EX-99.2 3 tm2124126d4_ex99-2.htm EXHIBIT 99.2

 

Exhibit 99.2

 

 

 

HUT 8 MINING CORP.

 

Unaudited Interim Condensed Consolidated Financial Statements

(In Canadian dollars)

 

For the three and six months ended June 30, 2021

 

1 

 

 

HUT 8 MINING CORP.

Unaudited Interim Condensed Consolidated Statements of Financial Position
(In Canadian dollars)

 

As at  Note   June 30,
2021		   December 31,
2020		 
Assets               
Current assets               
Cash       $92,680,919   $2,815,939 
Accounts receivable and other        938,043    451,061 
Digital assets - held in custody   4    79,221,335    75,505,472 
Dgitial assets - lending arrangements   4, 5    86,859,234    - 
Digital assets - pledged as collateral   4    -    26,456,199 
Deposits and prepaid expenses   3    5,728,313    92,014 
         265,427,844    105,320,685 
Non-current assets               
Plant and equipment   6    33,978,838    32,522,602 
Deposits and prepaid expenses   3    63,251,594    7,359,046 
Total assets       $362,658,276   $145,202,333 
Liabilities and shareholders' equity               
Current liabilities               
Accounts payable and accrued liabilities   7   $8,222,410   $3,890,512 
Loans payable and other liabilities   8    6,094,406    25,756,942 
         14,316,816    29,647,454 
Total liabilities        14,316,816    29,647,454 
Shareholders' equity               
Share capital   9    349,405,793    178,231,290 
Shares to be issued        -    398,317 
Warrants   9    44,536,293    2,559,484 
Contributed surplus   9    6,639,176    4,233,917 
Accumulated deficit        (100,455,241)   (115,549,069)
AOCI - Unrealized gain on bitcoin revaluation        48,215,439    45,680,940 
Total shareholder's equity        348,341,460    115,554,879 
Total liabilities and shareholders' equity       $362,658,276   $145,202,333 

 

Nature of operations (Note 1)

 

Approved on behalf of the Board:

 

“Jaime Leverton”  “Joseph Flinn”
Director & Chief Executive Officer  Director

 

2 

 

 

HUT 8 MINING CORP.

Unaudited Interim Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(In Canadian dollars)

 

    Three Months Ended  Six Months Ended 
For the periods ended June 30  Note   2021   2020   2021   2020 
Revenue    13   $33,549,443   $9,229,659   $65,531,856   $21,969,560 
Cost of revenue    14    (16,754,060)   (15,490,820)   (36,408,324)   (34,941,720)
Gross profit (loss)         16,795,383    (6,261,161)   29,123,532    (12,972,160)
General and administrative expenses   15    (8,672,215)   (1,384,977)   (15,335,252)   (1,533,283)
Gain on disposition of digital assets    4    -    688,619    182,213    1,602,615 
Revaluation of digital assets         -    9,417,727    -    8,136,108 
Operating income (loss)        8,123,168    2,460,208    13,970,493    (4,766,720)
Foreign exchange gain (loss)        (212,424)   1,072,880    (643,394)   (1,281,320)
Finance expense        (148,707)   (693,971)   (369,891)   (1,346,693)
Finance income        788,017    1,296    1,356,966    5,126 
Unrealized revaluation related to loan receivable classification change   2    (22,934,649)   -    -    - 
Net income (loss) before tax        (14,384,595)   2,840,413    14,314,174    (7,389,607)
Deferred income tax recovery (expense)        (6,045,594)   -    779,654    - 
Net income (loss)       $(20,430,189)  $2,840,413   $15,093,828   $(7,389,607)
Other comprehensive income (loss)                         
Items that will not be reclassified to net income                         
Revaluation gain (loss) on digital assets,

net of tax

   4    (64,291,666)   -    2,534,499    - 
Total comprehensive income (loss)       $(84,721,855)  $2,840,413   $17,628,327   $(7,389,607)
Net income (loss) per share:                         
Basic       $(0.17)  $0.03   $0.13   $(0.08)
Diluted       $(0.16)  $0.03   $0.12   $(0.08)
Weighted average number of shares outstanding:                         
Basic        123,379,871    91,286,227    118,297,534    90,653,513 
Diluted        129,284,763    91,527,894    124,202,426    90,895,180 

 

3 

 

 

 

HUT 8 MINING CORP.

