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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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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 ( ). |
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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. |
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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 | | | | | 29 | | |
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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. | |
Private Placement
(All amounts are approximate, expressed in millions Canadian dollars) |
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Description
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Prior
Disclosure |
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Actual
Spent(1) |
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Remaining
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Total
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Variance
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General corporate purposes, including, without limitation, infrastructure expansion, equipment purchases(2) and repayment of debt(3)
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| | | $ | 72.9(4) | | | | | $ | 47.6(5) | | | | | $ | 25.3(6) | | | | | $ | 72.9 | | | | | | Nil | | |
Exhibit
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Description
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4.1*
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4.2*
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4.3*
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4.4*
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4.5*
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| | Amended and restated unaudited condensed interim consolidated financial statements of the Company and the notes thereto as at and for the three and nine months ended September 30, 2020 and 2019. | |
4.6*
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4.7*
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4.8*
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4.9*
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4.10*
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4.11
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| | Annual information form of the Company dated March 25, 2021 in respect of the fiscal year ended December 31, 2020. | |
4.12
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4.13
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5.1
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6.1*
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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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April 7, 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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April 7, 2021
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*
Bill Tai
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Director
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April 7, 2021
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Jeremy Sewell
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Director
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April 7, 2021
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*
Joseph Flinn
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Director
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April 7, 2021
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*
Sanjiv Samant
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Director
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April 7, 2021
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*
Chris Eldredge
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Director
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April 7, 2021
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Exhibit 4.11
HUT 8 MINING CORP.
ANNUAL INFORMATION FORM
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
March 25, 2021
TABLE OF CONTENTS
Page | |
GLOSSARY OF DEFINED TERMS | 1 |
GENERAL | 4 |
STATEMENT REGARDING FORWARD LOOKING STATEMENTS | 4 |
CURRENCY AND EXCHANGE RATES | 5 |
CORPORATE STRUCTURE | 5 |
GENERAL DEVELOPMENT OF THE BUSINESS | 5 |
DESCRIPTION OF BUSINESS | 9 |
RISK FACTORS | 11 |
PRIOR SALES | 26 |
DIVIDENDS | 26 |
DESCRIPTION OF CAPITAL STRUCTURE | 26 |
MARKET FOR SECURITIES | 27 |
ESCROWED SECURITIES AND SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER | 28 |
DIRECTORS AND OFFICERS | 28 |
PROMOTERS | 32 |
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS | 32 |
LEGAL PROCEEDINGS AND REGULATORY ACTIONS | 32 |
AUDITORS, TRANSFER AGENT AND REGISTRAR | 33 |
MATERIAL CONTRACTS | 33 |
EXPERTS | 34 |
ADDITIONAL INFORMATION | 34 |
SCHEDULE “A” AUDIT COMMITTEE CHARTER | A-1 |
- i -
GLOSSARY OF DEFINED TERMS
In this Annual Information Form, the following capitalized words and terms shall have the following meanings:
$ | Canadian dollars. |
AIF | The Annual Information Form of the Company for the fiscal year ended December 31, 2020. |
Amalgamation | The “three-cornered amalgamation” involving Oriana, Oriana Subco and Hut 8. |
Bitcoin | The peer-to-peer payment system and the digital currency of the same name, which uses open source cryptography to control the creation and transfer of such digital currency. |
Bitcoin Network | The network of computers running the software protocol underlying Bitcoin and which network maintains the database of Bitcoin ownership and facilitates the transfer of Bitcoin among parties. |
Bitfury | Bitfury Holding B.V., corporation incorporated and existing under the laws of the Netherlands. |
BitGo | BitGo Trust Company Inc. |
BitGo Custodial Services Agreement | The custodial service agreement dated September 1, 2019 between BitGo and Hut 8. |
Blockbox | The proprietary BlockBox Data Centers AC – Air Cooled Mobile Data Centers manufactured by Bitfury and used for the purpose of running diverse cryptographic hash functions in connection with the mining of cryptocurrency, including all related specialized graphics processing unit rigs, associated housing and power supplies, and all required cabling, cooling units and other peripherals, as applicable. |
Blockchain | A digital ledger in which Bitcoin or other cryptocurrency transactions are recorded chronologically and publicly. |
CEO | Chief Executive Officer. |
CFO | Chief Financial Officer. |
DMCL | Dale Matheson Carr-Hilton Labonte LLP, Chartered Professional Accountants. |
Fiscal 2019 | The fiscal year ended December 31, 2019. |
Fiscal 2020 | The fiscal year ended December 31, 2020. |
Galaxy | Galaxy Digital Lending Services LLC |
Genesis | Genesis Global Capital, LLC. |
2
Insider | If used in relation to an issuer, means: |
(a) | a director or senior officer of the issuer; |
(b) | a director or senior officer of a 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. |
Investor Rights Agreement | The investor rights agreement to be entered into between Hut 8 and Bitfury, dated March 2, 2018 and which is available on SEDAR at www.sedar.com. |
IFRS | The International Financial Reporting Standards. |
Master Data Center Purchase Agreement | The master data center purchase agreement dated November 29, 2017, as amended, between Hut 8 and Bitfury, which is available on SEDAR at www.sedar.com. |
3
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. |
Promoter | (a) | a person or company that, acting alone or in conjunction with one or more other persons, companies or a combination of them, directly or indirectly, takes the initiative in founding, organizing or substantially reorganizing the business of an issuer; or |
(b) | a person or company that, in connection with the founding, organizing or substantial reorganizing of the business of an issuer, directly or indirectly, receives in consideration of services or property or both services and property, 10% or more of the issued securities of a class of securities of the issuer or 10% or more of the proceeds from the sale of a class of securities of a particular issue, but a person or company who receives the securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be considered a Promoter within the meaning of this definition where that person or company does not otherwise take part in founding, organizing or substantially reorganizing the business. | |
Qualifying Transaction | (a) | The transaction between Oriana and Hut 8 by which Oriana implemented a consolidation, immediately prior to the completion of the Debt Conversion (as defined herein) and the Amalgamation, of its then issued and outstanding 9,500,000 common shares on the basis of one new Oriana Common Share for every 52.7777 existing Oriana Common Shares; |
(b) | Oriana effected a conversion of $2,000,000 of debt owing by Oriana into 40,000 Oriana Common Shares, based on a conversion price of $5.00 per Oriana Common Share; | |
(c) | Oriana acquired all of the issued and outstanding common shares of a private corporation incorporated in British Columbia, Hut 8 Mining Corp., from the shareholders of Hut 8 PrivateCo in exchange for an aggregate of 82,160,000 Hut 8 Shares; | |
(d) | Hut 8 PrivateCo and 1149835 B.C. Ltd., a wholly-owned subsidiary of Oriana, amalgamated and continued as one corporation, Hut 8 Holdings Inc., which is a wholly-owned subsidiary of the Company; and | |
(e) | Oriana changed its name to “Hut 8 Mining Corp.” | |
RSU | Restricted Share Unit to be settled by the issuance of one common share of the Company issued from treasury. |
4
SEDAR | The System for Electronic Document Analysis and Retrieval. |
TSX | The Toronto Stock Exchange |
TSXV | The TSX Venture Exchange. |
Xapo | Xapo GmbH, which oversees the retention, security and transfer of Bitcoins, and is responsible for the execution of transactions in Bitcoin, for Hut 8. |
GENERAL
Unless otherwise noted herein, information in this AIF is presented as at March 24, 2021.
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. Such risks include, without limitation, concentration of voting power among a small number of significant shareholders, cybersecurity threats and hacks, malicious actors or botnet obtaining control of processing power on the Bitcoin Network, increases in fees for recording transactions in the Blockchain, reliance on a limited number of key employees, regulatory changes, momentum pricing risk, fraud and failure related to cryptocurrency exchanges, potential difficulty in obtaining banking services, internet disruptions, geopolitical events, uncertainty in the development of cryptographic and algorithmic protocols, uncertainty about the acceptance or widespread use of cryptocurrency, failure to anticipate or technology innovations, the COVID-19 pandemic, the Company’s unsecured loans, and other risks related to the cryptocurrency business. 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.
5
CURRENCY AND EXCHANGE RATES
Unless otherwise specified, all dollar references are to Canadian dollars.
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 2500 Park Place 666 Burrard Street, Vancouver BC, Canada, V6C 2X8. and the headquarters are located at 130 King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2. The Company’s common shares are listed under the symbol “HUT” on the TSX and as “HUTMF” on the OTCQX market.
Intercorporate Relationships
Hut 8 has 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.
GENERAL DEVELOPMENT OF THE BUSINESS
Three Year History
Fiscal 2018 (January 1, 2018 to December 31, 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, consisting 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 of the Second Offering were used to finance the purchase by Hut 8 of ten BlockBoxes from Bitfury, pursuant to the Master Data Center Purchaser Agreement, and to satisfy working capital requirements. The remaining proceeds from the Second Offering were used to finance the purchase by Hut 8 of 25 BlockBoxes from Bitfury, comprising the purchase order dated December 18, 2017 issued by Hut 8 to Bitfury for the purchase of a total of 15 BlockBoxes and related ancillary assets.
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, of its then issued and outstanding 9,500,000 common shares on the basis of one new Oriana Common Share for every 52.7777 existing Oriana Common Shares; |
(b) | Oriana effected a conversion of $2,000,000 of debt owing by Oriana into 40,000 Oriana Common Shares, based on a conversion price of $5.00 per Oriana Common Share (the “Debt Conversion”); |
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(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, completed 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.” | |
Immediately following the completion of the Qualifying Transaction, the Hut 8 Board consisted of six directors: Bill Tai (Chair), Jeffrey Mason, Gerri Sinclair, Dennis Mills, Michael Novogratz, and Valery Vavilov.
On March 5, 2018, an aggregate of 595,000 options were awarded to certain directors under the 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.
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 Unit 16 power plant. Under the terms of an electricity supply agreement, the City of Medicine Hat provides electric energy capacity of approximately 42 megawatts to the 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, Hut 8 launched 16 BlockBoxes, representing 19.2 MW of power capacity, at its mining facility in the City of Medicine Hat, bringing the Company’s total operating power to 37.9 MW.
On July 10, 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 (the “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 was 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.
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. When combined with its operations in Drumheller, Alberta, the Company then operated a total of 73 BlockBoxes, representing an aggregate capacity of 85.9 MWs of fully-funded operating power representing approximately 632 PH/s. The 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. 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.
7
On November 12, 2018, Hut 8 announced the purchase of an additional 12 BlockBoxes at its Drumheller Facility. The BlockBoxes were previously owned by the 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. When combined with its operations in the City of Medicine Hat, Alberta, Hut 8 operated a total of 85 BlockBoxes, representing an aggregate maximum of 100.3 MW of fully-funded operating capacity generating approximately 784 PH/s. The 12 new BlockBoxes, at a cost of US$13,000,000, were 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 the maturity date of the previously announced Galaxy loan already outstanding or such date as the Galaxy loan is repaid early. There are no additional fees and no penalty for prepayment.
On December 18, 2018, Hut 8 announced issuance of 2,133,858 Common Shares to Bitfury, at an issuance price of $3.75 per Common Share, pursuant to the purchase agreement made on September 7, 2018. Hut 8 also submitted application to the TSXV for the issuance of 131,975 Common Shares at a price of $1.20 to certain directors, officers, and employees of Hut 8 who elected to receive Common Shares instead of cash compensation for services rendered.
Fiscal 2019 (January 1, 2019 to December 31, 2019)
On January 8, 2019, Hut 8 completed the purchase of 12 additional BlockBoxes at its Drumheller Facility. Hut 8 also changed its auditor from MNP to DMCL.
On February 26, 2019, Hut 8 announced its issuance of 3,717,433 Common Shares to Bitfury to settle a $5,576,150 outstanding debt payable at a conversion price of $1.50 per Common Share, subject to TSXV approval. Hut 8 also received conditional approval from the TSXV with respect to the issuance of 838,511 common shares at $3.15 per common share, in satisfaction of the purchase of BlockBoxes made on November 12, 2018. Finally, Hut 8 submitted application to the TSXV for the issuance of an additional 74,993 Common Shares to Induna Energy Inc. as part consideration for consulting services during the months of December 2018 and January 2019.
On July 22, 2019, Jeremy Sewell, CFO of Bitfury, was elected to Hut 8 board to replace Valery Vavilov, CEO and founder of Bitfury.
On September 3, 2019, Hut 8 announced an increase of 4.3 MW to its operating facility in the City of Medicine Hat, Alberta. This expansion did not require any additional capital expenditures by the Company and brought Hut 8’s aggregate load, across all operations, to 99.5 MW.
On September 9, 2019, Hut 8 announced the purchase of 9 additional Blockboxes at its Drumheller Facility, for US$7 million, from Bitfury. The acquisition added approximately 113 PH/s and 9.9 MW to Hut 8’s existing operations, which represents a 13.3% increase. 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.
8
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 8, 2019, Hut 8 began trading on the TSX under “HUT”.
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 “Genesis Loan”). 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.
On November 28, 2019, Hut 8 announced completion of the Drumheller expansion, previously announced on September 9, 2019.
Fiscal 2020 (January 1, 2020 to December 31, 2020)
On January 28, 2020, Hut 8 announced that Andrew Kiguel would be stepping down from his role as CEO.
On February 21, 2020, Hut 8 successfully renegotiated the master service agreement and master purchase agreement with Bitfury. As part of this agreement, Hut 8 repaid US$4,750,000 of debt owed to Bitfury with funds from a new loan of US$5,000,000 from Genesis. The amendments allowed for increased autonomy for Hut 8 and reduction of costs.
On May 1, 2020, Andrew Kiguel formally stepped down as CEO of Hut 8 and Jimmy Vaiopoulos was appointed the Interim CEO. Kyle Appleby was appointed Interim CFO at this time and Viktoriya Griffin was appointed as Corporate Secretary.
