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As filed with the Securities and Exchange Commission on March 9, 2021
Registration No. 333-       ​
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM F-10
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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HUT 8 MINING CORP.
(Exact name of Registrant as specified in its charter)
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British Columbia, Canada
(Province or other Jurisdiction of
Incorporation or Organization)​
​ ​
7374
(Primary Standard Industrial
Classification Code Number)​
​ ​
Not Applicable
(I.R.S. Employer Identification
Number, if applicable)
​
130 King Street West, Suite 1800, Toronto, Ontario, M5X 2A2
(647) 256-1992
(Address and telephone number of Registrant’s principal executive offices)
Puglisi & Associates
850 Library Avenue, Suite 204
Newark, Delaware 19711
(302) 738-6680
(Name, address (including zip code) and telephone number (including area code) of agent for service in the United States)
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Copies to:
​
Richard Aftanas
Hogan Lovells US LLP
390 Madison Avenue
New York, NY 10017
(212) 918-3000
​ ​
Curtis Cusinato
Bennett Jones LLP
3400 One First Canadian Place
Toronto, Ontario M5X 1A4
(416) 863-1200
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Ryan J. Dzierniejko
Gregory A. Fernicola
Skadden, Arps, Slate,
Meagher & Flom LLP
One Manhattan West
New York, NY 10001
(212) 735-3000
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Martin Langlois
Stikeman Elliott LLP
5300 Commerce Court West
199 Bay Street
Toronto, Ontario M5L 1B9
(416) 869-5672
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Approximate date of commencement of proposed sale of the securities to the public:
As soon as practicable after this Registration Statement becomes effective
Province of Ontario, Canada
(Principal jurisdiction regulating this offering)​
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It is proposed that this filing shall become effective (check appropriate box below):
A.   ☐
upon filing with the Commission, pursuant to Rule 467(a) (if in connection with an offering being made contemporaneously in the United States and Canada).
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B.   ☒
at some future date (check the appropriate box below)
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1.
☐   pursuant to Rule 467(b) on ( ) at ( ) (designate a time not sooner than 7 calendar days after filing).
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2.
☐
pursuant to Rule 467(b) on ( ) at ( ) (designate a time 7 calendar days or sooner after filing) because the securities regulatory authority in the review jurisdiction has issued a receipt or notification of clearance on ( ).
3.
☐
pursuant to Rule 467(b) as soon as practicable after notification of the Commission by the Registrant or the Canadian securities regulatory authority of the review jurisdiction that a receipt or notification of clearance has been issued with respect hereto.
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4.
☒
after the filing of the next amendment to this Form (if preliminary material is being filed).
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to the home jurisdiction’s shelf prospectus offering procedures, check the following box. ☒
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered
​ ​ ​
Amount to be
Registered(1)
​ ​ ​
Proposed
Maximum
Offering Price
per Unit
​ ​ ​
Proposed
Maximum
Aggregate
Offering
Price(1)(2)
​ ​ ​
Amount of
Registration
Fee(2)
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Common Shares, no par value
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
Debt Securities
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
Subscription Receipts
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
Warrants
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
Convertible Securities
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
Units
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
Total
​ ​ ​ ​ US$ 394,944,708 ​ ​ ​ ​ ​
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(3)
​ ​ ​ ​ ​ US$ 394,944,708 ​ ​ ​ ​ ​ US$ 43,088.47 ​ ​
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(1)
There are being registered under this Registration Statement such indeterminate number of Common Shares, debt securities, subscription receipts, warrants, convertible securities and/or units comprised of one or more securities of the Registrant listed above in any combination as shall have an aggregate initial offering price of up to US$394,944,707.74 (C$500,000,000, based on the daily exchange rate on March 8, 2021, as reported by the Bank of Canada, for the conversion of U.S. dollars into Canadian dollars of US$1.00 equals C$1.266). The proposed maximum offering price per security will be determined, from time to time, by the Registrant in connection with the sale of the securities under this Registration Statement. Prices, when determined, may be in U.S. dollars or the equivalent thereof in Canadian dollars.
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(2)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
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(3)
The proposed maximum initial offering price per security will be determined, from time to time, by the Registrant in connection with the sale of the securities under this Registration Statement.
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The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registration Statement shall become effective as provided in Rule 467 under the Securities Act of 1933 or on such date as the U.S. Securities and Exchange Commission, acting pursuant to Section 8(a) of the Securities Act of 1933, may determine.
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PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the United States Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION, DATED MARCH 9, 2021
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. This preliminary short form base shelf prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities. See “Plan of Distribution”.
Information has been incorporated by reference in this prospectus from documents filed with securities commissions or similar authorities in Canada. Copies of the documents incorporated herein by reference may be obtained on request without charge from the Corporate Secretary of Hut 8 Mining Corp. at 130 King Street West, Suite 1800, Toronto, Ontario, M5X 2A2, by telephone at 647 256-1992, and are also available electronically at www.sedar.com.
Preliminary Short Form Base Shelf Prospectus
New Issue and/or Secondary OfferingMarch 9, 2021
[MISSING IMAGE: LG_HUT8-4C.JPG]
HUT 8 MINING CORP.
$500,000,000
Common Shares
Debt Securities
Subscription Receipts
Warrants
Convertible Securities
Units​
Hut 8 Mining Corp. (the “Company” or “Hut 8”) may from time to time offer and issue the following securities: (i) common shares (“Common Shares”); (ii) unsecured debt securities (“Debt Securities”), which may consist of bonds, debentures, notes or other evidences of indebtedness of any kind, nature or description and which may be issuable in series; (iii) subscription receipts (“Subscription Receipts”) exchangeable for Common Shares and/or other securities of the Company; (iv) warrants exercisable to acquire Common Shares and/or other securities of the Company (“Warrants”); (v) securities convertible into or exchangeable for Common Shares and/or other securities of the Company (“Convertible Securities”); and (vi) securities comprised of more than one of the Common Shares, Debt Securities, Subscription Receipts, Warrants and/or Convertible Securities offered together as a unit (“Units”), or any combination thereof, having an initial offer price of up to $500,000,000 in aggregate (or the equivalent thereof, at the date of issue, in any other currency or currencies, as the case may be), at any time during the 25-month period that this preliminary short form base shelf prospectus (including any amendments hereto, the “Prospectus”) remains effective.
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The Common Shares, Debt Securities, Subscription Receipts, Warrants, Convertible Securities and Units (any two or more being, “Securities”) offered hereby may be offered in one or more offerings, separately or together, in separate series, in amounts, at prices and on terms to be set forth in one or more prospectus supplements (each, a “Prospectus Supplement”).
All shelf information permitted under applicable securities legislation to be omitted from this Prospectus will be contained in one or more Prospectus Supplements that will be delivered to purchasers together with this Prospectus. Each Prospectus Supplement will be incorporated by reference into this Prospectus for the purposes of applicable securities legislation as of the date of such Prospectus Supplement and only for the purposes of the distribution of the Securities to which such Prospectus Supplement pertains. The offerings are subject to approval of certain legal matters on behalf of the Company by Bennett Jones LLP with respect to matters of Canadian law and by Hogan Lovells US LLP with respect to matters of U.S. law.
The specific terms of any offering of Securities will be set forth in the applicable Prospectus Supplement and may include, where applicable: (i) in the case of Common Shares, the number of Common Shares offered, offering price (in the event the offering is a fixed price distribution), manner of determining the offering price(s) (in the event the offering is not a fixed price distribution), and any other specific terms; (ii) in the case of Debt Securities, the specific designation, aggregate principal amount, currency or currency unit for which the Debt Securities may be purchased, maturity, interest provisions, authorized denominations, offering price, covenants, events of default, any terms for redemption at the option of the Company or the option of the holder, any exchange or conversion terms, and any other specific terms; (iii) in the case of Subscription Receipts, the number of Subscription Receipts offered, offering price, terms, conditions and procedures for the exchange of the Subscription Receipts into or for Common Shares and/or other securities of the Company, and any other specific terms; (iv) in the case of Warrants, the number of Warrants offered, offering price, terms, conditions and procedures for the exercise of such Warrants into or for Common Shares and/or other securities of the Company, and any other specific terms; (v) in the case of Convertible Securities, the number of Convertible Securities offered, the offering price (in the event the offering is a fixed price distribution), the manner of determining the offering price(s) (in the event the offering is a non-fixed price distribution), the procedures for the conversion or exchange of such Convertible Securities into or for Common Shares and/or other securities of the Company, and any other specific terms; and (vi) in the case of Units, the number of Units offered, offering price, terms of the underlying Common Shares, Debt Securities, Subscription Receipts, Warrants and/or Convertible Securities, and any other specific terms. One or more securityholders of the Company may also offer and sell Securities under this Prospectus (the “Selling Securityholders” and each a “Selling Securityholder”). See “Secondary Offering by Selling Securityholders”.
This Prospectus constitutes a public offering of Securities only in those jurisdictions where they may be lawfully offered for sale, and therein only by persons permitted to sell the Securities. The Company, or any Selling Securityholders, may offer and sell the Securities to or through underwriters purchasing as principal and may also sell the Securities to one or more purchasers directly, through applicable statutory exemptions, or through agents designated by the Company from time to time. The Securities may be sold from time to time in one or more transactions at fixed prices or not at fixed prices, such as market prices prevailing at the time of sale, prices related to such prevailing market prices or prices to be negotiated with purchasers, which prices may vary as between purchasers and during the period of distribution of the Securities. The Prospectus Supplement relating to a particular offering of Securities will identify each underwriter, dealer or agent engaged in connection with the offering and sale of such Securities, as well as the method of distribution and the terms of the offering of such Securities, including the initial offering price (in the event the offering is a fixed price distribution), the manner of determining the offering price(s) (in the event the offering is not a fixed price distribution), the net proceeds to the Company and, to the extent applicable, any fees, discounts or any other compensation payable to underwriters, dealers or agents and any other material terms. See “Plan of Distribution”.
This Prospectus may qualify as an “at-the-market distribution”. The Securities may be offered and sold pursuant to this Prospectus through underwriters, dealers, directly or through agents designated from time to time at amounts and prices and other terms determined by us or any selling securityholders. In connection with any underwritten offering of Securities other than an “at-the-market distribution” ​(as defined in National Instrument 44-102 — Shelf Distributions (“NI 44-102”)), unless otherwise specified in the relevant Prospectus Supplement, the underwriters may over-allot or effect transactions which stabilize or maintain the market price of the Securities offered at levels other than those that might otherwise prevail on the open market. Such transactions, if commenced, may be commenced, interrupted or discontinued at any time. See “Plan of Distribution”. No underwriter or dealer involved in an “at-the-market distribution” under this Prospectus, no affiliate of such an underwriter or dealer and no person or company acting jointly or in concert with such
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underwriter or dealer will over-allot Securities in connection with such distribution or effect any other transactions that are intended to stabilize or maintain the market price of the Securities.
The Common Shares are listed and posted for trading on the Toronto Stock Exchange (the “TSX”) under the symbol “HUT” and quoted on the OTCQX market under the symbol “HUTMF”. On March 8, 2021, the last trading day prior to the date of this Prospectus, the closing price of the Common Shares on the TSX was $9.19 and on the OTCQX market was US$7.29.
Unless otherwise specified in the applicable Prospectus Supplement, Debt Securities, Subscription Receipts, Warrants, Convertible Securities and Units will not be listed on any securities exchange. There is currently no market through which Securities other than Common Shares may be sold, and purchasers may not be able to resell such Securities purchased under this Prospectus. This may affect the pricing of the Securities in the secondary market, the transparency and availability of trading prices, the liquidity of the Securities, and the extent of issuer regulation. See “Risk Factors”.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) OR ANY STATE OR CANADIAN SECURITIES COMMISSION OR REGULATORY AUTHORITY NOR HAS THE SEC OR ANY STATE OR CANADIAN SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.
Prospective investors should be aware that the acquisition of the Securities may have tax consequences. Such consequences may not be described fully herein or in any applicable Prospectus Supplement. Prospective investors should read the discussion contained in this Prospectus under the headings “Certain Canadian and U.S. Federal Income Tax Considerations” as well as the tax discussion, if any, contained in the applicable Prospectus Supplement with respect to a particular offering of Securities.
An investment in the Securities is highly speculative and involves significant risks that should be carefully considered by prospective investors before purchasing such Securities. The risks outlined in this Prospectus and in the documents incorporated by reference herein should be carefully reviewed and considered by prospective investors in connection with an investment in such Securities. See “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors”.
No underwriter has been involved in the preparation of this Prospectus or performed any review of the contents hereof.
Note to U.S. Holders:
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This offering is made in the United States by a Canadian issuer that is permitted, under a multijurisdictional disclosure system adopted in the United States and Canada, to prepare this Prospectus in accordance with Canadian disclosure requirements. Prospective investors should be aware that such requirements are different from those of the United States. Financial statements included or incorporated by reference herein have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and are subject to Canadian auditing and auditor independence standards, and thus may not be comparable to financial statements of United States companies prepared under United States generally accepted accounting principles.
Prospective investors should be aware that the acquisition of the Securities may have tax consequences both in the United States and in Canada. Such consequences for investors who are resident in, or citizens of, the United States may not be described fully herein. Prospective investors should consult their own tax advisors prior to deciding to purchase any of the Securities.
The enforcement by investors of civil liabilities under U.S. federal securities laws may be affected adversely by the fact that the Company is incorporated under the laws of British Columbia, Canada, that some or all of its officers and directors may be residents of Canada, and that all or a substantial portion of the assets of the Company and said persons may be located outside the United States. See “Enforceability of Civil Liabilities” below.
No person is authorized by the Company to provide any information or to make any representation other than as contained in this Prospectus in connection with the issue and sale of the Securities offered hereunder.
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Prospective investors should assume that the information appearing in this Prospectus or any Prospectus Supplement is accurate only as of the date of such document unless otherwise specified. The Company’s business, financial condition, results of operations and prospects may have changed since such date.
Bill Tai, Jeremy Sewell and Chris Eldredge, directors of the Company, each reside outside of Canada. Mr. Tai, Mr. Sewell and Mr. Eldredge have appointed the following agents for service of process:
Name of Person
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Name and Address of Agent
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Bill Tai ​ ​
Hut 8 Mining Corp., 130 King Street West, Suite 1800, Toronto, Ontario, M5X 2A2
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Jeremy Sewell ​ ​
Fasken Martineau DuMoulin LLP, 800 Rue du Square-Victoria Bureau 3500, Montréal, Quebec, H4Z 1E9
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Chris Eldredge ​ ​
Hut 8 Mining Corp., 130 King Street West, Suite 1800, Toronto, Ontario, M5X 2A2
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Prospective investors are advised that it may not be possible for investors to enforce judgments obtained in Canada against any person or company that is incorporated, continued or otherwise organized under the laws of a foreign jurisdiction or resides outside of Canada, even if the party has appointed an agent for service of process.
The registered office of the Company is located at Suite 2500 Park Place 666 Burrard Street, Vancouver BC, Canada, V6C 2X8 and the corporate headquarters are located at 130 King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2.
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ABOUT THIS PROSPECTUS
Readers should rely only on the information contained or incorporated by reference in this Prospectus and should not rely only on certain parts of the information contained in this Prospectus to the exclusion of the remainder. The Company has not authorized anyone to provide the reader with different or additional information. If anyone provides you with additional, different or inconsistent information, including information or statements in articles about the Company or through other forms of media, readers should not rely on it. The information contained on www.hut8mining.com is not intended to be included in or incorporated by reference herein and prospective investors should not rely on such information when deciding whether or not to invest in the Securities. The Company is not making an offer of the Securities described in this Prospectus in any jurisdiction in which the offering of such Securities is not permitted. Readers should not assume that the information contained or incorporated by reference in this Prospectus is accurate as of any date other than the date of this Prospectus or the respective dates of the documents incorporated by reference herein, regardless of the time of delivery of this Prospectus or of any sale of the securities pursuant thereto. The Company does not undertake to update the information contained or incorporated by reference herein, except as required by applicable securities laws. Any market data or other industry forecasts used in this Prospectus or the documents incorporated by reference herein were obtained from market research, publicly available information and industry publications. The Company believes that these sources are generally reliable but the accuracy and completeness of such information is not guaranteed. The Company has not independently verified such information and does not make any representation as to the accuracy of such information.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities laws and United States securities laws, respectively (collectively, “forward-looking information”). All information, other than statements of historical facts, included in this Prospectus that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future business strategy, competitive strengths, goals, expansion and growth of the Company’s businesses, operations, plans and other such matters is forward-looking information. Forward-looking information is often identified by the words “may”, “would”, “could”, “should”, “will”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “expect” or similar expressions and includes, among others, information regarding: completion of an offering of the Securities; the intended use of proceeds from the offering of such Securities; expectations regarding future revenues, earnings, capital expenditures and operating and other costs; business strategy and objectives; market trends; the sufficiency of cash and working capital for future operating activities; expectations for other economic, business, regulatory and/or competitive factors related to the Company or the Bitcoin industry generally; the anticipated timing for the receipt of licences; anticipated production capacity; and other events or conditions that may occur in the future.
Investors are cautioned that forward-looking information is not based on historical facts but instead is based on reasonable assumptions and estimates of management of the Company at the time they were made and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. Such factors include, among others, risks relating to investing in the Securities; discretion in the use of proceeds; the Company’s ability to raise additional funds; there being no current market for the Securities; changes in the price of Bitcoin and other cryptocurrency risks; the Company’s ability to adapt to technological innovations; market instability due to the COVID-19 pandemic; the Company’s reliance on a limited number of key employees; and fluctuations in energy prices as well as the risk factors described under the heading “Risk Factors” in this Prospectus.
Risks involving the Securities and the Company are discussed under the heading “Risk Factors” in this Prospectus and in the AIF (as defined herein). Although the Company has attempted to identify important factors that could cause actual results to differ materially from statements contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue
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reliance on forward-looking information. Forward-looking information is made as of the date given and the Company does not undertake any obligation to revise or update any forward-looking information other than as required by applicable law.
To the extent any forward-looking information in this Prospectus, including the documents incorporated by reference herein, constitutes “future-oriented financial information” or “financial outlooks” within the meaning of applicable Canadian securities laws, such information is used by the Company for budgeting and planning purposes and the reader is cautioned that this information may not be appropriate for any other purpose. The reader should not place undue reliance on such future-oriented financial information and financial outlooks. Future-oriented financial information and financial outlooks, as with forward-looking information generally, are, without limitation, based on the assumptions and subject to the risks set out above.
ENFORCEABILITY OF CIVIL LIABILITIES
Hut 8 is incorporated under and governed by the Business Corporations Act (British Columbia). Most of the Company’s directors and officers reside principally in Canada, and the majority of its assets and all or a substantial portion of the assets of these persons is located outside the United States. As described below, the Company has appointed an agent for service of process in the United States; however it may nevertheless be difficult for investors who reside in the United States to effect service of process in the United States upon the Company or any such persons or to enforce a U.S. court judgment predicated upon the civil liability provisions of the U.S. federal securities laws against the Company or any such persons. There is substantial doubt whether an action could be brought in Canada in the first instance predicated solely upon U.S. federal securities laws.
The Company has filed with the SEC, concurrently with the Registration Statement (as defined herein), an appointment of agent for service of process on Form F-X. Under the Form F-X, the Company appointed Puglisi & Associates, 850 Library Avenue, Suite 204, Newark, Delaware 19711, as its agent for service of process in the United States in connection with any investigation or administrative proceeding conducted by the SEC and any civil suit or action brought against or involving the Company in a U.S. court arising out of or related to or concerning the offering of Securities under this Prospectus.
Certain of the Company’s officers and directors reside outside of Canada. Although the Company’s head and registered office is in Canada, it may not be possible for investors to effect service of process within Canada upon our directors or officers. In addition, it may not be possible to enforce against us or the Company’s directors or officers judgments obtained in courts in Canada predicated on the civil liability provisions of applicable securities laws of Canada.
FINANCIAL INFORMATION AND CURRENCY PRESENTATION
The financial statements of the Company incorporated by reference in this Prospectus have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and are reported in Canadian dollars. All currency amounts in this Prospectus are expressed in Canadian dollars, unless otherwise indicated.
WHERE YOU CAN FIND MORE INFORMATION
The Company files certain reports with, and furnishes other information to, each of the SEC and certain securities regulatory authorities of Canada. Under a multijurisdictional disclosure system adopted by the United States and Canada, such reports and other information may be prepared in accordance with the disclosure requirements of the provincial and territorial securities regulatory authorities of Canada, which requirements are different from those of the United States. As a foreign private issuer, the Company is exempt from the rules under the U.S. Securities Exchange Act of 1934, as amended (the “U.S. Exchange Act”), prescribing the furnishing and content of proxy statements, and the Company’s officers and directors are exempt from the reporting and short swing profit recovery provisions contained in Section 16 of the U.S. Exchange Act. The Company’s reports and other information filed or furnished with or to the SEC are available, from EDGAR at www.sec.gov, as well as from commercial document retrieval services. The Company’s Canadian filings are available on SEDAR at www.sedar.com.
The Company has filed with the SEC under the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”), the Registration Statement relating to the Securities being offered hereunder, of which
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this Prospectus forms a part. This Prospectus does not contain all of the information set forth in the Registration Statement, certain items of which are contained in the exhibits to the Registration Statement as permitted or required by the rules and regulations of the SEC. Items of information omitted from this Prospectus but contained in the Registration Statement will be available on the SEC’s website at www.sec.gov.
DOCUMENTS INCORPORATED BY REFERENCE
Information has been incorporated by reference in this Prospectus from documents filed with the securities commissions or similar authorities in each of the provinces and territories of Canada. Copies of the documents incorporated herein by reference may be obtained on request without charge from the Corporate Secretary of the Company at 130 King Street West, Suite 1800, Toronto, Ontario, M5X 2A2, by telephone at 647-256-1992, and are also available electronically under the Company’s profile on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. The filings of the Company through SEDAR are not incorporated by reference in this Prospectus except as specifically set out herein.
The following documents filed by the Company with the securities commissions or similar authorities in each of the provinces and territories of Canada are specifically incorporated by reference into, and form an integral part of, this Prospectus:
(a)
the management information circular of the Company dated November 26, 2020, as filed on SEDAR on December 1, 2020;
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(b)
the annual information form of the Company dated April 3, 2020 in respect of the fiscal year ended December 31, 2019 (“AIF”);
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(c)
the audited consolidated financial statements of the Company and the notes thereto as at and for the fiscal years ended December 31, 2019 and 2018, together with the auditors’ report thereon;
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(d)
the management’s discussion and analysis of the Company for the year ended December 31, 2019;
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(e)
the amended and restated unaudited condensed interim consolidated financial statements of the Company and the notes thereto as at and for the three and nine months ended September 30, 2020 and 2019, as filed on SEDAR on November 12, 2020;
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(f)
the amended and restated management’s discussion and analysis of the Company for the three and nine months ended September 30, 2020, as filed on SEDAR on November 12, 2020; and
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(g)
the material change reports of the Company dated February 21, 2020, March 31, 2020, June 22, 2020, and January 13, 2021.
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Any material change reports (excluding confidential material change reports), annual information forms, annual financial statements and the auditors’ report thereon and related annual management’s discussion and analysis (“MD&A”), interim financial statements and related interim MD&A, information circulars, business acquisition reports, any news release issued by the Company that specifically states it is to be incorporated by reference in this Prospectus, and any other documents as may be required to be incorporated by reference herein under applicable Canadian securities laws which are filed by the Company with a securities commission or any similar authority in Canada after the date of this Prospectus, during the 25-month period this Prospectus remains valid, shall be deemed to be incorporated by reference into this Prospectus. In addition, all documents filed on Form 6-K or Form 40-F by the Company with the SEC on or after the date of this Prospectus shall be deemed to be incorporated by reference into the registration statement on Form F-10 (the “Registration Statement”) of which this Prospectus forms a part, if and to the extent, in the case of any report on Form 6-K, expressly provided in such document.
Upon new interim financial statements and related interim MD&A of the Company being filed with the applicable securities regulatory authorities during the currency of this Prospectus, the previous interim financial statements and related interim MD&A of the Company most recently filed shall be deemed no longer to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities hereunder. Upon new annual financial statements and related annual MD&A of the Company being filed with the applicable securities regulatory authorities during the currency of this Prospectus, the previous annual financial statements and related annual MD&A of the Company most recently filed shall be deemed no longer
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to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities hereunder. Upon a new AIF of the Company being filed with the applicable securities regulatory authorities during the currency of this Prospectus, notwithstanding anything herein to the contrary, the following documents shall be deemed no longer to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities hereunder: (i) the previous AIF; (ii) material change reports filed by the Company prior to the end of the financial year in respect of which the new AIF is filed; (iii) business acquisition reports filed by the Company for acquisitions completed prior to the beginning of the financial year in respect of which the new AIF is filed; and (iv) any information circular of the Company filed prior to the beginning of the Company’s financial year in respect of which the new AIF is filed. Upon a new management information circular prepared in connection with an annual general meeting of the Company being filed with the applicable securities regulatory authorities during the currency of this Prospectus, the previous management information circular prepared in connection with an annual general meeting of the Company shall be deemed no longer to be incorporated by reference into this Prospectus for purposes of future offers and sales of Securities hereunder.
A Prospectus Supplement containing the specific variable terms in respect of an offering of Securities will be delivered to purchasers of such Securities together with this Prospectus, unless an exemption from the prospectus delivery requirements has been granted or is otherwise available, and will be deemed to be incorporated by reference into this Prospectus as of the date of such Prospectus Supplement only for the purposes of the offering of the Securities covered by such Prospectus Supplement.
Any statement contained in this Prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded, for purposes of this Prospectus, to the extent that a statement contained herein or in any other subsequently filed document that also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed to constitute a part of this Prospectus, except as so modified or superseded. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document that it modifies or supersedes. The making of such a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made.
WHERE YOU CAN FIND MORE INFORMATION
The Company may, from time to time, sell any combination of the Securities described in this Prospectus in one or more offerings up to an aggregate initial offering price of $500,000,000 (or the equivalent thereof, at the date of issue, in any other currency or currencies, as the case may be). Each time the Company sells Securities, it will provide a Prospectus Supplement that will contain specific information about the terms of that offering. The Prospectus Supplement may also add, update or change information contained in this Prospectus.
The Company files annual and quarterly financial information and material change reports and other material with the securities regulatory authorities in each of the provinces and territories of Canada. Prospective investors may read and download any public document that the Company has filed with the securities commissions or similar authorities in each of the provinces and territories of Canada on SEDAR at www.sedar.com.
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GLOSSARY OF DEFINED TERMS
In this Prospectus, unless otherwise specified the following capitalized words and terms shall have the following meanings:
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$
​ ​ Canadian dollars. ​
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ASIC
​ ​ An application-specific integrated circuit customized for Bitcoin mining. ​
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Bitcoin
​ ​
The peer-to-peer payment system and the digital currency of the same name which uses open source cryptography to control the creation and transfer of such digital currency.
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Bitcoin Network
​ ​
The network of computers running the software protocol underlying Bitcoin and which network maintains the database of Bitcoin ownership and facilitates the transfer of Bitcoin among parties.
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Bitfury
​ ​
Bitfury Holding B.V., corporation incorporated and existing under the laws of the Netherlands, which, pursuant to the Master Data Center Purchase Agreement and the Master Services Agreement, provides a turn-key service to Hut 8 for the installation of the BlockBox and a fully-managed service to configure, operate and maintain the BlockBox.
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Bitgo
​ ​ BitGo Trust Company Inc. ​
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BlockBox
​ ​
The proprietary BlockBox Data Centers AC manufactured by Bitfury and used for the purpose of running diverse cryptographic hash functions in connection with the mining of cryptocurrency, including all related housing and power supplies, and all required cabling, cooling units and other peripherals, as applicable.
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Blockchain
​ ​
A digital ledger in which Bitcoin or other cryptocurrency transactions are recorded chronologically and publicly.
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​
US$
​ ​ United States dollars ​
SUMMARY DESCRIPTION OF THE BUSINESS
Corporate Structure
Hut 8 was incorporated under the laws of the province of British Columbia on June 9, 2011. The registered office of the Company is located at Suite 2500 Park Place 666 Burrard Street, Vancouver BC, Canada, V6C 2X8 and the corporate headquarters are located at 130 King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2. The Company’s Common Shares are listed under the symbol “HUT” on the TSX and quoted under the symbol “HUTMF” on the OTCQX market. At the close of business on March 8, 2021, the last trading day prior to the date of this Prospectus, the closing price of the Common Shares as quoted by the TSX was $9.19 and the closing price of the Common Shares as quoted on the OTCQX market was US$7.29.
Hut 8 operates three wholly owned subsidiaries: Hut 8 Holdings Inc., which was incorporated in British Columbia, Canada; Hut 8 Asset Management, which was incorporated in Bridgetown, Barbados, and Hut 8 Finance Ltd, which was incorporated in Ontario, Canada. Hut 8 beneficially owns, or controls or directs, directly or indirectly, 100% of the voting common shares of the above-mentioned subsidiaries.
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The following diagram illustrates the corporate structure and provides the name, the percentage of voting securities owned, directly or indirectly, by the Company and the jurisdiction of incorporation, continuance or formation of the Company’s subsidiaries.
[MISSING IMAGE: TM218977D1-FC_CORPORATEBW.JPG]
Business of the Company
Hut 8 is a cryptocurrency mining company with industrial scale Bitcoin mining operations in Canada. As of December 31, 2020, Hut 8 had 25 employees and utilized the services of two contractors with the titles of Corporate Secretary and Head of Power.
Hut 8 provides investors with direct exposure to Bitcoin, without the technical complexity or constraints of purchasing the underlying cryptocurrency. Investors avoid the need to create online wallets, wire money offshore, and safely store their Bitcoin.
For its mining activities, Hut 8 utilizes BlockBoxes which are specialized freight containers outfitted for Bitcoin mining. The BlockBox is modular, portable, and more easily upgradeable to the next generation of silicon technology.
Material Contracts
On March 24, 2020, the Company entered into a business agreement (the “Slush Pool Agreement”) with Braiins Systems s.r.o., an operator of the Slush Pool virtual currency mining pool. The Slush Pool Agreement governs the terms and conditions under which the Company contributes its processing power to the Slush Pool mining pool in exchange for certain remuneration. Under the Slush Pool Agreement, the Company has agreed to contribute processing power of at least 600 peta hashes per second (“PH/s”) during the specified verification period. The initial term of the Slush Pool Agreement is for one year, ending on March 24, 2021. Pursuant to the Slush Pool Agreement, the Company has agreed to mine virtual currency exclusively on the Slush Pool, subject to certain exceptions.
On February 12, 2020, the Company entered into an Amended and Restated Master Data Center Purchase Agreement with Bitfury (the “Purchase Agreement”). The Purchase Agreement governs the terms and conditions of the purchase of Bitfury’s proprietary BlockBox AC — Air Cooled Mobile Datacenters (the “Data Centres”) and certain equipment and ancillary assets used to run diverse cryptographic hash functions in connection with the mining of cryptocurrency. Pursuant to the Purchase Agreement, the Company may offer to purchase Data Centres from time to time at specified prices by delivering a purchase order to Bitfury. The Purchase Agreement provides the Company with a right of first refusal over any Data Centres that Bitfury intends to sell within North America. Similarly, the Purchase Agreement provides Bitfury with a right of first refusal to provide any Data Centres that the Company intends to acquire within North America. Bitfury’s
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right of first refusal with respect to Data Centres does not prevent the Company from procuring silicon chips from other suppliers to upgrade its Data Centres unless Bitfury can provide similarly efficient equipment at the same or better cost on equivalent delivery terms. The Purchase Agreement is for a term of three years, with two consecutive automatic renewal terms of one year each.
Concurrent with the Purchase Agreement, on February 12, 2020, the Company entered into an Amended and Restated Master Service Agreement with Bitfury (the “MSA”). In accordance with the MSA, Bitfury shall provide the management, maintenance, support, logistics and operational services (the “Services”) required to run the Data Centres. The MSA is for a term of three years, with two consecutive automatic renewal terms of one year each. The Company transferred the employees at its facilities in both Medicine Hat and Drumheller from Bitfury to Hut 8 and took over the management of employees, with continued support from Bitfury regarding support, logistics, and other operational services.
On September 1, 2019, the Company entered into a custodial services agreement with Bitgo (the “Bitgo Custodial Agreement”), pursuant to which Bitgo provides the Company with various custodial and wallet services. The Company pays fees for these services pursuant to a fee schedule that may be revised by Bitgo on at least 30 days’ notice during which the Company may elect to terminate the agreement and services at no additional charge. The Bitgo Custodial Agreement has an initial term of 16 months, after which it will automatically renew for successive one-year periods unless either party notifies the other party of its intention not to renew at least 60 days prior to the expiration of the then-current term. The Bitgo Custodial Agreement replaced the services agreement the Company had with Xapo GmbH (“Xapo”).
On March 2, 2018, the Company entered into an investor rights agreement (the “Investor Rights Agreement”) with Bitfury. Pursuant to the Investor Rights Agreement, Bitfury has the right to participate in offerings of the Common Shares, or securities convertible or exchangeable into or giving the right to acquire Common Shares, to the extent necessary to maintain its proportion of the total voting rights (on a fully diluted basis) associated with the outstanding Common Shares.
In accordance with the Investor Rights Agreement, Bitfury may designate two nominees to the board of directors of the Company (the “Board”) if its beneficial ownership of the outstanding Common Shares is 20% or more and will decrease to one if its beneficial ownership of the outstanding Common Shares falls to between 10% and 20%, in each case on a non-diluted basis. The Investor Rights Agreement will terminate after the first continuous 30-day period during which Bitfury beneficially owns less than 10% of the issued and outstanding Common Shares on a non-diluted basis. If the size of the Board were to increase to 7 or more members, Bitfury would in certain circumstances be entitled to designate a greater number of directors in proportion to its beneficial ownership of the outstanding Common Shares.
On November 20, 2019, the Company entered into a master loan agreement (the “Genesis Credit Agreement”) with Genesis Global Capital, LLC (“Genesis”) pursuant to which Genesis advanced a term loan in the amount of US$15,000,000 to the Company. The proceeds of the Genesis Credit Agreement were used, together with cash on hand, to refinance the Company’s previously existing credit agreement with Galaxy Digital Lending Services LLC.
On March 15, 2018 and March 20, 2018, the Company entered into definitive agreements with the City of Medicine Hat (“CMH”) for the supply of electricity, and the lease of land upon which Hut 8 has constructed its mining facilities. For electricity, an Electricity Supply Agreement (“ESA”) was executed, whereby CMH will provide electric energy capacity of approximately 67 MW in operation in Drumheller, will allow Hut 8 to operate at 107 MW in total. The ESA and the land lease have a concurrent term of 10 years. The minimum payments on the land lease are $1,395 per month from May 1, 2018 to December 31, 2027.
Site Descriptions
Property Description and Location
Hut 8 has two facilities in operation, one in Drumheller, Alberta and the second in Medicine Hat, Alberta. Both sites are within two and a half hours by car from each other. The Drumheller facility is currently comprised of 38 BlockBoxes including 17 BlockBoxes with 16 nm ASIC chips and 21 BlockBoxes with Bitfury Clarke ASIC chips. The Medicine Hat facility is currently running 56 BlockBoxes with 14nm ASIC chips.
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Security
The environmental design of Hut 8’s sites provides the mining operations with added security. They are located in remote locations and surrounded by a chain-link fence with barbed wire and staffed with security on a 24x7x365 basis. The sites have a physical security policy and staff are trained to be aware of any unauthorized personnel. There are closed-circuit televisions on site and the BlockBoxes are welded to supporting metal beams and the frames are anchored with screw piles that are at least six feet deep.
Power
For the Drumheller Facility, Hut 8 entered into an agreement with ATCO Electric Ltd., the electric utility for the Drumheller area, for the provision of power. For the Medicine Hat site, Hut 8 entered into an agreement with the City of Medicine Hat, who runs their own electricity grid, for the use of electricity for the 56 BlockBoxes on site.
For the Drumheller Facility, the distance from the transmission poles owned by ATCO Electric Ltd. is approximately 40 meters. The Drumheller site receives its energy from the grid; therefore, there is exposure to market natural gas prices for up to 42MW. The Medicine Hat Facility is situated beside a 42MW generator where it does not pay transmission fees. An additional approximately 25MW of power at Medicine Hat is provided from the grid and is exposed to market natural gas prices.
Network Connectivity
The sites are equipped with the following mediums of connectivity: (a) two satellite internet connections; and (b) two long-term evolution connections. Each medium is provided by a different vendor, which increases redundancy and resiliency.
Monitoring and Repair
Hut 8 monitors the intake air temperature, hash board temperature, voltage, hash rate, in-container air temperature, exhaust air temperature and humidity of each container. All parameters are monitored on a 24x7x365 basis by local on-site staff who are responsible for implementing any necessary repairs to mining infrastructure. Hut 8 intends to maintain an inventory of all necessary components for repair and make all repairs on site when possible.
Custodial services for Bitcoin
For the protection of its Bitcoin on behalf of shareholders, Hut 8 does not self-custody its Bitcoin. Instead, Hut 8 uses the services of Bitgo. Bitgo has US$100 million of insurance backing its digital asset custody and one of the highest levels of regulatory certifications in the market. Bitgo is financially backed by Wall Street firms including Goldman Sachs. Hut 8 utilizes both cold and hot storage for Bitcoin with Bitgo.
Competition and Market Participants
In the cryptocurrency industry, there exist many online companies that offer cryptocurrency cloud mining services, as well as companies, individuals and groups that run their own mining farms. Miners can range from individual enthusiasts to professional mining operations with dedicated data centers, including those of the kind operated by one of the Company’s principal competitors, HIVE Blockchain Technologies Ltd. ARGO Blockchain Plc, Bitfarms Ltd., Riot Blockchain Inc., and Marathon Digital Holdings, Inc.
Miners may organize themselves in mining pools. A mining pool is created when cryptocurrency miners pool their processing power over a network and mine transactions together. Rewards are then distributed proportionately to each miner based on the hash power contributed. Mining pools allow miners to pool their resources so they can generate blocks quickly and receive rewards on a more consistent basis instead of mining alone where rewards may not be received for long periods. Hut 8 has also decided to participate in a mining pool in order to smooth the receipt of rewards.
Other market participants in the cryptocurrency industry include investors and speculators, retail users transacting in cryptocurrencies, and service companies that provide a variety of services including buying, selling, payment processing and storing of cryptocurrencies.
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Foreign Operations
The Company’s foreign operations include the Company’s digital currency trading operation based out of Barbados, which is currently inactive.
Cycles
The primary seasonality that the Company experiences is related to potential changes in electricity prices based on volatility in market natural gas prices. Hut 8’s Drumheller facility and all energy above 42MW in Medicine Hat are exposed to market natural gas prices and the electricity environment in Alberta. Electricity has been historically higher in the winter than the summer, and considering electricity is the largest expense of Hut 8, this may affect profits.
Financial Condition
Most of the Company’s operating cost is electricity, which is variable to its operations. The Company monitors its profitability at the site level constantly and switches the modes of the equipment between full, economic (approximately 50% less energy and 35% less output than full), and shutdown (effectively shut off) modes when necessary. As some of the older generation equipment becomes unprofitable, the Company has the ability to quickly scale down by shutting off its equipment and reducing staff levels to minimize losses. The Company’s overhead costs that are more fixed in nature are approximately $150,000 per month.
On June 25, 2020, the Company completed its public offering of 5,750,456 units for gross proceeds of $8,338,161. The Company used the proceeds of the offering to purchase 1,000 M31S, 2,559 M31S+, and 343 M30S Bitcoin mining machines, which were delivered to its Medicine Hat facility between September 2020 and January 2021.
On January 11, 2021, the Company announced that it had entered into a securities purchase agreement for a private placement of Common Shares and warrants to institutional investors for gross proceeds of $77,500,000 (the “Private Placement”). Pursuant to the Private Placement, on January 13, 2021, the Company issued 15,500,000 Common Shares and 7,750,000 warrants at a purchase price of $5.00 per Common Share and associated warrant. The net proceeds of the Private Placement will be used by the Company for working capital purposes, including, without limitation, infrastructure expansion, equipment purchases and repayment of debt.
Directors and Executive Officers
The following information supplements the disclosure included in the AIF.
Kyle Appleby, the Company’s former Interim CFO, is a director of Captor Capital Corp. (“Captor”). On August 6, 2019, a cease trade order was issued by the Ontario Securities Commission with respect to Captor. The cease trade order was a result of a delay by Captor in filing annual audited financial statements, management discussion and analysis and related certifications for the financial year ended March 31, 2019. The delay in filing was the result of a late-emerging change in the accounting treatment of Captor’s investee companies being required by Captor’s auditors. Captor made the required filings on November 4, 2019 and the Ontario Securities Commission granted a full revocation of the cease trade order on November 5, 2019. Mr. Appleby is no longer associated with the Company.
Audit Committee
The Company’s Audit Committee is comprised of Joseph Flinn, who acts as chair of this committee, and includes Sanjiv Samant and Chris Eldredge.
Compensation and Governance Committee
The Company’s Compensation and Governance Committee is comprised of Chris Eldredge, who acts as chair of this committee, and includes Joseph Flinn and Jeremy Sewell.
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Recent Developments
On January 28, 2020, Hut 8 announced that Andrew Kiguel would be stepping down from his role as CEO.
On February 21, 2020, Hut 8 successfully renegotiated the master service agreement and master purchase agreement with Bitfury. As part of this agreement, Hut 8 repaid US$4,750,000 of debt owed to Bitfury with funds from a new loan of US$5,000,000 from Genesis. The amendments allowed for increased autonomy for Hut 8 and reduction of costs.
On May 1, 2020, Andrew Kiguel formally stepped down as CEO of Hut 8 and Jimmy Vaiopoulos was appointed the Interim CEO. Kyle Appleby was appointed Interim CFO at this time and Viktoriya Griffin was appointed as Corporate Secretary.
On June 25, 2020, Hut 8 closed an overnight marketed public offering of units for gross proceeds of $8,338,161. Hut 8 used the funds to purchase Bitcoin mining equipment with output of approximately 275 PH/s.
On July 13, 2020, the Company announced that it had renegotiated key terms of the Genesis Credit Agreement. See “Summary Description of the Business — Material Contracts”.
On August 4, 2020, the Company announced that the management of the Medicine Hat facility operations have been transferred from Bitfury to the Company effective August 1, 2020.
On August 12, 2020, the Company announced operational updates, including receipt of 2,000 bitcoin miners from MicroBT, the beginning of a hosting arrangement for six full BlockBoxes and the transfer of its Bitfury Clarke chips, which are the Company’s latest generation technology before its recent order of MicroBT equipment, from the Drumheller facility to the Medicine Hat facility.
On September 2, 2020, the Company announced that the management of the Drumheller facility operations have been transferred from Bitfury to the Company effective August 28, 2020.
On September 18, 2020, the Company announced that it has received, on-site at its Medicine Hat facility, the planned 1,000 M31S and 1,000 M31S+ machines, most of which are already operating.
On October 9, 2020, the Company announced that it was the first TSX listed issuer to complete the TSX Sandbox program, an initiative to bring exceptional/novel entrants to the capital markets.
On November 2, 2020, the Company announced the appointment of Jaime Leverton as CEO, effective December 1, 2020. Jimmy Vaiopoulos, the Company’s former Interim CEO, returned to his previous position of Chief Financial Officer, effective December 1, 2020. Viktoriya Griffin also became the Company’s full-time Corporate Secretary on December 1, 2020.
On November 12, 2020, Bitfury filed a notice of intention to distribute securities of the Company. Certain officers, directors or partners of Bitfury are members of the Board, namely, William Ping Tai and Jeremy Paul Sewell.
On December 1, 2020, the Company announced that two new board members, Chris Eldredge and Sanjiv Samant were proposed to join the Company subject to a shareholder vote. In addition, Jaime Leverton, the Company’s CEO, was also included as a proposed board member and Dennis Mills did not seek re-election. All three board members were elected at the Company’s annual general meeting held on December 30, 2020.
On December 1, 2020, the Company also announced that it has made changes to increase the hash rate supply of the last portion of the Company’s Bitcoin mining equipment order to 153.4 PH/s from 139.9 PH/s, a 9.6% increase, by exchanging part of the ordered M30S units for M31S+ units. The Company ultimately received 1,000 M31S, 2,559 M31S+, and 343 M30S units from this order from MicroBT, which were delivered to its Medicine Hat facility between September 2020 and January 2021.
On December 16, 2020, the Company announced the appointment of Sue Ennis as Head of Investor Relations, effective January 4, 2021.
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On December 21, 2020, Bitfury announced that it disposed of 2,106,282 Common Shares of the Company ranging from $1.32 and $1.77 per Common Share pursuant to its previously filed notice of intention to distribute securities. As a result of this disposition, the securityholding percentage of Bitfury and its joint actor decreased by 2.18% since the last report filed on January 17, 2019. Immediately after the disposition of the Common Shares, Bitfury and its joint actor hold a total of 37,687,576 Common Shares of the Company representing approximately 38.96% of the outstanding Common Shares of the Company, and approximately 38.12% of the issued and outstanding Common Shares of the Company on a fully-diluted basis.
On December 30, 2020, the Company announced the results of its annual and special meeting of shareholders which was held telephonically on December 30, 2020. Bill Tai, Jeremy Sewell, Joseph Flinn, Sanjiv Samant, Chris Eldredge and Jaime Leverton were elected as directors of the Company. The Company’s shareholders also approved (i) the appointment of DMCL LLP as the Company’s auditors until the close of the next annual meeting of shareholders; and (ii) the issuance to Induna Energy Inc. of 380,000 Common Shares for services rendered to the Company in 2020 and the issuance of up to 600,000 Common Shares in 2021 for similar services to be rendered.
On January 6, 2021, the Company announced the opening of a Bitcoin yield account in partnership with Genesis. The account will enable the Company to earn a 4 percent rate of return on its Bitcoin holdings.
On January 13, 2021, the Company issued 15,500,000 Common Shares and 7,750,000 warrants at a purchase price of $5.00 per Common Share and associated warrant in connection with the Private Placement. See “Summary Description of the Business — Financial Condition”.
On January 22, 2021, the Company announced that it had finalized an equipment financing loan of US$11.8 million from Foundry Digital LLC, a wholly owned subsidiary of Digital Currency Group. Hut 8 will use all proceeds from the loan and provide a US$2.9 million deposit to order 5,400 units of Whatsminer M30S bitcoin mining machines from MicroBT, adding 475 PH/s to its bitcoin mining capacity over the six months following installation. The equipment financing will be a 12-month term with an annual interest rate of 16.5%. On February 11, 2021, the first batch of machines were delivered and successfully installed.
On January 26, 2021, the Company announced the appointment of Tanya Woods as General Counsel, Executive Vice President of Regulatory Affairs effective February 1, 2021.
On January 27, 2021, the Company announced that it had finalized plans to repay its US$20,000,000 loan with Genesis. The Company plans to repay Genesis in full in mid-February, 2021 as a one month repayment notice was required, which will provide a financial benefit of US$2.4M. The Company was driven by the savings from interest expenses of US$1.6M and that the bitcoin collateral will instead be used towards Hut 8’s previously disclosed yield account with Genesis which will be generating US$0.8M in interest income.
On February 22, 2021, the Company announced that had entered into exclusive partnership discussions with Validus Power Corp. to secure new revenue streams and energy solutions for its bitcoin mining operations. The Company and Validus Power Corp. are exploring the co-development of an industrial scale energy generation platform.
On March 2, 2021, the Company announced that it had repaid its US$20,000,000 loan with Genesis.
CAPITALIZATION OF THE COMPANY
The applicable Prospectus Supplement will describe any material change, and the effect of such material change, on the share and loan capitalization of the Company since the date of the Company’s most recently filed financial statements, including, as required, any material change, and the effect of such material change, that will result from the issuance of Securities pursuant to such Prospectus Supplement.
SECONDARY OFFERING BY SELLING SECURITYHOLDERS
Securities may be sold under this Prospectus by way of a secondary offering by or for the account of certain Selling Securityholders. The Prospectus Supplement for or including any offering of Securities by Selling Securityholders will include the following information, to the extent required by applicable securities laws:
•
the name or names of the Selling Securityholders;
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the number or amount of Securities owned, controlled or directed by each Selling Securityholder;
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the number or amount of Securities being distributed for the account of each Selling Securityholder;
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the number or amount of Securities to be owned, controlled or directed by the Selling Securityholders after the distribution and the percentage that number or amount represents of the total number of the Company’s outstanding Securities;
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whether the Securities are owned by the Selling Securityholders both of record and beneficially, of record only, or beneficially only;
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•
if the Selling Securityholder purchased any of the Securities in the 24 months preceding the date of the applicable Prospectus Supplement, the date or dates the Selling Securityholder acquired the Securities;
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if the Selling Securityholder acquired any of the Securities in the 12 months preceding the date of the applicable Prospectus Supplement, the cost thereof to the Selling Securityholder in aggregate and on an average-cost-per-security basis;
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if applicable, the disclosure required by item 1.11 of Form 41-101F1, and if applicable, the Selling Securityholders will file a non-issuer’s submission to jurisdiction form with the corresponding Prospectus Supplement; and
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all other information that is required to be included in the applicable Prospectus Supplement.
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DESCRIPTION OF THE SHARE CAPITAL
The authorized capital of the Company consists of an unlimited number of Common Shares without par value. As of the close of business on March 8, 2021, the Company had issued and outstanding share capital comprised of 117,874,172 Common Shares, 571,667 stock options, 12,064,327 warrants, and 3,313,334 restricted share units.
USE OF PROCEEDS
Unless otherwise specified in a Prospectus Supplement, the net proceeds to the Company from the sale of any Securities will be added to the general funds of the Company and utilized for general corporate purposes. Each Prospectus Supplement will contain specific information, if any, concerning the use of proceeds from that sale of Securities. The Company will not receive any proceeds from the sale of Securities by any Selling Securityholder.
PLAN OF DISTRIBUTION
The Company and the Selling Securityholders may sell the Securities, separately or together, to or through one or more underwriters or dealers purchasing as principal and may also sell the Securities to one or more purchasers directly, through applicable statutory exemptions, or through agents designated from time to time. The Securities offered pursuant to any Prospectus Supplement may be sold from time to time in one or more transactions at: (i) a fixed price or prices, which may be changed from time to time; (ii) market prices prevailing at the time of sale; (iii) prices related to such prevailing market prices; or (iv) other negotiated prices, including sales in transactions that are deemed to be “at-the-market distributions” as defined in NI 44-102, including sales made directly on the TSX or other existing trading markets for the Securities. The Company may only sell Securities pursuant to a Prospectus Supplement during the period that this Prospectus, including any amendments hereto, remains effective.
The Prospectus Supplement relating to a particular offering of Securities will identify each underwriter, dealer or agent engaged in connection with the offering and sale of the Securities, as well as the method of distribution and the terms of the offering of such Securities, including: the initial offering price (in the event the offering is a fixed price distribution); the manner of determining the offering price(s) (in the event the offering is not a fixed price distribution); the net proceeds to the Company, if any; to the extent applicable, any fees, discounts or any other compensation payable to underwriters, dealers or agents; and any other material terms.
Only underwriters so named in an applicable Prospectus Supplement are deemed to be underwriters in connection with the Securities offered thereby. If, in connection with an offering of Securities at the initial
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offering price(s), the underwriters have made a bona fide effort to sell all of the Securities at the initial offering price(s) fixed in the applicable Prospectus Supplement, and have been unable to do so, the public offering price(s) may be decreased and thereafter further changed from time to time, to an amount not greater than the initial public offering price(s) fixed in such Prospectus Supplement, in which case the compensation realized by the underwriters will be decreased by the amount that the aggregate price(s) paid by purchasers is less than the gross proceeds paid by the underwriters to the Company and/or Selling Securityholders. Any public offering price and any discounts or concessions allowed or re-allowed or paid to dealers may be changed from time to time.
Underwriters and agents may, from time to time, purchase and sell the Securities described in this Prospectus and the relevant Prospectus Supplement in the secondary market, but are not obligated to do so. No assurance can be given that there will be a secondary market for the Securities or liquidity on the secondary market if one develops. From time to time, underwriters and agents may make a market in the Securities.
If underwriters purchase Securities from the Company as principal or from any Selling Securityholders, the Securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale, at market prices prevailing at the time of sale or at prices related to such prevailing market prices. The obligations of the underwriters to purchase such Securities as principal will be subject to certain conditions precedent, and the underwriters will be obligated to purchase all the Securities offered by the Prospectus Supplement if any of such Securities are purchased. Any public offering price and any discounts or concessions allowed or paid to underwriters, dealers or agents may be changed from time to time.
The Securities may also be sold directly by the Company, pursuant to applicable statutory exemptions, at such prices and upon such terms as agreed to by the Company and the purchaser (in which case no underwriter or agent would be involved) or through agents designated by the Company from time to time. Any agent involved in the offering and sale of the Securities in respect of which this Prospectus is delivered will be named, and any commissions payable by the Company to such agent will be set forth, in the Prospectus Supplement. Unless otherwise indicated in the Prospectus Supplement, any agent would be acting on a best efforts basis for the period of its appointment.
The Company may offer the Securities to the public through underwriting syndicates represented by managing underwriters or by underwriters without a syndicate. The Company or any Selling Securityholders may agree to pay the underwriters a commission for various services relating to the issue and sale of any Securities offered hereby. Any such commission will be paid out of the general funds of the Company or any Selling Securityholder. The Company may use underwriters or agents with whom it has a material relationship and, if so, it will name the underwriter or agent and the nature of any such relationship in the Prospectus Supplement. In addition, one or more Selling Securityholders of the Company may sell Securities to or through underwriters or dealers purchasing as principals and may also sell the Securities to one or more purchasers directly, through statutory exemptions, or through agents designated from time to time. See “Secondary Offering by Selling Securityholders”.
Underwriters, dealers and agents who participate in the distribution of the Securities may be entitled under agreements to be entered into with the Company or any Selling Securityholders to indemnification by the Company and/or Selling Securityholders against certain liabilities, including liabilities under securities legislation, or to contribution with respect to payments which such underwriters, dealers or agents may be required to make in respect thereof.
Any offering of Debt Securities, Subscription Receipts, Warrants, Convertible Securities or Units will be a new issue of securities with no established trading market. Unless otherwise specified in the applicable Prospectus Supplement, no Debt Securities, Subscription Receipts, Warrants, Convertible Securities or Units will be listed on any securities exchange. Certain dealers may make a market in these Securities, but will not be obligated to do so and may discontinue any market making at any time without notice. No assurance can be given that any dealer will make a market in these Securities or as to the liquidity of the trading market, if any, for these Securities.
In connection with any offering of Securities, other than an “at-the-market distribution”, underwriters, agents or dealers may over-allot or effect transactions which stabilize or maintain the market price of the
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Securities offered at a level above that which might otherwise prevail in the open market. Such transactions may be commenced, interrupted or discontinued at any time.
No underwriter of an at-the-market distribution, and no person or company acting jointly or in concert with an underwriter, may, in connection with such distribution, enter into any transaction that is intended to stabilize or maintain the market price of the Securities or securities of the same class as the Securities distributed under the “at-the-market distribution”, including selling an aggregate number or principal amount of Securities that would result in the underwriter creating an over-allocation position in the Securities.
DESCRIPTION OF SECURITIES
Common Shares
The Company is authorized to issue an unlimited number of Common Shares. As of close of business on March 8, 2021, there were 117,874,172 outstanding Common Shares.
Holders of Common Shares are entitled to receive notice of and attend all meetings of the shareholders of Company and to one vote per Common Share on all matters upon which holders of Common Shares are entitled to vote at such meetings of shareholders.
The holders of Common Shares are entitled to receive dividends as and when declared by the Board. The Company has not paid dividends and currently intends to reinvest all future earnings to finance the development and growth of its business. As a result, the Company does not intend to pay dividends on the Common Shares in the foreseeable future. Any future determination to pay dividends will be at the discretion of the Board and will depend on the financial condition, business environment, operating results, capital requirements, any contractual restrictions on the payment of dividends and any other factors that the Board deems relevant. The Company is not bound or limited in any way to pay dividends in the event that the Board determined that a dividend was in the best interest of its shareholders. In addition, in the event of a liquidation, dissolution or winding-up or other distribution of assets among shareholders, the holders of Common Shares will be entitled to share pro rata in the distribution of the balance of the assets of the Company.
All of the Common Shares are fully paid and non-assessable and, except for the certain anti-dilution rights of Bitfury under the Investor Rights Agreement, are not subject to any pre-emptive rights, conversion or exchange rights, redemption, retraction, purchase for cancellation or surrender provisions, sinking or purchase fund provisions, provisions permitting or restricting the issuance of additional securities or provisions requiring a shareholder to contribute additional capital.
Common Shares may be offered separately or together with Debt Securities, Subscription Receipts, Warrants or Convertible Securities. See “Units”.
Debt Securities
The following sets forth certain general terms and provisions of the Debt Securities. The particular terms and provisions of Debt Securities offered by a Prospectus Supplement, and the extent to which the general terms and provisions described below may apply to such Debt Securities, will be described in such Prospectus Supplement. If there are differences between the Prospectus Supplement and this Prospectus, the Prospectus Supplement will prevail. As a result, the information in this section may not apply to all Debt Securities.
Debt Securities will be issued in one or more series under an indenture (the “Indenture”) to be entered into between the Company and one or more trustees that will be named in a Prospectus Supplement for the applicable series of Debt Securities. To the extent applicable, the Indenture will be subject to and governed by the U.S. Trust Indenture Act of 1939, as amended. A copy of the form of the Indenture to be entered into has been or will be filed with the SEC as an exhibit to the Registration Statement and will be filed with the securities commissions or similar authorities in Canada when it is entered into. The description of certain provisions of the Indenture in this section do not purport to be complete and are subject to, and are qualified in their entirety by reference to, the provisions of the Indenture. Terms used in this summary that are not otherwise defined herein have the meaning ascribed to them in the Indenture. The particular terms relating to Debt Securities offered by a Prospectus Supplement will be described in the related Prospectus Supplement. This description may include, but may not be limited to, any of the following, if applicable:
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the specific designation of the Debt Securities; any limit on the aggregate principal amount of the Debt Securities; the date or dates, if any, on which the Debt Securities will mature and the portion (if less than all of the principal amount) of the Debt Securities to be payable upon declaration of acceleration of maturity;
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the rate or rates (whether fixed or variable) at which the Debt Securities will bear interest, if any, the date or dates from which any such interest will accrue and on which any such interest will be payable and the record dates for any interest payable on the Debt Securities that are in registered form;
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the terms and conditions under which the Company may be obligated to redeem, repay or purchase the Debt Securities pursuant to any sinking fund or analogous provisions or otherwise;
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the terms and conditions upon which the Company may redeem the Debt Securities, in whole or in part, at the Company’s option;
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the covenants applicable to the Debt Securities;
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the terms and conditions for any conversion or exchange of the Debt Securities for any other securities;
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whether the Debt Securities will be issuable in registered form or bearer form or both, and, if issuable in bearer form, the restrictions as to the offer, sale and delivery of the Debt Securities which are in bearer form and as to exchanges between registered form and bearer form;
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whether the Debt Securities will be issuable in the form of registered global securities (“Global Securities”), and, if so, the identity of the depositary for such registered Global Securities;
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the denominations in which registered Debt Securities will be issuable;
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each office or agency where payments on the Debt Securities will be made and each office or agency where the Debt Securities may be presented for registration of transfer or exchange;
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the currency in which the Debt Securities are denominated or the currency in which the Company will make payments on the Debt Securities;
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material Canadian federal income tax consequences and U.S. federal income tax consequences of owning the Debt Securities;
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any index, formula or other method used to determine the amount of payments of principal of (and premium, if any) or interest, if any, on the Debt Securities; and
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any other terms of the Debt Securities which apply solely to the Debt Securities.
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Each series of Debt Securities may be issued at various times with different maturity dates, may bear interest at different rates and may otherwise vary.
The terms on which a series of Debt Securities may be convertible into or exchangeable for Common Shares or other securities of the Company will be described in the applicable Prospectus Supplement. These terms may include provisions as to whether conversion or exchange is mandatory, at the option of the holder or at the option of the Company, and may include provisions pursuant to which the number of Common Shares or other securities to be received by the holders of such series of Debt Securities would be subject to adjustment.
To the extent any Debt Securities are convertible into Common Shares or other securities of the Company, prior to such conversion the holders of such Debt Securities will not have any of the rights of holders of the securities into which the Debt Securities are convertible, including the right to receive payments of dividends or the right to vote such underlying securities.
Debt Securities may be offered separately or together with Common Shares, Subscription Receipts, Warrants or Convertible Securities. See “Units”.
Subscription Receipts
The following sets forth certain general terms and provisions of the Subscription Receipts. The specific terms of the Subscription Receipts as described in a Prospectus Supplement will supplement and, if applicable,
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may modify or replace the general terms described in this section. If there are differences between the Prospectus Supplement and this Prospectus, the Prospectus Supplement will prevail. As a result, the information in this section may not apply to the Subscription Receipts as described in a Prospectus Supplement.
The Subscription Receipts will be issued under a subscription receipt agreement. The following sets forth certain general terms and provisions of the Subscription Receipts. The applicable Prospectus Supplement will include, where applicable, disclosure regarding: (i) the number of Subscription Receipts; (ii) the price at which the Subscription Receipts will be offered; (iii) the terms, conditions and procedures for the exchange of the Subscription Receipts into or for Common Shares and/or other securities of the Company; (iv) the number of Common Shares and/or other securities of the Company that may be issued or delivered upon exchange of each Subscription Receipt; (v) certain material income tax consequences of owning, holding and disposing of the Subscription Receipts; and (vi) any other material terms and conditions of the Subscription Receipts. Common Shares and/or other securities of the Company issued or delivered upon the exchange of Subscription Receipts will be issued for no additional consideration. Prior to exercise, holders of Subscription Receipts will not have any of the rights of holders of Common Shares or other underlying securities issuable upon exercise of the Subscription Receipts.
Under the subscription receipt agreement, an original purchaser of Subscription Receipts may have a contractual right of rescission following the issuance of Common Shares and/or other securities of the Company issued or delivered to such purchaser upon exchange of Subscription Receipts, entitling the purchaser to receive the amount paid for the Subscription Receipts upon surrender or deemed surrender of the Subscription Receipts, if this Prospectus, the relevant Prospectus Supplement, and any amendment thereto, contains a misrepresentation or is not delivered to such purchaser, provided such remedy for rescission is exercised within 180 days of the date the Subscription Receipts are issued.
Subscription Receipts may be offered separately or together with Common Shares, Debt Securities, Warrants or Convertible Securities. See “Units”.
Warrants
The following sets forth certain general terms and provisions of the Warrants. The specific terms of a series of Warrants as described in a Prospectus Supplement will supplement and, if applicable, may modify or replace the general terms described in this section. If there are differences between the Prospectus Supplement and this Prospectus, the Prospectus Supplement will prevail. As a result, the information in this section may not apply to a given series of Warrants.
Each series of Warrants will be issued under a separate warrant indenture in each case between the Company and a warrant agent determined by the Company. The applicable Prospectus Supplement will include, where applicable, disclosure regarding: (i) the title or designation of the Warrants; (ii) the number of Warrants offered; (iii) the number of Common Shares and/or other securities of the Company purchasable upon exercise of the Warrants and the procedures for exercise; (iv) the exercise price of the Warrants; (v) the dates or periods during which the Warrants are exercisable and when they expire; (vi) the designation and terms of any other securities with which the Warrants will be offered, if any, and the number of Warrants that will be offered with each such security; (vii) certain material income tax consequences of owning, holding and disposing of the Warrants; and (viii) any other material terms and conditions of the Warrants including transferability and adjustment terms and whether the Warrants will be listed on a stock exchange. Prior to exercise, holders of Warrants will not have any of the rights of holders of Common Shares or other underlying securities issuable upon exercise of the Warrants.
The Company will not offer Warrants for sale separately to any member of the public in Canada unless the offering is in connection with and forms part of the consideration for an acquisition or merger transaction or unless the Prospectus Supplement containing the specific terms of the Warrants to be offered separately is first approved for filing by or on behalf of the securities commissions or similar regulatory authorities in each of the provinces and territories of Canada where the Warrants will be offered for sale.
Warrants may be offered separately or together with Common Shares, Debt Securities, Convertible Securities or Subscription Receipts. See “Units”.
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Convertible Securities
The following sets forth certain general terms and provisions of the Convertible Securities. The specific terms of any Convertible Securities as described in a Prospectus Supplement will supplement and, if applicable, may modify or replace the general terms described in this section. If there are differences between the Prospectus Supplement and this Prospectus, the Prospectus Supplement will prevail. As a result, the information in this section may not apply to Convertible Securities as described in this section.
The Convertible Securities will be convertible or exchangeable into Common Shares and/or other securities of the Company, and may be offered separately or together with other Securities, as the case may be. The applicable Prospectus Supplement will include details of the agreement, indenture or other instrument to which such Convertible Securities will be created and issued.
Each applicable Prospectus Supplement will set forth the terms and other information with respect to the Convertible Securities being offered thereby, which may include disclosure regarding: (i) the number of such Convertible Securities offered; (ii) the price at which such Convertible Securities will be offered; (iii) the procedures for the conversion or exchange of such Convertible Securities into or for Common Shares and/or other securities of the Company; (iv) the number of Common Shares and/or other securities that may be issued upon the conversion or exchange of such Convertible Securities; (v) the period or periods during which any conversion or exchange may or must occur; (vi) the designation and terms of any other Convertible Securities with which such Convertible Securities will be offered, if any; (vii) the gross proceeds from the sale of such Convertible Securities; (viii) whether the Convertible Securities will be listed on any securities exchange; (ix) whether the Convertible Securities are to be issued in registered form, “book-entry only” form, bearer form or in the form of temporary or permanent global securities and the basis of exchange, transfer and ownership thereof; (x) certain material Canadian tax consequences of owning the Convertible Securities; and (xi) any other material terms and conditions of the Convertible Securities.
Convertible Securities may be offered separately or together with Common Shares, Debt Securities, Warrants and/or Subscription Receipts. See “Units”.
Units
Units are a security comprised of more than one of the other Securities described in this Prospectus offered together as a “Unit”. A Unit is typically issued so the holder thereof is also the holder of each Security included in the Unit. As a result, the holder of a Unit will have the rights and obligations of a holder of each Security comprising the Unit. The agreement, if any, under which a Unit is issued may provide that the Securities comprising the Unit may not be held or transferred separately at any time or at any time before a specified date.
The particular terms and provisions of Units offered by any Prospectus Supplement, and the extent to which the general terms and provisions described below may apply to them, will be described in the Prospectus Supplement filed in respect of such Units. This description will include, where applicable: (i) the designation and terms of the Units and of the Securities comprising the Units, including whether and under what circumstances those Securities may be held or transferred separately; (ii) any provisions for the issuance, payment, settlement, transfer or exchange of the Units or of the Securities comprising the Units; (iii) whether the Units will be issued in registered or global form; and (iv) any other material terms and conditions of the Units.
CERTAIN CANADIAN AND U.S. FEDERAL INCOME TAX CONSIDERATIONS
Owning any of the Securities may subject holders to tax consequences. The applicable Prospectus Supplement may describe certain Canadian and U.S. federal income tax considerations generally applicable to investors described therein of purchasing, holding and disposing of the applicable Securities offered thereunder, including, in the case of an investor who is not a resident of Canada, Canadian non-resident withholding tax considerations. Prospective investors should consult their own tax advisors prior to deciding to purchase any of the Securities.
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PRIOR SALES
Information in respect of prior sales of the Common Shares and other Securities distributed under this Prospectus and for securities that are convertible or exchangeable into Common Shares or such other Securities within the previous 12-month period will be provided, as required, in the applicable Prospectus Supplement with respect to an issuance of Securities pursuant to such Prospectus Supplement. As of the date of this Prospectus, there are no securities of Hut 8 in escrow.
TRADING PRICE AND VOLUME
On March 8, 2021, the last trading day prior to the date of this Prospectus, the closing price of the Common Shares on the TSX was $9.19 and the closing price of the Common Shares as quoted on the OTCQX market was US$7.29. Trading prices and volume of the Common Shares will be provided, as required, in each Prospectus Supplement.
EARNINGS COVERAGE RATIOS
If the Company offers Debt Securities having a term to maturity in excess of one year under this Prospectus and any applicable Prospectus Supplement, the applicable Prospectus Supplement will include earnings coverage ratios giving effect to the issuance of such Debt Securities.
RISK FACTORS
An investment in the Securities is highly speculative and involves significant risks. Any prospective investor should carefully consider the risk factors and all of the other information set forth below and elsewhere in this Prospectus (including, without limitation, the AIF and the other documents incorporated by reference and subsequently incorporated by reference herein) before purchasing any of the Securities described in this Prospectus and those described in the Prospectus Supplement relating to a specific offering of Securities.
The risks described herein, in any applicable Prospectus Supplement, and in the documents incorporated by reference in this Prospectus are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems immaterial, may also potentially materially and adversely affect its business.
Investors may lose their entire investment and should carefully consider the risk factors described below and under the heading “Risk Factors” in the AIF.
No Market for Debt Securities, Subscription Receipts, Warrants, Convertible Securities or Units
There is no current market for any Debt Securities, Subscription Receipts, Warrants, Convertible Securities or Units that may be offered. No assurance can be given that an active or liquid trading market for these Securities will develop or be sustained. If an active or liquid market for these Securities fails to develop or be sustained, the prices at which these Securities trade may be adversely affected. Whether or not these Securities will trade at lower prices may depend on many factors, including liquidity of these Securities, prevailing interest rates and the markets for similar securities, the market price of the Common Shares, general economic conditions, and the Company’s financial condition, historic financial performance and future prospects.
Change in Interest Rates
Prevailing interest rates will affect the market price or value of the Debt Securities. The market price or value of the Debt Securities may decline as prevailing interest rates for comparable debt instruments rise, and increase as prevailing interest rates for comparable debt instruments decline.
Broad Discretion in the Use of Net Proceeds
Management of the Company will have broad discretion with respect to the application of net proceeds received by the Company from the sale of Securities under this Prospectus or a future Prospectus Supplement and may spend such proceeds in ways that do not improve the Company’s results of operations or enhance the
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value of the Common Shares or its other securities issued and outstanding from time to time. Any failure by management to apply these funds effectively could result in financial losses that could have a material adverse effect on the Company’s business or cause the price of the Securities issued and outstanding from time to time to decline.
The COVID-19 outbreak has had a material impact on the Canadian and global economies and could have a material adverse impact on the Company’s business, financial condition and results of operations
The current outbreak of the novel coronavirus (COVID-19) that was first reported from Wuhan, China in December 2019, and the spread of this virus could continue to have a material adverse effect on global economic conditions which may adversely impact the Company’s business. The World Health Organization declared a global emergency on January 30, 2020 with respect to the outbreak and characterized it as a pandemic on March 11, 2020. The outbreak has spread throughout Asia, Europe, the Middle East, Canada and the United States, causing companies and various governments to impose restrictions, such as quarantines, closures, cancellations and travel restrictions. The extent to which the outbreak impacts the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the actions to contain the outbreak or treat its impact, among others. The Company may incur expenses or delays relating to such events outside of the Company’s control, which could have a material adverse impact on the Company’s business, operating results and financial condition.
As the COVID-19 pandemic continues to develop, governments (at national, provincial and local levels), corporations and other authorities may continue to implement restrictions or policies that could adversely global capital markets, the global economy, the Bitcoin price and the Company’s share price.
The COVID-19 pandemic has resulted in the Company implementing a work-from-home regime for its head office, which limits in-person interactions among employees. The Company’s operating sites remain open with social distancing and other measures in place to prevent virus transmission. The restrictions imposed as a result of COVID-19 have also significantly limited the financing options available to the Company.
The Company’s financial statements contain “going concern” disclosure
The Company’s consolidated financial statements as at and for the three and nine months ended September 30, 2020 refer to a material uncertainty that may cast significant doubt over the Company’s ability to continue as a going concern. The financial statements were prepared assuming the Company will continue as a going concern, notwithstanding that the Company had an accumulated deficit. As of September 30, 2020, the Company had working capital of $15,407,215 and shareholders’ equity of $41,112,850.
The Company’s ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon maintaining sustained profitability and maintaining the Company’s loans in good standing. There are various risks and uncertainties affecting the Company’s operations including, but not limited to, the viability of the economics of Bitcoin mining, the liquidity of Bitcoin, the Company’s ability to maintain its security of its digital assets and execute its business plan.
The Company’s strategy to mitigate these risks and uncertainties is to execute a business plan aimed at continued security, operational efficiency, revenue growth, improving overall mining profit, managing operating expenses and working capital requirements, and securing additional financing, as needed, through one or more loans and equity investments. Given the volatility of the markets and the impact of the COVID-19 pandemic, it may be difficult for the Company to raise financing when needed. Failure to implement the Company’s business plan could have a material adverse effect on the Company’s financial condition and/or performance.
Negative cash flow from operations
The Company had negative operating cash flow for the year ended December 31, 2020. While the Company expects that it will have positive cash flow from operating activities in future periods, to the extent that the Company has negative cash flow in any future period, the Company may be required to undertake additional financing activities to fund such negative cash flow from operating activities.
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If Bitcoin were determined to be an investment security, the Company could be required to register as an investment company.
The SEC and its staff have taken the position that certain crypto assets fall within the definition of a “security” under the U.S. federal securities laws. Although public statements by senior officials and the staff of the SEC indicate that the SEC does not intend to take the position that Bitcoin is a security (in its current form), such statements are not official policy statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff.
The classification of Bitcoin as a security by the SEC could result in the Company being be deemed to be an “investment company” under the U.S. Investment Company Act. Classification as an investment company under the U.S. Investment Company Act requires registration with the SEC. If an investment company fails to register, it would have to stop doing almost all business, and its contracts would become voidable. Registration is time consuming and restrictive and would require a restructuring of the Company’s operations, and the Company would be very constrained in the kind of business it could do as a registered investment company. Further, the Company would become subject to substantial regulation concerning management, operations, transactions with affiliated persons and portfolio composition, and would need to file reports under the U.S. Investment Company Act regime. The cost of such compliance would result in the Company incurring substantial additional expenses, and the failure to register if required would have a materially adverse impact to conduct the Company’s operations.
The Company will incur increased costs as a result of being a public company in the United States, and the Company’s management will be required to devote substantial time to United States public company compliance efforts.
As a public company in the United States, the Company will incur additional legal, accounting, reporting and other expenses that the Company did not incur as a public company in Canada. The additional demands associated with being a U.S. public company may disrupt regular operations of the Company’s business by diverting the attention of some of the Company’s senior management team away from revenue-producing activities to additional management and administrative oversight, adversely affecting the Company’s ability to attract and complete business opportunities and increasing the difficulty in both retaining professionals and managing and growing the Company’s business. Any of these effects could harm the Company’s business, results of operations and financial condition.
If our efforts to comply with new United States laws, regulations and standards differ from the activities intended by regulatory or governing bodies, such regulatory bodies or third parties may initiate legal proceedings against the Company and its business may be adversely affected. As a public company in the United States, it is more expensive for the Company to obtain director and officer liability insurance, and the Company will be required to accept reduced coverage or incur substantially higher costs to continue its coverage. These factors could also make it more difficult for the Company to attract and retain qualified directors.
As a foreign private issuer, Hut 8 is subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit the information publicly available to its shareholders.
The Company is a “foreign private issuer,” as such term is defined in Rule 405 under the U.S. Securities Act, and is not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the U.S. Exchange Act, the Company is subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, the Company does not file the same reports that a U.S. domestic issuer would file with the SEC, although it is required to file or furnish to the SEC the continuous disclosure documents that the Company is required to file in Canada under Canadian securities laws. In addition, the Company’s officers, directors, and principal shareholders are exempt from the reporting and “short swing” profit recovery provisions of Section 16 of the U.S. Exchange Act. Therefore, the Company’s shareholders may not know on as timely a basis when its officers, directors and
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principal shareholders purchase or sell shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are longer.
As a foreign private issuer, the Company is exempt from the rules and regulations under the U.S. Exchange Act related to the furnishing and content of proxy statements. The Company is also exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. While the Company will comply with the corresponding requirements relating to proxy statements and disclosure of material nonpublic information under Canadian securities laws, these requirements differ from those under the U.S. Exchange Act and Regulation FD and shareholders should not expect to receive the same information at the same time as such information is provided by U.S. domestic companies. In addition, the Company is not required under the U.S. Exchange Act to file annual and quarterly reports with the SEC as promptly as U.S. domestic companies whose securities are registered under the U.S. Exchange Act.
In addition, as a foreign private issuer, the Company has the option to follow certain Canadian corporate governance practices, except to the extent that such laws would be contrary to U.S. securities laws, and provided that the Company discloses the requirements it is not following and describes the Canadian practices it follows instead. The Company currently relies on this exemption with respect to requirements regarding the quorum for any meeting of its shareholders. The Company may in the future elect to follow home country practices in Canada with regard to other matters. As a result, the Company’s shareholders may not have the same protections afforded to shareholders of U.S. domestic companies that are subject to all U.S. corporate governance requirements.
The Company may lose foreign private issuer status in the future, which could result in significant additional costs and expenses.
The Company may in the future lose its foreign private issuer status if a majority of its shares are held in the United States and it fails to meet the additional requirements necessary to avoid loss of foreign private issuer status, such as if: (1) a majority of its directors or executive officers are U.S. citizens or residents; (2) a majority of its assets are located in the United States; or (3) its business is administered principally in the United States. The regulatory and compliance costs to the Company under securities laws as a U.S. domestic issuer will be significantly more than the costs incurred as a Canadian foreign private issuer. If the Company were not a foreign private issuer, it would not be eligible to use foreign issuer forms and would be required to file periodic and current reports and registration statements on U.S. domestic issuer forms with the SEC, which are generally more detailed and extensive than the forms available to a foreign private issuer. In addition, the Company may lose its ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.
Provisions of Canadian law may delay, prevent or make undesirable an acquisition of all or a significant portion of its shares or assets.
The Investment Canada Act (Canada) subjects an acquisition of control of the Company by a non-Canadian to government review if the value of the Company’s assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant Minister is satisfied that the investment is likely to be of net benefit to Canada. This could prevent or delay a change of control and may eliminate or limit strategic opportunities for shareholders to sell their common shares.
It may be difficult to enforce civil liabilities in Canada under U.S. securities laws.
The Company was incorporated in Canada, and its corporate headquarters are located in Canada. A majority of the Company’s directors and executive officers reside or are based principally in Canada and the majority of the Company’s assets and all or a substantial portion of the assets of these persons is located outside the United States. It may be difficult for investors who reside in the United States to effect service of process upon these persons in the United States, or to enforce a U.S. court judgment predicated upon the civil liability provisions of the U.S. federal securities laws against the Company or any of these persons. There is substantial doubt whether an action could be brought in Canada in the first instance predicated solely upon U.S. federal securities laws. Canadian courts may refuse to hear a claim based on an alleged violation of U.S. securities laws against the Company or these persons on the grounds that Canada is not the most appropriate forum in which to bring such a claim. Even if a Canadian court agrees to hear a claim, it may determine that
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Canadian law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Canadian law.
General Risks
A small number of shareholders have a significant controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control
The largest shareholder, Bitfury, beneficially owns in the aggregate approximately 20.95% of the Common Shares as of the date of this Prospectus. As a result, Bitfury may exert significant influence over the Company’s operations and business strategy and will have sufficient voting power to likely control influence the outcome of matters requiring shareholder approval. These matters may include the composition of the Board, which has the authority to direct the Company’s business, and to appoint and remove officers; approving or rejecting a merger, amalgamation, consolidation or other business combination; raising future capital; and amending the Company’s articles, which governs the rights attached to the Common Shares. This concentration of ownership could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of the Common Shares that might otherwise give shareholders the opportunity to realize a premium over the then-prevailing market price of the Common Shares. This concentration of ownership may also adversely affect the trading price of the Common Shares.
Hut 8’s cryptocurrency inventory may be exposed to cybersecurity threats and hacks
As with any other computer code, flaws in cryptocurrency codes have been exposed by certain malicious actors. Several errors and defects have been found and corrected, including those that disabled some functionality for users and exposed users’ information. Discovery of flaws in or exploitations of the source code that allow malicious actors to take or create money have been rare.
If fees increase for recording transactions in the Blockchain, demand for Bitcoins may be reduced and prevent the expansion of the Bitcoin Network to retail merchants and commercial business, resulting in a reduction in the price of Bitcoins that could adversely affect an investment in the Company
As the number of Bitcoins awarded for solving a block in the Blockchain decreases, the incentive for miners to contribute processing power to the Bitcoin Network will transition from a set reward to transaction fees. In order to incentivize miners to continue to contribute processing power to the Bitcoin Network, the Bitcoin Network may either formally or informally transition from a set reward to transaction fees earned upon solving for a block. If miners demand higher transaction fees to record transactions in the Blockchain or a software upgrade automatically charges fees for all transactions, the cost of using Bitcoins may increase and the marketplace may be reluctant to accept Bitcoins as a means of payment. Existing users may be motivated to switch from Bitcoins to another digital currency or back to fiat currency. Decreased use and demand for Bitcoins may adversely affect their value and result in a reduction in the Bitcoin index price and the price of the Common Shares.
Reliance on a limited number of key employees
The success of Hut 8 is dependent upon the ability, expertise, judgment, discretion and good faith of a limited number of people constituting its senior management. While employment agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on Hut 8’s business, operating results or financial condition.
Regulatory changes or actions may alter the nature of an investment in the Company or restrict the use of cryptocurrencies in a manner that adversely affects the Company’s operations
As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted differently to cryptocurrencies with certain governments deeming them illegal while others have allowed their use and trade. On-going and future regulatory actions may alter, perhaps to a materially adverse extent, the ability of the Company to continue to operate.
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The effect of any future regulatory change on the Company or any cryptocurrency that the Company may mine is impossible to predict, but such change could be substantial and adverse to the Company. Investors may consult their tax advisers regarding the substantial uncertainty regarding the tax consequences of an investment in Bitcoins.
Governments may, in the future, restrict or prohibit the acquisition, use or redemption of cryptocurrencies. Ownership of, holding or trading in cryptocurrencies may then be considered illegal and subject to sanction. Governments may also take regulatory action that may increase the cost and/or subject cryptocurrency mining companies to additional regulation. For example, on July 25, 2017 the SEC released an investigative report which indicates that the SEC would, in some circumstances, consider the offer and sale of Blockchain tokens pursuant to an initial coin offering subject to U.S. securities laws. Similarly, on August 24, 2017, the Canadian Securities Administrators published CSA Staff Notice 46-307 — Cryptocurrency Offerings, providing guidance on whether initial coin offerings, pursuant to which tokens are offered to investors, are subject to Canadian securities laws.
Governments may in the future take regulatory actions that prohibit or severely restrict the right to acquire, own, hold, sell, use or trade cryptocurrencies or to exchange cryptocurrencies for fiat currency. By extension, similar actions by other governments, may result in the restriction of the acquisition, ownership, holding, selling, use or trading in the Common Shares. Such a restriction could result in the Company liquidating its Bitcoin inventory at unfavorable prices and may adversely affect the Company’s shareholders.
Banks and other financial institutions may not provide banking services, or may cut off banking services, to businesses that provide cryptocurrency-related services or that accept cryptocurrencies as payment
A number of companies that engage in Bitcoin and/or other cryptocurrency-related activities have been unable to find banks or financial institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions in response to government action, particularly in China, where regulatory response to cryptocurrencies has been to exclude their use for ordinary consumer transactions within China. We also may be unable to obtain or maintain these services for our business. The difficulty that many businesses that provide Bitcoin and/or derivatives on other cryptocurrency-related activities have and may continue to have in finding banks and financial institutions willing to provide them services may be decreasing the usefulness of cryptocurrencies as a payment system and harming public perception of cryptocurrencies, and could decrease their usefulness and harm their public perception in the future.
The usefulness of cryptocurrencies as a payment system and the public perception of cryptocurrencies could be damaged if banks or financial institutions were to close the accounts of businesses engaging in Bitcoin and/or other cryptocurrency-related activities. This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national stock and derivatives on commodities exchanges, the over-the-counter market, and securities depositories, which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively affect our relationships with financial institutions and impede our ability to convert cryptocurrencies to fiat currencies. Such factors could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations and harm investors.
We may face risks of internet disruptions, which could have an adverse effect on the price of cryptocurrencies.
A disruption of the internet may affect the use of cryptocurrencies and subsequently the value of our securities. Generally, cryptocurrencies and our business of mining cryptocurrencies is dependent upon the internet. A significant disruption in internet connectivity could disrupt a currency’s network operations until the disruption is resolved and have an adverse effect on the price of cryptocurrencies and our ability to mine cryptocurrencies.
The impact of geopolitical events on the supply and demand for cryptocurrencies is uncertain
Crises may motivate large-scale purchases of cryptocurrencies which could increase the price of cryptocurrencies rapidly. This may increase the likelihood of a subsequent price decrease as crisis-driven
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purchasing behavior wanes, adversely affecting the value of the Company’s Bitcoin inventory. The possibility of large-scale purchases of cryptocurrencies in times of crisis may have a short-term positive impact on the prices of Bitcoin. For example, in March 2013, a report of uncertainty in the economy of the Republic of Cyprus and the imposition of capital controls by Cypriot banks motivated individuals in Cyprus and other countries with similar economic situations to purchase Bitcoin. This resulted in a significant short-term positive impact on the price of Bitcoin. However, as the purchasing activity of individuals in this situation waned, speculative investors engaged in significant sales of Bitcoins, which significantly decreased the price of Bitcoins. Crises of this nature in the future may erode investors’ confidence in the stability of cryptocurrencies and may impair their price performance which would, in turn, adversely affect the Company’s Bitcoin inventory.
As an alternative to fiat currencies that are backed by central governments, cryptocurrencies such as Bitcoin, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of Bitcoins either globally or locally. Large-scale sales of cryptocurrencies would result in a reduction in their market prices and adversely affect the Company’s operations and profitability.
The further development and acceptance of the cryptographic and algorithmic protocols governing the issuance of and transactions in cryptocurrencies is subject to a variety of factors that are difficult to evaluate
The use of cryptocurrencies to, among other things, buy and sell goods and services and complete other transactions, is part of a new and rapidly evolving industry that employs digital assets based upon a computer-generated mathematical and/or cryptographic protocol. The growth of this industry in general, and the use of cryptocurrencies in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may adversely affect the Company’s operations. The factors affecting the further development of the industry, include, but are not limited to:
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Continued worldwide growth in the adoption and use of cryptocurrencies;
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Governmental and quasi-governmental regulation of cryptocurrencies and their use, or restrictions on or regulation of access to and operation of the network or similar cryptocurrency systems;
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Changes in consumer demographics and public tastes and preferences;
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The maintenance and development of the open-source software protocol of the network;
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The availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;
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General economic conditions and the regulatory environment relating to digital assets; and
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Consumer sentiment and perception of Bitcoins specifically and cryptocurrencies generally.
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The outcome of these factors could have negative effects on our ability to pursue our business strategy or continue as a going concern, which could have a material adverse effect on our business, prospects or operations as well as potentially negative effect on the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account, which would harm investors in our securities.
The Company may fail to anticipate or adapt to technology innovations in a timely manner, or at all
The blockchain and telecommunications markets are experiencing rapid technological changes. Failure to anticipate technology innovations or adapt to such innovations in a timely manner, or at all, may result in the Company’s products becoming obsolete at sudden and unpredictable intervals. To maintain the relevancy of the Company’s products, the Company has actively invested in product planning and research and development. The process of developing and marketing new products is inherently complex and involves significant uncertainties. There are a number of risks, including the following:
(a)
the Company’s product planning efforts may fail in resulting in the development or commercialization of new technologies or ideas;
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(b)
the Company’s research and development efforts may fail to translate new product plans into commercially feasible products;
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(c)
the Company’s new technologies or new products may not be well received by consumers;
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(d)
the Company may not have adequate funding and resources necessary for continual investments in product planning and research and development;
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(e)
the Company’s products may become obsolete due to rapid advancements in technology and changes in consumer preferences; and
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(f)
the Company’s newly developed technologies may not be protected as proprietary intellectual property rights.
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Any failure to anticipate the next-generation technology roadmap or changes in customer preferences or to timely develop new or enhanced products in response could result in decreased revenue and market share. In particular, the Company may experience difficulties with product design, product development, marketing or certification, which could result in excessive research and development expenses and capital expenditure, delays or prevent the Company’s introduction of new or enhanced products. Furthermore, the Company’s research and development efforts may not yield the expected results, or may prove to be futile due to the lack of market demand.
The Company is an unsecured lender of Bitcoin
The Company has loaned 1,000 Bitcoin to Genesis pursuant an unsecured lending arrangement. The loan is subject to the prior claims of any secured creditors to the extent of the value of the assets securing such indebtedness. In the event of Genesis’ bankruptcy, liquidation, reorganization or other winding up, assets that secure debt will be available to pay obligations on the loan only after all debt secured by those assets has been repaid in full. If there are insufficient assets remaining to pay all of Genesis’ creditors, all or a portion of the loan then outstanding would remain unpaid.
Hut 8 Cryptocurrency Risks
Risks of security breaches
Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the Bitcoin exchange market since the launch of the Bitcoin Network. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses, could harm the Company’s business operations or result in loss of the Company’s assets. Any breach of the Company’s infrastructure could result in damage to the Company’s reputation and reduce demand for the Common Shares, resulting in a reduction in the price of the Common Shares. Furthermore, the Company believes that if its assets grow, it may become a more appealing target for security threats, such as hackers and malware.
The Company believes that the security procedures used by its partners and providers utilize, such as hardware redundancy, segregation and offline data storage (i.e., the maintenance of data on computers and/or storage media that is not directly connected to, or accessible from, the internet and/or networked with other computers, also known as “cold storage”) protocols are reasonably designed to safeguard the Company’s Bitcoins from theft, loss, destruction or other issues relating to hackers and technological attack. Nevertheless, the security procedures cannot guarantee the prevention of any loss due to a security breach, software defect or act of God that may be borne by Hut 8.
The security procedures and operational infrastructure of the Company and its partners and providers may be breached due to the actions of outside parties, error or malfeasance of an employee of the Company or its partners and providers, or otherwise, and, as a result, an unauthorized party may obtain access to the Company’s Bitcoin account, private keys, data or Bitcoins. Additionally, outside parties may attempt to fraudulently induce employees of the Company or its partners and providers to disclose sensitive information in order to gain access to the Company’s infrastructure. As the techniques used to obtain unauthorized access,
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disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined event, and often are not recognized until launched against a target, the Company may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of the Company’s Bitcoin account occurs, the market perception of the effectiveness of the Company could be harmed.
Fluctuation of Bitcoin price and expected economic returns on Bitcoin mining activities
The price of Bitcoin is volatile. Fluctuation in the price of Bitcoin may significantly affect the Company’s results of operations and financial condition; in particular, a significant drop in Bitcoin price may have a material adverse effect on the Company’s results of operations. During 2020, global financial markets experienced a period of sharp decline and volatility due in large part to the real and perceived economic impact of the novel coronavirus (COVID-19) pandemic. The price of Bitcoin declined sharply during the first quarter of 2020 and experienced a period of particular volatility in the fourth quarter of 2020 and the first quarter of 2021. The public health impact of the coronavirus, as well as the steps taken by governments and businesses around the world to combat its spread, have had an adverse impact on the global economy. Any such economic downturn, either short-term or prolonged, could impact the Bitcoin market as well.
Bitcoin price fluctuated significantly in the past few years, which resulted in a corresponding fluctuation in the Company’s results of operations. The Company expects that the Bitcoin price may continue to fluctuate in the future, and as such, the Company would expect to continue to experience a significant corresponding fluctuation in the Company’s results of operations.
There is no assurance that Bitcoins will maintain their long-term value in terms of future purchasing power or that the acceptance of Bitcoin payments by mainstream retail merchants and commercial businesses will continue to grow.
The Bitcoin daily reward halves approximately every four years
The difficulty of Bitcoin mining, or the amount of computational resources required for a set amount of reward for recording a new block, directly affects the Company’s results of operations. Bitcoin mining difficulty is a measure of how much computing power is required to record a new block, and it is affected by the total amount of computing power in the Bitcoin Network. The Bitcoin algorithm is designed so that one block is generated, on average, every ten minutes, no matter how much computing power is in the network. Thus, as more computing power joins the network, and assuming the rate of block creation does not change (remaining at one block generated every ten minutes), the amount of computing power required to generate each block and hence the mining difficulty increases. In other words, based on the current design of the Bitcoin Network, Bitcoin mining difficulty would increase together with the total computing power available in the Bitcoin Network, which is in turn affected by the number of Bitcoin mining machines in operation. For example, Bitcoin mining difficulty would increase based on increases in the total computing power available in the Bitcoin Network, which is in turn affected by the number of Bitcoin mining machines in operation. From January 2017 to December 2019, Bitcoin mining difficulty increased by approximately 35 times, according to Blockchain.info.
In May 2020, the Bitcoin daily reward halved from 12.5 Bitcoin per block, or approximately 1,800 Bitcoin per day, to 6.25 Bitcoin per block, or approximately 900 Bitcoin per day. This halving may have a potential impact on the Company’s profitability at the reward level of 6.25 coins. Based on the fundamentals of Bitcoin mining and historical data on Bitcoin prices and the network difficulty rate after a halving event, it is unlikely that the network difficulty rate and price would remain at the current level when the Bitcoin rewards per block are halved. The Company believes that although the halving would reduce the block reward by 50%, other market factors such as the network difficulty rate and price of Bitcoin would change to offset the impact of the halving sufficiently for the Company to maintain profitability. Nevertheless, there is a risk that a halving will render the Company unprofitable and unable to continue as a going concern.
Exposure to hash rate and network difficulty
The hash rate in the Bitcoin Network is expected to increase as a result of upgrades across the industry as Bitcoin miners use more efficient chips. As the hash rate increases, the Bitcoin mining difficulty will increase in
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response to the increase in computing power in the network. This may make it difficult for the Company to remain competitive. The effect of increased computing power in the network combined with fluctuations in the Bitcoin price could have a material adverse effect on the Company’s results of operations and financial condition.
Bitcoin mining is capital intensive
Remaining competitive in the Bitcoin mining industry requires significant capital expenditure on new chips and other hardware necessary to increase processing power as the Bitcoin Network difficulty increases. If the Company is unable to fund its capital expenditures, either through its revenue stream or through other sources of capital, the Company may be unable to remain competitive and experience a deterioration in its result of operations and financial condition.
Limitation of liability in commercial agreements
Hut 8’s commercial agreements may limit the ability of the Company to recover losses relating to its Bitcoins. Under these agreements, some service providers and parties are not liable for any special, incidental, indirect, intangible, or consequential damages arising out of, or in connection with, among other things, the terms of the agreements or performance thereunder. Further, it may be the case that in no event will the aggregate liability pursuant to these agreements hold a party liable for any loss or damage exceeding the fees paid or payable to the party by the Company during a period immediately preceding the incident giving rise to such liability. Notwithstanding the foregoing, the liability of a party may not be limited in respect of direct damages arising from, or in any way related to, the fraud, willful misconduct or gross negligence of the party in question.
The Company may be unable to obtain additional financing on acceptable terms or at all
The continued development of the Company will require additional financing. The failure to raise or procure such additional funds or the failure to achieve positive cash flow could result in the delay or indefinite postponement of the Company’s business objectives. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, will be on terms acceptable to the Company. In particular, the financing options available to the Company have been significantly reduced as a result of the COVID-19 pandemic. Potential counterparties have been reluctant to enter into or engage in negotiations related to possible financing transactions during the restrictions and market disruption resulting from COVID-19. Prolonged restrictions relating to the COVID-19 pandemic or a further wave of infections could significantly limit the Company’s access to capital. If additional funds are raised by offering equity securities, existing shareholders could suffer significant dilution. The Company will require additional financing to fund its operations until positive cash flow is achieved.
Cryptocurrency mining consumes a significant amount of energy to process the computations and cool down the mining hardware. Therefore, a steady and inexpensive power supply is critical to the Company’s mining operations. There can be no assurance that the Company’s operations will not be affected by power shortages or an increase in energy prices in the future. In particular, the power supply could be disrupted by natural disasters, such as floods, mudslides and earthquakes, or other similar events beyond the control of the Company’s customers. Energy prices have recently experienced significant volatility and there can be no assurance that they will not increase significantly. Further, the Company may experience power shortages due to seasonal variations in the supply of power. Power shortages, power outages or increased power prices could have a material adverse effect on the Company’s business, results of operations and financial condition.
Supply chain disruption
As the technology evolves, the Company may be required to acquire more technologically advanced mining software and other required equipment to operate the Company effectively and remain competitive in the market. Disruption to the Company’s supply chain could prevent it from acquiring this software and any other required equipment that it needs to operate the Company and remain competitive, which could have a material adverse effect on the Company’s business, results of operations and financial condition. As new technological innovations occur, including in quantum computing, there are no assurances that the Company will be able to adopt or effect such new innovations, nor that the Company will be able to acquire new and
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improved equipment to stay competitive or that the existing software or other equipment of the Company will not become obsolete, uncompetitive or inefficient.
Increase in carbon taxes
Bitcoin mining is energy intensive and has a significant carbon footprint. Increases in the tax payable on carbon emissions related to the Company’s operations could significantly increase the Company’s cost of doing business and could have a material adverse effect on the Company’s business, results of operations and financial condition. While the Company currently uses wind power as a source of power for its existing operations, there are no assurances that the Company will be able to effectively and efficiently, or at all, source its power needs with cost efficient and reliable alternative renewable energy sources.
Mining of Bitcoin is subject to existing taxes and may be subject to new taxes
Where cryptocurrency has been acquired as a result of mining activities of a commercial nature, the Company is currently subject to certain applicable taxes by applicable government authorities and may be subject to certain new taxes imposed by various applicable governmental authorities, whether at the time the cryptocurrency is earned, as a service, or otherwise in connection with the operations the Company currently undertakes or may in the future undertake as part of its ongoing strategic plan. There are no assurances that any such taxes will not have a material adverse impact on the Company’s business, results of operations and financial condition.
EXEMPTION
Pursuant to a decision of the Autorité des marchés financiers dated February 26, 2021, the Company was granted a permanent exemption from the requirement to translate into French this Prospectus, as well as the documents incorporated by reference herein, and any Prospectus Supplement to be filed in relation to an “at-the-market distribution”. This exemption is granted on the condition that this Prospectus and any Prospectus Supplement (other than in relation to an “at-the-market distribution”) be translated into French if the Company offers Securities to Québec purchasers in connection with an offering other than in relation to an “at-the-market distribution”.
INTEREST OF EXPERTS
The following persons or companies whose profession or business gives authority to the report, valuation, statement or opinion made by the person or company are named in this Prospectus as having prepared or certified a report, valuation, statement or opinion in this Prospectus.
Certain legal matters in connection with such offering of Securities will be passed upon on behalf of the Company by Bennett Jones LLP with respect to matters of Canadian law and by Hogan Lovells US LLP with respect to matters of U.S. law. As of the date hereof, the partners, counsel and associates of Bennett Jones LLP, as a group, own, directly or indirectly, in the aggregate, less than 1% of the outstanding Common Shares.
In addition, certain legal matters in connection with any offering of Securities will be passed upon for any underwriters, dealers or agents by counsel to be designated at the time of such offering by such underwriters, dealers or agents with respect to matters of Canadian and, if applicable, United States or other foreign law.
Dale Matheson Carr-Hilton Labonte LLP are the current auditors of the Company and are independent of the Company in accordance with the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario.
AUDITORS, TRANSFER AGENT AND REGISTRAR
The auditors of the Company are Dale Matheson Carr-Hilton Labonte LLP, Chartered Professional Accountants. The transfer agent and registrar for the Common Shares is Computershare Trust Company of Canada.
DOCUMENTS FILED AS PART OF THE REGISTRATION STATEMENT
The following documents have been filed or furnished with the SEC as part of the Registration Statement of which this Prospectus forms a part: (i) the documents listed under the heading “Documents Incorporated by
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Reference”; (ii) powers of attorney from the Company’s directors and officers, as applicable; and (iii) the consent of Dale Matheson Carr-Hilton Labonte LLP. A copy of the form of indenture, warrant agreement, subscription receipt agreement or statement of eligibility of trustee on Form T-1, as applicable, will be filed by post-effective amendment or by incorporation by reference to documents filed or furnished with the SEC under the U.S. Exchange Act.
PURCHASERS’ STATUTORY RIGHTS
Unless provided otherwise in an applicable Prospectus Supplement, the following is a description of a purchaser’s statutory rights. Securities legislation in certain of the provinces and territories of Canada provides purchasers with the right to withdraw from an agreement to purchase securities. This right may be exercised within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces and territories of Canada, the securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus and any amendment contains a misrepresentation or is not delivered to the purchaser, provided that the remedies for rescission, revision of the price or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for the particulars of these rights or consult with a legal advisor.
In addition, original purchasers of Securities which are convertible, exchangeable or exercisable for other securities of the Company will have a contractual right of rescission against the Company in respect of the conversion, exchange or exercise of such Securities. The contractual right of rescission will be further described in any applicable Prospectus Supplement, but will, in general, entitle such original purchasers to receive, upon surrender of the underlying securities, the amount paid for the applicable convertible, exchangeable or exercisable Securities (and any additional amount paid upon conversion, exchange or exercise) in the event that this Prospectus, the relevant Prospectus Supplement or any amendment thereto contains a misrepresentation, provided that: (i) the conversion, exchange or exercise takes place within 180 days of the date of the purchase of such Securities under this Prospectus and the applicable Prospectus Supplement; and (ii) the right of rescission is exercised within 180 days of the date of the purchase of such Securities under this Prospectus and the applicable Prospectus Supplement. This contractual right of rescission will be consistent with the statutory right of rescission described under Section 130 of the Securities Act (Ontario), and is in addition to any other right or remedy available to original purchasers under Section 130 of the Securities Act (Ontario) or otherwise at law.
In an offering of Securities which are convertible, exchangeable or exercisable for other securities of the Company, investors are cautioned that the statutory right of action for damages for a misrepresentation contained in this Prospectus, the relevant Prospectus Supplement or an amendment thereto is limited, in certain provincial and territorial securities legislation, to the price at which the Securities which are convertible, exchangeable or exercisable for other securities of the Company are offered to the public under the prospectus offering. This means that, under the securities legislation of certain provinces and territories, if the purchaser pays additional amounts upon conversion, exchange or exercise of the security, those amounts may not be recoverable under the statutory right of action for damages that applies in those provinces and territories. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for the particulars of this right of action for damages, or consult with a legal adviser.
At-the-Market Distributions
Securities legislation in some provinces and territories of Canada provides purchasers of securities with the right to withdraw from an agreement to purchase securities and with remedies for rescission or, in some jurisdictions, revisions of the price, or damages if the prospectus, prospectus supplement, and any amendment relating to securities purchased by a purchaser are not sent or delivered to the purchaser. However, purchasers of Securities distributed under an at-the-market distribution under this Prospectus by the Company do not have the right to withdraw from an agreement to purchase the Securities and do not have remedies of rescission or, in some jurisdictions, revisions of the price, or damages for non-delivery of this Prospectus, the applicable Prospectus Supplement, and any amendment relating to any Securities purchased thereunder by such
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purchaser because this Prospectus, such Prospectus Supplement, and any amendment relating to the Securities purchased thereunder by such purchaser will not be sent or delivered, as permitted under Part 9 of NI 44-102.
Securities legislation in some provinces and territories of Canada further provides purchasers with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus, prospectus supplement, and any amendment relating to securities purchased by a purchaser contains a misrepresentation. Those remedies must be exercised by the purchaser within the time limit prescribed by securities legislation. Any remedies under securities legislation that a purchaser of Securities distributed under an at-the-market distribution under this Prospectus by the Company may have against the Company or its agents for rescission or, in some jurisdictions, revisions of the price, or damages if this Prospectus, the applicable Prospectus Supplement, and any amendment relating to Securities purchased thereunder by a purchaser contain a misrepresentation will remain unaffected by the non-delivery of this Prospectus referred to above.
A purchaser should refer to applicable securities legislation for the particulars of these rights and should consult a legal adviser.
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PART II
INFORMATION NOT REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
Indemnification of Directors and Officers.
Section 160 of the Business Corporations Act (British Columbia) (the “BCBCA”) authorizes a company to indemnify past and present directors and officers of the company and past and present directors and officers of a corporation of which the company is or was a shareholder, against liabilities incurred in connection with the provision of their services as such if the director or officer acted honestly and in good faith with a view to the best interests of the company and, in the case of a criminal or administrative proceeding, if he or she had reasonable grounds for believing that his or her conduct was lawful. Section 165 of the BCBCA provides that a company may purchase and maintain liability insurance for the benefit of such directors and officers.
Under the Registrant’s articles and subject to the provisions of the BCBCA, the Registrant must indemnify each director, former director, officer and former officer of the Registrant and his or her heirs and legal personal representatives against all judgments, penalties and fines awarded or imposed in, and amounts paid in settlement of, any legal proceeding or investigative action, whether current, threatened, pending or completed, in which such person and any of the heirs and legal personal representatives of such person, by reason of such person being or having been a director or officer of the Company, is or may be liable, and the Company must, after the final disposition of such legal proceeding or investigative action, pay the expenses actually and reasonably incurred by such person in respect of that proceeding to the fullest extent permitted by the BCBCA.
A policy of directors’ and officers’ liability insurance is maintained by the Registrant which insures directors and officers against losses incurred as a result of claims against the directors and officers of the Registrant in Canada pursuant to the indemnity provisions under the Registrant’s articles and the BCBCA.
Insofar as indemnification for liabilities arising under the U.S. Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the U.S. Securities and Exchange Commission such indemnification is against public policy as expressed in the U.S. Securities Act and is therefore unenforceable.
* * *
Insofar as indemnification for liabilities arising under the United States Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the U.S. Securities and Exchange Commission (the “SEC”) such indemnification is against public policy as expressed in the United States Securities Act of 1933 and is therefore unenforceable.
The exhibits listed in the exhibit index, appearing elsewhere in this Registration Statement, have been filed as part of this Registration Statement.
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EXHIBIT INDEX
Exhibit
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Description
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4.1 ​ ​ Management information circular of the Company dated November 26, 2020. ​
4.2 ​ ​ ​
4.3 ​ ​ ​
4.4 ​ ​ Management’s discussion and analysis of the Company for the year ended December 31, 2019. ​
4.5 ​ ​ ​
4.6 ​ ​ ​
4.7 ​ ​ Material change report of the Company dated February 21, 2020. ​
4.8 ​ ​ Material change report of the Company dated March 31, 2020. ​
4.9 ​ ​ Material change report of the Company dated June 22, 2020. ​
4.10 ​ ​ Material change report of the Company dated January 13, 2021. ​
5.1 ​ ​ Consent of Dale Matheson Carr-Hilton Labonte LLP. ​
6.1 ​ ​ Power of Attorney (included on the signature page of this Registration Statement). ​
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PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
Item 1.   Undertaking.
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the SEC staff, and to furnish promptly, when requested to do so by the SEC staff, information relating to the securities registered pursuant to this Form F-10 or to transactions in said securities.
Item 2.   Consent to Service of Process.
(a)
Concurrently with the filing of this Registration Statement, the Registrant is filing with the SEC a written irrevocable consent and power of attorney on Form F-X.
​
(b)
Any change to the name or address of the Registrant’s agent for service shall be communicated promptly to the SEC by amendment to Form F-X referencing the file number of this Registration Statement.
​
TABLE OF CONTENTS
 