Unaudited Interim Condensed Consolidated Statements of Cash Flows
(In Canadian dollars)

 

   Six Months Ended 
For the periods ended June 30  2021   2020 
Cash provided by (used in):          
           
Operating activities:          
Net income (loss)  $15,093,828   $(7,389,607)
Change in non-cash operating items:          
Digital assets mined   (61,913,593)   (21,969,560)
Digital assets converted to fiat currency   1,291,060    22,230,436 
Depreciation   8,779,833    13,967,426 
Gain on sale of digital assets   (182,213)   (1,602,615)
Revaluation of digital assets   -    (8,136,108)
Share based payments   4,524,141    (647,635)
Income tax recovery   (779,654)   - 
Net finance expense   (987,075)   (1,191,455)
Foreign exchange loss   643,394    1,281,320 
Accretion expense on lease obligations   12,000    19,559 
    (33,518,279)   (3,438,239)
Net change in working capital   2,850,767    2,197,487 
Net cash used in operating activities   (30,667,512)   (1,240,752)
           
Investing activities          
Purchase of mining equipment   (10,248,069)   - 
Deposits and prepaid expenses   (61,528,847)   470,977 
Net cash provided by (used in) investing activities   (71,776,916)   470,977 
           
Financing activities          
Repayment of loan payable   (25,372,000)   (6,622,303)
Finance draw from loan payable   -    6,615,500 
Finance draws from equipment financing   8,411,413    - 
Repayment of equipment financing   (2,745,693)   - 
Proceeds from issuance of common shares, net of issuance costs   180,033,032    7,719,620 
Proceeds from exercise of warrants and options   31,329,635    - 
Finance income received   1,013,642    5,126 
Finance expense paid   (369,891)   (1,199,549)
Recovery (repayment) of lease obligations   9,270    (17,394)
Net cash provided by financing activities   192,309,408    6,501,000 
           
Increase in cash   89,864,980    5,731,225 
Cash, beginning of period   2,815,939    2,946,017 
Cash, end of period  $92,680,919   $8,677,242 

 

Significant non-cash transactions for the six months ended June 30, 2021 include:

·         Derecognition of broker warrants upon expiry of $nil (2020 - $1,367,901);

·         Settlement of Accounts Payable in common shares valued at $398,317 (2020 - $nil);

·         Loan payable issued for purchase of mining equipment $8,411,413 (2020 - $nil)

 

4

 

 

HUT 8 MINING CORP.

Unaudited Interim Condensed Consolidated Statement of Changes in Shareholders’ Equity
(In Canadian dollars)

 

For the six months ended  Number of
shares		  Share
capital		  Shares to be
issued		  Warrants  Contributed
surplus		  Accumulated
deficit		  Accumulated
other
comprehensive
income		  Total 
Balance, December 31, 2020  97,245,223  $178,231,290  $398,317  $2,559,484  $4,233,917  $(1 15,549,069)  $45,680,940  $115,554,879 
Net income  -   -   -   -   -   15,093,828   -   15,093,828 
Other comprehensive income  -   -   -   -   -   -   2,534,499   2,534,499 
Comprehensive income  -   -   -   -   -   15,093,828   2,534,499   17,628,327 
Other equity movements                                
Shares issued for equity raises  38,500,000   130,219,190   -   49,813,842   -   -   -   180,033,032 
Shares issued on vesting of RSU  304,813   853,479   -   -   (853,479)  -   -   - 
Shares issued on vesting of DSU  42,500   52,698   -   -   (52,698)  -   -   - 
Share based payments withholding  -   -   -   -   (728,556)  -   -   (728,556)
Shares issued on exercise of options  170,639   1,206,681   -   -   (484,151)  -   -   722,530 
Shares issued on exercise of warrants  6,631,062   38,444,138   -   (7,837,033)  -   -   -   30,607,105 
Shares issued on settlement of accounts payable  380,000   398,317   (398,317)  -   -   -   -   - 
Share based payments  -   -   -   -   4,524,143   -   -   4,524,143 
Balance, June 30, 2021  143,274,237  $349,405,793  $-  $44,536,293  $6,639,176  $(100,455,241) $48,215,439  $348,341,460 