On June 25, 2020, Hut 8 closed an overnight marketed public offering of units for gross proceeds of $8,338,161. Hut 8 used the funds to purchase Bitcoin mining equipment with output of approximately 275 PH/s.
On July 13, 2020, Hut 8 successfully renegotiated loan terms with Genesis to decrease the annual interest rate under the Genesis Loan from 9.85% to 8.00% while providing more flexibility with the structure of collateral.
On August 4, 2020, Hut 8 transferred the site management of operations at the Medicine Hat Facility.
On August 12, 2020, Hut 8 announced its first hosting arrangement for six full BlockBoxes of latest generation Bitcoin mining equipment. Hut 8 also transferred its Clarke chips from its Drumheller Facility to Medicine Hat.
On September 2, 2020, Hut 8 transferred the site management of operations at its Drumheller Facility.
On October 9, 2020, Hut 8 announced it was the first TSX listed issuer to complete the Sandbox program.
On November 2, 2020, Hut 8 announced Jaime Leverton as CEO, who started with the Company on December 1, 2020.
On December 30, 2020, Hut 8 had its Annual General Meeting where Jaime Leverton, Christopher Eldredge, and Sanjiv Samant were voted in as new members of the board of directors. Dennis Mills was not up for re-election as a board member.
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Subsequent to Fiscal 2020
On January 13, 2021, Hut 8 announced the closing of an offering for the gross proceeds of $77.5 million which consisted of the sale of 15,500,000 Common Shares and warrants to purchase up to 7,750,000 Common Shares at a purchase price of $5.00 per Common Share and the warrant exercise price of $6.25 per Common Share.
On January 26, 2021, Hut 8 announced the appointment of Tanya Woods as General Counsel, Executive Vice President of Regulatory Affairs, effective February 1, 2021.
On March 2, 2021, Hut 8 announced that it had paid back its US$20.0 million loan with Genesis.
DESCRIPTION OF BUSINESS
General - Narrative Description of the Business
Hut 8 is a cryptocurrency mining company with industrial scale Bitcoin mining operations in Canada. 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. Hut 8 has assembled an experienced management team to pursue their strategic initiatives with a total staff of 30 full-time employees.
Site Descriptions
Property Description and Location
Hut 8 has two facilities in operation, one in Drumheller, Alberta and the second in Medicine Hat, Alberta. The sites are within two-and-a-half hours by car from each other. The Drumheller Facility is currently comprised of 38 operating BlockBoxes. This includes the original 17 BlockBoxes purchased between November 2017 and February 2018, an upgraded 12 BlockBoxes completed in December 2018, and another upgraded 9 BlockBoxes purchased in late November 2019. 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 a security guard on a 24x7x365 basis. The sites have a physical security policy and staff are trained to be aware of any unauthorized personnel. There are closed-circuit televisions on site and the BlockBoxes are welded to supporting metal beams and the frames are anchored with screw piles that are at least six feet deep.
Power
For the Drumheller Facility, Hut 8 entered into an agreement with ATCO Electric Ltd., the electric utility for the Drumheller area, for the provision of power. For the Medicine Hat site, Hut 8 entered into an agreement with the City of Medicine Hat, who runs their own electricity grid, for the use of electricity for the 56 BlockBoxes on site.
For the Drumheller Facility, the distance from the transmission poles owned by ATCO Electric Ltd. is approximately 40 meters. The Drumheller site receives its energy from the grid; therefore, there is exposure to market natural gas prices for up to 42MW. The Medicine Hat Facility is situated beside a 42MW generator where it does not pay transmission fees. An additional approximately 25MW of power at Medicine Hat is provided from the grid and is exposed to market natural gas prices.
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Network Connectivity
The sites are equipped with the following mediums of connectivity: (a) two satellite internet connections; and (b) two long-term evolution connections. Each medium is provided by a different vendor, which increases redundancy and resiliency.
Monitoring and Repair
Hut 8 monitors the intake air temperature, hash board temperature, voltage, hash rate, in-container air temperature, exhaust air temperature and humidity of each container. All parameters are monitored on a 24x7x365 basis by local on-site staff who are responsible for implementing any necessary repairs to mining infrastructure. Hut 8 intends to maintain an inventory of all necessary components for repair and make all repairs on site when possible.
Competition and Market Participants
The BlockBox is a unique proprietary portable data center solution with a chip design that facilitates variable power load input in order to maximize profit. The server design allows for hash boards to be readily upgraded to the latest available chip technology. The portable design of the BlockBox allows for rapid deployment and even transportation geographically for maximum flexibility and profit maximization.
In the cryptocurrency industry, there exist many companies that operate cryptocurrency 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 some of our principal competitors such as Bitfarms Ltd., HIVE Blockchain Technologies Ltd., Riot Blockchain Inc., Argo Blockchain plc, and Marathon Patent Group, Inc.
Miners may organize themselves in mining pools. A mining pool is created when cryptocurrency miners pool their processing power over a network and mine transactions together. Rewards are then distributed proportionately to each miner based on the work / hash power contributed. Mining pools became popular when mining difficulty and block time increased. Mining pools allow miners to pool their resources so they can generate blocks quickly and receive rewards on a consistent basis instead of mining alone where rewards may not be received for long periods. Hut 8 has also decided to participate in a mining pool in order to smooth the receipt of rewards.
Other market participants in the cryptocurrency industry include investors and speculators, retail users transacting in cryptocurrencies, and service companies that provide a variety of services including buying, selling, payment processing and storing of cryptocurrencies.
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, which is currently inactive.
Cycles
The only seasonality that the Company experiences is related to potential changes in electricity prices based on volatility in market natural gas prices, which affects all of Hut 8’s facilities. 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 significant controlling influence over matters requiring shareholder approval, which could delay or prevent a change of control
The largest shareholder, Bitfury, beneficially owns in the aggregate approximately 20.95% of the 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 prior to the completion of the Qualifying Transaction, and make some activities more difficult, time consuming or costly and increase demands on its systems and resources.
Hut 8’s cryptocurrency inventory may be exposed to cybersecurity threats and hacks
As with any other computer code, flaws in cryptocurrency codes have been exposed by certain malicious actors. Several errors and defects have been found and corrected, including those that disabled some functionality for users and exposed users’ information. Discovery of flaws in or exploitations of the source code that allow malicious actors to take or create money have been rare.
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.
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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 either formally or informally transition from a set reward to transaction fees earned upon solving for a block. If miners demand higher transaction fees to record transactions in the Blockchain or a software upgrade automatically charges fees for all transactions, the cost of using Bitcoins may increase and the marketplace may be reluctant to accept Bitcoins as a means of payment. Existing users may be motivated to switch from Bitcoins to another digital currency or back to fiat currency. Decreased use and demand for Bitcoins may adversely affect their value and result in a reduction in the Bitcoin index price and the price of the Hut 8 Shares.
The Company may face risks of disruptions to its supply of electrical power and an increase of electricity rates
The Company’s operations are dependent on its ability to maintain reliable and economical sources of power to run its cryptocurrency mining assets. In respect of its Drumheller facility, Hut 8 entered into an agreement with ATCO Electric Ltd., the electric utility for the Drumheller area, for the provision of power. In respect of its Medicine Hat facility, Hut 8 entered into an agreement with the City of Medicine Hat, who runs their own electricity grid, for the use of electricity at such facility. As of the date of this AIF, both agreements remain in force and effect and the Company expects its electricity supply to be reliable for the foreseeable future. However, any suspension of power, failure of electrical networks or material increase in electricity rates could result in a material adverse effect on the business, operations and/or profitability of the Company.
Reliance on a limited number of key employees
The success of Hut 8 is dependent upon the ability, expertise, judgment, discretion and good faith of a limited number of people constituting its senior management. While employment agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on Hut 8’s business, operating results or financial condition.
Regulatory changes or actions may alter the nature of an investment in the Company or restrict the use of cryptocurrencies in a manner that adversely affects the Company’s operations
As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted differently to cryptocurrencies with certain governments deeming them illegal while others have allowed their use and trade. On-going and future regulatory actions may alter, perhaps to a materially adverse extent, the ability of the Company to continue to operate.
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The effect of any future regulatory change on the Company or any cryptocurrency that the Company may mine is impossible to predict, but such change could be substantial and adverse to the Company. Investors may consult their tax advisers regarding the substantial uncertainty regarding the tax consequences of an investment in Bitcoins.
Governments may, in the future, restrict or prohibit the acquisition, use or redemption of cryptocurrencies. Ownership of, holding or trading in cryptocurrencies may then be considered illegal and subject to sanction. Governments may also take regulatory action that may increase the cost and/or subject cryptocurrency mining companies to additional regulation. For example, on July 25, 2017 the United States Securities and Exchange Commission released an investigative report which indicates that the United States Securities and Exchange Commission would, in some circumstances, consider the offer and sale of Blockchain tokens pursuant to an initial coin offering subject to U.S. securities laws. Similarly, on August 24, 2017, the Canadian Securities Administrators published CSA Staff Notice 46-307 – Cryptocurrency Offerings, providing guidance on whether initial coin offerings, pursuant to which tokens are offered to investors, are subject to Canadian securities laws.
Governments may in the future take regulatory actions that prohibit or severely restrict the right to acquire, own, hold, sell, use or trade cryptocurrencies or to exchange cryptocurrencies for fiat currency. By extension, similar actions by other governments, may result in the restriction of the acquisition, ownership, holding, selling, use or trading in the 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 most cases, largely 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 and other financial institutions may not provide banking services, or may cut off banking services, to businesses that provide cryptocurrency-related services or that accept cryptocurrencies as payment
A number of companies that engage in Bitcoin and/or other cryptocurrency-related activities have been unable to find banks or financial institutions that are willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses associated with cryptocurrencies may have had and may continue to have their existing bank accounts closed or services discontinued with financial institutions in response to government action, particularly in China, where regulatory response to cryptocurrencies has been to exclude their use for ordinary consumer transactions within China. We also may be unable to obtain or maintain these services for our business. The difficulty that many businesses that provide Bitcoin and/or derivatives on other cryptocurrency-related activities have and may continue to have in finding banks and financial institutions willing to provide them services may be decreasing the usefulness of cryptocurrencies as a payment system and harming public perception of cryptocurrencies, and could decrease their usefulness and harm their public perception in the future.
The usefulness of cryptocurrencies as a payment system and the public perception of cryptocurrencies could be damaged if banks or financial institutions were to close the accounts of businesses engaging in Bitcoin and/or other cryptocurrency-related activities. This could occur as a result of compliance risk, cost, government regulation or public pressure. The risk applies to securities firms, clearance and settlement firms, national stock and derivatives on commodities exchanges, the over-the-counter market, and securities depositories, which, if any of such entities adopts or implements similar policies, rules or regulations, could negatively affect our relationships with financial institutions and impede our ability to convert cryptocurrencies to fiat currencies. Such factors could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations and harm investors.
We may face risks of internet disruptions, which could have an adverse effect on the price of cryptocurrencies.
A disruption of the internet may affect the use of cryptocurrencies and subsequently the value of our securities. Generally, cryptocurrencies and our business of mining cryptocurrencies is dependent upon the internet. A significant disruption in internet connectivity could disrupt a currency’s network operations until the disruption is resolved and have an adverse effect on the price of cryptocurrencies and our ability to mine cryptocurrencies.
The impact of geopolitical events on the supply and demand for cryptocurrencies is uncertain
Crises may motivate large-scale purchases of cryptocurrencies which could increase the price of cryptocurrencies rapidly. This may increase the likelihood of a subsequent price decrease as crisis-driven purchasing behavior wanes, adversely affecting the value of the Company’s Bitcoin inventory. The possibility of large-scale purchases of cryptocurrencies in times of crisis may have a short-term positive impact on the prices of Bitcoin. For example, in March 2013, a report of uncertainty in the economy of the Republic of Cyprus and the imposition of capital controls by Cypriot banks motivated individuals in Cyprus and other countries with similar economic situations to purchase Bitcoin. This resulted in a significant short- term positive impact on the price of Bitcoin. However, as the purchasing activity of individuals in this situation waned, speculative investors engaged in significant sales of Bitcoins, which significantly decreased the price of Bitcoins. Crises of this nature in the future may erode investors’ confidence in the stability of cryptocurrencies and may impair their price performance which would, in turn, adversely affect the Company’s Bitcoin inventory.
As an alternative to fiat currencies that are backed by central governments, cryptocurrencies such as Bitcoin, which are relatively new, are subject to supply and demand forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of Bitcoins either globally or locally. Large-scale sales of cryptocurrencies would result in a reduction in their market prices and adversely affect the Company’s operations and profitability.
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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. |
The outcome of these factors could have negative effects on our ability to pursue our business strategy or continue as a going concern, which could have a material adverse effect on our business, prospects or operations as well as potentially negative effect on the value of any Bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account, which would harm investors in our securities.
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.
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The Company may fail to anticipate or adapt to technology innovations in a timely manner, or at all
The blockchain and telecommunications markets are experiencing rapid technological changes. Failure to anticipate technology innovations or adapt to such innovations in a timely manner, or at all, may result in the Company’s products becoming obsolete at sudden and unpredictable intervals. To maintain the relevancy of the Company’s products, the Company has actively invested in product planning and research and development. The process of developing and marketing new products is inherently complex and involves significant uncertainties. There are a number of risks, including the following:
(a) | the Company’s product planning efforts may fail in resulting in the development or commercialization of new technologies or ideas; |
(b) | the Company’s research and development efforts may fail to translate new product plans into commercially feasible products; |
(c) | the Company’s new technologies or new products may not be well received by consumers; |
(d) | the Company may not have adequate funding and resources necessary for continual investments in product planning and research and development; |
(e) | the Company’s products may become obsolete due to rapid advancements in technology and changes in consumer preferences; and |
(f) | the Company’s newly developed technologies may not be protected as proprietary intellectual property rights. |
Any failure to anticipate the next-generation technology roadmap or changes in customer preferences or to timely develop new or enhanced products in response could result in decreased revenue and market share. In particular, the Company may experience difficulties with product design, product development, marketing or certification, which could result in excessive research and development expenses and capital expenditure, delays or prevent the Company’s introduction of new or enhanced products. Furthermore, the Company’s research and development efforts may not yield the expected results, or may prove to be futile due to the lack of market demand.
