10-Q 1 sollensyscorp_10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1933

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2022

 

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM __________ TO __________.

 

Commission File Number 000-56448

 

Sollensys Corp

(Exact name of registrant as specified in its charter)

 

Nevada   80-0651816
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

1470 Treeland Blvd. SE

Palm Bay, Florida 32909

(Address of principal executive offices) (Zip Code)

 

(866)-438-7657

(Registrant’s telephone number, including area code)

 

2475 Palm Bay Road NE, Suite 120

Palm Bay, Florida 32905

(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. 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.

 

  Large accelerated filer Accelerated filer
  Non-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 ☐   No ☒

 

As of November 21, 2022, the registrant had 101,251,158 shares of common stock issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

        Page
PART I. FINANCIAL INFORMATION   1
     
Item 1.   Unaudited Consolidated Financial Statements   1
    Consolidated Balance Sheets   1
    Consolidated Statements of Operations   2
    Consolidated Statements of Changes in Stockholders’ Equity   3
    Consolidated Statements of Cash Flows   4
    Notes to the Unaudited Consolidated Financial Statements   5
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   25
Item 4.   Controls and Procedures   26
         
PART II. OTHER INFORMATION   27
     
Item 1.   Legal Proceedings   27
Item 1A.   Risk Factors   27
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   27
Item 3.   Defaults Upon Senior Securities   27
Item 4.   Mine Safety Disclosures   27
Item 5.   Other Information   27
Item 6.   Exhibits   28
    Signatures   29

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

SOLLENSYS CORP.

Consolidated Balance Sheets

(unaudited)

 

           
   September 30,   December 31, 
   2022   2021 
ASSETS          
Current assets:          
Cash and cash equivalents  $5,288   $592,534 
Accounts receivable   286,297    1,717 
Other receivables   27,102    - 
Inventory   78,000    78,000 
Prepaid expenses   -    60,749 
Total current assets   396,687    733,000 
Property, plant and equipment, net   2,884,449    2,944,830 
Right of use assets   437,691    - 
Other assets   17,994    17,994 
Goodwill, net   -    200,199 
Intangible assets, net   -    194,638 
Total assets  $3,736,821   $4,090,661 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)          
Current liabilities:          
Accounts payable  $321,334   $66,268 
Accrued expenses   213,537    195,589 
Deferred revenue   637,016    437,731 
Lease liability current portion   83,496    - 
Related party loans   1,396,075    - 
Notes payable-short term   3,226,179    2,505,553 
Total current liabilities   5,877,637    3,205,141 
Notes payable - long term   14,426    19,137 
Lease liabilities - long term   399,509    - 
Deferred revenue - long term   184,286    205,714 
Total liabilities   6,475,856    3,429,992 
           
Commitments and contingencies   -    - 
           
Stockholders’ Equity (Deficit):          
Preferred stock, Series A, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2022 and December 31, 2021   -    - 
Common stock, $0.001 par value, 300,000,000 shares authorized; 101,201,158 and 100,715,736 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively   101,201    100,716 
Additional paid-in capital   21,528,711    8,527,616 
Accumulated deficit   (24,368,948)   (7,967,663)
Total stockholders’ equity (deficit)   (2,739,035)   660,669 
Total liabilities and equity  $3,736,821   $4,090,661 

 

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   Nine months ended   Nine months ended 
   September 30,   September 30,   September 30,   September 30, 
   2022   2021   2022   2021 
Revenue  $102,353   $35,714   $890,576   $145,357 
Cost of sales   190,048    104,608    999,093    167,352 
Gross margin   (87,695)   (68,894)   (108,516)   (21,995)
                     
Operating expenses:                    
General and administrative expense   878,110    1,058,574    3,767,097    2,505,120 
Goodwill and intangible asset impairment charge   344,787    -    344,787    - 
Total operating expenses   1,222,896    1,058,574    4,111,884    2,505,120 
Loss from operations   (1,310,591)   (1,127,468)   (4,220,400)   (2,527,115)
Other income (expense)                    
Other income   5,533    2,167    11,893    3,675 
Interest expense   (56,595)   (20,871)   (148,316)   (30,767)
Total other income (expense)   (51,062)   (18,704)   (136,424)   (27,092)
Loss from continuing operations before income taxes   (1,361,654)   (1,146,172)   (4,356,824)   (2,554,207)
Provision (benefit) for income taxes   -    -    -    - 
Loss from continuing operations    (1,361,654)   (1,146,172)   (4,356,824)   (2,554,207)
Loss from discontinued operations   (14,866,180)   -    (11,998,500)   - 
Net loss  $(16,227,834)  $(1,146,172)  $(16,355,324)  $(2,554,207)
                     
Basic and diluted loss per common share:                    
Loss from continuing operations  $(0.02)  $(0.01)  $(0.05)  $(0.03)
Loss from discontinued operations  $(0.14)   -   $(0.11)  $- 
Basic and diluted loss per share  $(0.16)  $(0.01)  $(0.16)  $(0.03)
                     
Weighted-average number of common shares outstanding:                    
Basic and diluted   103,486,411    99,802,328    102,962,945    99,554,582 

 

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 Stockholders’ Equity (Deficit)

(unaudited)

 

                                    
   Preferred Stock           Additional       Total
Stockholders’
 
