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British Columbia, Canada
(Province or other Jurisdiction of
Incorporation or Organization) |
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7374
(Primary Standard Industrial
Classification Code Number) |
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Not Applicable
(I.R.S. Employer Identification
Number, if applicable) |
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Richard Aftanas
Hogan Lovells US LLP 390 Madison Avenue New York, NY 10017 (212) 918-3000 |
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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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2.
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☐
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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.
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☐
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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. |
4.
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☒
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after the filing of the next amendment to this Form (if preliminary material is being filed). |
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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DESCRIPTION
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EXEMPTION | | | | | 28 | | |
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$
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| | Canadian dollars. | |
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ASIC
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| | An application-specific integrated circuit customized for Bitcoin mining. | |
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Bitcoin
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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
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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
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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
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| | BitGo Trust Company Inc. | |
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BlockBox
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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
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A digital ledger in which Bitcoin or other cryptocurrency transactions are recorded chronologically and publicly.
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US$
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| | United States dollars | |
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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Signature
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Title
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Date
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/s/ Jaime Leverton
Jaime Leverton
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Chief Executive Officer (Principal Executive Officer) and Director
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March 9, 2021
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/s/ Jimmy Vaiopoulos
Jimmy Vaiopoulos
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Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
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March 9, 2021
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/s/ Bill Tai
Bill Tai
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Director
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March 9, 2021
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/s/ Jeremy Sewell
Jeremy Sewell
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Director
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March 9, 2021
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/s/ Joseph Flinn
Joseph Flinn
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Director
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March 9, 2021
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/s/ Sanjiv Samant
Sanjiv Samant
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Director
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March 9, 2021
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/s/ Chris Eldredge
Chris Eldredge
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Director
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March 9, 2021
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Exhibit 4.1
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 -
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.
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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.
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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.
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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.
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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.
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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
|
Share-based
|
Option-based
|
Non-equity
|
Pension
|
All
other
|
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 $2.51 per option, an expected life of 5 years, a volatility rate of 121.4%, an average risk-free rate of 2.31%, and a dividend rate of 0%. |
(4) | Amounts reflect the cash bonus awarded to each of the members of the Audit Committee. |
(5) | Gerri Sinclair resigned from the Hut 8 Board on April 3, 2020. |
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Outstanding Option-Based and Share-Based Awards
The following table sets out, for each director who is not also a NEO, information concerning all option-based and share-based awards outstanding as at December 31, 2019.
Option-Based Awards | Share-Based Awards | ||||||||||||||||
Name |
Number of
securities underlying unexercised options (#) |
Option
exercise price ($) |
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
|
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. |
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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.
(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.
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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. |
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.
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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.
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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
|
|||||||||||||||||||||||||||||||
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 $500,000, which, along with the Hut 8 RSUs vested in April 1, 2020 of 505,051 Shares, was paid to his numbered company. |
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Incentive Plan Awards
The following table sets forth information with respect to the Hut 8 Options and Share based awards held by the NEOs which were outstanding as of December 31, 2019.
Option-Based Awards | Share-Based Awards | |||||||||||||||||||
Name and
Principal Position |
Number of
Securities Underlying Unexercised Options (#) |
Option
Exercise Price ($) |
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.
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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.
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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.
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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.
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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
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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.
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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 |
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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. |
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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.
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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 |
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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”).
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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. |
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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; |
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(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; |
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(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.
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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 |
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GLOSSARY OF DEFINED TERMS
In this Annual Information Form, the following capitalized words and terms shall have the following meanings:
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(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. |
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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. |
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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. |
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
|
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”.
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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.
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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
Offices to
|
Principal
Occupation During the Past Five
|
Number and
percentage of voting securities(3) |
Director
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. |
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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.
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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.
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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.
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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. |
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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. |
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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); |
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(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; |
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(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; |
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(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
HUT 8 MINING CORP.
Consolidated Financial Statements
(In Canadian dollars)
Years ended December 31, 2019 and 2018
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.
DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Vancouver, BC
April 2, 2020
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.
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
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