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-10 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Toronto, Province of Ontario, Canada, on March 9, 2021.
HUT 8 MINING CORP.
By:
/s/ Jaime Leverton
​
​
Name: Jaime Leverton
Title: Chief Executive Officer
TABLE OF CONTENTS​
 
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jaime Leverton and Tanya Woods, or either of them, his or her true and lawful attorneys-in-fact and agents, each of whom may act alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement, including post-effective amendments, and any and all additional registration statements (including amendments and post-effective amendments thereto) in connection with any increase in the amount of securities registered with the SEC, and to file the same, with all exhibits thereto, and other documents and in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all his or her said attorneys-in-fact and agents or any of them or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated and on the dates indicated:
​
Signature
​ ​
Title
​ ​
Date
​
​
/s/ Jaime Leverton
​
Jaime Leverton
​ ​
Chief Executive Officer (Principal Executive Officer) and Director
​ ​
March 9, 2021
​
​
/s/ Jimmy Vaiopoulos
​
Jimmy Vaiopoulos
​ ​
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
​ ​
March 9, 2021
​
​
/s/ Bill Tai
​
Bill Tai
​ ​
Director
​ ​
March 9, 2021
​
​
/s/ Jeremy Sewell
​
Jeremy Sewell
​ ​
Director
​ ​
March 9, 2021
​
​
/s/ Joseph Flinn
​
Joseph Flinn
​ ​
Director
​ ​
March 9, 2021
​
​
/s/ Sanjiv Samant
​
Sanjiv Samant
​ ​
Director
​ ​
March 9, 2021
​
​
/s/ Chris Eldredge
​
Chris Eldredge
​ ​
Director
​ ​
March 9, 2021
​
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AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933, the undersigned has signed this Registration Statement, in the capacity of the duly authorized representative of the Registrant in the United States, on March 9, 2021.
PUGLISI & ASSOCIATES
By:
/s/ Donald J. Puglisi
​
​
Name: Donald J. Puglisi
Title: Managing Director

  

Exhibit 4.1 

 

(GRAPHIC)  

 

HUT 8 MINING CORP. 

130 King Street W. 

Toronto, Ontario 

M5X 2A2

 

NOTICE OF ANNUAL AND SPECIAL MEETING

 

NOTICE IS HEREBY GIVEN THAT an annual and special meeting (the “Meeting”) of the shareholders of Hut 8 Mining Corp. (“Hut 8” or the “Company”) will be held virtually on December 30, 2020 at 10:00 a.m. (Toronto time) (Shareholder Dial-in Number: (+1) 888 886 7786 (North America Toll Free)) for the following purposes:

 

1. to receive and consider Hut 8’s audited financial statements for the fiscal year-ending December 31, 2019 (“Fiscal 2019”), together with the report of the auditors thereon;

 

2. to elect the directors of the Company who will serve until the end of the next annual meeting of shareholders of the Company;

 

3. to re-appoint DMCL LLP as auditors and to authorize the directors to fix their remuneration;

 

4. to approve a securities for services plan with Induna Energy Inc. which includes a one-time securities issuance of 380,000 common shares for services rendered in 2020, and the issuance of up to 600,000 common shares in 2021 at the discretion of the Company;

 

5. to transact such further or other business as may properly come before the Meeting and any adjournments thereof.

 

The accompanying management information circular provides additional information relating to the matters to be considered at the Meeting. Also accompanying this notice is a form of proxy. Any adjournment of the Meeting will be held at a time and place to be specified at the Meeting. Only Hut 8 shareholders of record at the close of business on November 2, 2020, will be entitled to receive notice of and vote at the Meeting. If you are unable to attend the Meeting in person, please complete, sign and date the enclosed form of proxy and return the same in the enclosed return envelope provided for that purpose within the time and to the location set out in the form of proxy accompanying this notice. If you are a non-registered shareholder of Hut 8 and receive these materials through your broker or through another Intermediary, please complete and return the materials in accordance with the applicable instructions. Failure to do so may result in your shares not being eligible to be voted by proxy at the Meeting.

 

DATED this 26th day of November, 2020.

 

  ON BEHALF OF THE BOARD OF DIRECTORS
   
  “Bill Tai”
  Bill Tai
  Director
  Toronto, Ontario

 

 

GLOSSARY OF DEFINED TERMS

 

In this Information Circular, the following capitalized words and terms shall have the following meanings:

 

BCBCA The Business Corporations Act (British Columbia) and the regulations prescribed thereunder, as amended from time to time.
   
Business Combination The business combination between Hut 8 and Oriana which became effective March 2, 2018, all as further detailed in the filing statement of Oriana dated March 1, 2018 and available on SEDAR at www.sedar.com.
   
CEO Chief Executive Officer.
   
CFO Chief Financial Officer.
   
Computershare Computershare Trust Company.
   
DMCL Dale Matheson Carr-Hilton Labonte LLP, Chartered Professional Accountants.
   
Hut 8 or the Company Hut 8 Mining Corp., a Company existing under the BCBCA.
   
Hut 8 Board The board of directors of Hut 8.
   
Hut 8 DSUs Deferred Share Units of the Company, issued under the Omnibus Plan.
   
Hut 8 Named Executive Officers or NEO The named executive officers of Hut 8, as provided in “Compensation of Executive Officers and Directors”.
   
Hut 8 Nominees Proposed nominees to sit on the Hut 8 Board.
   
Hut 8 Options Stock options granted to directors, officers, employees and consultants of Hut 8 to acquire Hut 8 Shares, in accordance with the terms of the Omnibus Plan.
   
Hut 8 RSUs Restricted Share Units of the Company, issued under the Omnibus Plan.
   
Hut 8 Shareholders At the relevant time, holders of Hut 8 Shares.
   
Hut 8 Shares Common shares in the capital of Hut 8.
   
Hut 8 Warrants Warrants for common shares in the capital of Hut 8.
   
IFRS International Financial Reporting Standards.
   
Information Circular This management information circular sent to the Hut 8 Shareholders in connection with the Meeting.
   
Induna Induna Energy Inc.
   
Intermediary As defined in “General Proxy Information – Non-Registered Holders and Delivery Matters”.
   
Meeting The annual and special meeting of Hut 8 Shareholders to be held virtually on December 30, 2020 at 10:00 a.m. (Toronto time).
   
NI 52-110 National Instrument 52-110 – Audit Committees.
   
OBO An objecting beneficial owner, as defined in NI 54-101.
   
Omnibus Plan The Omnibus Long-Term Incentive Plan originally approved by the Hut 8 Shareholders on February 15, 2018.
   
Oriana Oriana Resources Corporation, a company incorporated under the BCBCA on June 9, 2011.

( ii )

 

 

Person Any individual, firm, partnership, joint venture, venture capital fund, association, trust, trustee, executor, administrator, legal personal representative, estate group, body corporate, Company, unincorporated association or organization, Governmental Authority, syndicate or other entity, whether or not having legal status.
   
Proxy Submission Deadline As defined in “General Proxy Information – Appointment and Revocation of Proxies”.
   
Record Date November 2, 2020, being the date for determining registered Hut 8 Shareholders entitled to receive notice of and vote at the Meeting.
   
RTO Has the same meaning as “Business Combination”.
   
TSX Toronto Stock Exchange.
   
TSXV TSX Venture Exchange.
   
VIF Voting Information Form.

 - iii -

 

(GRAPHIC)  

 

INFORMATION CIRCULAR

 

for the

 

ANNUAL GENERAL AND SPECIAL MEETING

 

of

 

Hut 8 Mining Corp.

 

to be held on

 

Wednesday, December 30, 2020

 - 1 -

 

Hut 8 Mining Corp. 

MANAGEMENT INFORMATION CIRCULAR 

For the Annual General and Special Meeting of Shareholders to be held on December 30, 2020

 

Management Solicitation

 

This Information Circular is furnished in connection with the solicitation by management of Hut 8 of proxies to be used at the Meeting referred to in the accompanying Notice of Annual and Special Meeting of Shareholders (the “Notice”) to be held virtually on December 30, 2020, at the time and place and for the purposes set forth in the Notice.

 

Shareholder Dial-in Numbers:

 

North American Toll Free: (+1) 888 886 7786
International: 08006522435 (United Kingdom); 1800076068 (Australia)

  

Shareholders in other jurisdictions can request their local dial-in number directly from customercare@accutel.com.

 

Solicitation of Proxies

 

The solicitation is made by the management of the Company and will be made primarily by mail, but proxies may also be solicited personally or by telephone by regular employees of the Company at nominal cost. The cost of solicitation by management will be borne by the Company. The information contained herein is given as of November 26, 2020, unless indicated otherwise.

 

Appointment and Revocation of Proxies

 

The Persons named in the enclosed form of proxy are directors and/or officers of the Company. Each shareholder has the right to appoint a Person or company, who need not be a shareholder of the Company, other than the Persons named in the enclosed form of proxy, to represent such shareholder at the Meeting or any adjournment thereof. Such right may be exercised by inserting such Person’s name in the blank space provided and striking out the names of management’s nominees in the enclosed form of proxy or by completing another proper form of proxy.

 

All proxies must be executed by the shareholder or his or her attorney duly authorized in writing or, if the shareholder is a company, by an officer or attorney thereof duly authorized. The completed form of proxy must be deposited at the office of Computershare, 100 University Avenue, 8th Floor, Toronto, Ontario, Canada M5J 2Y1 (the mailing address for Computershare), before 4:00 p.m. (Toronto time) on December 24, 2020 (the “Proxy Submission Deadline”).

 

A shareholder who has given a proxy has the power to revoke it as to any matter on which a vote has not already been cast pursuant to the authority conferred by such proxy and may do so either:

 

1. not later than 48 hours (excluding Saturdays, Sundays and holidays) before the time of holding the Meeting or adjournment thereof at which the proxy is to be used, by delivering another properly executed form of proxy bearing a later date and depositing it as aforesaid;

 

2. by depositing an instrument in writing revoking the proxy executed by him or her:

 

(a) with Computershare at its office denoted herein at any time up to and including the Proxy Submission Deadline, or not later than 48 hours prior to any adjournment(s) of the Meeting at which the proxy is to be used; or

 

(b) with the Chair of the Meeting on the day of the Meeting, prior to the commencement of the Meeting or any adjournment thereof; or

 - 2 -

 
3. in any other manner permitted by law.

 

Exercise of Discretion by Proxies

 

Shares represented by properly executed proxies in favour of the Persons named in the enclosed form of proxy will be voted or withheld from voting in accordance with the instructions of the shareholder on any ballot that may be called for and, where the Person whose proxy is solicited specifies a choice with respect to the matters identified in the proxy, the shares will be voted or withheld from voting in accordance with the specifications so made. Where shareholders have properly executed proxies in favour of the Persons named in the enclosed form of proxy and have not specified in the form of proxy the manner in which the named proxies are required to vote the shares represented thereby, such shares will be voted in favour of the passing of the matters set forth in the Notice. The enclosed form of proxy confers discretionary authority with respect to amendments or variations to the matters identified in the Notice and with respect to other matters that may properly come before the Meeting. At the date hereof, management of the Company knows of no such amendments, variations or other matters to come before the Meeting. However, if any other matters which at present are not known to management of the Company should properly come before the Meeting, the proxy will be voted on such matters in accordance with the best judgment of the named proxies.

 

Non-Registered Holders and Delivery Matters

 

These securityholder materials are being sent to both registered and non-registered owners of the securities. However, only registered shareholders, or the Persons they appoint as their proxies, are permitted to vote at the Meeting. If you are a non-registered owner, and the Company or its agent has sent these materials directly to you, your name and address and information about your holdings of securities have been obtained in accordance with applicable securities regulatory requirements from the Intermediary holding on your behalf. By choosing to send these materials to you directly, the Company (and not the Intermediary holding on your behalf) has assumed responsibility for (i) delivering these materials to you and (ii) executing your proper voting instructions.

 

If you have received the Company’s form of proxy, you may return it to the Computershare: (i) by regular mail in the return envelope provided or (ii) by fax at 1-866-249-7775 (toll free within Canada and the U.S.) or 416-263-9524 (international).

 

The OBOs and other beneficial holders receive a VIF from an Intermediary by way of instruction of their financial institution. Detailed instructions of how to submit your vote will be on the VIF.

 

In either case, the purpose of this procedure is to permit non-registered holders to direct the voting of the shares they beneficially own. Should a non-registered holder who receives either form of proxy wish to vote at the Meeting in person, the non-registered holder should strike out the Persons named in the form of proxy and insert the non-registered holder’s name in the blank space provided. Non- registered holders should carefully follow the instructions of their Intermediary including those regarding when and where the form of proxy or VIF is to be delivered.

 

The Company is not using the “notice and access” provisions of NI 54-101 in connection with the delivery of the Meeting materials in respect of the Meeting. The Company is not sending such Meeting materials directly to Non-Objecting Beneficial Owners in accordance with NI 54-101, and it intends to pay for intermediaries to deliver such Meeting materials to OBOs.

 - 3 -

 

 

INTEREST OF CERTAIN PERSONS OR COMPANIES IN MATTERS TO BE ACTED UPON

 

Except as otherwise disclosed in this Information Circular, none of the directors or executive officers of the Company, none of the Hut 8 Nominees, none of the Persons who have been directors or executive officers of the Company since the commencement of the Company’s last completed financial year and none of the associates or affiliates of any of the foregoing Persons has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon at the Meeting, other than the proposed amendment and confirmation of the Omnibus Plan, in connection with which the directors and executive officers of the Company may have been granted and/or may be entitled to receive Awards. 

 - 4 -

 

VOTING SECURITIES AND PRINCIPAL HOLDERS

 

Each shareholder of record at the close of the Record Date will be entitled to vote at the Meeting or at any adjournment thereof, either in person or by proxy. As of the Record Date, the only voting securities issued by the Company are Hut 8 Shares, of which there were 90,476,317 issued and outstanding. Each share carries the right to one vote. The outstanding shares are listed on the TSX under the symbol “HUT”.

 

To the knowledge of the directors and executive officers of the Company as of the Record Date, no Person beneficially owns, controls or directs, directly or indirectly, 10% or more of the outstanding shares, other than as set forth below.

 

Name   Number of Shares Beneficially Owned, 
Controlled or Directed (Directly or Indirectly) 		    Percentage of Issued and 
Outstanding Shares as of the Record
 Date 		 
Bitfury Holding BV     38,849,802 (1)     40.2 %

(1) Bitfury Holdings BV has 35,000,000 of their shares pledged to a third party.

 

BUSINESS OF THE MEETING

 

Financial Statements

 

The Hut 8 Shareholders will receive and consider the audited financial statements of the Company for the fiscal year-ending December 31, 2019, together with the auditor’s report thereon.

 

Election of Directors

 

Under the constating documents of the Company, the Hut 8 Board is to consist of a minimum of three and a maximum of ten directors, to be elected annually. Shareholders will be invited to elect six directors at the Meeting. Each director holds office until the next annual meeting or until his or her successor is duly elected or appointed unless his or her office is vacated earlier in accordance with the Company’s by-laws. On any ballot that may be called for in the election of directors, the Persons named in the enclosed form of proxy intend to cast the votes to which the Hut 8 Shares represented by such proxy are entitled for the Hut 8 Nominees, unless the shareholder who has given such proxy has directed that the Hut 8 Shares be otherwise voted or withheld from voting in respect of the election of directors. Management does not contemplate that any of the Hut 8 Nominees will be unable to serve as a director, but if that should occur for any reason prior to the Meeting, the Persons named in the enclosed form of proxy reserve the right to vote for other Hut 8 Nominees at their discretion.

