Sphere 3D (NASDAQ:ANY), a Canadian company, signed a deal with privately-held Gryphon Digital Mining on June 3 in an all-stock reverse merger transaction. The deal will transform Sphere 3D into a Bitcoin (CCC:BTC-USD) mining operation when it closes sometime in the fourth quarter. As it stands now, with ANY stock up significantly, my assessment is that the stock already incorporates most of the good news.

For example, since ANY stock closed at $1.63 on June 3, it has drifted up to $5.94 as of Thursday, Sept. 30. That represents a gain of about 264% in just a little over 3 months. In fact, the stock peaked at $9.40 on Sept. 2 and has slowly drifted down since then.

As it stands, investors are still waiting for the deal to close.

Where Things Stand With Sphere 3D

Since the reverse merger announcement, Sphere 3D has raised at least $192 million from institutional investors in order to purchase 60,000 servers. These are crypto mining servers called “miners” that hash out algorithms on the Bitcoin blockchain in order to earn BTC tokens as rewards. As a result, Gryphon expects to become a major player in the Bitcoin mining world.

The problem is that the implied value of the two companies now seems to be over $1 billion. Here is how that works out.

First, the June 3 announcement indicated Sphere 3D will issue 111 million shares to Gryphon. In addition, Gryphon shareholders will own 77% of the fully diluted shares after the merger.

Therefore, if we divide 111 million by 0.77, the result shows there will be 144.156 million shares outstanding. At its Friday, Oct. 1 closing price of $5.97, that means the pro-forma market capitalization is $860 million.

However, on Sept. 2, Sphere 3D issued a prospectus for the $192 million common stock capital raise. It updated the number of shares outstanding then and issued 22.6 million shares at $9.50, raising $215 million for the company.

On page PS-2 of that prospectus, the company said it now had 58.809 million shares outstanding. So, on a pro-forma basis, there are now 169.809 million shares worth $5.97 each, or a post-merger market cap of $1.014 billion. Additionally, there are 8.297 million warrants outstanding with a strike price of $5.97, so we can assume they will be issued. That raises the total to 178.1 million shares, or a pro-forma market cap of $1.063 billion.

Where This Leaves Sphere 3D

Gryphon has lots of projections about its future possibilities now that it is merging with Sphere 3D and using the capital at that company to buy more Bitcoin miners. The last page of its slide deck indicates it expects to make $82.3 million in “cash flow” next year.

I assume this means cash flow from operations (CFFO), which is always higher than free cash flow (FCF). That is because FCF includes capex spending, which is likely to be quite high at Gryphon.

For example, let’s assume capex is at least 10% of the $120 million in sales forecast by Gryphon for 2022. That means capex spending will be $12 million and lowers the FCF estimate to $70 million (i.e., $82.3 million less $12 million.)

So if we divide its pro-forma market cap of $1.06 billion by $70 million in FCF, the price-to-FCF multiple is 15.1x. That works out to an FCF yield of 6.6% (i.e., the inverse of 15.1x).

That seems to be about fair value, especially since the pro-forma market cap could end up being higher than my numbers. For example, there are also 11.3 million warrants outstanding with a strike price of $9.50 per share. Once the stock is over $10, the company will likely have to issue those shares (in return for $107.35 million).

What to Do With ANY Stock

BOOX Research authored a very good article on Sept. 9 in Seeking Alpha analyzing the Bitcoin mining operations of the company. This will help you understand the mathematical gymnastics of how Bitcoin mining translates into revenue and earnings. The author also agrees with me that ANY stock seems to be at fair value now.

So instead of chasing this stock higher, where it could easily go, most investors should probably wait. I suspect there might be a “sell on the news” effect on the closing of the merger. That would be a good time to invest. If not, look for another dip in the share price before investing.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.