The COVID-19 outbreak has had a material impact on the Canadian and global economies and could have a material adverse impact on the Company’s business, financial condition and results of operations
The current outbreak of the novel coronavirus (COVID-19) that was first reported from Wuhan, China in December 2019, and the spread of this virus could continue to have a material adverse effect on global economic conditions which may adversely impact the Company’s business. The World Health Organization declared a global emergency on January 30, 2020 with respect to the outbreak and characterized it as a pandemic on March 11, 2020. The outbreak has spread throughout Asia, Europe, the Middle East, Canada and the United States, causing companies and various governments to impose restrictions, such as quarantines, closures, cancellations and travel restrictions. The extent to which the outbreak impacts the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the actions to contain the outbreak or treat its impact, among others. The Company may incur expenses or delays relating to such events outside of the Company’s control, which could have a material adverse impact on the Company’s business, operating results and financial condition.
As the COVID-19 pandemic continues to develop, governments (at national, provincial and local levels), corporations and other authorities may continue to implement restrictions or policies that could adversely global capital markets, the global economy, the Bitcoin price and the Company’s share price.
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The COVID-19 pandemic has resulted in the Company implementing a work-from-home regime for its head office, which limits in-person interactions among employees. The Company’s operating sites remain open with social distancing and other measures in place to prevent virus transmission. The restrictions imposed as a result of COVID-19 have also significantly limited the financing options available to the Company. See “— The Company may be unable to obtain additional financing on acceptable terms or at all”.
The Company is an unsecured lender of Bitcoin
The Company has loaned 1,000 Bitcoin to Genesis pursuant an unsecured lending arrangement. The loan is subject to the prior claims of any secured creditors to the extent of the value of the assets securing such indebtedness. In the event of Genesis’ bankruptcy, liquidation, reorganization or other winding up, assets that secure debt will be available to pay obligations on the loan only after all debt secured by those assets has been repaid in full. If there are insufficient assets remaining to pay all of Genesis’ creditors, all or a portion of the loan then outstanding would remain unpaid.
Hut 8 Cryptocurrency Risks
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.
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.
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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.
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; |
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• | 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.
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.
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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 used by its partners and providers utilize, such as hardware redundancy, segregation and offline data storage (i.e., the maintenance of data on computers and/or storage media that is not directly connected to, or accessible from, the internet and/or networked with other computers, also known as “cold storage”) protocols are reasonably designed to safeguard the Company’s Bitcoins from theft, loss, destruction or other issues relating to hackers and technological attack. Nevertheless, the security procedures cannot guarantee the prevention of any loss due to a security breach, software defect or act of God that may be borne by Hut 8.
The security procedures and operational infrastructure of the Company and its partners and providers may be breached due to the actions of outside parties, error or malfeasance of an employee of the Company or its partners and providers, or otherwise, and, as a result, an unauthorized party may obtain access to the Company’s Bitcoin account, private keys, data or Bitcoins. Additionally, outside parties may attempt to fraudulently induce employees of the Company or its partners and providers to disclose sensitive information in order to gain access to the Company’s infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, or may be designed to remain dormant until a predetermined event, and often are not recognized until launched against a target, the Company may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of the Company’s Bitcoin account occurs, the market perception of the effectiveness of the Company could be harmed.
Fluctuation of Bitcoin price and expected economic returns on Bitcoin mining activities
The price of Bitcoin is volatile. Fluctuation in the price of Bitcoin may significantly affect the Company’s results of operations and financial condition; in particular, a significant drop in Bitcoin price may have a material adverse effect on the Company’s results of operations. During 2020, global financial markets experienced a period of sharp decline and volatility due in large part to the real and perceived economic impact of the novel coronavirus (COVID-19) pandemic. The price of Bitcoin declined sharply during the first quarter of 2020 and experienced a period of particular volatility in the fourth quarter of 2020 and the first quarter of 2021. The public health impact of the coronavirus, as well as the steps taken by governments and businesses around the world to combat its spread, have had an adverse impact on the global economy. Any such economic downturn, either short-term or prolonged, could impact the Bitcoin market as well.
Bitcoin price fluctuated significantly in the past few years, which resulted in a corresponding fluctuation in the Company’s results of operations. The Company expects that the Bitcoin price may continue to fluctuate in the future, and as such, the Company would expect to continue to experience a significant corresponding fluctuation in the Company’s results of operations.
There is no assurance that Bitcoins will maintain their long-term value in terms of future purchasing power or that the acceptance of Bitcoin payments by mainstream retail merchants and commercial businesses will continue to grow.
21
The Bitcoin daily reward halves approximately every four years
The difficulty of Bitcoin mining, or the amount of computational resources required for a set amount of reward for recording a new block, directly affects the Company’s results of operations. Bitcoin mining difficulty is a measure of how much computing power is required to record a new block, and it is affected by the total amount of computing power in the Bitcoin network. The Bitcoin algorithm is designed so that one block is generated, on average, every ten minutes, no matter how much computing power is in the network. Thus, as more computing power joins the network, and assuming the rate of block creation does not change (remaining at one block generated every ten minutes), the amount of computing power required to generate each block and hence the mining difficulty increases. In other words, based on the current design of the Bitcoin network, Bitcoin mining difficulty would increase together with the total computing power available in the Bitcoin network, which is in turn affected by the number of Bitcoin mining machines in operation. For example, Bitcoin mining difficulty would increase based on increases in the total computing power available in the Bitcoin network, which is in turn affected by the number of Bitcoin mining machines in operation. From January 2017 to December 2019, Bitcoin mining difficulty increased by approximately 35 times, according to Blockchain.info.
In May 2020, the Bitcoin daily reward halved from 12.5 Bitcoin per block, or approximately 1,800 Bitcoin per day, to 6.25 Bitcoin per block, or approximately 900 Bitcoin per day. This halving may have a potential impact on the Company’s profitability at the reward level of 6.25 coins. Based on the fundamentals of Bitcoin mining and historical data on Bitcoin prices and the network difficulty rate after a halving event, it is unlikely that the network difficulty rate and price would remain at the current level when the Bitcoin rewards per block are halved. The Company believes that although the halving would reduce the block reward by 50%, other market factors such as the network difficulty rate and price of Bitcoin would change to offset the impact of the halving sufficiently for the Company to maintain profitability. Nevertheless, there is a risk that a halving will render the Company unprofitable and unable to continue as a going concern.
Exposure to hash rate and network difficulty
The hash rate in the Bitcoin network is expected to increase as a result of upgrades across the industry as Bitcoin miners use more efficient chips. As the hash rate increases, the Bitcoin mining difficulty will increase in response to the increase in computing power in the network. This may make it difficult for the Company to remain competitive. The effect of increased computing power in the network combined with fluctuations in the Bitcoin price could have a material adverse effect on the Company’s results of operations and financial condition.
Bitcoin mining is capital intensive
Remaining competitive in the Bitcoin mining industry requires significant capital expenditure on new chips and other hardware necessary to increase processing power as the Bitcoin network difficulty increases. If the Company is unable to fund its capital expenditures, either through its revenue stream or through other sources of capital, the Company may be unable to remain competitive and experience a deterioration in its result of operations and financial condition.
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.
22
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.
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.
23
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.
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.
Limitation of liability in commercial agreements
Hut 8’s commercial agreements may limit the ability of the Company to recover losses relating to its Bitcoins. Under these agreements, some service providers and parties are not liable for any special, incidental, indirect, intangible, or consequential damages arising out of, or in connection with, among other things, the terms of the agreements or performance thereunder. Further, it may be the case that in no event will the aggregate liability pursuant to these agreements hold a party liable for any loss or damage exceeding the fees paid or payable to the party by the Company during a period immediately preceding the incident giving rise to such liability. Notwithstanding the foregoing, the liability of a party may not be limited in respect of direct damages arising from, or in any way related to, the fraud, willful misconduct or gross negligence of the party in question.
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.
24
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.
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.
The Company may be unable to obtain additional financing on acceptable terms or at all
The continued development of the Company will require additional financing. The failure to raise or procure such additional funds or the failure to achieve positive cash flow could result in the delay or indefinite postponement of the Company’s business objectives. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, will be on terms acceptable to the Company. In particular, the financing options available to the Company have been significantly reduced as a result of the COVID-19 pandemic. Potential counterparties have been reluctant to enter into or engage in negotiations related to possible financing transactions during the restrictions and market disruption resulting from COVID-19. Prolonged restrictions relating to the COVID-19 pandemic or a further wave of infections could significantly limit the Company’s access to capital. If additional funds are raised by offering equity securities, existing shareholders could suffer significant dilution. The Company will require additional financing to fund its operations until positive cash flow is achieved.
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.
Cryptocurrency mining consumes a significant amount of energy to process the computations and cool down the mining hardware. Therefore, a steady and inexpensive power supply is critical to the Company’s mining operations. There can be no assurance that the Company’s operations will not be affected by power shortages or an increase in energy prices in the future. In particular, the power supply could be disrupted by natural disasters, such as floods, mudslides and earthquakes, or other similar events beyond the control of the Company’s customers. Energy prices have recently experienced significant volatility and there can be no assurance that they will not increase significantly. Further, the Company may experience power shortages due to seasonal variations in the supply of power. Power shortages, power outages or increased power prices could have a material adverse effect on the Company’s business, results of operations and financial condition.
25
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.
Supply chain disruption
As the technology evolves, the Company may be required to acquire more technologically advanced mining software and other required equipment to operate the Company effectively and remain competitive in the market. Disruption to the Company’s supply chain could prevent it from acquiring this software and any other required equipment that it needs to operate the Company and remain competitive, which could have a material adverse effect on the Company’s business, results of operations and financial condition. As new technological innovations occur, including in quantum computing, there are no assurances that the Company will be able to adopt or effect such new innovations, nor that the Company will be able to acquire new and improved equipment to stay competitive or that the existing software or other equipment of the Company will not become obsolete, uncompetitive or inefficient.
Increase in carbon taxes
Bitcoin mining is energy intensive and has a significant carbon footprint. Increases in the tax payable on carbon emissions related to the Company’s operations could significantly increase the Company’s cost of doing business and could have a material adverse effect on the Company’s business, results of operations and financial condition. While the Company currently uses wind power as a source of power for its existing operations, there are no assurances that the Company will be able to effectively and efficiently, or at all, source its power needs with cost efficient and reliable alternative renewable energy sources.
Mining of Bitcoin is subject to existing taxes and may be subject to new taxes
Where cryptocurrency has been acquired as a result of mining activities of a commercial nature, the Company is currently subject to certain applicable taxes by applicable government authorities and may be subject to certain new taxes imposed by various applicable governmental authorities, whether at the time the cryptocurrency is earned, as a service, or otherwise in connection with the operations the Company currently undertakes or may in the future undertake as part of its ongoing strategic plan. There are no assurances that any such taxes will not have a material adverse impact on the Company’s business, results of operations and financial condition.
26
PRIOR SALES
The following table sets forth all securities issued by Hut 8 during Fiscal 2020:
Date |
Number
of Securities
Issued or Granted |
Type
of
Security |
Issue
Price
Per Security |
|||
April 30, 2020(1) | 125,000 | Restricted Share Units | n/a | |||
June 25, 2020(2) | 5,750,456 | Warrants | $1.80 | |||
June 25, 2020(2) | 345,027 | Broker Warrants | $1.45 | |||
June 30, 2020 | 170,000 | Deferred Share Units | n/a | |||
July 31, 2020(1) | 75,000 | Restricted Share Units | n/a | |||
September 30, 2020(1) | 90,000 | Restricted Share Units | n/a |
Notes:
(1) | RSUs granted to employees, officers, directors or consultants by the Board of Directors on the referenced date. |
(2) | Warrants and broker warrants were issued related to an overnight financing that closed on June 25, 2020. |
(3) | DSUs granted to employees, officers, directors or consultants by the Board of Directors on the referenced date. |
(4) | Stock options forfeited by employees, officers, directors or consultants on the referenced date. |
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 the close of trading on the date immediately prior to this AIF, 118,480,078 Hut 8 Shares, 11,490,727 warrants, 654,361 stock options, and 3,313,334 RSUs are issued and 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.
27
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”.
The following table sets out the price range and aggregate volumes traded or quoted on a monthly basis on the TSX from January 1, 2020 to December 31, 2020.