 - 5 -

 

Hut 8 Nominees

 

The following table sets out the names of management’s nominees for election as directors, each nominee’s principal occupation, business or employment, the year they began as a director of the Company, the number of common shares of Hut 8 beneficially owned by each, directly or indirectly, or over which each exercised control or direction, as at the date of this Circular.

 

Name and Municipality 
of Residence 		  Principal Occupations For Last 
Five Years 		  Year began as a 
director of 
Company 		    Shares Held or 
Beneficially Owned 		 

Bill Tai(1) 

San Francisco, USA 

  Partner Emeritus, CRV; Director, Bitfury Group Limited; Investor; Director     2018       708,453 (2)

Jeremy Sewell(3) 

London, UK 

  CFO, Bitfury Group Limited; CFO of eCurrency     2019       Nil  

Joseph Flinn(4) 

Halifax, Canada 

  CFO, Seaboard Transportation Group, President of Clarke Transport and Clarke North Canada; President Sysco Canada’s Eastern Division     2018       7,808  

Sanjiv Samant(5) 

Toronto, Canada 

  Managing Director of Round13 Capital; Group Head of Technology Media and Healthcare at National Bank     N/A       Nil  

Chris Eldredge(6) 

Washington D.C., USA 

  Former President and CEO of Dupont Fabros Technology and a Director of Seaborn     N/A       Nil  
Jaime Leverton 
Toronto, Canada 		  Former Chief Commercial Officer of eStruxture Data Centers and the General Manager of Cogego Peer 1     N/A       Nil  

(1) Chair of the Hut 8 Board
(2) 40,000 of Mr. Tai’s Hut 8 Shares are held through XTC Unicorn Fund I, LLC.
(3) Current member of Audit Committee to be removed at Meeting, proposed member of the Compensation and Governance Committee
(4) Independent; Audit Committee chair and member of Compensation and Governance Committee
(5) Proposed member of the Audit Committee
(6) Proposed member of Audit Committee and Compensation and Governance Committee chair

 - 6 -

 

The following is a brief description of the director nominees:

 

Bill Tai – Director

 

Bill is a Director of Bitfury and co-founder Chairman of data science company Treasure Data. He is an early seed investor behind high profile start-ups including Canva, Color Genomics, Tweetdeck/Twitter, Wish.com and Zoom Video. Mr. Tai is a Partner Emeritus for CRV after establishing their Silicon Valley office. Previously he founded several successful technology companies and served as a Director of seven publicly listed companies. He holds a BSEE with Honors from the University of Illinois and an MBA from Harvard.

 

Jeremy Sewell – Director

 

Jeremy Sewell serves as Bitfury’s CFO and has 30 years of extensive international financial, commercial and operating experience. Prior to his role as CFO of Bitfury, he was CFO of the Silicon Valley fintech company eCurrency, where he led the equity investment from eBay Founder Pierre Omidyar’s VC and Bridgewater Associates and Farallon Capital hedge fund founders Ray Dalio and Tom Steyer. Mr. Sewell qualified as a Chartered Accountant in the UK spending 10 years in practice with a focus on audit and consulting projects across multiple countries in Europe and Asia.

 

Joseph Flinn – Director

 

Joseph Flinn joins Hut 8 following 12 years of senior leadership at Sysco Corporation, where he played an integral role as both Chief Financial Officer of Sysco Canada, and President of Sysco Canada’s Eastern Division, and 2 years as President of Clarke Freight Transportation Group, a major national freight carrier. Mr. Flinn holds a business degree from Saint Mary’s University and is a chartered professional accountant. Currently, Mr. Flinn is the CFO of Seaboard Transportation Group, a major international bulk transportation group of companies.

 

Sanjiv Samant – Director Nominee

 

Sanjiv Samant is a Managing Partner at Round13 Capital where he founded and runs the Round13 Growth Fund, focused on investing in later stage Canadian growth opportunities in technology and healthcare. Mr. Samant has over twenty years of experience working with and advising a wide variety of Canadian growth companies on strategy, M&A, IPO and capital raising initiatives. Prior to establishing the Round13 Growth Fund, Sanjiv headed the Technology, Media, Telecommunication (“TMT”), Sustainability and Healthcare investment banking group at a Canadian bank owned dealer. Mr. Samant holds an LL.B. from Osgoode Hall Law School, an M.B.A. from York University’s Schulich School of Business and a B.A. (Economics) from the University of Western Ontario.

 

Christopher P. Eldredge – Director Nominee

 

Christopher P. Eldredge is the former president and CEO of DuPont Fabros Technology (“DFT”). While in this role, Eldredge repositioned the company and established its expansion strategy which eventually led to its sale to Digital Reality Trust. Prior to joining DFT, Eldredge was executive vice president of global solutions, an NTT America Inc., one of the largest global IT infrastructure services providers. Eldredge received an MBA from Dowling College; a Master’s in communication arts from New York Institute of Technology; and a Bachelor’s in business administration in marketing from Hofstra University where he earned a full athletic scholarship.

 

Jaime Leverton – Chief Executive Officer & Director Nominee

 

Jaime Leverton is a highly accomplished technology executive and industry thought leader with a long history of driving high growth mandates. With more than 20 years of leadership in the Canadian technology industry, she is joining Hut 8 from her current role as the Chief Commercial Officer at eStruxture Data Centers. Her career also includes tenure as the General Manager of Canada and APAC with data center and cloud provider Cogeco Peer 1 (now Aptum) and leadership roles with National Bank, BlackBerry, Bell Canada and IBM Canada. She proudly sits on the boards of the Stratford Festival, Technation and ComKids in addition to serving as the Chair of IMWomen Canada. 

 - 7 -

 

Cease Trade Orders

 

To the knowledge of the Company and based upon information provided by the Hut 8 Nominees, none of the Hut 8 Nominees is, as at the date of this Information Circular, or has been, within 10 years before the date of this Information Circular, a director, chief executive officer or chief financial officer of any company (including the Company) that, while such person was acting in that capacity (or after such person ceased to act in that capacity but resulting from an event that occurred while that person was acting in such capacity), was subject to a cease trade order, an order similar to a cease trade order, or an order that denied the company access to any exemption under securities legislation, in each case, for a period of more than 30 consecutive days.

 

Bankruptcies

 

Except as disclosed below, to the knowledge of the Company and based upon information provided by the Hut 8 Nominees, none of the Hut 8 Nominees:

 

(a) is, as at the date of this Information Circular, or has been within 10 years before the date of the Circular, a director or executive officer of any company (including the Company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or

 

(b) has, within the last 10 years before the date of this Information Circular, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the proposed director.

 

Securities Penalties or Sanctions

 

To the knowledge of the Company and based upon information provided by the Hut 8 Nominees, none of the Hut 8 Nominees has been subject to: (a) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable securityholder in deciding whether to vote for a proposed director.

 

The management representatives named in the attached form of proxy intend to vote the Hut 8 Shares represented by such proxy in favour of the election of the Hut 8 Nominees set forth in this Information Circular unless a shareholder specifies in the proxy that his or her Hut 8 Shares are to be withheld from voting in respect of such resolution.

 

Appointment and Remuneration of Auditors

 

DMCL have been the Company’s auditors since January 8, 2019. The Hut 8 Board recommends that DMCL continue as the Company’s auditors and hold office until the close of the next annual meeting of shareholders.

 

Prior to DMCL’s engagement, MNP LLP served as auditors for the Company for the 2018 and 2017 fiscal years.

 

In the past, the directors have negotiated with the auditors of the Company on an arm’s length basis in determining the fees to be paid to the auditors. Such fees have been based on the complexity of the matters in question and the time incurred by the auditors. The directors believe that the fees negotiated in the past with the auditors of the Company were reasonable and, in the circumstances, would be comparable to fees charged by other auditors providing similar services.

 

In order to appoint DMCL as auditors of the Company to hold office until the close of the next annual meeting and authorize the directors to fix the remuneration thereof, a majority of the votes cast at the Meeting must be voted in favour thereof.

 - 8 -

 

The Hut 8 Board unanimously recommends that the Hut 8 Shareholders vote in favour of appointing DMCL as auditors of the Company and authorizing the directors to fix the remuneration of the auditors. The management representatives named in the attached form of proxy intend to vote in favour of the appointment of DMCL as the auditors of the Company and in favour of authorizing the directors to fix the remuneration of the auditors, unless a shareholder specifies in the proxy that his or her Hut 8 Shares are to be withheld from voting in respect of the appointment of auditors and the fixing of their remuneration.

 

Approval of Security Based Compensation Arrangement

 

At the Meeting, the Hut 8 Shareholders will be asked to, if deemed appropriate, pass an ordinary resolution approving the security-based compensation arrangement with a service provider of the Company, Induna Energy Inc. (“Induna”). On May 29, 2018, Hut 8 entered into a Joint Development Agreement (the “JDA”) with Induna pursuant to which, for the ten (10) year term of the JDA, Hut 8 engages Induna to provide various services to Hut 8 including, but not limited to, operations and maintenance support for selected project sites of Hut 8.

 

This arrangement, and the consideration sought from Shareholders, is to authorize the Hut 8 Board to:

 

(i) issue 380,000 Hut 8 Shares to Induna, as payment for services already rendered by Induna, pursuant to the JDA, for the period between January 1, 2020 and November 26, 2020 (“2020 Share Issuance”); and

 

(ii) during the calendar year 2021, issue up to $50,000 in Hut 8 Shares (determined by dividing the then-current market price of the Hut 8 Shares) on a monthly basis (the “Share Payments”), in such monthly amounts to be determined at the discretion of the Hut 8 Board.

 

The JDA sets out that Hut 8 will make monthly payment related to its energy consumption at the subject project site. Such monthly payments are payable up to fifty percent (50%) in Hut 8 Shares. The Company is therefore seeking shareholder approval to make such Share Payments, at the discretion of management of the Company, up to the maximum amount payable on a monthly basis in accordance with the JDA and subject to a monthly maximum 50,000 common shares, as well as the approval for the 2020 Share Issuance.

 

The shares issuable by the Company are to be issued at the then-market price of the securities of the Company on the TSX.

 

Induna is the only eligible recipient of the Share Payments arrangement under the JDA, and under the proposed shareholder approval. The maximum monthly Share Payment is $50,000.00, which equals approximately 32,679 (monthly) and 392,156 (annual) Hut 8 Shares, representing 0.03% and 0.4%, respectively, of the total issued and outstanding Hut 8 Shares as of the date of this Circular using the closing price of the Hut 8 Shares on the TSX on November 24, 2020 ($1.53). The Share Payments are also subject to a maximum of 50,000 (monthly) and 600,000 (annually) Hut 8 Shares, representing 0.04% and 0.6%, respectively, of the total issued and outstanding Hut 8 Shares (resulting in an effective price floor of $1.00 for the Hut 8 Shares issuable under the Share Payments).

 

Induna currently holds 15,130 Hut 8 Shares, representing less than 0.02% of the total issued and outstanding Hut 8 Shares. If Induna is issued both the maximum Share Payments of 600,000 Hut 8 Shares, and the 2020 Share Issuance of 380,000 Hut 8 Shares, then Induna would be issued 980,000 total Hut 8 Shares which represents approximately 1.00% of the issued and outstanding Hut 8 Shares. Given Induna’s current holdings, and the maximum number of Hut 8 Shares that Induna can be issued, the number of the Hut 8 Shares: i) issued to insiders of Hut 8, within any one-year period, and ii) issuable to insiders of Hut 8, at any time, under the proposed share compensation arrangement combined with all of Hut 8’s other security based compensation arrangements, do not exceed 10% of Hut 8’s total issued and outstanding securities, respectively.

 

The JDA is assignable by either party on thirty-days written notice and may only be amended by written agreement of the parties. Pursuant to the policies of the TSX, the shareholder approval sought herein shall only be applicable to Share Payments made in accordance with the disclosure herein and made to Induna.

 

The Company previously made Share Payments to Induna in accordance with the JDA at such time as the Hut 8 Shares were listed on the TSXV. Notwithstanding the previous practices of the parties in this regard, the policies of the TSX require that this share compensation arrangement is approved by Hut 8’s security holders. The approval of security holders is specifically required pursuant to Section 613 of the TSX Company Manual.

 - 9 -

 

At the Meeting, the shareholders will be asked to consider the following resolution:

 

“BE IT RESOLVED AS AN ORDINARY RESOLUTION THAT:

 

1. If and when the directors of the Company shall deem appropriate to do so, the Company is hereby authorized to issue to Induna Energy Inc. (“Induna”), on a monthly basis for each calendar month of 2021, that number of Hut 8 Shares equal to up to $50,000 divided by the then-current market price of Hut 8 Shares, subject to 50,000 Hut 8 Share per month maximum issuance (600,000 Hut 8 Shares annually) in accordance with the terms of its Joint Development Agreement (“JDA”) with Induna, in such final amount as may be determined in the board of directors of the Company’s sole and complete discretion (the “Share Payments Resolution”).

 

2. The Company is authorized to issue 380,000 Hut 8 Shares to Induna for services rendered by Induna for the period between January 1, 2020 and November 26, 2020, pursuant to the JDA, such Hut 8 Shares to be issued at the then-market price at the time of issuance.

 

2. The directors of the Company, in their sole and complete discretion, are authorized and empowered to act upon this resolution to effect the share issuances described in this resolution;

 

3. Any one director or officer of the Company is authorized and directed, on behalf of the Company, to take all necessary steps and proceedings and to execute, deliver and file any and all declarations, agreements, documents and other instruments and do all such other acts and things that may be necessary or desirable to give effect to this special resolution.

 

4. Notwithstanding that this resolution has been duly passed by the shareholders of the Company, the directors of the Company are hereby authorized and empowered, without further notice to, or approval of, the shareholders of the Company to revoke the Share Payments Resolution at any time and to not proceed with the Share Payments.”

 

If shareholders pass the above resolutions, the Share Payments will be made on an ongoing basis on such dates to be determined by the directors of the Company, if at all, and the 2020 Share Issuance will be issued immediately.

 

The Hut 8 Board unanimously recommends that the Hut 8 Shareholders vote in favour of a resolution authorizing and directing the management of Hut 8, in their sole discretion, to make the Share Payments on an ongoing basis for the term of the JDA and to issue 380,000 Hut 8 Shares to Induna for services already rendered. The management representatives named in the attached form of proxy intend to vote in favour of such security-based compensation arrangement and share issuance, unless a shareholder specifies in the proxy that his or her Hut 8 Shares are to be withheld from voting thereon. 

 - 10 -

 

DIRECTOR COMPENSATION

 

The Company’s director compensation program is designed to attract and retain global talent to serve on the Hut 8 Board, taking into account the risks and responsibilities of being an effective director. The Company’s objective regarding director compensation is to follow best practices with respect to retainers, the format and weighting of the cash and incentive components of compensation, and the implementation of share ownership guidelines. The Company believes that these approaches have helped to attract, and will help to attract and retain, strong members for the Hut 8 Board who will be able to fulfill their fiduciary responsibilities without competing interests.

 

The chart below outlines the Hut 8 Board compensation program for Fiscal 2019.

 

Type of Fee for Board of Directors   Amount(1)
Chair and Lead Director(2)   $10,000/year
Committee Member(3)   $5,000/year
Board Member(4)   $40,000/year

 

(1) Represents compensation paid per year to each director.

(2) Such compensation to be paid to members that are either the chair of the Hut 8 Board or the lead director.
(3) Such compensation to be paid to members that sit on a committee of the Hut 8 Board.
(4) Directors are also reimbursed for applicable travel and other out-of-pocket expenses incurred in executing their duties as directors. To the extent that the Company requests a director to provide advisory or consulting services, they are compensated at rates comparable to what such directors charge for comparable services to arm’s-length parties.

 

Director Compensation Table

 

The following table sets out information concerning the Fiscal 2019 compensation earned by, paid to, or awarded to each director who is not a NEO.

 

Name  

Fees 
Earned 
($)(1) 

   

Share-based 
awards 
($)(2) 

 

Option-based 
awards 
($)(3) 

   

Non-equity
incentive plan
compensation ($) 

 

Pension 
value 
($) 

 

All other 
compensation 
($)(4) 

   

Total 
($) 

 
Bill Tai     50,000     Nil     Nil     Nil   Nil     Nil       50,000  
Jeremy Sewell     19,500     Nil     Nil     Nil   Nil     Nil       19,500  
Joseph Flinn     45,000     Nil     139,514     Nil   Nil     7,500       192,014  
Dennis Mills     45,000     Nil     109,492     Nil   Nil     7,500       161,992  
Gerri Sinclair(5)     45,000     Nil     Nil     Nil   Nil     7,500       52,500  

(1) Amounts reflect the cash compensation received.
(2) Amounts reflect the fair value of shares issued, Hut 8 RSUs, or Hut 8 DSUs recognized in the year.
(3) Amounts reflect the option-based awards recognized in the covered year. The fair value was determined in accordance with IFRS 2, “Share-based payments” using the Black-Scholes stock option pricing model.
• Dennis Mills’ option-based award was granted on March 5, 2018, consisting of 115,000 stock options which expire in five years. The grant price equaled $5.00 and the fair value assigned to these stock options under the Black-Scholes model was $3.10 per option, an expected life of 5 years, a volatility rate of 75.0%, an average risk-free rate of 2.14%, and a dividend rate of 0%.

• Joseph Flinn’s option-based award was granted on September 14, 2018, consisting of 115,000 stock options which expire in five years. The grant price equaled $5.00 and the fair value assigned to these stock options under the Black-Scholes model was $2.51 per option, an expected life of 5 years, a volatility rate of 121.4%, an average risk-free rate of 2.31%, and a dividend rate of 0%.

(4) Amounts reflect the cash bonus awarded to each of the members of the Audit Committee.
(5) Gerri Sinclair resigned from the Hut 8 Board on April 3, 2020.

 - 11 -

 

Outstanding Option-Based and Share-Based Awards

 

The following table sets out, for each director who is not also a NEO, information concerning all option-based and share-based awards outstanding as at December 31, 2019.

 

    Option-Based Awards Share-Based Awards
Name   Number of
securities
underlying
unexercised
options
(#) 		    Option 
exercise 
price
($) 		    Option 
expiration 
date 		  Value of 
unexercised 
in-the- 
money 
options ($) 		  Number of 
shares or 
units of 
shares that 
have not 
vested
(#) 		  Market or
payout value 
of share-based 
awards that 
have not 
vested
($) 		  Market or payout
value of share-
based awards not 
paid out or 
distributed
($)
Bill Tai   Nil     n/a     n/a   n/a    Nil   Nil   Nil
Jeremy Sewell   Nil     n/a     n/a   n/a   Nil   Nil   Nil
Joseph Flinn     115,000     5.00     Aug. 14, 2023   Nil   Nil   Nil   Nil
Dennis Mills     115,000     5.00     Mar. 5, 2023   Nil   Nil   Nil   Nil
Gerri Sinclair(1)     115,000     5.00     Mar. 5, 2023   Nil   Nil   Nil   Nil

 

(1) Gerri Sinclair resigned from the Hut 8 Board on April 3, 2020 and subsequently forfeited her outstanding stock options.

 

Incentive Plan Awards – Value Vested or Earned During Fiscal 2019

 

Name   Option-based awards –
Value vested during Fiscal
2019
($) 		   

Share-based awards – Value
vested during Fiscal 2019
($) 

  Non-equity incentive plan 
compensation – Value earned
during Fiscal 2019
($)
Bill Tai   Nil     Nil   Nil
Jeremy Sewell   Nil     Nil   Nil
Joseph Flinn     96,218     Nil   Nil
Dennis Mills     118,728     Nil   Nil
Gerri Sinclair(1)     118,728     Nil   Nil

(1) Gerri Sinclair resigned from the Hut 8 Board on April 3, 2020.

 - 12 -

 

TERMINATION AND CHANGE OF CONTROL BENEFITS

 

The Company is party to executive employment agreements with each of its CEO and CFO. See EXECUTIVE COMPENSATION – Executive Employment Agreements which sets out the material terms of the contracts therewith.

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

The Company’s approach to executive compensation has been to provide suitable compensation for executives that is internally equitable, externally competitive and reflects individual achievement. The Company attempts to maintain compensation arrangements that will attract and retain highly qualified individuals who are able and capable of carrying out the objectives of the Company.

 

The table below sets out the name of each of the current executive officers of Hut 8, the principal occupation or employment of each of them for the past five years and the approximate number of Hut 8 Shares that each has advised are beneficially owned or subject to his or her control or direction (directly or indirectly) as at December 31, 2019.

 

Name and
Province of
Residence

  Principal Occupations for Last Five Years  

Number of Hut 8 Shares
Beneficially Owned,
Controlled or Directed

 

Jimmy Vaiopoulos

Toronto, Canada

 

•      Interim CEO of Hut 8 (2020 to present)

•       CFO of Hut 8 (2018 to 2020)

•       CFO of TSXV-listed solar solutions provider (2015 to 2018)

•       KPMG LLP (2010 to 2015)

    30,108  
Kyle Appleby   •      Interim CFO of Hut 8 (2020 – Present)     Nil  
Viktoriya Griffin   •      Interim Corporate Secretary of Hut 8 (2020 – Present)     Nil  

Andrew Kiguel(1)

Toronto, Canada

 

•      CEO of Hut 8 (2018 to 2020)

•      Managing Director of GMP Securities (2000 to 2018)

    655,533(1)  

 

(1) Andrew Kiguel resigned as CEO on April 30, 2020 and at the time of his departure, held 400,000 of his Hut 8 Shares with 1138029 BC Ltd.

 

The Company’s compensation arrangements for Hut 8’s Named Executive Officers may, in addition to salary, include compensation in the form of bonuses and, over the longer term, benefits arising from the grant of Hut 8 Options and Hut 8 RSUs pursuant to the Omnibus Plan. The Company takes into consideration matters such as the existing securities held by Hut 8 Named Executive Officers at the time of subsequent grants and the basis for each individual grant in respect of the Company’s overall compensation goals for the individual, in determining the quantum or terms of each subsequent grants.

 

The Hut 8 Board establishes and reviews the Company’s overall compensation philosophy and its general compensation policies with respect to officers, including the corporate goals and objectives and the annual performance objectives relevant to such officers. The Hut 8 Board evaluates each officer’s performance in light these goals and objectives and, based on its evaluation, determines and approves the salary, bonus, options and other benefits for such officers. In determining compensation matters, the Hut 8 Board may consider a number of factors, including the Company’s performance, the value of similar incentive awards to officers performing similar functions at comparable companies, the awards given in prior periods and other factors it considers relevant.

 

The Company also continuously adjusts its compensation strategy and programs to attract and retain the best people and to ensure that they are always incentivized to achieve results that are consistent with the corporate strategic plan which includes the examination of the implications of the risks associated with the corporate compensation policies and practices that are ultimately selected, followed or adopted. Such implications are considered by the Hut 8 Board on a case-by-case basis at such time as the Hut 8 Board considers it to be applicable. At this time the Hut 8 Board has not identified any specific risks with Hut 8’s compensation policies and practices. 

 - 13 -

 

Performance Graph

 

The performance graphs below relates to the cumulative total Shareholder return of $100 invested in Hut 8 Shares from March 7, 2018 to December 31, 2019 as compared with the total cumulative return of the S&P/TSX Composite Index, and the total compensation awarded to NEOs for the same period. The company started trading on the TSX Venture Exchange on March 6, 2018, and therefore has limited history.

 

    March 7, 2018     December 31, 2018     December 31, 2019  
Hut 8 Shares   $ 100.00     $ 30.57     $ 22.71  
S&P/TSX Composite Index Total Return   $ 100.00     $ 92.57     $ 110.51  

Total NEO Compensation(1) 

          $ 3,148,734     $ 3,137,982  

 

(1) The Total NEO Compensation consits of the annualized base salary and the annual incentive (bonus) earned during the period covered, as well as the value of the long-term incentive awards of the NEOs. The value of long-term incentive awards represents the grant date fair values of option-based awards and of the Hut 8 Shares underlying Hut 8 RSU awars, which value may not be fully realized.

 

(GRAPHIC)

 

The NEOs’ compensation is determined in accordance with the principles set forth above and is not specifically based on the performance of the Company’s common shares on the TSX, mainly due to the fact that the price of the common shares is affected by external market factors beyond the Company’s and the NEOs’ control.

 

Option-Based Awards

 

Stock option grants are made on the basis of the number of stock options currently held, position, overall individual performance, anticipated contribution to the Company’s future success and the individual’s ability to influence corporate and business performance. The purpose of granting such stock options is to assist the Company in compensating, attracting, retaining and motivating the officers of the Company and to closely align the personal interests of such persons to the interests of the shareholders.

 

The recipients of incentive stock options and the terms of the stock options granted are determined from time to time by the Hut 8 Board. The exercise price of the stock options granted is generally determined by the market price at the time of grant. 

 - 14 -

 

Restricted Share Unit Awards

 

Restricted share units are made on the basis of other types of compensation currently paid or other types of equity held, position, overall individual performance, contribution to the Company’s future success and the individual’s ability to influence corporate and business performance. The Company adopted the RSU Plan to encourage directors, officers, employees and consultants of the Company to work towards and participate in the growth and development of the Company.

 

The recipients of Hut 8 RSUs are determined from time to time by the Hut 8 Board. The Hut 8 Board will set a performance period for the Hut 8 RSUs, and once the Hut 8 RSUs are granted, they will vest according to a vesting schedule approved by the Board throughout the performance period. The value of the Hut 8 RSUs is determined on the vesting date(s), and the price per share is computed on the basis of the closing price of shares of the day prior to the vesting date.

 

Deferred Share Unit Awards

 

Deferred share units are made on the basis of other types of compensation currently paid or other types of equity held, position, overall individual performance, contribution to the Company’s future success and the individual’s ability to influence corporate and business performance. The Company includes DSU in its Omnibus Plan to encourage directors, officers, employees and consultants of the Company to work towards and participate in the growth and development of the Company.

 

The recipients of Hut 8 DSUs are determined from time to time by the Hut 8 Board. The Hut 8 Board will set a performance period for the Hut 8 DSUs, and once the Hut 8 DSUs are granted, they will vest according to a vesting schedule approved by the Hut 8Board throughout the performance period. The value of the Hut 8 DSUs is determined on the vesting date(s), and the price per share is computed on the basis of the closing price of shares of the day prior to the vesting date. 

 - 15 -

 

Summary Compensation Table

 

The following table sets out information concerning the compensation earned by, paid to, or awarded to the persons determined to be NEOs during Fiscal 2019 and Fiscal 2018.

 

                           

Non-equity Incentive
Plan Compensation ($)

               
Name and
Principal
Position 		  Fiscal
Year 		    Salary(1)
($) 		    Share-
based
Awards(2)
($) 		    Option-
based
Awards(3)
($) 		    Annual
incentive
plan(4) 		    Long-
term
incentive
plans 		  Pension
value
($) 		  All Other
compensation
($)(5) 		    Total
compensation
($) 		 
Jimmy Vaiopoulos(6)   2019       175,000       200,440       121,766       131,250     Nil   Nil     Nil       628,456  
Interim Chief Executive Officer   2018       72,500       5,000       38,401       48,630     Nil   Nil     Nil       164,531  
Kyle Appleby(7)   2019       1,500       Nil       Nil       Nil     Nil   Nil     Nil       1,500  
Interim Chief Financial Officer   2018       31,000       Nil       Nil       Nil     Nil   Nil     Nil       31,000  
Viktoriya Griffin(8)   2019       Nil       Nil       Nil       Nil     Nil   Nil     Nil       Nil  
Interim Corporate Secretary   2018       Nil       Nil       Nil       Nil     Nil   Nil     Nil       Nil  
Andrew Kiguel(9)   2019       500,000       1,805,556       Nil       93,750     Nil   Nil     128,720       2,508,026  
Chief Executive Officer   2018       356,410       2,291,668       Nil       206,250     Nil   Nil     98,875       2,953,203  

 

(1) Amounts reflect the base salary received for each NEO.

(2) Amounts reflect the fair value of shares issued, Hut 8 DSUs, and/or Hut 8 RSUs recognized in the year.
(3) Amounts reflect the option-based awards recognized in the covered year. The fair value was determined in accordance with IFRS 2, “Share-based payments” using the Black-Scholes stock option pricing model.

• Jimmy Vaiopoulos’ option-based award was granted on September 28, 2018, consisting of 90,000 stock options which expire in five years. The grant price equaled $3.00 and the fair value assigned to these stock options under the Black-Scholes model was $2.44 per option, an expected life of 5 years, a volatility rate of 121.4%, an average risk-free rate of 2.30%, and a dividend rate of 0%.
• Jimmy Vaiopoulos’ option-based award was granted on December 14, 2019, consisting of 100,000 stock options which expire in five years. The grant price equaled $1.14 and the fair value assigned to these stock options under the Black-Scholes model was $1.04 per option, an expected life of 5 years, a volatility rate of 147%, an average risk-free rate of 1.68%, and a dividend rate of 0%.
(4) Annual performance related bonus.
(5) A portion of Andrew Kiguel’s compensation package is one bitcoin per month which occurred in each month of fiscal 2019 and 2018.
(6) Jimmy Vaiopoulos started with Hut 8 in July 2018. Mr. Vaiopoulos was appointed the Interim CEO on May 1, 2020 and is expected to return as the CFO of Hut 8 on December 1, 2020.
(7) Kyle Appleby was appointed Corporate Secretary for Hut 8 on October 2, 2019. Kyle Appleby resigned as Corporate Secretary and was appointed the Interim CFO on May 1, 2020. Mr. Appleby will no longer hold a role at Hut 8 beginning on December 1, 2020.
(8) Viktoriya Griffin was appointed the Interim Corporate Secretary on May 1, 2020 and will continue as the permanent Corporate Secretary for Hut 8 starting December 1, 2020.
(9) Andrew Kiguel started with Hut 8 in April 2018. Mr. Kiguel stepped down as the CEO of Hut 8 on April 30, 2020. As part of his severance package, Mr. Kiguel received $500,000, which, along with the Hut 8 RSUs vested in April 1, 2020 of 505,051 Shares, was paid to his numbered company.

 - 16 -

 

Incentive Plan Awards

 

The following table sets forth information with respect to the Hut 8 Options and Share based awards held by the NEOs which were outstanding as of December 31, 2019.

 

    Option-Based Awards     Share-Based Awards
Name and
Principal Position 		  Number of
Securities
Underlying
Unexercised
Options
(#) 		    Option
Exercise
Price
($) 		    Option
Expiration
Date 		  Value of
Unexercised
In-the-
Money
Options
($) 		  Number of
Shares or
Units of
Shares
That Have
Not Vested
(#) 		  Market or
Payout
Value of
Share-
Based
Awards
That Have
Not Vested(1)
($) 		    Market or
Payout Value of
Vested Share-
Based Awards
Not Paid Out or
Distributed
($)
Jimmy Vaiopoulos     90,000     $ 3.00   28-Sep-2023   Nil                
Interim Chief Executive Officer     100,000     $ 1.14     14-Dec-2024   Nil   175,000     187,250     Nil

Kyle Appleby

Interim Chief Financial Officer

    Nil       n/a     n/a   Nil   Nil     Nil     Nil
Viktoriya Griffin
Interim Corporate Secretary 		    Nil       Nil     Nil   Nil   Nil     Nil     Nil

Andrew Kiguel

Chief Executive Officer

    Nil       Nil     Nil   Nil   Nil     Nil     Nil
(1) Based on Hut 8’s share price on December 31, 2019 of $1.07.

 

Executive Employment Agreements

 

On June 6, 2018 and superseded on December 2, 2019, the Company entered into an employment agreement with Jimmy Vaiopoulos, setting forth the terms and conditions of his employment, which provides for his base salary and annual bonus, and includes, among other things, provisions regarding confidentiality, and waiver of intellectual property rights. The employment agreement with Mr. Vaiopoulos’ provides for the termination of Mr. Vaiopoulos’ employment for reasons of cause, early termination, and without cause or for good reason. In the event that Mr. Vaiopoulos’ employment is terminated without cause or for good reason, Mr. Vaiopoulos is entitled to payment of Mr. Vaiopoulos’ base salary for a period of twelve months following the date of termination, and the continuation of all of Mr. Vaiopoulos’ benefits and perquisites only for the minimum statutory notice period. Where the termination occurs in connection with a change of control of the Company, and within twelve months following the closing of such change of control transaction, the Company or any successor terminates Mr. Vaiopoulos’ employment without cause or Mr. Vaiopoulos terminates his employment for either (a) the relocation of Mr. Vaiopoulos’ principal workplace to a location that is more than one-hundred kilometers from his then current principal workplace, (b) a reduction of 10% or more in Mr. Vaiopoulos’ base salary, or (c) a material diminution in Mr. Vaiopoulos’ job duties, responsibilities or authority, then Mr. Vaiopoulos is entitled to the aforementioned entitlements. 

 - 17 -

 

On November 2, 2020, the Company entered into an employment agreement with Jaime Leverton, setting forth the terms and conditions of her employment as Chief Executive Officer of the Company, effective December 1, 2020, and which provides for her base salary and annual bonus, and includes, among other things, provisions regarding confidentiality, and waiver of intellectual property rights. The employment agreement with Ms. Leverton provides for the termination of Ms. Leverton’s employment for reasons of cause, early termination, and without cause or for good reason. In the event that Ms. Leverton’s employment is terminated without cause or for good reason, Ms. Leverton is entitled to any bonus awarded in the year preceeding the year of termination, if not yet paid, plus any bonus, if earned, for the year of termination. Ms. Leverton is also entitled to payment of Ms. Leverton’s base salary for a period of twelve months following the date of termination, and the continuation of all of Ms. Leverton’s benefits and perquisites only for the minimum statutory notice period. Where the termination occurs in connection with a change of control of the Company, and within twelve months following the closing of such change of control transaction, the Company or any successor terminates Ms. Leverton’s employment without cause or Ms. Leverton terminates her employment for either (a) the relocation of Ms. Leverton’s principal workplace to a location that is more than one-hundred kilometers from her then current principal workplace, (b) a reduction of 10% or more in Ms. Leverton’s base salary, or (c) a material diminution in Ms. Leverton’s job duties, responsibilities or authority, then Ms. Leverton is entitled to the aforementioned entitlements.

 

EQUITY COMPENSATION PLANS

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Set forth below is a summary of securities issued and issuable under all equity compensation plans of the Company as at December 31, 2019.

 

Plan Category   Number of Securities
to be Issued Upon
Exercise of
Outstanding Options 		    Weighted-Average
Exercise Price of
Outstanding
Options 		    Number of
Securities to be
Issued Upon Vesting
of Hut 8 RSUs 		    Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans 		 
Equity compensation plans approved by securityholders     910,000     $ 4.34       1,213,434       6,920,367  
Equity compensation plans not approved by securityholders     N/A       N/A       N/A       N/A  
Total     910,000     $ 4.34       1,213,434       6,920,367  

 

Summary of the Omnibus Plan

 

The shareholders of the Company initially approved the Omnibus Plan on February 15, 2018. As of the Record Date, the Company had outstanding Hut 8 Options to purchase 910,000 Hut 8 Shares, of which 900,000 have been granted to officers and directors of the Company. Also, as of the Record Date, the Company had outstanding 1,213,434 Hut 8 RSUs, all of which have been granted to officers and directors of the Company.

 

The executive officers, along with the Company’s directors, employees and consultants, are eligible to participate in the Omnibus Plan, which is comprised of Hut 8 Options and Hut 8 RSUs issued pursuant to the Omnibus Plan. The purpose of the Omnibus Plan is to promote greater alignment of interests between employees and shareholders, and to support the achievement of the Company’s longer-term performance objectives, while providing a long-term retention element.

 

The Hut 8 Board is responsible for administering the Omnibus Plan, and the Compensation and Governance Committee makes recommendations to the Hut 8 Board in respect of matters relating to the Omnibus Plan.

 

The Omnibus Plan allows for a variety of equity-based awards that provide different types of incentives to be granted to the Company’s directors, executive officers, employees and consultants. The Omnibus Plan facilitates the granting of Hut 8 Options, Hut 8 RSUs or Hut 8 DSUs (collectively, the “Awards”) representing the right to receive one Hut 8 Share (and in the case of Hut 8 RSUs and Hut 8 DSUs, one Hut 8 Share, the cash equivalent of one Hut 8 Share, or a combination thereof) in accordance with the terms of Omnibus Plan. The following discussion is qualified in its entirety by the text of the Omnibus Plan.

 - 18 -

 

Under the terms of the Omnibus Plan, the Hut 8 Board, or if authorized by the Hut 8 Board, the Compensation and Governance Committee, may grant awards to eligible participants. Awards may be granted at any time and from time to time in order to: (a) increase participants’ interest in the Company’s welfare; (b) provide incentives for participants to continue their services; and (c) reward participants for their performance of services. Participation in the Omnibus Plan is voluntary and, if an eligible participant agrees to participate, the grant of Awards will be evidenced by a grant agreement with each such participant. The interest of any participant in any Award is not assignable or transferable, whether voluntary, involuntary, by operation of law or otherwise, except upon the death of the participant.

 

The Omnibus Plan provides that appropriate adjustments, if any, will be made by the Hut 8 Board in connection with a reclassification, reorganization or other change of Hut 8 Shares, consolidation, distribution, merger or amalgamation, in the Hut 8 Shares issuable or amounts payable to preclude a dilution or enlargement of the benefits under the Omnibus Plan. In the event that a participant receives Hut 8 Shares in satisfaction of an Award during a black-out period, such participant shall not be entitled to sell or otherwise dispose of such Hut 8 Shares until such black-out period has expired.

 

The maximum number of Hut 8 Shares reserved for issuance, in the aggregate, under the Omnibus Plan is 10% of the aggregate number of Hut 8 Shares issued and outstanding. The aggregate number of Hut 8 Shares (i) issued to insiders under the Omnibus Plan or any other proposed or established share-based compensation arrangement within any one-year period and (ii) issuable to insiders at any time under the Omnibus Plan or any other proposed or established share-based compensation arrangement, shall in each case not exceed 10% of the aggregate number of issued and outstanding Hut 8 Shares (on a non-diluted basis), or such other number as may be approved by the TSX and the shareholders of the Company from time to time. The aggregate number of Hut 8 Shares issued to any one participant under the Omnibus Plan within any one-year period shall not exceed 5% of the aggregate number of issued and outstanding Hut 8 Shares (on a non-diluted basis). The aggregate number of Hut 8 Shares (i) issued to consultants under the Omnibus Plan within any one-year period and (ii) issuable to persons retained to provide investor relations activities under the Omnibus Plan within any one-year period, shall in each case not exceed 2% of the aggregate number of issued and outstanding Hut 8 Shares (on a non-diluted basis).

 

Unless the Hut 8 Board decides or the grant agreement specifies otherwise, the Omnibus Plan provides that Hut 8 Options will vest as to 16.7% (1/6) every six month interval following the date of such grant for those participants who have provided their services to the Company for at least one year. For those participants who have provided their services to the Company for less than one year, Hut 8 Options will vest as to 33.3% (1/3) one year from the date of grant, and 16.7% (1/6) vesting every six months thereafter. The exercise price of any Hut 8 Option shall be fixed by the Hut 8 Board when such Hut 8 Option is granted, but shall not be less than the closing price of the Hut 8 Shares on the TSX on the day prior to the date of grant (the “Market Value”). A Hut 8 Option shall be exercisable during a period established by the Hut 8 Board which shall commence on the date of the grant and shall terminate no later than ten years after the date of the granting of the award or such shorter period as the Hut 8 Board may determine. The Omnibus Plan will provide that the exercise period shall automatically be extended if the date on which it is scheduled to terminate shall fall during a black-out period. In such cases, the extended exercise period shall terminate 10 business days after the last day of the blackout-period.

 

With respect to Hut 8 RSUs, unless otherwise approved by the Hut 8 Board and except as otherwise provided in a participant’s grant agreement or any other provision of the Omnibus Plan, Hut 8 RSUs will vest as to 1/3 each on the first, second and third anniversary date of their grant. With respect to Hut 8 DSUs, unless otherwise approved by the Hut 8 Board and except as otherwise provided in a participant’s grant agreement or any other provision of the Omnibus Plan, Hut 8 DSUs will vest 50% on the date that is six months from the date of grant and 50% on the anniversary of the date of grant.

 - 19 -

 

The following table describes the impact of certain events upon the rights of holders of Awards under the Omnibus Plan, including termination for cause, termination other than for cause and death, subject to the terms of a participant’s employment agreement:

 

Event Provisions   Provisions
Termination for cause   Immediate forfeiture of all vested and unvested Awards.
     
Resignation Forfeiture of all unvested Awards and the earlier of the original expiry date and 90 days after resignation to exercise vested Awards or such longer period as the Hut 8 Board may determine in its sole discretion.
     
Termination other than for cause   Subject to the terms of the grant or as determined by the Hut 8 Board, upon a participant’s termination without cause the number of Awards that may vest is subject to pro-ration over the applicable performance or vesting period.
     
Retirement   Upon the retirement of a participant’s employment with the Company, any unvested Awards held by the participant as at the termination date will continue to vest in accordance with its vesting schedule, and all vested Awards held by the participant at the termination date may be exercised until the earlier of the expiry date of the Awards or three years following the termination date, provided that if the participant breaches any post-employment restrictive covenants in favour of the Company (including non-competition or non-solicitation covenants), then any Awards held by such participant, whether vested or unvested, will immediately expire and the participant shall pay to the Company any “in-the-money” amounts realized upon exercise of Awards following the termination date.
     
Death   All unvested Awards will vest and may be exercised within 180 days after death.

 

In connection with a change of control of the Company, the Hut 8 Board will take such steps as are reasonably necessary or desirable to cause the conversion or exchange or replacement of outstanding Awards into, or for, rights or other securities of substantially equivalent (or greater) value in the continuing entity, provided that the Hut 8 Board may accelerate the vesting of Awards if: (i) the required steps to cause the conversion or exchange or replacement of Awards are impossible or impracticable to take or are not being taken by the parties required to take such steps (other than the Company); or (ii) the Company has entered into an agreement which, if completed, would result in a change of control and the counterparty or counterparties to such agreement require that all outstanding Awards be exercised immediately before the effective time of such transaction or terminated on or after the effective time of such transaction. If a participant is terminated without cause or resigns for good reason during the 12 month period following a change of control, or after the Company has signed a written agreement to effect a change of control but before the change of control is completed, then any unvested Awards will immediately vest and may be exercised within 30 days of such date.

 

The Hut 8 Board may, in its sole discretion, suspend or terminate the Omnibus Plan at any time, or from time to time, amend, revise or discontinue the terms and conditions of the Omnibus Plan or of any Award granted under the Omnibus Plan and any grant agreement relating thereto, subject to any required regulatory and TSX approval, provided that such suspension, termination, amendment, or revision will not adversely alter or impair any Award previously granted except as permitted by the terms of Omnibus Plan or as required by applicable laws.

 - 20 -

 

The Hut 8 Board may amend the Omnibus Plan or any Award at any time without the consent of a participant provided that such amendment shall: (a) not adversely alter or impair any Award previously granted except as permitted by the terms of the Omnibus Plan; (b) be in compliance with applicable law and subject to any regulatory approvals including, where required, the approval of the TSX; and (c) be subject to shareholder approval, where required by law, the requirements of the TSX or the Omnibus Plan, provided however that shareholder approval shall not be required for the following amendments and the Hut 8 Board may make any changes which may include but are not limited to:

 

• amendments of a general housekeeping or clerical nature that, among others, clarify, correct or rectify any ambiguity, defective provision, error or omission in the Omnibus Plan;

• changes that alter, extend or accelerate the terms of vesting or settlement applicable to any Awards; and
• a change to the eligible participants under the Omnibus Plan,

 

provided that the alteration, amendment or variance does not:

 

• increase the maximum number of Hut 8 Shares issuable under the Omnibus Plan, other than an adjustment pursuant to a change in capitalization;
• reduce the exercise price of the Awards; or
• amend the amendment provisions of the Omnibus Plan.

 

CORPORATE GOVERNANCE

 

Statement of Corporate Governance Practices

 

The Guidelines address matters such as the constitution and independence of boards, the functions to be performed by boards and their committees and the effectiveness and education of board members. NI 58-101 requires an issuer who solicits a proxy from a security holder for the purpose of electing directors to include specified corporate governance disclosure in its management information circular. Set out below is a description of the Company’s approach to corporate governance in relation to the Guidelines.

 

The Hut 8 Board

 

NI 58-101 defines an “independent director” as a director who has no direct or indirect material relationship with the Company. A “material relationship” is in turn defined as a relationship which could, in the view of the Hut 8 Board, be reasonably expected to interfere with such member’s independent judgment.

 

Upon completion of the Business Combination on March 2, 2018, the Hut 8 Board was comprised of seven members, of which three were considered to be an “independent director” within the meaning of NI 58-101. Effective August 8, 2018, Mr. Joseph Flinn joined the Hut 8 Board, replacing Jeffrey Mason who resigned.

 

Mr. Kiguel was not considered to be “independent” as a result of his position as an officer of the Company prior to his resignation, and Ms. Leverton is not considered to be “independent” as a result of her position as an officer of the Company. Mr. Sewell and Mr. Tai are not considered to be “independent” as a result of their roles with Bitfury. The individuals nominated as director who would be “independent” directors, are Joseph Flinn, Sanjiv Samant, and Christopher Eldredge.

 

The Hut 8 Board believes that it functions independently of management. To enhance its ability to act independently of management, the Hut 8 Board may meet in the absence of members of management and the non-independent directors or may excuse such Persons from all or a portion of any meeting where a potential conflict of interest arises or where otherwise appropriate.

 

The independent directors generally meet virtually on a monthly basis but do hold meetings on an ad hoc basis from time-to-time, as needed in their determination, which is supported and encouraged by the Hut 8 Board.

 

The chair of the board, Bill Tai, is not an independent director. Gerri Sinclair, former board member was the lead independent director, for which a replacement has not yet been filled since her resignation. The Hut 8 Board intends for the independent directors to elect a new lead independent director once the Hut 8 Board is reconstituted after the Meeting.

 - 21 -

 

Directorships

 

As at the Record Date, the Company does not have any directors who serve on any other additional public boards.

 

The Hut 8 Board has not developed written position descriptions for the chair and the chair of each board committee. The role and responsibilities of each such position are determined based on each of the subject individual’s own experience and on discussion with the other members of the board or committee, as applicable. The Hut 8 Board determines its own roles, responsibilities and mandate in the same manner.

 

Orientation and Continuing Education

 

While the Company currently has no formal orientation and education program for new directors, the Hut 8 Board provides new directors with sufficient information (such as recent annual reports, prospectus, proxy solicitation materials and various other operating, property and budget reports) to ensure that new directors are familiar with the Company’s business and the procedures of the Hut 8 Board. In addition, new directors are encouraged to visit and meet with management on a regular basis. The Company also encourages continuing education of its directors and officers where appropriate to ensure that they have the necessary skills and knowledge to meet their respective obligations to the Company.

 

Ethical Business Conduct

 

The Hut 8 Board monitors the ethical conduct of the Company and ensures that it complies with applicable legal and regulatory requirements, such as those of relevant securities commissions and stock exchanges. The Hut 8 Board has found that the fiduciary duties placed on individual directors by the Company’s governing corporate legislation and the common law, as well as the restrictions placed by applicable corporate legislation on the individual director’s participation in decisions of the Hut 8 Board in which the director has an interest, have been sufficient to ensure that the Hut 8 Board operates independently of management and in the best interests of the Company. The Hut 8 Board has not adopted a written code for the directors.

 

Nomination of Directors

 

The Compensation and Governance Committee performs the functions of a nominating committee and is therefore responsible for appointing and assessing directors. The Hut 8 Board believes that this has been a practical approach to date. While there are no specific criteria for Hut 8 Board membership, the Company places a priority on prior experience as a senior executive and/or director of reporting issuer and a particular knowledge of areas germane to the Company’s activities and market sector. As such, nominations are considered from the recruitment efforts of Company management and supported if necessary by external recruitment professionals as well as by the efforts of the directors themselves.

 

Compensation

 

The Compensation and Governance Committee functions as the compensation committee of the Company for the purpose of annually reviewing the adequacy and form of compensation of directors and officers to ensure that such compensation reflects the responsibilities, time commitment and risks involved in being an effective director and/or officer. The committee was composed of Gerri Sinclair, Joseph Flinn and Dennis Mills, until Ms. Sinclair’s resignation at such time as the committee has remained constituted only by Mr. Flinn and Mr. Mills. The Hut 8 Board intends to constitute the Compensation and Governance Committee with the following independent directors: Christopher Eldredge (chair) and Joseph Flinn. Jeremy Sewell, a non-independent director, is also expected to join this committee. The Compensation and Governance Committee determines the compensation for Hut 8’s directors and officers through their own experience working in and with C-Suite executives, review of market data analysis for executive compensation comparable to that of Hut 8, and the specific experience 

 - 22 -

 

Hut 8 Board Committees

 

The Hut 8 Board currently has two standing committees: the Audit Committee and the Compensation and Governance Committee.

 

Assessments

 

The Hut 8 Board assesses, on an annual basis, the contributions of the Hut 8 Board as a whole and each of the individual directors, in order to determine whether each is functioning effectively. The Hut 8 Board satisfies itself that the board, its committees, and its individual directors are performing effectively through ongoing informal assessments made and discussed at meetings of the board.

 

Director Term Limits and Other Mechanisms of Board Renewal

 

Hut 8 has not adopted term limits for the directors on its board. The Hut 8 Board may consider implementing term limits and other mechanisms of board renewal if and when it determines it would improve Hut 8’s corporate governance.

 

Policies Regarding the Representation of Women on the Board

 

Hut 8 has not adopted a written policy relating to the identification and nomination of women directors. The Hut 8 Board may consider implementing such policies if and when it determines it would improve Hut 8’s corporate governance to do so.

 

Consideration of the Representation of Women in the Director Identification and Selection Process

 

The Hut 8 Board does not consider the level of representation of women on the board in identifying and nominating candidates for election or re-election to the board. The Hut 8 Board is solely focused on industry leaders with applicable experience to Hut 8.

 

Consideration Given to the Representation of Women in Executive Officer Appointments

 

The Hut 8 Board does not consider the level of representation of women in executive officer positions when making executive officer appointments as the executive team of the Company is composed only of two members, its CEO and CFO.

 

Issuer’s Targets Regarding the Representation of Women on the Board and in Executive Officer Positions

 

Hut 8 has not adopted a target for women’s representation on the Hut 8 Board or in its executive office, as it has not created a formal policy in this regard at this time.

 

Number of Women on the Hut 8 Board and in Executive Officer Positions

 

At the date of this Circular, Hut 8 does not have any women in executive office or on the Hut 8 Board. On December 1, 2020, Jaime Leverton will commence in her role as Chief Executive Officer, making up 50% of the executive office of Hut 8, and, if elected as director of Hut 8 at the Meeting, will be one (1) of six (6) directors who is a woman, being 16.7% of the directors. 

 - 23 -

 

INDEBTEDNESS OF EXECUTIVE OFFICERS AND DIRECTORS

 

No individual who is, or at any time during the most recently completed financial year of the Company was, a director, executive officer, employee or former director, executive officer or employee of the Company, a Hut 8 Nominee, or any of their associates, is indebted to the Company or any subsidiary of the Company as of the Record Date or was so indebted at any time during the last completed fiscal year of the Company, nor have any such individuals been or are they currently indebted to another entity where such indebtedness is or has been the subject of a guarantee, support agreement, letter of credit or other similar arrangement provided by the Company or any subsidiary of the Company.

 

AUDIT COMMITTEE

 

NI 52-110 requires the Company to annually disclose in its management information circular certain information concerning the constitution of its audit committee and its relationship with its independent auditor, as set forth below.

 

Audit Committee Charter

 

The Company’s audit committee is governed by an audit committee charter, the text of which is attached as Schedule “A” to this Information Circular.

 

Composition of the Audit Committee

 

At December 31, 2019, the Company’s Audit Committee was comprised of three individuals: Joseph Flinn, Dennis Mills, and Gerri Sinclair. All three members are considered to be “independent” within the meaning of NI 52-110. After Gerri Sinclair stepped down from Hut 8’s Board, Jeremy Sewell was appointed to the audit committee and as a non-independent board member, Hut 8 relied on the exemption in NI 52-110, Section 3.3. Each member of the Audit Committee is considered to be “financially literate” which includes the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues of the Company. After the Meeting, the Hut 8 Board intends to constitute the Audit Committee with each of the three (3) independent director nominees (Joseph Flinn (chair), Sanjiv Samant, and Christopher Eldredge).

 

Member Relevant Experience

Current Audit

Committee

 
Joseph Flinn

-      CFO  of  Seaboard  Transportation  Group,  a  major  international  bulk transportation group of companies.

 

-       Two years as President of Clarke Freight Transportation Group, a major national freight carrier

 

-      12 years of senior leadership at Sysco Corporation, including CFO of Sysco Canada, and President of Sysco Canada’s Eastern Division

Chris Eldredge(1)

-       Former President and CEO of Dupont Fabros Technology

 

-       Director of Seaborn

Sanjiv Samant(1)

-       Founder & Managing Partner, Round13 Capital

 

-       Group Head - Technology, Media, Telecom, Sustainability & Healthcare Banking

 

-       Managing Director, Head of Technology, Media & Telecom Investment Banking, Canada

 - 24 -

 
Member Relevant Experience

Current Audit

Committee

 
Gerri Sinclair(2)

-      25   years experience in mobile and digital media technologies, entrepreneurial business, and government policy

 

-      Founder and CEO of NCompass Labs, acquired by Microsoft in 2001

 

-      Country Manager for Canada for MSN

Jeremy Sewell(3)

-       Former CFO of Bitfury Group

 

-       Former CFO of eCurrency, a Sillicon Valley fintech company

 

-       Led multiple teams as COO and CFO of mobile group GSMA, helping build it from start-up to a global organization across 20 countries

Dennis Mills(4)

-       Founder and President of Toronto Partners Inc. since 2013

 

-       Vice Chairman and CEO of MI Developments Inc. from 2004 to 2011

 

-       Member of Parliament in Canada from 1988 to 2004

 

-       Vice President at Magna International from 1984 to 1987

(1) Chris Eldredge and Sanjiv Samant are proposed to join the audit committee immediately after election to the Hut 8 Board on December 30, 2020.
(2) Gerri Sinclair resigned from the Hut 8 Board on April 3, 2020.
(3) Jeremy Sewell joined the audit committee on April 4, 2020, and will be removed as of the date of the Meeting.
(4) Dennis Mill does not seek re-election, and will be removed as of the date of the Meeting.

 

Audit Fees

 

The following chart summarizes the aggregate fees that were billed by the external auditors of the Company for professional services rendered to the Company for audit and non-audit related services for Fiscal 2019 and Fiscal 2018. As at the Record Date, the Fiscal 2019 and Fiscal 2018 audits were completed and the fees are as follows.

 

Type of Work   Fiscal 2019     Fiscal 2018  
Audit Fees(1)   $ 150,000     $ 150,000  
Audit-Related Fees(2)     28,500       26,380  
Tax Advisory Fees(3)     13,200       58,842  
All Other Fees(4)     -       -  
Total   $ 191,700     $ 235,222  

 

(1) Aggregate fees estimated to be billed for the Company’s annual financial statements and services normally provided by the auditor in connection with the Company’s statutory and regulatory filings.
(2) Aggregate fees estimated to be billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported as “Audit Fees”, including: assistance with aspects of tax accounting, attest services not required by state or regulation and consultation regarding financial accounting and reporting standards.
(3) Aggregate estimated to be fees billed for tax compliance, advice, planning and assistance with tax for specific transactions.
(4) Aggregate estimated to be fees billed for products and services provided by the Company’s external auditor, other than the services reported in Audit Fees, Audit-Related Fees and Tax Fees.

 - 25 -

 

OTHER BUSINESS

 

Management of the Company is not aware of any other business to come before the Meeting other than as set forth in the Notice of Annual Meeting. If any other business properly comes before the Meeting, it is the intention of the persons named in the form of proxy to vote the Hut 8 Shares represented thereby in accordance with their best judgment on such matter.

 

ADDITIONAL INFORMATION

 

Additional information relating to the Company is available on SEDAR at www.sedar.com. Financial information is contained in the Company’s audited financial statements and management’s discussion and analysis for the year ended December 31, 2018. In addition, a Hut 8 Shareholder may obtain copies of the Company’s financial statements and management’s discussion and analysis by contacting the Company by mail at 130 King Street West, Suite 1800, Toronto, ON, M5X 1E3 or by telephone at 647-256-1992.

 - 26 -

 

APPROVAL

 

The Hut 8 Board has approved the contents of this Information Circular and the sending thereof to our shareholders, directors and auditor.

 

DATED as at the 26th day of November 2020.

 

  ON BEHALF OF THE BOARD OF DIRECTORS
   
  “Bill Tai”
  Bill Tai
  Director
   
  Toronto, Ontario

  27

 

SCHEDULE A

 

AUDIT COMMITTEE CHARTER

 

Section 1 Mandate

 

The mandate of the Audit Committee (the “Committee”) of the board of directors (the “Board”) of the Company is to:

 

(a) assist the Board in fulfilling its oversight responsibilities in respect of:

(i) the quality and integrity of the Company’s financial statements, financial reporting processes and systems of internal controls and disclosure controls regarding risk management, finance, accounting, and legal and regulatory compliance;
(ii) the independence and qualifications of the Company’s external auditors;
(iii) the review of the periodic audits performed by the Company’s external auditors and the Company’s internal accounting department; and
(iv) the development and implementation of policies and processes in respect of corporate governance matters;
(b) provide and establish open channels of communication between the Company’s management, internal accounting department, external auditor and directors;
(c) prepare all filings and disclosure documents required to be prepared by the Committee and/or the Board pursuant to all applicable federal, provincial and state securities legislation and the rules and regulations of all securities commissions having jurisdiction over the Company;
(d) review and confirm the adequacy of procedures for the review of all public disclosure of financial information extracted or derived from the Company’s financial statements, and to periodically assess the adequacy of those procedures; and
(e) establish procedures for:
(i) the receipt, retention and treatment of complaints or concerns received by the Company regarding accounting, internal accounting controls or auditing matters, including, but not limited to, concerns about questionable accounting or auditing practices; and
(ii) the confidential, anonymous submission by employees of the Company of such complaints or concerns.

 

The Committee will primarily fulfil its mandate by performing the duties set out in Article 7 hereof.

 

The Board and management of the Company will ensure that the Committee has adequate funding to fulfil its mandate.

 

While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits, or to determine that the Company’s financial statements are complete and accurate or are in accordance with generally accepted accounting principles, accounting standards or applicable laws and regulations. This is the responsibility of Company’s management, internal accounting department and external auditors. Because the primary function of the Committee is oversight, the Committee will be entitled to rely on the expertise, skills and knowledge of the Company’s management, internal accounting department, external auditors and other external advisors and the integrity and accuracy of information provided to the Committee by such persons in carrying out its oversight responsibilities. Nothing in this Charter is intended to change or in any way limit the responsibilities and duties of Company’s management, internal accounting department or external auditors.

 

Section 2 Composition

 

The Committee will be comprised of members of the Board, the number of which will be determined from time to time by resolution of the Board. The composition of the Committee will be determined by the Board such that the membership and independence requirements set out in the rules and regulations, in effect from time to time, of any securities commissions (including, but not limited to, the Securities and Exchange Commission and the British Columbia Securities Commission) and any exchanges upon which the Company’s securities are listed (including, but not limited to, the Toronto Stock Exchange and the NYSE American) are satisfied (the said securities commissions and exchanges are hereinafter collectively referred to as the “Regulators”). 

 

A-1 

 

 
Section 3 Term of Office

 

The members of the Committee will be appointed or re-appointed by the Board on an annual basis. Each member of the Committee will continue to be a member thereof until such member’s successor is appointed, or until such member resigns or is removed by the Board. The Board may remove or replace any member of the Committee at any time. However, a member of the Committee will automatically cease to be a member of the Committee upon either ceasing to be a director of the Board or ceasing to meet the requirements established, from time to time, by any Regulators. Vacancies on the Committee will be filled by the Board.

 

Section 4 Committee Chair

 

The Board, or if it fails to do so, the members of the Committee, will appoint a chair from the members of the Committee. If the chair of the Committee is not present at any meeting of the Committee, an acting chair for the meeting will be chosen by majority vote of the Committee from among the members present. In the case of a deadlock in respect of any matter or vote, the chair will refer the matter to the Board for resolution. The Committee may appoint a secretary who need not be a member of the Board or Committee.

 

Section 5 Meetings

 

The time and place of meetings of the Committee and the procedures at such meetings will be determined, from time to time, by the members thereof, provided that:

 

(a) a quorum for meetings will be two members, present in person or by telephone or other telecommunication device that permits all persons participating in the meeting to speak to and hear each other. The Committee will act on the affirmative vote of a majority of members present at a meeting at which a quorum is present. The Committee may also act by unanimous written consent in lieu of meeting;

(b) the Committee may meet as often as it deems necessary, but will not meet less than once annually;
(c) notice of the time and place of every meeting will be given in writing and delivered in pursuing or by facsimile or other means of electronic transmission to each member of the Committee at least 72 hours prior to the time of such meeting; and
(d) the Committee will maintain written minutes of its meetings, which minutes will be filed with the minutes of the meetings of the Board. The Committee will make regular reports of its meetings to the Board, directly or through its chair, accompanied by any recommendations to the Board approved by the Committee.