  

For the six months ended  Number of
shares		  Share capital  Shares to be
issued		  Warrants  Contributed
surplus		  Accumulated
deficit		  Accumulated
other
comprehensive
income		  Total 
Balance, December 31, 2019  90,438,009  $170,622,599  $-  $1,367,901  $5,300,480  $(134,589,223) $-  $42,701,757 
Net loss  -   -   -   -   -   (7,389,607)  -   (7,389,607)
Other comprehensive income  -   -   -   -   -   -   -   - 
Comprehensive income  -   -   -   -   -   (7,389,607)  -   (7,389,607)
Other equity movements                                
Shares issued for public offering  5,750,456   4,731,090   -   2,763,530   -   -   -   7,494,620 
Shares issued on exercise of RSU  543,359   1,804,260   -   -   (1,804,260)  -   -   - 
Share based payments  -   -   -   -   (647,635)  -   -   (647,635)
Share based payments withholding  -   -   -   -   (68,668)  -   -   (68,668)
Expiry of broker warrants  -   -   -   (1,367,901)  1,367,901   -   -   - 
Loss on retirement of Bitfury debt  -   -   -   -   (245,922)  -   -   (245,922)
Balance, June 30, 2020  96,731,824  $177,157,949  $            -  $2,763,530  $3,901,896  $(141,978,830) $                 -  $41,844,545 

 

5

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

 

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 2400, 745 Thurlow Street, Vancouver, BC, Canada V6E 0C5 and the headquarters are located at 24 Duncan St., Suite 500, Toronto, ON, Canada, M5V 2B8. The Company’s common shares are listed under the symbol “HUT” on the Toronto Stock Exchange and The Nasdaq Global Select Market. The Company is in the business of (i) utilizing specialized equipment to solve complex computational problems to validate transactions on the Bitcoin blockchain and receive Bitcoin in return for successful service and (ii) providing hosting services to institutional clients, for which services the Company receives monthly fees.

 

2.       STATEMENT OF COMPLIANCE AND BASIS OF PRESENTATION

 

(a)   Statement of compliance

 

These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. Certain information and note disclosures normally included in the audited annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), have been omitted or condensed. These interim condensed consolidated financial statements should be read in conjunction with the Company’s December 31, 2020 audited annual consolidated financial statements.

 

These unaudited interim condensed consolidated financial statements were approved and authorized for issuance by the Board of Directors on August 11, 2021.

 

(b)   Basis of presentation and consolidation

 

These unaudited interim condensed consolidated financial statements have been prepared on a historical cost basis except for some financial instruments that have been measured at fair value. All amounts are presented in Canadian Dollars (“CAD”), unless otherwise stated.

 

These unaudited interim condensed consolidated financial statements include the financial statements of the Company and all entities in which the Company has a controlling interest. All significant intercompany transactions, balances, income and expenses are eliminated on consolidation.

 

Certain comparative figures have been restated where necessary to conform with current period presentation.

 

(c)   Application of IFRS and use of estimates

 

IFRS does not currently provide specific guidance to address many aspects of the digital currencies business. 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.

 

The preparation of the Company’s unaudited interim condensed consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts. 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. Actual results may differ from those estimates.

 

6

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

 

(d)   Change in classification

 

The Company is required to make judgments as to the application of IFRS and the selection of its accounting policies. As IFRS does not currently provide specific guidance to many aspects of the digital asset industry, management must regularly review its judgements. During the quarter ended June 30, 2021, Management performed a review of lending arrangements associated with its digital assets holdings (see Note 5) and concluded a change in classification of the digital assets associated with these lending arrangements would result in more reliable and relevant information in accordance with IFRS. The result is a change in classification from loan receivable, as reported as at March 31, 2021, to intangible assets. This change in classification is applied prospectively. The borrow fee income earned from these lending arrangements have also been reclassified from revenue to finance income on the consolidated statements of operations.

