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TAAL Distributed Information Technologies Inc. Management’s Discussion and Analysis
For the three and nine months ended September 30, 2020
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OVERVIEW
TAAL is a vertically integrated blockchain technology company. We are engaged in the management of scalable professional-grade Blockchain Infrastructure upon which we will deliver value-added services to support and enable businesses building customized blockchain-based solutions and applications for enterprise clients. Our business model is designed to drive revenue by granting access to and enabling the utilization of a variety of proprietary products, platforms, licenses and services. In order for the Company to deliver on these initiatives, we require a blockchain network that supports limitless scalability, unbounded transactional volume, and profits earned by those that process the most transactions (as opposed to operations with the highest Hashrate). We believe that blockchain network is the BSV network, and accordingly, TAAL has focused its attention and resources on this protocol and on developing fiat-based revenue and business channels dedicated to the custom processes of blockchain data and Transaction Processing for enterprise clients building upon BSV blockchain.
Quarterly Highlights
Financial Highlights:
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Gross revenue from operations generated $245,629 for the three-months ended September 30, 2020, as compared to $7,380,758 for the same period in 2019, which decrease reflects the suspension of Digital Asset Hashing operations in May 2020 in advance of the Halving. This resulted in gross revenue of $7,854,585 for the nine months ended September 30, 2020, as compared to $11,685,385 for the same period in 2019, which decrease reflects the suspension of Hashing operations in 2020, partially offset by fleet management revenue.
- – Revenue from fleet management services was $232,067 in fees from the Management Services Agreement (defined below) pursuant to which we maintain and manage third-party Blockchain Computing Equipment. As fleet management services commenced in November 2019, no revenue exists for the comparable period in 2019.
- – Revenue from Transaction Processing services was $13,142 in monthly fees earned from third parties utilizing our services in connection with Transaction Processing on the blockchain. As Transaction Processing services commenced in 2020, no revenue exists for the comparable period in 2019.
- – Revenue from Block Subsidies generated by Digital Asset Hashing operations was $420 with site operating costs of $36,513, resulting in a net loss of $36,093 for the three months ended September 30, 2020, which reflects the suspension of our Digital Asset Hashing operations in May 2020. Revenue from Digital Asset Hashing operations for the three months ended September 30, 2019 was $6,993,533 with site operating costs of $4,038,315, resulting in a net gain of $2,995,218 for the period.
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Operating expenses totaled $4,965,786 for the three months ended September 30, 2020, as compared to $1,446,645 for the same period in 2019. The increase in expenses is largely attributable to one time impairment charge related to Blockchain Computing Units of $2,444,857 recognized in the quarter, as well as management fees, salaries and wages of $1,455,820, office and administration of $331,631, and share-based payments of $255,955, compared to $322,388, $143,643 and $230,605, respectively, for the same period 2019. The increased expenses reflect the investment we are continuing to make in the team to deliver the new business line including the transition to Transaction Processing, and the delivery of other value-added services for enterprise clients. For further information regarding the impairment charge, see financial statements for the period ended September 30, 2020.
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Net loss of $5,928,027 for the three months ended September 30, 2020, as compared to a net loss of $756,603 for the same period in 2019. Net loss of $9,120,930 for the nine months ended September 30, 2020, as compared to a net loss of $1,928,212 for the same period in 2019.
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TAAL Distributed Information Technologies Inc. Management’s Discussion and Analysis
For the three and nine months ended September 30, 2020
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• Working capital of $12,993,341 as of September 30, 2020, providing liquidity for at least the next 12
months. Operational Highlights:
- TAAL began the third quarter of 2020 by successfully securing the trading of our common shares on the OTCQX® Best Market under the symbol “TAALF”, with trading commencing on July 13, 2020.
