Sphere 3D Corp.

Current report

Our expansion into AI and HPC data-center infrastructure is subject to substantial development, financing, operational, technological and market risks, and we may not successfully implement or realize the anticipated benefits of this strategy.

Current report

Our business strategy includes diversifying our operations beyond Bitcoin mining by pursuing opportunities involving AI, HPC and other high-density computing applications. Developing, converting and operating facilities for these applications is capital intensive and requires substantial operational and financial resources, specialized technical expertise, qualified personnel, reliable and significant power capacity, advanced cooling and networking systems, specialized computing equipment and relationships with customers, utilities, equipment suppliers, contractors and other third parties. We have limited experience developing or operating AI or HPC data-center infrastructure at scale, and there can be no assurance that we will be able to develop the necessary capabilities, obtain the necessary resources or successfully execute this strategy.

Current report

The development, expansion or conversion of our existing or planned facilities for AI or HPC applications may be delayed, disrupted or cost more than anticipated. Such projects may be adversely affected by, among other things, delays in obtaining financing, permits, regulatory approvals, power commitments or utility interconnections; delays in the delivery or installation of equipment; difficulties integrating new equipment into existing infrastructure; shortages of skilled labor, materials, electrical equipment, servers, graphics processing units, cooling systems or other components; defects in design, engineering or construction; failures by contractors, vendors or other counterparties to perform their obligations; changes in applicable laws or regulations; and diversion of management’s attention and other resources. Actual project costs may exceed our budgets, and we may not have sufficient capital to complete a project as planned or at all. Delays, cost overruns or other development difficulties could prevent or delay our ability to generate revenue from a facility and could materially adversely affect our business, financial condition and results of operations.

Current report

We may be required to commit substantial capital and operational resources to develop or convert facilities before securing customer contracts or other binding commitments. We may be unable to attract customers, enter into contracts on commercially acceptable terms or generate sufficient customer demand to support the facilities and capacity that we develop. Even if we enter into customer contracts, such contracts may not generate the revenue or returns we anticipate, may require us to make significant additional investments or may expose us to customer concentration and counterparty credit risks. Customers may delay or reduce their deployment requirements, terminate or elect not to renew their agreements, seek to renegotiate pricing or other terms or otherwise fail to perform their contractual obligations.

Current report

The markets for AI and HPC infrastructure are rapidly evolving and highly competitive. We may compete against established data-center operators, cloud-service providers, technology companies and other Bitcoin mining companies seeking to diversify into similar businesses, many of which have substantially greater financial, technical, operational and personnel resources, longer operating histories and stronger customer relationships than we do. Competition for suitable sites, power capacity, equipment, financing, customers and qualified personnel may increase our costs and limit our ability to execute our strategy.

Current report

Technological developments and customer requirements in these markets may change rapidly. Facilities and equipment that we develop or acquire may become obsolete or may not satisfy future requirements relating to computing density, power availability, cooling, networking, security, redundancy, latency, efficiency or other technical specifications. We may be required to make significant additional capital expenditures to modify or replace our infrastructure and equipment, and we may be unable to do so on a timely or cost-effective basis.

Current report

AI and HPC customers may also require highly reliable infrastructure and may require us to satisfy service-level, uptime, security and performance commitments. Power outages, cooling-system failures, network disruptions, equipment failures, cybersecurity incidents, construction defects, natural disasters or other interruptions could prevent us from satisfying these commitments. Such events could result in service credits, contractual claims, loss of revenue, termination or non-renewal of customer agreements, damage to customer equipment, litigation and reputational harm. Contractual limitations on our liability may not be enforceable or may not adequately protect us from these losses.

Current report

If we are unable to successfully develop, finance, market and operate AI or HPC infrastructure, we may not realize the anticipated benefits of our diversification strategy. We could incur substantial costs without generating corresponding revenue, be required to abandon or modify projects, recognize impairment charges relating to facilities or equipment or divert resources from our existing operations. Any of these events could materially adversely affect our business, financial condition, results of operations and prospects.

Current report

Our mining equipment has been subject to impairment charges, and we may be required to recognize additional impairment losses in the future.

Current report

During the three and six months ended June 30, 2026, we recorded an impairment charge of $7.0 million for property and equipment related to the decline in Bitcoin prices. Our mining equipment may become impaired as a result of changes in market or operating conditions, reduced mining profitability, technological obsolescence, reduced expected mining output or changes in expected future economic benefits. If any of these factors deteriorate, or if additional mining equipment becomes idle or is not expected to return to use, we may be required to recognize additional impairment charges, which could adversely affect our financial condition and results of operations.

Current report

The conversion of our facilities from bitcoin mining to artificial intelligence and high-performance computing use is expected to result in the loss of favorable state and local tax treatment, which would increase our operating costs.

Current report

A substantial portion of our operations is located in the state of Kentucky. Kentucky law provides certain tax exemptions for qualifying commercial cryptocurrency mining operations, including exemptions from sales and use taxes on electricity and certain tangible personal property and the utility gross receipts license tax. We currently benefit from these exemptions at our Kentucky facilities.

Current report

These exemptions do not apply to artificial intelligence, high-performance computing, or general data center operations. Accordingly, as we convert facilities from bitcoin mining to artificial intelligence and high-performance computing use, we expect to lose these exemptions with respect to the converted capacity. The loss of these exemptions would increase our electricity costs at the affected facilities. In addition, artificial intelligence and high-performance computing equipment, which generally carries a higher assessed value than bitcoin mining equipment, is expected to increase our tangible personal property tax liability.

