EVERYTHING BLOCKCHAIN, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

You should read the following discussion and analysis of our financial condition, results of operations and cash flows in conjunction with our consolidated financial statements and the related notes presented in this report and in our Annual Report.

FORWARD-LOOKING STATEMENTS

Certain statements in this section contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this report and not clearly historical in nature are forward-looking, and the words "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "intends," "potential," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) generally are intended to identify forward-looking statements. Any statements in this report that are not historical facts are forward-looking statements. Actual results may differ materially from those discussed from time to time in the Company's SEC filings. The Company undertakes no obligation to update or revise any forward-looking statement for events or circumstances after the date on which such statement is made except as required by law.

OVERVIEW

The overview of the MD&A highlights selected information and does not contain all of the information that is important to readers of this Quarterly Report on Form 10Q.

The Company is primarily engaged in the business of consulting and developing blockchain and cybersecurity related solutions. Our technology platform provides the building blocks to power blockchain-related applications for organizations seeking to tap into the benefits of blockchain to solve critical business issues. Our patent--pending advances in blockchain engineering deliver the essential elements needed for real-world business use: speed, security, and energy efficiency. Currently, our lines of business are EB Advise, EB Build and EB Control.

On June 21, 2021, we acquired all of the equity interests of 832. On June 30, 2021, we acquired all of the equity interests of Mercury. On July 31, 2021, we acquired all of the equity interests of Vengar.

Our website can be found at www.everythingblockchain.io, which is not incorporated as part of this Form 10Q.

EMPLOYEES AND CONSULTANTS

As of July 31, 2022, the Company has 24 employees.

Available Information

All reports of the Company filed with the SEC are available free of charge through the SEC's website at www.sec.gov. In addition, the public may read and copy materials filed by the Company at the SEC's Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. The public may also obtain additional information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.

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Factors Affecting Comparability of Financial Information

Our historical results of operations for the three and six months ended July 31, 2022, may not be comparable with our results of operations for the three and six months ended July 31, 2021, for the reasons discussed below.

832's operations are included in our historical operating results as of June 21, 2021. Mercury's operations are included in our historical operating results as of July 1, 2021. Vengar's operations are included in our historical operating results as of August 1, 2021.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to uncollectible receivables, inventory valuation, deferred compensation and contingencies.

We base our estimates on historical performance and on various other assumptions that we believe to be reasonable under the circumstances. These estimates allow us to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected.

Results of Operations

Our operating results for the three and six months ended July 31, 2022 and 2021 are summarized as follows:

                  For the Three Months Ended July 31,       For the Six Months Ended July 31,
                     2022                   2021              2022                  2021
                                                 (in thousands)
Revenue           $       383         $            259     $       638         $         1,385
Cost of sales              56                       24              71                      24
Gross profit              327                      235             567                   1,361
Selling,
general,
administrative            979                      115           2,072                     827
Stock based
compensation              678                        -           1,481                       -
Depreciation
and
amortization               50                       23             100                      23
Total operating
expenses                1,707                      138           3,653                     850
Income (loss)
from operations        (1,380 )                     97          (3,086 )                   511
Other income
(expense), net         (2,070 )                  2,445          (2,230 )                 2,796
Income (loss)
before income
taxes                  (3,450 )                  2,542          (5,316 )                 3,307
Income tax
benefit                   782                        -           1,194                       -
Net income
(loss)            $    (2,668 )       $          2,542     $    (4,122 )       $         3,307




Revenue

Revenue for the three months ended July 31, 2022 was $0.4 million as compared to $0.3 million for the three months ended July 31, 2021. Revenue for the three months ended July 31, 2022 primarily consisted of $196,000 from consulting services, $158,000 from product revenue, and $24,000 from staking of cryptocurrency. Revenue for the three months ended July 31, 2021 primarily consisted of $168,000 from consulting services, $47,000 from product revenue, and $43,000 from staking of cryptocurrency.

Revenue for the six months ended July 31, 2022 was $0.6 million as compared to $1.4 million for the six months ended July 31, 2021. Revenue for the six months ended July 31, 2022 primarily consisted of $411,000 from consulting services, $171,000 from product revenue, and $51,000 from staking of cryptocurrency. Revenue for the six months ended July 31, 2021 primarily consisted of $1.2 million from consulting services, $130,000 from staking of cryptocurrency, and $47,000 from product revenue.

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Cost of Sales

Cost of sales for the three months ended July 31, 2022 was $56,000 as compared to $24,000 for the three months ended July 31, 2021. Cost of sales for the three months ended July 31, 2022 primarily consisted of cost of product costs from Mercury.

Cost of sales for the six months ended July 31, 2022 was $71,000 as compared to $24,000 for the six months ended July 31, 2021. Cost of sales for the six months ended July 31, 2022 primarily consisted of cost of product costs from Mercury.

Gross Profit

Gross profit for the three months ended July 31, 2022 was $0.3 million as compared to $0.2 million for the six months ended July 31, 2021. Gross profit for the six months ended July 31, 2022 was $0.6 million as compared to $1.4 million for the six months ended July 31, 2021.

Operating Expenses

Operating expenses primarily consist of selling, general and administrative expenses, stock based compensation expense, and amortization and depreciation expense. Selling, general and administrative expenses primarily consist of personnel costs, consultant fees, professional fees, computer and internet expenses, marketing expenses, utilities expenses, meals and entertainment, office supplies, and reporting fees.