Month | High | Low | Average Daily Volume | ||||||||||
December 2020 | $ | 4.38 | $ | 1.44 | 1,411,064 | ||||||||
November 2020 | $ | 1.95 | $ | 1.1 | 917,926 | ||||||||
October 2020 | $ | 1.32 | $ | 0.92 | 335,417 | ||||||||
September 2020 | $ | 1.13 | $ | 0.81 | 205,559 | ||||||||
August 2020 | $ | 1.42 | $ | 0.99 | 398,259 | ||||||||
July 2020 | $ | 1.5 | $ | 1.03 | 349,138 | ||||||||
June 2020 | $ | 2.1 | $ | 0.95 | 229,465 | ||||||||
May 2020 | $ | 1.94 | $ | 0.79 | 595,688 | ||||||||
April 2020 | $ | 1.1 | $ | 0.57 | 407,021 | ||||||||
March 2020 | $ | 1.4 | $ | 0.51 | 217,152 | ||||||||
February 2020 | $ | 2.13 | $ | 1.03 | 395,697 | ||||||||
January 2020 | $ | 1.72 | $ | 1.02 | 110,316 |
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 2020 | $ | 3.45 | $ | 1.1201 | 775,585 | ||||||||
November 2020 | $ | 1.5 | $ | 0.8498 | 441,323 | ||||||||
October 2020 | $ | 0.972 | $ | 0.65 | 170,068 | ||||||||
September 2020 | $ | 0.87 | $ | 0.585 | 148,062 | ||||||||
August 2020 | $ | 1.08 | $ | 0.756 | 188,941 | ||||||||
July 2020 | $ | 1.13 | $ | 0.72 | 147,905 | ||||||||
June 2020 | $ | 1.55 | $ | 0.7 | 147,898 | ||||||||
May 2020 | $ | 1.4 | $ | 0.554 | 380,506 | ||||||||
April 2020 | $ | 0.79 | $ | 0.4295 | 240,915 | ||||||||
March 2020 | $ | 1.0299 | $ | 0.3693 | 47,944 | ||||||||
February 2020 | $ | 1.5999 | $ | 0.785 | 57,298 | ||||||||
January 2020 | $ | 1.32 | $ | 0.8012 | 17,390 |
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ESCROWED
SECURITIES AND SECURITIES
SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER
Securities Subject to Escrow
As of December 31, 2020, there are no securities of Hut 8 in escrow.
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 shareholdings of each director and officer of Hut 8 as at December 31, 2020.
Name
and Municipality
|
Positions
and Offices Held |
Principal
Occupation
|
Number
and
percentage of voting securities(5) |
Director
or
|
||||
Jaime
Leverton(1)
(Ontario, Canada) |
CEO |
• CEO of Hut 8 (2020 to present) • Chief Commercial Officer, SVP at eStruxture Data Centers (2019 – 2020 • General Manager, VP at Cogeco Peer 1 (2017 – 2019) • Managing Director, Financial Markets at National Bank (2016 – 2017) • VP, Carrier Sales and Distribution at Blackberry (2015 – 2016) |
- |
December 2020 - Present |
||||
Jimmy
Vaiopoulos(2)
(Ontario, Canada) |
CFO |
• CFO of Hut 8 (2018 to present) • CFO of UGE International Ltd. (2015 to 2018) |
118,529 (0.1%) |
July
2018 -
Present |
||||
Bill
Tai
(California, United States) |
Director, Chair |
• Founder of Treasure Data, Inc. (2012 to Present) • Board member of the BitFury Group Ltd. (2014 to Present) |
729,286(10) (0.7%)
|
March
2018 -
Present |
||||
Jeremy
Sewell(3)
(London, UK) |
Director |
• CFO of Bitfury Group Limited (2017 to Present) • CFO of eCurrency (2014 to 2017) |
- |
August
2019 -
Present |
||||
Joseph
Flinn(3)(4)
(Ontario, Canada) |
Director |
• CFO, Seaboard Transportation Group (2019 to Present) • President of Clarke Transport and Clarke North America (2017 to 2019) |
7,808 (<0.01%) |
August
2018 -
Present |
||||
Christopher
Eldredge(3)(4)
Washington D.C., USA) |
Director | • Former President and CEO of Dupont Fabros Technology (2015 – 2017) | - |
December 2020 - Present
|
||||
Sanjiv
Samant(4)
(Ontario, Canada) |
Director |
• Managing Director of Round13 Capital (2020) • Group Head of Technology Media and Healthcare at National Bank (2016 – 2019) |
- |
December 2020 - Present
|
||||
Viktoriya
Griffin
(British Columbia, Canada) |
Corporate Secretary |
• Corporate Secretary for Hut 8 • CFO of Angkor Resources Corp. (2019 – 2020) • Manager at Clearline (2016 – 2018) • Manager at MNP (2014-2016) |
- |
May 2020 - Present |
||||
Total |
855,623 (1%) |
Notes:
(1) | Appointed CEO on December 1, 2020 |
(2) | Held position of CFO from January 1, 2020 to April 30, 2020. Was then appointed Interim CEO from May 1, 2020 to December 1, 2020, at which point Mr. Vaiopoulos returned to his role of CFO. |
(3) | Member of Governance and Compensation Committee. |
(4) | Member of Audit Committee. |
(5) | Percentages based on total outstanding Common Shares at December 31, 2020 of 97,245,223. |
(6) | 689,286 are held directly by Bill Tai and 40,000 are held indirectly through XTC Unicorn Fund I, LLC. |
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Board of Directors
Bill Tai
Bill is a venture capitalist and also the Founding Chairman of Treasure Data, which was successfully acquired by ARM Corp; Founding Chairman of IPInfusionTokyo:4813, Founding Chairman and CEO iAsiaworks (IPO via Goldman Sachs & Morgan Stanley) and a former director of eight publicly listed companies.
Jaime Leverton
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 joined Hut 8 from her previous 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.
Jeremy Sewell
Jeremy Sewell is an accomplished and experienced international commercial, financial and operating executive, with extensive digital asset industry experience with former CFO roles at Bitfury Group and Silicon Valley CBDC platform fintech innovator eCurrency. His career also covers audit, compliance and governance expertise as a UK qualified accountant with 10 years in public practice in London.
Joseph Flinn
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
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.
30
Christopher Eldredge
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.
Executive Officers
Jaime Leverton (CEO)
See entry under “Board of Directors”.
Jimmy Vaiopoulos (CFO)
Jimmy Vaiopoulos joined Hut 8 in 2018 following his role as CFO with UGE International Ltd., 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.
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 Sanjiv Samant and Chris Eldredge. 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 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.
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 Chris Eldredge, who acts as chair of this committee, and includes Joseph Flinn and Jeremy Sewell. The Compensation and Governance Committee is charged with reviewing, overseeing and evaluating the governance and nominating policies and the compensation policies of the Company.
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; |
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(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.
PROMOTERS
For Fiscal 2020, no Person or company has acted as a Promoter of the Company.
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 AND REGULATORY ACTIONS
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 or regulatory actions material to the Company, nor are any such proceedings or actions known to Hut 8 to be contemplated by any party.
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AUDITORS, TRANSFER AGENT AND REGISTRAR
The auditors of Hut 8 are DMCL at their offices in Vancouver, British Columbia.
Fee Description | 2020 ($)(2) | 2019 ($) | ||||||
Audit Fees | $ | 195,000 | $ | 150,000 | ||||
Audit Related Fees | $ | 50,000 | $ | 28,500 | ||||
Tax Fees(1) | $ | 60,000 | $ | 13,200 | ||||
All Other Fees | - | - | ||||||
Total | $ | 305,000 | $ | 191,700 |
Notes:
(1) | Tax services related comprising tax compliance, tax advice, and tax planning, including the preparation of corporate tax returns. |
(2) | 2020 fees are estimated as services are still ongoing. |
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.
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) | the Master Services Agreement; |
(b) | the Master Data Center Purchase Agreement; |
(c) | the lease agreement between the City of Medicine Hat, and Hut 8 Holdings Inc.; |
(d) | the Electricity Supply Agreement between the City of Medicine Hat, and Hut 8 Holdings Inc.; |
(e) | the Amendment Agreement No. 1 to the Master Services Agreement; |
(f) | the Amendment Agreement No. 1 to the Master Data Center Purchase Agreement; |
(g) | the Amendment Agreement No. 1 to the Purchase Order No. 6 Dated 9 November 2018, dated February 12, 2020; |
(h) | the Investor Rights Agreement dated March 2, 2018 between the Company and Bitfury. |
(j) | the BitGo Custodial Services Agreement, pursuant to which BitGo provides the Company with various custodial and wallet services; |
(k) | the Amendment and Restated Agreement to the Equipment Sale and Transfer Agreement; |
(l) | the Amendment Agreement No. 1 to the Amended and Restated Equipment Sale and Transfer Agreement, dated January 31, 2020; |
(m) | the Letter Agreement to the Amended and Restated Equipment Sale and Transfer Agreement; |
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(n) | Credit agreement with Genesis to borrow US$15,000,000 and an additional US$5,000,000. These loans were fully repaid on February 12, 2021; and |
(o) | Mining pool agreement with Slushpool (Braiins Systems S.R.O.) made on March 25, 2020. |
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 2020 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.
MNP LLP and DMCL LLP are independent with respect to the Company within the meaning of the relevant rules and related interpretations prescribed by the relevant professional bodies in Canada and any applicable legislation or regulation.
ADDITIONAL INFORMATION
Additional information relating to the Company is available on SEDAR at www.sedar.com. 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 is contained in the management information circular of the Company dated December 1, 2020.
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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.
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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; |
(t) | 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; | |
(u) | 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; |
(v) | 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 |
(w) | 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.
Dated: | March 5, 2018 |
Approved by: | Board of Directors of the Company |
Exhibit 4.12
HUT 8 MINING CORP.
Consolidated Financial Statements
(In Canadian dollars)
Years ended December 31, 2020 and 2019
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, 2020 and 2019, and the consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows 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, 2020 and 2019, 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.
Key Audit Matters
Key audit matters are those matters, that in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key Audit Matter | How the Matter was Addressed in the Audit | |
Reversal of impairment loss for plant and equipment:
We draw attention to Notes 3 and 6 to the financial statements. At December 31, 2020, the Company has plant and equipment with a carrying value of $32.5 million. During the year ended December 31, 2020, the Company recorded an impairment reversal in the amount of $13.2 million. Plant and equipment are assessed annually for indicators of impairment or the reversal of previously recorded impairment.
The recoverable amount of each cash generating unit was determined using a value in use calculation. Significant assumptions used in determining the recoverable amount include the discount rate, future bitcoin prices and future increases in mining difficulty.
We considered this as a key audit matter due to the significant management estimates and judgments required in determining the recoverable amount of the cash generating units. Audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to expected future bitcoin prices, future increases in mining difficulty and the selection of the discount rate required a high degree of auditor judgment and an increased extent of audit effort, including the need to involve our valuation experts and professionals with expertise in the industry and was based on assumptions that are affected by future market and economic conditions.
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Our procedures included, but were not limited to, the following:
• With the assistance of professionals with expertise in the industry, we evaluated the reasonableness of the expected future bitcoin prices and future increases in mining difficulty.
• With the assistance of our valuation experts, we evaluated the reasonableness of the valuation methodology and the discount rate by testing the information underlying the determination of the discount rate and the mathematical accuracy of the calculation and by developing a range of independent estimates and comparing those to the discount rate selected by management.
• We calculated the impact to the recoverable amounts when reasonable possible changes to the key assumptions are made.
• We reviewed the adequacy of the disclosures made in relation to the impairment reversals in the financial statements.
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Revenue from digital assets mined:
We draw attention to Notes 3 and 5 to the financial statements. The Company provides transaction verification services within the bitcoin blockchain, and as consideration for these services, the Company receives bitcoin. The fair value of the bitcoins received during the year ended December 31, 2020 for the provision of these services was $39.0 million.
Due to the nature of this revenue source, significant audit effort is required to test the occurrence, accuracy and completeness of the revenue recognized, including the use of professionals with expertise in the industry. Consequently, we considered this a key audit matter.
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Our procedures included, but were not limited to, the following:
• With the assistance of professionals with expertise in the industry, we tested the amounts of bitcoin received from providing transaction verification services using an independent node and ensuring that the bitcoin received was in fact from the particular mining pool.
• With the assistance of professionals with expertise in the industry, we assessed the reasonableness of the quantity of bitcoin received by testing the computing capacity of the Company’s mining servers, electricity consumption associated with this activity and mining pool arrangements.
• We tested the value of bitcoins received and recognized as revenue by comparing the price per bitcoin to the daily range of bitcoin prices listed on Coinmarket.com as well as active bitcoin exchanges.
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Existence of digital assets:
We draw attention to Notes 3, 5, 8 and 12 to the financial statements. The Company holds bitcoin of $102.0 million, including $75.5 million held with a third-party custodian and $26.8 million held as collateral by a third- party lender.
We considered this a key audit matter due to the magnitude of the digital asset balance and the audit effort involved in testing the existence of the bitcoins held with third parties.
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Our procedures included but were not limited to, the following:
• We obtained confirmations of the quantities and ownership of bitcoin directly from the third-party custodian and the lender holding bitcoin as collateral.
• With the assistance of IT specialists, we assessed the Service Organization Controls Report (the “SOC Report”) of the third-party custodian attesting to the appropriateness and effectiveness of the internal control systems established by the custodian and to test the design and operating effectiveness of the Company’s complementary user entity controls.
• With the assistance of IT specialists, we observed the performance of the transfer of a small amount of bitcoin from the Company’s cold wallet storage with the custodian to a different wallet to test the rights and ownership of the Bitcoin.
• With the assistance of professionals with expertise in the industry, we tested that the bitcoins held as collateral by the lender were transferred back to the Company upon settlement of the loan subsequent to the year end.
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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.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. 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.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is David Goertz.
