M&A Alert—April 15, 2018

HyperBlock Technologies Corp. acquires blockchain mining company CryptoGlobal Corp. for CDN $106mm in stock

Author: Benjamin Jamison

Target:

Buyer:

Transaction Size: CDN $106mm

Transaction Overview

HyperBlock Technologies Corp. and CryptoGlobal Corp. (TSXV: CPTO) signed a definitive agreement on April 3, 2018 for HyperBlock to acquire CryptoGlobal for approximately CDN $106mm in an all stock deal.

Target Description

CryptoGlobal Corp. is a blockchain mining and financial technology company in Canada. CryptoGlobal mines a portfolio of cryptocurrencies, including Bitcoin, Dash, Ethereum, and Litecoin. CryptoGlobal operates over 8,500 mining servers using 8 MW of power across four locations, with the company forecasting the number of servers to grow to 50,000 mining servers by December. In addition to its proprietary mining and hash rate rental mining, CryptoGlobal offers custody services for digital asset storage, a trading and exchange platform, and wallet services for business and mobile users.

CryptoGlobal was founded by Rob Segal (CEO) and James Millership (President) in 2017, and is based in Toronto, Canada. The company also recently acquired Blockchain Dynamics on March 1, 2018, and BitCityGroup on February 27, 2018.

Buyer Description

HyperBlock operates one of the largest cryptocurrency mining platforms in the U.S. and offers diversified services with revenue channels including Mining-as-a-Service (MAAS), self-mining, server hosting, and server hardware sales. The company is focused on consolidating the North America cryptocurrency mining market. The combined company will have over 21,000 operational mining servers with 28 MW of utilization and the ability to grow to 90 MW. Its competitors include Genesis Mining, Hashnest, Hashflare, Hashing 24, Eobot, Hut 8 Mining Corp. and others.

HyperBlock, founded in 2017, executed a micro public offering of equity (CDN $500,000) in late 2017 and is listed on the TSX Venture Exchange. In essence, HyperBlock is a public company formed to execute acquisitions. After the close of this transaction, HyperBlock plans on listing with the Canadian Securities Exchange. HyperBlock is located in Ontario, Canada and is led by Sean Walsh (CEO).

Transaction Parameters

HyperBlock is acquiring CryptoGlobal for approximately CDN $106mm in stock. HyperBlock is issuing 60.4mm common shares to CryptoGlobal shareholders, valuing each share of CryptoGlobal stock at CDN $0.74. The transaction price represents a 48% premium to the closing price of $0.50 of CryptoGlobal’s common shares on March 29, 2018, and a 31% premium to the 10-day volatility weighted average price of CryptoGlobal’s common shares on the TSXV.

While neither CryptoGlobal or HyperBlock have disclosed revenues, the deal was announced as accretive to the combined company’s projected 12-month cash flow. Following the transaction CryptoGlobal shareholders will own 25.2% of HyperBlock. The acquisition is subject to shareholder and regulatory approval.

Comparable transactions include Global Blockchain Technologies’ acquisition of Coinstream Mining Corporation on February 13, 2018, BitGo’s acquisition of Acquire Kingdom Trust on January 25, 2018, Anexio’s acquisition of Standard American Mining on March 7, 2018, and Calyx’s acquisition of Canada Blockchain Hosting Corp. on November 16, 2017 for CDN $400k.

Strategic Rationale

HyperBlock is executing a strategy of rapid growth through acquisition and an effort to expand market-share at a time when lower cryptocurrency values potentially discount acquisition values. By diversifying its Mining-as-a-Service model with CryptoGlobal’s direct to consumer products such as custodial storage and cryptocurrency trading, HyperBlock is also seeking to diversify its revenue base.

Architect Partners’ Observations

The deal demonstrates the ongoing consolidation in the mining business which sparks the fundamental question of the integrity of proof-of-work ecosystems as price pressures and operations of scale decrease the number of autonomous miners.

According to a study by the Cambridge Centre for Alternative Finance, approximately three-quarters of all major mining pools are based in just two countries, with 58% of mining pools with greater than 1% of the total bitcoin hash rate based in China, and 16% in the US. As consolidation increases, larger mining operations are beginning to diversify, with the same study finding that 82% of large miners are bringing in revenue at other points along the value chain.

Another interesting feature of this transaction is that the acquirer is a micro-cap public company formed for the sole purpose of acquiring an operating business. There are many issues and challenges associated with this model, however, it can offer advantages such as the ability to offer a publicly traded security as consideration, as demonstrated in this instance.

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