Form 10-Q SOLLENSYS CORP. For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
FOR
THE QUARTERLY PERIOD ENDED
FOR THE TRANSITION PERIOD FROM __________ TO __________.
Commission
File Number
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
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.
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).
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.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
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 ☐
As of August 16, 2022, the registrant had shares of common stock issued and outstanding.
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SOLLENSYS CORP
Consolidated Balance Sheets
(unaudited)
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Other receivables | ||||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Right of use assets | ||||||||
| Other assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Due to former affiliated company | ||||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Lease liabilities current portion | ||||||||
| Related party loans | ||||||||
| Notes payable - short term | ||||||||
| Total current liabilities | ||||||||
| Notes payable - long term | ||||||||
| Lease liabilities - long term | ||||||||
| Deferred revenue - long term | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding as of June 30, 2022 and December 31, 2021 | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
Note: Amounts may not foot due to rounding.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
1
SOLLENSYS CORP
Consolidated Statements of Operations
(unaudited)
| Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense) | ||||||||||||||||
| Other income | ||||||||||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Provision (benefit) for income taxes | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Basic and diluted income (loss) per common share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
Note: Amounts may not foot due to rounding.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
2
SOLLENSYS CORP
Statements of Changes in Stockholder’s Equity (Deficit)
(unaudited)
| Additional | Total Stockholder’ | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Equity | ||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance, December 31, 2020 | ( | ) | ||||||||||||||||||||||||||
| Private placement of common shares | ||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||
| Private placement of common shares | ||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Additional | Total Stockholders’ | |||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Equity | ||||||||||||||||||||||||
| Shares | Value | Shares | Value | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Impact of the adoption of ASC 842 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Private placement of common shares | ||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Issuance of common stock to purchase Celerit (Note 5) | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
Note: Amounts may not foot due to rounding.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
3
SOLLENSYS CORP
Consolidated Statements of Cash Flows
(unaudited)
| Six Months Ended | Six Months Ended | |||||||
| June 30, | June 30, | |||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other receivables | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Deferred revenues | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of property, plant and equipment | ( | ) | ||||||
| Acquisition of a business, net of cash acquired | ||||||||
| Net cash provided by in investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related party loans | ||||||||
| Payments on related party loans | ( | ) | ||||||
| Payments on notes payable | ( | ) | ||||||
| Proceeds from the sale of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosure of non-cash activities: | ||||||||
| Common stock issued for the acquisition of a business | $ | $ | ||||||
| Promissory note issued for the acquisition of a business | $ | |||||||
| Acquisition of a property with debt | $ | $ | ||||||
Note: Amounts may not foot due to rounding.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
4
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Sollensys Corp (“Sollensys” or the “Company”) was formerly a development stage company, incorporated in Nevada on September 29, 2010, under the name Health Directory, Inc.
Eagle Lake Laboratories, Inc (“Eagle Lake”) is a Florida-based science, technology, and engineering solutions corporation offering products that ensure their clients’ data integrity through the collection, storage, and transmission. The Company expects to generate revenue with Eagle’s innovative flagship product, the Blockchain Archive Server™ that can be utilized to protect client data from ransomware. Blockchain technology is a leading-edge tool for data security, providing an added layer of security against data loss due to malware.
On October 15, 2021, the Company entered into a Membership Interest Exchange Agreement (the “Agreement”), dated as of October 15, 2021, by and among (i) the Company; (ii) Abstract Media, LLC (“Abstract Media”), (iii) each of the members of Abstract Media (collectively, the “Abstract Media Members”); and (iv) Andrew Baker as the representative of the Abstract Media Members (the “Members’ Representative”). The Acquisition closed on December 6, 2021.
Abstract Media is a Texas limited liability company formed in October 2011, with the goal of improving user engagement using visualization tools. The Company has evolved into an interactive media and software development company to optimize effective corporate learning, operational workflow and communication using technology in the augmented reality or virtual reality space. Abstract Media conducts its operations from its office location in Houston, Texas.
Celerit Merger
On October 26, 2021, the Company entered into a Merger Agreement (“Merger Agreement”) by and among (i) the Company; (ii) S-CC Merger Sub, Inc., a wholly owned subsidiary of the Company (“S-CC Merger Sub”); (iii) S-Solutions Merger Sub, Inc., a wholly owned subsidiary of the Company (“S-Solutions Merger Sub”); (iv) Celerit Corporation (“Celerit”); (v) Celerit Solutions Corporation (“Celerit Solutions”); and (vi) Terry Rothwell (collectively, (i)-(v), the “Merger Parties”).
On the terms and subject to the conditions set forth in the Merger Agreement, as subsequently amended, and subject further to acceptance of Articles of Merger filed on the Closing Date with the Secretary of State of Arkansas (“SOS AR”), on April 7, 2022 (the “Closing Date”): (i) Celerit merged with and into S-CC Merger Sub (the “Celerit Merger”), and the separate corporate existence of S-CC Merger Sub ceased, with Celerit as the surviving corporation (the “Celerit Surviving Corporation”); and (ii) Celerit Solutions merged with and into S-Solutions Merger Sub (the “Celerit Solutions Merger”), and the separate corporate existence of S-Solutions Merger Sub ceased, with Celerit Solutions as the surviving corporation (the “Celerit Solutions Surviving Corporation”) (the Celerit Merger and Celerit Solutions Merger together, the “Mergers”). On the Closing Date, SS-Merger Sub and S-Solutions Merger Sub filed Articles of Merger with the SOS AR, which are currently pending.
By virtue of, and simultaneously with, the Celerit Merger and without any further action (other than the acceptance by the SOS AR of the applicable Articles of Merger or as otherwise required pursuant to applicable law) on the part of the Merger Parties, at the effective time of the Mergers (the “Effective Time”), the Celerit Merger was completed and the Celerit Solutions Merger was completed.