DALE
MATHESON CARR-HILTON LABONTE LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Vancouver, BC
March 24, 2021
HUT
8 MINING CORP.
(In Canadian dollars)
Consolidated Statements of Financial Position as at December 31,
2020 | 2019 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 2,815,939 | $ | 2,946,017 | ||||
Accounts receivable | 451,061 | - | ||||||
Deposits and prepaid expenses (Note 4) | 92,014 | 321,189 | ||||||
Digital assets (Note 5) | 75,505,472 | 10,484,106 | ||||||
Digital assets collateral (Note 5) | 26,456,199 | 15,883,182 | ||||||
Digital assets receivable (Note 5) | - | 943,438 | ||||||
105,320,685 | 30,577,932 | |||||||
Non-current assets | ||||||||
Plant and equipment (Note 6) | 32,522,602 | 34,883,085 | ||||||
Deposits and prepaid expenses (Note 4) | 7,359,046 | 5,776,227 | ||||||
Total assets | $ | 145,202,333 | $ | 71,237,244 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities (Note 7) | $ | 3,890,512 | $ | 2,496,864 | ||||
Loans payable (Note 8) | 25,756,942 | 6,231,548 | ||||||
29,647,454 | 8,728,412 | |||||||
Non-current liabilities | ||||||||
Loans payable (Note 8) | - | 19,807,075 | ||||||
29,647,454 | 28,535,487 | |||||||
Shareholders’ equity | ||||||||
Share capital (Note 9) | 178,231,290 | 170,622,599 | ||||||
Shares to be issued | 398,317 | - | ||||||
Warrants (Note 9) | 2,559,484 | 1,367,901 | ||||||
Contributed surplus (Note 9) | 4,233,917 | 5,300,480 | ||||||
Accumulated deficit | (115,549,069 | ) | (134,589,223 | ) | ||||
AOCI - Unrealized gain on bitcoin revaluation (Note 5) | 45,680,940 | - | ||||||
115,554,879 | 42,701,757 | |||||||
Total liabilities and shareholders’ equity | $ | 145,202,333 | $ | 71,237,244 |
Nature of operations (Note 1)
Subsequent events (Note 14)
Approved on behalf of the Board:
“Jaime Leverton” | “Bill Tai” | ||
Director & Chief Executive Officer | Director |
The accompanying notes are an integral part of these consolidated financial statements.
4
HUT 8 MINING CORP.
(In Canadian dollars)
Consolidated
Statements of Income and Comprehensive Income
for the years ended December 31,
2020 | 2019 | |||||||
Revenue | ||||||||
Digital assets mined (Note 5) | $ | 38,962,425 | $ | 81,990,119 | ||||
Hosting fees | 1,748,102 | - | ||||||
Cost of revenue | ||||||||
Site operating costs | (39,727,850 | ) | (45,448,549 | ) | ||||
Depreciation (Note 6) | (21,264,918 | ) | (33,053,597 | ) | ||||
Gross profit (loss) | (20,282,241 | ) | 3,487,973 | |||||
Gain on use of digital assets (Note 5) | 2,815,342 | 4,143,311 | ||||||
Revaluation of digital assets (Note 5) | 13,713,962 | 4,273,686 | ||||||
16,529,304 | 8,416,997 | |||||||
Expenses | ||||||||
Share based payments (Note 9) | 284,434 | (2,905,408 | ) | |||||
Professional fees | (1,665,795 | ) | (818,487 | ) | ||||
General and office | (1,037,126 | ) | (845,513 | ) | ||||
Salary and benefits | (817,696 | ) | (1,356,836 | ) | ||||
Investor and public relations | (15,184 | ) | (62,907 | ) | ||||
Regulatory | (133,796 | ) | (131,196 | ) | ||||
(3,385,163 | ) | (6,120,347 | ) | |||||
Operating income (loss) | (7,138,100 | ) | 5,784,623 | |||||
Foreign exchange gain | 408,832 | 1,198,011 | ||||||
Finance expense (Note 8) | (2,449,167 | ) | (4,826,061 | ) | ||||
Finance income | 8,301 | 41,244 | ||||||
Reversal of impairment (Note 6) | 13,155,936 | - | ||||||
Other gain (loss) | 5,645 | (67,247 | ) | |||||
Net income before tax | 3,991,447 | 2,130,570 | ||||||
Deferred income tax recovery (Note 13) | 15,048,707 | - | ||||||
Net income for the year | 19,040,154 | 2,130,570 | ||||||
Other comprehensive income |
||||||||
Items that will not be reclassified to net income | ||||||||
Revaluation gain on digital asset, net of tax (Note 5) | 45,680,940 | - | ||||||
Total comprehensive income | $ | 64,721,094 | $ | 2,130,570 | ||||
Basic net income per share
|
$ | 0.20 | $ | 0.02 | ||||
Diluted net income per share | $ | 0.20 | $ | 0.02 | ||||
Weighted-average number of shares outstanding: | ||||||||
Basic | 93,837,221 | 89,397,573 | ||||||
Diluted | 94,243,888 | 90,611,007 |
The accompanying notes are an integral part of these consolidated financial statements.
5
HUT 8 MINING CORP.
(In Canadian dollars)
Consolidated Statement of Changes in Shareholders’ Equity
Share Capital |
Accumulated
other |
|||||||||||||||||||||||||||||||
Number
of
shares |
Dollar amount |
Shares
to be
issued |
Warrants |
Contributed
surplus |
Accumulated
deficit |
comprehensive
income |
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 | 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 | - | - | - | - | - | 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 | |||||||||||||||||||||||
Shares issued for public offering | 5,750,456 | 5,702,617 | - | 2,635,544 | - | - | - | 8,338,161 | ||||||||||||||||||||||||
Shares issuance costs | - | (971,524 | ) | - | 127,986 | - | - | - | (843,538 | ) | ||||||||||||||||||||||
Shares issued on vesting of RSU | 543,359 | 1,804,260 | - | - | (1,804,260 | ) | - | - | - | |||||||||||||||||||||||
Shares issued on exercise of options | 33,333 | 69,176 | - | - | (31,179 | ) | - | - | 37,997 | |||||||||||||||||||||||
Shares issued on exercise of warrants | 480,066 | 1,004,162 | - | (204,046 | ) | - | - | - | 800,116 | |||||||||||||||||||||||
Shares to be issued | - | - | 398,317 | - | - | - | - | 398,317 | ||||||||||||||||||||||||
Share based payments | - | - | - | - | (284,434 | ) | - | - | (284,434 | ) | ||||||||||||||||||||||
Share based payments withholding | - | - | - | - | (68,669 | ) | - | - | (68,669 | ) | ||||||||||||||||||||||
Expiry of broker warrants | - | - | - | (1,367,901 | ) | 1,367,901 | - | - | - | |||||||||||||||||||||||
Loss on retirement of Bitfury debt | - | - | - | - | (245,922 | ) | - | - | (245,922 | ) | ||||||||||||||||||||||
Unrealized gain on bitcoin revaluation, net of tax | - | - | - | - | - | - | 45,680,940 | 45,680,940 | ||||||||||||||||||||||||
Net income | - | - | - | - | - | 19,040,154 | - | 19,040,154 | ||||||||||||||||||||||||
Balance, December 31, 2020 | 97,245,223 | $ | 178,231,290 | $ | 398,317 | $ | 2,559,484 | $ | 4,233,917 | $ | (115,549,069 | ) | $ | 45,680,940 | $ | 115,554,879 |
The accompanying notes are an integral part of these consolidated financial statements.
6
HUT 8 MINING CORP.
(In Canadian dollars)
Consolidated Statement of Cash Flows for the years ended December 31,
2020 | 2019 | |||||||
Cash provided by (used in): | ||||||||
Operating activities: | ||||||||
Net income (loss) | $ | 19,040,154 | $ | 2,130,570 | ||||
Change in non-cash operating items: | ||||||||
Deferred tax recovery | (15,048,707 | ) | - | |||||
Digital assets mined | (38,962,425 | ) | (81,990,119 | ) | ||||
Digital assets converted to fiat currency | 41,526,945 | 68,181,784 | ||||||
Digital assets paid for services | 43,485 | 7,514,399 | ||||||
Depreciation | 21,264,918 | 33,053,597 | ||||||
Gain on use of digital assets | (2,815,342 | ) | (4,143,311 | ) | ||||
Revaluation of digital assets | (13,713,962 | ) | (4,273,686 | ) | ||||
Shares issued for services | - | 667,256 | ||||||
Share based payments | (284,434 | ) | 2,905,408 | |||||
Net finance expense and other | 19,691 | 4,657,544 | ||||||
Reversal of impairment | (13,155,936 | ) | - | |||||
Foreign exchange | (515,007 | ) | (1,198,011 | ) | ||||
Interest expenses | 56,076 | 78,109 | ||||||
(2,544,544 | ) | 27,583,540 | ||||||
Change in non-cash working capital: | ||||||||
Accounts receivable | (451,061 | ) | - | |||||
Accounts payable and accrued liabilities | 1,703,608 | (13,074,965 | ) | |||||
Total change in non-cash operating working capital | 1,252,547 | (13,074,965 | ) | |||||
Net cash provided by (used in) operating activities | (1,291,997 | ) | 14,508,575 | |||||
Investing activities | ||||||||
Purchase of mining equipment | (5,810,969 | ) | (9,234,400 | ) | ||||
Deposits and prepaid expenses | (1,329,640 | ) | (497,734 | ) | ||||
Net cash used in investing activities | (7,140,609 | ) | (9,732,134 | ) | ||||
Financing activities | ||||||||
Repayment of loan payable | (6,621,300 | ) | (25,253,436 | ) | ||||
Finance draw from loan payable | 6,615,500 | 19,956,000 | ||||||
Repayment of lease obligations | (24,406 | ) | (89,549 | ) | ||||
Proceeds from issuance of common shares, net of issue costs | 7,494,622 | - | ||||||
Proceeds from exercise of warrants and options | 838,112 | - | ||||||
Net cash provided by (used in) financing activities | 8,302,528 | (5,386,984 | ) | |||||
Decrease in cash | (130,078 | ) | (610,543 | ) | ||||
Cash, beginning of year | 2,946,017 | 3,556,560 | ||||||
Cash, end of year | $ | 2,815,939 | $ | 2,946,017 |
Significant non-cash transactions included:
• | Payment in bitcoin of loans payable interest and principal totaling $Nil (2019 – $2,472,746); and |
• | Settlement of Accounts Payable with Common shares valued at $Nil (2019 - $4,609,617). |
The accompanying notes are an integral part of these consolidated financial statements.
7
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
1. | Nature of operations |
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 December 31, 2020, Bitfury Holding BV (“Bitfury”) owned 33% of the Company’s common shares and is a significant 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.
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 on March 24, 2021.
(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 3 wholly owned subsidiaries: Hut 8 Holdings Inc., Hut 8 Asset Management Inc., and Hut 8 Finance Ltd.
8
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
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.
(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.
9
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
3. | Significant accounting policies, judgements, and estimates (continued) |
(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 6 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.
(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 digital currency networks, commonly described as “crypto currency mining”. As consideration for these services, the Company receives bitcoins from each specific cryptocurrency mining pool in which it participates. Management has exercised significant judgement in determining the completion stage for this revenue stream and examined various factors surrounding the substance of the Company’s operations, and determined the stage of completion being the completion and addition of a block to a blockchain.
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.
10
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
3. | Significant accounting policies, judgements, and estimates (continued) |
(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 month. 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. Coinmaketcap is a pricing aggregator, as the principal market or most advantageous market is not always known. The Company believes any price difference amongst the principal market and an aggregated price to be immaterial. 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.
(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.
11
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
3. | Significant accounting policies, judgements, and estimates (continued) |
(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.
(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.
12
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
3. | Significant accounting policies, judgements, and estimates (continued) |
(xiii) | Changes in significant accounting policies |
• | Amendment to IFRS 3 – Definition of a Business |
In October 2018, the IASB amended IFRS 3, Business Combinations, to clarify the definition of a business, with the objective of assisting entities in determining whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendments are applicable to transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020, with earlier application permitted. The adoption of these amendments did not have an impact on the Company’s consolidated financial statements but may impact future periods if the Company enters into any future business combinations.
• | Amendment to IAS 1 and IAS 8 – Definition of Material |
In October 2018, the IASB amended IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, to clarify the definition of material and how it should be applied. In addition, the explanations accompanying the definition have been improved. The amendments are effective for annual periods beginning on or after January 1, 2020, with earlier application permitted. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements.
• | Amendment to IAS 1 – Classification of Liabilities as Current or Non-current |
In January 2020, the IASB amended IAS 1, Presentation of Financial Statements, to clarify the criterion for classifying a liability as non-current relating to the right to defer settlement of the liability for at least twelve months after the reporting period. The amendments are effective for annual reporting periods beginning on or after January 1, 2022, with earlier application permitted. The adoption of these amendments did not have an impact on the Company’s consolidated financial statements.
• | Amendment to IFRS 16 – COVID-19-Related Rent Concessions |
In May 2020, the IASB amended IFRS 16, Leases, to include a practical expedient which permits lessees not to assess whether rent concessions that occur as a direct consequence of the COVID- 19 pandemic are lease modifications and, instead, account for those rent concessions as if they were not lease modifications. In addition, the amendment to IFRS 16 provides specific disclosure requirements regarding COVID-19 related rent concessions. The amendments are effective for annual reporting periods beginning on or after June 1, 2020, with earlier application permitted. The Company received a total of $3,596 for the year ended December 31, 2020. The Company elected to apply the practical expedient to all eligible rent concessions. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements but may impact future periods if the Company receives additional rent concessions.