   Series A   Common stock   Paid-in   Accumulated   Equity 
   Shares   Value   Shares   Value   Capital   (Deficit)   (Deficit) 
Balance, December 31, 2020   -    -    99,354,547    99,355    3,390,213    (3,442,078)   47,490 
                                    
Private placement of common shares        -     36,572    37    111,464         111,501 
                                    
Net loss                            (524,472)   (524,472)
                                    
Balance, March 31, 2021   -   $-    99,391,119   $99,392   $3,501,677   $(3,966,550)  $(365,481)
                                    
Stock based compensation        -     44,365    44    234,316         234,360 
                                    
Private placement of common shares             199,893    200    750,876         751,076 
                                    
Net loss                            (883,563)   (883,563)
                                    
Balance, June 30, 2021   -   $-    99,635,377   $99,636   $4,486,869   $(4,850,113)  $(263,608)
                                    
Stock based compensation        -     12,000    12    65,988         66,000 
                                    
Private placement of common shares             355,115    355    1,178,047         1,178,402 
                                    
Net loss                            (1,146,172)   (1,146,172)
                                    
Balance, September 30, 2021   -   $-    100,002,492   $100,003   $5,730,904   $(5,996,285)  $(165,377)

 

   Preferred Stock           Additional       Total
Stockholders’
 
   Series A   Common stock   Paid-in   Accumulated   Equity 
   Shares   Value   Shares   Value   Capital   (Deficit)   (Deficit) 
Balance, December 31, 2021   -   $-    100,715,736   $100,716   $8,527,616   $(7,967,663)  $660,669 
                                    
Impact of the adoption of ASC 842                            (45,961)   (45,961)
                                    
Private placement of common shares        -     158,750    159    509,842         510,001 
                                    
Net loss                            (1,359,050)   (1,359,050)
                                    
Stock based compensation                       50,849         50,849 
                                    
Balance, March 31, 2022   -   $-    100,874,486   $100,875   $9,088,307   $(9,372,673)  $(183,492)
                                    
Issuance of common stock to purchase Celerit        -     4,000,000    4,000    12,796,500         12,800,500 
                                    
Net profit                            1,231,563    1,231,563 
                                    
Stock based compensation             73,336    73    140,967         141,040 
                                    
Balance, June 30, 2022   -   $-    104,947,822   $104,948   $22,025,773   $(8,141,112)  $13,989,609 
                                    
Return of common stock for Celerit rescission             (4,000,000)   (4,000)   (808,000)        (812,000)
                                    
Net loss        -                    (16,227,834)   (16,227,834)
                                    
Stock based compensation             253,336    253    310,938         311,191 
                                    
Balance, September 30, 2022   -   $-    101,201,158   $101,201   $21,528,711   $(24,368,948)  $(2,739,035)

 

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)

 

           
   Nine months   Nine months 
   ended   ended 
   September 30,   September 30, 
   2022   2021 
          
Cash flows from operating activities of continuing operations          
Net loss  $(16,355,324)  $(2,554,207)
Net loss from discontinued operations   (11,998,500)   - 
Net loss from continuing operations   (4,356,824)   (2,554,207)
Adjustments to reconcile net loss to net cash          
Stock-based compensation   503,080    300,360 
Impairment of goodwill and intangible assets    344,787    - 
Depreciation and amortization   143,376    7,592 
Changes in operating assets and liabilities:          
Accounts receivable   (71,297)   - 
Other receivables   (27,102)   - 
ROU leases   (647)   - 
Prepaid expenses   60,749    (96,969)
Inventory   -    (24,000)
Accounts payable   255,066    116,093 
Accrued expenses   17,948    261,787 
Deferred revenues   177,856    347,858 
Net cash (used in) operating activities - continuing operations   (2,953,008)   (1,641,486)
Net cash provided by operating activities - discontinued operations   2,480,826    - 
Net cash (used in) operating activities   (472,182)   (1,641,486)
           
Cash flows from investing activities          
Purchase of land, buildings and improvements   -    (167,246)
Proceeds from the disposal of fixed assets   2,700    - 
Purchase of furniture and equipment   (21,169)   (241,445)
Net cash (used in) investing activities-continuing operations   (18,469)   (408,691)
Net cash (used in) investing activities-discontinued operations   (2,347,992)   - 
Net cash (used in) investing activities   (2,366,461)   (408,691)
           
Cash flows from financing activities:          
Proceeds from notes payable   777,760    25,980 
Payments on notes payable   (61,845)   - 
Proceeds from related party loans   1,416,075    - 
Payments on related party notes   (20,000)   - 
Debt issuance costs   (18,510)   - 
Proceeds from the sale of common stock   510,001    2,040,979 
Net cash provided by financing activities-continuing operations   2,603,481    2,066,959 
Net cash (used in) financing activities-discontinued operations   (352,084)   - 
Net cash provided by financing activities   2,251,397    2,066,959 
           
Net increase (decrease) in cash and cash equivalents   (587,246)   16,782 
Cash and cash equivalents at beginning of period   592,534    129,624 
Cash and cash equivalents at end of period  $5,288   $146,406 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $100,979   $30,767 

 

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.

 

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.

 

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.

