Document:

Exhibit
4.3 

 

 

 

HUT
8 MINING CORP.

 

Consolidated
Financial Statements 

(In
Canadian dollars)

 

Years
ended December 31, 2019 and 2018  

    

     

    

 

 

 

INDEPENDENT
AUDITOR’S REPORT

 

To
the Shareholders of Hut 8 Mining Corp.

 

Opinion

 

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

 

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

 

Basis
for Opinion

 

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

 

Emphasis
of matter

 

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

 

Material
Uncertainty Related to Going Concern

 

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

 

Other
Information

 

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

 

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

 

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

 

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

 

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

 

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

 

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

    

     

    

Auditor’s
Responsibilities for the Audit of the Financial Statements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  

 

DALE
MATHESON CARR-HILTON LABONTE LLP 

CHARTERED
PROFESSIONAL ACCOUNTANTS 

Vancouver,
BC

 

April
2, 2020

 

 

    

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

Consolidated
Statements of Financial Position as at December 31,

 

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

 

Nature
of operations (Note 1) 

Subsequent
events (Notes 9 and 15)

 

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

    4

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

for
the years ended December 31,

 

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

    5

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

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

 

Significant
non-cash transactions included: 

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

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

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

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

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

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

    6

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

Consolidated
Statement of Changes in Shareholders’ Equity

 

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

    7

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		1.	Nature
                                         of operations 

 

		(a)	Reporting
                                         entity 

 

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

 

(b)
Going concern

 

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

 

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

 

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

    8

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		2.	Statement
                                         of Compliance and Basis of Presentation 

 

		(a)	Statement
                                         of compliance 

 

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

 

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

 

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

 

(b)
Basis of presentation

 

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

 

(c)
Functional and presentation currency

 

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

 

(d)
Consolidation

 

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

 

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

 

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

    9

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

  

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

 

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

 

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

 

Lease
accounting policy applicable from January 1, 2019

 

Definition
of a lease

 

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

 

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

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

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

 

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

 

Accounting
as a lessee under IFRS 16

 

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

 

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

 

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

    10

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

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

 

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

 

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

 

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

 

Transition
to IFRS 16

 

Practical
expedients

 

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

 

The
Company used the following additional practical expedients:

 

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

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

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

    11

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

  

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

 

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

 

Impacts
on consolidated financial statements 

 

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

 

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

 

3.       Significant
accounting policies, judgements, and estimates

 

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

 

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

 

(i)       Functional
currency

 

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

    12

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

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

 

		(ii)	Taxes

 

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

 

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

 

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

 

(iii)            Impairment
of non-financial assets

 

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

 

(iv)            Foreign
currency translation

 

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

    13

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

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

 

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

 

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

 

(vi)            Revenue
recognition

 

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

 

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

 

(vii)           Digital
assets

 

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

 

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

 

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

    14

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

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

 

(viii)          Non-monetary
transactions

 

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

 

(ix)            Earnings
per share

 

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

 

(x)             Share
issue costs

 

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

 

(xi)            Share
based transactions

 

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

 

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

    15

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

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

 

		(xii)	Useful
                                         life of mining equipment

 

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

 

	Seacan
    containers and supporting infrastructure	4
    years
	Mining
    servers	2
    years

 

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

 

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

 

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

 

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

    16

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		4.	Reverse
                                         acquisition

 

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

 

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

 

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

 

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

 

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

 

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

 

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

    17

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		5.	Deposits
                                         and prepaid expenses

 

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

 

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

 

		(ii)	Security
                                         deposit for future electricity usage.

    18

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		6.	Digital
                                         assets 

 

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

 

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

 

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

 

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

 

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

 

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

    19

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		6.	Digital
                                         assets (continued) 

 

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

 

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

 

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

 

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

    20

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

  

		7.	Plant
                                         and equipment

 

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

   

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

 

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

 

		•	Bitcoin
                                         price - $5,224 (US$3,829)

		•	Network
                                         difficulty - 5,619 billion

		•	Discount
                                         rate - 21%

 

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

    21

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		7.	Plant
                                         and equipment (continued) 

 

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

 

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

 

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

 

		8.	Accounts
                                         payable and accrued liabilities 

 

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

  

		9.	Loan payable

  

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

 

	 	(i)	Genesis
    loan

 

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

    22

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		9.	Loan
                                         payable (continued) 

 

		(ii)	Bitfury
                                         loan 

 

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

 

		(iii)	Lease
                                         liability

 

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

 

		(iv)	Galaxy
                                         loan

 

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

    23

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		10.	Equity
                                         

 

		(a)	Common
                                         shares 

 

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

 

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

 

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

    24

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

	10.	Equity
                                         (continued) 

 

		(a)	Common
                                         shares (continued) 

 

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

 

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

 

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

 

Risk-free
interest rate          1.75% 

Dividend
Yield                      Nil 

Volatility
factor                     75% 

Expected
life                         
2 years

 

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

 

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

 

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

 

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

 

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

    25

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

	10.	Equity (continued)

 

	 	(b)	Warrants

 

The
warrant activity is as follows:

 

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

   

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

 

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

 

(c)       Incentive
plan

 

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

 

Stock
options

 

The
stock option activity is as follows:

 

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

    26

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		10.	Equity
                                         (continued) 

 

		(c)	Incentive
                                         plan (continued) 

 

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

 

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

 

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

 

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

 

Restricted
Share Units (“RSUs”)

 

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

 

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

 

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

    27

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		11.	Related
                                         party agreements and transactions 

 

Related
party transactions 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

12.       Capital
management

 

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

    28

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

13.       Financial
Instruments

 

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

 

		(a)	Credit
                                         Risk:

 

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

 

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

 

		(b)	Interest
                                         Rate Risk:

