UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended July 31, 2023

For the transition period from _______________ to _______________.

Commission file number: 000-56142

(904) 454-2111

Registrant’s telephone number, including area code

(Former name and address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 31, 2023, the Company had 13,673,304 shares of common stock, $0.0001 par value outstanding.

Transitional Small Business Disclosure Format Yes ☐     No ☒

Everything Blockchain, Inc.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Interim Consolidated Financial Statements and Notes to Interim Financial Statements

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the three and six months ended July 31, 2023, are not necessarily indicative of the results that can be expected for the year ending January 31, 2024 or any other reporting period. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on May 1, 2023 (the “Annual Report”).

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

Everything Blockchain, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 10-Q.

The Company is primarily engaged in the business of consulting and developing data management, blockchain and cybersecurity related solutions. We are a technology company that is blending blockchain, zero-trust, and database management technology to create a platform to solve real world, practical business problems. Our business model is based on building recurring revenue through software subscriptions, licensing agreements, and transaction fees. 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, BuildDB and EB Control.

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

EMPLOYEES

As of July 31, 2023, 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.

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, 2023 and 2022 are summarized as follows:

Revenue

Revenue for the three months ended July 31, 2023 was $0.5 million as compared to $0.4 million for the three months ended July 31, 2022. Revenue for the three months ended July 31, 2023 primarily consisted of $288,000 from product revenue and $177,000 from consulting services. 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 six months ended July 31, 2023 was $0.7 million as compared to $0.6 million for the six months ended July 31, 2022. Revenue for the six months ended July 31, 2023 primarily consisted of $380,000 from product revenue and $347,000 from consulting services. 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. 

Cost of Sales

Cost of sales for the three months ended July 31, 2023 and 2022 was $0.1 million. Cost of sales for the six months ended July 31, 2023 and 2022 was $0.1 million. Cost of sales for all periods primarily consisted of product costs.

Gross Profit

Gross profit for the three months ended July 31, 2023 was $0.4 million as compared to $0.3 million for the three months ended July 31, 2022. Gross profit for the six months ended July 31, 2023 and 2022 was $0.6 million.

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, 2023 were $2.1 million compared to $1.7 million for the three months ended July 31, 2022. The primary reason for the increase was due to an increase in payroll expenses of $0.3 million and professional fees of $0.1 million.

Operating expenses for the six months ended July 31, 2023 were $4.2 million compared to $3.7 million for the six months ended July 31, 2022. The primary reason for the increase was due to an increase in payroll expenses of $0.5 million and professional fees of $0.1 million, partially offset by a decrease in stock-based compensation of $0.1 million.

Loss from Operations

Loss from operations for the three months ended July 31, 2023 was $1.8 million compared to $1.4 million for the three months ended July 31, 2022. Loss from operations for the six months ended July 31, 2023 was $3.6 million compared to $3.1 million for the six months ended July 31, 2022. The primary reasons for the increase in loss from operations were due to the increase in operating expenses as discussed above. 

Other Expense

Other income (expense) consists primarily of sales of cryptocurrency and the associated costs, fair market value adjustments to cryptocurrency, and interest income and expense.

Other expense, net for the three months ended July 31, 2023 was $1.3 million compared to $2.1 million for the three months ended July 31, 2022. Other expense, net for the three months ended July 31, 2023 consists primarily of fair market value expense adjustments related to PulseX of $1.3 million. Other expense, net for the three months ended July 31, 2022 consists primarily of fair market value expense adjustments to cryptocurrency of $2.1 million.

Other expense, net for the six months ended July 31, 2023 was $1.4 million compared to $2.2 million for the six months ended July 31, 2022. Other expense, net for the six months ended July 31, 2023 consists primarily of fair market value expense adjustments related to PulseX of $1.3 million. Other expense, net for the six months ended July 31, 2022 consists primarily of fair market value expense adjustments to cryptocurrency of $2.2 million.