 

(e)   Change in estimates

 

During the quarter ended June 30, 2021, Management performed an operational efficiency review of its mining equipment, which resulted in changes in the expected useful life of its Infrastructure assets. Previously estimated with a 4-year useful life, the Infrastructure assets are now estimated to have a useful life of 10 years from the date put into service. The result is a change in estimate and applied prospectively. Notwithstanding any future addition to the Infrastructure assets, the effect of the change in useful life on actual and expected depreciation expense, effective the second quarter ended June 30, 2021, is as follows:

 

(in thousands)  2021   2022   2023   2024   2025   2026   2027   2028   2029 
(Decrease) increase in depreciation expense   (9,826)   (4,672)   2,204    2,688    2,688    2,688    2,686    1,394    149 

 

Please see Note 6 for further information on Plant and Equipment.

 

3.       DEPOSITS AND PREPAID EXPENSES

 

The components of deposits and prepaid expenses are as follows:

 

As at  June 30,
2021		   December 31,
2021		 
Current          
Prepaid insurance  $2,700,651   $92,014 
Prepaid electricity(i)   2,753,579    - 
Miscelaneous deposits   274,083    - 
Total current deposits and prepaid expenses  $5,728,313   $92,014 
Non-current          
Deposits for equipment purchase(ii)  $41,785,670   $1,205,122 
Deposits related to power purchase agreement(iii)   15,000,000    - 
Deposits related to electricity supply under electricity supply agreement(iv)   6,252,735    5,952,735 
Land lease deposit   213,189    201,189 
Total non-current deposits  $63,251,594   $7,359,046 

 

(i)      Prepaid electricity costs for facility in Drumheller, Alberta.

(ii)     Deposits with respect to various equipment orders with NVIDIA, MicroBT and Dell.

(iii)    Deposit with respect to power purchase agreement with Validus Power Corp.

(iv)    Electricity deposits for facility in Medicine Hat, Alberta.

 

7

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

 

4.      DIGITAL ASSETS – HELD IN CUSTODY

 

Digital assets solely consist of Bitcoin. The Company’s Bitcoin are either held in custody, loaned out under lending arrangements, or pledged as collateral. The details of the Bitcoin are as follows:

 

    Amount     Number of digital assets  
    June 30,     December 31,     June 30,     December 31,  
As at   2021     2021     2021     2021  
Digital assets - held in custody   $   79,221 ,335     $ 75,505,472       1,824       2,045  
Digital assets loaned or pledged                                
Lending arrangem ents (i)     86,859,234       -       2,000       -  
Pledged as collateral(ii)     -       26,456,199       -       716  
Total digital assets held, loaned or pledged    $  1 66,080,569     $ 101,961,671       3,824       2,761  

 

(i)Bitcoin loaned out under lending arrangements. Please see Note 5.
(ii)As of December 31, 2020, the Company had pledged 716 Bitcoin as collateral for a loan. This loan has been subsequently repaid in 2021 and all Bitcoin pledged as collateral has been returned to the Company.

 

During the six months ended June 30, 2021, the Company traded Bitcoin for cash totaling $1,291,060 (2020 - $22,230,436) with a cost of $1,108,847 (2020 - $20,627,821), which resulted in a realized gain on use of $182,213 (2020 - $1,602,615).

 

Digital assets held are revalued each reporting period based on the fair market value of the price of Bitcoin on the reporting date. As of June 30, 2021, the price of Bitcoin was $43,430 (US$35,041), resulting in a revaluation gain for the six months ended June 30, 2021, of $3,314,152, net of taxes of $779,654. This gain was recorded to other comprehensive income.

 

5.       DIGITAL ASSETS – LENDING ARRANGEMENTS

 

The Company has entered into arrangements with third parties whereby, from time to time, the Company may lend out a portion of its digital assets for a period of time (the “Lending Arrangements”). The third parties must return the same amount and type of digital assets upon expiry of the lending period or upon exercise of a call option by the Company. In return for access to certain of the Company’s digital assets, the third parties must pay a borrow fee to the Company.

 

As of June 30, 2021, the Company determined the fair value of the digital assets loaned under the Lending Arrangements was $86,859,234 (December 31, 2020 - $nil).

 

During the three and six months ended June 30, 2021, the Company recorded borrow fee income of $770,877 (2020 - $nil) and $1,303,119 (2020 - $nil), respectively. Borrow fee income is recognized within finance income on the consolidated statements of operations. As of June 30, 2021, the Company has a borrow fee receivable balance of $343,323 (December 31, 2020 - $nil).