 

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

 

		(c)	Liquidity
                                         Risk:

 

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

 

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

 

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

 

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

    29

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

  

		13.	Financial
                                         Instruments (continued) 

 

		(d)	Currency
                                         Risk:

 

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

 

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

 

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

 

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

 

		(e)	Fair
                                         value measurements:

 

		(i)	Financial
                                         hierarchy:

 

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

 

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

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

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

 

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

 

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

    30

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		13.	Financial
                                         Instruments (continued) 

 

		(f)	Digital
                                         assets and risk management

 

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

 

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

 

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

 

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

    31

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		14.	Income
                                         taxes

 

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

 

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

 

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

 

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

 

Unrecognized
deferred tax assets

 

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

 

As
at December 31, 2019, the Company had non-capital loss carryforwards of approximately $18,000,000 that may be used to offset future
taxable income and will expire in periods between 2037 and 2039. Deferred tax asset has not been recognized because it is not
probable that a future taxable profit will be available against which the Company can utilize the benefits therefrom.

    32

     

    

HUT
8 MINING CORP.

 

(In
Canadian dollars) 

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

 

 

		15.	Subsequent
                                         events

 

The
Company and Bitfury renegotiated key agreements and Hut 8 repaid its remaining outstanding Bitfury debt with a US$5,000,000 financing
from Genesis. Hut 8 repaid US$4,750,000 of principal and US$1,000,000 of accrued interest by refinancing it with a US$5 million
bitcoin-collateralized credit facility with Genesis with a coupon of 9.85%.

 

The
recent outbreak of the coronavirus, also known as “COVID-19,” has spread across the globe and is impacting worldwide
economic activity. Conditions surrounding the coronavirus continue to rapidly evolve and government authorities have implemented
emergency measures to mitigate the spread of the virus. The outbreak and the related mitigation measures may have an adverse impact
on global economic conditions as well as on the Company’s business activities. The extent to which the coronavirus may impact
the Company’s business activities will depend on future developments, such as the ultimate geographic spread of the disease,
the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in Canada and
other countries to contain and treat the disease. The effect that these events will have on the price of bitcoin, the ability
for the Company to raise capital and the supply of upgraded equipment highly uncertain and as such, the Company cannot determine
their financial impact at this time.

    33Exhibit
4.4

 

 

 

HUT
8 MINING CORP.

 

Management’s
Discussion and Analysis

 

For
the year ended December 31, 2019

    1 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Introduction

 

This
Management’s Discussion and Analysis (“MD&A”) is dated April 2, 2020, and should be read in conjunction
with the audited consolidated financial statements and Annual Information Form for the year ended December 31, 2019 and 2018 of
Hut 8 Mining Corp each of which is available on SEDAR at www.sedar.com (“Hut 8” or the “Company”).

 

In
this MD&A, unless the context otherwise requires, all references to “we”, “us”, “our”,
 “Hut 8”, and “the Company” refer to Hut 8 Mining Corp. and its subsidiaries, and all references to “Management”
refer to the directors and executive officers of the Company.

 

Unless
otherwise stated, results are reported in Canadian dollars, unless otherwise noted. The Company applies International Financial
Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board and interpretations issued
by the IFRS Interpretations Committee. In the opinion of management, all adjustments considered necessary for a fair presentation
have been included. The results presented in the MD&A are not necessarily indicative of the results that may be expected for
any future period.

 

Cautionary
Note Regarding Forward-Looking Information

 

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

 

Inherent
in forward-looking statements are risks, uncertainties and other factors beyond the Company’s ability to predict or control.
For a complete list of the factors that could affect the Company, please make reference to those risk factors referenced in Part
VI – “ Risk Factors” of the Filing Statement of the Company dated February 26, 2018. Readers are cautioned
that such risk factors, uncertainties and other factors are not exhaustive. Actual results and developments are likely to differ,
and may differ materially, from those expressed or implied by the forward-looking statements contained in this MD&A.

 

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

 

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

    2 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Non-GAAP
Measures

 

This
MD&A presents certain non-GAAP (“GAAP” refers to Generally Accepted Accounting Principles) financial measures
to assist readers in understanding the Company’s performance. These non-GAAP measures do not have any standardized meaning
and therefore are unlikely to be comparable to similar measures presented by other issuers and should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with GAAP. Management uses these non-GAAP measures to supplement
the analysis and evaluation of operating performance.

 

Throughout
this MD&A, the following terms are used, which are not found in the Chartered Professional Accountants of Canada Handbook
and do not have a standardized meaning under GAAP.

 

EBITDA
(Earnings before Interest, Taxes, Depreciation, and Amortization)

 

		•	“EBITDA”
                                         represents net income or loss excluding net finance income or expense, income tax or
                                         recovery, depreciation, and amortization.

 

		•	“Adjusted
                                         EBITDA” represents EBITDA adjusted to exclude share-based compensation, fair value
                                         loss or gain on revaluation of digital assets, write-offs, and costs associated with
                                         one-time transactions (such as listing fees).

 

		•	“Adjusted
                                         EBITDA Margin” represents Adjusted EBITDA as a percentage of revenue.

 

EBITDA
is used to show ongoing profitability without the impact of non-cash accounting policies, capital structure, and taxation. This
provides a consistent comparable metric for profitability.

 

“Mining
Profit” represents gross profit (revenue less cost of revenue), excluding depreciation. “Mining Profit Margin”
represents Mining Profit as a percentage of revenue. Mining Profit and Mining Profit Margin show the cash expenses against the
revenue without the impact of non-cash accounting policies such as depreciation.

 

“Cost
per Bitcoin” represents cost of revenue excluding depreciation, divided by the number of bitcoin mined in the period. This
metric is commonly referenced in the bitcoin mining industry and is important to gain an understanding of the profitability in
reference to the price of bitcoin.

