respectively. The $2.1 million decrease in cost of revenue was primarily due to lower hosting fees related to machines taken offline to be relocated and the transition of removing older mining machines and replacing them with newer generation machines.

Previous wording

General and administrative expenses were $9.5 million and $10.5 million for the first nine months of 2024 and 2023, respectively. The decrease of $1.0 million was primarily due to a decrease of $0.9 million related to operating costs for our former special purpose acquisition company which no longer exists for 2024, a $0.7 million decrease associated with outside services related to our expansion into the cryptocurrency industry, an aggregate $0.2 million decrease in legal fees associated with our Bitcoin mining operation and insurance cost, and a $0.2 million decrease in investor relations. These decreases were offset by an increase of $0.5 million in share-based compensation primarily related to awards to certain executives, an increase of $0.2 million for employee and related expenses, and a $0.2 million increase in costs related to strategic business growth.

Current wording

General and administrative expenses were $3.2 million and $3.5 million for the first quarter of 2025 and 2024. The decrease of $0.3 million was due to a decrease of $1.0 million in share-based compensation primarily related to forfeited awards, a decrease of $0.3 million in employee and related expenses primarily related to a decrease in headcount, and a $0.2 million decrease in insurance and property tax expenses. These decreases were offset by an increase in legal fees of $0.8 million related to the Gryphon Digital Mining, Inc. litigation and an increase of $0.4 million in costs related to strategic business growth.

Previous wording

Depreciation and amortization expense was $1.7 million and $2.0 million for the third quarter of 2024 and 2023, respectively. The decrease of $0.3 million was primarily due to lessor depreciation related to our Bitcoin mining machines due to current year sales of machines and the impairment in the second quarter of 2024, resulting in a lower cost basis to be depreciated over the remaining useful life.

Current wording

Depreciation and amortization expense was $1.6 million and $1.8 million for the first quarter of 2025 and 2024, respectively. The decrease of $0.2 million was primarily due to lessor depreciation related to our Bitcoin mining machines due to current year sales of machines and the impairment in the second quarter of 2024, resulting in a lower cost basis to be depreciated over the remaining useful life.

Previous wording

Loss on disposal of property and equipment was nil and $0.3 million for the third quarter of 2024 and 2023, respectively, and the prior year related to the sale of mining equipment.

Current wording

Loss on disposal of property and equipment was $0.8 million and nil for the first quarter of 2025 and 2024, respectively, and related to the sale of mining equipment.

Previous wording

Change in fair value of Bitcoin was $8,000 and nil for the third quarter of 2024 and 2023, respectively. Effective January 1, 2024, we early adopted ASU 2023-08 and recorded a $20,000 decrease to the opening balance of accumulated deficit and an increase to digital assets. The loss in the third quarter of 2024 is the change in fair value of the Bitcoin held, as well as the gains and losses from when the Bitcoin was sold. Sale transactions are measured as the difference between the cash proceeds and the carrying basis of the Bitcoin as determined on a FIFO basis.

Current wording

Change in fair value of Bitcoin was a loss of $0.2 million and a gain of $0.8 million for the first quarter of 2025 and 2024, respectively. The loss or gain is the change in fair value of the Bitcoin held, as well as the gains and losses from when the Bitcoin was sold.

Previous wording

We have recurring year to date losses from operations. Our primary source of cash flow is generated from Bitcoin mining revenue. At September 30, 2024, we had cash and cash equivalents of $5.0 million compared to cash and cash equivalents of $0.6 million at December 31, 2023. As of September 30, 2024, we had working capital of $11.0 million reflecting an increase of $2.8 million since December 31, 2023 primarily related to an increase in cash and the unrealized gain on our investment in equity securities. Cash management continues to be a priority and we are phasing out high-cost hosting contracts, leveraging our access to capital, and reducing our overall mining costs.

Current wording

Our principal sources of liquidity are our existing cash, cash equivalents and available-for-sale equity securities. We expect to fund our operations going forward with existing cash resources, anticipated revenue from our Bitcoin mining operation, and cash that we may raise through future financing transactions. At March 31, 2025, we had cash and cash equivalents of $2.8 million compared to cash and cash equivalents of $5.4 million at December 31, 2024. As of March 31, 2025, we had working capital of $6.2 million, reflecting a decrease of $7.7 million since December 31, 2024 primarily related to a decrease in cash and an unrealized loss on our investment in equity securities. Cash management continues to be a priority and we are phasing out high-cost hosting contracts, leveraging our access to capital, and reducing our overall mining costs.