 

The Company’s digital assets subject to Lending Arrangements are exposed to credit risk. The Company limits its credit risk by loaning the digital assets to counterparties that are believed to have sufficient capital to meet their obligations as they come due based on the Company’s review of their size, credit quality and reputation. As of June 30, 2021, the Company does not expect a material loss on any of its digital assets subject to Lending Arrangements. As of each reporting period, the Company assesses if there are significant increases in credit risk requiring recognition of a loss or write-down. Such loss or write-down would be reflected in the fair value of the digital assets on loan. While the Company intends to only transact with counterparties that it believes to be creditworthy, there can be no assurance that a counterparty will not default and that the Company will not sustain a material loss on a transaction as a result.

 

8

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

 

Details of the Company’s various Lending Arrangements are as follows:

 

Genesis Global Capital LLC (“Genesis”)

 

On January 6, 2021, the Company entered into a Lending Arrangement with Genesis whereby the Company loaned to Genesis a number of digital assets, as agreed upon between the Company and Genesis. The Lending Agreement is subject to a borrow fee, is unsecured, due on demand and repayable in the same amount and type of digital assets. As of June 30, 2021, there are 1,000 Bitcoin (December 31, 2021 - nil) loaned to Genesis under the Company’s Lending Arrangement with Genesis. The borrow fee charged for the Lending Arrangement with Genesis is currently 4%.

 

Galaxy Digital LLC (“Galaxy”)

 

On May 17, 2021, the Company entered into a Lending Arrangement with Galaxy whereby the Company loaned to Galaxy a number of digital assets, as agreed upon between the Company and Galaxy. The Lending Agreement is subject to a borrow fee, is unsecured, due on demand and repayable in the same amount and type of digital assets. The Company obtained a guarantee from an affiliate of Galaxy in support of the Lending Arrangement. As of June 30, 2021, there are 1,000 Bitcoin (December 31, 2021 - nil) loaned to Galaxy under the Company’s Lending Arrangement with Galaxy. The borrow fee charged for the Lending Arrangement with Galaxy is currently 4%.

 

6.       PLANT AND EQUIPMENT

 

The changes in the carrying value of plant and equipment are as follows:

 

   Infrastructure   Mining servers   Right-of-use assets(i)   Total 
Cost                    
Balance, January 1, 2020  $32,130,866   $82,403,481   $575,274   $115,109,621 
Additions   -    5,810,970    -    5,810,970 
Expiration of lease   -    -    (71,440)   (71,440)
Reversal of prior-year impairment   13,155,936    -    -    13,155,936 
Balance, December 31, 2020   45,286,802    88,214,451    503,834    134,005,087 
Additions   -    10,248,069    -    10,248,069 
Balance, June 30, 2021  $45,286,802   $98,462,520   $503,834   $144,253,156 
Accumulated Depreciation                
Balance, January 1, 2020  $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 
Balance, December 31, 2020   21,859,838    79,522,092    100,555    101,482,485 
Depreciation   4,627,635    4,137,313    14,885    8,779,833 
Accretion expense   -    -    12,000    12,000 
Balance, June 30, 2021  $26,487,473   $83,659,405   $127,440   $110,274,318 

 

Net book value as of                
December 31, 2020  $23,426,964   $8,692,359   $403,279   $32,522,602 
June 30, 2021  $18,799,329   $14,803,115   $376,394   $33,978,838 

 

(i)       The right-of-use assets (“ROU”) comprise of a 10-year land lease with the City of Medicine Hat, dated June 1, 2018. See Note 8 for the related lease liability.