 

Section 6 Authority

 

The Committee will have the authority to:

 

(a) retain (at the Company’s expense) its own legal counsel, accountants and other consultants that the Committee believes, in its sole discretion, are needed to carry out its duties and responsibilities;

 

(b) conduct investigations that it believes, in its sole discretion, are necessary to carry out its responsibilities;

 

(c) take whatever actions it deems appropriate, in its sole discretion, to foster an internal culture within the Company that results in the development and maintenance of a superior level of financial reporting standards, sound business risk practices and ethical behaviour; and

 

(d) request that any director, officer or employee of the Company, or other persons whose advice and counsel are sought by the Committee (including, but not limited to, the Company’s legal counsel and the external auditors) meet with the Committee and any of its advisors and respond to their inquiries.

 

- A-2

 

 
Section 7 Specific Duties

 

In fulfilling its mandate, the Committee will, among other things:

 

(a) (i) select the external auditors, based upon criteria developed by the Committee; (ii) approve all audit and non-audit services in advance of the provision of such services and the fees and other compensation to be paid to the external auditors; (iii) oversee the services provided by the external auditors for the purpose of preparing or issuing an audit report or related work; and (iv) review the performance of the external auditors, including, but not limited to, the partner of the external auditors in charge of the audit, and, in its discretion, approve any proposed discharge of the external auditors when circumstances warrant, and appoint any new external auditors. Notwithstanding any other provision of this Charter, the external auditor will be ultimately accountable to the Board and the Committee, as representatives of the shareholders of the Company, and those representatives will have the ultimate authority and responsibility to select, evaluate and, where appropriate, replace the external auditor (or to nominate the external auditor to be proposed for shareholder approval);

 

(b) periodically review and discuss with the external auditors all significant relationships that the external auditors have with the Company to determine the independence of the external auditors. Without limiting the generality of the foregoing, the Committee will ensure that it receives, on an annual basis, a formal written statement from the external auditors that sets out all relationships between the external auditor and the Company, and receives an opinion on the financial statements consistent with all professional standards that are applicable to the external auditors (including, but not limited to, those established by any securities legislation and regulations, the Canadian Institute of Chartered Professional Accountants – Chartered Accountants, Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States) and the American Institute of Certified Public Accountants, and those set out in the International Financial Reporting Standards as issued by the International Accounting Standards Board);

 

(c) evaluate, in consultation with the Company’s management, internal accounting department and external auditors, the effectiveness of the Company’s processes for assessing significant risks or exposures and the steps taken by management to monitor, control and minimize such risks; and obtain, annually, a letter from the external auditors as to the adequacy of such controls;

 

(d) consider, in consultation with the Company’s external auditors and internal accounting department, the audit scope and plan of the external auditors and the internal accounting department;

 

(e) coordinate with the Company’s external auditors the conduct of any audits to ensure completeness of coverage and the effective use of audit resources;

 

(f) assist in the resolution of disagreements between the Company’s management and the external auditors regarding the preparation of financial statements; and in consultation with the external auditors, review any significant disagreement between management and the external auditors in connection with the preparation of the financial statements, including management’s responses thereto;

 

(g) after the completion of the annual audit, review separately with each of the Company’s management, external auditors and internal accounting department the following:

 

(i) the Company’s annual financial statements and related footnotes;

 

(ii) the external auditors’ audit of the financial statements and their report thereon;

 

(iii) any significant changes required in the external auditors’ audit plan;

 

(iv) any significant difficulties encountered during the course of the audit, including, but not limited to, any restrictions on the scope of work or access to required information;

 

- A-3

 

 
(v) the Company’s guidelines and policies governing the process of risk assessment and risk management; and

 

(h) other matters related to the conduct of the audit that must be communicated to the Committee in accordance with the standards of any regulatory body (including, but not limited to, securities legislation and regulations, the Canadian Institute of Chartered Professional Accountants - Chartered Accountants, International Financial Reporting Standards as issued by the International Accounting Standards Board, Canadian generally accepted auditing standards, the Public Company Accounting Oversight Board (United States), and the American Institute of Certified Public Accountants);

 

(i) consider and review with the Company’s external auditors (without the involvement of the Company’s management and internal accounting department):

 

(i) the adequacy of the Company’s internal controls and disclosure controls, including, but not limited to, the adequacy of computerized information systems and security;

 

(ii) the truthfulness and accuracy of the Company’s financial statements; and

 

(iii) any related significant findings and recommendations of the external auditors and internal accounting department, together with management’s responses thereto;

 

(j) consider and review with the Company’s management and internal accounting department:

 

(i) significant findings during the year and management’s responses thereto;

 

(ii) any changes required in the planned scope of their audit plan;

 

(iii) the internal accounting department’s budget and staffing; and

 

(iv) the internal auditor department’s compliance with the appropriate internal auditing standards;

 

(k) establish systems for the regular reporting to the Committee by each of the Company’s management, external auditors and internal accounting department of any significant judgments made by management in the preparation of the financial statements and the opinions of each as to appropriateness of such judgments;

 

(l) review (for compliance with the information set out in the Company’s financial statements and in consultation with the Company’s management, external auditors and internal accounting department, as applicable) all filings made with Regulators and government agencies, and other published documents that contain the Company’s financial statements before such filings are made or documents published (including, but not limited to: (i) any certification, report, opinion or review rendered by the external auditors; (ii) any press release announcing earnings (especially those that use the terms “pro forma”, “adjusted information” and “not prepared in compliance with generally accepted accounting principles”); and (iii) all financial information and earnings guidance intended to be provided to analysts, the public or to rating agencies);

 

(m) prepare and include in the Company’s annual proxy statement or other filings made with Regulators any report from the Committee or other disclosures required by all applicable federal, provincial and state securities legislation and the rules and regulations of Regulators having jurisdiction over the Company;

 

(n) review with the Company’s management: (i) the adequacy of the Company’s insurance and fidelity bond coverage, reported contingent liabilities and management’s assessment of contingency planning; (ii) management’s plans in respect of any changes in accounting practices or policies and the financial impact of such changes; (iii) any major areas in that, in management’s opinion, have or may have a significant effect upon the financial statements of the Company; and (iv) any litigation or claim (including, but not limited to, tax assessments) that could have a material effect upon the financial position or operating results of the Company;

 

- A-4

 

 
(o) at least annually, review with the Company’s legal counsel and accountants all legal, tax or regulatory matters that may have a material impact on the Company’s financial statements, operations and compliance with applicable laws and regulations;

 

(p) review and update periodically a Code of Ethics and Business Conduct for the directors, officers and employees of the Company; and review management’s monitoring of compliance with the Code of Ethics and Business Conduct;

 

(q) review and update periodically the procedures for the receipt, retention and treatment of complaints and concerns by employees received by the Company regarding accounting, internal accounting controls or auditing matters, including, but not limited to, concerns regarding questionable accounting or auditing practices;

 

(r) consider possible conflicts of interest between the Company’s directors and officers and the Company; and approve for such parties, in advance, all related party transactions;

 

(s) review policies and procedures in respect of the expense accounts of the Company’s directors and officers, including, but not limited to, the use of corporate assets;

 

(a) Monitor and periodically review the Whistleblower Policy of the Company and associated procedures for:

 

(i) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters;

 

(ii) the confidential, anonymous submission by directors, officers and employees of the Company of concerns regarding questionable accounting or auditing matters; and

 

(iii) if applicable, any violations of applicable law, rules or regulations that relate to corporate reporting and disclosure, or violations of the Company’s Code of Conduct;

 

(t) review and approve the Company’s hiring policies regarding employees and partners, and former employees and partners, of the present and former external auditors of the Company;

 

(u) direct and supervise the investigation into any matter brought to its attention within the scope of the Committee’s duties. Perform such other duties as may be assigned to it by the Board from time to time or as may be required by applicable law; and

 

(v) perform such other functions, consistent with this Charter, the Company’s constating documents and governing laws, as the Committee deems necessary or appropriate.

 

Section 8 Review of Charter

 

The Committee shall periodically review and assess the adequacy of this Charter and recommend any proposed changes to the Board for consideration.

 

- A-5

 

 

Exhibit 4.2

 

 

 

HUT 8 MINING CORP.

 

ANNUAL INFORMATION FORM

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019

 

April 3, 2020  

 

 

TABLE OF CONTENTS

 

GLOSSARY OF DEFINED TERMS 2
   
GENERAL 7
   
STATEMENT REGARDING FORWARD LOOKING STATEMENTS 7
   
CURRENCY AND EXCHANGE RATES 7
   
CORPORATE STRUCTURE 8
   
GENERAL DEVELOPMENT OF THE BUSINESS 8
   
DESCRIPTION OF BUSINESS 11
   
RISK FACTORS 14
   

GENERAL RISKS 

14
   
PRIOR SALES 26
   
DIVIDENDS 26
   
DESCRIPTION OF CAPITAL STRUCTURE 26
   
MARKET FOR SECURITIES 26
   
ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER 27
   
DIRECTORS AND OFFICERS 28
   

BOARD OF DIRECTORS

29
   

OFFICERS 

30
   

PROMOTERS 

33
   
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS 34
   
LEGAL PROCEEDINGS 34
   
AUDITORS, TRANSFER AGENT AND REGISTRAR 34
   
MATERIAL CONTRACTS 35
   
EXPERTS 36
   
ADDITIONAL INFORMATION 36
   

SCHEDULE A 

A-1

 

- 2 - 

 

GLOSSARY OF DEFINED TERMS

 

In this Annual Information Form, the following capitalized words and terms shall have the following meanings:

 

$ Canadian dollars.
   
AIF The Annual Information Form of the Company for the fiscal year ended December 31, 2019.
   
Agent GMP Securities L.P., as lead agent in connection with the brokered portions of: (a) the First Offering; and (b) the Second Offering.
   
Amalgamation The “three-cornered amalgamation” involving Oriana, Oriana Subco and Hut 8, to occur on Closing.
   
ASIC An application-specific integrated circuit customized for Bitcoin mining.
   
Bitcoin or BTC The peer-to-peer payment system and the digital currency of the same name which uses open source cryptography to control the creation and transfer of such digital currency.
   
Bitcoin Network The network of computers running the software protocol underlying Bitcoin and which network maintains the database of Bitcoin ownership and facilitates the transfer of Bitcoin among parties.
   
Bitfury Bitfury Holding B.V., corporation incorporated and existing under the laws of the Netherlands, which, pursuant to the Master Data Center Purchase Agreement and the Master Services Agreement, provides a turn-key service to Hut 8 for the installation of the BlockBox and a fully-managed service to configure, operate and maintain the BlockBox.
   
Bitgo BitGo Trust Company Inc.
   
Bitgo Services Agreement The custodial service agreement dated September 1, 2019 between Bitgo and Hut 8.
   
Blockbox The proprietary BlockBox Data Centers AC manufactured by Bitfury and used for the purpose of running diverse cryptographic hash functions in connection with the mining of cryptocurrency, including all related housing and power supplies, and all required cabling, cooling units and other peripherals, as applicable.
   
Blockchain A digital ledger in which Bitcoin or other cryptocurrency transactions are recorded chronologically and publicly.
   
Business Day Any day excepting a Saturday or Sunday or a day recognized as a civic or statutory holiday in Toronto, Ontario.

 

- 3 - 

 

CEO

Chief Executive Officer. 

   
CFO

Chief Financial Officer. 

   
DMCL

Dale Matheson Carr-Hilton Labonte LLP, Chartered Professional Accountants. 

   
Financial Statements

Audited consolidated financial statements for the year ended December 31, 2019. 

   
Fiscal 2017

The fiscal year ended December 31, 2017. 

   
Fiscal 2018

The fiscal year ended December 31, 2018. 

   
Fiscal 2019

The fiscal year ended December 31, 2019. 

   
Galaxy

Galaxy Digital Lending Services LLC 

   
Galaxy Acknowledgment and Termination Agreement

The acknowledgment and termination agreement dated December 15, 2017 between Bitfury and Hut 8. 

   
Galaxy Assignment Agreement

The assignment agreement dated December 15, 2017 between Hut 8, GACN 1 LLC and Galaxy Digital LP. 

   
Genesis

Genesis Global Capital, LLC. 

   
Genesis Master Loan Agreement

The loan agreement dated November 20, 2019 between Genesis and Hut 8. 

   
Governmental Authority

Any (i) international, multinational, national, federal, provincial, state, municipal, local or other governmental or public department, central bank, court, arbitral body, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) subdivision or authority of any of the above, (iii) quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the foregoing, or (iv) stock exchange or securities authorities. 

   
Hut 8 or the Company

Hut 8 Mining Corp. 

   
Hut 8 Board

The board of directors of the Company. 

   
Hut 8 Shares or Common Shares

The common shares in the capital of the Company. 

   
Insider

If used in relation to an issuer, means:

    (a) a director or senior officer of the issuer; 
    (b) a director or senior officer of the corporation that is an Insider or subsidiary of the issuer; 
    (c) a Person that beneficially owns or controls, directly or indirectly, voting shares carrying more than 10% of the voting rights attached to all outstanding voting shares of the issuer; or 
    (d) the issuer itself if it holds any of its own securities.

 

- 4 - 

 

Investor Rights Agreement

The investor rights agreement between Hut 8 and Bitfury, dated March 2, 2018.

   
IFRS

The International Financial Reporting Standards. 

   
Letter of Intent

The letter of intent between Oriana and Hut 8 dated December 21, 2017 with respect to the Qualifying Transaction. 

   
Master Data Center Purchase Agreement

The master data center purchase agreement dated November 29, 2017 between Hut 8 and Bitfury and subsequent amendments. 

   
Master Services Agreement

The master services agreement dated November 29, 2017 between Hut 8 and Bitfury and subsequent amendments. 

   
MD&A

The management discussion and analysis for the year ended December 31, 2019. 

   
MNP

MNP LLP, Chartered Professional Accountants. 

   
NI 52-110

The National Instrument 52-110 – Audit Committees. 

   

Omnibus Plan 

The Omnibus Long-Term Incentive Plan originally approved by the Hut 8 Shareholders on February 15, 2018.

   
Oriana

Oriana Resources Corporation, a capital pool company. 

   
Oriana Subco

1149835 B.C. Ltd., a wholly-owned subsidiary of Oriana. 

   

Person

 

Any individual, firm, partnership, joint venture, venture capital fund, association, trust, trustee, executor, administrator, legal personal representative, estate group, body corporate, corporation, unincorporated association or organization, Governmental Authority, syndicate or other entity, whether or not having legal status. 

   
PH/s

Petahash per second. 

   
Pool Services Agreement The pool services agreement for Hut 8 to participate in the Bitfury pool dated December 21, 2018 between Hut 8 and Bitfury and subsequent amendments.

 

- 5 - 

 

Promoter (a) a person or company that, acting alone or in conjunction with one or more other persons, companies or a combination of them, directly or indirectly, takes the initiative in founding, organizing or substantially reorganizing the business of an issuer; or
  (b) a person or company that, in connection with the founding, organizing or substantial reorganizing of the business of an issuer, directly or indirectly, receives in consideration of services or property or both services and property, 10% or more of the issued securities of a class of securities of the issuer or 10% or more of the proceeds from the sale of a class of securities of a particular issue, but a person or company who receives the securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be considered a Promoter within the meaning of this definition where that person or company does not otherwise take part in founding, organizing or substantially reorganizing the business.

     
Qualifying Transaction (a) The transaction between Oriana and Hut 8 by which Oriana implemented a consolidation, immediately prior to the completion of the Debt Conversion (as defined below) and the Amalgamation (as defined below), of its then issued and outstanding 9,500,000 common shares on the basis of one new Oriana Common Share for every 52.7777 existing Oriana Common Shares;
  (b)

Oriana effected a conversion of $2,000,000 of debt owing by Oriana into 40,000 Oriana Common Shares, based on a conversion price of $5.00 per Oriana Common Share;

  (c) Oriana acquired all of the issued and outstanding common shares of a private corporation incorporated in British Columbia, Hut 8 Mining Corp., from the shareholders of Hut 8 PrivateCo in exchange for an aggregate of 82,160,000 Hut 8 Shares;
  (d) Hut 8 PrivateCo and 1149835 B.C. Ltd., a wholly-owned subsidiary of Oriana, amalgamated and continued as one corporation, Hut 8 Holdings Inc., which is a wholly-owned subsidiary of the Company; and  
  (e)

Oriana changed its name to “Hut 8 Mining Corp.” 

     
RSU

Restricted Share Unit to be settled by the issuance of one common share of the Company issued from treasury. 

   
Subscription Receipt Agreement

The subscription receipt agreement dated February 7, 2018 between the Subscription Receipt Agent, Oriana, Hut 8 and the Agent in connection with the Second Offering. 

   
Transaction Agreement

The definitive transaction agreement dated February 7, 2018 between Oriana, Oriana Subco and Hut 8 in respect of the Qualifying Transaction. 

   
TSX The Toronto Stock Exchange

 

- 6 - 

 

TSXV The TSX Venture Exchange.
   
United States The United States of America, its territories and possessions, any State of the United States and the District of Columbia.
   
Xapo Xapo GmbH.
   
Xapo Services Agreement The wallet and vault service agreement dated December 21, 2017 between Hut 8 and Xapo.

 

- 7 - 

 

GENERAL

 

Reference is made in this AIF to the Financial Statements and MD&A for Hut 8 for Fiscal 2019, together with the auditor’s report thereon. The Financial Statements and MD&A are available for review on the SEDAR website located at www.sedar.com.

 

All financial information in this AIF for Fiscal 2019 has been prepared in accordance with IFRS.

 

Unless otherwise noted herein, information in this AIF is presented as at April 3, 2020.

 

STATEMENT REGARDING FORWARD LOOKING STATEMENTS

 

This AIF contains certain forward-looking information and forward-looking statements, as defined in applicable securities laws (collectively referred to herein as “forward-looking statements”). These statements relate to future events or the Company’s future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “continues”, “forecasts”, “projects”, “predicts”, “intends”, “anticipates” or “believes”, or variations of, or the negatives of, such words and phrases, or state that certain actions, events or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this AIF speak only as of the date of this AIF or as of the date specified in such statement.

 

Inherent in forward-looking statements are risks, uncertainties and other factors beyond the Company’s ability to predict or control. For a complete list of the factors that could affect the Company, please make reference to those risk factors further detailed below under the heading “Risk Factors”. Readers are cautioned that such risk factors, uncertainties and other factors are not exhaustive. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this AIF.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this AIF speak only as of the date of this AIF or as of the date specified in such statement. Specifically, this AIF includes, but is not limited to, forward-looking statements regarding: the Company’s ability to meet its working capital needs at the current level for the next twelve-month period; management’s outlook regarding future trends; sensitivity analysis on financial instruments, which may vary from amounts disclosed; and general business and economic conditions.

 

All forward-looking statements herein are qualified by this cautionary statement. Accordingly, readers should not place undue reliance on forward-looking statements. The Company undertakes no obligation to update publicly, or otherwise revise, any forward-looking statements, whether as a result of new information or future events or otherwise, except as may be required by law. If the Company does update one or more forward-looking statements, no inference should be drawn that it will make any further updates.

 

CURRENCY AND EXCHANGE RATES

 

Unless otherwise specified, all dollar references are to Canadian dollars.

 

- 8 - 

 

CORPORATE STRUCTURE

 

Name, Address and Incorporation

 

Hut 8 was incorporated under the laws of the Province of British Columbia on June 9, 2011. The registered office of the Company is located at Suite 1700 Park Place 666 Burrard Street, Vancouver BC, Canada, V6C 2X8 and the headquarter is located at 130 King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2. The Company’s common shares are listed under the symbol “HUT” on the TSX and as “HUTMF” on the OTCQX Exchange.

 

Intercorporate Relationships

 

Hut 8 operates three wholly owned subsidiaries: Hut 8 Holdings Inc., which was incorporated in British Columbia, Canada; Hut 8 Asset Management and Hut 8 Finance Ltd, which were incorporated in Bridgetown, Barbados. Hut 8 beneficially owns, or controls or directs, directly or indirectly, 100% of the voting common shares of the above-mentioned subsidiaries.

 

GENERAL DEVELOPMENT OF THE BUSINESS

 

Three Year History

 

Fiscal 2017

 

On November 15, 2017, Hut 8 was incorporated in British Columbia.

 

On December 14, 2017, Hut 8 amended its articles to incorporate the Hut 8 Shareholders’ Agreement into its articles. On this date, the sole director of Hut 8 approved the subdivision of all of the then issued and outstanding Hut 8 Shares on a 10:1 basis.

 

On December 20, 2017, Hut 8 completed a private placement, on both a brokered and non-brokered basis, of 15,200,000 Hut 8 Shares at a price of $2.50 per share for aggregate gross proceeds of $38,000,000, comprised of $25,424,392 in cash and $12,575,608 in value of Bitcoin (the “First Offering”). The brokered portion of the First Offering was completed pursuant to an agency agreement dated December 20, 2017 between Hut 8 and GMP Securities L.P. The proceeds from the First Offering were used to finance the purchase by Hut 8 of seven BlockBoxes from Bitfury, and to satisfy working capital requirements.

 

On December 21, 2017, in connection with the Qualifying Transaction, Oriana executed the Letter of Intent.

 

Fiscal 2018

 

On February 7, 2018, Hut 8 completed a private placement, on both a brokered and non-brokered basis, of 9,000,000 Hut 8 subscription receipts at a price of $5.00 per subscription receipt, and 5,000,000 Hut 8 Shares at a price of $5.00 per share, for aggregate gross proceeds of $70,000,000, comprised of $57,278,000 in cash and $12,722,000 in value of Bitcoin (the “Second Offering”). The brokered portion of the Second Offering was completed pursuant to an agency agreement dated February 7, 2018 between Hut 8 and GMP Securities L.P. The proceeds from the common share portion Second Offering were used to finance the purchase by Hut 8 of BlockBoxes from Bitfury, and to satisfy working capital requirements.

 

- 9 - 

 

On March 2, 2018, Hut 8, formerly Oriana, announced that it had completed its previously announced Qualifying Transaction, pursuant to the policies of the TSXV. Pursuant to the Qualifying Transaction,

 

(a) Oriana implemented a consolidation, immediately prior to the completion of the Debt Conversion (as defined below) and the Amalgamation (as defined below), of its then issued and outstanding 9,500,000 common shares (the “Oriana Common Shares”) on the basis of one new Oriana Common Share for every 52.7777 existing Oriana Common Shares;

(b) Oriana effected a conversion of $2,000,000 of debt owing by Oriana into 40,000 Oriana Common Shares, based on a conversion price of $5.00 per Oriana Common Share (the “Debt Conversion”);

(c) Oriana acquired all of the issued and outstanding common shares of a private corporation incorporated in British Columbia, Hut 8 Mining Corp. (the “Hut 8 PrivateCo”), from the shareholders of Hut 8 PrivateCo in exchange for an aggregate of 82,160,000 Hut 8 Shares;

(d) Hut 8 PrivateCo and 1149835 B.C. Ltd., a wholly owned subsidiary of Oriana, amalgamated in British Columbia (the “Amalgamation”) and continued as one corporation, Hut 8 Holdings Inc., which is a wholly-owned subsidiary of the Company; and
  (e) Oriana changed its name to “Hut 8 Mining Corp.”

 

On March 5, 2018, an aggregate of 595,000 options were awarded to certain directors under the Company’s Omnibus Plan. Each option is exercisable into one Hut 8 Share at a price of $5.00 for a period of five years from the date of grant. Pursuant to the Omnibus Plan, such options are to vest as to 1/6 at the six-month period from the date of grant, with vesting to occur in successive 1/6 increments every six months thereafter.

 

On March 6, 2018, Hut 8 Shares began trading on the TSXV under the symbol “HUT”.

 

On April 2, 2018, Hut 8 appointed Mr. Andrew Kiguel as President and Chief Executive Officer and a director of the Company. In connection with such appointment, Mr. Sean Clark stepped down as Interim Chief Executive Officer of the Company on March 31, 2018 but continues to serve the Company in an advisory role.

 

On March 19, 2018, Hut 8 entered into a definitive agreement with the City of Medicine Hat for the supply of 42 MW of electric energy and the lease of land upon which Hut 8 operates its mining facilities near the City of Medicine Hat’s new Unit 16 power plant. The City of Medicine Hat will provide electric energy capacity of approximately 42 MW to the new Hut 8 facilities. The electricity supply agreement and the land lease both have a concurrent term of 10 years.

 

On May 31, 2018, Hut 8 qualified to trade on the OTCQX Market.

 

On June 21, 2018, Jimmy Vaiopoulos was appointed as Hut 8’s Chief Financial Officer and Corporate Secretary.

 

On July 16, 2018, Hut 8 completed construction at its Medicine Hat Facility. With this completion, Hut 8 operated 40 BlockBoxes at its Medicine Hat Facility, each with 1.2 MW of capacity, representing 48 MW of operating power, and 17 BlockBoxes at its Drumheller facility (the “Drumheller Facility”), representing 18.7 MW of operating power, for a total of 66.7 MW of fully-funded operating power and 487.5 PH/s.

 

On August 8, 2018, Joseph Flinn has appointed as a director on the Hut 8 Board. Mr. Flinn replaced Jeffrey Mason, who resigned from the Hut 8 Board in order to accept a position as Head of Bitfury’s operations in Canada.

 

- 10 - 

 

On September 7, 2018, Hut 8 purchased an additional 16 BlockBoxes which have been installed at its Medicine Hat Facility. The additional 16 BlockBoxes, increased Hut 8’s Bitcoin mining capacity by 19.2 MW and approximately 144 PH/s. The new BlockBoxes, at a cost of US $950,000 per BlockBox, were financed through a secured loan from Galaxy in the amount of US$16 million (the “Loan Financing”) and a vendor-take-back from Bitfury for 40 percent of the purchase price of the BlockBoxes at $3.75 per Hut 8 Share. Terms of the Loan Financing are LIBOR + 9%. The coupon is payable in USD or Bitcoin and has a 30-month term with a bullet repayment. The Loan Financing is scheduled to close on or about September 7, 2018. As part of the Loan Financing, Galaxy received 2.2 million Hut 8 purchase warrants which can be exercised to acquire Hut 8 Shares at a price of $4.50. The Warrants are subject to customary restrictions on resale.

 

On November 12, 2018, Hut 8 announced the purchase of an additional 12 BlockBoxes at its Drumheller Facility. The BlockBoxes were previously owned by Bitfury. Prior to closing the purchase, the additional 12 BlockBoxes were upgraded to include 12 PH/s Bitfury Clarke ASIC chips, manufactured by Bitfury. These BlockBoxes increased Hut 8’s Bitcoin mining capacity by 14.4 MW and approximately 144 PH/s. The 12 new BlockBoxes, at a cost of US$13,000,000, are financed through: (i) a loan from Bitfury for US$9,000,000; (ii) US$2,000,000 in Hut 8 Shares priced at $3.15 per share; and (iii) US$2,000,000 in cash. The loan is unsecured, carries a 12% coupon and has a 24-month term, paid monthly, for the first $6.0 million. The balance would be repaid at the earlier of maturity date of the previously announced loan from Galaxy already outstanding or such date as the loan from Galaxy is repaid early. There are no additional fees and no penalty for prepayment.

 

On December 21, 2018, Hut 8 switched mining pool services from Slushpool to Bitfury. Hut 8 moved to a fixed fee of US$200 per month per BlockBox at current bitcoin prices from a 2% fee of all bitcoin mining revenues which was nearly $1 million for the 2018 year.

 

Fiscal 2019

 

On February 26, 2019, Hut 8 announced issuance of 3,717,433 common shares of the Company to Bitfury to settle a $5,576,150 outstanding debt payable at a conversion price of $1.50 per share.

 

On July 22, 2019, Jeremy Sewell, CFO of Bitfury, was appointed to the Hut 8 board to replace Valery Vavilov, CEO and founder of Bitfury.

 

On September 9, 2019, Hut 8 announced the purchase of nine additional Blockboxes at its Drumheller Facility, for US$7 million. The acquisition added approximately 113 PH/s and 9.9 MW to Hut 8’s existing operations. The purchase was financed internally via cash on hand and the sale of a portion of its Bitcoin.

 

On September 24, 2019, Hut 8 received conditional approval to be listed on the TSX via TSX Sandbox, an initiative intended to facilitate listing applications that may not satisfy all requirements and guidelines of TSX, but due to facts or situations unique to a particular issuer otherwise warrant a listing on TSX. On October 8, 2019, Hut 8 began trading on the TSX under “HUT”.

 

On October 2, 2019, Hut 8 appointed Kyle Appleby as Corporate Secretary. Previously, Jimmy Vaiopoulos assumed both the roles of Chief Financial Officer and Corporate Secretary.

 

On October 11, 2019, Hut 8 moved the custody of its bitcoin from Xapo to BitGo, as Xapo exited the institutional custodian business.

 

On November 22, 2019, Hut 8 announced refinancing of its Galaxy debt by a new loan with Genesis. The new US$15 million credit facility replaced and terminated the previous US$14 million loan with Galaxy. The terms of the new loan are a fixed 9.85% coupon per annum with an 18-month term and bullet repayment.

 

- 11 - 

 

DESCRIPTION OF BUSINESS

 

Description of the Business

 

Hut 8 is a cryptocurrency mining company with industrial scale bitcoin mining operations in Canada. Hut 8 has a North American partnership with Bitfury, one of the world’s leading full-service hardware and software blockchain technology companies. As of the date of this AIF, Hut 8 had three employees.

 

Hut 8 provides investors with direct exposure to bitcoin, without the technical complexity or constraints of purchasing the underlying cryptocurrency. Investors avoid the need to create online wallets, wire money offshore, and safely store their bitcoin.

 

For its mining activities, Hut 8 utilizes the BlockBoxes”) which are manufactured by Bitfury. The BlockBox is modular, portable, and more easily upgradeable to the next generation of silicon technology.

 

Material Contracts

 

On November 29, 2017, the Company entered into a Master Data Centre Purchase Agreement (the “Purchase Agreement”) with Bitfury. The Purchase Agreement governs the terms and conditions for the purchase from Bitfury of certain equipment (the “Data Centres”) used for the purpose of running diverse cryptographic hash functions in connection with the mining of cryptocurrency. The Purchase Agreement is for a term of five years, with two successive renewal terms of one year each.

 

Concurrent with the Purchase Agreement, on November 29, 2017, the Company entered into a Master Service Agreement (the “MSA”) with Bitfury. In accordance with the MSA, Bitfury shall provide the management, maintenance, support, logistics and operational services (the “Services”) required to run the Data Centres. The MSA is for a term of five years, with two successive renewal terms of one year each.

 

The Company entered into definitive agreements with the City of Medicine Hat (“CMH”) for the supply of electric energy, and the lease of land upon which Hut 8 is constructed its mining facilities. For electricity, an Electricity Supply Agreement (“ESA”) was executed, whereby CMH will provide electric energy capacity of approximately 63 MW to the new Hut 8 facilities, which in conjunction with the Company’s approximate 19 MW in operation in Drumheller, will allow Hut 8 to operate at 82 MW in total. The ESA and the land lease have a concurrent term of 10 years. The minimum payments on the land lease are $10,500 per month from May 1, 2018 to December 31, 2027.

 

Site Descriptions

 

Property Description and Location

 

Hut 8 has two facilities in operation, one in Drumheller, Alberta and the second in Medicine Hat, Alberta. Both sites are within two and a half hours by car from each other. The Drumheller Facility is currently comprised of 38 BlockBoxes including 17 BlockBoxes with 16 nm ASIC chips and 21 BlockBoxes with Bitfury Clarke ASIC chips. The Medicine Hat Facility is currently running 56 BlockBoxes.

 

Security

 

The environmental design of Hut 8’s sites provide the mining operations with added security. They are located in remote locations and surrounded by a chain-link fence with barbed wire and staffed with security on a 24x7x365 basis. The sites have a physical security policy and staff are trained to be aware of any unauthorized personnel. There are closed-circuit televisions on site and the BlockBoxes are welded to supporting metal beams and the frames are anchored with screw piles that are at least six feet deep.

 

- 12 - 

 

Power

 

For the Drumheller Site, Bitfury entered into an agreement with ATCO Electric Ltd., the electric utility for the Drumheller area, for the provision of power. Subsequent to the Drumheller expansion in November 2019, Hut 8 effectively owned 100% of the site and the previous agreement with ATCO Electric Ltd. was transferred to Hut 8 from Bitfury. For the Medicine Hat site, Hut 8 entered into an agreement with the City of Medicine Hat, who runs their own electricity grid, for the use of electricity for the 56 BlockBoxes on site.

 

For the Drumheller Facility, the distance from the transmission poles owned by ATCO Electric Ltd. is approximately 40 meters. The Drumheller site receives its energy from the grid therefore there is exposure to market natural gas prices. The Medicine Hat facility is situated beside a 42MW generation where it does not pay transmission fees. An additional approximately 25 MW of power at Medicine Hat is available from the grid which is exposed to market natural gas prices.

 

During the year ended 2019, the Company incurred $22.0 million in electricity cost for its City of Medicine Hat site and $14.9 million for its Drumheller site. The below chart shows the effect on operations and profitability of the Company if the average cost of electricity were to increase by 10%, 20%, and 30%.

 

Sensitivity Analysis   2019 Actual     +10%     +20%     +30%  
Electricity cost     36,891,929       40,581,122       44,270,314       47,959,507  
Gross profit     17,102,816       13,413,623       9,724,430       6,035,237  
% change             -22 %     -43 %     -65 %
Net loss     172,124       (3,517,069 )     (7,206,262 )     (10,895,455 )
% change             -2143 %     -4287 %     -6430 %

  

Network Connectivity

 

The sites are equipped with the following mediums of connectivity: (a) two satellite internet connections; and (b) two long-term evolution connections. Each medium is provided by a different vendor, which increases redundancy and resiliency.

 

Monitoring and Repair

 

All key components of the sites are monitored including the intake air temperature, hash board temperature, voltage, hash rate, in-container air temperature, exhaust air temperature and humidity of each container. All parameters are monitored and changed remotely by Bitfury on a 24x7x365 basis. Parallel monitoring is performed by local on-site staff who are responsible for implementing any necessary repairs to mining infrastructure.

 

In the event that Bitfury’s remote monitoring or any parallel monitoring identifies any malfunction or technical issue, personnel are dispatched to physically inspect and, if necessary, repair defective components. Hut 8 intends to maintain an inventory of all necessary components for repair. Currently, such repair inventory is located at a location near to the Drumheller Facility.

 

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Custodial services for bitcoin

 

For the protection of its bitcoin on behalf of shareholders, Hut 8 does not self-custody its bitcoin. Instead, Hut 8 uses the services of BitGo. BitGo has US$100 million of insurance backing its digital asset custody and one of the highest levels of regulatory certifications in the market. BitGo is financially backed by Wall Street firms including Goldman Sachs. Hut 8 utilizes both cold and hot storage for bitcoin with BitGo.

 

Previously to BitGo, Hut 8 used the services of Xapo since inception. Xapo is approved by a Swiss financial regulator, to operate on the bitcoin management, storage, and related services out of Switzerland and regulated under the oversight of the Association for Financial Quality Assurance.

 

Xapo announced their exit from the institutional custodian business on August 15, 2019. After a thorough search for a replacement, Hut 8 chose BitGo as its new custodian.

 

Competition and Market Participants

 

In the cryptocurrency industry, there exist many online companies that offer cryptocurrency cloud mining services, as well as companies, individuals and groups that run their own mining farms. Miners can range from individual enthusiasts to professional mining operations with dedicated data centers, including those of the kind operated by one of our principal competitors, HIVE Blockchain Technologies Ltd. And Bitfarms Ltd.

 

Miners may organize themselves in mining pools. A mining pool is created when cryptocurrency miners pool their processing power over a network and mine transactions together. Rewards are then distributed proportionately to each miner based on the hash power contributed. Mining pools allow miners to pool their resources so they can generate blocks quickly and receive rewards on a more consistent basis instead of mining alone where rewards may not be received for long periods. Hut 8 has also decided to participate in a mining pool in order to smooth the receipt of rewards.

 

Mining pools exist for each cryptocurrency. Blockchain.com lists the top five known Bitcoin mining pools and their approximate market shares as of January 06, 2020 as follows: Poolin (17.7%); F2Pool (16.4%); BTC.com (13.4%); AntPool (9.5%); and ViaBTC (8.7%).

 

Other market participants in the cryptocurrency industry include investors and speculators, retail users transacting in cryptocurrencies, and service companies that provide a variety of services including buying, selling, payment processing and storing of cryptocurrencies.

 

Foreign Operations

 

As at the date of this AIF, the Company’s foreign operations include the Company’s digital currency trading operation based out of Barbados.

 

Cycles

 

The only seasonality that the Company experiences is related to potential changes in electricity prices based on volatility in market natural gas prices. Hut 8’s Drumheller Facility and all energy above 42MW in Medicine Hat are exposed to market natural gas prices and the electricity environment in Alberta. Electricity has been historically higher in the winter than the summer, and considering electricity is the largest expense of Hut 8, this may affect profits.

 

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RISK FACTORS

 

The following discussion summarizes the principal risk factors that apply to the Company’s business and that may have a material adverse effect on the Company’s business and financial condition and results of operations, or the trading price of the Hut 8 Shares. Due to the nature of Hut 8’s business, the legal and economic climate in which it operates and its present stage of development and proposed operations, Hut 8 is subject to significant risks.

 

GENERAL RISKS

 

A small number of shareholders have a controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control

 

The largest shareholder, Bitfury, beneficially owns in the aggregate approximately 47% of the Hut 8 Shares as of the date of this AIF. As a result, Bitfury may exert significant influence over the Company’s operations and business strategy and will have sufficient voting power to likely control influence the outcome of matters requiring shareholder approval. These matters may include the composition of the Hut 8 Board, which has the authority to direct the Company’s business, and to appoint and remove officers; approving or rejecting a merger, amalgamation, consolidation or other business combination; raising future capital; and amending the Company’s articles, which governs the rights attached to the Hut 8 Shares. This concentration of ownership could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of the Hut 8 Shares that might otherwise give shareholders the opportunity to realize a premium over the then-prevailing market price of the Hut 8 Shares. This concentration of ownership may also adversely affect the trading price of the Hut 8 Shares.

 

The requirements of being a public company may strain the Company’s resources, divert management’s attention and affect its ability to attract and retain executive management and qualified board members

 

As a reporting issuer, the Company is subject to the reporting requirements of applicable securities legislation of the jurisdiction in which it is a reporting issuer, the listing requirements of the TSX and other applicable securities rules and regulations. Compliance with those rules increase the legal and financial costs of the Company compared to being private and make some activities more difficult, time consuming or costly and increase demands on its systems and resources.

 

There has been a limited history for Hut 8 Shares in the public market, and an active trading market may not continue

 

Prior to the completion of the Qualifying Transaction, there had been no active public market for Hut 8 Shares and as of the date of this AIF, there has been limited history. An active trading market may not continue, and the lack of an active market may impair an investor’s ability to sell its Hut 8 Shares at the time they wish to sell them or at a price they consider reasonable. The lack of an active market may also reduce the fair market value of the Hut 8 Shares. An inactive market may also impair an investor’s ability to raise capital by selling its Hut 8 Shares and may impair the Company’s ability to acquire other companies by using its Hut 8 Shares as consideration.

 

Hut 8’s cryptocurrency inventory may be exposed to cybersecurity threats and hacks

 

As with any other computer code, flaws in cryptocurrency codes may be exposed by certain malicious actors. Several errors and defects may be found, including those that disable some functionality for users and expose users’ information. Discovery of flaws in or exploitations of the source code that allow malicious actors to take or create money are rare.

 

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Malicious actors or botnet obtaining control of more than 50% of the processing power on the Bitcoin Network

 

If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a majority of the processing power dedicated to mining on the Bitcoin Network, it may be able to alter the Blockchain on which the Bitcoin Network and most Bitcoin transactions rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new Bitcoins or transactions using such control. The malicious actor could “double-spend” its own Bitcoins (i.e., spend the same Bitcoins in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintained control. To the extent that such malicious actor or botnet did not yield its control of the processing power on the Bitcoin Network or the Bitcoin community did not reject the fraudulent blocks as malicious, reversing any changes made to the Blockchain may not be possible.

 

Although there are no known reports of malicious activity or control of the Blockchain achieved through controlling over 50% of the processing power on the network, it is believed that certain mining pools may have exceeded the 50% threshold. The possible crossing of the 50% threshold indicates a greater risk that a single mining pool could exert authority over the validation of Bitcoin transactions. To the extent that the Bitcoin ecosystem, including developers and administrators of mining pools, do not act to ensure greater decentralization of Bitcoin mining processing power, the feasibility of a malicious actor obtaining control of the processing power on the Bitcoin Network will increase, which may adversely affect an investment in the Company.

 

If fees increase for recording transactions in the Blockchain, demand for Bitcoins may be reduced and prevent the expansion of the Bitcoin Network to retail merchants and commercial business, resulting in a reduction in the price of Bitcoins that could adversely affect an investment in the Company

 

As the number of Bitcoins awarded for solving a block in the Blockchain decreases, the incentive for miners to contribute processing power to the Bitcoin Network will transition from a set reward to transaction fees. In order to incentivize miners to continue to contribute processing power to the Bitcoin Network, the Bitcoin Network may transition from a set reward to transaction fees earned upon solving for a block. If miners demand higher transaction fees to record transactions in the Blockchain or a software upgrade automatically charges fees for all transactions, the cost of using Bitcoins may increase and the marketplace may be reluctant to accept Bitcoins as a means of payment. Existing users may be motivated to switch from Bitcoins to another digital currency or back to fiat currency. Decreased use and demand for Bitcoins may adversely affect their value and result in a reduction in the Bitcoin Index Price and the value of the Hut 8 Shares.

 

Reliance on Management

 

The success of Hut 8 is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on Hut 8’s business, operating results or financial condition.

 

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Regulatory changes or actions may alter the nature of an investment in the Company or restrict the use of cryptocurrencies in a manner that adversely affects the Company’s operations

 

As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted differently to cryptocurrencies with certain governments deeming them illegal while others have allowed their use and trade. On-going and future regulatory actions may alter, perhaps to a materially adverse extent, the ability of the Company to continue to operate.

 

The effect of any future regulatory change on the Company or Bitcoin is impossible to predict, but such change could be substantial and adverse to the Company. Investors may consult their tax advisers regarding the substantial uncertainty regarding the tax consequences of an investment in Bitcoin.

 

Governments may, in the future, restrict or prohibit the acquisition, use or redemption of cryptocurrencies. Ownership of, holding or trading in cryptocurrencies may then be considered illegal and subject to sanction. Governments may also take regulatory action that may increase the cost and/or subject cryptocurrency mining companies to additional regulation.

 

Governments may in the future take regulatory actions that prohibit or severely restrict the right to acquire, own, hold, sell, use or trade cryptocurrencies or to exchange cryptocurrencies for fiat currency. By extension, similar actions by other governments, may result in the restriction of the acquisition, ownership, holding, selling, use or trading in the Hut 8 Shares. Such a restriction could result in the Company liquidating its Bitcoin inventory at unfavorable prices and may adversely affect the Company’s shareholders.

 

The value of cryptocurrencies may be subject to momentum pricing risk

 

Momentum pricing typically is associated with growth stocks and other assets whose valuation, as determined by the investing public, accounts for anticipated future appreciation in value. Cryptocurrency market prices are determined primarily using data from various exchanges, over-the-counter markets, and derivative platforms. Momentum pricing may have resulted, and may continue to result, in speculation regarding future appreciation in the value of cryptocurrencies, inflating and making their market prices more volatile. As a result, they may be more likely to fluctuate in value due to changing investor confidence in future appreciation (or depreciation) in their market prices, which could adversely affect the value of the Company’s Bitcoin inventory and thereby affect the Company’s shareholders.

 

Cryptocurrency exchanges and other trading venues are relatively new and, in some cases, partially unregulated and may therefore be more exposed to fraud and failure

 

To the extent that cryptocurrency exchanges or other trading venues are involved in fraud or experience security failures or other operational issues, this could result in a reduction in cryptocurrency prices. Cryptocurrency market prices depend, directly or indirectly, on the prices set on exchanges and other trading venues, which are new and, in most cases, largely unregulated as compared to established, regulated exchanges for securities, derivatives and other currencies. For example, during the past three years, a number of Bitcoin exchanges have been closed due to fraud, business failure or security breaches. In many of these instances, the customers of the closed Bitcoin exchanges were not compensated or made whole for the partial or complete losses of their account balances in such Bitcoin exchanges. While smaller exchanges are less likely to have the infrastructure and capitalization that provide larger exchanges with additional stability, larger exchanges may be more likely to be appealing targets for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information or gain access to private computer systems) and may be more likely to be targets of regulatory enforcement action.

 

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Banks may not provide banking services, or may cut off banking services, to businesses that provide cryptocurrency-related services or that accept cryptocurrencies as payment

 

A number of companies that provide Bitcoin and/or other cryptocurrency-related services may be unable to find banks that are willing to provide them with bank accounts and banking services. Banks may refuse to provide bank accounts and other banking services to Bitcoin and/or other cryptocurrency-related companies or companies that accept cryptocurrencies for a number of reasons, such as perceived compliance risks or costs. The difficulty that many businesses that provide Bitcoin and/or other cryptocurrency-related services have and may continue to have in finding banks willing to provide them with bank accounts and other banking services may be currently decreasing the usefulness of cryptocurrencies as a payment system and harming public perception of cryptocurrencies or could decrease its usefulness and harm its public perception in the future. Similarly, the usefulness of cryptocurrencies as a payment system and the public perception of cryptocurrencies could be damaged if banks were to close the accounts of many or of a few key businesses providing Bitcoin and/or other cryptocurrency-related services. This could decrease the market prices of cryptocurrencies and adversely affect the value of the Company’s Bitcoin inventory.

 

The impact of geopolitical events on the supply and demand for cryptocurrencies is uncertain

 

Crises may motivate large-scale purchases of cryptocurrencies which could increase the price of cryptocurrencies rapidly. This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing behavior wanes, adversely affecting the value of the Company’s Bitcoin inventory. For example, in March 2013, a report of uncertainty in the economy of the Republic of Cyprus and the imposition of capital controls by Cypriot banks motivated individuals in Cyprus and other countries with similar economic situations to purchase Bitcoin. This resulted in a significant short-term positive impact on the price of Bitcoin. However, as the purchasing activity of individuals in this situation waned, speculative investors engaged in significant sales of Bitcoins, which significantly decreased the price of Bitcoins. Crises of this nature in the future may erode investors’ confidence in the stability of cryptocurrencies and may impair their price performance which would, in turn, adversely affect the Company’s Bitcoin inventory.

 

As an alternative to fiat currencies that are backed by central governments, cryptocurrencies such as Bitcoin, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of Bitcoins either globally or locally. Large-scale sales of cryptocurrencies would result in a reduction in their market prices and adversely affect the Company’s operations and profitability.

 

Contract Renewal Risk

 

Hut 8 and Bitfury have two key contracts that outline how equipment is purchased from Bitfury and how they provide services to Hut 8 which are the MPA and the MSA. The terms of these agreements are for five years, at which point the agreements will be up for renewal. Both the Company and Hut 8 have the ability to not renew the contracts, or the contracts may be renewed at terms less favorable for the Company or for Bitfury.

 

Pandemics and COVID-19

 

The Company cautions that current global uncertainty with respect to the spread of the COVID-19 Virus (“COVID-19”) and its effect on the broader global economy may have a significant negative effect on the Company. While the precise impact of the COVID-19 virus on the Company remain unknown, rapid spread of the COVID-19 virus may have a material adverse effect on global economic activity, and can result in volatility and disruption to global supply chains, operations, mobility of people and the financial markets, which could affect interest rates, credit ratings, credit risk, inflation, business, financial conditions, ability to visit Hut 8’s facilities, results of operations and other factors relevant to the Company.

 

 

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The further development and acceptance of the cryptographic and algorithmic protocols governing the issuance of and transactions in cryptocurrencies is subject to a variety of factors that are difficult to evaluate

 

The use of cryptocurrencies to, among other things, buy and sell goods and services and complete other transactions, is part of a new and rapidly evolving industry that employs digital assets based upon a computer-generated mathematical and/or cryptographic protocol. The growth of this industry in general, and the use of cryptocurrencies in particular, is subject to a high degree of uncertainty, and the slowing or stopping of the development or acceptance of developing protocols may adversely affect the Company’s operations. The factors affecting the further development of the industry, include, but are not limited to:

 

• Continued worldwide growth in the adoption and use of cryptocurrencies;

• Governmental and quasi-governmental regulation of cryptocurrencies and their use, or restrictions on or regulation of access to and operation of the network or similar cryptocurrency systems;

• Changes in consumer demographics and public tastes and preferences;

• The maintenance and development of the open-source software protocol of the network;

• The availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;

• General economic conditions and the regulatory environment relating to digital assets; and

• Consumer sentiment and perception of Bitcoins specifically and cryptocurrencies generally.

 

Acceptance and/or widespread use of cryptocurrency is uncertain

 

Currently, there is relatively small use of Bitcoins and/or other cryptocurrencies in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect the Company’s operations, investment strategies, and profitability.

 

As relatively new products and technologies, Bitcoin and its other cryptocurrency counterparts have not been widely adopted as a means of payment for goods and services by major retail and commercial outlets. Conversely, a significant portion of cryptocurrency demand is generated by speculators and investors seeking to profit from the short-term or long-term holding of cryptocurrencies. The relative lack of acceptance of cryptocurrencies in the retail and commercial marketplace limits the ability of end-users to use them to pay for goods and services. A lack of expansion by cryptocurrencies into retail and commercial markets, or a contraction of such use, may result in increased volatility or a reduction in their market prices, either of which could adversely impact the Company’s operations, investment strategies, and profitability.

 

Hut 8 Cryptocurrency Risks

 

Potential loss or destruction of private keys

 

Bitcoins are controllable only by the possessor of both the unique public key and private key relating to the local or online digital wallet in which the Bitcoins are held. While the Bitcoin Network requires a public key relating to a digital wallet to be published when used in a spending transaction, private keys must be safeguarded and kept private in order to prevent a third party from accessing the Bitcoins held in such wallet. To the extent a private key is lost, destroyed or otherwise compromised and no backup of the private key is accessible, the Company will be unable to access the Bitcoins held in the related digital wallet and the private key will not be capable of being restored by the Bitcoin Network.

 

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Risk of loss, theft or destruction of the Company’s Bitcoins

 

There is a risk that some or all of the Company’s Bitcoins could be lost, stolen or destroyed. If the Company’s Bitcoins are lost, stolen or destroyed under circumstances rendering a party liable to the Company, the responsible party may not have the financial resources sufficient to satisfy the Company’s claim. Also, although BitGo uses security procedures with various elements, such as redundancy, segregation and cold storage, to minimize the risk of loss, damage and theft, neither BitGo nor the Company can guarantee the prevention of such loss, damage or theft, whether caused intentionally, accidentally or by force majeure. Access to the Company’s Bitcoins could also be restricted by natural events (such as an earthquake or flood) or human actions (such as a terrorist attack).

 

Irrevocability of Bitcoin transactions

 

Bitcoin transactions are irrevocable meaning that stolen or incorrectly transferred Bitcoins may be irretrievable. Bitcoin transactions are not reversible without the consent and active participation of the recipient of the transaction. Once a transaction has been verified and recorded in a block that is added to the Blockchain, an incorrect transfer of Bitcoins or a theft of Bitcoins generally will not be reversible and the Company may not be capable of seeking compensation for any such transfer or theft. To the extent that the Company is unable to seek a corrective transaction with the third party or is incapable of identifying the third party that has received the Company’s Bitcoins through error or theft, the Company will be unable to revert or otherwise recover incorrectly transferred Bitcoins. The Company will also be unable to convert or recover Bitcoins transferred to uncontrolled accounts.

 

Risks associated with the Bitcoin Network

 

The open-source structure of the Bitcoin Network protocol means that the core developers of the Bitcoin Network and other contributors are generally not directly compensated for their contributions in maintaining and developing the Bitcoin Network protocol. A failure to properly monitor and upgrade the Bitcoin Network protocol could damage the Bitcoin Network.

 

The core developers of the Bitcoin Network can propose amendments to the Bitcoin Network’s source code through software upgrades that alter the protocols and software of the Bitcoin Network and the properties of Bitcoins, including the irreversibility of transactions and limitations on the mining of new Bitcoins. Proposals for upgrades and related discussions take place on online forums, including GitHub.com and Bitcointalk.org. To the extent that a significant majority of the users and miners on the Bitcoin Network install such software upgrade(s), the Bitcoin Network would be subject to new protocols and software.

 

The acceptance of Bitcoin Network software patches or upgrades by a significant, but not overwhelming, percentage of the users and miners in the Bitcoin Network could result in a “fork” in the Blockchain underlying the Bitcoin Network, resulting in the operation of two separate networks. Without an official developer or group of developers that formally control the Bitcoin Network, any individual can download the Bitcoin Network software and make desired modifications, which are proposed to users and miners on the Bitcoin Network through software downloads and upgrades, typically posted to the Bitcoin development forum. A substantial majority of miners and Bitcoin users must consent to such software modifications by downloading the altered software or upgrade; otherwise, the modifications do not become a part of the Bitcoin Network. Since the Bitcoin Network’s inception, modifications to the Bitcoin Network have been accepted by the vast majority of users and miners, ensuring that the Bitcoin Network remains a coherent economic system.

 

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If, however, a proposed modification is not accepted by a vast majority of miners and users but is nonetheless accepted by a substantial population of participants in the Bitcoin Network, a “fork” in the Blockchain underlying the Bitcoin Network could develop, resulting in two separate Bitcoin Networks. Such a fork in the Blockchain typically would be addressed by community-led efforts to merge the forked Blockchains, and several prior forks have been so merged. However, in some cases, there may be a permanent “hard fork” in the Blockchain and a new cryptocurrency may be formed as a result of that “hard fork”. For example, Bitcoin Cash, a new cryptocurrency, was recently created through a fork in the Blockchain. Where such forks occur on the Blockchain, the Company will follow the chain with the greatest proof of work in the fork. If a hard fork results in the Company holding an alternative coin, the Company will dispose of such alternative coin and either distribute the proceeds of such disposition to shareholders or reinvest the proceeds in additional Bitcoins.

 

Further development and acceptance of the Bitcoin Network

 

The further development and acceptance of the Bitcoin Network and other cryptographic and algorithmic protocols governing the issuance of transactions in Bitcoins and other digital currencies, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of the Bitcoin Network may adversely affect the value of Bitcoin.

 

The use of digital currencies, such as Bitcoins, to, among other things, buy and sell goods and services, is part of a new and rapidly evolving industry that employs digital assets based upon a computer-generated mathematical and/or cryptographic protocol. Bitcoin is a prominent, but not a unique, part of this industry. The growth of this industry in general, and the Bitcoin Network in particular, is subject to a high degree of uncertainty. The factors affecting the further development of this industry, include, but are not limited to:

 

• Continued worldwide growth in the adoption and use of Bitcoins and other digital currencies;

• Government and quasi-government regulation of Bitcoins and other digital assets and their use, or restrictions on, or regulation of, access to and operation of the Bitcoin Network or similar digital asset systems;

• Changes in consumer demographics and public tastes and preferences;

• The maintenance and development of the open-source software protocol of the Bitcoin Network;

• The availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;

• General economic conditions and the regulatory environment relating to digital assets; and

• Consumer perception of Bitcoins specifically and cryptocurrencies generally.

 

The Company will not have any strategy relating to the development of the Bitcoin Network. Furthermore, the Company cannot be certain what impact, if any, the listing of the Hut 8 Shares and the expansion of its Bitcoin holdings may have on the digital asset industry and the Bitcoin Network.

 

Potential failure to maintain the Bitcoin Network

 

The Bitcoin Network operates based on an open-source protocol maintained by the core developers of the Bitcoin Network and other contributors, largely on the GitHub resource section dedicated to Bitcoin development. As the Bitcoin Network protocol is not sold and its use does not generate revenues for its development team, the core developers are generally not compensated for maintaining and updating the Bitcoin Network protocol. Consequently, there is a lack of financial incentive for developers to maintain or develop the Bitcoin Network and the core developers may lack the resources to adequately address emerging issues with the Bitcoin Network protocol. Although the Bitcoin Network is currently supported by the core developers, there can be no guarantee that such support will continue or be sufficient in the future. To the extent that material issues arise with the Bitcoin Network protocol and the core developers and open-source contributors are unable to address the issues adequately or in a timely manner, the Bitcoin Network and an investment in the Hut 8 Shares may be adversely affected.

 

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Potential manipulation of Blockchain

 

If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains control of more than 50% of the processing power dedicated to mining on the Bitcoin Network, it may be able to alter or manipulate the Blockchain on which the Bitcoin Network and most Bitcoin transactions rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner, or at all. The malicious actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new Bitcoins or transactions using such control. The malicious actor could “double-spend” its own Bitcoins (i.e., spend the same Bitcoins in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintained control. To the extent that such malicious actor or botnet did not yield its control of the processing power on the Bitcoin Network or the Bitcoin community did not reject the fraudulent blocks as malicious, reversing any changes made to the Blockchain may not be possible.

 

Although there are no known reports of malicious activity or control of the Bitcoin Blockchain achieved through controlling over 50% of the processing power on the network, it is believed that certain mining pools may have exceeded the 50% threshold. The possible crossing of the 50% threshold indicates a greater risk that a single mining pool could exert authority over the validation of Bitcoin transactions. To the extent that the Bitcoin ecosystem, including the core developers and the administrators of mining pools, do not act to ensure greater decentralization of Bitcoin mining processing power, the feasibility of a malicious actor obtaining control of the processing power on the Bitcoin Network will increase.

 

Risks of security breaches

 

Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the Bitcoin exchange market since the launch of the Bitcoin Network. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses, could harm the Company’s business operations or result in loss of the Company’s assets. Any breach of the Company’s infrastructure could result in damage to the Company’s reputation and reduce demand for the Hut 8 Shares, resulting in a reduction in the price of the Hut 8 Shares. Furthermore, the Company believes that if its assets grow, it may become a more appealing target for security threats, such as hackers and malware.

 

The Company believes that the security procedures that BitGo utilizes, such as hardware redundancy, segregation and offline data storage (i.e., the maintenance of data on computers and/or storage media that is not directly connected to, or accessible from, the internet and/or networked with other computers, also known as “cold storage”) protocols are reasonably designed to safeguard the Company’s Bitcoins from theft, loss, destruction or other issues relating to hackers and technological attack. Nevertheless, the security procedures cannot guarantee the prevention of any loss due to a security breach, software defect or act of God that may be borne by Hut 8.

 

The security procedures and operational infrastructure of the Company and BitGo may be breached due to the actions of outside parties, error or malfeasance of an employee of the Company or BitGo, or otherwise, and, as a result, an unauthorized party may obtain access to the Company’s Bitcoin account, private keys, data or Bitcoins. Additionally, outside parties may attempt to fraudulently induce employees of the Company or BitGo to disclose sensitive information in order to gain access to the Company’s infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined event, and often are not recognized until launched against a target, the Company may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of the Company’s Bitcoin account occurs, the market perception of the effectiveness of the Company could be harmed.

 

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Fluctuations in the market price of Bitcoins

 

The value of the Hut 8 Shares relates directly to the value of the Bitcoins held directly or indirectly by the Company, and fluctuations in the price of Bitcoins could materially and adversely affect an investment in the Hut 8 Shares. Several factors may affect the price of Bitcoins, including: the total number of Bitcoins in existence; global Bitcoin demand; global Bitcoin supply; investors’ expectations with respect to the rate of inflation of fiat currencies; investors’ expectations with respect to the rate of deflation of Bitcoin; interest rates; currency exchange rates, including the rates at which Bitcoin may be exchanged for fiat currencies; fiat currency withdrawal and deposit policies of Bitcoin exchanges and liquidity of such Bitcoin exchanges; interruptions in service from or failures of major Bitcoin exchanges; cyber theft of Bitcoins from online Bitcoin wallet providers, or news of such theft from such providers or from individuals’ Bitcoin wallets; investment and trading activities of large investors; monetary policies of governments, trade restrictions, currency devaluations and revaluations; regulatory measures, if any, that restrict the use of Bitcoins as a form of payment or the purchase of Bitcoins on the Bitcoin market; the availability and popularity of businesses that provide Bitcoin-related services; the maintenance and development of the open-source software protocol of the Bitcoin Network; increased competition from other forms of cryptocurrency or payments services; global or regional political, economic or financial events and situations; expectations among Bitcoin economy participants that the value of Bitcoins will soon change; and fees associated with processing a Bitcoin transaction.

 

Bitcoin has historically experienced significant intraday and long-term price volatility. If Bitcoin markets continue to be subject to sharp fluctuations, shareholders may experience losses if they need to sell their Hut 8 Shares at a time when the price of Bitcoins is lower than it was when they purchased their Hut 8 Shares. Even if shareholders are able to hold Hut 8 Shares for the long-term, their Hut 8 Shares may never generate a profit, since Bitcoin markets have historically experienced extended periods of flat or declining prices, in addition to sharp fluctuations.