 

On November 4, 2022 the Company entered into a Membership Interest Purchase Agreement with TechEdge Services, a Texas corporation, to sell 100% of its ownership interest in Abstract Media. See Note 12. “Subsequent Events”

 

Celerit Merger and Rescission

 

On April 7, 2022, the Company completed 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 August 22, 2022 the Company entered into Recission Agreement with the Merger Parties. As a result of the Recission Agreement Celerit and Celerit Solutions became discontinued operations. See Note 6. “Discontinued Operations”

 

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.

 

5

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

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 September 30, 2022, the results of its operations for the three months and nine months ended September 30, 2022 and 2021 and its cash flows for the nine months ended September 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 nine months ended September 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 all of its wholly-owned subsidiaries. The operations of the Company’s former Celerit division has been presented as discontinued operations for all periods presented. See Note 6 - “Discontinued Operations” for further information. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate solely to continuing operations and exclude all discontinued operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

 

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 are available. The Company has incurred significant operating losses since its inception. As of September 30, 2022, the Company had a working capital deficit of $5,480,950 and an accumulated deficit of $24,368,948.

 

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.

 

6

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

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.

 

Goodwill and Intangible Assets

 

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisition is attributable to the value of the potential expanded market opportunity with new customers. Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets consist primarily of customer relationships. The useful life of these customer relationships is estimated to be three years.

 

Goodwill is not amortized, but is subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing compares the fair value of the reporting unit to its carrying amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches. The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the discount rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest rate, the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s size and industry and other Company specific risks. Other significant assumptions used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital requirements. The market approaches use key multiples from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, then an impairment loss is recognized in an amount equal to the excess.

 

On November 4, 2022 the Company entered into a Membership Interest Purchase Agreement with TechEdge Services, a Texas corporation, to sell all of its ownership interest in Abstract Media. See Note 12. “Subsequent Events.” After assessing the impact of the terms of the Membership Interest Purchase Agreement on its financial statements, the Company determined that the carrying value of Abstract Media as of September 30, 2022 exceeded its fair value. As a result, the Company recorded an impairment charge of $344,787 on its Consolidated Statement of Operations for the three months ended September 30, 2022.

 

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.

 

7

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

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.

 

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 September 30, 2022, the current balance of deferred revenue was $637,016 and the long-term balance was $184,286 compared to $437,731 and $-0- respectively at December 31, 2021.

 

8

 

 

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 three and nine months ended September 30, 2022 and 2021 is as follows:

 

                    
   Three months ended   Three months ended   Nine months ended   Nine months ended 
   September 30,   September 30,   September 30,   September 30, 
   2022   2021   2022   2021 
Revenue from Blockchain Archive Servers and SaaS  $40,520   $35,714   $569,384   $145,357 
Revenue from augmented reality for corporate high tech training and integration of cybersecurity   61,833    -    321,192    - 
Total revenue  $102,353   $35,714   $890,576   $145,357 

 

Net Income (Loss) Per Share

 

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 September 30, 2022 and December 31, 2021, there were no 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.

 

9

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

In the first quarter of fiscal 2022, the Company 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 $496,000 and $541,000, respectively. The cumulative impact of these changes increased the accumulated deficit by approximately $46,000. We expect the impact of adoption to be immaterial to our consolidated statements of operations 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.

 

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 September 30, 2022 and December 31, 2021, the balance of accounts receivable were $286,297 and $1,717, respectively. Management determined that an allowance for doubtful accounts was not necessary for either period.

 

NOTE 4 – NOTES PAYABLE AND RELATED PARTY LOANS

 

As of September 30, 2022 and December 31, 2021, the Company had the following notes payable, and related party loans outstanding:

 

          
   September 30,   December 31, 
   2022   2021 
Related party loans (a)  $1,396,075   $- 
Notes payable - short term (b)  $3,226,179   $2,505,553 
Notes payable - long term (c)  $14,426   $19,137 

 

 
(a) Related party loans are comprised of the following:

 

  (i) As of September 30, 2022, David Beavers, a related party had loaned the Company on an unsecured basis, $166,803 at 6% with a maturity date of September 30, 2023, and Donald Beavers, the Company’s CEO had loaned the Company $15,372 on an interest free basis with a maturity of date of August 30, 2022.
  (ii) The Company had one interest free demand loan, and four 6% loans from various related parties in the amount of $15,000, $468,900, $150,000, $350,000, and 230,000, respectively. These notes mature on March 31, 2023, September 30, 2023, April 10, 2023, May 4, 2023 and August 11, 2023, respectively. The $468,900, $150,000, $350,000 and $230,000 notes are unsecured. The $15,000 note is secured by a personal guarantee from the Company’s CEO.

 

10

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

(b) Notes payable - short term are comprised of the following:

 

  (i) The Company has a $2,500,000 mortgage note payable from the acquisition of a building in Palm Bay, Florida. The terms of the mortgage note payable called for monthly interest only payments of approximately $10,000 each through December 2021. Effective January 8, 2022, the mortgage note payable requires monthly mortgage payments of principal and interest of $16,250, at an interest rate of 4.75% per annum, with a maturity date of December 8, 2024 and a balloon principal payment due of approximately $2,270,000. The mortgage is secured by the underlying real estate all equipment and fixtures owned or subsequently acquired, and 500,000 shares of the Company’s common stock pledged by the Company’s CEO, as well his personal guarantee for the full amount of the mortgage. Additionally, the mortgage note payable provides the lender a due on demand feature at the discretion of the lender. As a result, the Company has recorded the outstanding balance of the note payable as a current liability. At September 30, 2022 and December 31, 2021, the balance outstanding on the mortgage note payable is $2,442,681 and $2,500,000, respectively.