13
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
4. | Deposits and prepaid expenses |
December 31, 2020 | December 31, 2019 | |||||||
Current | ||||||||
Prepaid electricity(i) | $ | - | $ | 158,391 | ||||
Prepaid insurance | 92,014 | 82,225 | ||||||
Miscelaneous deposits | - | 80,573 | ||||||
Total current deposits and prepaids expenses | $ | 92,014 | $ | 321,189 | ||||
Non-current | ||||||||
Deposits related to electricity supply under Electricity Supply Agreement(ii) | $ | 5,952,735 | $ | 5,652,240 | ||||
Deposit on equipment order(iii) | 1,205,122 | - | ||||||
Land lease deposit | 201,189 | 123,987 | ||||||
Total non-current deposits and prepaids expenses | $ | 7,359,046 | $ | 5,776,227 |
(i) | Electricity deposits for facility in Drumheller, Alberta. |
(ii) | Payments for mining equipment in transit. |
(iii) | Electricity deposits for facility in Medicine Hat, Alberta. |
5. | Digital assets |
Digital assets solely consist of bitcoin. Below is 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(i) | (68,181,784 | ) | (6,883 | ) | ||||
Bitcoin used for debt and interest payments(i) | (2,472,746 | ) | (405 | ) | ||||
Bitcoin paid for services(i) | (7,850,049 | ) | (1,441 | ) | ||||
Gain on sale of digital assets(i) | 4,143,311 | - | ||||||
Revaluation of digital assets(ii) | 4,273,686 | - | ||||||
Balance, December 31, 2019 | $ | 27,310,725 | 2,923 | |||||
Bitcoin mined | 38,962,425 | 2,798 | ||||||
Bitcoin traded for cash(i) | (41,526,945 | ) | (2,956 | ) | ||||
Bitcoin paid for services(i) | (43,485 | ) | (4 | ) | ||||
Gain on sale of digital assets(i) | 2,815,342 | - | ||||||
Revaluation of digital assets(ii) | 74,443,609 | - | ||||||
Balance, December 31, 2020 | $ | 101,961,671 | 2,761 | |||||
Current portion | ||||||||
Digital assets, current(iii) | $ | 75,505,472 | 2,045 | |||||
Bitcoin used as collateral(iv) | $ | 26,456,199 | 716 |
14
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
5. | Digital assets (continued) |
(i) | During the year ended December 31, 2020, the Company exchanged its bitcoin for cash, and other services totaling $41,570,430 (2019 - $78,504,579) with a cost of $38,755,088 (2019 - $74,361,268), which resulted in a realized gain on sale of $2,815,342 (2019 - $4,143,311). |
(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 December 31, 2020, the price of bitcoin was $36,925 (US$29,002) resulting in a revaluation gain of $74,443,609 (2019 - $4,273,686). Of this gain, $13,713,962 was recorded as a gain in the net income, which offset the revaluation losses recorded in prior years, and the remaining $60,729,647 was recorded to other comprehensive income net of taxes of $15,048,707. |
(iii) | Bitcoin that is held by Hut 8 and available for use as at December 31, 2020. |
(iv) | Digital assets held by Genesis as collateral for the loan (Note 8). |
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 | - | 5,810,969 | - | 5,810,969 | ||||||||||||
Expiration of lease | - | - | (71,440 | ) | (71,440 | ) | ||||||||||
Reversal of prior-year impairment(ii) | 13,155,936 | - | - | 13,155,936 | ||||||||||||
As at December 31, 2020 | $ | 45,286,802 | $ | 88,214,450 | $ | 503,834 | $ | 134,005,086 | ||||||||
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 | 6,801,080 | 14,428,573 | 35,265 | 21,264,918 | ||||||||||||
Expiration of lease | - | - | (32,973 | ) | (32,973 | ) | ||||||||||
Accretion expense | - | - | 24,004 | 24,004 | ||||||||||||
As at December 31, 2020 | $ | 21,859,838 | $ | 79,522,092 | $ | 100,555 | $ | 101,482,485 | ||||||||
Net Book Value December 31, 2019 | $ | 17,072,108 | $ | 17,309,962 | $ | 501,015 | $ | 34,883,085 | ||||||||
Net Book Value December 31, 2020 | $ | 23,426,964 | $ | 8,692,358 | $ | 403,279 | $ | 32,522,602 |
15
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
6. | Plant and equipment (continued) |
(i) | The right-of-use assets (ROUs) comprises of a 10-year land lease with the City of Medicine Hat, which came into agreement on June 1, 2018, and a 3-year sublease under Bitfury with a landlord in Drumheller with an optional 3-year extension, which was agreed on May 8, 2017. See Note 9 for the related lease liability. |
• | The City of Medicine Hat lease was originally for payment of $10,500 monthly. A ROU asset and a related lease liability had been recognized as such. On July 1, 2019, the monthly obligation was reduced to $1,395, which results in an immediate de- recognition of the original ROU asset and recognition of a new ROU asset. A gain of $46,882 was also recognized as a result of this. |
• | The Drumheller sub-lease was originally for payment of $1,500 monthly. A ROU asset and a related lease liability had been recognized as such. In May 2020, the lease expired, which resulted in an immediate de-recognition of the ROU asset and a gain of $5,645. |
(ii) | At December 31, 2020, the Company tested its Cash-Generating Units (CGUs) for impairment. 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: |
December 31, 2020 |
December 31, 2019 |
|||||||
Starting bitcoin price | $36,925 (US$29,002) | $5,224 (US$3,829) | ||||||
Starting network difficulty | 18,600 billion | 5,619 billion | ||||||
Discount rate | 25% | 21% | ||||||
Monthly bitcoin price growth | 1.21% - 5.13% | 2.4% - 3.0% | ||||||
Difficulty growth rate | 4.42% | 3.90% |
Due to the positive mining economics, increasing prices of bitcoin related to the difficulty levels during the fourth quarter of 2020, the Company reversed prior years’ impairment charges on Infrastructure based on Management’s conclusion that, using the above assumptions, the events and circumstances which led to previous years’ impairment charges no longer exist. Consequently, in the fourth quarter of 2020, the Company recorded a reversal of prior years’ impairment charges of $13.2 million.
The Company believes a reasonable increase or decrease in the bitcoin price growth and difficulty growth used in the analysis would not cause the recoverable amount to decrease below the carrying value.
7. | Accounts payable and accrued liabilities |
December 31, 2020 | December 31, 2019 | |||||||
Accounts payable | $ | 3,726,309 | $ | 563,868 | ||||
Accrued liabilities | 164,203 | 1,932,996 | ||||||
Total | $ | 3,890,512 | $ | 2,496,864 |
16
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
8. | Loans payable |
December 31, 2020 |
December 31, 2019 |
|||||||
Balance, beginning
|
$ | 26,038,623 | $ | 32,366,242 | ||||
Borrowing | 6,615,500 | 19,956,000 | ||||||
Addition upon adoption of IFRS 16 | - | 983,445 | ||||||
Modification of lease | (44,113 | ) | (646,932 | ) | ||||
Repayments | (6,645,706 | ) | (26,675,748 | ) | ||||
Accrued interest | 58,033 | 688,386 | ||||||
Foreign exchange impact | (511,317 | ) | (1,272,871 | ) | ||||
Gain/loss on retirement of debt | 245,922 | 640,101 | ||||||
Balance, ending | $ | 25,756,942 | $ | 26,038,623 |
December 31, 2020 |
December 31, 2019 |
|||||||
Genesis | $ | 25,464,000 | $ | 19,482,000 | ||||
Lease liability | 292,942 | 325,075 | ||||||
Bitfury | - | 6,231,548 | ||||||
25,756,942 | 26,038,623 | |||||||
Current portion | $ | 25,756,942 | $ | 6,231,548 | ||||
Non-current portion | $ | - | $ | 19,807,075 |
During the year ended December 31, 2020, the Company made loan repayments of $nil (2019 - $1,137,504) through bitcoin.
(i) | Genesis loan |
As at December 31, 2020, the Company had a loan payable of $25,464,000 (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 year ended December 31, 2020 was $2,335,520 (US$1,736,952) (2019 – $224,240 (US$170,014)). A foreign exchange gain of $633,500 was recognized for the year ended December 31, 2020 (2019 – gain of $474,000).
On February 12, 2021, Hut 8 has fully repaid this loan, and all bitcoin collateral was returned to the Company.
(ii) | Lease liability |
The lease liability is measured at amortized cost using the effective interest method.
In May 2020, the Drumheller lease expired, resulting in a write-off of its ROU asset and related lease liability.
17
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
8. | Loans payable (continued) |
(iii) | Bitfury loan |
As at December 31, 2019, the Company had 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) repayment. On February 20, 2020, the Company had fully paid off its remaining debt with Bitfury.
During the year ended December 31, 2020, interest accretion was $19,691 (US$15,046) [2019 – $264,630 (US$199,446)] and interest accrued was $78,009 (US$59,608) [2019 – $1,275,432 (US$960,800)].
During the year ended December 31, 2020, the Company recorded a foreign exchange loss of $122,183 (2019 – gain of $390,464) and a loss on retirement of the Bitfury loan of $245,922 (2019 - $nil) to recognized in Contributed Surplus.
(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) of debt principal and an additional $319,174 (US$240,000) 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) and interest accretion was $345,646 (US$260,190), both of which have been recognized as finance expense A foreign exchange gain of $408,407 and a loss of $640,101 on debt retirement were recognized for the year ended December 31, 2019.
18
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 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(i) | 838,511 | 1,167,386 | ||||||
Shares issued in settlement of accounts payable(ii) | 3,717,433 | 4,609,617 | ||||||
Shares issued for services(iii) | 419,507 | 667,256 | ||||||
Shares issued for RSUs(iv) | 234,700 | 1,444,980 | ||||||
Balance, December 31, 2019 | 90,438,009 | $ | 170,622,599 | |||||
Shares issued for RSUs(iv) | 543,359 | 1,804,260 | ||||||
Shares issued for exercise of options | 33,333 | 69,176 | ||||||
Shares issued for public offering(v) | 5,750,456 | 5,702,617 | ||||||
Cost of issuance attributed to public offering | - | (971,527 | ) | |||||
Shares issued for exercise of warrants | 480,066 | 1,004,162 | ||||||
Balance, December 31, 2020 | 97,245,223 | $ | 178,231,290 |
(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. |
(ii) | 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. |
(iii) | 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. |
(iv) | During the year ended December 31, 2020, the Company issued 543,359 shares (2019 – 234,700 shares) related to exercise of restricted share units (“RSU”) and reallocated $1,804,260 (2019 - $1,444,980), the relative fair value of RSU’s net of employment withholdings, from contributed surplus to share capital. |
19
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
9. | Equity (continued) |
(v) | On June 25, 2020, the Company completed a public offering (the “Offering”), and, with the underwriters exercising their over-allotment option, issued 5,750,456 units (“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 were valued at $2,635,544 under the relative 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 an exercise price of $1.45 per share and 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% |
(b) | Warrants |
The warrant activity is as follows:
Number of
warrants |
Weighted average
exercise price |
||||||||
Balance, January 1, 2019 | 2,882,222 | $ | 4.61 | ||||||
Balance, December 31, 2019 | 2,882,222 | $ | 4.61 | ||||||
Issued(i) | 6,095,483 | 1.78 | |||||||
Exercised(ii) | (480,066 | ) | 1.67 | ||||||
Expired(iii) | (660,000 | ) | 5.00 | ||||||
Balance, December 31, 2020 | 7,837,639 | $ | 2.56 |
(i) | The warrants issued comprise of 5,750,456 warrants related to its public offering on June 25, 2020, and 345,027 broker warrants. |
(ii) | The exercised warrants, which are related to the recent public offering, comprise of 297,200 warrants with an exercise price of $1.80 and 182,866 broker warrants with an exercise of $1.45. |
(iii) | 660,000 broker warrants related to a previous private replacement with an exercise price of $5.00 expired on July 2, 2020. |
20
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
9. | Equity (continued) |
The warrants issued and outstanding as at December 31, 2020 are as follows:
Exercise
price |
Number |
Weighted average
remaining contractual life (months) |
Expiry date | |||||||||
$ | 4.50 | 2,222,222 | 33 | 9/10/2023 | ||||||||
$ | 1.80 | 5,453,256 | 12 | 12/25/2021 | ||||||||
$ | 1.45 | 162,161 | 18 | 6/25/2022 | ||||||||
$ | 2.56 | 7,837,639 | 18 |
(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:
Number of
options |
Weighted average
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 | ||||||
Exercised | (33,333 | ) | 1.14 | ||||||
Options outstanding, December 31, 2020 | 761,667 | $ | 4.38 | ||||||
Options exercisable, December 31, 2020 | 540,001 | $ | 4.76 |
As at December 31, 2020, the Company had the following stock options outstanding:
Exercise price |
Number
of
options outstanding |
Number
of
options exercisable |
Weighted
average
remaining life (months) |
|||||||||||
$ | 1.14 | 66,667 | - | 48 | ||||||||||
1.80 | 10,000 | 3,333 | 46 | |||||||||||
3.00 | 90,000 | 60,000 | 33 | |||||||||||
5.00 | 595,000 | 476,668 | 27 | |||||||||||
$ | 4.38 | 761,667 | 540,001 | 30 |
21
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
9. | Equity (continued) |
During the year ended December 31, 2020, the Company recorded a total of $354,500 (2019 - $856,844) as share-based payments related to stock options. 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.
Year ended
December 31, 2020 |
Year ended
December 31, 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 |
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, 2020, rights to receive 406,667 shares have been granted of which 348,333 vests in 2021, and 58,334 vests in 2022. During the year ended December 31, 2019, the Company issued 543,359 common shares (2019 - 234,700 common shares) for the rights that vested, which were net of standard withholdings.
During the year ended December 31, 2020, the Company recognized a total of $562,867 (2019 - $2,084,564) 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:
Year ended
December 31, 2020 |
Year ended
December 31, 2019 |
|||||||
Salary, fees, and other short-term benefits | $ | 1,048,195 | $ | 1,197,470 | ||||
Share based payments | 722,055 | 2,486,260 | ||||||
$ | 1,770,250 | $ | 3,683,730 |
During the year ended December 31, 2020, the Company was charged $2,350,392 (2019 - $19,913,152) 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 December 31, 2020, $754,737 (2019 - $394,732) 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.
22
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 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 year ended December 31, 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.
As at December 31, 2020, the contractual maturities of financial liabilities, including estimated interest payments are as follows:
Carrying
amount |
Contractual
cash flows |
Within 1
year |
1 to 2 years | 2 to 5 years | 5+ years | |||||||||||||||||||
Accounts payable and accrued liabilities | $ | 3,890,512 | $ | 3,890,512 | $ | 3,890,512 | $ | - | $ | - | $ | - | ||||||||||||
Loans payable and interest | 25,464,000 | 27,501,120 | 27,501,120 | - | - | - | ||||||||||||||||||
Lease commitments | 292,942 | 630,363 | 17,577 | 17,577 | 52,731 | 542,478 | ||||||||||||||||||
$ | 29,647,454 | $ | 32,021,995 | $ | 31,409,209 | $ | 17,577 | $ | 52,731 | $ | 542,478 |
23
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
12. | 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, 2020 in Canadian dollar terms:
2020 | ||||
Cash | $ | 368,769 | ||
Accounts payable | 30,275 | |||
Loans payable | 25,464,000 |
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 $2,586,304.