 

In addition, investors should be aware that there is no assurance that Bitcoins will maintain their long-term value in terms of future purchasing power or that the acceptance of Bitcoin payments by mainstream retail merchants and commercial businesses will continue to grow. In the event that the price of Bitcoins declines, the Company expects the value of an investment in the Hut 8 Shares to decline.

 

Response to changing security needs

 

As technological change occurs, the security threats to the Company’s Bitcoins will likely adapt and previously unknown threats may emerge. The Company’s and BitGo’s ability to adopt technology in response to changing security needs or trends may pose a challenge to the safekeeping of the Company’s Bitcoins. To the extent that the Company or BitGo is unable to identify and mitigate or stop new security threats, the Company’s Bitcoins may be subject to theft, loss, destruction or other attack.

 

Market adoption

 

Currently, there is relatively small use of Bitcoins in the retail and commercial marketplace in comparison to relatively large use by speculators, thus contributing to price volatility that could adversely affect an investment in the Hut 8 Shares.

 

Bitcoins and the Bitcoin Network have only recently become accepted as a means of payment for goods and services by certain major retail and commercial outlets, and use of Bitcoins by consumers to pay such retail and commercial outlets remains limited. Conversely, a significant portion of Bitcoin demand is generated by speculators and investors seeking to profit from the short- or long-term holding of Bitcoins. A lack of expansion by Bitcoins into the retail and commercial markets, or a contraction of such use, may result in increased volatility or a reduction in the market price of Bitcoin.

 

Further, if fees increase for recording transactions in the Bitcoin Blockchain, demand for Bitcoins may be reduced and prevent the expansion of the Bitcoin Network to retail merchants and commercial businesses, resulting in a reduction in the price of Bitcoins.

 

- 23 - 

 

Changes to prominence of Bitcoin and other digital assets

 

Demand for Bitcoins is driven, in part, by its status as the most prominent and secure digital asset. It is possible that a digital asset other than Bitcoin could have features that make it more desirable to a material portion of the digital asset user base, resulting in a reduction in demand for Bitcoins, which could have a negative impact on the price of Bitcoins.

 

The Bitcoin Network and Bitcoins, as an asset, hold a “first-to-market” advantage over other digital assets. This first-to-market advantage is driven in large part by having the largest user base and, more importantly, the largest combined mining power in use to secure the Bitcoin Blockchain and transaction verification system. Having a large mining network results in greater user confidence regarding the security and long-term stability of a digital asset’s network and its Blockchain; as a result, the advantage of more users and miners makes a digital asset more secure, which makes it more attractive to new users and miners, resulting in a network effect that strengthens the first-to-market advantage.

 

Despite the marked first-mover advantage of the Bitcoin Network over other digital assets, it is possible that an alternative coin could become materially popular due to either a perceived or exposed shortcoming of the Bitcoin Network protocol that is not immediately addressed by the core developers or a perceived advantage of an altcoin that includes features not incorporated into Bitcoin. If an alternative coin obtains significant market share (either in market capitalization, mining power or use as a payment technology), this could reduce Bitcoin’s market share and have a negative impact on the demand for, and price of, Bitcoins.

 

Bitcoin miners may cease operations

 

If the award of Bitcoins for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize miners, miners may cease expending processing power to solve blocks and confirmations of transactions on the Bitcoin Blockchain could be slowed. A reduction in the processing power expended by miners on the Bitcoin Network could increase the likelihood of a malicious actor or botnet obtaining control.

 

Changes to cost of Bitcoin transactions

 

In order to incentivize miners to continue to contribute processing power to the Bitcoin Network, the Bitcoin Network may either formally or informally transition from a set reward to transaction fees earned upon solving for a block. This transition could be accomplished either by miners independently electing to record on the blocks they solve only those transactions that include payment of a transaction fee or by the Bitcoin Network adopting software upgrades that require the payment of a minimum transaction fee for all transactions. If transaction fees paid for the recording of transactions in the Blockchain become too high, the marketplace may be reluctant to accept Bitcoins as a means of payment and existing users may be motivated to switch from Bitcoins to another digital asset or back to fiat currency.

 

Miners may cause delays in recording of transactions

 

To the extent that any miner ceases to record transactions in solved blocks, such transactions will not be recorded on the Bitcoin Blockchain until a block is solved by a miner who does not require the payment of transaction fees. Currently, there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks. However, to the extent that any such incentives arise (for example, a collective movement among miners or one or more mining pools forcing Bitcoin users to pay transaction fees as a substitute for, or in addition to, the award of new Bitcoins upon the solving of a block), miners could delay the recording and confirmation of a significant number of transactions on the Bitcoin Blockchain. If such delays became systemic, it could result in greater exposure to double-spending transactions and a loss of confidence in the Bitcoin Network.

 

- 24 - 

 

Potential intellectual property right claims

 

Intellectual property rights claims may adversely affect the operation of the Bitcoin Network. Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in the Bitcoin Network’s long-term viability or the ability of end-users to hold and transfer Bitcoins may adversely affect the value of Bitcoins. Additionally, a meritorious intellectual property claim could prevent the Company and other end-users from accessing the Bitcoin Network or holding or transferring their Bitcoins.

 

Reliance on Bitfury

 

As the Company and its management are reliant on the expertise and experience of Bitfury, the Company may be exposed to certain risks should Bitfury fail to perform its obligations under the Master Data Center Purchase Agreement or the Master Services Agreement.

 

Risks related to insurance

 

The Company intends to insure its operations in accordance with technology industry practice. However, given the novelty of cryptocurrency mining and associated businesses, such insurance may not be available, may be uneconomical for the Company, or the nature or level may be insufficient to provide adequate insurance cover. The occurrence of an event that is not covered or fully covered by insurance could have a material adverse effect on the Company.

 

Limited liability of BitGo

 

BitGo’s limited liability under the BitGo Services Agreement may limit the ability of the Company to recover losses relating to its Bitcoins. Under the BitGo Services Agreement, BitGo is not liable for any special, incidental, indirect, intangible, or consequential damages arising out of, or in connection with, among other things, the terms of the BitGo Services Agreement or BitGo’s performance thereunder. Further, in no event will the aggregate liability of BitGo for any loss or damage exceed the fees paid or payable to BitGo by the Company during the 12-month period immediately preceding the incident giving rise to such liability. Notwithstanding the foregoing, the liability of BitGo is not limited in respect of direct damages arising from, or in any way related to, the fraud, willful misconduct or gross negligence of BitGo.

 

Cyber security risk

 

Cyber incidents can result from deliberate attacks or unintentional events, and may arise from internal sources (e.g., employees, contractors, service providers, suppliers and operational risks) or external sources (e.g., nation states, terrorists, hacktivists, competitors and acts of nature). Cyber incidents include, but are not limited to, unauthorized access to information systems and data (e.g., through hacking or malicious software) for purposes of misappropriating or corrupting data or causing operational disruption. Cyber incidents also may be caused in a manner that does not require unauthorized access, such as causing denial-of-service attacks on websites (e.g., efforts to make network services unavailable to intended users).

 

A cyber incident that affects the Company or its service providers (including the Registrar and Transfer Agent, BitGo or Bitfury) might cause disruptions and adversely affect their respective business operations and might also result in violations of applicable law (e.g., personal information protection laws), each of which might result in potentially significant financial losses and liabilities, regulatory fines and penalties, reputational harm, and reimbursement and other compensation costs. In addition, substantial costs might be incurred to investigate, remediate and prevent cyber incidents.

 

- 25 - 

 

Litigation risk

 

The Company may be subject to litigation arising out of its operations. Damages claimed under such litigation may be material, and the outcome of such litigation may materially impact the Company’s operations, and the value of the Hut 8 Shares. While the Company will assess the merits of any lawsuits and defend such lawsuits accordingly, they may be required to incur significant expense or devote significant financial resources to such defenses. In addition, the adverse publicity surrounding such claims may have a material adverse effect on the Company’s operations.

 

Limited operating history

 

The Company has a limited history of operations and is in the early stage of development. As such, the Company will be subject to many risks common to such enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered in light of its early stage of operations. There can be no assurance that the Company will be able to develop any of its projects profitably or that any of its activities will generate positive cash flow.

 

Bitcoin Halving Risk

 

The current global bitcoin network rewards miners 12.5 bitcoin per block, which is approximately 1,800 bitcoin per day. In May 2020, the bitcoin daily reward will halve to 6.25 bitcoin per block, or approximately 900 bitcoin per day. This halving may have a potential impact on the Company’s profitability at the reward level of 6.25 coins. Based on the fundamentals of bitcoin mining and historical data on bitcoin prices and the network difficulty rate after a halving event, it is unlikely that the network difficulty rate and price would remain at the current level when the bitcoin rewards per block are halved. The Company believes that although the halving would reduce the block reward by 50%, other market factors such as the network difficulty rate and price of bitcoin would change to offset the impact of the halving sufficiently for the Company to maintain profitability. Nevertheless, there is a risk that a halving will render the Company unprofitable and unable to continue as a going concern.

 

Liquidity and additional financing

 

Additional funds, by way of private placement offerings, may need to be raised to finance the Company’s future activities. There can be no assurance that the Company will be able to obtain adequate financing in the future or that the terms of such financing will be favorable. Failure to obtain such additional financing could cause the Company to reduce or terminate its operations.

 

Competition from other cryptocurrency companies

 

The Company will compete with other cryptocurrency and distributed ledger technology businesses, including other businesses focused on developing substantial Bitcoin mining operations.

 

Electrical risks and back-up power

 

The containers and their contents are substantially comprised of metal components, which increase the risk of an electrical short in the Company’s equipment. The Company will maintain a supply of back-up and replacement parts on-site or at a location near to the Drumheller Facility. In addition, the Company’s operations consume a large amount of energy; accordingly, it is not practical or economical for the Company’s operations to run on back-up generators in the event of a power outage.

 

- 26 - 

 

Container exposure

 

The Company’s mining operations are housed in containers. Containers are susceptible to excessive heat exposure, which may result in equipment malfunction and require equipment to be replaced. The status of the air filters in the containers are manually tracked and replaced, requiring a dedicated monitoring schedule.

 

PRIOR SALES

 

The following table sets forth the outstanding securities of Hut 8 that are not listed or quoted on a marketplace that were issued during Fiscal 2019:

 

Date    

Number of  

Securities Issued or
Granted  

    Type of Security   Issue Price Per
Security 		 
May 28, 2019(1)       260,000     RSUs   $ 2.38  
November 6, 2019(1)       10,000     Stock options   $ 1.80  
December 19, 2019(1)       100,000     Stock options   $ 1.14  

 

 

Notes:

(1) Stock options and RSUs granted to employees, officers, or directors or consultants by the Board of Directors on the referenced date pursuant to Hut 8’s Omnibus Plan.

 

DIVIDENDS

 

Hut 8 has never paid dividends. Payment of any future dividends, if any, will be at the discretion of the Hut 8 Board after taking into account many factors, including operating results, financial condition, and current and anticipated cash needs. All of the Hut 8 Shares will be entitled to an equal share in any dividends declared and paid on a per share basis.

 

DESCRIPTION OF CAPITAL STRUCTURE

 

The Company is authorized to issue an unlimited number of Hut 8 Shares. As of the date of this AIF, 90,438,009 Hut 8 Shares are issued and outstanding. Further, as at December 31, 2019, the Company had 2,882,222 warrants, 910,000 stock options, and 1,270,100 RSUs outstanding. Holders of Hut 8 Shares are entitled to dividends, if, as and when declared by the board of Hut 8 Board, to one vote per Hut 8 Share at meetings of Hut 8 Shareholders and, upon liquidation, to share equally in such assets of Hut 8 as are distributable to the holders of the Hut 8 Shares. All of the Hut 8 Shares are fully paid and non-assessable and, except for the certain anti-dilution rights of Bitfury under the Investor Rights Agreement, are not subject to any pre-emptive rights, conversion or exchange rights, redemption, retraction, purchase for cancellation or surrender provisions, sinking or purchase fund provisions, provisions permitting or restricting the issuance of additional securities or provisions requiring a shareholder to contribute additional capital

 

MARKET FOR SECURITIES

 

Trading Price and Volume

 

The Hut 8 Shares are listed and posted for trading on the TSX under the symbol “HUT” and on the OTCQX under the symbol “HUTMF”.

 

- 27 - 

 

The following table sets out the price range and aggregate volumes traded or quoted on a monthly basis on the TSXV from January 1, 2019 to October 7, 2019 and on the TSX from October 8, 2019 to December 31, 2019.

 

Month     High     Low     Average Daily
Volume 		 
December 2019     $ 1.29     $ 1.00       50,055  
November 2019     $ 1.88     $ 1.29       47,033  
October 2019(1)     $ 2.24     $ 1.56       107,648  
September 2019     $ 2.36     $ 1.89       88,430  
August 2019     $ 2.70     $ 2.23       58,043  
July 2019     $ 2.60     $ 2.06       101,829  
June 2019     $ 2.93     $ 1.81       219,910  
May 2019     $ 2.78     $ 1.45       157,100  
April 2019     $ 1.64     $ 0.82       152,395  
March 2019     $ 1.35     $ 0.80       41,024  
February 2019     $ 1.57     $ 1.24       17,868  
January 2019     $ 1.96     $ 1.49       38,732  

 

The following table sets out the price range and aggregate volumes traded or quoted on a monthly basis on the OTCQX.

 

Month   High (US$)     Low (US$)     Average Daily
Volume 		 
December 2019   $ 0.96     $ 0.75       10,704  
November 2019   $ 1.44     $ 0.96       12,921  
October 2019   $ 1.69     $ 1.19       17,712  
September 2019   $ 1.78     $ 1.47       25,323  
August 2019   $ 2.02     $ 1.66       16,292  
July 2019   $ 2.02     $ 1.60       22,373  
June 2019   $ 2.23     $ 1.38       49,035  
May 2019   $ 1.90     $ 1.09       36,012  
April 2019   $ 1.21     $ 0.63       20,224  
March 2019   $ 1.02     $ 0.60       10,835  
February 2019   $ 1.19     $ 0.89       7,203  
January 2019   $ 1.45     $ 1.05       2,225  

 

ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER

 

Securities Subject to Escrow

 

Following the Qualifying Transaction, 49,465,453 commons shares held by directors, officers and securityholders in excess of 20% of the outstanding Resulting Issuer Common Shares were subject to voluntary escrow/pooling agreement. Pursuant to the escrow/pooling agreements, the 49,465,453 common shares will be released as follows: 25% on closing of the qualifying transaction (March 5, 2018); and 25% will be released 6, 12 and 18 months thereafter. As of December 31, 2019, there is no shares in escrow.

 

- 28 - 

 

DIRECTORS AND OFFICERS

 

The individuals disclosed in the table below are the directors and officers of the Company, with the term of office of the directors to expire on the date of the next annual general meeting of the shareholders. The following table lists the name, municipality of residence, proposed office, principal occupation and anticipated shareholdings of each proposed director and officer of Hut 8 as at December 31, 2019.

 

Name and

Municipality 

of Residence  

 

Positions
and  

Offices to
be Held

 

Principal Occupation During the Past Five
Years

  Number and
percentage
of voting
securities(3) 		 

Director
or

Officer  

Since

Andrew Kiguel 

(Ontario, 

Canada)

  CEO  

•       CEO of Hut 8 (2018 to Present) 

•       Managing Director of GMP Securities (2000 to 2018)

 

680,533 

(0.75%) 

 

April 

2018

Jimmy 

Vaiopoulos 

(Ontario, 

Canada)

  CFO  

•       CFO of Hut 8 (2018 to present). 

•       CFO of TSXV-listed solar solutions provider (2015 to 2018) 

•       KPMG LLP Advisory and Audit (2010 to 2015)

 

30,108 

(0.03%)

 

July 

2018

Bill Tai 

(California, 

United States)

 

Director,

Chair

 

•       Founder of Treasure Data, Inc. (2012 to Present) 

•       Board member of Bitfury (2014 to Present) 

 

729,286

(0.81%)

 

March

2018

Dennis 

Mills(1)(2) 

(Ontario, 

Canada) 

  Director   •       Director of Pacific Rubiales Energy Corp. (2012 to 2016)   -  

March

2018

Joseph 

Flinn(1)(2) 

(Ontario, 

Canada)

  Director  

•       CFO, Seaboard Transportation Group (2019 to Present) 

•       President of Clarke Transport and Clarke North America (2017 to 2019) 

•       CFO of Sysco Canada (2003 to 2015)

 

7,808 

(0.01%)

 

August

2018

Gerri 

Sinclair(1)(2)  

(British 

Columbia, 

Canada) 

  Director  

•       Director of TSX Group (2004 to Present) 

•       Director of Vancouver Airport Authority (2011 to Present)

 

17,000

(0.02%)

 

March

2018

Jeremy Sewell

(London, UK)

  Director  

•       CFO of Bitfury Group Limited (2017 to Present) 

•       CFO of eCurrency (2014 to 2017) 

  -  

August

2019

Kyle Appleby 

(Ontario, 

Canada)

 

Corporate

Secretary

 

•       Corporate Secretary of Hut 8 (2019 to Present) 

•       CFO and Corporate Secretary services through CFO Advantage Inc. (2007 – Present)

 

10,000 

(0.01%)

 

October

2019

 

 
Notes:

(1) Member of Audit Committee.

(2) Member of Governance and Compensation Committee.

(3) Percentages based on total outstanding Common Shares at December 31, 2019 of 90,438,009.

 

- 29 - 

 

BOARD OF DIRECTORS

 

Bill Tai

 

Bill Tai is a Director of Bitfury and co-founder Chairman of data science company Treasure Data. He is an early seed investor behind high profile start-ups including Canva, Color Genomics, Tweetdeck/Twitter, Wish.com and Zoom Video. Mr. Tai is a Partner Emeritus for CRV after establishing their Silicon Valley office. Previously he founded several successful technology companies and served as a Director of seven publicly listed companies. He holds a BSEE with Honors from the University of Illinois and an MBA from Harvard.

 

Dennis Mills

 

Dennis Mills is the Founder and President of Toronto Partners Inc. since 2013, a director of CGX Energy Inc., and was a director of Pacific Rubiales Energy Corp. from 2012 to 2016. Mr. Mills was Vice Chairman and Chief Executive Officer of MI Developments Inc. from 2004 to 2011, and a Vice-President at Magna International from 1984 to 1987. Mr. Mills served as a Member of Parliament in Canada from 1988 to 2004 and was the Senior Communications Advisor to the Prime Minister of Canada, The Right Honourable Pierre Elliott Trudeau (1980-1984).

 

Gerri Sinclair

 

Gerri Sinclair’s career includes more than 25 years of experience in mobile and digital media technologies, entrepreneurial business, and government policy. Ms. Sinclair was the founder and CEO of NCompass Labs, the Internet digital content management company acquired by Microsoft in 2001. Ms. Sinclair then joined Microsoft as their Country Manager for Canada for MSN. She holds a Ph.D. in Renaissance drama as well as an honorary Doctor of Science in Computing Science from the University of British Columbia. Ms. Sinclair also serves as a Senior Innovation Strategist at Ryerson University in Toronto, and at Telefonica’s Advanced Multimedia Research Lab in Barcelona, Spain. In addition to being a member of the Toronto Montreal Stock Exchange board of directors, she is currently a director of the Vancouver Airport Authority, as well as on the board of directors of ThinkData, a small Toronto-based start-up in the field of Big Data.

 

Joseph Flinn

 

Joseph Flinn’s career includes 12 years of senior leadership at Sysco Corporation, where he played an integral role as both Chief Financial Officer of Sysco Canada, and President of Sysco Canada’s Eastern Division, and 2 years as President of Clarke Freight Transportation Group, a major national freight carrier. Currently Mr. Flinn is the CFO of Seaboard Transportation Group, a major international bulk transportation group of companies. Mr. Flinn holds a business degree from Saint Mary’s University and is a chartered professional accountant.

 

Jeremy Sewell

 

Jeremy Sewell serves as Bitfury’s CFO and has 30 years of extensive international financial, commercial and operating experience. Prior to his role as CFO of Bitfury, he was CFO of the Silicon Valley fintech company eCurrency, where he led the equity investment from eBay Founder Pierre Omidyar’s VC and Bridgewater Associates and Farallon Capital hedge fund founders Ray Dalio and Tom Steyer. Mr. Sewell qualified as a Chartered Accountant in the UK spending 10 years in practice with a focus on audit and consulting projects across multiple countries in Europe and Asia.

 

- 30 - 

 

OFFICERS

 

Andrew Kiguel (CEO)

 

As one of the co-founders of Hut 8, Andrew Kiguel played a key role in the formation, structure and financing of the Company. Prior to Hut 8, he served as Managing Director in investment banking at GMP Securities, with a focus on blockchain and technology. Mr. Kiguel has extensive experience in providing investment banking services to numerous public and private entities, including raising equity and debt capital in excess of $5 billion through his career.

 

Jimmy Vaiopoulos (CFO)

 

Jimmy Vaiopoulos joined Hut 8 following his role as CFO with a TSXV-listed commercial solar solutions provider, where he served since 2015. Prior to that role, he worked with KPMG in both audit and advisory practices with a focus on energy and infrastructure markets. Mr. Vaiopoulos has worked closely with independent power producers and specializes in start-up growth, international management, tech and mining, and has extensive experience in the underlying Canadian and U.S. compliance regimes. He holds a Bachelor of Engineering Science from Western University and an Honours Business Administration from the Richard Ivey School of Business and is a member of the Chartered Professional Accountants of British Columbia.

 

Kyle Appleby

 

Since 2007, Kyle has been providing CFO and Corporate Secretary services to a number of public and private companies both domestic and international. He has focused on assisting companies with financial reporting and controls, governance, operations, regulatory compliance and taxation. Prior to 2007, Kyle worked for several public accounting firms in Canada. He is a member in good standing of the Chartered Professional Accountants of Canada and the Chartered Professional Accountants of Ontario.

 

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

 

Cease Trade Orders or Bankruptcies

 

None of the directors, officers, Insiders or Promoters of the Company or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company is, or within 10 years before the date of this AIF has been, a director, officer, Insider or Promoter of any other issuer that, while that person was acting in that capacity:

 

(a) was the subject of a cease trade or similar order, or an order that denied the other issuer access to any exemptions under applicable securities legislation for a period of more than 30 consecutive days; or

 

(b) became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

 

Penalties or Sanctions

 

None of the directors, officers, Insiders or the Promoters of the Company or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by any securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or has been subject to any other penalties or sanctions imposed by a court or regulatory body or self-regulatory authority that would be likely to be considered important to a reasonable investor making an investment decision.

 

- 31 - 

 

Personal Bankruptcies

 

None of the directors, officers, Insiders or the Promoters of the Company or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company is, or within the 10 years before the date of this AIF, has been declared bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or has been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold their assets.

 

Committees of the Board of Directors

 

The Hut 8 Board currently has an Audit Committee and a Compensation and Governance Committee.

 

Audit Committee

 

The Audit Committee consists of individuals who are “independent” and “financially literate” within the meaning of NI 52-110. Our Audit Committee is comprised of Joseph Flinn, who acts as chair of this committee, and includes Gerri Sinclair and Dennis Mills. Each of our Audit Committee members has an understanding of the accounting principles used to prepare financial statements and varied experience as to the general application of such accounting principles, as well as an understanding of the internal controls and procedures necessary for financial reporting. For additional details regarding the relevant education and experience of each member of our Audit Committee, see the relevant biographical experiences for each of our directors and officers under the heading “Directors, Officers and Promoters”.

 

The Hut 8 Board has adopted a written charter for the Audit Committee, provide in Schedule A, which sets out the Audit Committee’s responsibility in reviewing the financial statements of the Company and public disclosure documents containing financial information and reporting on such review to the Hut 8 Board, ensuring that adequate procedures are in place for the review of the Company’s public disclosure documents that contain financial information, overseeing the work and reviewing the independence of the external auditors and reviewing, evaluating and approving the internal control procedures that are implemented and maintained by management. The Audit Committee is also responsible for recommending the adoption of an enterprise risk management program and an environmental management program for the Company and for supervising the Company’s compliance with and implementation of the risk and environmental programs.

 

At no time since the commencement of the Company’s most recently completed financial year has Hut 8 relied on any of the exemptions contained in Sections 2.4, 3.2, 3.3(2), 3.4, 3.5, 3.6 or 3.8 of NI 52-110, or an exemption from NI 52-110, in whole or in part, granted under Part 8 thereof.

 

At no time since the commencement of Hut 8’s most recently completed financial year has a recommendation of the Audit Committee to nominate or compensate an external auditor not been adopted by the Board.

 

Compensation and Governance Committee

 

The Compensation and Governance Committee consists of individuals who are “independent” within the meaning of National Instrument 58-101 — Disclosure of Corporate Governance Practices. Our Compensation and Governance Committee is comprised of Gerri Sinclair, who acts as chair of this committee, and includes Joseph Flinn, Gerri Sinclair and Dennis Mills. The Compensation and Governance Committee is charged with reviewing, overseeing and evaluating the governance and nominating policies and the compensation policies of the Company.

 

- 32 - 

 

In addition, the Compensation and Governance Committee will be responsible for:

 

(a) assessing the effectiveness of the Hut 8 Board, each of its committees and individual directors;

(b) overseeing the recruitment and selection of candidates as directors of Hut 8;

(c) organizing an orientation and education program for new directors and coordinating continuing director development programs;

(d) considering and approving proposals by the directors to engage outside advisers on behalf of the Hut 8 Board as a whole or on behalf of the independent directors;

(e) reviewing and making recommendations to the Hut 8 Board concerning any change in the number of directors composing the Hut 8 Board;

(f) administering any stock option or purchase plan of Hut 8 or any other compensation incentive programs;

(g) assessing the performance of the officers and other members of the executive management team of Hut 8; and

(h) reviewing and making recommendations to the Hut 8 Board concerning the level and nature of the compensation payable, if any, to the directors and officers of Hut 8.

 

Conflicts of Interest

 

There may from time to time be potential conflicts of interest to which some of the directors, officers, Insiders and Promoters of the Company will be subject in connection with the operations of the Company. Some of the individuals who are directors or officers of the Company are also directors and/or officers of other reporting and non-reporting issuers. Conflicts, if any, will be subject to the procedures and remedies. Hut 8 and Bitfury are each party to the Master Data Center Purchase Agreement and the Master Services Agreement, pursuant to which the BlockBoxes are purchased, serviced and maintained.

 

- 33 - 

 

PROMOTERS

 

Bitfury was a promoter for Hut 8 in 2018 on the basis that more than 10% of the funds raised from the First Offering and the Second Offering were used to finance the purchase by Hut 8 of Bitfury equipment. Through the Master Services Agreement, Bitfury provides all services required to manage and operate Hut 8’s facilities. This includes security, repairs and maintenance, technology management, pool services, chip upgrade services and more.

 

As at December 31, 2019, Hut 8 only operated Bitfury equipment which were purchased as follows:

 

• On February 2, 2018, Hut 8 entered into a purchase order with Bitfury for 10 BlockBoxes at a price of $2,500,000 per BlockBoxes or $25,000,000. This purchase includes already installed BlockBoxes and was paid fully in cash.

• On March 20, 2018, Hut 8 entered into a purchase order with Bitfury for 25 BlockBoxes at a price of $2,000,000 per BlockBoxes or $50,000,000. This purchase price includes the BlockBoxes, ASIC chips, and installation; however, other related infrastructure is not included. The purchase price comprised of $20,000,000 in cash and $30,000,000 by way of the issuance of 6,000,000 common shares of Hut 8 at $5.00 per share.

• On July 30, 2018, Hut 8 entered into a purchase order with Bitfury for 16 BlockBoxes at a price of US$950,000 per BlockBoxes or US$15,200,000. This purchase price includes the BlockBoxes, ASIC chips, and installation; however, other related infrastructure is not included. The purchase price comprised of US$9,120,000 in cash and US$6,080,000 by way of the issuance of 2,133,858 common shares of Hut 8 at $3.75 per share.

• On November 9, 2018, Hut 8 entered into a purchase order with Bitfury for 12 BlockBoxes at a price of approximately US$1,083,333 per BlockBoxes or US$13,000,000. The purchase price includes already installed BlockBoxes and was comprised of US$2,000,000 in cash, US$2,000,000 by way of the issuance of 838,511 common shares of Hut 8 at $3.15 per share.

• On September 8, 2019, Hut 8 entered into a purchase order with Bitfury for nine BlockBoxes at a price of US$7,000,000 in total. The purchase price includes already installed BlockBoxes and paid fully in cash.

 

The cost of the equipment is difficult to assess due to research and development that is involved with creating the intellectual property related to the design of the ASIC chips. The purchase price was determined based on multiple factors including the supply and demand for general bitcoin mining equipment market and comparing price per hash power. A portion of the purchase price for some of the equipment included infrastructure such as interconnection to the grid, transformers, switchboard, internet connections, and general wiring. The agreements were negotiated by the President of Bitfury and the Interim-CEO at the time of Hut 8. The Company’s management has no additional connection to Bitfury other than the relationship between Bitfury and Hut 8, as described in this AIF.

 

- 34 - 

 

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

 

Other than as disclosed elsewhere in this AIF, no director, executive officer or principal shareholder of the Company, or any associate or affiliate of the foregoing, has had any material interest, direct or indirect, in any transaction within the three most recently completed financial years or during the current financial year prior to the date of this AIF that has materially affected or is reasonably expected to materially affect the Company.

 

LEGAL PROCEEDINGS

 

To the knowledge of the Company, Hut 8 is neither a party to, nor is any of its property the subject matter of, any legal proceedings, nor is any such proceedings known to Hut 8 to be contemplated by any party.

 

AUDITORS, TRANSFER AGENT AND REGISTRAR

 

The auditors of Hut 8 are DMCL at their offices in Vancouver, British Columbia.

 

Fee Description   2019 ($)     2018 ($)  
Audit Fees   $ 150,000     $ 150,000  
Audit Related Fees   $ 28,500     $ 26,380  
Tax Fees(1)   $ 13,200     $ 58,842  
All Other Fees     -       -  
Total   $ 191,700     $ 235,222  

 

 

Notes: 

(1) Tax services comprising tax compliance, tax advice, and tax planning, including the preparation of corporate tax returns.

 

The registrar and transfer agent for Hut 8 Shares is Computershare Trust Company of Canada, located at 510 Burrard Street, 3rd Floor, Vancouver, British Columbia, V6C 3B9.

 

- 35 - 

 

MATERIAL CONTRACTS

 

Hut 8 has not entered into any material contracts, outside of the ordinary course of business, prior to the date hereof, other than:

 

(a) Purchase order to purchase 10 BlockBoxes dated February 2, 2018;

(b) the agency agreement dated February 7, 2018 between Hut 8 and the Agent (in respect of the Second Offering);

(c) the Master Services Agreement;

(d) the Master Data Center Purchase Agreement;

(e) the Galaxy Acknowledgement and Termination Agreement;

(f) the Galaxy Assignment Agreement;

(g) the Investor Rights Agreement between Hut 8 and Bitfury, dated March 2, 2018;

(h) Purchase order to purchase 25 BlockBoxes dated March 20, 2018;

(i) the Xapo Services Agreement;

(j) the Subscription Receipt Agreement;

(k) the Transaction Agreement;

(l) the lease agreement between the City of Medicine Hat, and Hut 8 Holdings Inc.;

(m) the Electricity Supply Agreement between the City of Medicine Hat, and Hut 8 Holdings Inc.;

(n) the Amendment Agreement No. 1 to the Master Services Agreement;

(o) the Amendment Agreement No. 1 to the Master Data Center Purchase Agreement;

(p) Purchase order to purchase 16 BlockBoxes dated July 30, 2018;

(q) Credit agreement with Galaxy dated September 10, 2018 to borrow US$16,000,000 due on March 10, 2021; and

(r) Purchase order to purchase 12 BlockBoxes dated November 9, 2018;

(s) Pool Services Agreement to participate in the Bitfury pool dated December 21, 2018;

(t) Amendment Agreement to the Pool Services Agreement dated January 23, 2019;

(u) Amendment Agreement No. 2 to the Pool Service Agreement entered into on November 17, 2019;

(v) Agreement with Bitfury dated March 27, 2019 to convert $5,576,150 of accounts payable for shares based on a conversion price of $1.50 per share.

(w) the BitGo Custodial Services Agreements;

(x) Equipment Sale and Transfer Agreement to purchase 9 BlockBoxes dated September 8, 2019;

(y) the Amendment and Restated Agreement to the Equipment Sale and Transfer Agreemen dated October 9, 2019;

(z) the Letter Agreement to the Amended and Restated Equipment Sale and Transfer Agreement dated October 9, 2019;

(aa) Credit agreement with Genesis dated November 20, 2019 to borrow US$15,000,000 due on May 21, 2021;

(bb) Amendment Agreement to the Amended and Restated Equipment Sale and Transfer Agreement entered into on January 31, 2020;

(cc) Amendment Agreement No. 3 to the Pool Service Agreement entered into on February 7, 2020;

(dd) Amendment Agreement No. 1 to the Purchase Order No. 6 Dated to allow for the early repayment of the loan related to this purchase. This amendment was entered into February 12, 2020;

(ee) Amendment and Restated Master Service Agreement entered into on February 12, 2020;

(ff) Amended and Restated Master Data Center Purchase Agreement entered into on February 12, 2020.

 

- 36 - 

 

EXPERTS

 

Names of Experts

 

Following are the names of each person or company who is named as having prepared or certified a report, valuation, statement or opinion described, included or referred to in a filing made under National Instrument 51-102 by the Company during or relating to Fiscal 2019 and the applicable subsequent period, whose profession or business gives authority to such report, valuation, statement or opinion:

 

(a) MNP LLP - regarding the technical assessment of the Drumheller Facility, and plant and equipment valuation

 

(b) DMCL LLP - regarding the auditor’s report of the financial statements for the year ended December 31, 2019.

 

Interests of Experts

 

There is no interest, direct or indirect, in any securities or property of Hut 8, or of an Associate or Affiliate of Hut 8, received or to be received by an expert.

 

ADDITIONAL INFORMATION

 

Additional information relating to the Company, including financial information in the Company’s Financial Statements and MD&A for Fiscal 2019, is available on SEDAR at www.sedar.com. Moreover, additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s securities and securities authorized for issuance under equity compensation plans, if applicable, is contained in the Company’s information circular for its most recent annual meeting of securityholders. 

 

 

SCHEDULE A

 

AUDIT COMMITTEE CHARTER

 

Section 1 Mandate

 

The mandate of the Audit Committee (the “Committee”) of the board of directors (the “Board”) of the Company is to:

 

(a) assist the Board in fulfilling its oversight responsibilities in respect of:

(i) the quality and integrity of the Company’s financial statements, financial reporting processes and systems of internal controls and disclosure controls regarding risk management, finance, accounting, and legal and regulatory compliance;

(ii) the independence and qualifications of the Company’s external auditors;

(iii) the review of the periodic audits performed by the Company’s external auditors and the Company’s internal accounting department; and

(iv) the development and implementation of policies and processes in respect of corporate governance matters;

(b) provide and establish open channels of communication between the Company’s management, internal accounting department, external auditor and directors;

(c) prepare all filings and disclosure documents required to be prepared by the Committee and/or the Board pursuant to all applicable federal, provincial and state securities legislation and the rules and regulations of all securities commissions having jurisdiction over the Company;

(d) review and confirm the adequacy of procedures for the review of all public disclosure of financial information extracted or derived from the Company’s financial statements, and to periodically assess the adequacy of those procedures; and
  (e) establish procedures for:

(i) the receipt, retention and treatment of complaints or concerns received by the Company regarding accounting, internal accounting controls or auditing matters, including, but not limited to, concerns about questionable accounting or auditing practices; and

(ii) the confidential, anonymous submission by employees of the Company of such complaints or concerns.

 

The Committee will primarily fulfil its mandate by performing the duties set out in Article 7 hereof.

 

The Board and management of the Company will ensure that the Committee has adequate funding to fulfil its mandate.

 

While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee to plan or conduct audits, or to determine that the Company’s financial statements are complete and accurate or are in accordance with generally accepted accounting principles, accounting standards or applicable laws and regulations. This is the responsibility of Company’s management, internal accounting department and external auditors. Because the primary function of the Committee is oversight, the Committee will be entitled to rely on the expertise, skills and knowledge of the Company’s management, internal accounting department, external auditors and other external advisors and the integrity and accuracy of information provided to the Committee by such persons in carrying out its oversight responsibilities. Nothing in this Charter is intended to change or in any way limit the responsibilities and duties of Company’s management, internal accounting department or external auditors.

 

A-2

 

Section 2 Composition

 

The Committee will be comprised of members of the Board, the number of which will be determined from time to time by resolution of the Board. The composition of the Committee will be determined by the Board such that the membership and independence requirements set out in the rules and regulations, in effect from time to time, of any securities commissions (including, but not limited to, the Securities and Exchange Commission and the British Columbia Securities Commission) and any exchanges upon which the Company’s securities are listed (including, but not limited to, the Toronto Stock Exchange and the NYSE American) are satisfied (the said securities commissions and exchanges are hereinafter collectively referred to as the “Regulators”).

 

Section 3 Term of Office

 

The members of the Committee will be appointed or re-appointed by the Board on an annual basis. Each member of the Committee will continue to be a member thereof until such member’s successor is appointed, or until such member resigns or is removed by the Board. The Board may remove or replace any member of the Committee at any time. However, a member of the Committee will automatically cease to be a member of the Committee upon either ceasing to be a director of the Board or ceasing to meet the requirements established, from time to time, by any Regulators. Vacancies on the Committee will be filled by the Board.

 

Section 4 Committee Chair

 

The Board, or if it fails to do so, the members of the Committee, will appoint a chair from the members of the Committee. If the chair of the Committee is not present at any meeting of the Committee, an acting chair for the meeting will be chosen by majority vote of the Committee from among the members present. In the case of a deadlock in respect of any matter or vote, the chair will refer the matter to the Board for resolution. The Committee may appoint a secretary who need not be a member of the Board or Committee.

 

Section 5 Meetings

 

The time and place of meetings of the Committee and the procedures at such meetings will be determined, from time to time, by the members thereof, provided that:

 

(a) a quorum for meetings will be two members, present in person or by telephone or other telecommunication device that permits all persons participating in the meeting to speak to and hear each other. The Committee will act on the affirmative vote of a majority of members present at a meeting at which a quorum is present. The Committee may also act by unanimous written consent in lieu of meeting;

(b) the Committee may meet as often as it deems necessary, but will not meet less than once annually;

(c) notice of the time and place of every meeting will be given in writing and delivered in pursuing or by facsimile or other means of electronic transmission to each member of the Committee at least 72 hours prior to the time of such meeting; and

(d) the Committee will maintain written minutes of its meetings, which minutes will be filed with the minutes of the meetings of the Board. The Committee will make regular reports of its meetings to the Board, directly or through its chair, accompanied by any recommendations to the Board approved by the Committee.

 

A-3

 

Section 6 Authority

 

The Committee will have the authority to:

 

(a) retain (at the Company’s expense) its own legal counsel, accountants and other consultants that the Committee believes, in its sole discretion, are needed to carry out its duties and responsibilities;

 

(b) conduct investigations that it believes, in its sole discretion, are necessary to carry out its responsibilities;

 

(c) take whatever actions it deems appropriate, in its sole discretion, to foster an internal culture within the Company that results in the development and maintenance of a superior level of financial reporting standards, sound business risk practices and ethical behaviour; and

 

(d) request that any director, officer or employee of the Company, or other persons whose advice and counsel are sought by the Committee (including, but not limited to, the Company’s legal counsel and the external auditors) meet with the Committee and any of its advisors and respond to their inquiries.

 

Section 7 Specific Duties

 

In fulfilling its mandate, the Committee will, among other things:

 

(a) (i) select the external auditors, based upon criteria developed by the Committee; (ii) approve all audit and non-audit services in advance of the provision of such services and the fees and other compensation to be paid to the external auditors; (iii) oversee the services provided by the external auditors for the purpose of preparing or issuing an audit report or related work; and (iv) review the performance of the external auditors, including, but not limited to, the partner of the external auditors in charge of the audit, and, in its discretion, approve any proposed discharge of the external auditors when circumstances warrant, and appoint any new external auditors. Notwithstanding any other provision of this Charter, the external auditor will be ultimately accountable to the Board and the Committee, as representatives of the shareholders of the Company, and those representatives will have the ultimate authority and responsibility to select, evaluate and, where appropriate, replace the external auditor (or to nominate the external auditor to be proposed for shareholder approval);

 

(b) periodically review and discuss with the external auditors all significant relationships that the external auditors have with the Company to determine the independence of the external auditors. Without limiting the generality of the foregoing, the Committee will ensure that it receives, on an annual basis, a formal written statement from the external auditors that sets out all relationships between the external auditor and the Company, and receives an opinion on the financial statements consistent with all professional standards that are applicable to the external auditors (including, but not limited to, those established by any securities legislation and regulations, the Canadian Institute of Chartered Professional Accountants – Chartered Accountants, Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States) and the American Institute of Certified Public Accountants, and those set out in the International Financial Reporting Standards as issued by the International Accounting Standards Board);

 

A-4

 

(c) evaluate, in consultation with the Company’s management, internal accounting department and external auditors, the effectiveness of the Company’s processes for assessing significant risks or exposures and the steps taken by management to monitor, control and minimize such risks; and obtain, annually, a letter from the external auditors as to the adequacy of such controls;

 

(d) consider, in consultation with the Company’s external auditors and internal accounting department, the audit scope and plan of the external auditors and the internal accounting department;

 

(e) coordinate with the Company’s external auditors the conduct of any audits to ensure completeness of coverage and the effective use of audit resources;

 

(f) assist in the resolution of disagreements between the Company’s management and the external auditors regarding the preparation of financial statements; and in consultation with the external auditors, review any significant disagreement between management and the external auditors in connection with the preparation of the financial statements, including management’s responses thereto;

 

(g) after the completion of the annual audit, review separately with each of the Company’s management, external auditors and internal accounting department the following:

 

(i) the Company’s annual financial statements and related footnotes;

 

(ii) the external auditors’ audit of the financial statements and their report thereon;

 

(iii) any significant changes required in the external auditors’ audit plan;

 

(iv) any significant difficulties encountered during the course of the audit, including, but not limited to, any restrictions on the scope of work or access to required information;

 

(v) the Company’s guidelines and policies governing the process of risk assessment and risk management; and

 

(h) other matters related to the conduct of the audit that must be communicated to the Committee in accordance with the standards of any regulatory body (including, but not limited to, securities legislation and regulations, the Canadian Institute of Chartered Professional Accountants - Chartered Accountants, International Financial Reporting Standards as issued by the International Accounting Standards Board, Canadian generally accepted auditing standards, the Public Company Accounting Oversight Board (United States), and the American Institute of Certified Public Accountants);

 

(i) consider and review with the Company’s external auditors (without the involvement of the Company’s management and internal accounting department):

 

(i) the adequacy of the Company’s internal controls and disclosure controls, including, but not limited to, the adequacy of computerized information systems and security;

 

(ii) the truthfulness and accuracy of the Company’s financial statements; and

 

(iii) any related significant findings and recommendations of the external auditors and internal accounting department, together with management’s responses thereto;

 

A-5

 

(j) consider and review with the Company’s management and internal accounting department:

 

(i) significant findings during the year and management’s responses thereto;

 

(ii) any changes required in the planned scope of their audit plan;

 

(iii) the internal accounting department’s budget and staffing; and

 

(iv) the internal auditor department’s compliance with the appropriate internal auditing standards;

 

(k) establish systems for the regular reporting to the Committee by each of the Company’s management, external auditors and internal accounting department of any significant judgments made by management in the preparation of the financial statements and the opinions of each as to appropriateness of such judgments;

 

(l) review (for compliance with the information set out in the Company’s financial statements and in consultation with the Company’s management, external auditors and internal accounting department, as applicable) all filings made with Regulators and government agencies, and other published documents that contain the Company’s financial statements before such filings are made or documents published (including, but not limited to: (i) any certification, report, opinion or review rendered by the external auditors; (ii) any press release announcing earnings (especially those that use the terms “pro forma”, “adjusted information” and “not prepared in compliance with generally accepted accounting principles”); and (iii) all financial information and earnings guidance intended to be provided to analysts, the public or to rating agencies);

 

(m) prepare and include in the Company’s annual proxy statement or other filings made with Regulators any report from the Committee or other disclosures required by all applicable federal, provincial and state securities legislation and the rules and regulations of Regulators having jurisdiction over the Company;

 

(n) review with the Company’s management: (i) the adequacy of the Company’s insurance and fidelity bond coverage, reported contingent liabilities and management’s assessment of contingency planning; (ii) management’s plans in respect of any changes in accounting practices or policies and the financial impact of such changes; (iii) any major areas in that, in management’s opinion, have or may have a significant effect upon the financial statements of the Company; and (iv) any litigation or claim (including, but not limited to, tax assessments) that could have a material effect upon the financial position or operating results of the Company;

 

(o) at least annually, review with the Company’s legal counsel and accountants all legal, tax or regulatory matters that may have a material impact on the Company’s financial statements, operations and compliance with applicable laws and regulations;

 

(p) review and update periodically a Code of Ethics and Business Conduct for the directors, officers and employees of the Company; and review management’s monitoring of compliance with the Code of Ethics and Business Conduct;

 

(q) review and update periodically the procedures for the receipt, retention and treatment of complaints and concerns by employees received by the Company regarding accounting, internal accounting controls or auditing matters, including, but not limited to, concerns regarding questionable accounting or auditing practices;

 

(r) consider possible conflicts of interest between the Company’s directors and officers and the Company; and approve for such parties, in advance, all related party transactions;

 

A-6

 

(s) review policies and procedures in respect of the expense accounts of the Company’s directors and officers, including, but not limited to, the use of corporate assets;

 

(a) Monitor and periodically review the Whistleblower Policy of the Company and associated procedures for:

(i) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters;

 

(ii) the confidential, anonymous submission by directors, officers and employees of the Company of concerns regarding questionable accounting or auditing matters; and

 

(iii) if applicable, any violations of applicable law, rules or regulations that relate to corporate reporting and disclosure, or violations of the Company’s Code of Conduct;

 

(t) review and approve the Company’s hiring policies regarding employees and partners, and former employees and partners, of the present and former external auditors of the Company;

 

(u) direct and supervise the investigation into any matter brought to its attention within the scope of the Committee’s duties. Perform such other duties as may be assigned to it by the Board from time to time or as may be required by applicable law; and

 

(v) perform such other functions, consistent with this Charter, the Company’s constating documents and governing laws, as the Committee deems necessary or appropriate.

 

Section 8 Review of Charter

 

The Committee shall periodically review and assess the adequacy of this Charter and recommend any proposed changes to the Board for consideration.

 

 

Exhibit 4.3 

 

(IMAGE)  

 

HUT 8 MINING CORP.

 

Consolidated Financial Statements 

(In Canadian dollars)

 

Years ended December 31, 2019 and 2018  

 

 

(IMAGE)  

 

INDEPENDENT AUDITOR’S REPORT

 

To the Shareholders of Hut 8 Mining Corp.

 

Opinion

 

We have audited the consolidated financial statements of Hut 8 Mining Corp. (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2019 and 2018, and the consolidated statements of income (loss) and comprehensive income (loss), cash flows and changes in shareholders’ equity for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”).

 

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

 

Basis for Opinion

 

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Emphasis of matter

 

We draw attention to note 15 of the financial statements, which indicates that a recent health crisis may have adverse impact on the Company’s future operations. Our opinion is not modified in respect of this matter.

 

Material Uncertainty Related to Going Concern

 

We draw attention to Note 1 to the financial statements, which describes events or conditions that indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

 

Other Information

 

Management is responsible for the other information. The other information comprises the information included in Management’s Discussion and Analysis.

 

Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

 

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

 

Responsibilities of Management and Those Charged with Governance for the Financial Statements

 

Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

 

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

 

Auditor’s Responsibilities for the Audit of the Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.

 

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

 

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

 

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

 

The engagement partner on the audit resulting in this independent auditor’s report is David J. Goertz.

 

(IMAGE)   

 

DALE MATHESON CARR-HILTON LABONTE LLP 

CHARTERED PROFESSIONAL ACCOUNTANTS 

Vancouver, BC

 

April 2, 2020

 

(IMAGE)  

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Consolidated Statements of Financial Position as at December 31,

 

    2019     2018  
Assets                
Current assets                
Cash   $ 2,946,017     $ 3,556,560  
Deposits and prepaid expenses (Note 5)     321,189       79,901  
Digital assets (Note 6)     10,484,106       -  
Digital assets receivable (Note 6)     943,438       -  
      14,694,750       3,636,461  
Non-current assets                
Plant and equipment (Note 7)     34,883,085       58,127,009  
Digital assets collateral (Note 6)     15,883,182       15,408,189  
Deposits and prepaid expenses (Note 5)     5,776,227       5,723,794  
Total assets   $ 71,237,244     $ 82,895,453  
Liabilities and shareholders’ equity                
Current liabilities                
Accounts payable and accrued liabilities (Note 8)   $ 2,496,864     $ 17,869,849  
Loans payable (Note 9)     6,231,548       4,070,004  
      8,728,412       21,939,853  
Non-current liabilities                
Loans payable (Note 9)     19,807,075       28,296,238  
      28,535,487       50,236,091  
Shareholders’ equity                
Share capital (Note 10)     170,622,599       162,733,360  
Shares to be issued (Note 10)     -       1,167,386  
Warrants (Note 10)     1,367,901       1,367,901  
Contributed surplus (Note 10)     5,300,480       4,061,740  
Accumulated deficit     (134,589,223 )     (136,671,025 )
      42,701,757       32,659,362  
Total liabilities and shareholders’ equity   $ 71,237,244     $ 82,895,453  

 

Nature of operations (Note 1) 

Subsequent events (Notes 9 and 15)

 

Approved on behalf of the Board:    
     
“Andrew Kiguel”   “Bill Tai”
Director & Chief Executive Officer   Director

4

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

for the years ended December 31,

 

    2019     2018  
Revenue                
Digital assets mined (Note 6)   $ 81,990,119     $ 49,439,100  
Cost of revenue                
Site operating costs     (45,448,549 )     (24,873,528 )
Depreciation (Note 7)     (33,053,597 )     (47,018,781 )
Gross profit     3,487,973       (22,453,209 )
Gain on use of digital assets (Note 6)     4,143,311       (4,039,713 )
Revaluation of digital assets (Note 6)     4,273,686       (13,822,974 )
      8,416,997       (17,862,687 )
Expenses                
Share based payments (Note 10)     (2,905,408 )     (3,517,013 )
Professional fees     (818,487 )     (2,371,428 )
General and office     (845,513 )     (913,524 )
Salary and benefits     (1,356,836 )     (1,030,449 )
Investor and public relations     (62,907 )     (795,150 )
Regulatory     (131,196 )     (163,750 )
Listing and qualifying transaction (Note 4)     -       (1,151,401 )
      (6,120,347 )     (9,942,715 )
Operating income (loss)     5,784,623       (50,258,611 )
Foreign exchange gain (loss)     1,198,011       (678,495 )
Write-down (Note 7)     -       (85,404,592 )
Finance expense (Note 9)     (4,826,061 )     (904,511 )
Finance income     41,244       32,408  
Other gain (loss)     (67,247 )     448,264  
Net income (loss) and comprehensive income (loss)     2,130,570       (136,765,537 )
Basic net income (loss) per share   $ 0.02     $ (2.43 )
Diluted net income (loss) per share   $ 0.02     $ (2.43 )
Weighted-average number of shares outstanding:                
Basic     89,397,573       56,188,943  
Diluted     90,611,007       -  

5

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Consolidated Statement of Cash Flows for the years ended December 31,

 

    2019     2018  
Cash provided by (used in):                
Operating activities:                
Net income (loss)   $ 2,130,570     $ (136,765,537 )
Change in non-cash operating items:                
Digital assets mined     (81,990,119 )     (49,439,100 )
Digital assets converted to fiat currency     68,181,784       11,168,400  
Depreciation     33,053,597       47,018,781  
Digital assets paid for services     7,514,399       5,161,512  
Loss (gain) on use of digital assets     (4,143,311 )     4,039,713  
Revaluation of digital assets     (4,273,686 )     13,822,974  
Shares issued for services     667,256       -  
Share based payments     2,905,408       3,517,013  
Net finance expense and other     4,657,544       174,172  
Foreign exchange     (1,198,011 )     (448,264 )
Write-down     -       85,404,592  
Accretion expense on lease obligations     78,109       -  
Listing and qualifying transaction     -       1,151,401  
      27,583,540       (15,194,343 )
Change in non-cash working capital:                
Sales tax and other receivables     -       50,000  
Accounts payable and accrued liabilities     (13,074,965 )     8,371,856  
Total change in non-cash operating working capital     (13,074,965 )     8,421,856  
                 
Net cash provided by (used in) operating activities     14,508,575       (6,772,487 )
Investing activities                
Additions to plant and equipment     (9,234,400 )     (84,363,382 )
Deposits and prepaid expenses     (497,734 )     (5,800,095 )
Net cash used in investing activities     (9,732,134 )     (90,163,477 )
Financing activities                
Repayment of loan payable     (25,253,436 )     -  
Finance draw from loan payable     19,956,000       20,618,613  
Repayment of lease obligations     (89,549 )     -  
Proceeds from issuance of common shares     -       54,840,426  
Cash received from exercise of warrants     -       1,785,000  
Net cash provided from (used in) financing activities     (5,386,984 )     77,244,039  
Decrease in cash     (610,543 )     (19,691,925 )
Cash, beginning of year     3,556,560       23,248,485  
Cash, end of year   $ 2,946,017     $ 3,556,560  

 

Significant non-cash transactions included: 

• Payment in bitcoin of loans payable interest and principal totaling $2,808,396 (2018 – $Nil);

• Recognition of the fair value of broker warrants of $Nil (2018 - $1,367,901);

• Purchase of plant and equipment with Hut 8’s common shares valued at $Nil (2018 - $58,463,070);

• Purchase of plant and equipment with bitcoin valued at $Nil (2018 - $4,130,051);

• Digital assets received through share subscriptions valued at $Nil (2018 - $11,569,735); and

• Settlement of Accounts Payable with Hut 8’s common shares valued at $4,609,617 (2018 - $Nil).

6

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Consolidated Statement of Changes in Shareholders’ Equity

 

    Share Capital                                
    Number of
shares 		    Dollar amount     Shares to be
issued 		    Warrants     Contributed
surplus 		    Accumulated deficit     Total  
Balance, December 31, 2017     55,200,000     $ 35,676,182     $ -     $ 736,848     $ -     $ 94,512     $ 36,507,542  
Shares issued for mining equipment     16,693,858       58,463,070       -       -       -       -       58,463,070  
Shares issued on private placement     14,000,000       65,052,260       -       1,367,901       -       -       66,420,161  
Shares issued for reverse takover     220,000       1,100,000       -       -       -       -       1,100,000  
Shares to be issued     -       -       1,167,386       -       -       -       1,167,386  
Buy back of shares     (1,600,000 )     (80,000 )     -       -       -       -       (80,000 )
Exercise of warrants     714,000       2,521,848       -       (736,848 )     -       -       1,785,000  
Share based payments     -       -       -       -       3,517,013       -       3,517,013  
Discount to Bitfury loan     -       -       -       -       544,727       -       544,727  
Net loss and comprehensive loss     -       -       -       -       -       (136,765,537 )     (136,765,537 )
Balance, December 31, 2018     85,227,858       162,733,360       1,167,386       1,367,901       4,061,740       (136,671,025 )     32,659,362  
Shares issued for mining equipment     838,511       1,167,386       (1,167,386 )     -       -       -       -  
Shares issued in settlement of accounts payable     3,717,433       4,609,617       -       -       -       -       4,609,617  
Shares issued for services     419,507       667,256       -       -       -       -       667,256  
Share based payments     234,700       1,444,980       -       -       1,460,428       -       2,905,408  
Share based payments withholding     -       -       -       -       (221,688 )     -       (221,688 )
Prior-year adjustment due to IFRS 16 transition     -       -       -       -       -       (48,768 )     (48,768 )
Net income and comprehensive income     -       -       -       -       -       2,130,570       2,130,570  
Balance, December 31, 2019     90,438,009     $ 170,622,599     $ -     $ 1,367,901     $ 5,300,480     $ (134,589,223 )   $ 42,701,757  

7

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018 

 

 

1. Nature of operations

 

(a) Reporting entity

 

Hut 8 Mining Corp. (the “Company” or “Hut 8” or “Pubco”) was incorporated under the laws of the Province of British Columbia on June 9, 2011. The registered office of the Company is located at Suite 1700 Park Place, 666 Burrard St, Vancouver BC, Canada, V6C 2X8 and the headquarter is located at 130 King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2. The Company’s common shares are listed under the symbol “HUT” on the Toronto Stock Exchange (“TSX”) and as “HUTMF” on the OTCQX Exchange. On March 2, 2018, the Company closed its qualifying transaction with Hut 8 Holdings Inc. (“Hut 8 Holdings”). The Company was a capital pool company prior to the transaction. The transaction was accounted for as a reverse acquisition. As at December 31, 2019, Bitfury Holding BV (“Bitfury”) owned 47.4% of the Company’s common shares and is a controlling shareholder and related party of Hut 8. The Company is in the business of utilizing specialized equipment to solve complex computational problems to validate transactions on the bitcoin blockchain. The Company receives bitcoin in return for successful service.

 

(b) Going concern

 

These consolidated financial statements have been prepared assuming the Company will continue as a going concern, notwithstanding that the Company has an accumulated deficit. As at December 31, 2019, the Company has positive working capital of $5,966,338 and shareholders’ equity of $42,701,757.

 

The Company’s ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon maintaining sustained profitability and maintaining the Company’s loans in good standing. There are various risks and uncertainties affecting the Company’s operations including, but not limited to, the viability of the economics of bitcoin mining, the liquidity of bitcoin, the Company’s ability to maintain its security of its digital assets and execute its business plan. As discussed in Note 9, the Genesis loan requires bitcoin collateral. If the bitcoin price reaches a price where Hut 8 does not have the bitcoin to sufficiently collateralize the loan, then after a cure period of 10 days, Genesis may be able to liquidate a significant portion of Hut 8’s bitcoin, demand immediate repayment of the loan, or terminate the loan agreement. The Company’s strategy to mitigate these risks and uncertainties is to execute a business plan aimed at continued security, operational efficiency, revenue growth, improving overall mining profit, managing operating expenses and working capital requirements, and securing additional financing, as needed, through one or more of loans and equity investments. Given the volatility in the financial markets, it may be difficult to raise financing when needed. Failure to implement the Company’s business plan could have a material adverse effect on the Company’s financial condition and/or financial performance, see also Note 15. Accordingly, there are material risks and uncertainties that cast significant doubt about the Company’s ability to continue as a going concern.

 

These consolidated financial statements do not include any adjustments or disclosures that would be required if assets are not realized and liabilities and commitments are not settled in the normal course of operations. If the Company is unable to continue as a going concern, then the carrying value of certain assets and liabilities would require revaluation to a liquidation basis, which could differ materially from the values presented in the consolidated financial statements

8

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

2. Statement of Compliance and Basis of Presentation

 

(a) Statement of compliance

 

These consolidated financial statements, including comparatives, have been prepared in accordance with International Financial Reporting Standards” (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Standards Interpretations Committee (“IFRIC”).

 

The Company is in the business of digital currencies, many aspects of which are not specifically addressed by current IFRS guidance. The Company is required to make judgments as to the application of IFRS and the selection of its accounting policies. The Company has disclosed its presentation, recognition and derecognition, and measurement of digital currencies, and the recognition of revenue as well as significant assumptions and judgments, however, if specific guidance is enacted by the IASB in the future, the impact may result in changes to the Company’s earnings and financial position as presented.

 

These consolidated financial statements were approved and authorized for issuance by the Board of Directors for April 2, 2020.

 

(b) Basis of presentation

 

The consolidated financial statements have been prepared on a historical cost basis except for some financial instruments that have been measured at fair value.

 

(c) Functional and presentation currency

 

Items included in the consolidated financial statements of the Company and its wholly owned subsidiaries are measured using the currency of the primary economic environment in which the entity operates. These consolidated financial statements have been prepared in Canadian dollars, which is the Company’s functional and presentation currency.

 

(d) Consolidation

 

These consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary. All significant intercompany transactions, balances, income and expenses are eliminated on consolidation.

 

The Company has three wholly owned subsidiaries: Hut 8 Holdings Inc., Hut 8 Asset Management Inc., and Hut 8 Finance Ltd.

 

The Company incorporated Hut 8 Asset Management Inc. on November 1, 2018 for the Company’s digital currency trading operations in Bridgetown, Barbados. No transactions have occurred to date. The Company incorporated Hut 8 Finance Ltd. on January 30, 2019 in Ontario, Canada, which is also related to the digital currency trading operations.

9

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

  

2. Statement of Compliance and Basis of Presentation (continued)

 

(e) Adoption of IFRS 16, Leases and resulting changes to lease accounting policy

 

On January 1, 2019, the Company adopted IFRS 16 using the modified retrospective approach. Therefore, the comparative information has not been restated and continues to be reported under IAS 17, Leases (“IAS 17”) and IFRIC 4, Determining Whether an Arrangement Contains a Lease (“IFRIC 4”).