Operating expenses for the three months ended July 31, 2022 were $1.7 million compared to $0.1 million for the three months ended July 31, 2021. The primary reason for the increase was due to stock based compensation of $0.7 million, marketing expenses of $0.1 million, professional fees of $0.1 million, and the acquisitions of 832, Mercury, and Vengar.

Operating expenses for the six months ended July 31, 2022 were $3.7 million compared to $0.9 million for the six months ended July 31, 2021. The primary reason for the increase was due to stock based compensation of $1.5 million, marketing expenses of $0.4 million, professional fees of $0.3 million, and the acquisitions of 832, Mercury, and Vengar.

Income (Loss) from Operations

Loss from operations for the three months ended July 31, 2022 was $1.4 million compared to income from operations of $0.1 million for the three months ended July 31, 2021. The primary reasons for the decrease in income from operations was due to the increase in operating expenses as discussed above.

Loss from operations for the six months ended July 31, 2022 was $3.1 million compared to income from operations of $0.5 million for the six months ended July 31, 2021. The primary reasons for the decrease in income from operations was due to the decrease in revenue and increase in operating expenses as discussed above.

Adjusted EBITDA

The Company reports all financial information required in accordance with GAAP. The Company believes, however, that evaluating its ongoing operating results will be enhanced if it also discloses certain non-GAAP information.

Adjusted EBITDA, which is a non-GAAP financial measure, is defined by the Company as net income (loss) plus net interest income, income tax (benefit) expense, depreciation and amortization, and stock based compensation.

Adjusted EBITDA should not be considered an alternative to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. In addition, Adjusted EBITDA presented by other companies may not be comparable to our presentation, since each company may define these terms differently.

The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to net income (loss).

                  For the Three Months Ended July 31,       For the Six Months Ended July 31,
                     2022                   2021              2022                  2021
                                                 (in thousands)
Net income
(loss)            $    (2,668 )       $          2,542     $    (4,122 )       $         3,307
Add:
Income tax
benefit                  (782 )                      -          (1,194 )                     -
Stock based
compensation              678                        -           1,481                       -
Depreciation
and
amortization               50                       23             100                      23
Net interest
(income)
expense                    13                      (16 )            26                     (41 )
Adjusted EBITDA   $    (2,709 )       $          2,549     $    (3,709 )       $         3,289




Analysis of Cash Flows



Operating Activities

Net cash used in operating activities was $1.6 million for the six months ended July 31, 2022. We had net loss of $4.1 million, which included fair value adjustments to cryptocurrency of $2.2 million, due to decreases in the values of cryptocurrencies, and stock based compensation of $1.5 million.

Net cash provided by operating activities was $0.8 million for the six months ended July 31, 2021. We had net income of $3.3 million, which included fair value adjustments to cryptocurrency of $2.4 million, due to increases in the values of cryptocurrencies.

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Investing Activities

Net cash used in investing activities was $0.6 million for the six months ended July 31, 2022, compared to net cash used in investing activities of $0.2 million for the six months ended July 31, 2021. During the six months ended July 31, 2022, we had capital expenditures of $0.6 million. During the six months ended July 31, 2021, we purchased $0.3 million of cryptocurrencies and sold $0.1 million of cryptocurrencies.

Financing Activities

Net cash provided by financing activities was $1.5 million for the six months ended July 31, 2022, compared to $0.3 million for the six months ended July 31, 2021. During the six months ended July 31, 2022, we sold 250,000 shares of Series C Preferred Stock for $1.0 million and two warrants were exercised for a total of 500,000 shares of common stock resulting in the Company receiving $0.5 million. During the six months ended July 31, 2021, we had proceeds from issuance of common stock of $0.5 million and borrowings of debt of $0.3 million, which was partially offset by the debt payment of $0.5 million to a related party.

Liquidity and Capital Resources

Our cash on hand as of July 31, 2022 was $0.3 million. Based on our revenues, cash on hand, cryptocurrency holdings, and current monthly burn rate, the Company can sustain its operations going forward.

We fund operations primarily through cash on hand and cash from sales of cryptocurrencies and common stock.

On March 17, 2022, our board approved the conversion of 2,000,000 shares of blank check preferred stock into 2,000,000 shares of Series C Preferred Stock, par value $0.0001. On April 19, 2022, the Company sold 250,000 shares of Series C Preferred Stock for $1.0 million. On June 14, 2022, our board of directors approved the early conversion of 250,000 shares of Series C Preferred Stock into 560,928 shares of common stock.

On April 19, 2022, two warrants were exercised for a total of 500,000 shares of common stock resulting in the Company receiving $0.5 million.

On July 27, 2022, we launched EB Control, our patent-pending, zero-trust data protection solution, which was developed by Vengar.

On August 11, 2022, our board of directors approved the sale of our 2021 Cadillac Escalade to Eric Jaffe, our former chief executive officer and current board member, for $91,983. Mr. Jaffe paid for the vehicle with 26,662 shares of his Company common stock.

On August 14, our board of directors approved the sale of 10 million HEX tokens to Michael Hawkins for $450,000.

Off-Balance Sheet Arrangements

We did not have any material off-balance sheet arrangements as of July 31, 2022.

Going Concern

Our financial statements are prepared in accordance with GAAP, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Because the business is relatively new and has a short history and relatively few sales, no certainty of continuation can be stated. The accompanying consolidated financial statements for the three and six months ended July 31, 2022 and 2021 have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

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