 

  (ii)

The Company has a vehicle loan which requires monthly payments of principal and interest in the amount of $710. The loan matures August 2025, bears interest at 13.1%, and is secured by the specific vehicle. As of September 30, 2022 the short term portion of this note amounted to $5,738.

     
  (iii) On September 20, 2022 the Company entered into a twelve percent (12%) $172,760 promissory note including $18,510 of Original Issue discount with 1800 Diagonal Lending LLC (“Diagonal) with a maturity date of September 30, 2023. Accrued interest, and outstanding principal shall be repaid in ten payments each in the amount of $19,349. In the event of a default, as defined in the note payable agreement, the loan is convertible at the discretion of the lender into common stock at 75% of the lowest ten day trading price prior to the conversion date multiplied by the amount outstanding.
     
  (iv) As part of the Celerit recission the Company agreed to a promissory note payable to Celerit for $605,000 accruing interest at 7% and maturing on September 30, 2022.

 

(c) The notes payable – long term balance of $14,426 is the long term portion of the vehicle loan noted above.

 

At September 30, 2022, the aggregate maturities of notes payable for the next five years and thereafter are as follows:

 

     
Year 1  $4,622,254 
Year 2   7,494 
Year 3   6,932 
Year 4   - 
Total  $4,636,680 

 

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) $15,000 paid to the Abstract Media members, plus (iii) $15,000 to be paid solely to John Swain as additional consideration for Mr. Swain’s membership interests (the “Acquisition”).

 

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 73,244 shares of the Company’s common stock.

 

For the acquisition of Abstract Media, the following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired and liabilities assumed:

 

Consideration paid

 

     
Cash and cash equivalents  $30,000 
Common stock, 73,244 shares of the Company restricted common stock valued at $4.00 per share   292,976 
Net liabilities assumed   77,422 
Fair value of total consideration paid  $400,398 

 

Net assets acquired and liabilities assumed

 

     
Cash and cash equivalents  $21,080 
Accounts receivable   39,345 
Other current assets   19,758 
Fixed assets, net   15,467 
Total assets  $95,650 
      
Accounts payable   69,724 
Accrued liabilities   103,348 
Total liabilities   173,072 
      
Net liabilities assumed  $77,422 

 

The Company allocated the fair value of the total consideration paid of $400,398 to goodwill of $200,199 and the same amount of $200,199 to intangible assets with a life of three years. The value of goodwill represented Abstract Media’s ability to generate profitable operations going forward. Management estimated the provisional fair values of the intangible assets and goodwill on December 31, 2021.

 

On November 4, 2022 the Company entered into a Membership Interest Purchase Agreement with TechEdge Services, a Texas corporation, to sell all of its ownership interest in Abstract Media. See Note 12. “Subsequent Events.” After assessing the impact of the terms of the Membership Interest Purchase Agreement on its financial statements, the Company determined that the goodwill and the unamortized value of intangible assets as of September 30, 2022 had been fully impaired. As a result the Company recorded an impairment charge of $344,787 on its Consolidated Statement of Operations for the three months ended September 30, 2022.

 

12

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

NOTE 6 – DISCOUNTINUED OPERATIONS

 

On April 7, 2022, the Company closed on 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”).

 

Aggregate consideration for the Mergers consisted of (i) $2,695,000, subject to certain adjustments set forth in the Merger Agreement, as amended (the “Cash Consideration”), and (ii) 4,000,000 shares of Sollensys common stock (the “Sollensys Shares”). The Cash Consideration was paid to Terry Rothwell via the issuance to Terry Rothwell at the closing of a promissory note of Sollensys (the “Rothwell Note”). Additional consideration of $10,000 was paid to Terry Rothwell. The Rothwell Note has a principal amount of $2,695,000, bears simple interest at a rate of 0.0001% to the maturity date, September 30, 2022, and, if not paid at maturity, the Rothwell Note accrued simple interest at 6% per year until paid. There was no penalty or premium for prepayment. In the event of a default, Sollensys agreed to pay Terry Rothwell’s reasonable legal fees and costs of collection.

 

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  $10,000 
Common stock, 4,000,000 shares of the Company restricted common stock valued at $3.20 per share   12,800,500 
Issuance of promissory note   2,695,000 
Fair value of total consideration paid  $15,505,500 

 

Net assets acquired and liabilities assumed

 

     
Cash and cash equivalents  $222,064 
Accounts receivable   1,156,146 
Prepaid expenses   319,895 
Other current assets   276,913 
Property, plant and equipment   481,817 
Intangible assets (provisional)   2,736,378 
Goodwill   10,945,515 
Total assets  $16,138,728 
      
Accounts payable   23,443 
Accrued expenses   609,785 
Total liabilities assumed   633,228 
      
Net purchase price  $15,505,500 

 

The Company allocated the fair value of the total consideration paid to goodwill of $10,945,515 and $2,736,378 to intangible assets with a life of three years. The value of goodwill represents Celerit and Celerit Solutions’ ability to generate profitable operations going forward. Management estimated the provisional fair values of the intangible assets and goodwill on September 30, 2022. The Company’s accounting for the acquisition of Celerit was based upon estimates of the allocation between goodwill and intangible assets

 

Subsequent to entry into the Merger Agreement, the parties determined that they would unwind the transactions as set forth in the Merger Agreement and in the other agreements entered into in connection therewith.