- On August 6, 2020, TAAL Technologies SEZC (“TAAL Tech”), a wholly-owned operating subsidiary of the Company, filed a second patent application with the United Kingdom patent office with respect to Layer 0 Token blockchain technology for the BSV network which underpins its substantiated Tokens by actualizing Satoshi’s ("STAS") Layer 0 tokenization technology. Layer 0 Tokens are Digital Assets that are validated by computers operating on the blockchain directly, unlike more common Layer 2 token systems which require separate Layer 2 protocol servers. STAS allows developers to create new Digital Assets based on the BSV blockchain similar to how Ethereum smart contracts can be used to create tokens. BSV's advantage over other blockchains is it has proven scalability in both transaction volume/capacity and block size that has been demonstrated on the BSV stress test network (1 gigabyte sustained) and BSV main network (360 megabyte peak) that is unequaled by any other blockchain technology. The Company believes that its STAS technology represents an opportunity for the migration of legitimate tokens that require enterprise level scaling to the BSV network.
- On September 8, 2020, the Company entered into an agreement to sell 37,500 non-operational Blockchain Computing Units (the “Assets”) to an arms’ length buyer for total proceeds of approximately $1.1 million (USD $825,000) (the “Asset Sale”). The purchase price was paid in eight equal installments over eight weeks and the purchaser proportionally took possession of the equipment from TAAL’s U.S. warehouses upon each payment. TAAL had acquired over 50,000 of Blockchain Computing Units on March 9, 2020 for a purchase price of $5,566,170 (USD $4,093,374) pursuant to an asset purchase agreement with, among others, Tansley Equipment Limited (“Tansley”), which is beneficially owned by Calvin Ayre, TAAL’s controlling shareholder. The Assets were originally acquired by TAAL with the intention of upgrading and optimizing them for deployment in the Company’s blockchain Digital Asset Hashing and Transaction Processing operations; however, the Company subsequently determined to sell some of the Assets and to use the proceeds, and any further sales of the Assets, for other strategic initiatives. In connection with the closing of the Asset Sale, the Company recognized a one-time impairment charge of $2,444,857, reflecting a write-down of remaining Blockchain Computing Units to reflect their market price.
- On September 10, 2020, we announced the opening of a new office in Zug, Switzerland. The city of Zug was chosen by the Company in part due to its reputation as one of the fastest growing technology hubs in Europe, which has recently seen a proliferation of fintech, blockchain and distributed ledger technology companies and higher education and post-doctoral level research on blockchain is offered at many nearby universities, contributing to a concentration of world-class talent. In connection with the opening of the Zug office, TAAL also announced a number of key new hires, including a Chief Technology Officer, Chief Compliance Officer, Vice-President of Product Development, Head of Business Development, Chief Scientist, and Vice-President of Digital Strategy. The office is expected to be completely staffed and fully operational by the end of the first quarter of 2021.
- On September 15, 2020, TAAL Tech purchased all of the issued and outstanding shares of WhatsOnChain Limited (“WhatsOnChain”) for a transaction value of $3,140,848, satisfied through the issuance of 1,739,882 TAAL common shares. WhatsOnChain owns proprietary BSV blockchain explorer technology. A blockchain explorer is a browser for the blockchain, similar to how web browsers such as Firefox or Google Chrome are used for browsing internet web pages. The three co-founders of WhatsOnChain agreed to lock-up agreements pursuant to which one-half of the common shares received as consideration for the transaction will be locked up for a one year period and the remaining common shares will remain locked up, subject to release only upon the achievement of certain
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TAAL Distributed Information Technologies Inc. Management’s Discussion and Analysis
For the three and nine months ended September 30, 2020
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development milestones by WhatsOnChain over a period of five years. Any such common shares which remain unreleased thereafter will be redeemable by TAAL for nominal consideration.
Responding to COVID-19:
The health and well-being of our employees and their families, and that of those in the communities in which we live and work, are of paramount importance to us. As such, we implemented a remote work policy in late February 2020, prior to the World Health Organisation issuing its pandemic warning in March 2020 with respect to the spread of the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) ("COVID-19"). Despite these restrictions, at our core is a culture of problem-solving and our approach to COVID-19 has been no different, requiring adjustments for time zones to improve communications both internally and with our clients, customers and prospects. As a result, despite the effect on global financial markets and logistical supply chains, we have had minimal disruption to our business, and as we transition away from market- exposed Digital Assets, we hope to further insulate our results from such external effects. See “Risks & Uncertainties – Pandemic Risk”.