    3 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Company

 

Hut
8 is a bitcoin mining company with industrial scale bitcoin mining operations in Canada. Hut 8 has a North American partnership
with the Bitfury Group Limited, inclusive of Bitfury Holding BV (“Bitfury”), one of the world’s leading full-service
hardware and software blockchain technology companies.

 

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

 

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

 

The
Company was incorporated under the laws of the Province of British Columbia on June 9, 2011. Its registered office is located
at Suite 1700, Park Place, 666 Burrard St, Vancouver, BC, Canada V6C 2X8, and the headquarter of the Company is located at 130
King St. W, Suite 1800, Toronto, ON, Canada, M5X 2A2. The Company’s financial year ends on December 31. The Company’s common
shares are listed under the symbol “HUT” on the Toronto Stock Exchange and as “HUTMF” on the OTCQX Exchange.
On March 2, 2018, the Company closed its “Qualifying Transaction” with Hut 8 Holdings Inc. (“Hut 8 Holdings”).
The Company was a capital pool company prior to the Qualifying Transaction. In connection with the Qualifying Transaction, the
Company changed its name to “Hut 8 Mining Corp.”

 

Non-GAAP
Measures

 

This
MD&A presents certain non-GAAP (“GAAP” refers to Generally Accepted Accounting Principles) financial measures
to assist readers in understanding the Company’s performance. These non-GAAP measures do not have any standardized meaning
and therefore are unlikely to be comparable to similar measures presented by other issuers and should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with GAAP. Management uses these non-GAAP measures to supplement
the analysis and evaluation of operating performance.

 

Throughout
this MD&A, the following terms are used, which are not found in the Chartered Professional Accountants of Canada Handbook
and do not have a standardized meaning under GAAP.

 

EBITDA
(Earnings before Interest, Taxes, Depreciation, and Amortization)

 

		•	“EBITDA”
                                         represents net income or loss excluding net finance income or expense, income tax or
                                         recovery, depreciation, and amortization.

 

		•	“Adjusted
                                         EBITDA” represents EBITDA adjusted to exclude share-based compensation, fair value
                                         loss or gain on re-measurement of digital assets, write-offs, and costs associated with
                                         one-time transactions (such as listing fees).

 

		•	“Adjusted
                                         EBITDA margin” represents Adjusted EBITDA as a percentage of revenue.

 

“Mining
Profit” represents gross profit (revenue less cost of revenue), excluding depreciation. “Mining Profit Margin”
represents Mining Profit as a percentage of revenue.

 

“Cost
per bitcoin” represents cost of revenue excluding depreciation, divided by the number of bitcoin mined in the period.

    4 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Summary

 

2019
was a good year for Hut 8. Despite volatile price swings in the price of bitcoin, Hut 8 managed to achieve revenue of $82.0 million,
a 66% increase from 2018. In addition, Hut 8 was able to self-finance growth of hashrate in 2019, while paying down its debt balance
from cash flow generated from operations. To management’s knowledge, Hut 8 remains the world’s largest publicly traded
cryptocurrency miner by capacity of its operations.

 

Management
successfully reduced operating costs over the year and positioned Hut 8 as a leading bitcoin miner in North America. Our relationship
with Bitfury, our strategic partner and largest shareholder remains positive, as does our relationship with the City of Medicine
Hat, from whom we purchase the majority of our electricity. We continue to strive for operational excellence and transparency
for shareholders.

 

The
network hashrate, which is reflective of the competition amongst bitcoin miners, increased from 40.2 EH/s to 92.7 EH/s, an increase
of 131% in 2019. This resulted in Hut 8 having increased competition for the block reward paid to bitcoin miners and consequently,
mining fewer bitcoin for the same fixed costs. The bitcoin price as a comparison increased from US$3,747 to US$7,194 in 2019,
an increase of 92%, which has a positive impact on Hut 8. We believe the sharp increase in the bitcoin price in 2017 spurred significant
research and development for new more efficient ASIC mining equipment which hit the market the following years. In 2018, mining
began to evolve from hobbyists to large scale industrial mining. In 2019, the more efficient ASIC mining equipment entered the
market and brought more institutional investors into the space which resulted in the increase in network hashrate outpacing the
increase in bitcoin price.

 

The
upcoming bitcoin halving is a major event for bitcoin this year and is also on management’s radar. The halving, set to occur
in mid-May 2020, will have the impact of cutting miners’ bitcoin compensation per block reward in half. We expect that will
cause many less efficient miners to shut off their miners unless the price of bitcoin significantly appreciates before then. The
impact on Hut 8 is difficult to assess. Certainly, without a corresponding increase in the price of bitcoin, Hut 8’s revenue
will be impacted negatively. If the price of bitcoin and the network hashrate remain flat, Hut 8’s corresponding revenue
would be cut in half subsequent to the halving. Management’s expectation is that there will be a drop in hashrate as less
efficient miners shut down, consequently reducing competition. We also anticipate that the price of bitcoin will appreciate post
the halving as it has in the past two halvings. However, how these two factors play out is difficult to forecast. Management is
actively seeking ways to mitigate these industry specific factors.

 

For
2020, management will continue to be diligent in keeping operations lean and optimizing its hardware and electricity consumption.