 

9

 

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

 

7.            ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

The components of accounts payable and accrued liabilities are as follows:

 

As at  June 30,
2021		   December 31,
2021		 
Accounts payable  $6,882,101   $3,726,309 
Other accrued liabilities   1,340,309    164,203 
Total accounts payable and accrued liabilites  $8,222,410   $3,890,512 

 

8.           LOANS PAYABLE AND OTHER LIABILITIES

 

The components of loans payable are as follows:

 

As at  June 30,
2021		   December 31,
2021		 
Loans(i)  $5,792,195   $25,464,000 
Lease liabilities(ii)   302,211    292,942 
Total loans payable and other liabilities  $6,094,406   $25,756,942 
           
Current portion  $6,094,406   $25,756,942 
Non-current portion   -    - 
Total loans payable and other liabilities  $6,094,406   $25,756,942 

 

(i)      Loans

 

The Company’s loans as at June 30, 2021, consist of $5,792,195 (December 31, 2020 - $nil) with Foundry Digital LLC (“Foundry”) and $nil (December 31, 2020 - $25,464,000) with Genesis. Details of the Company’s Loans are as follows:

 

Foundry

 

On January 22, 2021, the Company finalized an equipment financing loan of US$11.8 million with Foundry, a wholly-owned subsidiary of Digital Currency Group. The equipment financing has a 12-month term with an annual interest rate of 16.5% and is secured against the financed equipment, as well as digital currency and future mined digital currencies by the financed equipment. During the six months ended June 30, 2021, the Company recognized a loan payable of $8,411,413 (US$6,916,800). The Company provided a 20% down payment of $1,704,672 (US$1,396,360) which included an administrative fee of $16,085 (US$13,000). For the six months ended June 30, 2021, the Company also made principal payments totaling $1,057,106 (US$860,053), and interest payments of $153,222 (US$124,591). A foreign exchange loss of $126,476 was recognized for the six months ended June 30, 2021.

 

Genesis

 

The Company fully paid off its US$20,000,00 loan with Genesis on February 11, 2021; and subsequently all Bitcoin held by Genesis as collateral for the loan were 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.

 

10

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

 

9.           EQUITY

 

(a)     Common shares

 

The Company has authorized share capital of an unlimited number of common shares. The changes in share capital are as follows:

 

   Number of shares   Amount 
Balance, January 1, 2020   90,438,009   $170,622,599 
Shares issued for RSUs   543,359    1,804,260 
Shares issued for exercise of options   33,333    69,176 
Shares issued for public offering   5,750,456    5,702,617 
Cost of issuance attributed to public offering   -    (971,524)
Shares issued for exercise of warrants   480,066    1,004,162 
Balance, December 31, 2020   97,245,223   $178,231,290 
Shares issued for services(i)   380,000    398,317 
Shares issued for RSUs and DSUs(ii)   347,313    906,177 
Shares issued for exercise of options   170,639    1,206,681 
Shares issued for private placement(iii)(iv)   38,500,000    130,219,190 
Shares issued for exercise of warrants   6,631,062    38,444,138 
Balance, June 30, 2021   143,274,237   $349,405,793 

 

(i)Shares issued as payment of invoices to key service providers.

 

(ii)Shares issued upon vesting of restricted share units (“RSU”) and deferred share units (“DSU”), net of employment tax withholdings.

 

(iii)On January 13, 2021, the Company closed a private placement of equity securities (an “Offering”). Pursuant to the Offering, the Company issued 15,500,000 common shares and 7,750,000 warrants to purchase common shares (the “Offered Warrants”), at a price of $5.00 per common share and associated Offered Warrant, for gross proceeds of $77,500,000. The Company also issued 930,000 broker warrants (the “Broker Warrants”). Each Offered Warrant and Broker Warrant will entitle the holder to purchase one common share at an exercise price of $6.25 per common share at time for a period of 24 months from the issuance date. Under the relative fair value approach, the Offered Warrants and Broker Warrants were valued using the Black-Scholes Option using the following assumptions: expected life of 2 years, risk-free rate of 0.16%, volatility of 136% and dividend yield of 0%. The Company incurred commissions and fees totaling $5,336,748. As of June 30, 2021, $123,808 of the commissions and fees remained unpaid.

 

(iv)On June 15, 2021, the Company closed an Offering. Pursuant to the Offering, the Company issued 23,000,000 common shares and 11,500,000 Offered Warrants, at a price of $5.00 per common share and associated Offered Warrant, for gross proceeds of $115,000,000. The Company also issued 144,000 Broker Warrants. Each Offered Warrant and Broker Warrant will entitle the holder to purchase one common share at an exercise price of $6.25 per common share at time for a period of 24 months from the issuance date. Under the relative fair value approach, the Offered Warrants and Broker Warrants were valued using the Black-Scholes Option using the following assumptions: expected life of 2 years, risk-free rate of 0.16%, volatility of 136% and dividend yield of 0%. The Company incurred commissions and fees totaling $7,130,218. As of June 30, 2021, $1,020,000 of the commissions and fees remained unpaid.