 

13

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Rescission Agreement

 

On August 22, 2022, the Company entered into the Rescission, Termination and Release Agreement (the “Rescission Agreement”) by and among (i) the Company, (ii) SCARE Holdings LLC, a wholly-owned subsidiary of Sollensys, (“SCARE”); (iii) Celerit; (iv) Celerit Solutions; (v) Ms. Rothwell; (vi) Ron Harmon; and (vii) CRE. Pursuant to the terms of the Rescission Agreement, the parties agreed to unwind the transactions as set forth in the Merger Agreement and in the other agreements entered into in connection therewith, so as to place each of the parties to the Merger Agreement in the position that they were as of immediately prior to the closing of the transactions as set forth in and as contemplated by the Merger Agreement and the related agreements. As a result, on August 26, 2022, the following agreements were terminated, except as set forth in the Rescission Agreement: (i) the Rothwell Employment Agreement, (ii) the Harmon Employment Agreement, (iii) the Blockchain Archive Server Agreement, (iv) the Rothwell Note, (v) the Banking Agreement, and (vi) the Real Estate Purchase Agreement.

 

Pursuant to the terms of the Rescission Agreement, among other things, the parties agreed as follows:

 

(i)Sollensys agreed to transfer to Ms. Rothwell one share of Celerit common stock;

 

(ii)Sollensys agreed to transfer to Ms. Rothwell one share of Celerit Solutions common stock;

 

(iii)Ms. Rothwell agreed to transfer to Sollensys 4,000,000 shares of Sollensys common stock;

 

(iv)Ms. Rothwell agreed to resign from any and all positions with Sollensys, including as a member of Sollensys’ board of directors;

 

(v)Donald Beavers agreed to resign as a director and officer of Celerit and Celerit Solutions;

 

(vi)Anthony Nolte agreed to resign as a director and officer of Celerit and Celerit Solutions; and

 

(vii)Sollensys agreed, in connection with its withdrawal from Celerit of an aggregate of $605,000 following the closing of the Merger Agreement, to issue to Celerit a promissory note in the principal amount of $605,000, accruing interest at the rate of 7% per annum and due on September 30, 2022 (the “Celerit Note”).

 

As of the date of this Report the promissory note for $605,000 had not been paid.

 

In addition, pursuant to the terms of the Rescission Agreement, the parties agreed to terminate:

 

(i)The Executive Employment Agreement, dated as of April 7, 2022, by and between Sollensys and Ms. Rothwell;

 

(ii)The Executive Employment Agreement, dated as of April 7, 2022, by and between Sollensys and Mr. Harmon;

 

(iii)The Rothwell Sollensys Blockchain Archive Server Distributive Data Center Agreement (2 Units);

 

(iv)The Promissory Note issued by Sollensys to Ms. Rothwell on April 7, 2022;

 

(v)The Banking and Credit Union Services Agreement, dated as of April 7, 2022; and

 

(vi)The Real Estate Purchase Agreement, dated as of March 24, 2022.

 

14

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

As a result of the recission the Company recorded the following loss from discontinued operations :

 

     
Assets transferred:    
Cash  $2,560,058 
Accounts receivable   942,862 
Other accounts receivable   629,086 
Prepaids and other assets   107,109 
Property and equipment, net   449,520 
Goodwill   10,945,115 
Intangibles   2,394,238 
Total assets   18,027,988 
Liabilities transferred:     
Accounts payable   (56,715)
Accrued expenses   (166,579)
Loans payable   (223,294)
      
Net assets transferred   17,804,694 
      
Consideration received, 4,000,000 shares returned to treasury   (812,000)
Extinguishment of promissory note   (2,342,916)
Loss from discontinued operation  $(14,649,778)

 

The loss from discontinued operations is follows:

 

                
   Three months ended
June 30,
2022
   Three months ended
September 30,
2022
  

Nine months ended
September 30,
2022

 
Revenue  $5,945,395   $1,299,787   $7,245,182 
                
Operating Expenses   3,077,715    1,516,189    4,593,904 
                
Income Loss from Discontinued Operations   2,867,680    (216,402)   2,651,278 
                

Loss on Rescission(a)

   -    (14,649,778)   (14,649,778)
Discontinued operations  $2,867,680   $(14,866,180)  $(11,998,500)

 

                    
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
Revenue  $1,299,787   $-   $7,245,182   $- 
                     
Operating expenses   1,516,189    -    4,593,904    - 
                     
Income (loss) from discontinued operations    (216,402)   -    2,651,278    - 
                     
Loss on rescission (a)   (14,649,778)   -    (14,649,778)   - 
                     
Discontinued operations, net of tax  $(14,866,180)  $-   $(11,998,500)  $- 

 

 
(a)Other loss from discontinued operations is attributable to the loss incurred due to the rescission of the acquisition agreement

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

 

As of September 30, 2022, the balance of goodwill and intangible assets was $-0- and $-0-, respectively. During the nine months ended September 30, 2022 and 2021, the Company recorded $50,050 and $-0- in amortization expense, respectively.