5
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Director Appointments
Effective as of the Closing Date, (i) the Sollensys Board of Directors was expanded by one person, and Terry Rothwell was named as a director; (ii) Celerit Surviving Corporation’s board of directors expanded the size of Celerit Surviving Corporation’s board of directors by two persons, and named Messrs. Anthony Nolte and Donald Beavers as directors on the Celerit Surviving Corporation board of directors, while retaining Terry Rothwell as a director; and (iii) Celerit Solutions Surviving Corporation’s board of directors expanded the size of the Celerit Solutions Surviving Corporation Board by two persons, and named Messrs. Nolte and Beavers as directors.
Executive Employment Agreements
Also as of the Closing Date, Sollensys entered into (i) an employment agreement with Terry Rothwell pursuant to which Terry Rothwell was appointed as the Chief Executive Officer of each of Celerit Surviving Corporation and Celerit Solutions Surviving Corporation (the “Rothwell Employment Agreement”), and (ii) an employment agreement with Ron Harmon pursuant to which he was appointed as the Chief Operating Officer of each of Celerit Surviving Corporation and Celerit Solutions Surviving Corporation (the “Harmon Employment Agreement” and, together with the Rothwell Employment Agreement, the “Employment Agreements”).
Management’s Representation of Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company uses the same accounting policies in preparing quarterly and annual financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Tables included in notes may not sum due to rounding.
Basis of Presentation
In the opinion of Sollensys, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications, which are of a normal recurring nature, necessary to present fairly its financial position as of June 30, 2022, the results of its operations for the three months and six months ended June 30, 2022 and 2021 and its cash flows for the six months ended June 30, 2022 and 2021. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2021 and the notes thereto included in the Form 10-K for such period. The results of operations for the three and six months ended June 30, 2022 and 2021 are not necessarily indicative of the results to be expected for the full fiscal year.
The consolidated financial statements of Sollensys include its wholly-owned subsidiaries, Eagle Lake, Abstract Media, Celerit, and Celerit Solutions. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
6
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 – GOING CONCERN
Going Concern
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the twelve months
following the date of these consolidated financial statements. The Company has incurred significant operating losses since its
inception. As of June 30, 2022, the Company had a working capital deficit of $(
The Company expects to generate operating cash flows that will be sufficient to fund presently anticipated operations although there can be no assurance. This raises substantial doubt about the Company’s ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing to supplement expected cash flow. Historically, the Company has raised capital through private placements, as an interim measure to finance working capital needs and may continue to raise additional capital through the sale of common stock or other securities and obtaining some short-term loans. The Company will be required to continue to do so until its revenues support its operations.
The Company may attempt to raise capital in the near future through the sale of equity or debt financing; however, there can be assurances the Company will be successful in doing so. There can be no assurance that such additional financing will be available to the Company on acceptable terms or at all.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of expenses during the reporting period. The most significant estimates relate to right of use assets and liabilities, and contingencies. The Company bases its estimates on historical experience, known or expected trends, and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these consolidated financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Business Combinations
Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. These valuations require us to make significant estimates and assumptions, especially with respect to intangible assets. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill.
If the initial accounting for a business combination is incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our consolidated financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our consolidated financial statements.
7
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Fair Value Measurements
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.
Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. We use the market approach to measure fair value for its Level 1 financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The respective carrying value of certain balance sheet financial instruments approximates its fair value. These financial instruments include cash and cash equivalents, trade receivables, related party payables, accounts payable, accrued liabilities and short-term borrowings. Fair values were estimated to approximate carrying values for these financial instruments since they are short term in nature, and they are receivable or payable on demand.
The estimated fair value of assets and liabilities acquired in business combinations and reporting units and long-lived assets used in the related asset impairment tests utilize inputs classified as Level 3 in the fair value hierarchy.
We determine the fair value of contingent consideration based on a probability-weighted discounted cash flow analysis. The fair value remeasurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in the fair value hierarchy. In each period, we reassess our current estimates of performance relative to the stated targets and adjusts the liability to fair value. Any such adjustments are included as a component of Other Income (Expense) in the Consolidated Statements of Operations and Comprehensive Loss.
Revenue Recognition
Revenues are accounted for in accordance with the FASB’s Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606 or ASC 606).
The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for the products and/or services. To achieve this principle, the Company applies the following five steps:
| 1. | Identify the contract with the customer; |
| 2. | Identify the performance obligations in the contract; |
| 3. | Determine the transaction price; |
| 4. | Allocate the transaction price to performance obligations in the contract, and |
| 5. | Recognize revenue when or as the Company satisfies a performance obligation. |
8
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company derives revenue from numerous sources. One of the Company’s products is the Blockchain Archive Server—a turn-key, off-the-shelf, blockchain solution that works with virtually any hardware and software combinations currently used in commerce, without the need to replace or eliminate any part of the client’s data security that is being utilized.
The Company accounts for a contract with a customer when it has written approval, the contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection. Binding contracts or agreements with customers together with agreement to the Company’s terms and conditions are considered the contract with a customer. The Company considers collection of the contract to be probable at the onset of the arrangement.
The second product offering is called the “Regional Service Center” which is a single unit system of 32 Blockchain Archive Servers capable of servicing up to 2,580 individual small accounts, and is marketed to existing IT service providers with established accounts. The service is delivered over the Internet and is considered software as a service “SaaS”.
The Company recognizes revenue when the control of the Blockchain Archive Server is transferred to the Company’s customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for these products. Control is generally transferred when products are delivered. The Company’s revenue contracts generally represent a single performance obligation to sell its products to customers. For the SaaS software, which typically involves a significant customer deposit with services provided by the Company over a 60 month period, the Company recognizes revenue ratably as service is provided over the contract period.