    5 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Selected
Annual Financial Information

 

	 	 	Year ended December 31,	 
	 	 	2019	 	 	2018	 
	Revenue	 	$	81,990,119	 	 	$	49,439,100	 
	Site operating costs	 	 	(45,448,549	)	 	 	(24,873,528	)
	Mining profit	 	 	36,541,570	 	 	 	24,565,572	 
	Mining profit margin	 	 	45	%	 	 	50	%
	 	 	 	 	 	 	 	 	 
	Depreciation	 	 	(33,053,597	)	 	 	(47,018,781	)
	Gross profit	 	$	3,487,973	 	 	$	(22,453,209	)
	Gross profit margin	 	 	4	%	 	 	-45	%
	 	 	 	 	 	 	 	 	 
	Expenses	 	 	(6,120,347	)	 	 	(8,791,314	)
	Gain (loss) on use of digital assets	 	 	4,143,311	 	 	 	(4,039,713	)
	Revaluation of digital assets	 	 	4,273,686	 	 	 	(13,822,974	)
	Listing and qualifying transaction	 	 	-	 	 	 	(1,151,401	)
	Net operating income (loss)	 	 	5,784,623	 	 	 	(50,258,611	)
	 	 	 	 	 	 	 	 	 
	Net finance expense	 	 	(4,784,817	)	 	 	(872,103	)
	Foreign exchange gain (loss)	 	 	1,198,011	 	 	 	(678,495	)
	Other gain (loss)	 	 	(67,247	)	 	 	448,264	 
	Write-down	 	 	-	 	 	 	(85,404,592	)
	Net income (loss) and comprehensive income (loss)	 	$	2,130,570	 	 	$	(136,765,537	)
	 	 	 	 	 	 	 	 	 
	Adjusted EBITDA	 	$	33,523,508	 	 	$	19,291,271	 
	Adjusted EBITDA margin	 	 	41	%	 	 	39	%
	Basic net income (loss) per share	 	$	0.02	 	 	$	(2.43	)
	Diluted net income (loss) per share	 	$	0.02	 	 	$	(2.43	)

 

	Assets	 	 	 	 	 	 
	 	 	December 31,	 	 	December 31,	 
	 	 	2019	 	 	2018	 
	Total assets	 	$	71,237,244	 	 	$	82,895,453	 
	Total non-current financial liabilities	 	$	19,807,075	 	 	$	28,296,238	 

    6 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Discussion
of Operations for the 2019 Year

 

For
the year ended December 31, 2019, the Company mined 8,618 bitcoin, resulting in revenue generation of $82.0 million compared with
the prior year of 5,592 bitcoin mined with revenue of $49.4 million. The reason for the increase was primarily due to a full year
of operation at Hut 8’s flagship site in Medicine Hat and 12 additional BlockBoxes purchased at the end of 2018 that became
operational in 2019, and also due to the increasing bitcoin price during the year.

 

The
site operating costs for the year were $45.4 million (2018 - $24.9 million) which represents the costs incurred related to mining
the 8,618 bitcoin for the year ended December 31, 2019. The cost of mining each bitcoin for the year was $5,274 (US$3,978) [2018
- $4,448 (US$3,423)] calculated by dividing site operating costs by the number of bitcoin mined for the 2019 year. As at December
31, 2019, the cost of mining remained lower than the average bitcoin price for the 2019 year of $9,832 (US$7,395) [2018 - $9,839
(US$7,572)].

 

Depreciation
for the year was $33.0 million, compared to prior year of $47.0 million. Management revised its 2018 impairment allocation to
re-distribute the impairment on a pro-rata basis to different components of the same cash-generating units based on the carrying
value of each component.

 

Expenses
for the 2019 year were $6.1 million (2018 - $8.8 million) of which there were non-cash share-based payments of $2.9 million (2018
- $3.5 million). Hut 8 recognized $33.5 million in Adjusted EBITDA, an increase of 74% from the prior year of $19.3 million. This
resulted in Adjusted EBITDA margin of 41% for 2019 compared to 39% for the prior year.

 

For
the 2019 fiscal year, Hut 8 had a revaluation gain of $4.3 million (2018 - loss of $13.8 million) from adjusting the value of
the digital assets held in inventory to the market value on the reporting date. This gain is from the increase in bitcoin price
from US$3,743 on December 31, 2018 to the December 31, 2019 price of US$7,194. The upward trend of bitcoin price in 2019 also
meant that the Company was able to sell bitcoin at a higher market price than its adjusted cost base, resulting in a realized
gain on use of $4.1 million for the year ended December 31, 2019 (2018 – loss of $4.0 million). In future quarters, the
Company would expect to see unrealized gains or losses based on the price of bitcoin on the reporting date, relative to the price
on the day mined, when revenue is recorded.

    7 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Below
is a bitcoin price chart together with the network difficulty chart for 2019 year (reference https://coinmarketcap.com/currencies/bitcoin):

 

 

The
Company recorded net income for the year ended December 31, 2019 of $2.1 million (December 31, 2018 – net loss of $136.8
million) which was primarily due to the increase in bitcoin price and purchase of additional BlockBoxes in 2018 and 2019.

 

Selected
Quarterly Information

 

The
following table summarizes the Company’s financial information for the last eight quarters:

 

All amounts in 000’s, except for share figures, and bitcoin mined, and Cost per Bitcoin            