 

On November 4, 2022 the Company entered into a Membership Interest Purchase Agreement with TechEdge Services, a Texas corporation, to sell all of its ownership interest in Abstract Media. See Note 12. “Subsequent Events.” After assessing the impact of the terms of the Membership Interest Purchase Agreement on its financial statements, the Company determined that the goodwill and the unamortized value of intangible assets as of September 30, 2022 had been fully impaired. As a result the Company recorded an impairment charge of $344,787 on its Consolidated Statement of Operations for the three months ended September 30, 2022.

 

 

15

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

During the nine months ended September 30, 2022 ended September 30, 2022, the Company received a number of related party loans, 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 blockchain service to them. For that service, the member of management paid a deposit of $90,000, which is currently reflected as deferred revenue at September 30, 2022 and December 31, 2021.

 

NOTE 9 – STOCK-BASED COMPENSATION

 

During 2022 and 2021, the Company issued 383,037 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 $848,889 and are amortized and vest ratably over the requisite period that the consultants provided service over. In some cases these shares vest immediately. During the nine months ended September 30, 2022, the Company expensed $503,080. The remaining unamortized stock-based compensation amount of $104,000 will be amortized to expense through April 2023. Of the 383,037 shares issued, 283,037 shares are currently vested and the remaining 10,000 shares vest through December 2022.

 

NOTE 10 – 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 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 3.52 years and the weighted average discount rate is 12%. Future lease payments under our non-cancellable leases as of September 30, 2022 were as follows:

 

     
Year 1  $190,515 
Year 2   161,153 
Year 3   160,599 
Year 4   68,216 
Total   580,483 
Imputed interest   (97,478)
Lease liability  $483,005 

 

16

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

NOTE 11 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

On September 30, 2022, and December 31, 2021, there were 25,000,000 shares of preferred stock authorized, with -0- shares issued and outstanding at both periods, respectively.

 

Common Stock

 

The Company has authorized 300,000,000 shares of common stock, $0.001 par value per share. As of September 30, 2022 and December 31, 2021, respectively, there were 101,201,158 and 100,715,736 shares of common stock issued and outstanding.

 

During the nine months ended September 30, 2022, the Company:

 

Raised $510,001 from the sale of 158,750 restricted common shares to investors

 

  Issued 4,000,000 shares pursuant to the acquisition of Celerit and Celerit Solutions. These shares were valued at $3.20 per share. These shares were returned and retired due to the recission of the Celerit transaction on August 22, 2022. The shares were returned at a fair value of $0.20 per share

 

  Issued an aggregate of 326,672 shares of common stock, valued at $538,842 pursuant to the 2021 Equity Incentive Plan to numerous consultants and service providers.

 

During the year ended December 31, 2021, the Company:

 

  Raised $4,603,979 from the sale of 1,231,580 common shares to investors

 

  Issued 73,244 shares valued at $292,976 in connection with the acquisition of Abstract Media

 

  Issued an aggregate of 56,365 shares of common stock, valued at $310,048 pursuant to the Sollensys Corp 2021 Equity Incentive Plan to numerous consultants.

 

NOTE 12 – SUBSEQUENT EVENTS

 

10% Convertible Promissory Note

 

On October 13, 2022, the Company issued a promissory note to AJB Capital Investments, LLC (“AJB”) an unrelated thirty party lender, in the principal amount of $600,000 (“AJB Note”). Pursuant to the terms of the AJB Note, the Company agreed to pay to AJB the principal amount of the AJB Note, together with guaranteed interest on the principal balance in the amount of 10% per calendar year. The AJB Note matures on April 13, 2023 (the “Maturity Date”); provided, however, that the Maturity Date may be extended at the Company’s sole discretion up to six months following the original Maturity Date. If the Maturity Date is extended, the interest rate will be 15% per annum for any period following the original Maturity Date, payable monthly. The AJB Note has an original issue discount of $60,000. Accordingly, the purchase price of the AJB Note was $540,000. Any amount of principal or interest on the AJB Note that is not paid when due will bear interest at the rate of the lesser of (i) 18%, and (ii) the maximum amount permitted under law from the due date thereof until the same is paid.

 

17

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

The AJB Note is convertible, subject to a 4.99% equity blocker, in the event of a default, as provided in the AJB Note, into common stock at a conversion price (the “Conversion Price”) equal to the Variable Weighted Average Price (“VWAP”) (i) during the previous 10 trading day period ending on the date of issuance of the AJB Note, or (ii) during the previous 10 trading day period ending on the conversion date, whichever is lower. If the common stock is not deliverable electronically by the Depository Trust Company (“DWAC”), an additional 10% discount will apply for all future conversions until DWAC delivery becomes available. If the common stock is “chilled” for deposit into the DTC system and only eligible for clearing deposit, an additional 15% discount will apply for all future conversions until such chill is lifted. Additionally, if the Company ceases to be a reporting company pursuant to the Exchange Act, or if the AJB Note cannot be converted into free trading shares after 181 days from the issue date (other than as a result of AJB’s status as an affiliate of the Company), an additional 15% discount will be attributed to the conversion price.