Under
the terms of the Company’s regional service center contracts, the Company requires a substantial deposit in advance of the support
work required to be performed by the Company. All deposits that have not been deemed earned by the Company following the guidelines of
the ASC 606 are considered to be contract liabilities and are classified as deferred revenue on the Company’s consolidated balance
sheets. As of June 30, 2022, the current balance of deferred revenue was $
Celerit Revenue
At its newly acquired Celerit subsidiaries, revenue is primarily comprised of service agreements, where the Company enters into a contract with a banking institution to provide professional services. The contract may be fixed or variable, and the variable rate is based on the number of hours worked under the contract. The Company’s fixed rate contracts typically include a base range of hours, where the Company or the customer incurs charges if the hours worked are less than or exceed the agreed upon range, respectively.
The Company believes that each service agreement entered into constitutes a single performance obligation for the purposes of revenue recognition under ASC 606. The Company recognizes revenue as services are provided based on the number of hours worked and the consideration that the Company expects to receive in a contract with a customer, which is based on the rate established in the contract agreement. The Company believes this method best depicts the pattern of the satisfaction of its performance obligation.
The timing of revenue recognition from contracts with customers results in contract assets. Generally, billing occurs subsequent to revenue recognition, resulting in the recording of a contract asset. The amount recorded for contract assets is recorded as unbilled revenue which is included in other receivables on the consolidated balance sheets.
Significant judgments:
| ● | Principal versus agent considerations – Judgment is applied to determine whether the Company is the principal or the agent by evaluating whether the Company has control of the service prior to it being transferred to the customer. The principal versus agent assessment is performed at the performance obligation level. Indicators that the Company considers in determining if it has control include whether the Company is ultimately responsible for fulfilling the promise to provide the specific service to the customer, and the Company has discretion in establishing the price the customer ultimately pays for the service. The Company is the principal for sales of all services and recognizes the revenue on a gross basis. |
Practical expedients and accounting policy elections:
| ● | Incremental costs of obtaining and fulfilling a contract – These costs are included in general and administrative expenses as the amortization period is generally one year or less. The Company expenses costs associated with obtaining and fulfilling contracts as incurred. |
| ● | Significant financing components – The Company has elected not to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised service to a customer and when the customer pays for that service will generally be one year or less. |
| ● | Sales tax and other related taxes – Taxes collected from customers and remitted to governmental authorities are not included in revenue. |
9
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Disaggregation of revenues
Under the guidelines of ASC 606, the Company disaggregates its revenues from contracts with customers by service types, as the Company believes it best depicts how the nature, amount, timing and uncertainty of the revenue and cash flows are affected by economic factors. Management has determined that this level of disaggregation is beneficial to the users of the Company’s consolidated financial statements.
The Company’s disaggregation of revenues by type for the six months ended June 30, 2022 and 2021 is as follows:
| Three months | Three months | Six months | Six months | |||||||||||||
| ended | ended | ended | ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue from bank service agreements | $ | $ | $ | $ | ||||||||||||
| Revenue from Blockchain Archive Servers and SaaS | ||||||||||||||||
| Revenue from augmented reality for corporate high tech training and integration of cybersecurity | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Net income (loss) per common share is computed by dividing net income (loss) by the weighted average common shares outstanding during the period as defined by ASC 260, “Earnings per Share.” Basic earnings per common share calculations are determined by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share calculations are determined by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents outstanding. As of June 30, 2022 and December 31 2021, there were instruments which would have a dilutive effect.
Recently Issued Accounting Pronouncements
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. In March 2019, the FASB issued ASU 2019-01, Codification Improvements, which clarifies certain aspects of the new lease standard. The FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases in July 2018. Also in 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides an optional transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. The amendments have the same effective date and transition requirements as the new lease standard. On November 15, 2019, the FASB issued ASU 2019-10, which amends the effective dates for three major accounting standards. The ASU defers the effective dates for the credit losses, derivatives, and lease standards for certain companies. Since the Company is classified as a small reporting company and emerging growth company and has a calendar-year end, the Company was eligible for deferring the adoption of ASC 842 to January 1, 2022.
In the first quarter of fiscal 2022, we adopted ASU 2016-02 using the “Comparatives Under 840 Option” approach to transition. Under this method, financial information related to periods prior to adoption will be as originally reported under the previous standard – ASC 840, Leases. The effects of adopting the new standard (ASC 842, Leases) in fiscal 2022 were recognized as a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal first quarter. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification as operating or capital leases. We also elected to combine lease and non-lease components and to exclude short-term leases from our consolidated balance sheets.
The
most significant impact of adoption was the recognition of right of use operating lease assets and right of use operating lease
liabilities of $
Accounts receivable
The
Company extends credit to its customers in the normal course of business. The Company performs ongoing credit evaluations and
generally does not require collateral. The Company uses the allowance method to estimate for uncollectible receivables and maintains
reserves, when necessary, for potential credit losses. An allowance for doubtful accounts, when necessary, is based upon a review
of outstanding receivables, historical collection information, and existing economic conditions. Accounts receivable are ordinarily
due 30 days after the issuance of an invoice. Accounts more than 120 days past due are considered delinquent and are written off
after all collection attempts have been exhausted. As of June 30, 2022 and December 31, 2021, the balance of accounts receivable
were $
10
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 – NOTES PAYABLE AND RELATED PARTY LOANS
As of June 30, 2022 and December 31, 2021, the Company had the following notes payable, and notes payable related party outstanding:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Related party loans (a) | $ | $ | ||||||
| Notes payable - short term (b) | $ | $ | ||||||
| Notes payable - long term (c) | $ | $ | ||||||
| (a) | Related party loans are comprised of the following: |
| (i) | A portion the
Company’s acquisition consideration on April 7, 2022 was paid to Terry Rothwell via the issuance to Terry Rothwell at the
closing of a promissory note of Sollensys (the “Rothwell Note”). The Rothwell Note has a principal amount of $ |
| (ii) | On
June 30, 2022, David Beavers, a related party, loaned the Company on an unsecured basis, $ |
|
| (iii) | The Company had one interest free demand loan, and three |
| (b) | Notes payable - short term are comprised of the following: |
| (i) | The
Company has a $ |
| (ii) | The Company has a vehicle loan which requires monthly payments
of principal and interest in the amount of $ |
| (c) | The notes payable –
long term balance of $ |
At June 30, 2022, the aggregate maturities of notes payable for the next five years and thereafter are as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total | $ |
11
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 – BUSINESS ACQUISITIONS
ABSTRACT MEDIA
On October 15, 2021, the Company entered into a Membership Interest Exchange Agreement (the “Agreement”), dated as of October 15, 2021, by and among (i) the Company; (ii) Abstract Media, LLC (“Abstract Media”), (iii) each of the members of Abstract Media (collectively, the “Abstract Media Members”); and (iv) Andrew Baker as the representative of the Abstract Media Members (the “Members’ Representative”). The Acquisition closed on December 6, 2021.