(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 and digital assets have been classified as follows:
December 31, 2020 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fair value through profit and loss | ||||||||||||||||
Cash | $ | 2,815,939 | $ | - | $ | - | $ | 2,815,939 | ||||||||
Digital assets | $ | - | $ | 101,961,671 | $ | - | $ | 101,961,671 |
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 | $ | - | $ | 27,310,726 | $ | - | $ | 27,310,726 |
24
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 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 holdings 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 December 31, 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 $10,326,932.
13. | Income taxes |
Income tax expense for the years ended December 31, is as follows:
2020 | 2019 | |||||||
Current tax expense | $ | - | $ | - | ||||
Deferred tax recovery | (15,047,707 | ) | - | |||||
Total income tax recovery | $ | (15,047,707 | ) | $ | - |
The reconciliation of the combined Canadian federal and provincial statutory income tax rate of 26.5% to the effective tax rate is as follows:
2020 | 2019 | |||||||
Net income (loss) before recovery of income taxes | $ | 3,991,447 | $ | 2,130,570 | ||||
Canadian statutory tax rate | 26.5 | % | 26.5 | % | ||||
Expected tax expense (recovery) | 1,057,733 | 564,601 | ||||||
Permanent differences | 386,788 | 537,949 | ||||||
Share issuance costs capitalized to equity | (257,455 | ) | - | |||||
Prior year true-up | (2,247,099 | ) | (1,546,521 | ) | ||||
Impact of Change in Tax Rate | 2,799,784 | 688,385 | ||||||
Utilization of non-capital loss balance | (15,048,707 | ) | 55,889 | |||||
Other | - | 92,057 | ||||||
Change in tax benefits not recognized | (1,739,751 | ) | (392,360 | ) | ||||
Income tax recovery | $ | (15,048,707 | ) | $ | - |
For the year ended December 31, 2020, income tax debited to other comprehensive income was $15,048,707 (2019 - $nil)
25
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
13. | Income taxes (continued) |
Deferred tax assets (liabilities)
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. Significant components of the deferred tax assets and liabilities are as follows:
2020 | 2019 | |||||||
Non-capital losses | $ | 18,233,106 | $ | 2,070,809 | ||||
Capital lease obligation | 70,584 | 64,973 | ||||||
Capital losses | 68,837 | - | ||||||
Digital assets | (18,141,931 | ) | (1,999,865 | ) | ||||
Right of use asset | (97,170 | ) | - | |||||
Capital loan | (133,426 | ) | (135,917 | ) | ||||
Net deferred tax asset (liability) | $ | - | $ | - |
The movement on the net deferred income tax assets and liabilities is as follows:
2020 | 2019 | |||||||
Beginning | $ | - | $ | - | ||||
Deferred tax recovery recorded in profit or loss | 15,048,707 | - | ||||||
Movement recognized in other comprehensive income | (15,048,707 | ) | - | |||||
Net deferred tax asset (liability) | $ | - | $ | - |
As at December 31, 2020, the Company had non-capital loss carryforwards of $30,456,595 (2019 - $49,631,207) that may be used to offset future taxable income and will expire in periods between 2039 and 2040. Share issue and financing costs of $3,388,076 (2019 - $3,842,849) will be fully amortized in 2024. Deferred tax assets have not been recognized because it is not probable that future taxable profit will be available against which the Company can utilize the benefits therefrom.
14. | Subsequent events |
As of December 31, 2020, the Company recorded shares to be issued to a service provider at fair value of $398,317 for electricity management services provided to the Company’s facilities during the year ended December 31, 2020. On January 4, 2021, the Company issued 380,000 common shares to the service provider.
On January 13, 2021, the Company successfully closed a private placement of equity securities for gross proceeds of CAD$77,500,000, which consisted of the sale of 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 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.
On January 22, 2021, the Company finalized an equipment financing loan of US$11.8 million from Foundry Digital LLC, a wholly-owned subsidiary of Digital Currency Group (DCG). The Company will use all proceeds from this loan and provide a USD$2.9 million deposit to order 5,400 units of Whatsminer M30S bitcoin mining machines from MicroBT, adding 475 petahashes per second (PH/s) to its bitcoin mining capacity over the next six months. The equipment financing will be a 12 month term with an annual interest rate of 16.5%.
26
HUT 8 MINING CORP.
(In Canadian dollars)
Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019
14. | Subsequent events (continued) |
From January 1, 2021 up to the date of the financial statements, 5,026,912 warrants and 107,306 options have been exercised resulting in a gross cash proceed of $24.7 million to the Company.
Subsequent to the year ended December 31, 2020, the Company granted 3,290,000 RSU to key management members with various vesting terms arranging from 1/6th every six months to 1/3rd annually.
Subsequent to the year ended December 31, 2020, the Company granted 177,500 deferred share units to directors vesting 50% upon grant date, 25% on June 30, 2021, and 25% on December 31, 2021.
27
Exhibit 4.13
HUT 8 MINING CORP.
Management’s Discussion and Analysis
For the year ended December 31, 2020
1
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Introduction
This Management’s Discussion and Analysis (“MD&A”) is dated March 24, 2021 and should be read in conjunction with the audited consolidated financial statements and Annual Information Form for the year ended December 31, 2020 and 2019 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, all references to “digital assets” refer to bitcoin and all references to “Management” refer to the directors and executive officers of the Company.
Unless otherwise stated, results are reported in Canadian dollars. 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. Such risks include, without limitation, credit risks; fluctuating interest rates; the Company not being able to meet its financial obligation as they become due; changes in foreign exchange rates; concentration of exposures within the same category; fluctuation in the price of bitcoin and the speculative nature of bitcoin; the security of bitcoin networks; and the Company’s dependence on the price of bitcoin. For a complete list of the factors that could affect the Company, please make reference to those risk factors referenced in “Risk Factors” of the Annual Information Form of the Company dated March 24, 2021. 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 growth of the Company; the Company’s implementation of its business plan; the Company’s ability to meet its working capital needs at the current level for the next twelve-month period; revenue expectations; 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.
2
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Non-IFRS Measures
This MD&A makes reference to certain measures that are not recognized under IFRS and do not have a standardized meaning prescribed by IFRS. They are therefore unlikely to be comparable to similar measures presented by other companies. The Company uses non-IFRS measures including “EBITDA,” “EBITDA margin,” “Adjusted EBITDA,” “Adjusted EBITDA margin,” “Mining Profit,” and “Cost per Bitcoin” as additional information to complement IFRS measures by providing further understanding of the Company’s results of operations from Management’s perspective.
Throughout this MD&A, the following terms are used, which do not have a standardized meaning under IFRS.
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, in Management’s estimation, 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, 2020
Company
Hut 8 is a bitcoin mining company with industrial scale operations in Alberta, Canada. Hut 8 provides investors with an opportunity to have direct exposure to bitcoin through both its bitcoin mining operation and by holding its bitcoin balance. By owning Hut 8, investors are provided an option to 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 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 2500, Park Place, 666 Burrard St, Vancouver, BC, Canada V6C 2X8, and the corporate headquarters are located at 130 King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2. The Company’s 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.
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 (described further below) 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”.
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 extremely difficult 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 Application Specific Integrated Circuit (“ASIC”) computing chips to compete with each other to correctly solve the encryption code.
4
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
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. Hut 8 utilizes both cold and hot storage for bitcoin with BitGo. Hut 8 has in place sufficient internal controls and processes with respect to the storage and transfer of bitcoin which includes multiple layers of approvals. The Company does not detail this internal control process due to confidentiality and security concerns.
Hut 8 continues to explore new ways to enhance the custody of its bitcoin and improve security for shareholders.
Summary
Fiscal 2020 was a year of transition for Hut 8 and the bitcoin industry in general. The first three quarters of 2020 were difficult for many bitcoin mining companies, including Hut 8, as the industry experienced a significant decline in the bitcoin price in mid-March to below US$4,000 and the bitcoin halving event that occurred in mid-May, 2020, where the bitcoin block reward decreased from 12.5 to 6.25 bitcoins per block (the “Bitcoin Halving Event”). Despite this, the institutional interest grew throughout 2020 and into 2021. For the 2020 calendar year, the bitcoin price increased by 303% (compared to the 2019 calendar year) while the network difficulty rate only increased by 35%, with most of the increase in bitcoin price taking effect in the last quarter of 2020, marking a positive close to the year for the industry.
Hut 8 focused in early 2020 to restructure its agreements with Bitfury Holding B.V. (“Bitfury”), which beneficially owns in the aggregate approximately 20.95% of the common shares of Hut 8 as of the date of the MD&A, to provide the Company more autonomy and the ability to purchase bitcoin mining equipment from any manufacturer. There was also a transition during the year to transfer all the site operations form being run externally by Bitfury, to bringing all operations and staff in house to Hut 8. This reduced costs significantly for the Company and also increased the quality and control of the Company’s operation.
The Company also closed an oversubscribed prospectus offering for gross proceeds of $8.3 million on June 25, 2020. The net proceeds of this offering were used to purchase latest generation equipment from MicroBT, a prominent bitcoin manufacturer, and was installed between September 2020 and January 2021.
Hut 8 also became the first Company to successfully exit the TSX SandBox program (the “TSX Sandbox”), after being the first Company to enter the TSX SandBox in 2019, thereby solidifying the Company’s status as a TSX listed company. Shortly after, on December 31, 2020, Hut 8 appointed Jaime Leverton as CEO who has a strong track record in the datacentre space and technology.
Hut 8 saw a strong start to 2021 with the bitcoin price increasing by an additional 90% from December 31, 2020, while the network difficulty increased by only 15%. On January 13, 2021, the Company further strengthened its balance sheet through the closing of a $77.5 million offering with institutional investors. Hut 8 also fully repaid its debt with Genesis Global Capital, LLC (“Genesis”) of US$20 million and all bitcoin collateral was returned. The Company began to further leverage its balance sheet by announcing a yield account with Genesis where Hut 8 is able to earn 4% in annual interest from 1,000 bitcoin.
5
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
During a time in the industry where bitcoin mining equipment manufacturers are constrained by supply, the Company was able to announce equipment financing to purchase 5,400 M30S units that is planned to be delivered between January 2021 and June 2021, of which 400 units have already been installed in January 2021.
In Management’s view, for fiscal 2020 Hut 8 maintained its strategy to continue to modernize its bitcoin mining production and hold as much bitcoin as possible on its balance sheet.
Selected Annual Financial Information
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Revenue | $ | 40,710,527 | $ | 81,990,119 | $ | 49,439,100 | ||||||
Site operating costs | (39,727,850 | ) | (45,448,549 | ) | (24,873,528 | ) | ||||||
Mining profit | 982,677 | 36,541,570 | 24,565,572 | |||||||||
Mining profit margin | 2 | % | 45 | % | 50 | % | ||||||
Depreciation | (21,264,918 | ) | (33,053,597 | ) | (47,018,781 | ) | ||||||
Gross profit | $ | (20,282,241 | ) | $ | 3,487,973 | $ | (22,453,209 | ) | ||||
Gross profit margin | -50 | % | 4 | % | -45 | % | ||||||
Expenses | (3,385,163 | ) | (6,120,347 | ) | (8,791,314 | ) | ||||||
Gain (loss) on use of digital assets | 2,815,342 | 4,143,311 | (4,039,713 | ) | ||||||||
Revaluation of digital assets | 13,713,962 | 4,273,686 | (13,822,974 | ) | ||||||||
Listing and qualifying transaction | - | - | (1,151,401 | ) | ||||||||
Net operating income (loss) | (7,138,100 | ) | 5,784,623 | (50,258,611 | ) | |||||||
Write-down | - | - | (85,404,592 | ) | ||||||||
Net finance expense | (2,440,866 | ) | (4,784,817 | ) | (872,103 | ) | ||||||
Foreign exchange gain (loss) | 408,832 | 1,198,011 | (678,495 | ) | ||||||||
Other gain (loss) | 13,161,581 | (67,247 | ) | 448,264 | ||||||||
Net income before tax | $ | 3,991,447 | $ | 2,130,570 | $ | (136,765,537 | ) | |||||
Deferred income tax recovery | 15,048,707 | - | - | |||||||||
Net income (loss) | $ | 19,040,154 | $ | 2,130,570 | $ | (136,765,537 | ) | |||||
Adjusted EBITDA | $ | (2,144,836 | ) | $ | 33,523,508 | $ | 19,291,271 | |||||
Adjusted EBITDA margin | -5 | % | 41 | % | 39 | % | ||||||
Net income (loss) per share - basic and diluted | $ | 0.20 | $ | 0.02 | $ | (2.43 | ) |
6
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Selected Quarterly Financial Information
Three-month ended December 31, | ||||||||
2020 | 2019 | |||||||
Revenue | $ | 12,986,235 | $ | 14,857,843 | ||||
Site operating costs | (10,607,444 | ) | (11,075,926 | ) | ||||
Mining profit | 2,378,791 | 3,781,917 | ||||||
Mining profit margin | 18 | % | 25 | % | ||||
Depreciation | (3,752,319 | ) | (8,518,790 | ) | ||||
Gross profit | $ | (1,373,528 | ) | $ | (4,736,873 | ) | ||
Gross profit margin | -11 | % | -32 | % | ||||
Expenses | (1,171,053 | ) | (1,602,629 | ) | ||||
Gain (loss) on use of digital assets | 1,014,358 | (1,290,219 | ) | |||||
Revaluation of digital assets | - | (3,969,403 | ) | |||||
Net operating income (loss) | (1,530,223 | ) | (11,599,124 | ) | ||||
Net finance expense | (531,512 | ) | (1,272,651 | ) | ||||
Foreign exchange gain | 1,181,546 | 494,664 | ||||||
Other gain (loss) | 13,161,581 | (1,018,306 | ) | |||||
Net income (loss) before tax | $ | 12,281,392 | $ | (13,395,417 | ) | |||
Deferred income tax recovery | 15,048,707 | - | ||||||
Net income (loss) | $ | 27,330,099 | $ | (13,395,417 | ) | |||
Adjusted EBITDA | $ | 1,403,196 | $ | 2,855,529 | ||||
Adjusted EBITDA margin | 12 | % | 19 | % | ||||
Net income (loss) per share - basic and diluted | $ | 0.28 | $ | (0.17 | ) |
Assets |
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
Total assets | $ | 145,202,333 | $ | 71,237,244 | ||||
Total non-current financial liabilities | $ | - | $ | 19,807,075 |
7
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
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 common shares in the capital of Hut 8 will be entitled to an equal share in any dividends declared and paid on a per share basis.