Previous wording

Management has projected that based on our recurring losses, negative cash flows from operating activities, and our hashing rate at September 30, 2024, cash on hand may not be sufficient to allow us to continue operations and there is doubt about our ability to continue as a going concern within 12 months from the date of issuance of the financial statements 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. Included in our working capital is an investment in equity securities that we can liquidate as needed to assist in funding 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 business and successful implementation of our key strategic initiatives, financial, economic and market conditions and other factors, some of which are beyond our control. If we require additional capital and are unsuccessful in raising that capital at a reasonable cost and at the required time, or at all, 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. In an effort to mitigate these risks we expect to take steps to lower our cost of mining and also refresh our mining fleet to increase our mining efficiency.

Current wording

Management has projected that based on our recurring losses, negative cash flows from operating activities, and our hashing rate at March 31, 2025, cash on hand may not be sufficient to allow us to continue operations and there is substantial doubt about our ability to continue as a going concern within 12 months from the date of issuance of our financial statements 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. Included in our working capital is an investment in equity securities that we can liquidate as needed to assist in funding 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 business and successful implementation of our key strategic initiatives, financial, economic and market conditions and other factors, some of which are beyond our control. We require additional capital and if we are unsuccessful in raising that capital at a reasonable cost and at the required times, or at all, 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. In an effort to mitigate these risks we expect to take steps to lower our cost of mining and also refresh our mining fleet to increase our mining efficiency.

Previous wording

Significant changes from our current forecasts, including but not limited to: (i) shortfalls from projected mining earning levels; (ii) increases in operating costs; (iii) decreases in the value of cryptocurrency; and (iv) we do not maintain compliance with the requirements of the NASDAQ Capital Market and/or we do not maintain our listing with the NASDAQ Capital Market could have a material adverse impact on our ability to access the level of funding necessary to continue our operations at current levels. These factors, among others, should they occur may result in our inability to continue as a going concern within 12 months from the date of issuance of the financial statements. 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.

Current wording

Significant changes from our current forecasts, including but not limited to: (i) shortfalls from projected mining earning levels; (ii) increases in operating costs; (iii) decreases in the value of cryptocurrency; and (iv) if we do not maintain compliance with the requirements of Nasdaq and/or we do not maintain our listing with Nasdaq could have a material adverse impact on our ability to access the level of funding necessary to continue its operations at current levels. These factors, among others, should they occur may result in our inability to continue as a going concern within 12 months from the date of issuance of our financial statements. 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.

Previous wording

Net cash used in operating activities. The use of cash during the first nine months of 2024 was primarily a result of our net loss of $2.2 million, offset by $1.5 million in non-cash items, which primarily included an unrealized gain on investment in equity securities, realized gain on investment in equity securities, depreciation and amortization, share-based compensation expense, impairment of property and equipment, loss on disposal of property and equipment, change in fair value of Bitcoin, Bitcoin issued for services, and change in fair value of warrant liabilities.

Current wording

Net cash used in operating activities. The use of cash during the first three months of 2025 was primarily a result of our net loss of $8.8 million, offset by $6.3 million in non-cash items, which primarily included an unrealized loss on investment in equity securities, depreciation and amortization, share-based compensation expense, loss on disposal of property and equipment, change in fair value of Bitcoin, and change in fair value of warrant liabilities.

Previous wording

Net cash provided by investing activities. During the first nine months of 2024, we received $10.5 million from proceeds from the sale of investment in equity securities and $1.5 million from proceeds from the sale of Bitcoin, offset by $4.6 million of payments for the purchase of property and equipment consisting of newer generation mining machines. During the first nine months of 2023, we sold 2,925 miners originally included in mining equipment, for cash proceeds of $4.1 million, our SPAC received $10.3 million from the redemption of the trust account and paid $10.4 million for the redemption of the redeemable non-controlling interest related to MEOA, and we paid $1.6 million towards digital asset mining machines and shipping costs.

Current wording

Net cash provided by investing activities. During the first three months of 2025, we received $2.1 million from proceeds from the sale of Bitcoin, and $0.2 million for the sale of 950 miners originally included in mining equipment, offset by $1.0 million of payments for the purchase of property and equipment consisting of newer generation mining machines. During the first three months of 2024, we received $1.5 million from proceeds from the sale of Bitcoin.

Previous wording

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Current wording

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are outlined in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.