Pursuant
to the terms of the Agreement, the Company agreed to acquire from the Abstract Media Members all of the membership interests of
Abstract Media held by the Abstract Media Members, representing 100% of the membership interests of Abstract Media, in exchange
for the issuance by the Company to the Abstract Media Members of (i) shares of the Company’s common stock, plus (ii) $
Pursuant to the terms of the Agreement, on December 6, 2021, the Abstract Media Members assigned their respective membership interests in Abstract Media to the Company, and Abstract Media became a wholly owned subsidiary of the Company. In exchange therefor, on December 6, 2021, the Company issued to the Abstract Media Members an aggregate of shares of the Company’s common stock.
For the acquisition of Abstract Media, the following table summarizes the acquisition date fair value of consideration paid, identifiable assets acquired and liabilities assumed:
Consideration paid
| Cash and cash equivalents | $ | |||
| Common stock, 73,244 shares of the Company restricted common stock valued at $4.00 per share | ||||
| Net liabilities assumed | ||||
| Fair value of total consideration paid | $ |
Net assets acquired and liabilities assumed
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Other current assets | ||||
| Fixed assets, net | ||||
| Total assets | $ | |||
| Accounts payable | ||||
| Accrued liabilities | ||||
| Total liabilities | ||||
| Net liabilities assumed | $ |
The
Company has allocated the fair value of the total consideration paid of $
12
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CELERIT MERGER
On October 26, 2021, the Company entered into a Merger Agreement (“Merger Agreement”) by and among (i) the Company; (ii) S-CC Merger Sub, Inc., a wholly owned subsidiary of the Company (“S-CC Merger Sub”); (iii) S-Solutions Merger Sub, Inc., a wholly owned subsidiary of the Company (“S-Solutions Merger Sub”); (iv) Celerit Corporation (“Celerit”); (v) Celerit Solutions Corporation (“Celerit Solutions”); and (vi) Terry Rothwell (collectively, (i)-(v), the “Merger Parties”).
On the terms and subject to the conditions set forth in the Merger Agreement, as subsequently amended, and subject further to acceptance of Articles of Merger filed on the Closing Date with the Secretary of State of Arkansas (“SOS AR”), on April 7, 2022 (the “Closing Date”): (i) Celerit merged with and into S-CC Merger Sub (the “Celerit Merger”), and the separate corporate existence of S-CC Merger Sub ceased, with Celerit as the surviving corporation (the “Celerit Surviving Corporation”); and (ii) Celerit Solutions merged with and into S-Solutions Merger Sub (the “Celerit Solutions Merger”), and the separate corporate existence of S-Solutions Merger Sub ceased, with Celerit Solutions as the surviving corporation (the “Celerit Solutions Surviving Corporation”) (the Celerit Merger and Celerit Solutions Merger together, the “Mergers”). On the Closing Date, SS-Merger Sub and S-Solutions Merger Sub filed Articles of Merger with the SOS AR, which are currently pending.
By virtue of, and simultaneously with, the Celerit Merger and without any further action (other than the acceptance by the SOS AR of the applicable Articles of Merger or as otherwise required pursuant to applicable law) on the part of the Merger Parties, at the effective time of the Mergers (the “Effective Time”), the Celerit Merger was completed and the Celerit Solutions Merger was completed.
Aggregate
consideration for the Mergers consisted of (i) $
For the acquisition of Celerit and Celerit Solutions, the following table summarizes the acquisition date fair value of consideration paid, identifiable assets acquired and liabilities assumed:
Consideration paid
| Cash and cash equivalents | $ | |||
| Common stock, 4,000,000 shares of the Company restricted common stock valued at $3.20 per share | ||||
| Issuance of promissory note | ||||
| Fair value of total consideration paid | $ |
Net assets acquired and liabilities assumed
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Prepaid expenses | ||||
| Other current assets | ||||
| Property, plant and equipment | ||||
| Intangible assets (provisional) | ||||
| Goodwill | ||||
| Total assets | $ | |||
| Accounts payable | ||||
| Accrued expenses | ||||
| Total liabilities assumed | ||||
| Net purchase price | $ |
13
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
Company has allocated the fair value of the total consideration paid to goodwill of $
The
unaudited financial information in the table below summarizes the combined results of operations of the Company, Celerit and Celerit
Solutions for the three and six month periods ended June 30, 2022 and June 30, 2021, on a pro forma basis, as though the companies
had been combined as of January 1, 2021. The pro forma earnings for these period, were adjusted to include annual intangible
amortization expense of $
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
| Net income (loss) from operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Basic and fully income (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Weighted average shares outstanding | ||||||||||||||||
Real Estate Agreement
Terry
Rothwell and George Rothwell are the members of CRE Holdings, LLC (“CRE”), the owner of two office buildings, a vacant
commercial lot and a condominium. The office buildings are leased by Celerit. The Merger Parties expect that, shortly after the
Effective Time, Sollensys, CRE, Terry Rothwell and George Rothwell shall enter into an agreement (the “CRE Agreement”)
related to the purchase by Sollensys of the two office buildings, a vacant commercial lot and a condominium, as well as other assets
owned by CRE, Terry Rothwell and George Rothwell (the “CRE Transactions”). The purchase price for the CRE properties is
$
NOTE 6 – INTANGIBLE ASSETS
As of June 30, 2022, the balance of intangible assets was $
NOTE 7 – RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2022 ended June 30, 2022, the Company received a number of related party loan, See NOTE 4 – “Notes Payable And Related Party Loans” for a detail of these transactions.