	 	 	Mar 31	 	 	June 30	 	 	Sep 30	 	 	Dec 31	 	 	Mar 31	 	 	June 30	 	 	Sep 30	 	 	Dec 31	 
	 	 	2018	 	 	2018	 	 	2018	 	 	2018	 	 	2019	 	 	2019	 	 	2019	 	 	2019	 
	 	 	Q1	 	 	Q2	 	 	Q3	 	 	Q4	 	 	Q1	 	 	Q2	 	 	Q3	 	 	Q4	 
	Revenue	 	$	10,989	 	 	$	7,800	 	 	$	17,655	 	 	$	12,995	 	 	$	12,102	 	 	$	28,280	 	 	$	26,750	 	 	$	14,858	 
	Net income (loss)	 	 	(3,816	)	 	 	(4,937	)	 	 	(11,444	)	 	 	(116,569	)	 	 	(6,065	)	 	 	33,672	 	 	 	(1,743	)	 	 	(23,733	)
	Net income (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	basic	 	 	(0.05	)	 	 	(0.06	)	 	 	(0.14	)	 	 	(2.18	)	 	 	(0.08	)	 	 	0.43	 	 	 	(0.02	)	 	 	(0.31	)
	diluted	 	 	n.a.	 	 	 	n.a.	 	 	 	n.a.	 	 	 	n.a.	 	 	 	n.a.	 	 	 	0.43	 	 	 	n.a.	 	 	 	n.a.	 
	Site operating costs	 	 	(2,165	)	 	 	(2,844	)	 	 	(8,727	)	 	 	(11,137	)	 	 	(12,633	)	 	 	(10,387	)	 	 	(11,353	)	 	 	(11,076	)
	Bitcoin mined	 	 	785	 	 	 	786	 	 	 	1,978	 	 	 	1,724	 	 	 	2,308	 	 	 	2,697	 	 	 	1,965	 	 	 	1,648	 
	Cost per Bitcoin ($CAD)	 	$	2,758	 	 	$	3,618	 	 	$	4,412	 	 	$	6,460	 	 	$	5,473	 	 	$	3,851	 	 	$	5,778	 	 	$	6,721	 
	Cost per Bitcoin ($USD)	 	$	2,139	 	 	$	2,781	 	 	$	3,394	 	 	$	4,735	 	 	$	4,117	 	 	$	2,879	 	 	$	4,363	 	 	$	5,092	 

    8 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

See
below for the calculation of EBITDA and Adjusted EBITDA for the most recent eight quarters:

 

All amounts in 000’s, except per share figures                            

 

	 	 	Mar 31	 	 	Jun 30	 	 	Sep 30	 	 	Dec 31	 	 	Mar 31	 	 	Jun 30	 	 	Sep 30	 	 	Dec 31	 
	 	 	2018	 	 	2018	 	 	2018	 	 	2018	 	 	2019	 	 	2019	 	 	2019	 	 	2019	 
	 	 	Q1	 	 	Q2	 	 	Q3	 	 	Q4	 	 	Q1	 	 	Q2	 	 	Q3	 	 	Q4	 
	Net income (loss) from	 	$	(3,816	)	 	$	(4,937	)	 	$	(11,444	)	 	$	(116,569	)	 	$	(6,065	)	 	$	33,672	 	 	$	(1,743	)	 	$	(23,733	)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Add/(deduct):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net finance costs	 	 	(32	)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	1,184	 	 	 	1,205	 	 	 	1,123	 	 	 	1,273	 
	Depreciation and amortization	 	 	5,640	 	 	 	5,900	 	 	 	17,441	 	 	 	18,037	 	 	 	4,732	 	 	 	4,732	 	 	 	4,732	 	 	 	18,858	 
	Stock-based compensation	 	 	125	 	 	 	1,140	 	 	 	1,114	 	 	 	1,138	 	 	 	1,102	 	 	 	655	 	 	 	670	 	 	 	478	 
	Revaluation of digital assets	 	 	4,073	 	 	 	1,759	 	 	 	548	 	 	 	7,443	 	 	 	(1,043	)	 	 	(17,255	)	 	 	10,052	 	 	 	3,972	 
	Gain/loss on use of digital assets	 	 	-	 	 	 	(3	)	 	 	(230	)	 	 	4,273	 	 	 	253	 	 	 	(5,169	)	 	 	(515	)	 	 	1,288	 
	Foreign exchange	 	 	(7	)	 	 	-	 	 	 	(251	)	 	 	927	 	 	 	(489	)	 	 	(585	)	 	 	370	 	 	 	(494	)
	Write-off	 	 	-	 	 	 	-	 	 	 	 	 	 	 	85,405	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 
	Other one-off items(1)	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	-	 	 	 	197	 
	Other gains or losses	 	 	1,705	 	 	 	-	 	 	 	-	 	 	 	(89	)	 	 	(951	)	 	 	-	 	 	 	-	 	 	 	1,018	 
	Adjusted EBITDA(2)	 	$	7,688	 	 	$	3,859	 	 	$	7,177	 	 	$	565	 	 	$	(1,277	)	 	$	17,257	 	 	$	14,688	 	 	$	2,857	 

		(1)	TSX
                                         uplisting fee 

		(2)	A
                                         non-GAAP measure defined above 

 

The
Bitcoin mining industry does not typically have seasonality; however, the Company may have fluctuations at similar times in the
year related to its electricity prices. The Company’s operations are solely out of Alberta, Canada where 42MW of power is
directly from a power purchase agreement with the City of Medicine Hat and the remainder is from the Alberta electricity grid.
Due to the changing weather in Alberta and seasonal electricity needs, time periods of extreme cold or extreme hot weather may
result in higher electricity costs. Hut 8 manages electricity costs to avoid peak prices and is constantly monitoring its operations
to maximize efficiency.