 

While the AJB Note is outstanding, each time any third party has the right to convert monies owed to that third party into common stock (or receive shares pursuant to a settlement or otherwise), at a discount to market greater than the Conversion Price in effect at that time (prior to all other applicable adjustments in the AJB Note), then AJB, in its sole discretion, may utilize such greater discount percentage (prior to all applicable adjustments in this AJB Note) until the AJB Note is no longer outstanding. While the AJB Note is outstanding, each time any third party has a look back period greater than the look back period in effect under the AJB Note at that time, then AJB, in its sole discretion, may utilize such greater number of look back days until the AJB Note is no longer outstanding.

 

Upon the occurrence of certain events of default specified in the AJB Note, including, but not limited to, a failure to honor a conversion request, failure to maintain the Company’s quotation, or the Company’s failure to comply with its obligations under Exchange Act, all amounts owed to AJB under the AJB Note, including default interest if any, shall then become due and payable. Further, if the Company fail to maintain its quotation, fails to comply with its obligations under the Exchange Act, or loses the “bid” price for its common stock for a period of five days after written notice thereof to the Company, after the nine-month anniversary of the AJB Note, then the principal amount of the AJB Note will increase by $15,000 and AJB will be entitled to use the lowest trading price during the delinquency period as a base price for the conversion and the Conversion Price will be redefined to mean 40% multiplied by the Conversion Price, subject to adjustment as provided in the AJB Note.

 

Common Stock Purchase Warrant

 

Pursuant to the terms of the Warrant, AJB may purchase up to 1,000,000 shares of common stock at an exercise price per share of $0.15, subject to adjustment as set forth in the Warrant, for a period ending on October 13, 2027. Exercises are subject to a 4.99% equity blocker.

 

The Company also agreed to include the shares exercisable upon exercise of the Warrant in a registration statement filed by the Company with respect to a public offering of the Company’s securities. If no such registration statement is filed or if the Company fails to include such shares in the registration statement, then no later than the date that is 90 days after October 13, 2022, the Company will file a registration statement including all shares issuable upon exercise of the Warrant and will cause the registration statement to be declared effective within 180 days after October 13, 2022.

 

Security Agreement

 

In connection with entry into the SPA and issuance of the AJB Note, on October 13, 2022, the Company entered into a Security Agreement, dated as of October 13, 2022, by and between the Company and AJB (the “Security Agreement”). Pursuant to the terms of the Security Agreement, the Company agreed to grant to AJB an unconditional and continuing first priority security interest in all of the assets and property of the Company to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the AJB Note, the SPA and the other documents executed in connection with the SPA.

 

The Security Agreement contains customary representations, warranties, covenants and indemnification obligations of the Company.

 

18

 

 

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Membership Purchase Agreement for the Sale of Abstract Media LLC

 

On November 4, 2022 the company sold 100% of its membership interest in Abstract Media, LLC to Tech Edge Services for $1,000. Additional terms are as follows:

 

(a) The Parties acknowledge and agree that Abstract Media is currently the lessee pursuant to a lease for the premises located at 33136 Magnolia Circle, Suite F, Magnolia, Texas 77354 (the “Lease”). Following the Closing, the Seller shall continue to pay the rent payable pursuant to the Lease for the months of November 2022 and December 2022. Buyer shall thereafter be responsible for rent payments in the Lease commencing on January 1, 2023.

 

(b) The Company shall pay, and shall be responsible for, all outstanding liabilities of Abstract Media related to any and all contracts of Abstract Media as of the Closing Date.

 

(c) Following the Closing and for a period of 24 months thereafter (the “Earn-Out Period”), Buyer shall pay to the Company an amount equal to 5% of the gross proceeds received by the Company with respect to contracts and agreements in place with Abstract Media as of the Closing Date. Such payments shall be made within 7 days of each calendar month during the Earn-Out Period.

 

Sale of Company Headquarters Building

 

On November 3, 2022 the Company entered into a Purchase and Sale Agreement with EML Realty Partners (“EML”), a Florida LLC to sell its corporate headquarters located at 1470 Treeland Boulevard SE, Palm Bay, Florida 32909 for $3,850,000 with an expected closing date of no later than December 30, 2022. The transaction is expressly contingent on EMP completing successful due diligence, to their sole and absolute discretion within 30 days of November 3, 2022. If the closing occurs the Company and EML have agreed to a lease where the Company will leaseback its premises for a five year period at a monthly base rent of $25,667 with an annual 3% escalator clause.

 

19

 

 

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.

 

20

 

 

Recent Developments

 

Rescission Agreement

 

As previously disclosed, pursuant to the Amended and Restated Merger Agreement dated as of April 7, 2022 (the “Merger Agreement”), by and among S-CC Merger Sub, Inc. (“S-CC Merger Sub”), a previously a wholly owned subsidiary of Sollensys Corp (“Sollensys”); SSolutions Merger Sub, Inc., a previously a wholly owned subsidiary of Sollensys (“S-Solutions Merger Sub”); SCARE Holdings, LLC, a wholly owned subsidiary of Sollensys (“SCARE”); (iii) Celerit Corporation, a wholly owned subsidiary of Sollensys (“Celerit”); (iv) Celerit Solutions Corporation, a wholly owned subsidiary of Sollensys (“Celerit Solutions”); (v) Terry Rothwell; and (vi) CRE Holdings, LLC (“CRE”), the parties to the Merger Agreement undertook certain transactions, including the merger of Celerit with and into S-CC Merger Sub, with Celerit surviving, and the merger of Celerit Solutions with and into S-Solutions Merger Sub, with Celerit Solutions surviving, in which transactions Ms. Rothwell received certain consideration as set forth in the Merger Agreement, and in connection with which the parties entered into certain other agreements and certain other transactions. Subsequent to entry into the Merger Agreement, the parties determined that they would unwind the transactions as set forth in the Merger Agreement and in the other agreements entered into in connection therewith.