During
2021, the Company entered into a contract with a member of management to provide service to them. For that service the member
of management paid a deposit of $
14
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During 2022 and 2021, the Company issued , common shares to various consultants in lieu of cash payment. The awards were valued at the market price on the date of grant. The shares were valued at $ and are amortized and vest ratably over the one year service period that the consultants provided service over. In some cases these shares vest immediately. During the six months ended June 30, 2022, the Company expensed $. The remaining unamortized stock-based compensation amount of $ amortized to expense through April 2023. Of the shares issued, shares are currently vested and the remaining shares vest through April 2023.
NOTE 9 – LEASES
The majority of our lease obligations are real estate operating leases from which we conduct our business. For any lease with an initial term in excess of 12 months, the related lease assets and liabilities are recognized on the Consolidated Balance Sheets as either operating or finance leases at the inception of an agreement where it is determined that a lease exists. Leases with an initial term of 12 months or less are not recorded on our Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.
Leases with an initial term of 12 months or less, or that are on a month to month basis such as our leases at our Celerit subsidiaries, are not recorded on our Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.
Operating lease assets represent the right to use an underlying asset for the lease term, and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at commencement date. We use a collateralized incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.
The
weighted average remaining lease term is
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total | $ | |||
| Imputed interest | ( | ) | ||
| Lease liability | $ |
15
SOLLENSYS
CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 10 – STOCKHOLDERS’ EQUITY
Preferred Stock
On June 30, 2022, and December 31, 2021, there were shares of preferred stock authorized, with -- shares issued and outstanding at both periods, respectively.
Common Stock
The Company has authorized shares of common stock, $ par value per share. As of June 30, 2022 and December 31, 2021, respectively, there were and shares of common stock issued and outstanding.
During the six months ended June 30, 2022, the Company:
| ● | Raised
$ |
| ● | Issued shares pursuant to the acquisition of Celerit and Celerit Solutions. These shares were valued at $3.20 per share |
| ● | Issued
an aggregate of shares of common stock, valued at $ |
During the year ended December 31, 2021, the Company:
| ● | Raised $ |
| ● | Issued shares
valued at $ |
| ● | Issued an aggregate
of shares of common stock, valued at $ |
NOTE 11 – SUBSEQUENT EVENTS
On July 1, 2022, the Company issued restricted common shares to a service provider. These shares were valued at $ per share. On July 8, 2022 the Company issued restricted common shares to an investor relations firm. These shares were valued at $ per share.
Real Estate Agreement
Terry Rothwell and George Rothwell are
the members of CRE Holdings, LLC (“CRE”), the owner of two office buildings, a vacant commercial lot and a condominium.
The office buildings are leased by Celerit. The Merger Parties expect that, shortly after the Effective Time, Sollensys, CRE, Terry
Rothwell and George Rothwell shall enter into an agreement (the “CRE Agreement”) related to the purchase by Sollensys
of the two office buildings, a vacant commercial lot and a condominium, as well as other assets owned by CRE, Terry Rothwell and
George Rothwell (the “CRE Transactions”). The purchase price for the CRE properties is $
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto. The management’s discussion and analysis contains forward-looking statements, such as statements of our plans, objectives, expectations, and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with our audited financial statements and the related notes that appear in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 30, 2022.
Overview
Business Overview
Our primary product is the Blockchain Archive Server—a turn-key, off-the-shelf, blockchain solution that works with virtually any hardware and software combinations currently used in commerce, without the need to replace or eliminate any part of the client’s data security that is being utilized. The Blockchain Archive Server encrypts, fragments, and distributes data across thousands of secure nodes every day, which makes it virtually impossible for hackers to compromise. Using blockchain technology, the Blockchain Archive Server maintains a redundant, secure, and immutable backup of data. Redundant backups and the blockchain work together to assure not only the physical security of the database but also the integrity of the information held within.
Blockchain Archive Server protects client data from “ransomware”—malicious software that infects your computer and displays messages demanding a fee to be paid in order for your system to work again. Blockchain technology is a leading-edge tool for data security, providing an added layer of security against data loss due to all types of software specifically designed to disrupt, damage, or gain unauthorized access to a computer system (i.e., malware).
Uniquely, the Blockchain Archive Server is a turn-key solution that can stand alone or seamlessly integrate into an existing data infrastructure to quickly recover from a cyber-attack. The Blockchain Archive Server is a server that comes pre-loaded with the blockchain-powered cybersecurity software, which can be delivered, installed, and integrated into a client’s computer systems with ease.
In December 2020, we made our second product offering—the Regional Service Center—available on a limited test market basis. The Regional Service Center was added to our standard product line effective January 1, 2021. A Regional Service Center is a single unit system of 32 Blockchain Archive Servers capable of servicing up to 2,580 individual small accounts, and is marketed to existing IT service providers with established accounts. The Regional Service Center offers small businesses the same state of the art technology previously available only to large or very well-funded companies. Sollensys believes that smaller companies, and even certain individuals, will find the Regional Service Center affordable, paying only for the actual space they use.
We acquired Abstract Media, LLC (“Abstract Media”) in December 2021. Abstract Media was formed in October 2011 with the goal of improving user engagement using visualization tools, and has evolved into an interactive media and software development company to optimize effective corporate learning, operational workflow and communication using technology in the augmented reality or virtual reality space. Abstract Media conducts its operations from its office location in Houston, Texas.