Current report

The Kentucky Qualified Data Center Incentive Program provides a state sales and use tax exemption on qualifying computing equipment only. It does not exempt electricity or reduce local property tax, school tax, or occupational tax. Participation is subject to various eligibility and other conditions. We have not determined whether we will apply for that program, and we can provide no assurance that we would qualify or that its benefits would be material relative to the exemptions we expect to lose.

Current report

Local zoning and permitting requirements, moratoriums on data center development, and community opposition may delay, restrict, or prevent the development, conversion, expansion, or continued operation of our facilities.

Current report

Our operations involve large numbers of high-powered computers and supporting infrastructure that consume substantial amounts of electricity, may consume water, and can generate noise. Data center development, including cryptocurrency mining and artificial intelligence and high-performance computing operations, has become the subject of increasing public attention and, in a number of communities across the United States, organized opposition.

Current report

A growing number of state, county, and municipal governments have adopted or are considering measures that restrict data center development. Such measures may include temporary moratoriums on new data center development or permitting while applicable regulatory standards are studied or revised and may be adopted in response to community opposition or concerns regarding environmental, infrastructure or other impacts.

Current report

Communities that have not previously adopted zoning standards specific to data centers may do so, and the standards ultimately adopted may be more restrictive than those in effect at the time a site was acquired, developed, or placed into service. Such standards may include setback requirements measured from property lines, limits on facility size or footprint, screening, landscaping and berming requirements, noise limits measured at the property line, water use restrictions, decommissioning bond requirements, and restrictions on particular construction methods or building types. Depending on how such standards are formulated, they may materially restrict, or in some cases effectively preclude, the development or expansion of data center facilities on parcels that would otherwise be suitable.

Current report

If standards of this kind were adopted in a jurisdiction in which we operate, facilities we operate today could fail to obtain or retain legal nonconforming use status, could be required to be modified at significant cost, or could become subject to operating restrictions. Approvals we require may be subject to public hearing processes that are lengthy, uncertain in outcome, and susceptible to organized opposition, and adverse action in one jurisdiction may influence the approach taken by others, including jurisdictions in which we operate or may seek to operate.

Current report

These matters could result in delays in or denial of permits and approvals; requirements that we implement costly noise, screening, water, or other mitigation measures; restrictions on operating hours or the scale of our operations; obligations to post decommissioning bonds or provide other financial assurances or community commitments as a condition of approval; fines or penalties; litigation; reputational harm; and, in certain circumstances, the curtailment or shutdown of facilities that cannot satisfy applicable requirements. Any of the foregoing could delay or prevent execution of our conversion and growth strategy, increase our costs, reduce our operating capacity, and materially adversely affect our business, financial condition, results of operations, and prospects.

Current report

Our Rights Agreement includes terms and conditions that could discourage a takeover or other transaction that stockholders may consider favorable.

Current report

On August 7, 2026, our Board of Directors adopted a shareholder rights plan, pursuant to the Rights Agreement. The Rights Agreement is intended to ensure, to the extent possible, that all shareholders of the Company are treated fairly in connection with a take-over bid or other acquisition of Voting Shares that could result in a person becoming the beneficial owner of 20% or more of the outstanding Voting Shares of the Company. Pursuant to the Rights Agreement, one Right will attach to each Voting Share outstanding as of the close of business on August 20, 2026, the Record Time, and to each Voting Share issued after the Record Time and prior to the earlier of the Separation Time and the Expiration Time. From and after the Separation Time and prior to the Expiration Time, each Right entitles its holder to purchase one common share of the Company at an exercise price equal to three times the market price of a common share determined as of the Separation Time, subject to adjustment in accordance with the Rights Agreement. Upon the occurrence of certain triggering events, each Right, other than Rights beneficially owned by an Acquiring Person or certain related persons, will entitle its holder to purchase common shares having an aggregate market value equal to twice the exercise price of the Right. Alternatively, in certain circumstances, the Company may exchange each outstanding Right, other than Rights that have become void under the Rights Agreement, for one common share, subject to adjustment. The Rights will expire on August 10, 2027, unless earlier redeemed, exchanged or otherwise terminated in accordance with the Rights Agreement.

Current report

The Board of Directors adopted the Rights Agreement to protect the interests of the Company’s shareholders. In general terms, subject to the terms and exceptions set forth in the Rights Agreement, the Rights Agreement is designed to impose significant dilution upon any person that becomes an Acquiring Person by acquiring beneficial ownership of 20% or more of the outstanding Voting Shares of the Company without complying with the Rights Agreement. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a take-over bid, merger, arrangement or other business combination or acquisition involving the Company that is not approved by the Board.

Current report

The Rights Agreement is intended to protect shareholders’ interests, including by providing the Board of Directors sufficient time to make informed judgments and take actions that the Board of Directors determines are in the best interests of the Company and its shareholders. Nevertheless, the Rights Agreement may be considered to have certain anti-takeover effects, including potentially discouraging a third party from attempting to obtain a substantial position in the Voting Shares or seeking to obtain control of the Company and discouraging a take-over attempt that shareholders may consider favorable or that could result in a premium over the market price of the Company’s common shares. Even in the absence of a take-over attempt, the Rights Agreement may adversely affect the prevailing market price of the Company’s common shares if it is viewed as discouraging take-over attempts in the future.

Current report

For additional information regarding the Rights Agreement, refer to Note 16 Subsequent Events to the condensed consolidated financial statements.