 

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

 

	Sensitivity Analysis	 	2019 Actual	 	 	+10%	 	 	+20%	 	 	+30%	 
	Electricity cost	 	 	36,891,929	 	 	 	40,581,122	 	 	 	44,270,314	 	 	 	47,959,507	 
	Gross profit	 	 	3,487,974	 	 	 	(201,219	)	 	 	(3,890,412	)	 	 	(7,579,605	)
	% change	 	 	 	 	 	 	-106	%	 	 	-212	%	 	 	-317	%
	Net loss	 	 	2,130,570	 	 	 	(1,558,623	)	 	 	(5,247,816	)	 	 	(8,937,009	)
	% change	 	 	 	 	 	 	-173	%	 	 	-346	%	 	 	-519	%

 

Industry
Overview

 

Bitcoin

 

Bitcoin
is a digital currency that allows peer- to-peer transactions globally over the internet. Bitcoin is independent of any central
authority, such as a bank or government. Instead, bitcoin is governed by a pre-programmed algorithm called Secure Hash Algorithm
256 (SHA-256) that is backed by millions of computers across the world called “miners”. Bitcoin miners record transactions
and check their authenticity. While fiat currencies are controlled by central banks and governments, bitcoin miners are spread
out across the world and store transactions on a digital public ledger called the “blockchain” that can be accessed
by anyone. This global and transparent system is referred to as decentralized control as the management of bitcoin does not have
a central point of failure or attack.

    9 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Unlike
fiat currencies, which have an unlimited supply which is controlled by governments and central banks, the supply of bitcoin is
controlled by the SHA-256 to keep its availability scarce and total supply fixed. To date, approximately 18 million bitcoin exist
and only 21 million bitcoin will ever exist. It is expected that all bitcoin will be mined by 2140. Due to the scarcity and computational
power required to mine bitcoin, it is often referred to as “digital gold”, as physical gold is also scarce and is
costly to mine.

 

Blockchain

 

The
bitcoin “blockchain” is a cloud-based digital public ledger where bitcoin transactions are grouped together and represented
as a block in a network chain, containing all relevant transaction details. The bitcoin blockchain is maintained by a community
of miners. All transactions on the blockchain are transparent and designed to make it impossible to add, remove or change data
without being detected by users.

 

Bitcoin
Mining

 

Mining
is the process of verifying bitcoin transactions by solving a computationally difficult encrypted code, called a “hash”.
The hash rate is the number of attempts at solving the encryption code the equipment can process per second. Miners use equipment
that produces a high hash rate, as it results in more attempts at solving the encrypted code. The average hash rate for a two-
week period determines the network difficulty rate, which is set every two weeks. The network difficulty is a measure of how difficult
it is to solve a block. This computational process of decrypting the code through hashing is referred to as “proof of work”.
Bitcoin miners use powerful Application Specific Integrated Circuit (“ASIC”) computing chips to compete with each
other to correctly solve the encryption code.

 

The
power of the ASIC chip to produce a high number of hashes is essential to successfully mining. When a miner is successful in solving
the code, a block containing transactions is validated and incorporated into the blockchain resulting in an economic incentive
payment for the miner in the amount of 12.5 newly minted bitcoins plus potential transaction fees. This incentive payment halves
every four years which is set to occur in mid-May 2020.

 

When
mining Bitcoin, Hut 8 measures the output to process in computer hash rates. Each BlockBox, as owned by Hut 8, is capable of processing
a total hash rate of approximately 9 to 13 PH/s. Thus, each BlockBox has a processing power of between 9-13 (depending on the
strength of the ASIC chip) quadrillion hashes per second. In total, at full operation, Hut 8 has 952 PH/s or 952 quadrillion hashes
per second that are attempting to solve the cryptology code and receive the bitcoin incentive payment.

 

Bitcoin
Outlook

 

The
bitcoin price hit its all-time-high in December 2017. During that time, there was substantial euphoria around bitcoin and other
cryptocurrencies, referred to as “altcoins”. The demand and price of bitcoin was driven higher by speculators seeking
quick returns and retail investors using bitcoin as a means of investing in altcoins.

 

By
early 2018, the euphoria faded and was replaced by uncertainty around regulation and proper custody for cryptocurrencies. In addition,
the value proposition of most altcoins, in general, did not come to fruition. This led to profit taking by early adopters and
then to a widespread cryptocurrency sell-off through 2018 that resulted in bitcoin losing 80% of its value from its all- time-high.
However, through this “crypto winter” period, bitcoin still remained the largest cryptocurrency by market size and
volume by a large margin.

 

2019
was a mixed year for bitcoin. While the price started the year at US$3,747 and ended the year at US$7,194, there was tremendous
volatility throughout the year. In 2019, the bitcoin price had a low of US$3,391 and a high of US$13,796, which was thought to
be as a result of the Facebook backed Libra cryptocurrency. While Libra is considered to be very different than bitcoin, the initial
support behind Libra lifted
all cryptocurrencies. Consequently, when regulatory concern and initial support waned for Libra, so did demand for bitcoin which
declined and did not see the price peak again in 2019.

    10 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

However,
despite the volatility of 2019, Hut 8 management still believes that bitcoin represents a digital storage of value and the future
of global digital money. Our conviction in the use of bitcoin as a digital store of value and international payment settlement
system remains strong.

 

Overall,
Hut 8 is optimized to benefit from the strength in the price of bitcoin. Hut 8 does not plan to stray from its strategy of being
a pure play bitcoin miner.

 

Hut
8 Custody of Bitcoin

 

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

 

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

 

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

 

Hut
8 continues to explore new ways to enhance the custody of its bitcoin and improve security for shareholders.

 

Qualifying
Transaction

 

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

 

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

 

		(b)	The
                                         Company effected a conversion of $200,000 of debt owing by the Company into 40,000 Common
                                         Shares, based on a conversion price of $5.00 per Common Share (the “Debt Conversion”);

 

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

 

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

    11 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

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

 

Significant
Agreements

 

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

 

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

 

The
Company entered into definitive agreements with the City of Medicine Hat (“CMH”) for the supply of electric energy,
and the lease of land upon which Hut 8 is constructed its mining facilities. For electricity, an Electricity Supply Agreement
(”ESA”) was executed, whereby CMH will provide electric energy capacity of approximately 67 MW to the new Hut 8 facilities,
which in conjunction with the Company’s approximate 40 MW in operation in Drumheller, will allow Hut 8 to operate at 107
MW in total. The ESA and the land lease have a concurrent term of 10 years. The minimum payments on the land lease are $1,395
per month up to December 31, 2027.