17
Recent Developments
Celerit Mergers
On April 7, 2022 (the “Closing Date”), (i) the Company; (ii) S-CC Merger Sub, Inc., a wholly owned subsidiary of the Company (“S-CC Merger Sub”); (iii) S-Solutions Merger Sub, Inc., a wholly owned subsidiary of the Company (“S-Solutions Merger Sub”); (iv) Celerit Corporation (“Celerit”); (v) Celerit Solutions Corporation (“Celerit Solutions”); and (vi) Terry Rothwell (collectively, (i)-(v), the “Merger Parties”) executed an Amended and Restated Merger Agreement (the “AR Merger Agreement”). On the terms and subject to the conditions set forth in the AR Merger Agreement, and subject further to acceptance of Articles of Merger to be filed with the Secretary of State of Arkansas (“SOS AR”): (i) Celerit merged with and into S-CC Merger Sub (the “Celerit Merger”), and the separate corporate existence of S-CC Merger Sub ceased, with Celerit as the surviving corporation (the “Celerit Surviving Corporation”). (ii) Celerit Solutions merged with and into S-Solutions Merger Sub (the “Celerit Solutions Merger”), and the separate corporate existence of S-Solutions Merger Sub ceased, with Celerit Solutions as the surviving corporation (the “Celerit Solutions Surviving Corporation”) (the Celerit Merger and Celerit Solutions Merger together, the “Mergers”). The Mergers shall have the effects set forth in the AR Merger Agreement and in the Arkansas Business Corporation Act of 1987 (the “ABCA”).
Aggregate consideration for the Mergers consists of (i) the sum of $2,695,000, subject to certain adjustments set forth in the AR Merger Agreement (the “Cash Consideration”), and (ii) 4,000,000 shares of Sollensys common stock (the “Sollensys Shares”), 3,880,000 of which were apportioned pro rata between the Celerit stockholders, and 120,000 of which were apportioned pro rata between the Celerit Solutions stockholders. The Cash Consideration was paid to the Terry Rothwell via the issuance to the Terry Rothwell on the Closing Date of a promissory note of Sollensys (the “Note”). The Note bears interest at a rate of 0.0001% through June 30, 2022, and, if not paid at maturity, the note accrues simple interest at 6% per year until paid. There is no penalty or premium for prepayment. Additional consideration of $10,000 was paid to Terry Rothwell.
CRE Agreement
Terry Rothwell and George Rothwell are the members of CRE Holdings, LLC (“CRE”), which owns two office buildings, a vacant commercial lot and a condominium. The office buildings are currently leased by Celerit. The parties expect that, shortly after the Effective Date, Sollensys, CRE, Terry Rothwell and George Rothwell shall enter into an agreement (the “CRE Agreement”) related to the purchase by Sollensys of the two office buildings, a vacant commercial lot and a condominium, as well as other assets owned by CRE, Terry Rothwell and George Rothwell (the “CRE Transactions”). The purchase price for the CRE properties is $3,295,000. The closing of the CRE Transactions shall occur on a mutually agreed upon date and time in accordance with the terms and conditions of the CRE Agreement. Because the closing did not occur on or before June 30, 2022, Sollensys must pay a monthly rent of $50,000 in addition to the then-existing lease obligations. The CRE Agreement and the CRE Transactions operate independently of the AR Merger Agreement and the other transactions contemplated therein.
Director Appointment
On the Closing Date, (i) the Sollensys Board was increased by one director, and Terry Rothwell was named to fill the newly created vacancy; (ii) the Celerit Board was increased by two directors, and Anthony Nolte and Donald Beavers were named to fill the newly created vacancies; and (iii) the Celerit Solutions Board was increased by two directors, and Anthony Nolte and Donald Beavers were named to fill the newly created vacancies.
Executive Employment Agreements
On the Closing Date, Sollensys entered into (i) an employment agreement with Terry Rothwell pursuant to which Terry Rothwell was appointed as the Chief Executive Officer of each of Celerit and Celerit Solutions (the “Rothwell Employment Agreement”) and (ii) an employment agreement with Ron Harmon pursuant to which he was appointed as the Chief Operating Officer of each of Celerit and Celerit Solutions (the “Harmon Employment Agreement” and, together with the Rothwell Employment Agreement, the “Employment Agreements”).
18
Pursuant to the Rothwell Employment Agreement, Terry Rothwell will be paid a base salary of $135,000 and an annual bonus of $210,000. Ms. Rothwell may be eligible for other bonuses. She will be an “at will” employee and the term of the Rothwell Employment Agreement is one year and subject to annual renewals.
Pursuant to the Harmon Employment Agreement, Ron Harmon will be paid a base salary of $240,000 and an annual bonus of $70,000. Mr. Harmon may be eligible for other bonuses. He will be an “at will” employee and the term of the Harmon Employment Agreement is one year and subject to annual renewals.
Banking and Credit Union Services Agreement
On April 7, 2022, Sollensys and Celerit entered into the Banking and Credit Union Services Agreement (the “Banking Agreement”), pursuant to which Sollensys assigned to Celerit exclusive rights and responsibility for sales, support and service of all Sollensys products and services offered to banks and financial institutions and assign to Celerit, or any agreements related thereto and execute all future similar agreements as Celerit.
Server Agreement
The Rothwell Sollensys Blockchain Archive Server Distribution Data Center Agreement (2 Units) was entered into April 7, 2022, by and among Terry Rothwell, George Benjamin Rothwell and Sollensys (the “Server Agreement”). The Rothwells collectively own two units of Sollensys Blockchain Archive Server Distributive Data Center, each loaded with Sollensys Application Software (R4 Enterprise) (the “Equipment”). Pursuant to the terms and conditions of the Server Agreement, Sollensys may use the Equipment in exchange for level monthly payments of $100,000 ($50,000 per server) from the servers’ revenue to Terry Rothwell and George Benjamin Rothwell, a married couple, as a joint and survivor annuity, payable until both Rothwells are deceased.