Business Analysis
Our existing business is divided along the following general revenue lines:
- Digital Asset Hashing,in which we operate Blockchain Infrastructure principally for Block Rewards;
- Fleet Management Services, in which we manage for a fee based on operating miners, a fleet of Blockchain Computing Units placed with third-party hosting service providers;
- Software Development and Licensing, in which we develop new software and earn fees for the use of these licenses and revenue from the sale of the products. As we transition to a Transaction Processing-oriented business, we expect to see increased growth in this revenue line; and
- Transaction Processing, in which we validate transactions and time stamp them by sequencing and encoding them into blocks, which are then published and added to the associated blockchain. As renumeration for validating transactions, we receive Transaction Fees received in the form of BSV
Digital Asset Hashing:
Our Digital Asset Hashing operations commenced on May 1, 2019 as a result of the acquisition (the “Freschette Transaction”) of Freschette Limited. As of May 8, 2020, due to high network Hashrate (completion) and depressed Digital Asset prices and in advance of the uncertainty related to the Halving, TAAL put a moratorium on its Digital Asset Hashing operations. TAAL has commenced deploying its Digital Asset Hashing operations in Canada for expected recommencement of operations in 2021.
Fleet Management Services:
On November 8, 2019, TAAL Tech, entered into a management services agreement (the “Management Services Agreement”) with Bigfoot Holdings Group Ltd. (“CoinGeek”), an affiliate of Mr. Ayre, to provide it and certain of its affiliates with turn‐key management and oversight over globally‐owned Blockchain Infrastructure. During the period ended September 30, 2020, revenue generated from the Management Services Agreement accounted for all revenues of the Company related to fleet management services. For additional information on the Management Services Agreement, see “Transaction with Related Parties”.
Digital Asset Pool Management
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TAAL Distributed Information Technologies Inc. Management’s Discussion and Analysis
For the three and nine months ended September 30, 2020
Page 8
TAAL Tech operates "TAAL POOL", which is a Digital Asset Pool. Clients with Hashing power enter into a pool participation agreement to participate in TAAL POOL, which in turn operates on the BSV SHA-256 blockchain. TAAL Tech uses the proprietary TAAL Orchestrator fleet management system to coordinate the Hashing of all TAAL POOL participants to realize Block Rewards. The Block Subsidies that are realized by the pool are allocated to pool clients, net of TAAL Tech's pool management fees based on the proportion of Hashrate they have contributed over the period from the last distribution. TAAL Tech currently retains all Transaction Fees generated by TAAL POOL activities.
Software Development & Licensing
TAAL continues to develop its proprietary custom software solution used for Blockchain Computing Equipment fleet management called TAAL Orchestrator (“TAAL Orchestrator”). TAAL Orchestrator conducts and coordinates Hashing operation pools of Hashing servers providing full visibility and transparency to end- users to track performance and performing other functions previously unavailable to industry participants. In consideration of acquiring the original source code used for TAAL Orchestrator, the Company agreed to pay $2,860,258 to a development firm, in four installments over the eighteen months from the effective date of the license, June 1, 2019. As of the date of this MD&A, we have completed three of the four payments due to the developer, with the final payment of $639,764 due to be paid December 2020.
In the future, the Company intends to expand our services by exploiting the extensive portfolio of filed and pending intellectual property that we acquired access to through the Company’s strategic licensing agreement with nChain Group Holdings Ltd. (“nChain”). This portfolio is essential to realizing a diversification of our business and development of our Transaction Processing business on the BSV blockchain network. While a significant advantage of this arrangement with nChain is collaboration and sharing of resources, including senior technical software engineers, we are in discussions with a number of new hire candidates, and are also exploring several potential acquisitions or partnership targets we believe will give us an even greater advantage in further development of these and other innovative products. For additional information on the Company’s relationship with nChain, see “Transaction with Related Parties”.
Industry Trends
Several macro industry trends are driving research and development capital into developing blockchain products and services for large enterprise customers. Trends such as the growing expectations of consumer choice, food security, single source data for medical records, and big data, to name a few. There are talented companies working to build these solutions in many industry verticals. Many of these companies have participated in conferences and industry events where TAAL has been a key sponsor. As these companies develop software and solutions for their customer segments, someone must be positioned to process the countless transactions that must then be written to the BSV blockchain. As large enterprises begin to adopt blockchain technology solutions for product and information tracking and security, we expect that they will increasingly rely on third party service providers for the managing and processing increasing volumes of blockchain transactions.