 

11

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

 

(b)     Warrants

 

The changes in warrants are as follows:

 

   Number of warrants   Weighted average
exercise price		 
Balance, January 1, 2020   2,882,222   $4.61 
Issued   6,095,483    1.78 
Exercised   (480,066)   1.67 
Expired   (660,000)   5.00 
Balance, December 31, 2020   7,837,639   $2.56 
Issued(i)   20,324,000    6.25 
Exercised(ii)   (6,631,062)   4.62 
Balance, June 30, 2021   21,530,577   $5.41 

 

(i)The warrants issued comprise of 7,750,000 Offered Warrants and 930,000 Broker Warrants related to its Offering on January 13, 2021, and 11,500,000 Offered Warrants and 144,000 Broker Warrants related to its Offering on June 15, 2021.

 

(ii)The warrants exercised comprise of 2,854,450 warrants with an exercise price of $6.25, 2,222,222 warrants with an exercise price of $4.50, 1,465,500 warrants with an exercise price of $1.80, and 88,890 warrants with an exercise price of $1.45.

 

The warrants issued and outstanding as of June 30, 2021 are as follows:

 

Exercise price   Number   Weighted average
remaining contractual
life (months)		   Expiry date 
$6.25    11,644,000    24    2023-06-15 
$6.25    5,825,550    19    2023-01-13 
$1.80    3,987,756    6    2021-12-25 
$1.45    73,271    12    2022-06-25 
$5.41    21,530,577    19      

 

(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, RSUs and DSUs (“Awards”) to officers, directors, employees, and consultants enabling them to acquire common shares of the Company. The LTIP was further amended April 8, 2019 and June 23, 2021. 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.

 

12

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

 

Stock options

 

Stock option activity is as follows:

 

   Number of options   Weighted average
exercise price		 
Balance, January 1, 2020   910,000   $4.34 
Forfeiture   (115,000)   5.00 
Exercised   (33,333)   1.14 
Balance, December 31, 2020   761,667    4.38 
Granted   60,000    6.57 
Forfeiture   (104,361)   1.96 
Exercised   (170,639)   4.23 
Options outstanding, June 30, 2021   546,667   $5.13 

 

As of June 30, 2021, the Company had the following stock options outstanding:

 

Exercise price   Number of
options
outstanding		   Number of
options
exercisable		   Weighted
average
exercise price		   Weighted average
remaining life
(months)		 
$1.80    6,667    -   $1.80    40 
 5.00    480,000    480,000    5.00    21 
 6.57    60,000    -    6.57    118 
$5.13    546,667    480,000   $4.77    32 

 

 

During the six months ended June 30, 2021, the Company recorded a total of $86,152 (2020 - $228,757) as share-based compensation expense related to stock options. The Company also recorded a reversal of share-based compensation totaling $120,959 due to forfeiture of 104,361 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. The stock compensation expense was based on the fair value of each stock option on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the six months ended June 30, 2021: expected life of 10 years, risk-free rate of 1.53%, volatility of 205.80%, and dividend yield of 0%.

 

RSUs and DSUs

 

As of June 30, 2021, rights to receive 3,107,624 shares have been granted of which 803,874 vest in 2021, 1,110,416 vest in 2022, 1,046,667 vest in 2023, and 146,667 vest in 2024. Upon vesting, the Company will issue shares from treasury to the employees for no additional consideration. During the three and six months ended June 30, 2021, the Company recorded a total of $2,552,208 (2020 – expense reversal of $1,053,658) and $4,206,538 (2020 - $325,409) as share-based compensation expense related to RSUs, respectively, and $193,078 (2020 - $nil) and $352,410 (2020 - $nil) as share-based compensation expense related to DSUs, respectively.

 

13

 

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

10.            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:

 

   Six months ended 
For the periods ended June 30  2021   2020 
Salary, fees, and other short-term benefits (i)  $2,764,072   $387,654 
Share based payments   4,560,191    569,896 
   $7,324,263   $957,550 

 

(i)In connection with the issuance of shares related to the RSUs and DSUs granted, during the six months ended June 30, 2021, the Company incurred payroll tax expense of $1,245,688 (2020 - $nil).