Termination of Celerit Third Party Vendor Agreement
On December 1, 2017, prior to the closing of the Celerit Merger, Celerit entered into a Third Party Vendor Agreement, as subsequently amended (the “Agreement”), with a third party. Pursuant to the terms of the Agreement, on May 27, 2022, the third party paid to the Company a lump sum of $3,019,852 to terminate the Agreement. The Company will continue to provide services to the third party, however, as a subcontractor to another third party. The subcontractor arrangement may be terminated at any time upon 30 days’ prior written notice.
Results of Operations for the Three and Six Months Ended June 30, 2022 Compared to the Three and Six Months Ended June 30, 2021
The comparison of operating results includes the operations of Abstract Media, Celerit in the three and six months ended June 30, 2022 compared to zero operating results for Abstract Media and Celerit in same three and six month periods in 2021.
Revenue
For the three months ended June 30, 2022, we recorded $6,292,177 in revenue from Celerit by providing bank resource management, technology hosting, and network services, at Sollensys from the execution of our blockchain archive server agreements and due to addition of Abstract Media revenue, compared to $38,214 in revenue for the three months ended June 30, 2021. We are in the process of developing our strategic business plan going forward and, therefore, revenue may vary from period to period.
For the six months ended June 30, 2022, we recorded $6,736,273 in revenue compared to $109,643 for the same period ended June 30, 2021. We are in the process of developing our strategic business plan going forward and, therefore, revenue may vary from period to period.
19
Cost of sales
Cost of sales was $2,233,418 for the three months ended June 30, 2022, compared to cost of sales of $30,400 for the three months ended June 30, 2021. The significant increase in cost of sales is attributable to higher sales, the buildout of our infrastructure in the prior period in anticipation of higher sales levels in 2022, and the addition of Celerit’s and Abstract Media’s revenue and cost of sales.
Cost of sales was $2,630,074 for the six months ended June 30, 2022, compared to cost of sales of $62,744 for the six months ended June 30, 2021. The significant increase in cost of sales is attributable to higher sales, the buildout of our infrastructure in the prior period in anticipation of higher sales levels in 2022, and the addition of Celerit’s and Abstract Media’s revenue and cost of sales.
Operating expenses
Operating expenses for the three months ended June 30, 2022 were $2,786,398 compared to $882,989 for the three months ended June 30, 2021. The significant increase in operating expenses in the three months ended June 30, 2022, compared to the same period in 2021 is due to the buildout of the infrastructure at the Company in 2021 to support higher levels of activity and revenue generation in 2022, and due to the addition of Celerit’s and Abstract Media’s operating expenses.
Operating expenses for the six months ended June 30, 2022 were $4,146,943 compared to $1,446,546 for the six months ended June 30, 2021. The significant increase in operating expenses in the six months ended June 30, 2022, compared to the same period in 2021 is due to the buildout of the infrastructure at the Company in 2021 to support higher levels of activity and revenue generation in 2022, and due to the addition of Celerit’s and Abstract Media’s operating expenses.
Key components of the Company’s operating expenses for six months ended June 30, 2022 include approximately $1,066,000 in legal and professional fees, approximately $1,907,000 in payroll and benefits, approximately $144,000 in rent expense, approximately $192,000 in stock based compensation for services, approximately $338,000 in amortization of intangible assets and depreciation, and approximately $49,000 in marketing expense.
Liquidity and Capital Resources
We had $2,441,556 in cash and cash equivalents on hand as of June 30, 2022.
Net cash provided by operating activities was $492,163 for the six months ended June 30, 2022, compared to $(644,996) in cash used for the six months ended June 30, 2021. The material improvement in cash provided by operating activities during the six months ended June 30, 2022 was primarily due to the improvement in profitability during the six months ended June 30, 2022
Net cash provided by investing activities during the six months ended June 30, 2022 was $190,898 compared to $-0- for the six months ended June 30, 2021. The investing activity in 2022 primarily related to the acquisition of Celerit, compared to the purchase of the Company’s corporate headquarters in the 2021 period, which was financed with debt.
Net cash provided by financing activities was $1,165,961 for the six months ended June 30, 2022, compared to $862,557 for the six months ended June 30, 2021. The increase during the 2022 period was primarily due to related party loan proceeds, net of repayments, and proceeds from the sale of common stock of approximately $510,000 in the 2022 period, compared to approximately $863,000 from the sale of common stock in 2021.
Since we have been incurring losses from operations, we have relied on ongoing sales of unregistered securities and the personal guarantees of Mr. Beavers, our Chief Executive Officer, a member of our Board of Directors and a significant stockholder, to obtain financing to fund our operations.
There can be no assurance that we will be able to continue to raise capital from the sale of our securities, or use our securities to make acquisitions. Additionally, there can be any assurances that Mr. Beavers will continue to provide his personal guaranty on financing transactions to help raise capital.
20
Plans to Address Liquidity Shortages
In order to address liquidity shortages the Company has undertaken two initiatives:
Potential Sale or Lease of the Company’s Building
The Company’s management believes that its corporate headquarters building in Palm Bay, Florida has significantly appreciated in value and has excess capacity that will not be utilized in the immediate future. In order to capitalize on the perceived building appreciation, the Company is considering several courses of action but has not yet formalized a plan. These alternatives include rental of the building, outright sale of the building, or a sale-leaseback arrangement. There can be no assurance as to the timing of the formulation of a plan, or that any of these alternatives will materialize, and if they do materialize, will be on favorable terms to the Company that will result in an improvement in the Company’s liquidity.