 

Lease accounting policy applicable from January 1, 2019

 

Definition of a lease

 

At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys this right the Company assesses whether:

 

• The contract involves the use of an identified asset – this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset; and

• The Company has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use; and

• The Company has the right to direct the use of the asset. The Company has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used.

 

At inception or reassessment of a contract that contains lease and non-lease components, the Company allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.

 

Accounting as a lessee under IFRS 16

 

The Company recognizes right-of-use assets and lease liabilities on the consolidated statements of financial position at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

 

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of its useful life or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses 12% as the discount rate.

10

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

2. Statement of compliance and basis of presentation (continued)

 

(e) Adoption of IFRS 16, Leases and resulting changes to lease accounting policy (continued)

 

Lease payments included in the measurement of the lease liability comprise (a) fixed payments, including in-substance fixed payments; (b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; (c) amounts expected to be payable under a residual value guarantee; and (d) the exercise price under a purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.

 

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of use asset, or is recorded in the consolidated statements of operations if the carrying amount of the right-of-use asset has been reduced to $Nil.

 

Transition to IFRS 16

 

Practical expedients

 

On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which transactions represent leases. The Company applied IFRS 16 only to contracts that were previously identified as leases under IAS 17 and IFRIC 4. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into, or changed, on or after January 1, 2019.

 

The Company used the following additional practical expedients:

 

• Applied the exemption not to recognize right-of-use assets and lease liabilities for short-term leases with terms less than 12 months and leases of low-value assets. The Company recognizes the lease payments associated with these leases as an expense on a straight-line or other systematic basis over the lease term;

• Excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application; and

• Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.

11

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

  

2. Statement of compliance and basis of presentation (continued)

 

(e)   Adoption of IFRS 16, Leases and resulting changes to lease accounting policy (continued)

 

Impacts on consolidated financial statements

 

The following table summarizes the adjustments to opening balances resulting from the adoption of IFRS 16, with the effects on transition being recognized directly to retained earnings. 

 

    As previously     IFRS 16 transition     As reported  
As at January 1, 2019   reported     adjustment     under IFRS 16  
Non-current deposits   $ 5,723,794     $ (216,319 )   $ 5,507,475  
Plant and equipment     58,127,009       1,150,997       59,278,006  
Non-current loans payable     (28,296,238 )     (983,445 )     (29,279,683 )
Accumulated deficit     (136,671,025 )     48,768       (136,622,257 )

 

3.       Significant accounting policies, judgements, and estimates

 

The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts; however, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fiscal year are described below. The Company based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Company. 

 

The following are the estimates and assumptions that have been made in applying the Company’s accounting policies that have the most significant effect on the amounts in the consolidated financial statements:

 

(i)       Functional currency

 

The functional currency of the Company has been assessed by management based on consideration of the currency and economic factors that mainly influence the Company’s digital currencies, production and operating costs, financing and related transactions. Specifically, the Company considers the currencies in which digital currencies are most commonly denominated and the currencies in which expenses are settled, by each entity, as well as the currency in which each entity receives or raises financing. Changes to these factors may have an impact on the judgment applied in the determination of the Company’s functional currency.

12

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

3. Significant accounting policies, judgements, and estimates (continued)

 

(ii) Taxes

 

Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. The Company has not recognized the value of any deferred tax assets in its statements of financial position.

 

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on its technical merits. The Company measures and records the tax benefits from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company’s estimated liabilities related to these matters are adjusted in the period in which the uncertain tax position is effectively settled, the statute of limitations for examination expires or when additional information becomes available. The Company’s liability for unrecognized tax benefits requires the use of assumptions and significant judgment to estimate the exposures associated with our various filing positions. Although the Company believes that the judgments and estimates made are reasonable, actual results could differ and resulting adjustments could materially affect our effective income tax rate and income tax provision.

 

The Company has earned bitcoin from the commercial activity of bitcoin mining. The Company has followed the published Canada Revenue Agency (“CRA”) view that bitcoin is a commodity and inventory of the business, the value of which is included in the calculation of taxable income from the business. Bitcoin is valued in accordance with Section 10 of the Income Tax Act. Revenue from bitcoin mining is included in taxable income when the bitcoin earned is sold or exchanged for cash or another asset. There is uncertainty regarding the taxation of cryptocurrency and the CRA may assess the Company differently from the position adopted. This could result in additional current taxes payable with equal offset to deferred tax expense.

 

(iii)            Impairment of non-financial assets

 

Impairment exists when the carrying value of an asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. These calculations are based on available data, other observable inputs and projections of cash flows, all of which are subject to estimates and assumptions. Recoverable amounts are also sensitive to assumptions about the future usefulness of in-process development and the related marketing rights. See Note 7 for the discussion regarding impairment of the Company’s non-financial assets.

 

(iv)            Foreign currency translation

 

Within each entity, transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing on dates of transactions. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate at that date. Foreign exchange differences arising on translation are recognized in the statement of operations. Non-monetary assets and liabilities that are measured at historical cost are translated using the exchange rate at the date of the transaction.

13

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

3. Significant accounting policies, judgements, and estimates (continued)

 

(v) Fair value measurement of stock options and broker warrants

 

The Company measures the cost of equity-settled transaction by reference to the fair value of the equity instruments at the date on which they are granted. Estimating fair value requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires the determination of the most appropriate inputs to the valuation model including the expected life of the broker warrants, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for stock options and broker warrants are disclosed in Note 10.

 

(vi)            Revenue recognition

 

The Company recognizes revenue from the provision of transaction verification services within the bitcoin blockchain, and as consideration for these services, the Company receives bitcoin. Revenue is measured based on the fair value of the bitcoin received. The fair value is determined using the closing bitcoin price per www.coinmarketcap.com (“Coinmarketcap”). The Company is relying on the data available at Coinmarketcap to be an accurate representation of the closing price for the digital assets.

 

There is currently no specific definitive guidance in IFRS or alternative accounting frameworks for the accounting for the production and mining of bitcoin and management has exercised significant judgment in determining appropriate accounting treatment for the recognition of revenue. In the event authoritative guidance is enacted by the IASB, the Company may be required to change its policies which could result in a change in the Company’s financial position and earnings.

 

(vii)           Digital assets

 

Digital assets consist of Bitcoin. Digital assets meet the definition of intangible assets in IAS 38 Intangible Assets as they are identifiable non-monetary assets without physical substance. They are initially recorded at cost and the revaluation method is used to measure the digital assets subsequently. Where digital assets are recognized as revenue, the fair value of the bitcoin received is considered to be the cost of the digital assets. Under the revaluation method, increases in fair value are recorded in other comprehensive income, while decreases are recorded in profit or loss. The Company revalues its digital asset at the end of each of its three interim financial reporting periods and at its annual financial reporting period end date. There is no recycling of gains from other comprehensive income to profit or loss. However, to the extent that an increase in fair value reverses a previous decrease in fair value that has been recorded in profit or loss, that increase is recorded in profit or loss. Decreases in fair value that reverse gains previously recorded in other comprehensive income are recorded in other comprehensive income.

 

Digital assets are measured at fair value using the quoted price on www.coinmarketcap.com (“CMC”). Management considers this fair value to be a Level 2 input under IFRS 13 Fair Value Measurement fair value hierarchy as the price on this source represents an average of quoted prices on multiple digital currency exchanges

 

The Company’s determination to classify its holding of bitcoin as current assets is based on management’s assessment that its bitcoin held can be considered to be a commodity, the availability of liquid markets to which the Company may sell a portion of its holdings and that the Company is actively selling its digital currencies in the near future to generate a profit from price fluctuations.

14

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

3. Significant accounting policies, judgements, and estimates (continued)

 

(viii)          Non-monetary transactions

 

Where the Company is settling a liability for the purchase of goods and services where the price was established in a fiat currency, the difference between the liability settled and the fair value of the digital assets transferred is recognized as a gain or loss on settlement. Otherwise, the transaction is measured based on the fair value of the digital assets exchanged. Any difference between the fair value of the digital assets exchanged and the carrying amount of the digital assets is recognized in profit and loss.

 

(ix)            Earnings per share

 

The calculation of earnings per common share is based on the reported net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated on the treasury stock basis. Where potentially dilutive equity instruments are anti-dilutive, basic and diluted earnings per share are the same.

 

(x)             Share issue costs

 

Costs incurred for the issue of common shares are deducted from share capital.

 

(xi)            Share based transactions

 

Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service.

 

The Company issued broker warrants as part of brokered private placement offering for common shares. Broker warrants are measured at fair value at the date of the offering and accounted for as a separate component of shareholders’ equity. When the broker warrants are exercised, the proceeds received together with the related amount allocated as a separate component of shareholders’ equity are allocated to capital stock. If the broker warrants expire unexercised, the related amount separately allocated to shareholders’ equity is allocated to contributed surplus.

15

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

3. Significant accounting policies, judgements, and estimates (continued)

 

(xii) Useful life of mining equipment

 

Management is depreciating mining equipment using a straight-line basis, with a useful life of:

 

Seacan containers and supporting infrastructure 4 years
Mining servers 2 years

 

The mining equipment is used to generate bitcoin. The rate at which the Company generates digital assets and, therefore, consumes the economic benefits of its mining equipment are influenced by several factors including, but not limited to, the following:

 

• The complexity of the mining process which is driven by the algorithms contained within the digital assets open source software; and

 

• Technological obsolescence reflecting rapid development in the mining machines such that more recently developed hardware is more economically efficient to run in terms of digital assets mined as a function of operating costs, primarily power costs (ie., the speed of mining machines evolution in the industry) is such that later mining machine models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase.

 

Based on the Company and the industry’s limited history to date, management is limited by the market data available. Furthermore, the data available also includes data derived from the use of economic modelling to forecast future digital assets and the assumptions included in such forecasts, including digital asset’s price and network difficulty, and derived from management’s assumptions which are inherently judgmental. Based on current data available, management has determined that the straight-line method of amortization best reflects the current expected useful life of mining equipment. Management will review their estimates at each reporting date and will revise such estimates as and when data become available. Management will review the appropriateness of its assumption related to residual value at each reporting date.

16

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

4. Reverse acquisition

 

 On March 2, 2018, the Company completed its qualifying transaction (the “Qualifying Transaction”) with Hut 8 Holdings. Pursuant to the Qualifying Transaction the following occurred:

 

(i) The Company completed a consolidation of its common shares immediately prior to the completion of the Debt Conversion and the Amalgamation (as defined below), of its then issued and outstanding 9,500,000 common shares on the basis of one new Pubco share for every 52.7777 existing Pubco shares;

 

(ii) The Company effected a conversion of $200,000 of debt owing by Pubco into 40,000 Pubco common shares, based on a conversion price of $5.00 per Pubco share (the “Debt Conversion”);

 

(iii) The Company acquired all of the issued and outstanding common shares of a private corporation incorporated under the Business Corporations Act (British Columbia) (the “BCBCA”), Hut 8 Mining Corp. (the “Hut 8 PrivateCo”), from the shareholders of Hut 8 PrivateCo in exchange for an aggregate of 82,160,000 Pubco shares;

 

(iv) Hut 8 PrivateCo and 1149835 B.C. Ltd., a wholly-owned subsidiary of the Company amalgamated under the BCBCA (the “Amalgamation”) and continued as one corporation, Hut 8 Holdings (“Amalco”), which is a wholly-owned subsidiary of the Company. The Company changed its name to “Hut 8 Mining Corp.”.

 

The Qualifying Transaction has been accounted for as a reverse acquisition that does not constitute a business combination. For accounting purposes, the legal subsidiary, Hut 8 Holdings, has been treated as the acquirer and Hut 8 Mining Corp., the legal parent, has been treated as the acquiree. For accounting purposes, these consolidated financial statements reflect a continuation of the financial position, operating results and cash flows of the Company’s legal subsidiary, Hut 8 Holdings.

 

The fair value of the consideration is as follows:      
220,000 common shares at a price of $5 per share   $ 1,100,000  
Net assets acquired:        
Accounts receivable     4,167  
Accounts payable and accrued liabilities     (55,568 )
Listing and qualifying transaction     1,151,401  
Value attributed to Hut 8 shares issued   $ 1,100,000  

17

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

5. Deposits and prepaid expenses

 

    December 31, 2019     December 31, 2018  
Current                
Prepaid electricity(i)   $ 158,391     $ -  
Prepaid insurance     82,225       71,901  
Miscelaneous deposits     80,573       8,000  
Total current deposits and prepaids expenses   $ 321,189     $ 79,901  
                 
Non-current                
Deposits related to electricity supply under Electricity Supply Agreement(ii)   $ 5,652,240     $ 5,395,794  
Land lease deposit     123,987       328,000  
Total non-current deposits and prepaids expenses   $ 5,776,227     $ 5,723,794  

 

(i) Electricity deposits for facility in Drumheller, Alberta.

 

(ii) Security deposit for future electricity usage.

18

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

6. Digital assets

 

Digital assets solely consist of bitcoin. Below is the bitcoin mined and transacted.

 

          Bitcoin  
Balance, January 1, 2018   $ 1,078,760       62  
Bitcoin mined     49,439,100       5,592  
Bitcoin recovered(i)     448,264       32  
Bitcoin traded for cash     (11,168,400 )     (1,719 )
Bitcoin received through share subscriptions     11,569,735       1,077  
Bitcoin used to purchase plant and equipment     (12,935,071 )     (1,342 )
Bitcoin paid for services(ii)     (5,161,512 )     (667 )
Gain on use of digital assets(v)     (4,039,713 )     -  
Revaluation of digital assets(iii)     (13,822,974 )     -  
Balance, December 31, 2018   $ 15,408,189       3,035  
Bitcoin mined     81,990,119       8,618  
Bitcoin traded for cash     (68,181,784 )     (6,883 )
Bitcoin used for debt and interest payments(iv)     (2,808,396 )     (449 )
Bitcoin paid for services(ii)     (7,514,399 )     (1,397 )
Gain on use of digital assets(v)     4,143,311       -  
Revaluation of digital assets(iii)     4,273,686       -  
Balance, December 31, 2019   $ 27,310,725       2,923  
Current portion                
Digital assets, current(vi)   $ 10,484,106       1,122  
Digital assets, receivable(vii)   $ 943,437       101  
Non-current portion                
Bitcoin used as collateral(viii)   $ 15,883,182       1,700  

 

(i) Hut 8 entered into an agreement with Bitfury whereas Hut 8 experienced electricity outages for its BlockBoxes and a settlement was reached to compensate Hut 8 for the lost revenue.

 

(ii) Primarily includes services paid to Bitfury for the maintenance and operation of Hut 8’s facilities. During the year ended December 31, 2018, the Company undertook a review of transfers made to counterparties. It was determined that a transfer of bitcoins was not recoverable. As such, the transfer was deemed to exceed its recoverable amount and an asset impairment of $699,120 was recognized as a result of this excess amount.

 

(iii) Digital assets held are revalued each reporting period based on the fair market value of the price of bitcoin on the reporting date. As at December 31, 2019, the price of bitcoin was $9,343 (US$7,194) resulting in a revaluation gain of $4,273,686. [2018 – loss of $13,822,974 at bitcoin price of $5,078 (US$3,743)].

 

(iv) Hut 8 has the option to repay certain loans payable and related interest payments in bitcoin. The Company considers it more efficient at times to settle these liabilities in bitcoin and has paid Galaxy Digital (“Galaxy”) 178 bitcoin to settle $1,139,983 (US$853,062) of interest expense. During the year ended December 31, 2019, Hut 8 also repaid 227 bitcoin to settle $1,332,763 (US$1,000,000) of principal related to the Bitfury loan (Note 9).

19

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

6. Digital assets (continued)

 

(v) During the year ended December 31, 2019, the Company exchanged its bitcoin for cash, repayments of debts, interest, and other services totaling $78,504,579 (2018 - $16,329,912), which resulted in a realized gain on use of digital assets of $4,143,311 (2018 – loss of $4,039,713).

 

(vi) Bitcoin that is held by Hut 8, is available for use, and not subject to any restrictions or covenants as at December 31, 2019.

 

(vii) Bitcoin receivable refers to the amount of bitcoin mined that has not been transferred from the mining pool to the Company. During the year ended 2019, the Company mined 101 bitcoins that were received shortly after the year end.

 

(viii) These digital assets are non-current because bitcoin is held by Genesis as collateral for the Genesis loan (Note 9).

20

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

  

7. Plant and equipment

 

    Infrastructure     Mining servers     Right-of-use assets(iii)     Total  
Cost                        
As at January 1, 2018   $ 5,033,000     $ 16,317,000     $ -     $ 21,350,000  
Additions     56,427,119       111,346,466       -       167,773,585  
Impairment(i)     (31,453,165 )     (52,370,473 )     -       (83,823,638 )
As at December 31, 2018     30,006,954       75,292,993       -       105,299,947  
Additions     2,123,912       7,110,488       575,274       9,809,674  
As at December 31, 2019(ii)     32,130,866       82,403,481       575,274       115,109,621  
                                 
Accumulated Depreciation                                
As at January 1, 2018   $ 31,222     $ 122,936     $ -     $ 154,158  
Depreciation     8,712,587       38,306,194       -       47,018,781  
As at December 31, 2018     8,743,809       38,429,130       -       47,172,939  
Depreciation     6,314,949       26,664,389       74,259       33,053,597  
As at December 31, 2019(ii)     15,058,758       65,093,519       74,259       80,226,536  
                                 
Net Book Value December 31, 2018     21,263,145       36,863,863       -       58,127,008  
Net Book Value December 31, 2019     17,072,108       17,309,962       501,015       34,883,085  

   

 Plant and equipment is made up of specialized equipment to mine bitcoin.

 

(i) Due to the decline in the market value of servers, weakening prices of bitcoin and volatility in network difficulty levels during the year, management assessed that impairment indicators exist to bitcoin mining equipment as at December 31, 2018, and an impairment analysis was completed. Management has determined the recoverable amount as the Fair Value for the Drumheller facility and Value in Use (“VIU”) for the Medicine Hat facility. The significant assumptions in determining VIU included the following:

 

• Bitcoin price - $5,224 (US$3,829)
• Network difficulty - 5,619 billion
• Discount rate - 21%

 

Although the bitcoin price and network difficulty fluctuate, they both adjust to ensure that the lowest cost and efficient miners are able to make a margin from their operations. Instead of assuming the change in the bitcoin price and network difficulty which are volatile, it was assumed that they would remain consistent due to the fact that they would continue to be a profit margin at the levels as at December 31, 2018 stated above. There were additional impairment charges related to sales tax paid of $881,835 for purchases of BlockBoxes, that were considered not likely to be collected, and a $699,120 impairment per Note 6.

21

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

7. Plant and equipment (continued)

 

(ii) The right-of-use assets (“ROU”) comprise of a 10-year land lease with the City of Medicine Hat, dated June 1, 2018, and a three-year sublease with a landlord in Drumheller with an optional 3-year extension dated May 8, 2017. See Note 9 for the related lease liability.

 

• The City of Medicine Hat lease was originally for payment of $10,500 per month. A ROU asset and a related lease liability had been recognized as such. On July 1, 2019, the City of Medicine Hat reduced the monthly obligation to $1,395 per month, which results in an immediate de-recognition of the original ROU asset and recognition of a new ROU asset. A gain of $83,514 was recognized as a result of this.

 

  •  
• The Drumheller sublease is $1,500 monthly in lease payment. A ROU asset and a related lease liability had been recognized as such.

 

8. Accounts payable and accrued liabilities

 

    December 31, 2019     December 31, 2018  
Accounts payable   $ 563,868     $ 16,869,179  
Accrued interest (Note 9)     1,275,432       -  
Other accrued liabilities     657,564       1,000,670  
Total   $ 2,496,864     $ 17,869,849  

  

9. Loan payable

  

    December 31, 2019     December 31, 2018  
Genesis   $ 19,482,000     $ -  
Bitfury     6,231,548       11,665,285  
Lease liability     325,075       -  
Galaxy     -       20,700,957  
      26,038,623       32,366,242  
Current portion   $ 6,227,207     $ 4,070,004  
Non-current portion   $ 19,811,416     $ 28,296,238  

 

  (i) Genesis loan

 

As at December 31, 2019, the Company has a loan payable of $19,482,000 (US$15,000,000) to Genesis Global Capital, LLC (“Genesis”). The loan bears interest at 9.85% per annum, payable monthly, and matures on May 21, 2021. As an additional covenant, 85% of the loan is collateralized with bitcoin that has been transferred to Genesis. If the collateralized value of the bitcoin drops below 75% of the loan, Genesis may require additional bitcoin to bring the collateral level back to 85%. Conversely, if the collateralized bitcoin value goes over 95% of the loan, the Company may request the return of the surplus bitcoin. Interest expense for the year ended December 31, 2019 was $224,240 (US$170,014). A foreign exchange gain of $474,000 was recognized during the year ended December 31, 2019.

22

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

9. Loan payable (continued)

 

(ii) Bitfury loan

 

As at December 31, 2019, the Company has a loan payable of $6,231,548 (US$4,797,927) to Bitfury, a related party. The loan payable was unsecured and bore interest at 12% per annum. The loan is carried at amortized cost based on an 18% market interest rate causing the underlying value to be lower than the original principal value with a difference of $544,727 (US$401,518) at inception which was recognized as a related party contribution in contributed surplus. The loan is split into a $3,896,400 (US$3,000,000) portion which was to be repaid in $324,700 (US$250,000) installments every month for the next 12 months. For the year ended December 31, 2019, twelve months of installments of the principal were repaid totaling $3,980,103 (US$3,000,000). On November 27, 2019, the Company made an additional $1,327,800 (US$1,000,000) debt repayment to Bitfury. The remaining principal of $2,597,600 (US$2,000,000) was due when the Galaxy loan was fully repaid. The Bitfury loan was repaid in full on February 20, 2020. For the year ended December 31, 2019, interest accretion was $264,630 (US$ 199,446) (2018 – $Nil) and interest accrued was $1,275,432 (US$960,800) (2018 – $Nil). A foreign exchange gain of $390,464 (2018 – $Nil) was recognized for the year ended December 31, 2019.

 

(iii) Lease liability

 

A lease liability for each ROUs was recognized in fiscal 2018 and re-measured at amortized cost using the effective interest method. On July 1, 2019, the terms of the original City of Medicine Hat lease changed, resulting in the de-recognition of the original lease liability and recognition of a lower amount.

 

(iv) Galaxy loan

 

As at December 31, 2019, the Company had fully repaid the loan with Galaxy. During the year ended December 31, 2019, the Company paid $21,278,296 (US$16,000,000) [2018 – $Nil] of debt principal and an additional $319,174 (US$240,000) (2018 – $Nil) as an early repayment fee to retire the loan ahead of its maturity on March 10, 2021. The interest expense for the period up until November 21, 2019 was $3,029,130 (US$2,273,815) [September 10, 2018 to December 31, 2018 - $904,108 (US$686,620)] and interest accretion was $345,646 (US$260,190) [September 10, 2018 to December 31, 2018 - $82,694 (US$64,107)], both of which have been recognized as finance expense A foreign exchange gain of $408,407 (2018 – loss of $989,572) and a loss of $640,101 on debt retirement were recognized for the year ended December 31, 2019 (2018 - $Nil).

23

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

10. Equity

 

(a) Common shares

 

The Company has authorized share capital of an unlimited number of common shares.

 

    Number of shares     Amount  
Balance, December 31, 2017     55,200,000     $ 35,676,182  
Shares issued for mining equipment(i)     16,693,858       58,463,070  
Shares issued on private placement(ii)     14,000,000       70,000,000  
Share issue costs – cash(ii)     -       (3,579,839 )
Shares issue costs - broker warrants(ii)     -       (1,367,901 )
Buyback of shares(iii)     (1,600,000 )     (80,000 )
Shares issued for reverse acquisition (Note 4)     220,000       1,100,000  
Shares issued on exercise of warrants(iv)     714,000       2,521,848  
Balance, December 31, 2018     85,227,858     $ 162,733,360  
Shares issued for mining equipment(i)     838,511       1,167,386  
Shares issued in settlement of accounts payable(v)     3,717,433       4,609,617  
Shares issued for services(vi)     419,507       667,256  
Shares issued for RSUs(vii)     234,700       1,444,980  
Balance, December 31, 2019     90,438,009     $ 170,622,599  

 

(i) During the year ended December 31, 2018, the Company issued $58,463,070 in common shares as payment for mining equipment. As part of the Company’s purchase of 12 upgraded BlockBoxes from Bitfury in Drumheller, US$2 million of the purchase price was issued in equity at a share price of $3.15 for an issuance of 838,511 common shares. The purchase was closed on December 31, 2018 and the process to issue the common shares had begun; however, the share issuance was not finalized until January 15, 2019. The share issuance was measured at a fair value of $1,167,386 and recognized during the year ended December 31, 2019

24

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

10. Equity (continued)

 

(a) Common shares (continued)

 

(ii) On February 7, 2018, the Company completed a brokered financing for gross proceeds of $45,000,000 and issued 9,000,000 common shares, and a non-brokered financing for gross proceeds of $25,000,000 through the issuance of 5,000,000 common shares at a price of $5.00 per share (the “Financing”). In connection with the Financing, the Company paid a commission to the underwriters of 6% of the proceeds and a 2% advisory fee.

 

Total cash issue costs (including the commission and advisory fee) amounted to $3,579,839. Related to this Financing, $11,569,735 of bitcoin was received as consideration for common share subscriptions, with the balance paid in cash.

 

In connection with the Financing, the agent received 660,000 warrants with an exercise price of $5.00 per common share expiring on February 7, 2020. The warrants have been valued at $1,367,901, using the Black-Scholes option pricing model with the following assumptions:

 

Risk-free interest rate          1.75% 

Dividend Yield                      Nil 

Volatility factor                     75% 

Expected life                          2 years

 

(iii) On March 1, 2018, the Company re-purchased 1,600,000 previously issued shares at a price of $0.05 from founders of the Company.

 

(iv) On June 1, 2018, and September 4, 2018, the Company issued 428,400 and 285,600 common shares, respectively, upon the exercise of 714,000 warrants for cash proceeds of $1,785,000. The warrants were valued at $736,848.

 

(v) On March 27, 2019, the Company issued 3,717,433 common shares in settlement of outstanding accounts payable to Bitfury of $5,576,150, based on a conversion share price of $1.50. The share price on the date of settlement of February 26, 2019 was $1.24 which created a gain of $966,533.

 

(vi) Shares are issued for services at times to align key service providers with the overall success of Hut 8. These shares were primarily issued as payment of invoices for electricity management services provided for the Company’s facilities.

 

(vii) The CEO of the Company had a third of his outstanding RSUs vested on April 2, 2019, which were issued net of employment withholdings.

25

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

10. Equity (continued)

 

  (b) Warrants

 

The warrant activity is as follows:

 

        Number of        
    Grant date   warrants     Value  
Balance, January 1, 2018         714,000     $ 736,848  
Broker warrants   2/7/2018     660,000       1,367,901  
Warrants exercised         (714,000 )     (736,848 )
Galaxy warrants   9/10/2018     2,222,222       -  
Balance, December 31, 2019 and 2018         2,882,222     $ 1,367,901  

   

The warrants issued and outstanding as at December 31, 2019 are as follows:

 

            Weighted average      
            remaining contractual      
Strike price     Number     life (months)     Expiry date
$ 4.50       2,222,222       45     9/10/2023
  5.00       660,000       1     2/7/2020
$ 4.61       2,882,222       35      

 

(c)       Incentive plan

 

On March 5, 2018, the Company adopted a Long-Term Incentive Plan (“LTIP”) under which it is authorized to grant stock options, restricted share units and deferred share units (“Awards”) to officers, directors, employees, and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of Awards that may be granted under the plan is 10% of the issued and outstanding common shares of the Company.

 

Stock options

 

The stock option activity is as follows:

 

            Weighted average  
      Number of options     exercise price  
Balance, January 1, 2018       -     $ -  
Granted       965,000       4.63  
Options outstanding, December 31, 2018       965,000     $ 4.63  
Granted       110,000     $ 1.20  
Forfeiture       (165,000 )        
Options outstanding, December 31, 2019       910,000     $ 4.34  
Options exercisable, December 31, 2019       403,335     $ 4.85  

26

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

10. Equity (continued)

 

(c) Incentive plan (continued)

 

As at December 31, 2019, the Company had the following stock options outstanding:

 

      Number of     Number of       Weighted   Weighted average  
Exercise price     options     options     average     remaining life  
      outstanding     exercisable     exercise price     (months)  
$ 1.14       100,000       -     $ 1.14       36  
  1.80       10,000       -       1.80       34  
  3.00       90,000       30,000       3.00       45  
  5.00       710,000       373,335       5.00       39  
$ 4.34       910,000       403,335     $ 4.85       39  

 

During the year ended December 31, 2019, the Company recorded $856,844 (2018 - $1,225,346), as share based payments related to stock options. The compensation expense was based on the fair value of each stock option on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

    Year ended     Year ended  
    December 31, 2019     December 31, 2018  
Expected life (years)     5.00       4.96  
Expected volatility     146.81 %     109.36 %
Dividend rate     0.00 %     0.00 %
Risk-free interest rate     1.66 %     2.00 %
Weighted average fair value per option granted   $ 1.04     $ 3.08  

 

Restricted Share Units (“RSUs”)

 

The Company has a restricted share unit plan that provides for the granting of restricted share units to directors, officers, employees and consultants of up to 3,000,000 shares of the Company. Upon vesting, the Company will issue shares from treasury to the employees for no additional consideration.

 

As at December 31, 2019, rights to receive 1,213,434 shares have been granted of which 591,717 vests in 2020, 563,383 vests in 2021, and 58,334 vests in 2022. During the year ended December 31, 2019, the Company issued 234,700 common shares for the rights that vested, which were net of standard withholdings.

 

During the year ended December 31, 2019, the Company recognized a total of $2,048,564 (2018 – $2,291,667) as share-based payments related to RSUs.

27

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

11. Related party agreements and transactions

 

Related party transactions

 

Key management includes members of the Board of Directors and its corporate officers. The aggregate value of transactions relating to key management personnel and entities over which they have control or significant influence were as follows:

 

    Year ended     Year ended  
    December 31, 2019     December 31, 2018  
Salary, fees, and other short-term benefits   $ 1,197,470     $ 1,110,440  
Share based payments     2,486,260       3,321,441  
    $ 3,683,730     $ 4,431,881  

 

During the year ended December 31, 2018, $24,000 was charged by CFO Advantage Inc., a Company controlled by the former Chief Financial Officer of the Company, for consulting fees.

 

During the year ended December 31, 2018, $75,000 was charged by a director of the Company for consulting fees in consideration of this director’s involvement with various pre-listing and corporate governance-related matters and was reimbursed for $13,627 of out of pocket expenses.

 

During the year ended December 31, 2018, the Company was charged $146,044 by a firm controlled by a former officer and a former director of the Company. These expenses were primarily for travel costs related to fundraising, meetings with strategic partners, and organizing the Company.

 

See Note 10 for related party transactions with respect to share issuances.

 

During the year ended December 31, 2019, the Company acquired mining equipment from Bitfury, a controlling shareholder of the Company, with a total cost of $9,234,400 (2018 - $168,712,484) paid with common shares, bitcoin, and cash. The Company paid $461,720 (2018 - $ 881,835) related to GST for the purchase, which has been expensed since the amount is unlikely to be recoverable. During the year ended December 31, 2019, the Company was charged $19,913,152 (2018 - $13,368,890) in site operating costs. As at December 31, 2019, $394,732 (December 31, 2018 - $15,163,527) was owed to Bitfury, which has been included in accounts payable and accrued liabilities. Of the outstanding accounts payable at December 31, 2018, $5,576,150 was converted to common shares of the Company on March 27, 2019.

 

12.       Capital management

 

The Company manages its capital to maintain its ability to continue as a going concern and to provide returns to shareholders and benefits to other stakeholders. The capital structure of the Company consists of equity comprised of issued share capital and reserves. The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company, upon approval from its Board of Directors, will balance its overall capital structure through new share issuances or by undertaking other activities as deemed appropriate under the specific circumstances. The Company is not subject to externally imposed capital requirements and the Company’s overall strategy with respect to capital risk management remains unchanged from the year ended December 31, 2018.

28

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

13.       Financial Instruments

 

 The Company’s risk exposures and the impact on the Company’s financial instruments are summarized below.

 

(a) Credit Risk:

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, digital assets, and prepaid expenses. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions.

 

Hut 8 does not self-custody its bitcoin. Instead, Hut 8 uses the services of BitGo Trust Company Inc. (“BitGo”). BitGo has US$100 million of insurance backing its digital asset custody. The custodian agreement between the Company and BitGo commenced on November 1, 2019.

 

(b) Interest Rate Risk:

 

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to interest rate risk is limited and only relates to its ability to earn interest income on cash balances nominated in foreign currency at variable rates. Changes in short term interest rates will not have a significant effect on the fair value of the Company’s cash account.

 

(c) Liquidity Risk:

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company currently settles its financial obligations out of cash and cash equivalents and digital assets. The Company has a planning and budgeting process to help determine the funds required to support the Company’s normal spending requirements on an ongoing basis and its expansionary plans.

 

As at December 31, 2019, the contractual maturities of financial liabilities, including estimated interest payments are as follows:

 

    Carrying     Contractual                          
    amount     cash flows       Within 1 year     1 to 2 years     2 to 5 years     5+ years  
Accounts payable and accrued liabilities   $ 1,221,432     $ 1,221,432     $ 1,221,432     $ -     $ -     $ -  
Loans payable and interest     25,713,548       30,561,714       10,345,679       20,216,035       -       -  
Lease commitments     325,075       728,482       35,577       35,577       78,231       579,097  
    $ 27,260,055     $ 32,511,628     $ 11,602,688     $ 20,251,612     $ 78,231     $ 579,097  

 

Recent economic events have caused extreme volatility in the bitcoin price, which may have an adverse effect on the value of the bitcoin collateral held with Genesis that may cause a margin call that the Company is unable to meet (Note 9).

29

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

  

13. Financial Instruments (continued)

 

(d) Currency Risk:

 

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises from financial instruments (including cash and cash equivalents) that are denominated in a currency other than Canadian dollars, which represents the functional currency of the Company. The Company’s functional currency is the Canadian dollar and most purchases are transacted in Canadian dollars. The Company has also transacted in US Dollars to purchase mining equipment from Bitfury and with loans payable denominated in US Dollars. Management currently does not hedge its foreign exchange risk.

 

The table below indicates the foreign currencies to which the Company has significant exposure as at December 31, 2019 in Canadian dollar terms:

 

    2019  
Cash   $ 571,073  
Accounts payable     171,874  
Interest payable     1,275,432  
Loans payable     25,713,548  

 

The effect on earnings before tax of a 10% strengthening or weakening of the CAD exchange rate at the balance sheet date for financial instruments denominated in USD, with all other variables held constant, is $2,773,193.

 

(e) Fair value measurements:

 

(i) Financial hierarchy:

 

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The hierarchy is summarized as follows:

 

Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities; 

Level 2: Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly from observable market data; and 

Level 3: Inputs that are not based on observable market data.

 

The Company’s financial instruments have been classified as follows:

 

December 31, 2018   Level 1     Level 2     Level 3     Total  
Fair value through profit and loss                                
Cash   $ 3,556,560     $ -     $ -     $ 3,556,560  
Digital assets   $ -     $ 15,408,189     $ -     $ 15,408,189  
December 31, 2019     Level 1       Level 2       Level 3       Total  
Fair value through profit and loss                                
Cash   $ 2,946,017     $ -     $ -     $ 2,946,017  
Digital assets   $ -     $ 27,310,725     $ -     $ 27,310,725  

30

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

13. Financial Instruments (continued)

 

(f) Digital assets and risk management

 

Digital assets are measured using level two fair values, determined by taking the rate from Coinmarketcap.

 

Digital asset prices are affected by various forces including global supply and demand, interest rates, exchange rates, inflation or deflation and the global political and economic conditions. The profitability of the Company is directly related to the current and future market price of digital assets; in addition, the Company may not be able liquidate its inventory of digital assets at its desired price if required. A decline in the market prices for digital assets could negatively impact the Company’s future operations. The Company has not hedged the conversion of any of its sales of digital assets.

 

Digital assets have a limited history and the fair value historically has been very volatile. Historical performance of digital assets is not indicative of their future price performance. The Company’s digital assets currently solely consist of bitcoin.

 

At September 30, 2019, had the market price of the Company’s holdings of Bitcoin increased or decreased by 10% with all other variables held constant, the corresponding asset value increase or decrease respectively would amount to $2,731,073.

31

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

14. Income taxes

 

Income tax expense for the years ended December 31, is as follows:

 

      2019       2018  
Current tax expense   $ -     $ -  
Deferred tax expense     -       -  
Total income tax expense   $ -     $ -  

 

The reconciliation of the combined Canadian federal and provincial statutory income tax rate of 26.5% to the effective tax rate is as follows:

 

    2019     2018  
Net income (loss) before recovery of income taxes   $ 2,130,570     $ (136,765,537 )
Canadian statutory tax rate     26.5 %     27.0 %
Expected tax expense (recovery)     564,601       (36,926,695 )
Permanent differences     537,949       1,513,089  
Share issuance costs capitalized to equity     -       (965,477 )
Legal fees booked to Balance Sheet     -       (280,928 )
Prior year true-up     (1,546,521 )     5,765,489  
Impact of change in tax rate     688,385       -  
Utilization of non-capital loss balance     55,889       -  
Other     92,057       -  
Change in tax benefits not recognized     (392,360 )     30,894,522  
Income tax recovery   $ -     $ -  

 

Unrecognized deferred tax assets

 

Deferred taxes are provided as a result of temporary differences that arise due to the differences between the income tax values and the carrying amount of assets and liabilities. Deferred tax assets have not been recognized in respect of the deductible temporary differences.

 

As at December 31, 2019, the Company had non-capital loss carryforwards of approximately $18,000,000 that may be used to offset future taxable income and will expire in periods between 2037 and 2039. Deferred tax asset has not been recognized because it is not probable that a future taxable profit will be available against which the Company can utilize the benefits therefrom.

32

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Consolidated Financial Statements for the years ended December 31, 2019 and 2018

 

 

15. Subsequent events

 

The Company and Bitfury renegotiated key agreements and Hut 8 repaid its remaining outstanding Bitfury debt with a US$5,000,000 financing from Genesis. Hut 8 repaid US$4,750,000 of principal and US$1,000,000 of accrued interest by refinancing it with a US$5 million bitcoin-collateralized credit facility with Genesis with a coupon of 9.85%.

 

The recent outbreak of the coronavirus, also known as “COVID-19,” has spread across the globe and is impacting worldwide economic activity. Conditions surrounding the coronavirus continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. The outbreak and the related mitigation measures may have an adverse impact on global economic conditions as well as on the Company’s business activities. The extent to which the coronavirus may impact the Company’s business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in Canada and other countries to contain and treat the disease. The effect that these events will have on the price of bitcoin, the ability for the Company to raise capital and the supply of upgraded equipment highly uncertain and as such, the Company cannot determine their financial impact at this time.

33

 

Exhibit 4.4

 

 

 

HUT 8 MINING CORP.

 

Management’s Discussion and Analysis

 

For the year ended December 31, 2019

1 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Introduction

 

This Management’s Discussion and Analysis (“MD&A”) is dated April 2, 2020, and should be read in conjunction with the audited consolidated financial statements and Annual Information Form for the year ended December 31, 2019 and 2018 of Hut 8 Mining Corp each of which is available on SEDAR at www.sedar.com (“Hut 8” or the “Company”).

 

In this MD&A, unless the context otherwise requires, all references to “we”, “us”, “our”, “Hut 8”, and “the Company” refer to Hut 8 Mining Corp. and its subsidiaries, and all references to “Management” refer to the directors and executive officers of the Company.

 

Unless otherwise stated, results are reported in Canadian dollars, unless otherwise noted. The Company applies International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board and interpretations issued by the IFRS Interpretations Committee. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results presented in the MD&A are not necessarily indicative of the results that may be expected for any future period.

 

Cautionary Note Regarding Forward-Looking Information

 

This MD&A contains certain forward-looking information and forward-looking statements, as defined in applicable securities laws (collectively referred to herein as “forward-looking statements”). These statements relate to future events or the Company’s future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “continues”, “forecasts”, “projects”, “predicts”, “intends”, “anticipates” or “believes”, or variations of, or the negatives of, such words and phrases, or state that certain actions, events or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement.

 

Inherent in forward-looking statements are risks, uncertainties and other factors beyond the Company’s ability to predict or control. For a complete list of the factors that could affect the Company, please make reference to those risk factors referenced in Part VI – “ Risk Factors” of the Filing Statement of the Company dated February 26, 2018. Readers are cautioned that such risk factors, uncertainties and other factors are not exhaustive. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this MD&A.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement. Specifically, this MD&A includes, but is not limited to, forward-looking statements regarding: the Company’s ability to meet its working capital needs at the current level for the next twelve-month period; management’s outlook regarding future trends; sensitivity analysis on financial instruments, which may vary from amounts disclosed; and general business and economic conditions.

 

All forward-looking statements herein are qualified by this cautionary statement. Accordingly, readers should not place undue reliance on forward-looking statements. The Company undertakes no obligation to update publicly, or otherwise revise, any forward-looking statements, whether as a result of new information or future events or otherwise, except as may be required by law. If the Company does update one or more forward- looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements, unless required by law.

2 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Non-GAAP Measures

 

This MD&A presents certain non-GAAP (“GAAP” refers to Generally Accepted Accounting Principles) financial measures to assist readers in understanding the Company’s performance. These non-GAAP measures do not have any standardized meaning and therefore are unlikely to be comparable to similar measures presented by other issuers and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Management uses these non-GAAP measures to supplement the analysis and evaluation of operating performance.

 

Throughout this MD&A, the following terms are used, which are not found in the Chartered Professional Accountants of Canada Handbook and do not have a standardized meaning under GAAP.

 

EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization)

 

• “EBITDA” represents net income or loss excluding net finance income or expense, income tax or recovery, depreciation, and amortization.

 

• “Adjusted EBITDA” represents EBITDA adjusted to exclude share-based compensation, fair value loss or gain on revaluation of digital assets, write-offs, and costs associated with one-time transactions (such as listing fees).

 

• “Adjusted EBITDA Margin” represents Adjusted EBITDA as a percentage of revenue.

 

EBITDA is used to show ongoing profitability without the impact of non-cash accounting policies, capital structure, and taxation. This provides a consistent comparable metric for profitability.

 

“Mining Profit” represents gross profit (revenue less cost of revenue), excluding depreciation. “Mining Profit Margin” represents Mining Profit as a percentage of revenue. Mining Profit and Mining Profit Margin show the cash expenses against the revenue without the impact of non-cash accounting policies such as depreciation.

 

“Cost per Bitcoin” represents cost of revenue excluding depreciation, divided by the number of bitcoin mined in the period. This metric is commonly referenced in the bitcoin mining industry and is important to gain an understanding of the profitability in reference to the price of bitcoin.

3 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Company

 

Hut 8 is a bitcoin mining company with industrial scale bitcoin mining operations in Canada. Hut 8 has a North American partnership with the Bitfury Group Limited, inclusive of Bitfury Holding BV (“Bitfury”), one of the world’s leading full-service hardware and software blockchain technology companies.

 

Hut 8 provides investors with direct exposure to bitcoin, without the technical complexity or constraints of purchasing the underlying cryptocurrency. Investors avoid the need to create online wallets, wire money offshore, and safely store their bitcoin.

 

For its mining activities, Hut 8 utilizes the BlockBox Data Center AC (“BlockBoxe”) which are manufactured by Bitfury. The BlockBox is modular, portable, and more easily upgradeable to the next generation of silicon technology.

 

The Company was incorporated under the laws of the Province of British Columbia on June 9, 2011. Its registered office is located at Suite 1700, Park Place, 666 Burrard St, Vancouver, BC, Canada V6C 2X8, and the headquarter of the Company is located at 130 King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2. The Company’s financial year ends on December 31. The Company’s common shares are listed under the symbol “HUT” on the Toronto Stock Exchange and as “HUTMF” on the OTCQX Exchange. On March 2, 2018, the Company closed its “Qualifying Transaction” with Hut 8 Holdings Inc. (“Hut 8 Holdings”). The Company was a capital pool company prior to the Qualifying Transaction. In connection with the Qualifying Transaction, the Company changed its name to “Hut 8 Mining Corp.”

 

Non-GAAP Measures

 

This MD&A presents certain non-GAAP (“GAAP” refers to Generally Accepted Accounting Principles) financial measures to assist readers in understanding the Company’s performance. These non-GAAP measures do not have any standardized meaning and therefore are unlikely to be comparable to similar measures presented by other issuers and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Management uses these non-GAAP measures to supplement the analysis and evaluation of operating performance.

 

Throughout this MD&A, the following terms are used, which are not found in the Chartered Professional Accountants of Canada Handbook and do not have a standardized meaning under GAAP.

 

EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization)

 

• “EBITDA” represents net income or loss excluding net finance income or expense, income tax or recovery, depreciation, and amortization.

 

• “Adjusted EBITDA” represents EBITDA adjusted to exclude share-based compensation, fair value loss or gain on re-measurement of digital assets, write-offs, and costs associated with one-time transactions (such as listing fees).

 

• “Adjusted EBITDA margin” represents Adjusted EBITDA as a percentage of revenue.

 

“Mining Profit” represents gross profit (revenue less cost of revenue), excluding depreciation. “Mining Profit Margin” represents Mining Profit as a percentage of revenue.

 

“Cost per bitcoin” represents cost of revenue excluding depreciation, divided by the number of bitcoin mined in the period.

4 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Summary

 

2019 was a good year for Hut 8. Despite volatile price swings in the price of bitcoin, Hut 8 managed to achieve revenue of $82.0 million, a 66% increase from 2018. In addition, Hut 8 was able to self-finance growth of hashrate in 2019, while paying down its debt balance from cash flow generated from operations. To management’s knowledge, Hut 8 remains the world’s largest publicly traded cryptocurrency miner by capacity of its operations.

 

Management successfully reduced operating costs over the year and positioned Hut 8 as a leading bitcoin miner in North America. Our relationship with Bitfury, our strategic partner and largest shareholder remains positive, as does our relationship with the City of Medicine Hat, from whom we purchase the majority of our electricity. We continue to strive for operational excellence and transparency for shareholders.

 

The network hashrate, which is reflective of the competition amongst bitcoin miners, increased from 40.2 EH/s to 92.7 EH/s, an increase of 131% in 2019. This resulted in Hut 8 having increased competition for the block reward paid to bitcoin miners and consequently, mining fewer bitcoin for the same fixed costs. The bitcoin price as a comparison increased from US$3,747 to US$7,194 in 2019, an increase of 92%, which has a positive impact on Hut 8. We believe the sharp increase in the bitcoin price in 2017 spurred significant research and development for new more efficient ASIC mining equipment which hit the market the following years. In 2018, mining began to evolve from hobbyists to large scale industrial mining. In 2019, the more efficient ASIC mining equipment entered the market and brought more institutional investors into the space which resulted in the increase in network hashrate outpacing the increase in bitcoin price.

 

The upcoming bitcoin halving is a major event for bitcoin this year and is also on management’s radar. The halving, set to occur in mid-May 2020, will have the impact of cutting miners’ bitcoin compensation per block reward in half. We expect that will cause many less efficient miners to shut off their miners unless the price of bitcoin significantly appreciates before then. The impact on Hut 8 is difficult to assess. Certainly, without a corresponding increase in the price of bitcoin, Hut 8’s revenue will be impacted negatively. If the price of bitcoin and the network hashrate remain flat, Hut 8’s corresponding revenue would be cut in half subsequent to the halving. Management’s expectation is that there will be a drop in hashrate as less efficient miners shut down, consequently reducing competition. We also anticipate that the price of bitcoin will appreciate post the halving as it has in the past two halvings. However, how these two factors play out is difficult to forecast. Management is actively seeking ways to mitigate these industry specific factors.

 

For 2020, management will continue to be diligent in keeping operations lean and optimizing its hardware and electricity consumption.

5 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Selected Annual Financial Information

 

    Year ended December 31,  
    2019     2018  
Revenue   $ 81,990,119     $ 49,439,100  
Site operating costs     (45,448,549 )     (24,873,528 )
Mining profit     36,541,570       24,565,572  
Mining profit margin     45 %     50 %
                 
Depreciation     (33,053,597 )     (47,018,781 )
Gross profit   $ 3,487,973     $ (22,453,209 )
Gross profit margin     4 %     -45 %
                 
Expenses     (6,120,347 )     (8,791,314 )
Gain (loss) on use of digital assets     4,143,311       (4,039,713 )
Revaluation of digital assets     4,273,686       (13,822,974 )
Listing and qualifying transaction     -       (1,151,401 )
Net operating income (loss)     5,784,623       (50,258,611 )
                 
Net finance expense     (4,784,817 )     (872,103 )
Foreign exchange gain (loss)     1,198,011       (678,495 )
Other gain (loss)     (67,247 )     448,264  
Write-down     -       (85,404,592 )
Net income (loss) and comprehensive income (loss)   $ 2,130,570     $ (136,765,537 )
                 
Adjusted EBITDA   $ 33,523,508     $ 19,291,271  
Adjusted EBITDA margin     41 %     39 %
Basic net income (loss) per share   $ 0.02     $ (2.43 )
Diluted net income (loss) per share   $ 0.02     $ (2.43 )

 

Assets            
    December 31,     December 31,  
    2019     2018  
Total assets   $ 71,237,244     $ 82,895,453  
Total non-current financial liabilities   $ 19,807,075     $ 28,296,238  

6 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Discussion of Operations for the 2019 Year

 

For the year ended December 31, 2019, the Company mined 8,618 bitcoin, resulting in revenue generation of $82.0 million compared with the prior year of 5,592 bitcoin mined with revenue of $49.4 million. The reason for the increase was primarily due to a full year of operation at Hut 8’s flagship site in Medicine Hat and 12 additional BlockBoxes purchased at the end of 2018 that became operational in 2019, and also due to the increasing bitcoin price during the year.

 

The site operating costs for the year were $45.4 million (2018 - $24.9 million) which represents the costs incurred related to mining the 8,618 bitcoin for the year ended December 31, 2019. The cost of mining each bitcoin for the year was $5,274 (US$3,978) [2018 - $4,448 (US$3,423)] calculated by dividing site operating costs by the number of bitcoin mined for the 2019 year. As at December 31, 2019, the cost of mining remained lower than the average bitcoin price for the 2019 year of $9,832 (US$7,395) [2018 - $9,839 (US$7,572)].

 

Depreciation for the year was $33.0 million, compared to prior year of $47.0 million. Management revised its 2018 impairment allocation to re-distribute the impairment on a pro-rata basis to different components of the same cash-generating units based on the carrying value of each component.

 

Expenses for the 2019 year were $6.1 million (2018 - $8.8 million) of which there were non-cash share-based payments of $2.9 million (2018 - $3.5 million). Hut 8 recognized $33.5 million in Adjusted EBITDA, an increase of 74% from the prior year of $19.3 million. This resulted in Adjusted EBITDA margin of 41% for 2019 compared to 39% for the prior year.

 

For the 2019 fiscal year, Hut 8 had a revaluation gain of $4.3 million (2018 - loss of $13.8 million) from adjusting the value of the digital assets held in inventory to the market value on the reporting date. This gain is from the increase in bitcoin price from US$3,743 on December 31, 2018 to the December 31, 2019 price of US$7,194. The upward trend of bitcoin price in 2019 also meant that the Company was able to sell bitcoin at a higher market price than its adjusted cost base, resulting in a realized gain on use of $4.1 million for the year ended December 31, 2019 (2018 – loss of $4.0 million). In future quarters, the Company would expect to see unrealized gains or losses based on the price of bitcoin on the reporting date, relative to the price on the day mined, when revenue is recorded.

7 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Below is a bitcoin price chart together with the network difficulty chart for 2019 year (reference https://coinmarketcap.com/currencies/bitcoin):

 

 

The Company recorded net income for the year ended December 31, 2019 of $2.1 million (December 31, 2018 – net loss of $136.8 million) which was primarily due to the increase in bitcoin price and purchase of additional BlockBoxes in 2018 and 2019.

 

Selected Quarterly Information

 

The following table summarizes the Company’s financial information for the last eight quarters:

 

All amounts in 000’s, except for share figures, and bitcoin mined, and Cost per Bitcoin            

    Mar 31     June 30     Sep 30     Dec 31     Mar 31     June 30     Sep 30     Dec 31  
    2018     2018     2018     2018     2019     2019     2019     2019  
    Q1     Q2     Q3     Q4     Q1     Q2     Q3     Q4  
Revenue   $ 10,989     $ 7,800     $ 17,655     $ 12,995     $ 12,102     $ 28,280     $ 26,750     $ 14,858  
Net income (loss)     (3,816 )     (4,937 )     (11,444 )     (116,569 )     (6,065 )     33,672       (1,743 )     (23,733 )
Net income (loss) per share:                                                                
basic     (0.05 )     (0.06 )     (0.14 )     (2.18 )     (0.08 )     0.43       (0.02 )     (0.31 )
diluted     n.a.       n.a.       n.a.       n.a.       n.a.       0.43       n.a.       n.a.  
Site operating costs     (2,165 )     (2,844 )     (8,727 )     (11,137 )     (12,633 )     (10,387 )     (11,353 )     (11,076 )
Bitcoin mined     785       786       1,978       1,724       2,308       2,697       1,965       1,648  
Cost per Bitcoin ($CAD)   $ 2,758     $ 3,618     $ 4,412     $ 6,460     $ 5,473     $ 3,851     $ 5,778     $ 6,721  
Cost per Bitcoin ($USD)   $ 2,139     $ 2,781     $ 3,394     $ 4,735     $ 4,117     $ 2,879     $ 4,363     $ 5,092  

8 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

See below for the calculation of EBITDA and Adjusted EBITDA for the most recent eight quarters:

 

All amounts in 000’s, except per share figures                            

 

    Mar 31     Jun 30     Sep 30     Dec 31     Mar 31     Jun 30     Sep 30     Dec 31  
    2018     2018     2018     2018     2019     2019     2019     2019  
    Q1     Q2     Q3     Q4     Q1     Q2     Q3     Q4  
Net income (loss) from   $ (3,816 )   $ (4,937 )   $ (11,444 )   $ (116,569 )   $ (6,065 )   $ 33,672     $ (1,743 )   $ (23,733 )
                                                                 
Add/(deduct):                                                                
Net finance costs     (32 )     -       -       -       1,184       1,205       1,123       1,273  
Depreciation and amortization     5,640       5,900       17,441       18,037       4,732       4,732       4,732       18,858  
Stock-based compensation     125       1,140       1,114       1,138       1,102       655       670       478  
Revaluation of digital assets     4,073       1,759       548       7,443       (1,043 )     (17,255 )     10,052       3,972  
Gain/loss on use of digital assets     -       (3 )     (230 )     4,273       253       (5,169 )     (515 )     1,288  
Foreign exchange     (7 )     -       (251 )     927       (489 )     (585 )     370       (494 )
Write-off     -       -               85,405       -       -       -       -  
Other one-off items(1)     -       -       -       -       -       -       -       197  
Other gains or losses     1,705       -       -       (89 )     (951 )     -       -       1,018  
Adjusted EBITDA(2)   $ 7,688     $ 3,859     $ 7,177     $ 565     $ (1,277 )   $ 17,257     $ 14,688     $ 2,857  
(1) TSX uplisting fee

(2) A non-GAAP measure defined above

 

The Bitcoin mining industry does not typically have seasonality; however, the Company may have fluctuations at similar times in the year related to its electricity prices. The Company’s operations are solely out of Alberta, Canada where 42MW of power is directly from a power purchase agreement with the City of Medicine Hat and the remainder is from the Alberta electricity grid. Due to the changing weather in Alberta and seasonal electricity needs, time periods of extreme cold or extreme hot weather may result in higher electricity costs. Hut 8 manages electricity costs to avoid peak prices and is constantly monitoring its operations to maximize efficiency.

 

During the year ended 2019, the Company incurred $22.0 million in electricity cost for its City of Medicine Hat site and $14.9 million for its Drumheller site. The below chart shows the effect on operations and profitability of the Company if the average cost of electricity were to increase by 10%, 20%, and 30%.

 

Sensitivity Analysis   2019 Actual     +10%     +20%     +30%  
Electricity cost     36,891,929       40,581,122       44,270,314       47,959,507  
Gross profit     3,487,974       (201,219 )     (3,890,412 )     (7,579,605 )
% change             -106 %     -212 %     -317 %
Net loss     2,130,570       (1,558,623 )     (5,247,816 )     (8,937,009 )
% change             -173 %     -346 %     -519 %

 

Industry Overview

 

Bitcoin

 

Bitcoin is a digital currency that allows peer- to-peer transactions globally over the internet. Bitcoin is independent of any central authority, such as a bank or government. Instead, bitcoin is governed by a pre-programmed algorithm called Secure Hash Algorithm 256 (SHA-256) that is backed by millions of computers across the world called “miners”. Bitcoin miners record transactions and check their authenticity. While fiat currencies are controlled by central banks and governments, bitcoin miners are spread out across the world and store transactions on a digital public ledger called the “blockchain” that can be accessed by anyone. This global and transparent system is referred to as decentralized control as the management of bitcoin does not have a central point of failure or attack.

9 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Unlike fiat currencies, which have an unlimited supply which is controlled by governments and central banks, the supply of bitcoin is controlled by the SHA-256 to keep its availability scarce and total supply fixed. To date, approximately 18 million bitcoin exist and only 21 million bitcoin will ever exist. It is expected that all bitcoin will be mined by 2140. Due to the scarcity and computational power required to mine bitcoin, it is often referred to as “digital gold”, as physical gold is also scarce and is costly to mine.

 

Blockchain

 

The bitcoin “blockchain” is a cloud-based digital public ledger where bitcoin transactions are grouped together and represented as a block in a network chain, containing all relevant transaction details. The bitcoin blockchain is maintained by a community of miners. All transactions on the blockchain are transparent and designed to make it impossible to add, remove or change data without being detected by users.

 

Bitcoin Mining

 

Mining is the process of verifying bitcoin transactions by solving a computationally difficult encrypted code, called a “hash”. The hash rate is the number of attempts at solving the encryption code the equipment can process per second. Miners use equipment that produces a high hash rate, as it results in more attempts at solving the encrypted code. The average hash rate for a two- week period determines the network difficulty rate, which is set every two weeks. The network difficulty is a measure of how difficult it is to solve a block. This computational process of decrypting the code through hashing is referred to as “proof of work”. Bitcoin miners use powerful Application Specific Integrated Circuit (“ASIC”) computing chips to compete with each other to correctly solve the encryption code.

 

The power of the ASIC chip to produce a high number of hashes is essential to successfully mining. When a miner is successful in solving the code, a block containing transactions is validated and incorporated into the blockchain resulting in an economic incentive payment for the miner in the amount of 12.5 newly minted bitcoins plus potential transaction fees. This incentive payment halves every four years which is set to occur in mid-May 2020.

 

When mining Bitcoin, Hut 8 measures the output to process in computer hash rates. Each BlockBox, as owned by Hut 8, is capable of processing a total hash rate of approximately 9 to 13 PH/s. Thus, each BlockBox has a processing power of between 9-13 (depending on the strength of the ASIC chip) quadrillion hashes per second. In total, at full operation, Hut 8 has 952 PH/s or 952 quadrillion hashes per second that are attempting to solve the cryptology code and receive the bitcoin incentive payment.

 

Bitcoin Outlook

 

The bitcoin price hit its all-time-high in December 2017. During that time, there was substantial euphoria around bitcoin and other cryptocurrencies, referred to as “altcoins”. The demand and price of bitcoin was driven higher by speculators seeking quick returns and retail investors using bitcoin as a means of investing in altcoins.

 

By early 2018, the euphoria faded and was replaced by uncertainty around regulation and proper custody for cryptocurrencies. In addition, the value proposition of most altcoins, in general, did not come to fruition. This led to profit taking by early adopters and then to a widespread cryptocurrency sell-off through 2018 that resulted in bitcoin losing 80% of its value from its all- time-high. However, through this “crypto winter” period, bitcoin still remained the largest cryptocurrency by market size and volume by a large margin.

 

2019 was a mixed year for bitcoin. While the price started the year at US$3,747 and ended the year at US$7,194, there was tremendous volatility throughout the year. In 2019, the bitcoin price had a low of US$3,391 and a high of US$13,796, which was thought to be as a result of the Facebook backed Libra cryptocurrency. While Libra is considered to be very different than bitcoin, the initial support behind Libra lifted all cryptocurrencies. Consequently, when regulatory concern and initial support waned for Libra, so did demand for bitcoin which declined and did not see the price peak again in 2019.

10 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

However, despite the volatility of 2019, Hut 8 management still believes that bitcoin represents a digital storage of value and the future of global digital money. Our conviction in the use of bitcoin as a digital store of value and international payment settlement system remains strong.

 

Overall, Hut 8 is optimized to benefit from the strength in the price of bitcoin. Hut 8 does not plan to stray from its strategy of being a pure play bitcoin miner.

 

Hut 8 Custody of Bitcoin

 

For the protection of its bitcoin on behalf of shareholders, Hut 8 does not self-custody its bitcoin. Instead, Hut 8 uses the services of BitGo Trust Company Inc. (“BitGo”). BitGo has US$100 million of insurance backing its digital asset custody and one of the highest levels of regulatory certifications in the market. BitGo is financially backed by Wall Street firms including Goldman Sachs. Hut 8 utilizes both cold and hot storage for bitcoin with BitGo.