    12 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Liquidity
and Capital Resources

 

As
at December 31, 2019, the Company had a working capital surplus of $6.0 million (December 31, 2018 deficit of $18.3 million) and
shareholders’ equity of $42.7 million.

 

Net
cash provided from operating activities was $14.4 million, which does not include the bitcoin mined but not yet converted to cash.
Cash used in investing activities amounted to $9.7 million which was used for the purchase of nine BlockBoxes at the Drumheller
site. Cash used in financing activities was $5.3 million, net of the finance draw from the loan with Genesis Global Capital, LLC
(“Genesis”) and the payment of the Galaxy Digital Holdings Ltd. (“Galaxy”) loan in full and the Bitfury
loan.

 

As
at December 31, 2019, the Company had cash on hand of $2.9 million (December 31, 2018 - $3.6 million) and digital assets of $27.3
million (December 31, 2018 - $15.4 million).

 

The
Company’s ability to continue as a going concern and realize its assets and discharge its liabilities in the normal course
of business is dependent upon maintaining sustained profitability and maintaining the Company’s loans in good standing.
There are various risks and uncertainties affecting the Company’s operations including, but not limited to, the viability
of the economics of bitcoin mining, the liquidity of bitcoin, the Company’s ability to maintain its security of its digital
assets and execute its business plan. The Genesis loan requires bitcoin collateral. If the bitcoin price reaches a price where
Hut 8 does not have the bitcoin to sufficiently collateralize the loan, then after a cure period of 10 days, Genesis may be able
to liquidate a significant portion of Hut 8’s bitcoin, demand immediate repayment of the loan, or terminate the loan agreement.

 

The
Company’s strategy to mitigate these risks and uncertainties is to execute a business plan aimed at continued security,
operational efficiency, revenue growth, improving overall mining profit, managing operating expenses and working capital requirements,
and securing additional financing, as needed, through one or more of loans and equity investments. Given the volatility in the
financial markets, it may be difficult to raise financing when needed. Failure to implement the Company’s business plan
could have a material adverse effect on the Company’s financial condition and/or financial performance (See also Note 15).
Accordingly, there are material risks and uncertainties that cast significant doubt about the Company’s ability to continue
as a going concern.

 

On
February 7, 2018, Hut 8 completed a private placement, on both a brokered and non-brokered basis, of 9,000,000 Hut 8 Subscription
Receipts at a price of $5.00 per Hut 8 Subscription Receipt, and 5,000,000 Hut 8 PrivateCo Common Shares at a price of $5.00 per
Hut 8 PrivateCo Common Share, for aggregate gross proceeds of $70,000,000 (the “Offering”), comprised of $58,440,265
in cash and $11,559,735 in value of bitcoin. The brokered portion of the Offering was completed pursuant to an agency agreement
dated February 7, 2018 between Hut 8 and the Agent, being GMP Securities L.P.

 

On
September 10, 2018, the Company received funds from a loan payable, net of cash transaction costs, of $19,626,691 (US$15,194,570)
to Galaxy, a related party. The loan payable matures on March 10, 2021 when US$16,000,000 will be due to Galaxy. The loan payable
is denominated in US dollars and bears interest at a rate equal to LIBOR + 10% per annum (or otherwise in accordance with the
terms of the loan payable credit agreement).

 

At
December 31, 2018, the Company finalized a loan with Bitfury related to a purchase for the purchase of 12 BlockBoxes in Drumheller
which included upgraded chips, for $12,210,012 (US$9,000,000). The loan payable is unsecured and bears interest at 12% per annum.
This loan is split into a $8,140,008 (US$6,000,000) portion which will be repaid in $339,167 (US$250,000) installments every month
for 24 months. The remaining principal of $ 4,070,004 (US$3,000,000) will become due at the earlier of January 1, 2021 or the
date that the principal for the Galaxy loan has been fully repaid. All interest accrued during the first 24 months of this loan
will become due on January 1, 2021 and all interest accrued after this date will be due on a monthly basis thereafter.

    13 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

On
November 20, 2019, the Company finalized a loan for $19,482,000 (US$15,000,000) to Genesis. The loan bears interest at 9.85% per
annum, payable monthly, and matures on May 21, 2021. 85% of the loan is collateralized with bitcoin that has been transferred
to Genesis. If the collateralized value of the bitcoin drops below 75% of the loan, additional bitcoin will be sent to Genesis
to bring the collateral level back to 85%. Conversely, if the collateralized bitcoin value goes over 95% of the loan, bitcoin
will be returned to the Company as long as the 85% level remains satisfied. These funds were used to repay the loan with Galaxy.

 

Off-Balance
Sheet Arrangements

 

As
of the date of this MD&A, the Company does not have any off-balance sheet arrangements that have, or are reasonably likely
to have, a current or future effect on the results of operations or financial condition of the Company including, without limitation,
such considerations as liquidity and capital resources that have not previously been discussed.

 

Financial
Instruments and Business Risks

 

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

 

Credit
risk

 

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

 

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

 

Interest
Rate Risk

 

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

 

Liquidity
Risk

 

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

    14 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

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

 

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

 

Foreign
Currency Risk

 

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

 

Concentration
Risk

 

Concentration
risk arises as a result of the concentration of exposures within the same category, whether it is geographical location, product
type, industry sector or counterparty type. Currently, the Company has its investment highly concentrated in a single asset, bitcoin.
The Company tracks the market price of bitcoin, less the Company’s liabilities and expenses, by investing in the assets
of the company in bitcoin.