Potential Divestiture of the Celerit Assets
Based upon Celerit’s post-acquisition performance and due to divergent views with the executive management team, the Company is considering its options with respect to the Celerit assets. Management has initiated discussions with the Celerit sellers about “unwinding” the Celerit transaction, however, multiple issues are being considered on both sides and no meaningful plan or agreement on potential deal points has been reached. There can be no assurances on timing, or that any transaction will be consummated with the Celerit sellers or other potential third parties; and if a transaction is consummated that it will be favorable terms or that it will positively impact the Company’s liquidity.
Financial Impact of COVID-19
The COVID-19 pandemic has affected how we are operating our business, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain. The COVID-19 pandemic is having widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices. Federal, state and foreign governments have implemented measures to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, and closure of non-essential businesses. To protect the health and well-being of our employees, partners, and third-party service providers, we have implemented work-from-home requirements, made substantial modifications to employee travel policies, and cancelled or shifted marketing and other corporate events to virtual-only formats for the foreseeable future. While we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, such precautionary measures could negatively affect our customer success efforts, sales and marketing efforts, delay and lengthen our sales cycles, or create operational or other challenges, any of which could harm our business and results of operations. In addition, the COVID-19 pandemic has disrupted the operations of our current enterprise customers, as well as many potential enterprise customers, and may continue to disrupt their operations, for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, uncertainty in the financial markets, or other harm to their businesses and financial results, resulting in delayed purchasing decisions, extended payment terms, and postponed or cancelled projects, all of which could negatively impact our business and results of operations, including our revenue and cash flows.
Beginning in March 2020, the U.S. and global economies have reacted negatively in response to worldwide concerns due to the economic impacts of the COVID-19 pandemic. These factors also may adversely impact enterprise and government spending on technology as well as such customers’ ability to pay for our products and services on an ongoing basis. For example, some businesses in industries particularly impacted by the COVID-19 pandemic, such as travel, hospitality, retail, and oil and gas, have significantly cut or eliminated capital expenditures. A prolonged economic downturn could adversely affect technology spending, demand for our offerings, which could have a negative impact on our financial condition, results of operations and cash flows. Any resulting instability in the financial markets could also adversely affect the value of our common stock, our ability to refinance our indebtedness, and our access to capital.
The ultimate duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately forecasted at this time, such as the severity and transmission rate of the disease, the actions of governments, businesses and individuals in response to the pandemic, the extent and effectiveness of containment actions, the impact on economic activity and the impact of these and other factors on our employees, partners, and third-party service providers. These uncertainties may increase variability in our future results of operations and adversely impact our ability to accurately forecast changes in our business performance and financial condition in future periods. If we are not able to respond to and manage the impact of such events effectively or if global economic conditions do not improve, or deteriorate further, our business, financial condition, results of operations, and cash flows could be adversely affected.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.
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New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. In March 2019, the FASB issued ASU 2019-01, Codification Improvements, which clarifies certain aspects of the new lease standard. The FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases in July 2018. Also in 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides an optional transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. The amendments have the same effective date and transition requirements as the new lease standard On November 15, 2019, the FASB issued ASU 2019-10, which amends the effective dates for three major accounting standards. The ASU defers the effective dates for the credit losses, derivatives, and lease standards for certain companies. Since the Company is classified as a small reporting company, emerging growth company, and has a calendar-year end the Company was eligible for deferring the adoption of ASC 842 to January 1, 2022.
In the first quarter of fiscal 2022, we adopted ASU 2016-02 using the “Comparatives Under 840 Option” approach to transition. Under this method, financial information related to periods prior to adoption will be as originally reported under the previous standard – ASC 840, Leases. The effects of adopting the new standard (ASC 842, Leases) in fiscal 2022 were recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal first quarter. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification as operating or capital leases. We also elected to combine lease and non-lease components and to exclude short-term leases from our consolidated balance sheets.
The most significant impact of adoption was the recognition of operating lease assets and operating lease liabilities of $496 thousand and $541 thousand, respectively. The cumulative impact of these changes increased accumulated deficit by $46 thousand. We expect the impact of adoption to be immaterial to our consolidated statements of earnings and consolidated statements of cash flows on an ongoing basis. As part of our adoption, we also modified our control procedures and processes, none of which materially affected our internal control over financial reporting. See Note 9, Leases, for additional information regarding our accounting policy for leases and additional disclosures.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are a smaller reporting company and are not required to provide this information.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and principal financial officer, as of June 30, 2022, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2022 to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that our disclosure controls are effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and principal financial officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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. 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 our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to include this disclosure in this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended June 30, 2022, the Company issued an aggregate of 4,000,000 shares to investors pursuant to the terms of the Celerit Agreement and issued 73,336 shares to service providers valued at $252,776.
The above sales were made pursuant to an exemption from registration as set forth in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
| (a) | None. |
| (b) | There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the filing with the SEC of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022. |
24
Item 6. Exhibits
| * | Filed herewith. |
| ** | Furnished herewith. |
25
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.
| SOLLENSYS CORP | ||
| Dated: August 16, 2022 | By: | /s/ Donald Beavers |
| Chief Executive Officer | ||
| (principal executive officer, principal financial officer and principal accounting officer) | ||
26
Exhibit 31.1
CERTIFICATIONS
I, Donald Beavers, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Sollensys Corp; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: August 16, 2022 | By: | /s/ Donald Beavers |
| Donald Beavers | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Donald Beavers, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Sollensys Corp; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures; and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: August 16, 2022 | By: | /s/ Donald Beavers |
| Donald Beavers | ||
| Chief Executive Officer
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sollensys Corp (the “Company”) on Form 10-Q for the period ended June 30, 2022 (the “Report”), I, Donald Beavers, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: August 16, 2022 | By: | /s/ Donald Beavers |
| Donald Beavers | ||
| Chief Executive Officer | ||
| (Principal Executive Officer and Principal Financial Officer) |
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