 

Previously to BitGo, Hut 8 used the services of Xapo GmbH (“Xapo”) since inception. Xapo is approved by a Swiss financial regulator, to operate on the bitcoin management, storage, and related services out of Switzerland and regulated under the oversight of the Association for Financial Quality Assurance.

 

Xapo announced their exit from the institutional custodian business on August 15, 2019. After a thorough search for a replacement, Hut 8 chose BitGo as its new custodian.

 

Hut 8 continues to explore new ways to enhance the custody of its bitcoin and improve security for shareholders.

 

Qualifying Transaction

 

On March 2, 2018, the Company completed its qualifying transaction (the “Qualifying Transaction”) with Hut 8 Holdings Pursuant to the Qualifying Transaction the following occurred:

 

(a) The Company implemented a consolidation, immediately prior to the completion of the Debt Conversion and the Amalgamation (as defined below), of its then issued and outstanding 9,500,000 Common Shares on the basis of one new Common Share for every 52.7777 existing Common Share;

 

(b) The Company effected a conversion of $200,000 of debt owing by the Company into 40,000 Common Shares, based on a conversion price of $5.00 per Common Share (the “Debt Conversion”);

 

(c) The Company acquired all of the issued and outstanding common shares of a private corporation incorporated under the Business Corporations Act (British Columbia) (the “BCBCA”), Hut 8 Mining Corp. (the “Hut 8 PrivateCo”), from the shareholders of Hut 8 PrivateCo in exchange for an aggregate of 82,160,000 Common Shares;

 

(d) Hut 8 PrivateCo and 1149835 B.C. Ltd., a wholly-owned subsidiary of the Company amalgamated under the BCBCA (the “Amalgamation”) and continued as one corporation, Hut 8 Holdings, which is a wholly-owned subsidiary of the Company; and (e) the Company changed its name to “Hut 8 Mining Corp.”.

11 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

The Qualifying Transaction has been accounted for as a reverse acquisition that does not constitute a business combination. For accounting purposes, the legal subsidiary, Hut 8 Holdings, has been treated as the acquirer and Hut 8 Mining Corp., the legal parent, has been treated as the acquiree. For accounting purposes, this MDA and the related consolidated financial statements reflect a continuation of the financial position, operating results and cash flows of the Company’s legal subsidiary, Hut 8 Holdings.

 

Significant Agreements

 

On November 29, 2017, the Company entered into a Master Data Centre Purchase Agreement (the “MPA”) with Bitfury. The MPA governs the terms and conditions for the purchase from Bitfury of certain equipment (the “Data Centres”) used for the purpose of running diverse cryptographic hash functions in connection with the mining of cryptocurrency. The MPA is for a term of five years, with two successive renewal terms of one year each.

 

Concurrent with the MPA, on November 29, 2017, the Company entered into a Master Service Agreement (the “MSA”) with Bitfury. In accordance with the MSA, Bitfury shall provide the management, maintenance, support, logistics and operational services (the “Services”) required to run the Data Centres. The MSA is for a term of five years, with two successive renewal terms of one year each.

 

The Company entered into definitive agreements with the City of Medicine Hat (“CMH”) for the supply of electric energy, and the lease of land upon which Hut 8 is constructed its mining facilities. For electricity, an Electricity Supply Agreement (”ESA”) was executed, whereby CMH will provide electric energy capacity of approximately 67 MW to the new Hut 8 facilities, which in conjunction with the Company’s approximate 40 MW in operation in Drumheller, will allow Hut 8 to operate at 107 MW in total. The ESA and the land lease have a concurrent term of 10 years. The minimum payments on the land lease are $1,395 per month up to December 31, 2027.

12 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Liquidity and Capital Resources

 

As at December 31, 2019, the Company had a working capital surplus of $6.0 million (December 31, 2018 deficit of $18.3 million) and shareholders’ equity of $42.7 million.

 

Net cash provided from operating activities was $14.4 million, which does not include the bitcoin mined but not yet converted to cash. Cash used in investing activities amounted to $9.7 million which was used for the purchase of nine BlockBoxes at the Drumheller site. Cash used in financing activities was $5.3 million, net of the finance draw from the loan with Genesis Global Capital, LLC (“Genesis”) and the payment of the Galaxy Digital Holdings Ltd. (“Galaxy”) loan in full and the Bitfury loan.

 

As at December 31, 2019, the Company had cash on hand of $2.9 million (December 31, 2018 - $3.6 million) and digital assets of $27.3 million (December 31, 2018 - $15.4 million).

 

The Company’s ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon maintaining sustained profitability and maintaining the Company’s loans in good standing. There are various risks and uncertainties affecting the Company’s operations including, but not limited to, the viability of the economics of bitcoin mining, the liquidity of bitcoin, the Company’s ability to maintain its security of its digital assets and execute its business plan. The Genesis loan requires bitcoin collateral. If the bitcoin price reaches a price where Hut 8 does not have the bitcoin to sufficiently collateralize the loan, then after a cure period of 10 days, Genesis may be able to liquidate a significant portion of Hut 8’s bitcoin, demand immediate repayment of the loan, or terminate the loan agreement.

 

The Company’s strategy to mitigate these risks and uncertainties is to execute a business plan aimed at continued security, operational efficiency, revenue growth, improving overall mining profit, managing operating expenses and working capital requirements, and securing additional financing, as needed, through one or more of loans and equity investments. Given the volatility in the financial markets, it may be difficult to raise financing when needed. Failure to implement the Company’s business plan could have a material adverse effect on the Company’s financial condition and/or financial performance (See also Note 15). Accordingly, there are material risks and uncertainties that cast significant doubt about the Company’s ability to continue as a going concern.

 

On February 7, 2018, Hut 8 completed a private placement, on both a brokered and non-brokered basis, of 9,000,000 Hut 8 Subscription Receipts at a price of $5.00 per Hut 8 Subscription Receipt, and 5,000,000 Hut 8 PrivateCo Common Shares at a price of $5.00 per Hut 8 PrivateCo Common Share, for aggregate gross proceeds of $70,000,000 (the “Offering”), comprised of $58,440,265 in cash and $11,559,735 in value of bitcoin. The brokered portion of the Offering was completed pursuant to an agency agreement dated February 7, 2018 between Hut 8 and the Agent, being GMP Securities L.P.

 

On September 10, 2018, the Company received funds from a loan payable, net of cash transaction costs, of $19,626,691 (US$15,194,570) to Galaxy, a related party. The loan payable matures on March 10, 2021 when US$16,000,000 will be due to Galaxy. The loan payable is denominated in US dollars and bears interest at a rate equal to LIBOR + 10% per annum (or otherwise in accordance with the terms of the loan payable credit agreement).

 

At December 31, 2018, the Company finalized a loan with Bitfury related to a purchase for the purchase of 12 BlockBoxes in Drumheller which included upgraded chips, for $12,210,012 (US$9,000,000). The loan payable is unsecured and bears interest at 12% per annum. This loan is split into a $8,140,008 (US$6,000,000) portion which will be repaid in $339,167 (US$250,000) installments every month for 24 months. The remaining principal of $ 4,070,004 (US$3,000,000) will become due at the earlier of January 1, 2021 or the date that the principal for the Galaxy loan has been fully repaid. All interest accrued during the first 24 months of this loan will become due on January 1, 2021 and all interest accrued after this date will be due on a monthly basis thereafter.

13 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

On November 20, 2019, the Company finalized a loan for $19,482,000 (US$15,000,000) to Genesis. The loan bears interest at 9.85% per annum, payable monthly, and matures on May 21, 2021. 85% of the loan is collateralized with bitcoin that has been transferred to Genesis. If the collateralized value of the bitcoin drops below 75% of the loan, additional bitcoin will be sent to Genesis to bring the collateral level back to 85%. Conversely, if the collateralized bitcoin value goes over 95% of the loan, bitcoin will be returned to the Company as long as the 85% level remains satisfied. These funds were used to repay the loan with Galaxy.

 

Off-Balance Sheet Arrangements

 

As of the date of this MD&A, the Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company including, without limitation, such considerations as liquidity and capital resources that have not previously been discussed.

 

Financial Instruments and Business Risks

 

The Company’s risk exposures and the impact on the Company’s financial instruments are summarized below.

 

Credit risk

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and deposits and prepaid expenses. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions.

 

For the protection of its bitcoin on behalf of shareholders, Hut 8 does not self-custody its bitcoin. Instead, Hut 8 uses the services of BitGo. BitGo has US$100 million of insurance backing its digital asset custody and one of the highest levels of regulatory certifications in the market. BitGo is financially backed by Wall Street firms including Goldman Sachs.

 

Interest Rate Risk

 

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to interest rate risk is limited and only relates to its ability to earn interest income on cash balances nominated in foreign currency at variable rates. Changes in short term interest rates will not have a significant effect on the fair value of the Company’s cash account.

 

Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company currently settles its financial obligations out of cash and cash equivalents and digital assets. The Company has a planning and budgeting process to help determine the funds required to support the Company’s normal spending requirements on an ongoing basis and its expansionary plans.

14 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

As at December 31, 2019 the contractual maturities of financial liabilities, including estimated interest payments are as follows:

 

    Carrying     Contractual                          
    amount     cash flows     Within 1 year     1 to 2 years     2 to 5 years     5+ years  
Accounts payable and accrued liabilities   $ 1,221,432     $ 1,221,432     $ 1,221,432     $ -     $ -     $ -  
Loans payable and interest     25,713,548       30,561,714       10,345,679       20,216,035       -       -  
Lease commitments     325,075       728,482       35,577       35,577       78,231       579,097  
    $ 27,260,055     $ 32,511,628     $ 11,602,688     $ 20,251,612     $ 78,231     $ 579,097  

 

Foreign Currency Risk

 

Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Foreign currency risk arises from financial instruments (including cash and cash equivalents) that are denominated in a currency other than Canadian dollars, which represents the functional currency of the Company. The Company’s functional currency is the Canadian dollar and most purchases are transacted in Canadian dollars. The Company has also transacted in US Dollars to purchase mining equipment from Bitfury and with loans payable denominated in US Dollars. Management currently does not hedge its foreign exchange risk.

 

Concentration Risk

 

Concentration risk arises as a result of the concentration of exposures within the same category, whether it is geographical location, product type, industry sector or counterparty type. Currently, the Company has its investment highly concentrated in a single asset, bitcoin. The Company tracks the market price of bitcoin, less the Company’s liabilities and expenses, by investing in the assets of the company in bitcoin.

 

Price Volatility Risk

 

The Company is at risk due to a wide fluctuation in the price of bitcoin, the speculative nature of the underlying asset, and negative media coverage. Downward pricing of bitcoin may adversely affect investor confidence, and subsequently, the value of the Company’s bitcoin inventory, its stock price, and profitability.

 

Security Risk

 

Bitcoins are controllable only by the possessor of the private key relating to the local or online digital wallet in which the bitcoin is held. The bitcoin network requires a public key relating to a digital wallet to be published when used in a spending transaction and, if keys are lost or destroyed, this could prevent trading of the corresponding bitcoins.

 

Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the bitcoin exchange market since the launch of the bitcoin network. Any security breach caused by hacking could cause loss of bitcoin investments.

 

Bitcoin Network Risk

 

The open-source structure of the bitcoin network protocol means that the core developers of the bitcoin network and other contributors are generally not directly compensated for their contributions in maintaining and developing the bitcoin network protocol. A failure to properly monitor and upgrade the bitcoin network protocol could damage the bitcoin network.

15 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Digital Assets and Risk Management

 

Digital assets are measured using level two fair values, determined by taking the rate from Coinmarketcap.com.

 

Digital asset prices are affected by various forces including global supply and demand, interest rates, exchange rates, inflation or deflation, and the global political and economic conditions. The profitability of the Company is directly related to the current and future market price of bitcoin; in addition, the Company may not be able liquidate its inventory of digital assets at its desired price if required. A decline in the market price for bitcoin could negatively impact the Company’s future operations. The Company has not hedged the conversion of any of its sales of bitcoin.

 

Bitcoin has a limited history and the fair value historically has been volatile. Historical performance of bitcoin is not indicative of its future price performance. The Company’s digital assets currently solely consist of bitcoin.

 

Bitcoin Halving Risk

 

The current global bitcoin network rewards miners 12.5 bitcoin per block, which is approximately 1,800 bitcoin per day. In May 2020, the bitcoin daily reward will halve to 6.25 bitcoin per block, or approximately 900 bitcoin per day. This halving may have a potential impact on the Company’s profitability at the reward level of 6.25 coins. Based on the fundamentals of bitcoin mining and historical data on bitcoin prices and the network difficulty rate after a halving event, it is unlikely that the network difficulty rate and price would remain at the current level when the bitcoin rewards per block are halved. The Company believes that although the halving would reduce the block reward by 50%, other market factors such as the network difficulty rate and price of bitcoin would change to offset the impact of the halving sufficiently for the Company to maintain profitability. Nevertheless, there is a risk that a halving will render the Company unprofitable and unable to continue as a going concern.

 

Pandemic and COVID-19

 

The Company cautions that current global uncertainty with respect to the spread of the COVID-19 virus (“COVID-19”) and its effect on the broader global economy may have a significant negative effect on the Company. While the precise impact of the COVID-19 virus on the Company remain unknown, rapid spread of the COVID-19 virus may have a material adverse effect on global economic activity, and can result in volatility and disruption to global supply chains, operations, mobility of people and the financial markets, which could affect interest rates, credit ratings, credit risk, inflation, business, financial conditions, ability to visit Hut 8’s facilities, results of operations and other factors relevant to the Company.

 

Contract Renewal Risk

 

Hut 8 and Bitfury have two key contracts that outline how equipment is purchased from Bitfury and how they provide services to Hut 8 which are the MPA and the MSA. The terms of these agreements are for five years, at which point the agreements will be up for renewal. Both the Company and Hut 8 have the ability to not renew the contracts, or the contracts may be renewed at terms less favorable for the Company or for Bitfury.

16 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Related Party Transactions

 

During the year ended December 31, 2018, $24,000 was charged by CFO Advantage Inc., a Company owned by the former Chief Financial Officer of the Company, for consulting fees.

 

During the year ended December 31, 2018, $75,000 was charged by a former director of the Company for consulting fees in consideration of this former director’s involvement with various pre-listing and corporate governance-related matters and was reimbursed for $13,627 of out of pocket expenses.

 

During the year ended December 31, 2018, the Company was charged $ 146,044 (2017 - $105,239) for out of pocket expenses, by First Block Capital Inc., a Company controlled by a former officer and a former director of the Company. These expenses were charged primarily for travel costs related to fundraising, meetings with strategic partners, and organizing the Company.

 

See the consolidated financial statements for the year ended December 31, 2019, for related party transactions with respect to share issuances.

 

Michael Novogratz was a former director of the Company and is a controlling shareholder of Galaxy, resulting in the Company and Galaxy to be classified as related party entities up to May 13, 2019, the date of the Company’s Annual General Meeting. During the year ended December 31, 2018, the Company sold 1,345 bitcoin for approximately $ 8,068,270 with Galaxy. During the period between January 1, 2019 and May 13, 2019, the Company sold 1,942 bitcoin for approximately $10,950,403 of fiat currency with Galaxy. See Note 9 for the amounts owing and further transactions with Galaxy

 

During the year ended December 31, 2019, the Company acquired mining equipment from Bitfury, a controlling shareholder of the Company, with a total cost of $9,234,400 (2018 - $168,712,484) paid with common shares, bitcoin, and cash. The Company paid $ 461,720 (2018 - $881,835) related to GST for the purchase, which has been expensed since the amount is unlikely to be recoverable. During the year ended December 31, 2019, the Company was charged $19,913,152 (2018 - $13,368,890) in site operating costs. As of December 31, 2019, $ 394,732 (December 31, 2018 - $15,163,527) was owed to Bitfury, which have been included in accounts payable and accrued liabilities. Of the outstanding accounts payable on December 31, 2018, $5,576,150 was converted to common shares of the Company on March 27, 2019.

 

On February 26, 2019, Hut 8 agreed and subsequently closed the issuance of 3,717,433 common shares in settlement of outstanding accounts payable to Bitfury of $5,576,150, based on a conversion price of $1.50 per share.

 

These transactions were made on terms equivalent to those that prevail in arm’s length transactions.

 

Critical Accounting Estimates and Accounting Policies

 

The following are the estimates and assumptions that have been made in applying the Company’s accounting policies that have the most significant effect on the amounts in the unaudited condensed consolidated interim financial statements:

 

i.       Fair value measurement of stock options and broker warrants

 

The Company measures the cost of equity-settled transaction by reference to the fair value of the equity instruments at the date on which they are granted. Estimating fair value requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires the determination of the most appropriate inputs to the valuation model including the expected life of the broker warrants, volatility and dividend yield and making assumptions about them.

17 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

ii.       Revenue recognition

 

The Company recognizes revenue from the provision of transaction verification services within the bitcoin blockchain, and as consideration for these services, the Company receives bitcoin. Revenue is measured based on the fair value of the bitcoin received. The fair value is determined using the closing bitcoin price each day per Coinmarketcap. The Company is relying on the data available at Coinmarketcap to be an accurate representation of the closing price for the digital assets.

 

iii.       Fair value of digital assets

 

Digital assets, consisting solely of bitcoin, are measured at fair value using the quoted price on Coinmarketcap. Management considers this fair value to be a level two input under IFRS 13 Fair Value Measurement fair value hierarchy as the price on this source represents an average of quoted prices on multiple digital currency exchanges. The bitcoin is valued based on the closing price obtained from Coinmarketcap at the reporting period corresponding to the digital assets mined by the Company.

 

The Company’s determination to classify its holding of bitcoin as current assets is based on management’s assessment that its bitcoin held can be considered a commodity and the availability of liquid markets to which the Company may sell a portion or all of its holdings.

 

iv.       Non-monetary transactions

 

Non-monetary transactions for the exchange of bitcoin for various goods and services are measured at the fair value determined from the exchange amount. Fair value of the bitcoin is determined at the time of transaction.

 

v.       Share based transactions

 

Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service.

 

The Company issued broker warrants as part of brokered private placement offering for common shares. Broker warrants are measured at fair value at the date of the offering and accounted for as a separate component of shareholders’ equity. When the broker warrants are exercised, the proceeds received together with the related amount allocated as a separate component of shareholders’ equity are allocated to capital stock. If the broker warrants expire unexercised, the related amount separately allocated to shareholders’ equity is allocated to contributed surplus.

18 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

vi.       Useful life of mining equipment

 

Management is depreciating mining equipment using a straight-line basis, with a useful life of:

 

Seacan containers and supporting infrastructure 4 years
Mining servers 2 years

 

The mining equipment is used to generate bitcoin. The rate at which the Company generates digital assets and, therefore, consumes the economic benefits of its mining equipment are influenced by several factors including, but not limited to, the following:

 

• The complexity of the mining process which is driven by the algorithms contained within the digital assets open source software; and

 

• Technological obsolescence reflecting rapid development in the mining machines such that more recently developed hardware is more economically efficient to run in terms of digital assets mined as a function of operating costs, primarily power costs (ie., the speed of mining machines evolution in the industry) is such that later mining machine models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase.

 

Based on the Company and the industry’s limited history to date, management is limited by the market data available. Furthermore, the data available also includes data derived from the use of economic modelling to forecast future digital assets and the assumptions included in such forecasts, including digital asset’s price and network difficulty, and derived from management’s assumptions. Based on current data available, management has determined that the straight-line method of amortization best reflects the current expected useful life of mining equipment. Management will review their estimates at each reporting date and will revise such estimates as and when data become available. Management will review the appropriateness of its assumption related to residual value at each reporting date.

 

vii.       Taxes

 

Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. The Company has not recognized the value of any deferred tax assets in its statements of financial position.

 

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on its technical merits. The Company measures and records the tax benefits from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company’s estimated liabilities related to these matters are adjusted in the period in which the uncertain tax position is effectively settled, the statute of limitations for examination expires or when additional information becomes available. The Company’s liability for unrecognized tax benefits requires the use of assumptions and significant judgment to estimate the exposures associated with our various filing positions. Although the Company believes that the judgments and estimates made are reasonable, actual results could differ and resulting adjustments could materially affect our effective income tax rate and income tax provision.

 

The Company has earned bitcoin from the commercial activity of bitcoin mining. The Company has followed the published Canada Revenue Agency (“CRA”) view that bitcoin is a commodity and inventory of the business, the value of which is included in the calculation of taxable income from the business. Bitcoin is valued in accordance with Section 10 of the Income Tax Act. Revenue from bitcoin mining is included in taxable income when the bitcoin earned is sold or exchanged for cash or another asset. There is uncertainty regarding the taxation of cryptocurrency and the CRA may assess the Company differently from the position adopted. This could result in additional current taxes payable with equal offset to deferred tax expense.

19 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

For the year ended December 31, 2019

 

Capital Management

 

The Company’s capital currently consists of Common Shares. The Company’s capital management objectives are to safeguard its ability to continue as a going concern and to have sufficient capital to be able to identify, evaluate and then acquire an interest in a business or assets. The Company does not have any externally imposed capital requirements to which it is subject. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares.

 

Management’s Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting

 

Management is committed to delivering timely and accurate disclosure of all material information.

 

Disclosure controls and procedures ensure that reporting requirements are satisfied, and that material information is disclosed in a timely manner. Due to the limitation on the ability of the officers to design and implement cost-effective policies for disclosure controls and procedures and internal control over financial reporting, the officers are not making representations that such controls and procedures would identify and allow for reporting material information on a timely basis, nor are they representing that such procedures are in place that provide reasonable assurance regarding the reliability of financial reporting.

 

However, as permitted for TSX issuers, the CEO and CFO individually have certified that after reviewing the consolidated financial statements for the years ended December 31, 2019 and 2018 and this MD&A of the Company, there are no material misstatements or omissions, and the filing materially presents the consolidated financial position and consolidated results of operations and cash flows for the year ended December 31, 2019 and all material subsequent activity up to April 2, 2020.

 

Share Capital

 

As of the date of this MD&A, the Company has issued, and outstanding share capital comprised of 90,476,317 Common Shares, 910,000 stock options, 2,882,222 warrants, and 1,213,434 restricted share units.

 

Additional information and other publicly filed documents relating to the Company are available through the internet on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (“SEDAR”), which can be accessed at www.sedar.com.

20 

 

Exhibit 4.5

(GRAPHIC)  

 

HUT 8 MINING CORP.

 

Unaudited Condensed Consolidated Interim Financial Statements 

Amended and Restated 

(In Canadian dollars)

 

Three and nine months ended September 30, 2020 and 2019

 1

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Unaudited Condensed Consolidated Interim Statements of Financial Position 

Amended and Restated

 

    September 30,     December 31,  
    2020     2019  
Assets                
Current assets                
Cash   $ 2,259,951     $ 2,946,017  
Digital assets (Note 5)     14,119,230       10,484,106  
Digital assets collateral (Note 5)     26,843,667       -  
Digital assets receivable (Note 5)     66,608       943,438  
Deposits and prepaid expenses (Note 4)     3,214,703       321,189  
      46,504,159       14,694,750  
Non-current assets                
Plant and equipment (Note 6)     21,132,230       34,883,085  
Digital assets collateral (Note 5)     -       15,883,182  
Deposits and prepaid expenses (Note 4)     4,573,405       5,776,227  
Total assets   $ 72,209,794     $ 71,237,244  
Liabilities and shareholders’ equity                
Current liabilities                
Accounts payable and accrued liabilities (Note 7)   $ 4,090,633     $ 2,496,864  
Loans payable (Note 8)     27,006,311       6,231,548  
      31,096,944       8,728,412  
Non-current liabilities                
Loans payable (Note 8)     -       19,807,075  
      31,096,944       28,535,487  
Shareholders’ equity                
Share capital (Note 9)     177,158,850       170,622,599  
Contributed surplus (Note 9)     4,069,867       5,300,480  
Warrants (Note 9)     2,763,301       1,367,901  
Accumulated deficit     (142,879,169 )     (134,589,223 )
      41,112,850       42,701,757  
Total liabilities and shareholders’ equity   $ 72,209,794     $ 71,237,244  

 

Reporting entity and going concern (Note 1) 

Subsequent event (Note 13)

 

Approved on behalf of the Board:

 

“Bill Tai” “Joseph Flinn”
Director Director

 2

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Unaudited Condensed Consolidated Interim Statements of Income (Loss) and Comprehensive Income (Loss) 

Amended and Restated 

For the three and nine months ended September 30, 2020 and September 30, 2019

 

    Three months ended September 30,     Nine months ended September 30,  
    2020     2019     2020     2019  
          (Restated - Note 14)           (Restated - Note 14)  
Revenue                                
Digital assets mined (Note 5)   $ 5,264,369     $ 26,749,874     $ 27,233,929     $ 67,132,276  
Hosting fees     490,363       -       490,363       -  
Cost of revenue                                
Site operating costs     (7,871,231 )     (11,353,029 )     (29,120,406 )     (34,372,623 )
Depreciation (Note 6, 14)     (3,545,173 )     (8,178,269 )     (17,512,599 )     (24,534,807 )
Gross profit     (5,661,672 )     7,218,576       (18,908,713 )     8,224,846  
Gain on use of digital assets (Note 5)     198,369       514,135       1,800,984       5,433,530  
Revaluation of digital assets (Note 5)     5,577,854       (10,050,642 )     13,713,962       8,243,089  
      5,776,223       (9,536,507 )     15,514,946       13,676,619  
Expenses                                
Share based payments (Note 9)     (167,743 )     (670,136 )     479,892       (2,427,144 )
Professional     (379,510 )     (77,259 )     (1,320,720 )     (376,717 )
General and office     (250,428 )     (159,114 )     (748,587 )     (611,889 )
Salary and benefits     (149,542 )     (454,223 )     (521,329 )     (970,795 )
Investor and public relations     -       (2,909 )     (5,000 )     (35,577 )
Regulatory     (8,485 )     (13,765 )     (98,366 )     (95,596 )
      (955,708 )     (1,377,406 )     (2,214,110 )     (4,517,718 )
Operating income (loss)     (841,157 )     (3,695,337 )     (5,607,877 )     17,383,747  
Foreign exchange gain (loss)     508,606       (370,374 )     (772,714 )     703,347  
Finance expense     (569,620 )     (1,146,630 )     (1,916,313 )     (3,544,978 )
Finance income     1,833       23,700       6,959       32,812  
Other gain     -       -       -       951,059  
Net income (loss)   $ (900,338 )   $ (5,188,641 )   $ (8,289,945 )   $ 15,525,987  
Basic earning (loss) per share     (0.01 )     (0.07 )     (0.09 )     0.20  
Diluted earning (loss) per share     (0.01 )     (0.07 )     (0.09 )     0.20  
Weighted-average shares used in                                
computation of earningd per share:                                
Basic     96,732,232       78,024,609       92,243,948       76,649,808  
Diluted     97,048,899       78,024,609       92,560,615       77,919,908  

 3

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Unaudited Condensed Consolidated Interim Statement of Cash Flows 

Amended and Restated 

For the nine months ended September 30, 2020 and September 30, 2019

 

    2020     2019  
          (Restated - Note 14)  
Cash provided by (used in):                
Operating activities:                
Net income (loss)   $ (8,289,945 )   $ 15,525,987  
Change in non-cash operating items:                
Digital assets mined     (27,233,929 )     (67,132,276 )
Digital assets converted to fiat currency     29,030,097       47,527,631  
Depreciation     17,512,599       24,534,807  
Gain on use of digital assets     (1,800,984 )     (5,433,530 )
Revaluation of digital assets     (13,713,962 )     (8,243,089 )
Share based payments     (479,890 )     2,427,144  
Gain on shares issued to settle accounts payable     -       (951,059 )
Net finance expense and other     (620,002 )     3,309,214  
Foreign exchange     772,714       (703,344 )
Accretion expense on lease obligations     19,556       -  
      (4,803,746 )     10,861,485  
Change in non-cash working capital:                
Accounts payable and accrued liabilities     1,882,550       (2,044,104 )
Total change in non-cash operating working capital     1,882,550       (2,044,104 )
Net cash used in operating activities     (2,921,196 )     8,817,381  
Investing activities                
Purchase of mining equipment     (3,779,746 )     -  
Deposits and prepaid expenses     (1,672,691 )     (4,884,383 )
Net cash used in investing activities     (5,452,437 )     (4,884,383 )
Financing activities                
Repayment of loan payable     (6,622,303 )     (4,306,586 )
Finance draw from loan payable     6,615,500       -  
Repayment of lease obligations     (26,150 )     -  
Proceeds from issuance of common shares, net of issue costs     7,719,620       -  
Proceeds from exercise of warrants     900       -  
Net cash provided by (used in) financing activities     7,687,567       (4,306,586 )
Increase in cash     (686,066 )     (373,588 )
Cash, beginning of year     2,946,017       3,556,560  
Cash, end of period   $ 2,259,951     $ 3,182,972  

 

Significant non-cash transactions included: 

☐ Expiration of broker warrants of $1,367,901 (2019 - $Nil);

☐ Issuance of broker warrants as share issuance costs valued at $127,986 (2019 - $Nil);
☐ Payment in bitcoin of loans payable interest and principle totaling $Nil (2019 - $2,470,746);
☐ Payment in bitcoin of accounts payable totaling $Nil (2019 - $7,736,330); and
☐ Settlement of accounts payable in common shares valued at $Nil (2019 - $5,855,486).

 4

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Unaudited Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity 

Amended and Restated

 

    Share Capital                                
    Number of           Shares to be           Contributed     Accumulated        
    shares     Dollar amount     issued     Warrants     surplus     deficit     Total  
Balance, December 31, 2018     85,227,858     $ 162,733,360     $ 1,167,386     $ 1,367,901     $ 4,061,740     $ (136,671,025 )   $ 32,659,362  
Shares issued for mining equipment     838,511       1,167,386       (1,167,386 )     -       -       -       -  
Shares issued in settlement of accounts payable     3,717,433       4,609,617       -       -       -       -       4,609,617  
Shares issued for services     419,507       667,256       -       -       -       -       667,256  
Share based payments     234,700       192,454       -       -       2,013,002       -       2,205,456  
Net loss and comprehensive loss     -       -       -       -       -       15,525,987       15,525,987  
Balance, September 30, 2019     90,438,009     $ 169,370,073     $ -     $ 1,367,901     $ 6,074,742     $ (121,145,038 )   $ 55,667,678  

 

    Share Capital                                
    Number of           Shares to be           Contributed     Accumulated        
    shares     Dollar amount     issued     Warrants     surplus     deficit     Total  
Balance, December 31, 2019     90,438,009     $ 170,622,599     $ -     $ 1,367,901     $ 5,300,480     $ (134,589,223 )   $ 42,701,757  
Shares issued for public offering     5,750,456       5,702,617       -       2,635,544       -       -       8,338,161  
Share issuance costs     -       (971,527 )     -       127,986       -       -       (843,541 )
Shares issued on exercise of RSU     543,359       1,804,260       -       -       (1,804,260 )     -       0  
Shares issued for exercise of warrants     500       900       -       (229 )     229       -       900  
Share based payments     -       -       -       -       (479,892 )     -       (479,892 )
Share based payments withholding     -       -       -       -       (68,668 )     -       (68,668 )
Expiry of broker warrants     -       -       -       (1,367,901 )     1,367,901       -       -  
Loss on retirement of Bitfury debt     -       -       -       -       (245,922 )     -       (245,922 )
Net loss and comprehensive loss     -       -       -       -       -       (8,289,945 )     (8,289,945 )
Balance, September 30, 2020     96,732,324     $ 177,158,850     $ -     $ 2,763,301     $ 4,069,867     $ (142,879,169 )   $ 41,112,850  

 5

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

1. Reporting entity and going concern

 

(a) Reporting entity

 

Hut 8 Mining Corp. (the “Company” or “Hut 8”) was incorporated under the laws of the Province of British Columbia on June 9, 2011. The registered office of the Company is located at Suite 1700 Park Place, 666 Burrard St, Vancouver BC, Canada, V6C 2X8 and the headquarter is located at 130 King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2. The Company’s common shares are listed under the symbol “HUT” on the Toronto Stock Exchange (“TSX”) and as “HUTMF” on the OTCQX Exchange. As at September 30, 2020, Bitfury Holding BV (“Bitfury”) owned 40% of the Company’s common shares and is a controlling shareholder and related party of Hut 8. The Company is in the business of utilizing specialized equipment to solve complex computational problems to validate transactions on the bitcoin blockchain. The Company receives bitcoin in return for successful service.

 

(b) Going concern

 

These unaudited condensed interim consolidated financial statements have been prepared assuming the Company will continue as a going concern, notwithstanding that the Company has an accumulated deficit. As at September 30, 2020, the Company has a working capital surplus of $15,407,215 and shareholders’ equity of $41,112,850.

 

The Company’s ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon maintaining sustained profitability and maintaining the Company’s loans in good standing. There are various risks and uncertainties affecting the Company’s operations including, but not limited to, the viability of the economics of bitcoin mining, the liquidity of bitcoin, the Company’s ability to maintain its security of its digital assets and execute its business plan. As discussed in Note 8, the Genesis loan requires bitcoin collateral. If the bitcoin price reaches a price where Hut 8 does not have the bitcoin to sufficiently collateralize the loan, then after a cure period of 10 days, Genesis may be able to liquidate a significant portion of Hut 8’s bitcoin, demand immediate repayment of the loan, or terminate the loan agreement. The Company’s strategy to mitigate these risks and uncertainties is to execute a business plan aimed at continued security, operational efficiency, revenue growth, improving overall mining profit, managing operating expenses and working capital requirements, and securing additional financing, as needed, through one or more of loans and equity investments. Given the volatility in the financial markets, it may be difficult to raise financing when needed. Failure to implement the Company’s business plan could have a material adverse effect on the Company’s financial condition and/or financial performance, see also Note 12. Accordingly, there are material risks and uncertainties that cast significant doubt about the Company’s ability to continue as a going concern.

 

These unaudited condensed interim consolidated financial statements do not include any adjustments or disclosures that would be required if assets are not realized and liabilities and commitments are not settled in the normal course of operations. If the Company is unable to continue as a going concern, then the carrying value of certain assets and liabilities would require revaluation to a liquidation basis, which could differ materially from the values presented in the consolidated financial statements

 6

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

2. Statement of compliance and basis of presentation

 

(a) Statement of compliance

 

These unaudited condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. Certain information and note disclosures normally included in the audited annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), have been omitted or condensed. These condensed interim consolidated financial statements should be read in conjunction with the Company’s December 31, 2019 audited annual consolidated financial statements.

 

The Company is in the business of digital currencies, many aspects of which are not specifically addressed by current IFRS guidance. The Company is required to make judgments as to the application of IFRS and the selection of its accounting policies. The Company has disclosed its presentation, recognition and derecognition, and measurement of digital currencies, and the recognition of revenue as well as significant assumptions and judgments, however, if specific guidance is enacted by the IASB in the future, the impact may result in changes to the Company’s earnings and financial position as presented.

 

These unaudited condensed consolidated interim financial statements were approved and authorized for issuance by the Board of Directors for November 12, 2020.

 

(b) Basis of presentation

 

The unaudited condensed consolidated interim financial statements have been prepared on a historical cost basis except for some financial instruments that have been measured at fair value.

 

(c) Functional and presentation currency

 

Items included in the unaudited condensed consolidated interim financial statements of the Company and its wholly owned subsidiaries are measured using the currency of the primary economic environment in which the entity operates. These unaudited condensed consolidated interim financial statements have been prepared in Canadian dollars, which is the Company’s functional and presentation currency.

 

(d) Consolidation

 

These unaudited condensed consolidated interim financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany transactions, balances, income and expenses are eliminated on consolidation.

 

The Company has three wholly owned subsidiaries: Hut 8 Holdings Inc., Hut 8 Asset Management Inc., and Hut 8 Finance Ltd.

 

The Company incorporated Hut 8 Asset Management Inc. on November 1, 2018 for the Company’s digital currency trading operations in Bridgetown, Barbados. No transactions have occurred to date. The Company incorporated Hut 8 Finance Ltd. on January 30, 2019 in Ontario, Canada, which is also related to the digital currency trading operations. 

 7

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019 

 

 

3. Significant accounting policies, judgements, and estimates

 

The preparation of the Company’s unaudited condensed consolidated interim financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts; however, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fiscal year are described below. The Company based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Company.

 

The following are the estimates and assumptions that have been made in applying the Company’s accounting policies that have the most significant effect on the amounts in the unaudited condensed consolidated interim financial statements:

 

(i) Functional currency

 

The functional currency of the Company has been assessed by management based on consideration of the currency and economic factors that mainly influence the Company’s digital currencies, production and operating costs, financing and related transactions. Specifically, the Company considers the currencies in which digital currencies are most commonly denominated and the currencies in which expenses are settled, by each entity, as well as the currency in which each entity receives or raises financing. Changes to these factors may have an impact on the judgment applied in the determination of the Company’s functional currency.

 8

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

3. Significant accounting policies, judgements, and estimates (continued)

 

(ii) Taxes

 

Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. The Company has not recognized the value of any deferred tax assets in its statements of financial position.

 

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on its technical merits. The Company measures and records the tax benefits from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company’s estimated liabilities related to these matters are adjusted in the period in which the uncertain tax position is effectively settled, the statute of limitations for examination expires or when additional information becomes available. The Company’s liability for unrecognized tax benefits requires the use of assumptions and significant judgment to estimate the exposures associated with our various filing positions. Although the Company believes that the judgments and estimates made are reasonable, actual results could differ and resulting adjustments could materially affect our effective income tax rate and income tax provision.

 

The Company has earned bitcoin from the commercial activity of bitcoin mining. The Company has followed the published Canada Revenue Agency (“CRA”) view that bitcoin is a commodity and inventory of the business, the value of which is included in the calculation of taxable income from the business. Bitcoin is valued in accordance with Section 10 of the Income Tax Act. Revenue from bitcoin mining is included in taxable income when the bitcoin earned is sold or exchanged for cash or another asset. There is uncertainty regarding the taxation of cryptocurrency and the CRA may assess the Company differently from the position adopted. This could result in additional current taxes payable with equal offset to deferred tax expense.

 

(iii) Impairment of non-financial assets

 

Impairment exists when the carrying value of an asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. These calculations are based on available data, other observable inputs and projections of cash flows, all of which are subject to estimates and assumptions. Recoverable amounts are also sensitive to assumptions about the future usefulness of in- process development and the related marketing rights.

 

(iv) Foreign currency translation

 

Within each entity, transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing on dates of transactions. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate at that date. Foreign exchange differences arising on translation are recognized in the statement of operations. Non-monetary assets and liabilities that are measured at historical cost are translated using the exchange rate at the date of the transaction.

 9

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

3. Significant accounting policies, judgements, and estimates (continued)

 

(v) Fair value measurement of stock options and broker warrants

 

The Company measures the cost of equity-settled transaction by reference to the fair value of the equity instruments at the date on which they are granted. Estimating fair value requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires the determination of the most appropriate inputs to the valuation model including the expected life of the broker warrants, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for stock options and broker warrants are disclosed in Note 9.

 

(vi) Revenue recognition

 

The Company recognizes revenue from the provision of transaction verification services within the bitcoin blockchain, and as consideration for these services, the Company receives bitcoin. Revenue is measured based on the fair value of the bitcoin received. The fair value is determined using the closing bitcoin price per www.coinmarketcap.com (“Coinmarketcap”). The Company is relying on the data available at Coinmarketcap to be an accurate representation of the closing price for the digital assets.

 

There is currently no specific definitive guidance in IFRS or alternative accounting frameworks for the accounting for the production and mining of bitcoin and management has exercised significant judgment in determining appropriate accounting treatment for the recognition of revenue. In the event authoritative guidance is enacted by the IASB, the Company may be required to change its policies which could result in a change in the Company’s financial position and earnings.

 

(vii) Digital assets

 

Digital assets consist of Bitcoin. Digital assets meet the definition of intangible assets in IAS 38 Intangible Assets as they are identifiable non-monetary assets without physical substance. They are initially recorded at cost and the revaluation method is used to measure the digital assets subsequently. Where digital assets are recognized as revenue, the fair value of the bitcoin received is considered to be the cost of the digital assets. Under the revaluation method, increases in fair value are recorded in other comprehensive income, while decreases are recorded in profit or loss. The Company revalues its digital asset at the end of each of its three interim financial reporting periods and at its annual financial reporting period end date. There is no recycling of gains from other comprehensive income to profit or loss. However, to the extent that an increase in fair value reverses a previous decrease in fair value that has been recorded in profit or loss, that increase is recorded in profit or loss. Decreases in fair value that reverse gains previously recorded in other comprehensive income are recorded in other comprehensive income.

 

Digital assets are measured at fair value using the quoted price on Coinmarketcap. Management considers this fair value to be a Level 2 input under IFRS 13 Fair Value Measurement fair value hierarchy as the price on this source represents an average of quoted prices on multiple digital currency exchanges

 

The Company’s determination to classify its holding of bitcoin as current assets is based on management’s assessment that its bitcoin held can be considered to be a commodity, the availability of liquid markets to which the Company may sell a portion of its holdings and that the Company is actively selling its digital currencies in the near future to generate a profit from price fluctuations. 

 10

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

3. Significant accounting policies, judgements, and estimates (continued)

 

(viii) Non-monetary transactions

 

Where the Company is settling a liability for the purchase of goods and services where the price was established in a fiat currency, the difference between the liability settled and the fair value of the digital assets transferred is recognized as a gain or loss on settlement. Otherwise, the transaction is measured based on the fair value of the digital assets exchanged. Any difference between the fair value of the digital assets exchanged and the carrying amount of the digital assets is recognized in profit and loss.

 

(ix) Earnings per share

 

The calculation of earnings per common share is based on the reported net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated on the treasury stock basis. Where potentially dilutive equity instruments are anti-dilutive, basic and diluted earnings per share are the same.

 

(x) Share issue costs

 

Costs incurred for the issue of common shares are deducted from share capital.

 

(xi) Share based transactions

 

Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service.

 

The Company issued broker warrants as part of brokered private placement offering for common shares. Broker warrants are measured at fair value at the date of the offering and accounted for as a separate component of shareholders’ equity. When the broker warrants are exercised, the proceeds received together with the related amount allocated as a separate component of shareholders’ equity are allocated to capital stock. If the broker warrants expire unexercised, the related amount separately allocated to shareholders’ equity is allocated to contributed surplus. 

 11

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

3. Significant accounting policies, judgements, and estimates (continued)

 

(xii) Useful life of mining equipment

 

Management is depreciating mining equipment using a straight-line basis, with a useful life of:

 

Seacan containers and supporting infrastructure 4 years
Mining servers 2 years

 

The mining equipment is used to generate bitcoin. The rate at which the Company generates digital assets and, therefore, consumes the economic benefits of its mining equipment are influenced by several factors including, but not limited to, the following:

 

Ÿ The complexity of the mining process which is driven by the algorithms contained within the digital assets open source software; and

 

Ÿ Technological obsolescence reflecting rapid development in the mining machines such that more recently developed hardware is more economically efficient to run in terms of digital assets mined as a function of operating costs, primarily power costs (ie., the speed of mining machines evolution in the industry) is such that later mining machine models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase.

 

Based on the Company and the industry’s limited history to date, management is limited by the market data available. Furthermore, the data available also includes data derived from the use of economic modelling to forecast future digital assets and the assumptions included in such forecasts, including digital asset’s price and network difficulty, and derived from management’s assumptions. Based on current data available, management has determined that the straight-line method of amortization best reflects the current expected useful life of mining equipment. Management will review their estimates at each reporting date and will revise such estimates as and when data become available. Management will review the appropriateness of its assumption related to residual value at each reporting date. 

 12

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

4. Deposits and prepaid expenses

 

    September 30, 2020     December 31, 2019  
Current                
Deposit on equipment order(i)   $ 2,127,167     $ -  
Prepaid electricity(ii)     974,558       158,391  
Prepaid insurance     108,455       82,225  
Miscelaneous deposits     4,523       80,573  
Total current deposits and prepaids expenses   $ 3,214,703     $ 321,189  
                 
Non-current                
Deposits related to electricity supply under Electricity Supply Agreement(iii)   $ 4,431,417     $ 5,652,240  
Land lease deposit     141,988       123,987  
Total non-current deposits and prepaids expenses   $ 4,573,405     $ 5,776,227  

 

(i) Payments for mining equipment to ship from China in November 2020.

 

(ii) Electricity deposits for facility in Drumheller, Alberta.

 

(iii) Electricity deposits for facility in Medicine Hat, Alberta.

 13

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

5. Digital assets

 

Digital assets solely consist of bitcoin. Below summarizes the bitcoin mined and transacted.

 

          Bitcoin  
Balance, December 31, 2018   $ 15,408,189       3,035  
Bitcoin mined     81,990,119       8,618  
Bitcoin traded for cash     (68,181,784 )     (6,883 )
Bitcoin used for debt and interest payments     (2,808,396 )     (449 )
Bitcoin paid for services     (7,514,399 )     (1,397 )
Gain on use of digital assets     4,143,311       -  
Revaluation of digital assets     4,273,686       -  
Balance, December 31, 2019   $ 27,310,725       2,923  
Bitcoin mined     27,233,929       2,282  
Bitcoin traded for cash(i)     (28,986,610 )     (2,350 )
Bitcoin paid for services(i)     (43,485 )     (4 )
Gain on use of digital assets(i)     1,800,983       -  
Revaluation of digital assets(ii)     13,713,962       -  
Balance, September 30, 2020   $ 41,029,505       2,851  
Current portion                
Digital assets, current(iii)   $ 14,119,230       981  
Bitcoin used as collateral(iv)   $ 26,843,667       1,865  
Digital assets, receivable(v)   $ 66,608       5  

 

(i) During the nine months ended September 30, 2020, the Company used its bitcoin for cash, payments of debts, interest, and other services totaling $29,030,095 with a cost of $27,229,112, which resulted in a realized gain on use of $1,800,983.

 

(ii) Digital assets held are revalued each reporting period based on the fair market value of the price of bitcoin on the reporting date. As at September 30, 2020, the price of bitcoin was $14,390 (US$10,788) which for the nine months ended September 30, 2020 resulted in a revaluation gain of $13,713,962.

 

(iii) Bitcoin that is held by Hut 8, is available for use, and not subject to any restrictions or covenants as at September 30, 2020.

 

(iv) Digital assets held by Genesis as collateral for the loan (Note 8).

 

(v) Bitcoin receivable refers to the amount of bitcoin mined that has not been transferred from the mining pool to the Company. The Company mined approximately 5 bitcoins during September 2020 that were received shortly after the quarter end.

 14

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

6. Plant and equipment

 

    Infrastructure     Mining servers    

Right-of-use 

assets(i) 

    Total  
Cost                        
As at January 1, 2019   $ 30,006,954     $ 75,292,993     $ -     $ 105,299,947  
Additions     2,123,912       7,110,488       575,274       9,809,674  
As at December 31, 2019     32,130,866       82,403,481       575,274       115,109,621  
Additions     869,342       2,910,405       -       3,779,747  
As at September 30, 2020     33,000,208       85,313,886       575,274       118,889,368  
                                 
Accumulated Depreciation                                
As at January 1, 2019   $ 8,743,809     $ 38,429,130     $ -     $ 47,172,939  
Depreciation     6,314,949       26,664,389       74,259       33,053,597  
As at December 31, 2019     15,058,758       65,093,519       74,259       80,226,536  
Depreciation     5,109,866       12,370,514       32,219       17,512,599  
Accretion expense     -       -       18,003       18,003  
As at September 30, 2020     20,168,624       77,464,033       124,481       97,757,138  
                                 
Net Book Value December 31, 2019     17,072,108       17,309,962       501,015       34,883,085  
Net Book Value September 30, 2020     12,831,584       7,849,853       450,793       21,132,230  

 

(i) The right-of-use assets (“ROU”) comprise of a 10-year land lease with the City of Medicine Hat, dated June 1, 2018, and a three-year sublease with a landlord in Drumheller with an optional 3-year extension dated May 8, 2017. See Note 8 for the related lease liability.

 

☐ The City of Medicine Hat lease is $1,395 monthly in lease payment. A ROU asset and a related lease liability had been recognized as such.

 

☐ The Drumheller sublease is $1,500 monthly in lease payment. A ROU asset and a related lease liability had been recognized as such.

 

7. Accounts payable and accrued liabilities

 

    September 30, 2020     December 31, 2019  
Accounts payable   $ 3,575,187     $ 563,868  
Other accrued liabilities     515,446       657,564  
Accrued interest     -       1,275,432  
Total   $ 4,090,633     $ 2,496,864  

 15

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

8. Loans payable

 

    September 30, 2020     December 31, 2019  
Genesis   $ 26,678,000     $ 19,482,000  
Lease liabilities     328,311       325,075  
Bitfury     -       6,231,548  
      27,006,311       26,038,623  
Current portion   $ 27,006,311     $ 4,070,004  
Non-current portion   $ -     $ 21,968,619  

 

(i) Genesis loan

 

As at September 30, 2020, the Company has a loan payable of $26,678,000 (US$20,000,000) to Genesis Global Capital, LLC (“Genesis”). The loan has an open term where Genesis can call the loan principal, or any part thereof, with a five-month notice to the Company, and Hut 8 can repay the loan, or any part thereof, to Genesis with one month notice. The loan bears interest at 8% per annum, which is payable monthly. The loan has a covenant requiring 95% of the loan principal to be collateralized by bitcoin. The bitcoin for collateral related to the loan are held by Genesis. If the collateralized value of the bitcoin drops below 85% of loan, Genesis may request additional bitcoin to bring the collateral back to the required levels. Conversely, if the collateralized bitcoin value goes over 105% of the loan, the Company may request the return of the surplus bitcoin. Additionally, if the price of bitcoin drops below US$6,500, the collateral requirement will automatically change to 80% of the loan value and the interest rate adjusts to 10% per annum until the bitcoin price increases above US$6,500 again. Interest expense for the three and nine months ended September 30, 2020, respectively, was $556,384 (US$417,479) (2019 - $Nil), and $1,810,045 (US$1,333,664) (2019 - $Nil). A foreign exchange gain of $ 578,000 and loss of $106,500 was recognized for the three and nine months ended September 30, 2020 (2019 - $Nil).

 

(ii) Lease liability

 

A lease liability for each ROUs was recognized in 2018 amortized cost using the effective interest method. 

 16

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

9. Equity

 

(a) Common shares

 

The Company has authorized share capital of an unlimited number of common shares.

 

    Number of shares     Amount  
Balance, December 31, 2018     85,227,858     $ 162,733,360  
Shares issued for mining equipment     838,511       1,167,386  
Shares issued in settlement of accounts payable     3,717,433       4,609,617  
Shares issued for services     419,507       667,256  
Shares issued for RSUs     234,700       1,444,980  
Balance, December 31, 2019     90,438,009     $ 170,622,599  
Shares issued for RSUs(i)     543,359       1,804,260  
Shares issued for public offering(ii)     5,750,456       5,702,617  
Cost of issuance attributed to public offering(ii)     -       (971,527 )
Shares issued for exercise of warrants     500       900  
Balance, September 30, 2020     96,732,324     $ 177,158,850  

 

(i) During the nine months ended September 30, 2020, the Company issued 543,359 shares related to exercise of restricted share units (“RSU”) and reallocated $1,804,260, the relative fair value of RSU’s net of employment withholdings, from contributed surplus to share capital.

 

(ii) On June 25, 2020, the Company completed its public offering (the “Offering”), and, with the underwriters exercising their over-allotment option, issued 5,750,456 units (“Unit”) at a price of $1.45 per Unit for gross proceeds of $8,338,161. Each unit comprises of one common share (each a “Common Share”) and one Common Share purchase warrant of the Company (each a “Warrant”). Each Warrant entitles the holder thereof to acquire one additional common share of the Company at an exercise price of $1.80 per share at any time for a period of 18 months. The Warrants are valued at $2,635,544 under the related fair value approach using the Black-Scholes Option Pricing model based on the following assumptions: expected life of 1.5 years, risk-free rate of 0.30%, volatility of 128% and dividend yield of 0%. The Company paid commissions and fees totaling $843,541 and issued 345,027 broker warrants with a fair value of $127,986. The broker warrants are determined using the Black-Scholes Option Pricing model based on the following assumptions: expected life of 2 years, interest rate of 0.30%, volatility of 118% and dividend yield of 0%.

 17

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

9. Equity (continued)

 

(b) Warrants

 

The warrant activity is as follows:

 

    Grant date   Number of warrants     Value  
Balance, January 1, 2019         2,882,222     $ 1,367,901  
Balance, December 31, 2019         2,882,222     $ 1,367,901  
                     
Broker warrants expired   2/7/2020     (660,000 )     (1,367,901 )
Public offering warrants   6/25/2020     5,750,456       2,635,544  
Public offering - broker warrants   6/25/2020     345,027       127,986  
Warrants exercised   7/17/2020     (500 )     (229 )
Balance, September 30, 2020         8,317,205     $ 2,763,301  

 

The warrants issued and outstanding as at September 30, 2020 are as follows:

 

            Weighted average        
            remaining contractual        
Exercise price     Number     life (months)     Expiry date  
$ 4.50       2,222,222       36     9/10/2023  
$ 1.80       5,749,956       15     12/25/2021  
$ 1.45       345,027       21     6/25/2022  
$ 2.51       8,317,205       21        

 

(c) Incentive plan

 

On March 5, 2018, the Company adopted a Long-Term Incentive Plan (“LTIP”) under which it is authorized to grant stock options, restricted share units and deferred share units (“Awards”) to officers, directors, employees, and consultants enabling them to acquire common shares of the Company. The maximum number of common shares reserved for issuance of Awards that may be granted under the plan is 10% of the issued and outstanding common shares of the Company.

 18

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

9. Equity (continued)

 

(c) Incentive plan (continued)

 

Stock options

 

The stock option activity is as follows:

 

      Number of     Weighted average  
      options     exercise price  
Balance, January 1, 2019       965,000     $ 4.63  
Granted       110,000       1.20  
Forfeiture       (165,000 )        
Balance, December 31, 2019       910,000       4.34  
Forfeiture       (115,000 )     5.00  
Options outstanding, September 30, 2020       795,000     $ 4.25  
Options exercisable, September 30, 2020       536,668     $ 4.78  

 

As at September 30, 2020 the Company had the following stock options outstanding:

 

      Number of     Number of     Weighted     Weighted average  
Exercise price     options     options     average     remaining life  
      outstanding     exercisable     exercise price     (months)  
$ 1.14       100,000     -     $ 1.14       51  
  1.80       10,000       -       1.80       49  
  3.00       90,000       60,000       3.00       36  
  5.00       595,000       476,668       5.00       30  
$ 4.25       795,000     536,668     $ 4.78       34  

 

During the three and nine months ended September 30, 2020, the Company recorded a total of $76,548 and $289,475 (2019 – $195,286 and $798,639), respectively, as share based payments related to stock options. During the three and nine months, the Company also recorded a reversal of share-based payments totaling $90,691 due to the forfeiture of 115,000 options. The compensation expense was based on the fair value of each stock option on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions.

 

    2020     2019  
Expected life (years)     n/a       4.96  
Expected volatility     n/a       109.36 %
Dividend rate     n/a       0.00 %
Risk-free interest rate     n/a       2.00 %
Weighted average fair value per option granted     n/a     $ 3.08  

 19

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

9. Equity (continued)

 

Restricted Share Units (“RSUs”)

 

The Company has a restricted share unit plan that provides for the granting of restricted share units to directors, officers, employees, and consultants of up to 3,000,000 shares of the Company. Upon vesting, the Company will issue shares from treasury to the employees for no additional consideration.

 

As at September 30, 2020, rights to receive 406,667 shares have been granted of which none vests in the remainder of 2020, 348,333 vests in 2021, and 58,334 vests in 2022.

 

During the three and nine months ended September 30, 2020, the Company recognized a total of $91,195 (2019 - $474,849) and $199,841 (2019 – $1,628,503) as share-based payments related to RSUs. The Company also recorded a reversal of share-based payments totaling $1,111,110 previously due to the forfeiture of 505,050 RSUs.

 

10. Related party agreements and transactions

 

Related party transactions

 

Key management includes members of the Board of Directors and its corporate officers. The aggregate value of transactions relating to key management personnel and entities over which they have control or significant influence were as follows:

 

    Nine months ended     Nine months ended  
    September 30, 2020     September 30, 2019  
Salary, fees, and other short-term benefits   $ 664,112     $ 942,625  
Share based payments     577,171       1,972,472  
    $ 1,241,283     $ 2,915,097  

 

During the three and nine months ended September 30, 2020, the Company was charged $325,884 (2019 - $5,419,253) and $2,259,087 (2019 - $15,475,339), respectively, in site operating costs by Bitfury. The reduction in cost is the result of the Company taking over the site management from Bitfury. As at September 30, 2020, $658,868 (September 30, 2019 - $166,814) was owed to Bitfury, which has been included in accounts payable.

 

The Company also made payment to Andrew Kiguel, the previous CEO, through his numbered corporation 1138029 B.C. Ltd, a one-time $500,000 consulting fee to assist with the transition to the Interim CEO. 

 20

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

11. Capital management

 

The Company manages its capital to maintain its ability to continue as a going concern and to provide returns to shareholders and benefits to other stakeholders. The capital structure of the Company consists of equity comprised of issued share capital and reserves. The Company manages its capital structure and makes adjustments to it in light of economic conditions. The Company, upon approval from its Board of Directors, will balance its overall capital structure through new share issuances or by undertaking other activities as deemed appropriate under the specific circumstances. The Company is not subject to externally imposed capital requirements and the Company’s overall strategy with respect to capital risk management remains unchanged from the period ended September 30, 2019.

 

12. Financial Instruments

 

The Company’s risk exposures and the impact on the Company’s financial instruments are summarized below.

 

(a) Credit risk

 

Financial instruments that are potentially subject the Company to a concentration of credit risk consist primarily of cash, digital assets, and prepaid expenses. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions.

 

Hut 8 uses the services of BitGo Trust Company Inc. (“BitGo”). BitGo is considered one of the top custodians for cryptocurrency and has US$100 million of insurance backing its digital asset custody. Hut 8 does not self-custody its bitcoin.

 

(b) Interest rate risk

 

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to interest rate risk is limited and only relates to its ability to earn interest income on cash balances nominated in foreign currency at variable rates. Changes in short term interest rates will not have a significant effect on the fair value of the Company’s cash account.

 

(c) Liquidity risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company currently settles its financial obligations out of cash and cash equivalents and digital assets. The Company has a planning and budgeting process to help determine the funds required to support the Company’s normal spending requirements on an ongoing basis and its expansionary plans.

 21

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

12. Financial Instruments (continued)

 

(d) Foreign currency risk

 

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Currency risk arises from financial instruments (including cash and cash equivalents) that are denominated in a currency other than Canadian dollars, which represents the functional currency of the Company. The Company’s functional currency is the Canadian dollar and most purchases are transacted in Canadian dollars. The Company has also transacted in US Dollars to purchase mining equipment from Bitfury and with loans payable denominated in US Dollars. Management currently does not hedge its foreign exchange risk.

 

The table below indicates the foreign currencies to which the Company has significant exposure as at September 30, 2020 in Canadian dollar terms:

 

    2020  
Cash   $ 1,364,460  
Accounts payable     174,592  
Loans payable     26,678,000  

 

The effect on earnings before tax of a 10% strengthening or weakening of the CAD exchange rate at the balance sheet date for financial instruments denominated in USD, with all other variables held constant, is $2,821,705.

 

(e) Fair value measurements:

 

(i) Financial hierarchy:

 

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The hierarchy is summarized as follows:

 

Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities;

 

Level 2: Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly from observable market data; and

 

Level 3: Inputs that are not based on observable market data.

 

The Company’s financial instruments have been classified as follows:

 

December 31, 2019   Level 1     Level 2     Level 3     Total  
Fair value through profit and loss                                
Cash   $ 2,946,017     $ -     $ -     $ 2,946,017  
Digital assets   $ -     $ 27,310,725     $ -     $ 27,310,725  

 

September 30, 2020   Level 1     Level 2     Level 3     Total  
Fair value through profit and loss                                
Cash   $ 2,259,951     $ -     $ -     $ 2,259,951  
Digital assets   $ -     $ 41,029,505     $ -     $ 41,029,505  

 22

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

12. Financial Instruments (continued)

 

(f) Digital assets and risk management

 

Digital assets are measured using level two fair values, determined by taking the rate from Coinmarketcap.

 

Digital asset prices are affected by various forces including global supply and demand, interest rates, exchange rates, inflation or deflation and the global political and economic conditions. The profitability of the Company is directly related to the current and future market price of digital assets; in addition, the Company may not be able liquidate its inventory of digital assets at its desired price if required. A decline in the market prices for digital assets could negatively impact the Company’s future operations. The Company has not hedged the conversion of any of its sales of digital assets.

 

Digital assets have a limited history and the fair value historically has been very volatile. Historical performance of digital assets is not indicative of their future price performance. The Company’s digital assets currently solely consist of bitcoin.

 

As at September 30, 2020, had the market price of the Company’s holdings of Bitcoin increased or decreased by 10% with all other variables held constant, the corresponding asset value increase or decrease respectively would amount to $4,102,951.