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 loss.

Analysis of Cash Flows

Operating Activities

Net cash used in operating activities was $0.6 million for the six months ended July 31, 2023. We had net loss of $4.9 million, which included fair value adjustments to cryptocurrency of $1.3 million and stock-based compensation of $1.4 million.

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.

Investing Activities

Net cash used in investing activities was $0.4 million for the six months ended July 31, 2023, compared to $0.6 million for the six months ended July 31, 2022. During the six months ended July 31, 2023, we had capital expenditures of $0.6 million, partially offset by proceeds from cryptocurrencies of $0.2 million. During the six months ended July 31, 2022, we had capital expenditures of $0.6 million.

Financing Activities

Net cash provided by financing activities was $0.2 million for the six months ended July 31, 2023, compared to $1.5 million for the six months ended July 31, 2022. During the six months ended July 31, 2023, we received the $0.2 million receivable from stockholder. 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.

Liquidity and Capital Resources

We fund operations primarily through cash on hand, cash from sales of Series C Preferred Stock, cryptocurrencies, and exercises of warrants, and the support of Michael Hawkins.

In May 2023, Overwatch distributed to us Pulse and PulseX tokens of 12.3 billion each. As a result of this transaction, the Company distributed to Epic 2.5 billion Pulse tokens. The receipt of Pulse and PulseX also earned Epic 50,000 shares of Series A Preferred Stock, which were issued to Epic during the quarter ended July 31, 2021 and recorded as a prepaid expense of $2.0 million. Our board decided that the value received from Pulse and PulseX, in lieu of sales, satisfied the requirements for the Series A Preferred Stock to be earned by Epic.

On July 14, 2023, a board director of the Company loaned it $55,000, representing half of the Company’s employee retention credit refund, which the Company expects to receive this year. The note calls for the payment of the principal sum of $55,000 plus interest of $12,500 for a total of $67,500. The maturity date of the note is December 31, 2023.

During the six months ended July 31, 2023, we received the $0.2 million receivable from stockholder.

We were recently notified by the bank that when we acquired Mercury it triggered defaults under both Mercury's line of credit and term loan due to the change in ownership. Both the line of credit and term loan are classified as current liabilities. On August 15, 2023, Epic, with the approval of the board, purchased Mercury’s building for $480,000. Mercury used $461,000 of the proceeds from the sale to payoff both Mercury's line of credit and term loan. After paying off the notes and closing costs, Mercury was left with $11,000 for general corporate purposes.

On September 7, 2023, Epic formalized the loans to the Company in a note. As of July 31, 2023, the outstanding balance was $0.7 million. Subsequent to July 31, 2023, Epic has provided funding and plans to provide additional funding to equal a total note principal of $1.0 million. Monthly interest only payments at an annual rate of 4% will be made through the maturity date of February 1, 2025.

Off-Balance Sheet Arrangements

We did not have any material off-balance sheet arrangements as of July 31, 2023.

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, 2023 and 2022 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company and therefore, we are not required to provide the information required by this Item of Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures.

We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2023. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report because we did not document our Sarbanes-Oxley Act Section 404 internal controls and procedures.

As funds become available to us, we expect to implement additional measures to improve disclosure controls and procedures such as implementing and documenting our internal controls procedures.

Changes in internal controls over financial reporting

There have been no changes in our internal control over financial reporting during the quarter ended July 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The Company’s management, including its principal executive officer and its principal financial officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not involved in any legal proceedings which management believes will have a material effect upon the financial condition of the Company, nor are any such material legal proceedings anticipated.

Item 1A. Risk Factors

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There have been no events that are required to be reported under this Item.

Item 3. Defaults Upon Senior Securities

There have been no events that are required to be reported under this Item.

Item 4. Mine Safety Disclosures

There have been no events that are required to be reported under this Item.

Item 5. Other Information

There have been no events that are required to be reported under this Item.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.