From a consumer choice perspective, we are seeing a number of trends emerge. Developers are working with food and beverage companies, enabling consumers to see the origin of not only the food inside, but the packaging as well. This gives consumers greater choice and builds trust between the buyer and seller. We are also seeing social media companies being compelled to allow users to participate in the economic rewards of these platforms, paid in ‘micro-payments’ to the user. Elsewhere, developers are working on blockchain solutions for gamers so they can have a permanent record of their history, thereby creating trust with other gamers and platforms. Again, rewards, and payments completed on chain, all of which needs to be processed and written to the blockchain.
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TAAL Distributed Information Technologies Inc. Management’s Discussion and Analysis
For the three and nine months ended September 30, 2020
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The growing adoption of blockchain technology is beginning to be seen in other industries as well, including the banking industry, where most major US financial institutions now have dedicated blockchain departments, and are deploying capital and resources to prepare for a future where blockchain is a central component of the financial system.
Transaction Processing in particular is, in our view, the next opportunity in the blockchain industry. The original bitcoin whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System, describes how the Block Subsidy is programmed to disappear, and participants would be incentivized with Transaction Fees alone. We expect to see the migration to a Transaction Fee based blockchain network that is not dependent on Block Subsidy incentives.
Accordingly, the Company is focused on the Transaction Processing business model and moving away from a reliance upon the Block Subsidies of Digital Assets. To ensure a sustainable business in the long-term, we are committed to building professional grade value-added products and services for Blockchain Infrastructure, i.e. Transaction Processing. We believe the value of a blockchain is only realized when it is used at scale, and the business of Transaction Processing (creating blocks) on a blockchain for a reward is only sustainable with the existence of a constant and massive daily flow of transactions for processing.
Our Business Focus
We believe that the Company is well-positioned to be a leader in the transformation of Blockchain Infrastructure companies from Digital Asset miners and speculators to Transaction Processing operators and valued-added products and services providers. In addition to the traditional Digital Asset mining operations, our future business will center around four potential streams of revenue:
- Transaction Processing: Our Transaction Processing business model is intended to facilitate businesses building applications and contributing data onto a public, permission-less, and scalable blockchain. We believe that our first-mover advantage will allow us to acquire market share by growing our existing user base through our Hashing application programming interface service (M/API) which will help build a substantive and stable flow of transactions for processing.
- Pool Management: We will use TAAL Orchestrator to manage public and private Digital Asset Pools so that Hash producers can contribute to building the BSV blockchain.
- Intellectual Property Licensing: TAAL will license STAS technology for third party Tokenization on the BSV blockchain.
- Blockchain Computing: We believe blockchain computing is poised to become the most interesting space in the next decade. The use of blockchain for computing purposes will allow for computation to be truly distributed.
Recent Developments
On October 12, 2020, we appointed Chris Naprawa as President and Stefan Matthews as Chief Executive Officer of the Company. At the same time, Jerry Chan stepped down as President and Chief Executive Officer and moved into the role of Chief Product Officer of the Company.
In November 2020, we announced that our Canadian operating subsidiary had entered into an agreement effective October 20, 2020 with a provider to host approximately 175 PH of custom modified blockchain computing power at the provider’s facility in Alberta, Canada. Through this agreement, we will establish trustworthy, North American capacity to power BSV solutions for enterprise clients globally. The term of the agreement is two years with automatic yearly renewals thereafter. The agreement can be terminated by TAAL after eight months on 90 days’ notice. Fees payable by the Company under the agreement will be based on
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TAAL Distributed Information Technologies Inc. Management’s Discussion and Analysis
For the three and nine months ended September 30, 2020
Page 10
the realized daily Hashrate performance of the Blockchain Computing Units rather than the actual power consumed. We expect to begin operating the devices by Q1 2021. The operation will enable TAAL to offer specialized services to enterprises that require large volumes of transactions processed in North America on an ongoing basis on the reliable BSV blockchain.
On November 24, 2020 Satoshi Kitahama ceased acting as Chief Financial Officer of the Company. Mr. Naprawa was appointed interim Chief Financial Officer. Additionally, David Allen was appointed senior financial advisor to the Company.