 

Price
Volatility Risk

 

The
Company is at risk due to a wide fluctuation in the price of bitcoin, the speculative nature of the underlying asset, and negative
media coverage. Downward pricing of bitcoin may adversely affect investor confidence, and subsequently, the value of the Company’s
bitcoin inventory, its stock price, and profitability.

 

Security
Risk

 

Bitcoins
are controllable only by the possessor of the private key relating to the local or online digital wallet in which the bitcoin
is held. The bitcoin network requires a public key relating to a digital wallet to be published when used in a spending transaction
and, if keys are lost or destroyed, this could prevent trading of the corresponding bitcoins.

 

Security
breaches, computer malware and computer hacking attacks have been a prevalent concern in the bitcoin exchange market since the
launch of the bitcoin network. Any security breach caused by hacking could cause loss of bitcoin investments.

 

Bitcoin
Network Risk

 

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

    15 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Digital
Assets and Risk Management

 

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

 

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

 

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

 

Bitcoin
Halving Risk

 

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

 

Pandemic
and COVID-19

 

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

 

Contract
Renewal Risk

 

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

    16 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Related
Party Transactions

 

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

 

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

 

During
the year ended December 31, 2018, the Company was charged $ 146,044 (2017 - $105,239) for out of pocket expenses, by First Block
Capital Inc., a Company controlled by a former officer and a former director of the Company. These expenses were charged primarily
for travel costs related to fundraising, meetings with strategic partners, and organizing the Company.

 

See
the consolidated financial statements for the year ended December 31, 2019, for related party transactions with respect to share
issuances.

 

Michael
Novogratz was a former director of the Company and is a controlling shareholder of Galaxy, resulting in the Company and Galaxy
to be classified as related party entities up to May 13, 2019, the date of the Company’s Annual General Meeting. During
the year ended December 31, 2018, the Company sold 1,345 bitcoin for approximately $ 8,068,270 with Galaxy. During the period
between January 1, 2019 and May 13, 2019, the Company sold 1,942 bitcoin for approximately $10,950,403 of fiat currency with Galaxy.
See Note 9 for the amounts owing and further transactions with Galaxy

 

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

 

On
February 26, 2019, Hut 8 agreed and subsequently closed the issuance of 3,717,433 common shares in settlement of outstanding accounts
payable to Bitfury of $5,576,150, based on a conversion price of $1.50 per share.

 

These
transactions were made on terms equivalent to those that prevail in arm’s length transactions.

 

Critical
Accounting Estimates and Accounting Policies

 

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

 

i.       Fair
value measurement of stock options and broker warrants

 

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

    17 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

ii.       Revenue
recognition

 

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

 

iii.       Fair
value of digital assets

 

Digital
assets, consisting solely of bitcoin, are measured at fair value using the quoted price on Coinmarketcap. Management considers
this fair value to be a level two input under IFRS 13 Fair Value Measurement fair value hierarchy as the price on this source
represents an average of quoted prices on multiple digital currency exchanges. The bitcoin is valued based on the closing price
obtained from Coinmarketcap at the reporting period corresponding to the digital assets mined by the Company.

 

The
Company’s determination to classify its holding of bitcoin as current assets is based on management’s assessment that
its bitcoin held can be considered a commodity and the availability of liquid markets to which the Company may sell a portion
or all of its holdings.

 

iv.       Non-monetary
transactions

 

Non-monetary
transactions for the exchange of bitcoin for various goods and services are measured at the fair value determined from the exchange
amount. Fair value of the bitcoin is determined at the time of transaction.

 

v.       Share
based transactions

 

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

 

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

    18 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

vi.       Useful
life of mining equipment

 

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

 

	Seacan containers and supporting
    infrastructure	4 years
	Mining servers	2 years

 

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

 

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

 

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

 

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

 

vii.       Taxes

 

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

 

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

 

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

    19 

     

    

Hut
8 Mining Corp.

Management’s
Discussion and Analysis

For
the year ended December 31, 2019

 

Capital
Management

 

The
Company’s capital currently consists of Common Shares. The Company’s capital management objectives are to safeguard
its ability to continue as a going concern and to have sufficient capital to be able to identify, evaluate and then acquire an
interest in a business or assets. The Company does not have any externally imposed capital requirements to which it is subject.
The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk
characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares.

 

Management’s
Report on Disclosure Controls and Procedures and Internal Control over Financial Reporting

 

Management
is committed to delivering timely and accurate disclosure of all material information.

 

Disclosure
controls and procedures ensure that reporting requirements are satisfied, and that material information is disclosed in a timely
manner. Due to the limitation on the ability of the officers to design and implement cost-effective policies for disclosure controls
and procedures and internal control over financial reporting, the officers are not making representations that such controls and
procedures would identify and allow for reporting material information on a timely basis, nor are they representing that such
procedures are in place that provide reasonable assurance regarding the reliability of financial reporting.

 

However,
as permitted for TSX issuers, the CEO and CFO individually have certified that after reviewing the consolidated financial statements
for the years ended December 31, 2019 and 2018 and this MD&A of the Company, there are no material misstatements or omissions,
and the filing materially presents the consolidated financial position and consolidated results of operations and cash flows for
the year ended December 31, 2019 and all material subsequent activity up to April 2, 2020.

 

Share
Capital

 

As
of the date of this MD&A, the Company has issued, and outstanding share capital comprised of 90,476,317 Common Shares, 910,000
stock options, 2,882,222 warrants, and 1,213,434 restricted share units.

 

Additional
information and other publicly filed documents relating to the Company are available through the internet on the Canadian Securities
Administrators’ System for Electronic Document Analysis and Retrieval (“SEDAR”), which can be accessed at www.sedar.com.

    20

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