 

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 composed 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, 2020.

 

12.           FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

 

(a) Fair value measurements:

 

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.

 

14

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

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

 

June 30, 2021  Level 1   Level 2   Level 3   Total 
Fair value through profit and loss                    
Cash  $92,680,919   $-   $-   $92,680,919 
Fair value through other comprehensive income                    
Total digital assets held, loaned or pledged  $-   $166,080,569   $-   $166,080,569 

 

December 31, 2020  Level 1   Level 2   Level 3   Total 
Fair value through profit and loss                    
Cash  $2,815,938   $-   $-   $2,815,938 
Fair value through other comprehensive income                    
Total digital assets held, loaned or pledged  $-   $101,961,671   $-   $101,961,671 

 

The Company determined that the carrying value of accounts receivable and loan payable approximate the corresponding fair value because of the relatively short periods to maturity of these instruments and the low credit risk.

 

Digital assets and risk management

 

Digital assets are measured using Level 2 fair values, determined by taking the rate from Coinmarketcap.

 

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

 

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

 

As of June 30, 2021, had the market price of Bitcoin increased or decreased by 10% with all other variables held constant, the corresponding digital assets value increase or decrease respectively would amount to $16,608,057.

 

(b) Financial risk management:

 

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, 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 carries a US$100 million insurance policy backing its digital asset custody services. Hut 8 does not self-custody its Bitcoin.

 

Hut 8 also faces credit risk associated with the Genesis and Galaxy Bitcoin lending arrangements. Management believes this risk is limited based on the size, credit quality and reputation of these counterparties.

 

15

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

Interest rate risk

 

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

 

Liquidity risk

 

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

 

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 and has 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 of June 30, 2021 in Canadian dollar terms:

 

As at  June 30,
2021		 
Cash  $1,185,485 
Accounts receivable   343,323 
Deposits and prepaid expenses (current)   60,440 
Deposits and prepaid expenses (non-current)   40,580,017 
Accounts payable   402,483 
Loans payable   5,792,195 

 

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 $4,836,394.

 

16

 

 

HUT 8 MINING CORP.

Notes to the Unaudited Interim Condensed Consolidated Financial Statements
(In Canadian dollars)

 

13.           REVENUE

 

The details of our revenue by type are as follows:

 

   Three months ended   Six months ended 
For the periods ended June 30  2021   2020   2021   2020 
Digital assets mined  $31,356,529   $9,229,659    $ 61 ,913,593   $21,969,560 
Hosting fees   2,192,914    -    3,618,263    - 
Total revenue  $33,549,443   $9,229,659   $65,531,856   $21,969,560 

 

14.           COSTS OF REVENUE

 

The details of our costs of revenue by type are as follows:

 

For the periods ended June 30  2021   2020   2021   2020 
Site operating costs  $(13,776,647)  $(8,532,509)  $(27,628,491)  $(20,974,294)
Depreciation   (2,977,413)   (6,958,311)   (8,779,833)   (13,967,426)
Total cost of revenue  $(16,754,060)  $(15,490,820)  $(36,408,324)  $(34,941,720)

 

15.           GENERAL AND ADMINISTRATIVE EXPENSES

 

The details of our general and administrative expenses by type are as follows:

 

   Three months ended   Six months ended 
For the periods ended June 30  2021   2020   2021   2020 
Share based payments  $(1,767,687)  $(60,228)  $(4,524,141)  $647,635 
Professional fees   (2,616,383)   (779,445)   (3,217,755)   (894,885)
General and office   (158,363)   (63,393)   (440,352)   (164,573)
Salary and benefits   (680,216)   (94,821)   (2,537,711)   (371,787)
Insurance expense   (627,784)   (198,800)   (827,024)   (331,509)
Investor relations and regulatory   (1,803,338)   (36,154)   (1,986,778)   (94,881)
Sales tax expense   (1,018,444)   (152,136)   (1,801,491)   (323,283)
Total general and administrative expense  $(8,672,215)  $(1,384,977)  $(15,335,252)  $(1,533,283)

 

17