Discussion of Operations for the 2020 Year
For the year ended December 31, 2020, the Company mined 2,798 bitcoin, resulting in revenue generation of $40.7 million combined with hosting revenue, compared with the prior year of 8,618 bitcoin mined with revenue of $82.0 million. The reason for the significant decrease was due to a difficult year for bitcoin (particularly in the first three quarters) which included a price collapse in mid-March, which was largely attributable to the COVID-19 related activities that affected all bitcoin miners, as well as the Bitcoin Halving Event which occurred on May 11, 2020, effectively cutting down the bitcoin production for every miner in half. After the Bitcoin Halving Event, there was little to no improvement in bitcoin mining economics until the final quarter of 2020.
The Company also made changes on site as they moved all of the Clarke chips, the latest generation of Bitfury bitcoin mining chips, from Drumheller to Medicine Hat which caused some down time in mining, but allowed for better mining economics for the Company. The bitcoin mining economics improved as the Company brought together their most efficient bitcoin mining equipment to Medicine Hat, where Hut 8 has their lowest electricity price. There were also periods of Fiscal 2020 where Hut 8 was operating at an unprofitable or breakeven level; however, by the end of the 2020, Hut 8 was operating at fully capacity and was profitable on all generations of bitcoin mining equipment.
The site operating costs for the year were $39.7 million, a 13% reduction from the prior year operating costs of $45.4 million. The costs incurred related to the Company’s mining activity in 2020 was 2,798 bitcoin when compared to the prior year bitcoin mined of 8,618 bitcoin. The average cost of mining each bitcoin for the year was $14,195, compared to the prior year of $5,273, calculated by dividing site operating costs by the number of bitcoin mined for the given year. As at December 31, 2020, the cost of mining each bitcoin increased as the network difficulty and the bitcoin price increased from the prior year. The cost per bitcoin is expected to increase during periods where output is reduced due to periods of lower bitcoin mining economics, as fixed costs become a larger portion of overall costs. This caused mining profit margin to decrease to 3% from the prior year of 45%.
Depreciation was reduced significantly by 36% to $21.3 million from the prior year amount of $33.0 million. The cause of this decrease was because many of the first generation chips that the Company purchased came to the end of their two year useful life set for accounting purposes. Although the chips are through their useful life and the infrastructure is halfway through its useful life, as at December 31, 2020, they were operating on full on a profitable basis. This caused the gross profit margin to reduce to negative 49% in 2020 from 4% for fiscal 2019.
During the tight bitcoin economics of 2020, Hut 8 focused on maintaining a lean operation, and reduced expenses by 45% on a corporate level from $6.1 million in 2019 to $3.4 million in 2020. A large part of this decrease was due to share based capital gain of $0.3 million in 2020 due to the recovery of share based compensation from a prior officer and director stepping down, and a share based capital expense of $2.9 million for 2019.
The Company was able to maintain a $2.8 million gain on the use of digital assets, which consists solely of bitcoin, throughout the year despite a volatile bitcoin price by strategically timing any sale of such digital asset. This compared to the prior year gain on the use of digital assets of $4.1 million.
The unrealized gain on digital assets increased by 221% to $13.7 million in 2020 from $4.3 million in 2019 due to the increase in the bitcoin price, but also did not include a $45.7 million unrealized gain on Hut 8’s bitcoin holdings that wasn’t recognized on the income statement, but instead was accounted for directly through Other Comprehensive Income on the equity section of the Company’s balance sheet.
The Company reduced its net finance expense by 49% to $2.4 million in 2020 from $4.8 million in 2019 primarily due to the reduction of the interest rate and finance expenses related to Hut 8’s bitcoin collateralized loan. This loan was with Galaxy Digital Lending Services LLC (“Galaxy”) for most of 2019 and was refinanced with Genesis where the Company was able to lower the overall fees.
8
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
Hut 8 recognized negative $2.1 million in Adjusted EBITDA which was from the first three quarters of Fiscal 2020, and a positive $1.4 million in Adjusted EBTIDA was recognized in Q4-2020.
Below is a bitcoin price chart and mining difficulty for the year ended December 31, 2020 (reference https://coinmarketcap.com/currencies/bitcoin):
The Company recorded net income for the year ended December 31, 2020 of $19.0 million (December 31, 2019 – $2.1 million) which was primarily due to the reversal of impairment charges recognized in prior years with the bitcoin mining economics improved drastically since Q4-2020, and a deferred income tax recovery related to the unrealized gain on bitcoin revaluation.
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
Mar 31 2019 Q1 |
June 30 2019 Q2 |
Sep 30 2019 Q3 |
Dec 31 2019 Q4 |
Mar 31 2020 Q1 |
June 30 2020 Q2 |
Sep 30 2020 Q3 |
Dec 31 2020 Q4 |
|||||||||||||||||||||||||
Revenue | $ | 12,102 | $ | 28,280 | $ | 26,750 | $ | 14,858 | $ | 12,740 | $ | 9,230 | $ | 5,755 | $ | 12,986 | ||||||||||||||||
Net income (loss) | (9,511 | ) | 30,226 | (5,189 | ) | (13,395 | ) | (10,230 | ) | 2,840 | (900 | ) | 27,330 | |||||||||||||||||||
Net income (loss) per share: | ||||||||||||||||||||||||||||||||
basic | (0.13 | ) | 0.38 | (0.06 | ) | (0.17 | ) | (0.11 | ) | 0.03 | (0.01 | ) | 0.28 | |||||||||||||||||||
diluted | n.a. | 0.38 | n.a. | n.a. | n.a. | 0.03 | n.a. | 0.28 |
9
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
See below for the calculation of Adjusted EBITDA for the most recent eight quarters:
All amounts in 000’s, except per share figures
Mar 31 2019 Q1 |
Jun 30 2019 Q2 |
Sep 30 2019 Q3 |
Dec 31 2019 Q4 |
Mar 31 2020 Q1 |
June 30 2020 Q2 |
Sep 30 2020 Q3 |
Dec 31 2020 Q4 |
|||||||||||||||||||||||||
Net income (loss) | $ | (9,511 | ) | $ | 30,226 | $ | (5,189 | ) | $ | (13,395 | ) | $ | (10,230 | ) | $ | 2,840 | $ | (900 | ) | $ | 27,330 | |||||||||||
Add/(deduct): | ||||||||||||||||||||||||||||||||
Net finance costs | 1,184 | 1,205 | 1,123 | 1,273 | 649 | 693 | 568 | 532 | ||||||||||||||||||||||||
Depreciation and amortization | 8,178 | 8,178 | 8,178 | 8,519 | 7,009 | 6,958 | 3,545 | 3,752 | ||||||||||||||||||||||||
Stock-based compensation | 1,102 | 655 | 670 | 478 | (708 | ) | 60 | 168 | 195 | |||||||||||||||||||||||
Revaluation of digital assets | (1,043 | ) | (17,255 | ) | 10,052 | 3,972 | 1,282 | (9,418 | ) | (5,578 | ) | - | ||||||||||||||||||||
Gain/loss on use of digital assets | 253 | (5,169 | ) | (515 | ) | 1,288 | (914 | ) | (689 | ) | (198 | ) | (1,014 | ) | ||||||||||||||||||
Foreign exchange | (489 | ) | (585 | ) | 370 | (494 | ) | 2,354 | (1,073 | ) | (509 | ) | (1,182 | ) | ||||||||||||||||||
Other one-off items | - | - | - | 197 | - | 542 | - | - | ||||||||||||||||||||||||
Other gains or losses | (951 | ) | - | - | 1,018 | - | - | - | (13,162 | ) | ||||||||||||||||||||||
Deferred income tax recovery | - | - | - | - | - | - | - | (15,049 | ) | |||||||||||||||||||||||
Adjusted EBITDA(1) | $ | (1,277 | ) | $ | 17,256 | $ | 14,689 | $ | 2,856 | $ | (558 | ) | $ | (86 | ) | $ | (2,904 | ) | $ | 1,403 |
(1) | A non-IFRS measure defined above |
The bitcoin mining industry does not typically have seasonality; however, the Company may have fluctuations at certain 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 December 31, 2020, the Company incurred $18.64 million in electricity cost for its City of Medicine Hat site and $14.54 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 | 2020 Actual | +10% | +20% | +30% | ||||||||||||
Electricity cost | 33,180,786 | 36,498,865 | 39,816,944 | 43,135,022 | ||||||||||||
Gross loss | (20,282,241 | ) | (23,600,320 | ) | (26,918,398 | ) | (30,236,477 | ) | ||||||||
% change | 16 | % | 33 | % | 49 | % | ||||||||||
Net income | 19,040,154 | 15,722,075 | 12,403,997 | 9,085,918 | ||||||||||||
% change | -17 | % | -35 | % | -52 | % |
10
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
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.
Liquidity and Capital Resources
As at December 31, 2020, the Company had a working capital surplus of $75.7 million (December 31, 2019 - $21.8 million) and shareholders’ equity of $115.6 million.
Net cash used in operating activities was $1.3 million, which does not include the bitcoin mined but not yet converted to cash. Cash used in investing activities amounted to $7.1 million which was used for the purchase of new generation miners for the City of Medicine Hat facility. Cash provided by financing activities was $8.3 million, mostly from the public offering completed on June 25, 2020, for gross proceeds of $8,338,161 (the “Offering”) and exercise of warrants (as defined below) issued from the Offering.
As at December 31, 2020, the Company had cash on hand of $2.8 million (December 31, 2019 - $2.9 million) and digital assets of $102.0 million (December 31, 2019 - $27.3 million).
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.
On June 25, 2020, the Company completed 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%.
11
Hut
8 Mining Corp.
Management’s Discussion and Analysis
For the year ended December 31, 2020
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. This loan was fully repaid on February 12, 2021 and all bitcoin collateral was returned.
On January 6, 2021, Hut 8 announced a yield account where Hut 8 will provide Genesis with a 1,000 bitcoin unsecured loan with an interest rate of 4% per annum.
On January 13, 2021, Hut 8 closed a private placement of equity securities for gross proceeds of $77.5 million and consisted of the sale of 15,500,000 common shares and warrants to purchase up to 7,750,000 common shares at a purchase price of $5.00 per share and associated warrant. Each warrant will entitle the holder to purchase one common share at an exercise price of $6.25 per common share at any time prior to the second anniversary of the issuance date.
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 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.
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
For the year ended December 31, 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 December 31, 2020 the contractual maturities of financial liabilities, including estimated interest payments are as follows:
Carrying
amount |
Contractual
cash flows |
Within 1
year |
1 to 2 years | 2 to 5 years | 5+ years | |||||||||||||||||||
Accounts payable and accrued liabilities | $ | 3,890,512 | $ | 3,890,512 | $ | 3,890,512 | $ | - | $ | - | $ | - | ||||||||||||
Loans payable and interest | 25,464,000 | 27,501,120 | 27,501,120 | - | - | - | ||||||||||||||||||
Lease commitments | 292,942 | 630,363 | 17,577 | 17,577 | 52,731 | 542,478 | ||||||||||||||||||
$ | 29,647,454 | $ | 32,021,995 | $ | 31,409,209 | $ | 17,577 | $ | 52,731 | $ | 542,478 |
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.
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
For the year ended December 31, 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 consolidated financial statements for the year ended December 31, 2020, for related party transactions with respect to share issuances.
During the year ended December 31, 2020, the Company was charged $2,350,392 (2019 - $19,913,152) 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 December 31, 2020, $754,737 (2019 - $394,732) 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
For the year ended December 31, 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
For the year ended December 31, 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
For the year ended December 31, 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 consolidated financial statements for the years ended December 31, 2020 and 2019 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, 2020 and all material subsequent activity up to March 24, 2021.
The CEO and CFO are responsible for establishing and maintaining disclosure controls and procedures (“DC&P”) and internal controls over financial reporting (“ICFR”), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the Company.
The Company’s CEO and CFO certify that: (i) the control framework the Company’s CEO and CFO used to design the Company’s ICFR is The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework issued on May 14, 2013; (ii) there is no material weakness relating to the design of ICFR or limitation on the scope of the design of the DC&P and ICFR; and (iii) there has been no material change in the Company’s design of the ICFR that occurred during the year ended December 31, 2020 which has materially affected, or is reasonably likely to materially affect the Company’s ICFR.
Share Capital
As of the date of this MD&A, the Company has issued, and outstanding share capital comprised of 118,480,078 Common Shares, 646,667 stock options, 11,490,727 warrants, and 3,313,334 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 5.1
Consent of Independent Auditor
The Board of Directors
Hut 8 Mining Corp.
We hereby consent to the use of our reports dated April 2, 2020 and March 24, 2021, 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 “Interests of Experts”, “Auditors, Registrar and Transfer Agent” and “Documents Filed as Part of the Registration Statement” in the prospectus.
/s/ DMCL
April 7, 2021
Vancouver, Canada