 

13. Subsequent events

 

On November 2, 2020, Hut 8 announced the appointment of Jaime Leverton as its new permanent CEO, effective December 1, 2020. The current Interim CEO, Jimmy Vaiopoulos, will return to his previous position of CFO, while the current Interim CFO will step down from his position effective November 30, 2020. Viktoriya Griffin will become Hut 8’s full-time Corporate Secretary beginning December 1, 2020.

 

The continuing outbreak of the coronavirus, also known as “COVID-19”, is still impacting worldwide economic activity. Conditions surrounding the coronavirus continue to rapidly evolve and government authorities have implemented emergency measures to mitigate the spread of the virus. The outbreak and the related mitigation measures may have an adverse impact on global economic conditions as well as on the Company’s business activities. The extent to which the coronavirus may impact the Company’s business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in Canada and other countries to contain and treat the disease. The effect that these events will have on the price of bitcoin, the ability for the Company to raise capital and the supply of upgraded equipment remain uncertain and as such, the Company cannot determine their financial impact at this time. 

 23

 

HUT 8 MINING CORP.

 

(In Canadian dollars) 

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amended and Restated 

For the three and nine months ended September 30, 2020 and 2019

 

 

14. Restatement of the financial statements

 

The unaudited condensed consolidated interim financial statements of the Company as at September 30, 2019 and for the period then ended have been restated to correct material errors and omissions in its prior filing. The Company discovered the deficiencies in the accounting information subsequent to the filing and issuance of the financial statements. The unaudited condensed consolidated interim financial statements for the period ended September 30, 2019 have been prepared using the most complete information currently available. Below are the restated:

 

Period ended September 30, 2019

 

Unaudited Condensed Consolidated Interim Statement of Loss and Comprehensive Loss

 

The net and comprehensive loss for the three months ended September 30, 2019 was increased by $3,445,964 to $5,188,641 from $1,742,677 due to a change in depreciation expense on plant and equipment, which was adjusted to $8,178,269 from $4,732,305.

 

The net and comprehensive income for the nine months ended September 30, 2019 was decreased by $ 10,337,892 to $15,525,987 from $ 25,863,879 due to a change in depreciation expense on plant and equipment, which was adjusted to $24,534,807 from $14,196,915.

 

Unaudited Condensed Consolidated Interim Statement of Cash flows

 

The net income for the nine months ended September 30, 2019 was decreased by $10,337,892 which was offset by non-cash depreciation expense of $10,337,892 resulting in no changes to cash used in operating activities.

 24

 

Exhibit 4.6

 

 

HUT 8 MINING CORP.

 

Management’s Discussion and Analysis

Amended and Restated

 

For the three and nine months ended September 30, 2020

1 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Introduction

 

This Management’s Discussion and Analysis (“MD&A”) is dated November 12, 2020, and should be read in conjunction with the unaudited condensed consolidated interim financial statements for the three and nine months ended September 30, 2020 (“Q3-2020”), the audited consolidated financial statements for the year ended December 31, 2019, the annual MD&A for the year ended December 31, 2019, and the annual information form dated April 3, 2020 of Hut 8 Mining Corp., each of which is available on SEDAR at www.sedar.com.

 

In this MD&A, unless the context otherwise requires, all references to “we”, “us”, “our”, “Hut 8”, and “the Company” refer to Hut 8 Mining Corp. and its subsidiaries, and all references to “Management” refer to the directors and executive officers of the Company.

 

Unless otherwise stated, results are reported in Canadian dollars, unless otherwise noted. The Company applies International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board and interpretations issued by the IFRS Interpretations Committee. In the opinion of Management, all adjustments considered necessary for a fair presentation have been included. The results presented in the MD&A are not necessarily indicative of the results that may be expected for any future period.

 

Cautionary Note Regarding Forward-Looking Information

 

This MD&A contains certain forward-looking information and forward-looking statements, as defined in applicable securities laws (collectively referred to herein as “forward-looking statements”). These statements relate to future events or the Company’s future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “continues”, “forecasts”, “projects”, “predicts”, “intends”, “anticipates” or “believes”, or variations of, or the negatives of, such words and phrases, or state that certain actions, events or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement.

 

Inherent in forward-looking statements are risks, uncertainties and other factors beyond the Company’s ability to predict or control. For a list of the factors that could affect the Company, please make reference to those risk factors referenced the annual information form dated April 3, 2020. Readers are cautioned that such risk factors, uncertainties and other factors are not exhaustive. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this MD&A.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement. Specifically, this MD&A includes, but is not limited to, forward-looking statements regarding: the Company’s ability to meet its working capital needs at the current level for the next twelve-month period; management’s outlook regarding future trends; sensitivity analysis on financial instruments, which may vary from amounts disclosed; and general business and economic conditions.

 

All forward-looking statements herein are qualified by this cautionary statement. Accordingly, readers should not place undue reliance on forward-looking statements. The Company undertakes no obligation to update publicly, or otherwise revise, any forward-looking statements, whether as a result of new information or future events or otherwise, except as may be required by law. If the Company does update one or more forward- looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements, unless required by law.

2 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Non-GAAP Measures

 

This MD&A presents certain non-GAAP (“GAAP” refers to Generally Accepted Accounting Principles) financial measures to assist readers in understanding the Company’s performance. These non-GAAP measures do not have any standardized meaning and therefore are unlikely to be comparable to similar measures presented by other issuers and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Management uses these non-GAAP measures to supplement the analysis and evaluation of operating performance.

 

Throughout this MD&A, the following terms are used, which are not found in the Chartered Professional Accountants of Canada Handbook and do not have a standardized meaning under GAAP.

 

EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization)

 

• “EBITDA” represents net income or loss excluding net finance income or expense, income tax or recovery, depreciation, and amortization.

 

• “Adjusted EBITDA” represents EBITDA adjusted to exclude share-based compensation, fair value loss or gain on revaluation of digital assets, write-offs, and costs associated with one-time transactions (such as listing fees).

 

• “Adjusted EBITDA Margin” represents Adjusted EBITDA as a percentage of revenue.

 

EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin are used to show ongoing profitability without the impact of non-cash accounting policies, capital structure, and taxation. This provides a consistent comparable metric for profitability.

 

“Mining Profit” represents gross profit (revenue less cost of revenue), excluding depreciation. “Mining Profit Margin” represents Mining Profit as a percentage of revenue. Mining Profit and Mining Profit Margin show the cash expenses against the revenue without the impact of non-cash accounting policies such as depreciation.

 

“Cost per Bitcoin” represents cost of revenue excluding depreciation, divided by the number of bitcoin mined in the period. This metric is commonly referenced in the bitcoin mining industry and is important to gain an understanding of the profitability in reference to the price of bitcoin.

3 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Company

 

Hut 8 is a bitcoin mining company with industrial scale operations in Alberta, Canada. Hut 8 provides investors with direct exposure to bitcoin through both its bitcoin mining operation and by holding its bitcoin balance. By owning Hut 8, investors avoid the technical complexity or constraints of purchasing the underlying cryptocurrency. Investors avoid the need to create online wallets, wire money offshore, and safely store their bitcoin.

 

For its mining activities, Hut 8 utilizes the BlockBox Data Center AC (“BlockBox”) which is a modular, portable, and more easily upgradeable to the next generation of silicon technology. The BlockBox is customizable to difference types of mining equipment.

 

The Company was incorporated under the laws of the Province of British Columbia on June 9, 2011. Its registered office is located at Suite 1700, Park Place, 666 Burrard St, Vancouver, BC, Canada V6C 2X8, and the headquarter of the Company is located at 130 King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2. The Company’s financial year ends on December 31. The Company’s common shares are listed under the symbol “HUT” on the Toronto Stock Exchange and as “HUTMF” on the OTCQX Exchange.

4 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Summary

 

Q3-2020 was the first full quarter after the bitcoin halving where bitcoin production was cut in half while the network hash rate continued to rise, making it one of the most difficult periods for bitcoin miners to operate. To put this into context, it became 140% more difficult to mine for a bitcoin from just before the halving event in May 2020 to September 30, 2020, while the bitcoin price increased by 9% in that same period. The economics of mining bitcoin have significantly improved subsequent to September 30, 2020.

 

Hut 8 has continued to find ways to reduce costs in Q3- 2020 through a few successful initiatives in the quarter. On July 13, 2020, the Company re- negotiated its credit facility terms with Genesis Global Capital, LLC (“Genesis) and successfully reduced the interest rate from 9.85% to 8.00% per annum saving approximately $500,000 per year.

 

During Q3-2020, Hut 8 transferred the Clarke chips from its Drumheller facility to Medicine Hat which brought together Hut 8’s higher efficiency chips with its best electricity pricing at Medicine Hat. Also, during Q3-2020, Hut 8 completed the transfer of the management of operations of both the Medicine Hat and Drumheller facilities from Bitfury to Hut 8, providing savings of over $1.5 million per year. With full control over the sites, Hut 8 will continue to streamline operations while maintaining the highest industry standards.

 

Hut 8’s strategy of mining and holding bitcoin continued to pay off as there was a $5.6 million gain on the re -measurement of bitcoin holdings at the end of Q3-2020. Additionally, by only strategically selling bitcoin at higher prices, Hut 8 recorded a $0.2 million gain on use of digital assets.

 

Near the end of the quarter, Hut 8 completed the installation of 1,000 M31S and 1,000 M31S+ mining equipment at its Medicine Hat facility. The equipment collectively increased Hut 8’s mining power by approximately 154 PH/s using 6.7 MW of power. The remainder of the equipment purchase, which consists of 1,590 M30S units is expected to be shipped in November 2020 and provide an additional 140 PH/s using approximately 5.3MW to the Company’s current bitcoin mining fleet.

 

Hut 8 also achieved a milestone when they became the first company to successfully exit the TSX SandBox which solidifies Hut 8 as a TSX listed issuer. Hut 8 was also the first issuer to be listed to the TSX via the TSX Sandbox and has been trading on the senior TSX exchange since early October 2019.

5 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Selected Financial Information

 

    Three months ended September 30,     Nine months ended September 30,  
    2020     2019     2020     2019  
Revenue   $ 5,754,732     $ 26,749,874     $ 27,724,292     $ 67,132,276  
Site operating costs     (7,871,231 )     (11,353,029 )     (29,120,406 )     (34,372,623 )
Mining profit     (2,116,499 )     15,396,845       (1,396,114 )     32,759,653  
Mining profit margin     -37 %     58 %     -5 %     49 %
                                 
Depreciation     (3,545,173 )     (8,178,269 )     (17,512,599 )     (24,534,807 )
Gross profit   $ (5,661,672 )   $ 7,218,576     $ (18,908,713 )   $ 8,224,846  
Gross profit margin     -98 %     27 %     -68 %     12 %
                                 
Expenses     (787,965 )     (707,270 )     (2,694,002 )     (2,090,574 )
Share-based compensation     (167,743 )     (670,136 )     479,892       (2,427,144 )
Gain on use of digital assets     198,369       514,135       1,800,984       5,433,530  
Revaluation of digital assets     5,577,854       (10,050,642 )     13,713,962       8,243,089  
Net operating income (loss)     (841,157 )     (3,695,337 )     (5,607,877 )     17,383,747  
                                 
Net finance expense     (567,787 )     (1,122,930 )     (1,909,354 )     (3,512,166 )
Foreign exchange gain (loss)     508,606       (370,374 )     (772,714 )     703,347  
Gain on share issuance     -       -       -       951,059  
Net income (loss)   $ (900,338 )   $ (5,188,641 )   $ (8,289,945 )   $ 15,525,987  
                                 
Adjusted EBITDA   $ (2,904,464 )   $ 14,689,575     $ (3,548,032 )   $ 30,669,079  
Adjusted EBITDA margin     -50 %     55 %     -13 %     46 %
Net income (loss) per share - basic and diluted   $ (0.01 )   $ (0.07 )   $ (0.09 )   $ 0.20  

 

Assets            
    September 30,     December 31,  
    2020     2019  
Total assets   $ 72,209,794     $ 71,237,244  
                 
Total non-current financial liabilities   $ -     $ 19,807,075  

6 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Discussion of Operations for the three months ended September 30, 2020

 

During Q3-2020, the Company mined 372 bitcoin, resulting in revenue generation of $5.8 million, compared to the same period of the prior year of 1,965 bitcoin mined with revenue of $26.8 million. The bitcoin halving occurred on May 11, 2020, effectively cutting down the bitcoin production for every miner in half. This was the first quarter that every bitcoin miner, including Hut 8, experienced the full effect of the halving. This led to a difficult quarter for Hut 8 financially, especially during significant transitions on site to increase revenue and decrease costs. More than halfway through Q3-2020, Hut 8 installed 2,000 new generation bitcoin mining units and finalize the transfer of site management which will increase the profitability of Hut 8’s operations.

 

Hut 8 also recognized $0.5 million of hosting revenue after signing up its first client with 6MW of latest generation bitcoin mining equipment. This is a new revenue stream for Hut 8 and provides consistent recurring revenue with its available electrical capacity and existing infrastructure.

 

Expenses for Q3-2020 were $1 million, of which there were non-cash share- based payments of $0.2 million compared with the same period of the prior year expenses of $1.4 million of which there were non-cash share-based payments of $0.7 million. Management has worked to decrease quarterly expenses, especially after the halving occurred.

 

For Q3-2020, Hut 8 had a revaluation gain of $5.6 million from adjusting the value of the digital assets held in inventory to the market value on the reporting date. This gain is from the increase in bitcoin price from US$9,138 on June 30, 2020 to the September 30, 2020 price of US$10,788. Hut 8 also remained strategic at selling its bitcoin inventory for fiat currency, resulting in a realized gain on use of bitcoin $198k for the three months ended June 30, 2020, compared to the Q3-2019 gain of $514k. In future quarters, the Company would expect to see unrealized gains or losses based on the price of bitcoin on the reporting date, relative to the price on the day mined, when revenue is recorded. Hut 8 recorded negative adjusted EBITDA of $2.9 million and net loss of $0.9 million for Q3-2020 which was due to the worsening bitcoin economics.

 

Below is a bitcoin price chart and mining difficulty for the nine months ended September 30, 2020 (reference https://coinmarketcap.com/currencies/bitcoin):

 

 

7 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Selected Quarterly Information

 

The following table summarizes the Company’s financial information for the last eight quarters:

 

All amounts in 000’s, except for share figures                        

 

    Dec 31     Mar 31     June 30     Sep 30     Dec 31     Mar 31     June 30     Sep 30  
    2018     2019     2019     2019     2019     2020     2020     2020  
  Q4     Q1     Q2     Q3     Q4     Q1     Q2     Q3  
Revenue   $ 12,995     $ 12,102     $ 28,280     $ 26,750     $ 14,858     $ 12,740     $ 9,230     $ 5,755  
Net income (loss)     (116,569 )     (9,511 )     30,226       (5,189 )     (13,395 )     (10,230 )     2,840       (900 )
Net income (loss) per share:                                                                
basic     (2.18 )     (0.13 )     0.38       (0.06 )     (0.17 )     (0.11 )     0.03       (0.01 )
diluted     n.a.       n.a.       0.38       n.a.       n.a.       n.a.       0.03       n.a.  

 

See below for the calculation of Adjusted EBITDA for the most recent eight quarters:

 

All amounts in 000’s, except per share figures                            

 

    Dec 31     Mar 31     Jun 30     Sep 30     Dec 31     Mar 31     June 30     Sep 30  
    2018     2019     2019     2019     2019     2020     2020     2020  
    Q4     Q1     Q2     Q3     Q4     Q1     Q2     Q3  
Net income (loss)   $ (116,569 )   $ (9,511 )   $ 30,226     $ (5,189 )   $ (13,395 )   $ (10,230 )   $ 2,840     $ (900 )
                                                                 
Add/(deduct):                                                                
Net finance costs     -       1,184       1,205       1,123       1,273       649       693       568  
Depreciation and amortization     18,037       8,178       8,178       8,178       8,519       7,009       6,958       3,545  
Stock-based compensation     1,138       1,102       655       670       478       (708 )     60       168  
Revaluation of digital assets     7,443       (1,043 )     (17,255 )     10,052       3,972       1,282       (9,418 )     (5,578 )
Gain/loss on use of digital assets     4,273       253       (5,169 )     (515 )     1,288       (914 )     (689 )     (198 )
Foreign exchange     927       (489 )     (585 )     370       (494 )     2,354       (1,073 )     (509 )
Write-off     85,405       -       -       -       -       -       -       -  
Other one-off items     -       -       -       -       197       -       542       -  
Other gains or losses     (89 )     (951 )     -       -       1,018       -       -       -  
Adjusted EBITDA(1)   $ 565     $ (1,277 )   $ 17,256     $ 14,689     $ 2,856     $ (558 )   $ (86 )   $ (2,904 )

 

(1) A non-GAAP measure defined above

8 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

The bitcoin mining industry does not typically have seasonality; however, the Company may have fluctuations at similar times in the year related to its electricity prices. The Company’s operations are solely out of Alberta, Canada where 42MW of power is directly from a power purchase agreement with the City of Medicine Hat and the remainder is from the Alberta electricity grid. Due to the changing weather in Alberta and seasonal electricity needs, time periods of extreme cold or extreme hot weather may result in higher electricity costs. Hut 8 manages electricity costs to avoid peak prices and is constantly monitoring its operations to maximize efficiency.

 

During the three months ended September 30, 2020, the Company incurred $3.86 million in electricity cost for its City of Medicine Hat site and $2.58 million for its Drumheller site. The below chart shows the effect on operations and profitability of the Company if the average cost of electricity were to increase by 10%, 20%, and 30%.

 

  Jul 2020     Aug 2020     Sep 2020     Total  
Electricity Cost                                
Drumheller     889,526       834,761       853,862       2,578,149  
City of Medicine Hat     991,847       1,373,016       1,494,140       3,859,003  
Total     1,881,373       2,207,777       2,348,002       6,437,152  
                                 
Sensitivity Analysis     Q3-2020 Actual       +10%       +20%       +30%  
Electricity cost     6,437,152       7,080,867       7,724,582       8,368,297  
Gross profit     (5,661,672 )     (6,305,387 )     (6,949,102 )     (7,592,818 )
% change             -11 %     -23 %     -34 %
Net loss     (900,338 )     (1,544,053 )     (2,187,768 )     (2,831,484 )
% change             -71 %     -143 %     -214 %

 

Industry Overview

 

Bitcoin

 

Bitcoin is a digital currency that allows peer- to-peer transactions globally over the internet. Bitcoin is independent of any central authority, such as a bank or government. Instead, bitcoin is governed by a pre-programmed algorithm called Secure Hash Algorithm 256 (SHA-256) that is backed by millions of computers across the world called “miners”. Bitcoin miners record transactions and check their authenticity. While fiat currencies are controlled by central banks and governments, bitcoin miners are spread out across the world and store transactions on the blockchain which is a digital public ledger that can be accessed by anyone. This global and transparent system is referred to as decentralized control as the management of bitcoin does not have a central point of failure or attack.

 

Unlike fiat currencies, which have an unlimited supply which is controlled by governments and central banks, the supply of bitcoin is controlled by the SHA-256 to keep its availability scarce and total supply fixed. To date, approximately 18.5 million bitcoin exist and only 21 million bitcoin will ever exist. It is expected that all bitcoin will be mined by 2140. Due to the scarcity and computational power required to mine bitcoin, it is often referred to as “digital gold”, as physical gold is also scarce and is costly to mine.

 

Blockchain

 

The bitcoin blockchain is a cloud-based digital public ledger where bitcoin transactions are grouped together and represented as a block in a network chain, containing all relevant transaction details. The bitcoin blockchain is maintained by a community of miners. All transactions on the blockchain are transparent and designed to make it impossible to add, remove or change data without being detected by users.

9 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Bitcoin Mining

 

Mining is the process of verifying bitcoin transactions by solving a computationally difficult encrypted code, called a “hash”. The hash rate is the number of attempts at solving the encryption code the equipment can process per second. Miners use equipment that produces a high hash rate, as it results in more attempts at solving the encrypted code. The average hash rate for a two- week period determines the network difficulty rate, which is set every two weeks. The network difficulty is a measure of how difficult it is to solve a block. This computational process of decrypting the code through hashing is referred to as proof of work. Bitcoin miners use powerful Application Specific Integrated Circuit (“ASIC”) computing chips to compete with each other to correctly solve the encryption code.

 

The power and efficiency of the ASIC chip to produce a high number of hashes is essential to successfully mining. When a miner is successful in solving the code, a block containing transactions is validated and incorporated into the blockchain resulting in an economic incentive payment for the miner in the amount of 6.25 newly minted bitcoins plus potential transaction fees. This incentive payment halves every four years, the most recent of which occurred on May 11, 2020.

 

When mining Bitcoin, Hut 8 measures the output to process in computer hash rates. For example, one PH/s processes one quadrillion hashes per second that constantly attempts to solve the bitcoin cryptology code and receive the bitcoin incentive payment.

 

Hut 8 Custody of Bitcoin

 

For the protection of its bitcoin on behalf of shareholders, Hut 8 does not self-custody its bitcoin. Instead, Hut 8 uses the services of BitGo Trust Company Inc. (“BitGo”). BitGo has US$100 million of insurance backing its digital asset custody and one of the highest levels of regulatory certifications in the market. BitGo is financially backed by Wall Street firms including Goldman Sachs. Hut 8 utilizes both cold and hot storage for bitcoin with BitGo.

 

Hut 8 continues to explore new ways to enhance the custody of its bitcoin and improve security for shareholders.

 

Significant Agreements

 

On November 29, 2017, the Company entered into a Master Data Centre Purchase Agreement (the “MPA”) with Bitfury. The MPA governs the terms and conditions for the purchase from Bitfury of certain equipment (the “Data Centres”) used for the purpose of running diverse cryptographic hash functions in connection with the mining of cryptocurrency. The MPA is for a term of five years, with two successive renewal terms of one year each.

 

Concurrent with the MPA, on November 29, 2017, the Company entered into a Master Service Agreement (the “MSA”) with Bitfury. In accordance with the MSA, Bitfury shall provide the management, maintenance, support, logistics and operational services (the “Services”) required to run the Data Centres. The MSA is for a term of five years, with two successive renewal terms of one year each.

 

On February 21, 2020, the Company and Bitfury agreed to amend these key agreements, with the intent of reducing operating costs and providing more autonomy to Hut 8 in managing its operations. Hut 8 will have improved flexibility to work with outside equipment vendors and Bitfury will have the ability to work with other miners in North America as well. On August 4, 2020 and September 2, 2020, Hut 8 completed the transfers of its City of Medicine Hat and Drumheller sites, respectively, from Bitfury.

 

The Company entered into definitive agreements with the City of Medicine Hat (“CMH”) for the supply of electric energy, and the lease of land upon which Hut 8 is constructed its mining facilities. For electricity, an Electricity Supply Agreement (”ESA”) was executed, whereby CMH will provide electric energy capacity of approximately 67 MW to the new Hut 8 facilities, which in conjunction with the Company’s approximate 40 MW in operation in Drumheller, will allow Hut 8 to operate at 107 MW in total. The ESA and the land lease have a concurrent term of 10 years. The minimum payments on the land lease are $1,395 per month up to December 31, 2027.

10 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Liquidity and Capital Resources

 

As at September 30, 2020, the Company had a working capital surplus of $15.4 million, (December 31, 2019 - $6.0 million) and shareholders’ equity of $41.1 million.

 

Net cash used in operating activities was $2.9 million, which does not include the bitcoin mined but not yet converted to cash. Cash used in investing activities amounted to $5.5 million which was mainly used for purchase of new mining equipment and electricity deposit at the Drumheller facility. Cash provided by financing activities was $7.7 million, net of the proceeds from the Company’s public offering completed on June 25, 2020.

 

As at September 30, 2020, the Company had cash on hand of $2.3 million (December 31, 2019 - $2.9 million) and digital assets of $41.0 million (December 31, 2019 - $27.3 million).

 

The Company’s ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course of business is dependent upon maintaining sustained profitability and maintaining the Company’s loans in good standing. There are various risks and uncertainties affecting the Company’s operations including, but not limited to, the viability of the economics of bitcoin mining, the liquidity of bitcoin, the Company’s ability to maintain its security of its digital assets and execute its business plan. The Genesis loan requires bitcoin collateral. If the bitcoin price reaches a price where Hut 8 does not have the bitcoin to sufficiently collateralize the loan, then after a cure period of 10 days, Genesis may be able to liquidate a significant portion of Hut 8’s bitcoin, demand immediate repayment of the loan, or terminate the loan agreement.

 

The Company’s strategy to mitigate these risks and uncertainties is to execute a business plan aimed at continued security, operational efficiency, revenue growth, improving overall mining profit, managing operating expenses and working capital requirements, and securing additional financing, as needed, through one or more of loans and equity investments. Given the volatility in the financial markets, it may be difficult to raise financing when needed. Failure to implement the Company’s business plan could have a material adverse effect on the Company’s financial condition and/or financial performance. Accordingly, there are material risks and uncertainties that cast significant doubt about the Company’s ability to continue as a going concern.

 

On November 20, 2019, the Company finalized a loan for $19,956,000 (US$15,000,000) to Genesis. The loan bears interest at 9.85% per annum, payable monthly, and matures on May 21, 2021. 85% of the loan is collateralized with bitcoin that has been transferred to Genesis. If the collateralized value of the bitcoin drops below 75% of the loan, additional bitcoin will be sent to Genesis to bring the collateral level back to 85%. Conversely, if the collateralized bitcoin value goes over 95% of the loan, bitcoin will be returned to the Company as long as the 85% level remains satisfied. These funds were used to repay the loan with Galaxy.

 

On February 18, 2020, the Company completed a loan extension with Genesis for $6,615,500 (US$5,000,000). The loan bears interest at 9.85% per annum, payable monthly, and matures on Feb 18, 2021. 100% of the loan is collateralized with bitcoin that has been transferred to Genesis. If the collateralized value of the bitcoin drops below 90% of the loan, additional bitcoin will be sent to Genesis to bring the collateral level back to 100%. Conversely, if the collateralized bitcoin value goes over 110% of the loan, bitcoin will be returned to the Company as long as the 100% collateral level remains satisfied. These funds were used to repay the loan with Bitfury.

11 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

On June 25, 2020, the Company completed its public offering (the “Offering”), and, with the underwriters exercising their over-allotment option, issued 5,750,456 units (“Unit”) at a price of $1.45 per Unit for gross proceeds of $8,338,161. Each unit comprises of one common share (each a “Common Share”) and one Common Share purchase warrant of the Company (each a “Warrant”). Each Warrant entitles the holder thereof to acquire one additional common share of the Company at an exercise price of $ 1.80 per share at any time for a period of 18 months. The Warrants are determined at $2,635,544 under the related fair value approach using the Black-Scholes Option Pricing model based on the following assumptions: expected life of 1.5 years, interest rate of 0.30%, volatility of 128% and dividend yield of 0%. The Company paid commissions and fees totaling $843,541 and issued 345,027 broker warrants with a fair value of $127,986. The broker warrants are determined using the Black-Scholes Option Pricing model based on the following assumptions: expected life of 2 years, interest rate of 0.30%, volatility of 118% and dividend yield of 0%.

 

On July 13, 2020, the Company successfully renegotiated key terms of the loans with Genesis. The interest rate on the full amount of the loan, US$ 20 million, was reduced to 8.00% from 9.85% per annum. The bitcoin collateral required increased from 85% of the loan value to 95%. Additionally, if the price of bitcoin drops below US$6,500, the bitcoin collateral will automatically drop to 80% of the loan value, while interest rate adjusts to 10.00% per annum until the bitcoin price once again increases above US$6,500. The loan will continue indefinitely with Genesis being able to call the loan with five months’ notice, while the Company will have the option to repay with one month’s notice and no prepayment penalty.

 

Off-Balance Sheet Arrangements

 

As of the date of this MD&A, the Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company including, without limitation, such considerations as liquidity and capital resources that have not previously been discussed.

 

Financial Instruments and Business Risks

 

The Company’s risk exposures and the impact on the Company’s financial instruments are summarized below.

 

Credit risk

 

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and deposits and prepaid expenses. The Company limits its exposure to credit loss by placing its cash with high credit quality financial institutions.

 

For the protection of its bitcoin on behalf of shareholders, Hut 8 does not self-custody its bitcoin. Instead, Hut 8 uses the services of BitGo. BitGo has US$100 million of insurance backing its digital asset custody and one of the highest levels of regulatory certifications in the market. BitGo is financially backed by Wall Street firms including Goldman Sachs.

 

Interest Rate Risk

 

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to interest rate risk is limited and only relates to its ability to earn interest income on cash balances nominated in foreign currency at variable rates. Changes in short term interest rates will not have a significant effect on the fair value of the Company’s cash account.

12 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company currently settles its financial obligations out of cash and cash equivalents and digital assets. The Company has a planning and budgeting process to help determine the funds required to support the Company’s normal spending requirements on an ongoing basis and its expansionary plans.

 

As at September 30, 2020 the contractual maturities of financial liabilities, including estimated interest payments are as follows:

 

    Carrying     Contractual                          
    amount     cash flows     Within 1 year   1 to 2 years     2 to 5 years     5+ years  
Accounts payable and accrued liabilities   $ 4,090,633     $ 4,090,633     $ 4,090,633     $ -     $ -     $ -  
Loans payable and interest     26,678,000       28,812,240       28,812,240       -       -       -  
Lease commitments     328,311       691,651       35,577       35,577       69,231       551,266  
    $ 31,096,944     $ 33,594,524     $ 32,938,450     $ 35,577     $ 69,231     $ 551,266  

 

Foreign Currency Risk

 

Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Foreign currency risk arises from financial instruments (including cash and cash equivalents) that are denominated in a currency other than Canadian dollars, which represents the functional currency of the Company. The Company’s functional currency is the Canadian dollar and most purchases are transacted in Canadian dollars. The Company has also transacted in US Dollars to purchase mining equipment from Bitfury and with loans payable denominated in US Dollars. Management currently does not hedge its foreign exchange risk.

 

Concentration Risk

 

Concentration risk arises as a result of the concentration of exposures within the same category, whether it is geographical location, product type, industry sector or counterparty type. Currently, the Company has its investment highly concentrated in a single asset, bitcoin. The Company tracks the market price of bitcoin, less the Company’s liabilities and expenses, by investing in the assets of the company in bitcoin.

 

Price Volatility Risk

 

The Company is at risk due to a wide fluctuation in the price of bitcoin, the speculative nature of the underlying asset, and negative media coverage. Downward pricing of bitcoin may adversely affect investor confidence, and subsequently, the value of the Company’s bitcoin inventory, its stock price, and profitability.

 

Security Risk

 

Bitcoins are controllable only by the possessor of both the unique public key and private key relating to the local or online digital wallet in which the bitcoins are held. The bitcoin network requires a public key relating to a digital wallet to be published when used in a spending transaction and, if keys are lost or destroyed, this could prevent trading of the corresponding bitcoins.

13 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the bitcoin exchange market since the launch of the bitcoin network. Any security breach caused by hacking could cause loss of bitcoin investments.

 

Bitcoin Network Risk

 

The open-source structure of the bitcoin network protocol means that the core developers of the bitcoin network and other contributors are generally not directly compensated for their contributions in maintaining and developing the bitcoin network protocol. A failure to properly monitor and upgrade the bitcoin network protocol could damage the bitcoin network.

 

Digital Assets and Risk Management

 

Digital assets are measured using level two fair values, determined by taking the rate from Coinmarketcap.com.

 

Digital asset prices are affected by various forces including global supply and demand, interest rates, exchange rates, inflation or deflation, and the global political and economic conditions. The profitability of the Company is directly related to the current and future market price of bitcoin; in addition, the Company may not be able liquidate its inventory of digital assets at its desired price if required. A decline in the market price for bitcoin could negatively impact the Company’s future operations. The Company has not hedged the conversion of any of its sales of bitcoin.

 

Bitcoin has a limited history and the fair value historically has been volatile. Historical performance of bitcoin is not indicative of its future price performance. The Company’s digital assets currently solely consist of bitcoin.

 

Related Party Transactions

 

See the unaudited condensed consolidated interim financial statements for the three and nine months ended September 30, 2020, for related party transactions with respect to share issuances.

 

During the three and nine months ended September 30, 2020, the Company was charged $325,884 (2019 - $5,419,253) and $ 2,259,087 (2019 - $15,475,339), respectively, in site operating costs by Bitfury. The reduction in cost is the result of the Company taking over the site management from Bitfury. As at September 30, 2020, $658,868 (September 30, 2019 - $166,814) was owed to Bitfury, which has been included in accounts payable.

 

The Company also made payment to Andrew Kiguel, the previous CEO, through his numbered corporation 1138029 B.C. Ltd, a one-time $500,000 consulting fee to assist with the transition to the Interim CEO.

 

These transactions were made on terms equivalent to those that prevail in arm’s length transactions.

14 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Critical Accounting Estimates and Accounting Policies

 

The following are the estimates and assumptions that have been made in applying the Company’s accounting policies that have the most significant effect on the amounts in the unaudited condensed consolidated interim financial statements:

 

i.       Fair value measurement of stock options and broker warrants

 

The Company measures the cost of equity-settled transaction by reference to the fair value of the equity instruments at the date on which they are granted. Estimating fair value requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires the determination of the most appropriate inputs to the valuation model including the expected life of the broker warrants, volatility and dividend yield and making assumptions about them.

 

ii.       Revenue recognition

 

The Company recognizes revenue from the provision of transaction verification services within the bitcoin blockchain, and as consideration for these services, the Company receives bitcoin. Revenue is measured based on the fair value of the bitcoin received. The fair value is determined using the closing bitcoin price each day per Coinmarketcap. The Company is relying on the data available at Coinmarketcap to be an accurate representation of the closing price for the digital assets.

 

iii.       Fair value of digital assets

 

Digital assets, consisting solely of bitcoin, are measured at fair value using the quoted price on Coinmarketcap. Management considers this fair value to be a level two input under IFRS 13 Fair Value Measurement fair value hierarchy as the price on this source represents an average of quoted prices on multiple digital currency exchanges. The bitcoin is valued based on the closing price obtained from Coinmarketcap at the reporting period corresponding to the digital assets mined by the Company.

 

The Company’s determination to classify its holding of bitcoin as current assets is based on management’s assessment that its bitcoin held can be considered a commodity and the availability of liquid markets to which the Company may sell a portion or all of its holdings.

 

iv.       Non-monetary transactions

 

Non-monetary transactions for the exchange of bitcoin for various goods and services are measured at the fair value determined from the exchange amount. Fair value of the bitcoin is determined at the time of transaction.

 

v.       Share based transactions

 

Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of the goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service.

 

The Company issued broker warrants as part of brokered private placement offering for common shares. Broker warrants are measured at fair value at the date of the offering and accounted for as a separate component of shareholders’ equity. When the broker warrants are exercised, the proceeds received together with the related amount allocated as a separate component of shareholders’ equity are allocated to capital stock. If the broker warrants expire unexercised, the related amount separately allocated to shareholders’ equity is allocated to contributed surplus.

15 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

vi.       Useful life of mining equipment

 

Management is depreciating mining equipment using a straight-line basis, with a useful life of:

 

Seacan containers and supporting infrastructure 4 years
Mining servers 2 years

 

The mining equipment is used to generate bitcoin. The rate at which the Company generates digital assets and, therefore, consumes the economic benefits of its mining equipment are influenced by several factors including, but not limited to, the following:

 

• The complexity of the mining process which is driven by the algorithms contained within the digital assets open source software; and

 

• Technological obsolescence reflecting rapid development in the mining machines such that more recently developed hardware is more economically efficient to run in terms of digital assets mined as a function of operating costs, primarily power costs (ie., the speed of mining machines evolution in the industry) is such that later mining machine models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase.

 

Based on the Company and the industry’s limited history to date, management is limited by the market data available. Furthermore, the data available also includes data derived from the use of economic modelling to forecast future digital assets and the assumptions included in such forecasts, including digital asset’s price and network difficulty, and derived from management’s assumptions. Based on current data available, management has determined that the straight-line method of amortization best reflects the current expected useful life of mining equipment. Management will review their estimates at each reporting date and will revise such estimates as and when data become available. Management will review the appropriateness of its assumption related to residual value at each reporting date.

 

vii.       Taxes

 

Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. The Company has not recognized the value of any deferred tax assets in its statements of financial position.

 

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained based on its technical merits. The Company measures and records the tax benefits from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company’s estimated liabilities related to these matters are adjusted in the period in which the uncertain tax position is effectively settled, the statute of limitations for examination expires or when additional information becomes available. The Company’s liability for unrecognized tax benefits requires the use of assumptions and significant judgment to estimate the exposures associated with our various filing positions. Although the Company believes that the judgments and estimates made are reasonable, actual results could differ and resulting adjustments could materially affect our effective income tax rate and income tax provision.

 

The Company has earned bitcoin from the commercial activity of bitcoin mining. The Company has followed the published Canada Revenue Agency (“CRA”) view that bitcoin is a commodity and inventory of the business, the value of which is included in the calculation of taxable income from the business. Bitcoin is valued in accordance with Section 10 of the Income Tax Act. Revenue from bitcoin mining is included in taxable income when the bitcoin earned is sold or exchanged for cash or another asset. There is uncertainty regarding the taxation of cryptocurrency and the CRA may assess the Company differently from the position adopted. This could result in additional current taxes payable with equal offset to deferred tax expense.

16 

 

Hut 8 Mining Corp.

Management’s Discussion and Analysis

Amended and Restated

For the three and nine months ended September 30, 2020

 

Capital Management

 

The Company’s capital currently consists of Common Shares. The Company’s capital management objectives are to safeguard its ability to continue as a going concern and to have sufficient capital to be able to identify, evaluate and then acquire an interest in a business or assets. The Company does not have any externally imposed capital requirements to which it is subject. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares.

 

Management’s Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting

 

Management is committed to delivering timely and accurate disclosure of all material information.

 

Disclosure controls and procedures ensure that reporting requirements are satisfied, and that material information is disclosed in a timely manner. Due to the limitation on the ability of the officers to design and implement cost-effective policies for disclosure controls and procedures and internal control over financial reporting, the officers are not making representations that such controls and procedures would identify and allow for reporting material information on a timely basis, nor are they representing that such procedures are in place that provide reasonable assurance regarding the reliability of financial reporting.

 

However, as permitted for TSX issuers, the CEO and CFO individually have certified that after reviewing the unaudited condensed consolidated interim financial statements for the three months and nine months ended September 30, 2020 and this MD&A of the Company, there are no material misstatements or omissions, and the filing materially presents the unaudited condensed consolidated interim financial position and consolidated results of operations and cash flows for the three months and nine months ended September 30, 2020 and all material subsequent activity up to November 12, 2020.

 

Share Capital

 

As of the date of this MD&A, the Company has issued, and outstanding share capital comprised of 96,732,324 Common Shares, 795,000 stock options, 8,317,205 warrants, and 406,667 restricted share units.

 

Additional information and other publicly filed documents relating to the Company are available through the internet on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (“SEDAR”), which can be accessed at www.sedar.com.

17 

 

Exhibit 4.7

FORM 51-102F3

 

MATERIAL CHANGE REPORT

 

Item 1 Name and Address of Company

 

Hut 8 Mining Corp. (the “Company”)

 

130 King St. W, Suite 1800

 

Toronto, ON

 

M5X 1E3

 

Item 2 Date of Material Change

 

The material change occurred on February 21, 2020.

 

Item 3 News Release

 

A press release in connection with the material change was issued on September 7, 2018 through Canadian newswires and filed on www.sedar.com under the Issuer’s profile and is attached hereto as Schedule “A”.

 

Item 4 Summary of Material Change

 

The Company announced successful re-negotiations with Bitfury Holding BV (“Bitfury”), resulting in amendments to several key agreements and repayment of existing debt.

 

Item 5 Full Description of Material Change

 

5.1 Full Description of Material Change

 

The Company successfully finalized the amendments to several key agreements with Bitfury, including the Master Data Center Purchase Agreement, the Master Services Agreement, the Pool Service Agreement, the Purchase Order No.6, and the Equipment Sale and Transfer Agreement. Part of these agreements will see the Company repaying the existing credit facility with Bitfury, plus any accrued interest, the sum of US$ 5.75 million, by refinancing it with a US$5 million loan with Genesis Global Capital, LLC (“Genesis”) and with Hut 8’s cash on hand. The agreement will also allow for increased operating autonomy for the Company and reductions in Hut 8’s annual operating and interest costs of up to approximately $2 million.

 

This is considered a related party transaction, as Bitfury is a controlling shareholder of the Company.

 

5.2 Disclosure for Restructuring Transactions

 

Not applicable

 

 

Item 6 Reliance on subsection 7.1(2) of National Instrument 51-102

 

Not applicable

 

Item 7 Omitted Information

 

Not applicable

 

Item 8 Executive Officer

 

For further information with respect to this report, please contact Jimmy Vaiopoulos, CFO of the Company, at (647) 256 1992.

 

Item 9 Date of Report

 

February 21, 2020.

 

Additional Disclosure under s.5.2 of MI – 61-101

 

The purpose of this transaction was to allow the Company to operate more independently and without the restrictions of only using Bitfury’s equipment. By having the autonomy to explore other suppliers, the Company is able to choose the best mining equipment in the market in terms of cost and efficiency. The amendments also see a reduction of operating and interest costs of up to $2 million annually for Hut 8, cementing the Company’s strategy as a low-cost and efficient bitcoin mining company.

 

This is a related party transaction as described above, accordingly, Hut 8 is filing this material change report in accordance with the requirements of s. 5.2 of MI 61-101. Hut 8 is exempt from obtaining minority approval and formal valuations for this transaction because the fair market value of the transaction does not exceed 25% of Hut 8’s market capitalization. The fair market value for the transaction has been assessed by Hut 8’s board of directors acting in good faith, meaning no formal valuation was completed. Finally, to address 5.5(a) (iii) of MI 61-101, the transaction is not part of a broader connected transaction, but rather standalone transactions. A full board meeting and vote took place, in which two directors (Bill Tai and Jeremy Sewell) abstained from voting.

 

 

Schedule “A”

 

Hut 8 Announces Successful Re-negotiations to Key Agreements with Bitfury and Refinance of Debt

 

TORONTO, ON, February 21, 2020 – Hut 8 Mining Corp. (“Hut 8” or “the Company”) (TSX: HUT) (OTCQX: HUTMF), one of the world’s largest publicly listed bitcoin mining companies by operating capacity and market capitalization, announces that further to the press release on January 28, 2020, the amendments to key agreements with Bitfury Holding BV (“Bitfury”) have now been successfully finalized.

 

As part of this transaction, Hut 8 has repaid US$ 4.75 of debt and US$1 million of outstanding interest to Bitfury via a new US$5 million loan from Genesis Global Capital, LLC (“Genesis”) and Hut 8’s cash on hand. The terms of the new loan with Genesis includes a 9.85% coupon per annum and a 12 month term with a bullet repayment. This refinancing will decrease Hut 8’s interest costs by 2.15% per annum which equal savings of approximately $136,000 annually.

 

The amendments to key agreements allow for increased autonomy for Hut 8 and a reduction of costs up to $2 million annually, while still maintaining Bitfury as a key strategic partner and shareholder.

 

ABOUT HUT 8 MINING CORP.

 

Hut 8 is a bitcoin mining company with industrial scale operations in Canada. In total, Hut 8 owns and operates two sites in Alberta, Canada utilizing 94 BlockBox AC data centers with current operating capacity of 107 MW and 952 PH/s.

 

Hut 8 creates value for investors through low production costs and appreciation of its bitcoin inventory. The company provides investors with direct exposure to bitcoin, without the technical complexity or constraints of purchasing the underlying cryptocurrency. Investors avoid the need to create online wallets, wire money offshore, and safely store their bitcoin.

 

The Company’s common shares are listed under the symbol “HUT” on the TSX and as “HUTMF” on the OTCQX Exchange.

 

Key investment highlights and FAQ’s: https://www.hut8mining.com/investors.

 

Keep up-to-date on Hut 8 events and developments and join our online communities at Facebook, Twitter, Instagram and LinkedIn.

 

Hut 8 Corporate Contact:

 

Andrew Kiguel 

Chief Executive Officer 

Tel: (647) 256-1992 

Email: info@hut8mining.com

 

Jimmy Vaiopoulos 

Chief Financial Officer 

Tel: (647) 256-1992 

Email: info@hut8mining.com

 

 

FORWARD-LOOKING STATEMENTS

 

Certain information in this press release constitutes forward-looking information. In some cases, but not necessarily in all cases, forward-looking information can be identified by the use of forward-looking terminology, such as “plans”, “targets”, “expects” or “does not expect”, “is expected”, “estimates”, “intends”, “assumes”, “anticipates” or “does not anticipate” or “believes”, or variations of such words and phrases, or state that certain actions, events or results “may”, “could”, “would”, “might”, “will” or “will be taken”, “occur” or “be achieved”. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts, but instead represent management’s expectations, estimates and projections regarding future events.

 

Forward-looking information is necessarily based on a number of opinions, assumptions and estimates that, while considered reasonable by Hut 8 as of the date of this press release, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the factors described in greater detail in the “Risk Factors” section of the Filing Statement dated March 1, 2018 relating to the Qualifying Transaction of Oriana Resources Corporation and Hut 8, which is available at www.sedar.com. These factors are not intended to represent a complete list of the factors that could affect Hut 8; however, these factors should be considered carefully. There can be no assurance that such estimates and assumptions will prove to be correct. The forward-looking statements contained in this press release are made as of the date of this press release, and Hut 8 expressly disclaims any obligation to update or alter statements containing any forward-looking information, or the factors or assumptions underlying them, whether as a result of new information, future events or otherwise, except as required by law.

 

Neither the TSX nor its Regulation Services Provider (as that term is defined in the policies of the TSX) accepts responsibility for the adequacy or accuracy of this release.

 

 

Exhibit 4.8

 

FORM 51-102F3

 

MATERIAL CHANGE REPORT

 

Item 1 Name and Address of Company

 

Hut 8 Mining Corp. (the “Company”)

 

130 King St. W, Suite 1800

 

Toronto, ON

 

M5X 1E3

 

Item 2 Date of Material Change

 

The material change occurred on March 24, 2020.

 

Item 3 News Release

 

A press release in connection with the material change was issued on March 31, 2020 through Canadian newswires and filed on www.sedar.com under the Issuer’s profile and is attached hereto as Schedule “A”.

 

Item 4 Summary of Material Change

 

The Company announced transfer of its hashpower from the Bitfury Pool to Slushpool.

 

Item 5 Full Description of Material Change

 

5.1 Full Description of Material Change

 

The Company finalized the transfer of its computing power to Slushpool, committing a minimum of 600 PH/s during the entire period from March 24, 2020 to March 24, 2021.

 

5.2 Disclosure for Restructuring Transactions

 

Not applicable

 

 

Item 6 Reliance on subsection 7.1(2) of National Instrument 51-102

 

Not applicable

 

Item 7 Omitted Information

 

Not applicable

 

Item 8 Executive Officer

 

For further information with respect to this report, please contact Jimmy Vaiopoulos, CFO of the Company, at (647) 256 1992.

 

Item 9 Date of Report

 

March 31, 2020.

 

Additional Disclosure under s.5.2 of MI – 61-101

 

The purpose of this transaction was to allow the Company to switch its mining hashpower to a larger pool, which will allow for more consistent rewards and payouts. Slushpool was one of the first mining pools, having started in 2010, and has mined over 1 million bitcoin to date.

 

 

Schedule “A”

 

Hut 8 Announces Release Date for Audited Fiscal Year 2019 Financial Results

 

TORONTO, ON, March 31, 2020 – Hut 8 Mining Corp. (“Hut 8” or “the Company”) (TSX: HUT) (OTCQX: HUTMF), one of the world’s largest publicly listed bitcoin mining companies by operating capacity and market capitalization, today announced that it will release its fiscal year 2019 financial results pre-market open on Friday, April 3, 2020.

 

A conference call has been scheduled to discuss the Company’s year-end financial results, hosted by CEO Andrew Kiguel and CFO Jimmy Vaiopoulos, starting at 10:00 a.m. ET Monday April 6, 2020.

 

Date: Monday, April 6, 2020

Time: 10:00 a.m. ET

Dial-In: 1 (888) 465-5079, Canada 1 (888) 424-8151, US

Passcode: 7760 654#

 

In addition, Hut 8 has transferred all its hash power from the Bitfury Pool to Slushpool. The Company made this change to a larger pool to allow for more consistent payouts. Slushpool was one of the first mining pools having started in 2010 and has mined over 1 million bitcoin over its history.

 

ABOUT HUT 8 MINING CORP.

 

Hut 8 is a bitcoin mining company with industrial scale operations in Canada. In total, Hut 8 owns and operates two sites in Alberta, Canada utilizing 94 BlockBox AC data centers with current operating capacity of 107 MW and 952 PH/s.

 

Hut 8 creates value for investors through low production costs and appreciation of its bitcoin inventory. The company provides investors with direct exposure to bitcoin, without the technical complexity or constraints of purchasing the underlying cryptocurrency. Investors avoid the need to create online wallets, wire money offshore, and safely store their bitcoin.

 

The Company’s common shares are listed under the symbol “HUT” on the TSX and as “HUTMF” on the OTCQX Exchange.

 

Key investment highlights and FAQ’s: https://www.hut8mining.com/investors.

 

Keep up-to-date on Hut 8 events and developments and join our online communities at Facebook, Twitter, Instagram and LinkedIn.

 

Hut 8 Corporate Contact:

 

Andrew Kiguel 

Chief Executive Officer 

Tel: (647) 256-1992 

Email: info@hut8mining.com

 

Jimmy Vaiopoulos 

Chief Financial Officer 

Tel: (647) 256-1992 

Email: info@hut8mining.com

 

 

FORWARD-LOOKING STATEMENTS

 

Certain information in this press release constitutes forward-looking information. In some cases, but not necessarily in all cases, forward-looking information can be identified by the use of forward-looking terminology, such as “plans”, “targets”, “expects” or “does not expect”, “is expected”, “estimates”, “intends”, “assumes”, “anticipates” or “does not anticipate” or “believes”, or variations of such words and phrases, or state that certain actions, events or results “may”, “could”, “would”, “might”, “will” or “will be taken”, “occur” or “be achieved”. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts, but instead represent management’s expectations, estimates and projections regarding future events.

 

Forward-looking information is necessarily based on a number of opinions, assumptions and estimates that, while considered reasonable by Hut 8 as of the date of this press release, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the factors described in greater detail in the “Risk Factors” section of the Filing Statement dated March 1, 2018 relating to the Qualifying Transaction of Oriana Resources Corporation and Hut 8, which is available at www.sedar.com. These factors are not intended to represent a complete list of the factors that could affect Hut 8; however, these factors should be considered carefully. There can be no assurance that such estimates and assumptions will prove to be correct. The forward-looking statements contained in this press release are made as of the date of this press release, and Hut 8 expressly disclaims any obligation to update or alter statements containing any forward-looking information, or the factors or assumptions underlying them, whether as a result of new information, future events or otherwise, except as required by law.

 

Neither the TSX nor its Regulation Services Provider (as that term is defined in the policies of the TSX) accepts responsibility for the adequacy or accuracy of this release.

 

 

Exhibit 4.9

 

FORM 51-102F3

 

MATERIAL CHANGE REPORT

 

Item 1 Name and Address of the Company

 

Hut 8 Mining Corp. (the “Company”) 

130 King Street West, Suite 1800 

Toronto, Ontario 

M5X 2A2

 

Item 2 Date of Material Change

 

June 10, 2020 and June 11, 2020

 

Item 3 News Release

 

Two news releases with respect to the material change referred to in this Material Change Report were disseminated by the Company through newswires on June 10, 2020 and on June 11, 2020 and were subsequently filed on the System for Electronic Document Analysis and Retrieval (SEDAR).

 

Item 4 Summary of Material Change

 

On June 10, 2020, the Company announced that it had filed a preliminary short form prospectus in connection with an overnight marketed public offering (the “Offering”) of units of the Company (“Units”). On June 11, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Stifel Nicolaus Canada Inc. (the “Lead Underwriter”) and Canaccord Genuity Corp., Echelon Wealth Partners Inc., Gravitas Securities Inc., Haywood Securities Inc., and Richardson GMP Limited (together with the Lead Underwriter, the “Underwriters”).

 

Pursuant to the Underwriting Agreement, the Company has agreed to sell and the Underwriters have agreed to purchase an aggregate of 5,172,125 Units at a price of $1.45 per Unit (the “Offering Price”), for aggregate gross proceeds of $7,500,125 payable in cash to the Company against delivery of the Units. The Company has also granted the Underwriters an over-allotment option (the “Over-Allotment Option”), exercisable in whole or in part in the sole discretion of the Underwriters for a period of 30 days from and including the closing date of the offering, to purchase up to 775,900 additional Units (the “Additional Units”) at a price of $1.45 per Additional Unit. Each Additional Unit shall consist of one common share (each an “Additional Share”) and one common share purchase warrant (each an “Additional Warrant”). If the Over-Allotment Option is exercised in full, the aggregate gross proceeds of the Offering will be $8,625,180.

 

Item 5 Full Description of Material Change

 

On June 10, 2020, the Company announced that it had filed a preliminary short form prospectus in connection with the Offering. On June 11, 2020, the Company announced that it had entered into the Underwriting Agreement in connection with the Offering. The Company also filed an amended and restated preliminary short form prospectus on June 11, 2020.

 

Pursuant to the Underwriting Agreement, the Company has agreed to sell and the Underwriters have agreed to purchase an aggregate of 5,172,500 Units at the Offering Price, for aggregate gross proceeds of $7,500,125 payable in cash to the Company against delivery of the Units, subject to the terms and conditions of the Underwriting Agreement. The Underwriting Agreement contains customary representations and warranties and termination provisions.

 

Each Unit will consist of one common share of the Company and one common share purchase warrant of the Company (each a “Warrant”). Each Warrant will entitle the holder thereof to purchase one common share (each a “Warrant Share”) at a price of $1.80 per Warrant Share at any time prior to 5:00 p.m. (Toronto time) on the date that is 18 months following the closing of the Offering. The Warrants will be created and issued pursuant to the terms of a warrant indenture to be dated as of the closing of the Offering between the Company and Computershare Trust Company of Canada (the “Warrant Indenture”). The Warrant Indenture will contain customary anti-dilution provisions.

 

The Company has also granted the Underwriters the Over-Allotment Option, exercisable in whole or in part in the sole discretion of the Underwriters for a period of 30 days from and including the closing date of the Offering. The Underwriters can elect to exercise the Over-Allotment Option for Additional Units only, Additional Shares only, Additional Warrants only, or any combination thereof. The purchase price for Additional Warrants purchased upon exercise of the Over-Allotment Option is $0.14 per Additional Warrant, and the purchase price per Additional Share purchased upon exercise of the Over-Allotment Option is $1.31 per Additional Share.

 

Item 6 Reliance on subsection 7.1(2) of National Instrument 51-102

 

Not applicable.

 

Item 7 Omitted Information

 

Not applicable.

 

Item 8 Executive Officer

 

The following senior officer of the Company is knowledgeable about the material change and this material change report, and may be contacted as follows:

 

Jimmy Vaiopoulos, Interim CEO 

Telephone: (647) 256-1992 

Email: jimmy@hut8mining.com

 

Item 9 Date of Report

 

June 22, 2020.

 

Forward-looking Statements

 

This material change report includes “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities laws and United States securities laws, respectively (collectively, “forward-looking information”). All information, other than statements of historical facts, included in this material change report that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future business strategy, competitive strengths, goals, expansion and growth of the Company’s businesses, operations, plans and other such matters is forward-looking information. Forward-looking information is often identified by the words “may”, “would”, “could”, “should”, “will”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “expect” or similar expressions and includes, among others, information regarding: completion of the Offering; the intended use of proceeds from the Offering; expectations regarding future revenues, earnings, capital expenditures and operating and other costs; business strategy and objectives; market trends; the sufficiency of cash and working capital for future operating activities; expectations for other economic, business, regulatory and/or competitive factors related to the Company or the bitcoin industry generally; the anticipated timing for the receipt of licences; anticipated production capacity; and other events or conditions that may occur in the future.

 

Forward-looking information is not based on historical facts but instead is based on reasonable assumptions and estimates of management of the Company at the time they were made and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. Such factors include, among others, risks relating to investing in the Units; discretion in the use of proceeds; the ability to raise additional funds; there being no current market for the Warrants; investing in the Warrants being speculative; volatility of the market price for the Common Shares generally; risk of dilution; changes in the price of bitcoin; the Company’s reliance on a limited number of key employees; and fluctuations in energy prices as well as the risk factors described in the Company’s annual information form dated April 3, 2020 and other filings with the Canadian securities regulators available under the Company’s profile on SEDAR at www.sedar.com.

 

 Exhibit 4.10

 

FORM 51-102F3

 

MATERIAL CHANGE REPORT

 

Item 1 Name and Address of the Company

 

Hut 8 Mining Corp. (the “Company”) 

130 King Street West, Suite 1800 

Toronto, Ontario 

M5X 2A2

 

Item 2 Date of Material Change

 

January 11, 2021

 

Item 3 News Release

 

A news release with respect to the material change referred to in this Material Change Report was disseminated by the Company through newswires on January 11, 2021 and was subsequently filed on the System for Electronic Document Analysis and Retrieval (SEDAR).

 

Item 4 Summary of Material Change

 

On January 11, 2021, the Company announced that it had entered into a securities purchase agreement for a private placement of its common shares (“Common Shares”) and warrants to purchase common shares (“Warrants”) to institutional investors for gross proceeds of CAD$77,500,000 (the “Private Placement”).

 

Pursuant to the Private Placement, the Company will issue 15,500,000 Common Shares and Warrants to purchase up to 7,750,000 Common Shares at a purchase price of CAD$5.00 per Common Share and associated Warrant. Each Warrant will entitle the holder to purchase one Common Share at an exercise price of CAD$6.25 per Common Share at any time prior to the second anniversary of the issuance date.

 

Item 5 Full Description of Material Change

 

On January 11, 2021, the Company announced that it had entered into a securities purchase agreement for the Private Placement of Common Shares and Warrants to purchase Common Shares to institutional investors for gross proceeds of CAD$77,500,000.

 

Pursuant to the Private Placement, the Company will issue 15,500,000 Common Shares and Warrants to purchase up to 7,750,000 Common Shares at a purchase price of CAD$5.00 per Common Share and associated Warrant. Each Warrant will entitle the holder to purchase one Common Share at an exercise price of CAD$6.25 per Common Share at any time prior to the second anniversary of the issuance date.

 

The net proceeds of the Private Placement will be used by the Company for working capital and general corporate purposes, including, without limitation, infrastructure expansion, equipment purchases and repayment of debt.

 

The Company has applied to list the Common Shares issued in the Private Placement and the Common Shares underlying the Warrants on the Toronto Stock Exchange (“TSX”). The Private Placement is expected to close on or about January 13, 2021, subject to satisfaction of customary closing conditions, including receipt of conditional approval by the TSX for the Private Placement.

 

H.C. Wainwright & Co. is acting as the exclusive placement agent for the Private Placement in the United States.

 

Item 6 Reliance on subsection 7.1(2) of National Instrument 51-102

 

Not applicable.

 

Item 7 Omitted Information

 

Not applicable.

 

Item 8 Executive Officer

 

The following senior officer of the Company is knowledgeable about the material change and this material change report, and may be contacted as follows:

 

Jaime Leverton, Chief Executive Officer 

Telephone: (647) 521-7433 

Email: info@hut8mining.com

 

Item 9 Date of Report

 

January 13, 2021.

 

Forward-looking Statements

 

This material change report includes “forward-looking information” and “forward-looking statements” within the meaning of Canadian securities laws and United States securities laws, respectively (collectively, “forward-looking information”). All information, other than statements of historical facts, included in this material change report that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future business strategy, competitive strengths, goals, expansion and growth of the Company’s businesses, operations, plans and other such matters is forward-looking information. Forward-looking information is often identified by the words “may”, “would”, “could”, “should”, “will”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “expect” or similar expressions and includes, among others, information regarding: the Company’s intention to complete the Private Placement and the expected use of proceeds of the Private Placement. Forward-looking information is not based on historical facts but instead is based on reasonable assumptions and estimates of management of the Company at the time they were made and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. Such factors include, among others, market and other conditions, risks relating to investing in the Private Placement; discretion in the use of proceeds; the ability to raise additional funds; there being no current market for the Warrants; investing in the Company’s securities being speculative; volatility of the market price for the Common Shares generally; risk of dilution; changes in the price of bitcoin and other cryptocurrency risks; market instability due to the COVID-19 pandemic; the Company’s reliance on a limited number of key employees; and fluctuations in energy prices as well as the risk factors described in the Company’s annual information form dated April 3, 2020 and other filings with the Canadian securities regulators available under the Company’s profile on SEDAR at www .sedar.com.

 

Exhibit 5.1

 

 

 

Consent of Independent Auditor

 

Dear Sirs,

 

We hereby consent to the use of our report dated April 2, 2020, on the consolidated financial statements of Hut 8 Mining Corp., incorporated by reference in the registration statement on Form F-10, and to the reference to our firm under the heading “Interest of Experts”, “Auditors, Registrar and Transfer Agent” and “Documents Filed as Part of the Registration Statement” in the prospectus.

 

 

DALE MATHESON CARR-HILTON LABONTE LLP

CHARTERED PROFESSIONAL ACCOUNTANTS

 

March 9, 2021

Vancouver, Canada