 

Accordingly, on August 22, 2022, the Company entered into the Rescission, Termination and Release Agreement (the “Rescission Agreement”) by and among (i) the Company, (ii) SCARE; (iii) Celerit; (iv) Celerit Solutions; (v) Ms. Rothwell; (vi) Ron Harmon; and (vii) CRE. Pursuant to the terms of the Rescission Agreement, the parties agreed to unwind the transactions as set forth in the Merger Agreement and in the other agreements entered into in connection therewith, so as to place each of the parties to the Merger Agreement in the position that they were as of immediately prior to the closing of the transactions as set forth in and as contemplated by the Merger Agreement and the related agreements. As a result, on August 26, 2022, the following agreements were terminated, except as set forth in the Rescission Agreement: (i) the Rothwell Employment Agreement, (ii) the Harmon Employment Agreement, (iii) the Blockchain Archive Server Agreement, (iv) the Rothwell Note, (v) the Banking Agreement, and (vi) the Real Estate Purchase Agreement.

 

Pursuant to the terms of the Rescission Agreement, among other things, the parties agreed as follows:

 

(viii)Sollensys agreed to transfer to Ms. Rothwell one share of Celerit common stock;

 

(ix)Sollensys agreed to transfer to Ms. Rothwell one share of Celerit Solutions common stock;

 

(x)Ms. Rothwell agreed to transfer to Sollensys 4,000,000 shares of Sollensys common stock;

 

(xi)Ms. Rothwell agreed to resign from any and all positions with Sollensys, including as a member of Sollensys’ board of directors;

 

(xii)Donald Beavers agreed to resign as a director and officer of Celerit and Celerit Solutions;

 

(xiii)Anthony Nolte agreed to resign as a director and officer of Celerit and Celerit Solutions; and

 

(xiv)Sollensys agreed, in connection with its withdrawal from Celerit of an aggregate of $605,000 following the closing of the Merger Agreement, to issue to Celerit a promissory note in the principal amount of $605,000, accruing interest at the rate of 7% per annum and due on September 30, 2022 (the “Celerit Note”).

 

In addition, pursuant to the terms of the Rescission Agreement, the parties agreed to terminate:

 

(vii)The Executive Employment Agreement, dated as of April 7, 2022, by and between Sollensys and Ms. Rothwell (the “Rothwell Employment Agreement”), except as set forth in the Rescission Agreement;

 

(viii)The Executive Employment Agreement, dated as of April 7, 2022, by and between Sollensys and Mr. Harmon (the “Harmon Employment Agreement”), except as set forth in the Rescission Agreement;

 

21

 

 

(ix)The Rothwell Sollensys Blockchain Archive Server Distributive Data Center Agreement (2 Units), dated as of April 7, 2022, by and among Sollensys, Ms. Rothwell and George Benjamin Rothwell (the “Blockchain Archive Server Agreement”);

 

(x)The Promissory Note issued by Sollensys to Ms. Rothwell on April 7, 2022 (the “Rothwell Note”);

 

(xi)The Banking and Credit Union Services Agreement, dated as of April 7, 2022, by and between Sollensys and Celerit (the “Banking Agreement”);

 

(xii)The Real Estate Purchase Agreement, dated as of March 24, 2022, by and among Sollensys, SCARE, CRE, Ms. Rothwell and Mr. Rothwell (the “Real Estate Purchase Agreement”).

 

Promissory Note

 

On August 22, 2022, Sollensys issued a Promissory Note, in the principal amount of $605,000, to Celerit. The Celerit Note bears simple interest at a rate of 7% per annum to the maturity date, September 30, 2022, or such earlier date as the Celerit Note may be paid pursuant to the terms of the Celerit Note. There is no penalty or premium for prepayment. In the Event of Default (as defined in the Celerit Note), Celerit may, at its option, declare the entire indebtedness under the Celerit Note immediately due and payable.

 

Board Resignations

 

Pursuant to the terms of the Rescission Agreement, effective August 22, 2022, Ms. Rothwell resigned as a member of Sollensys’ board of directors. Effective August 23, 2022, Anthony Nolte resigned as a member of Sollensys’ board of directors. Ms. Rothwell’s and Mr. Nolte’s resignations are not because of a disagreement with Sollensys on any matter relating to Sollensys’ operations, policies or practices.

 

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.

 

On November 4, 2022 the company sold 100% of its membership interest in Abstract Media, LLC to Tech Edge Services for $1,000. Additional terms are as follows:

 

(a) The Parties acknowledge and agree that Abstract Media is currently the lessee pursuant to a lease for the premises located at 33136 Magnolia Circle, Suite F, Magnolia, Texas 77354 (the “Lease”). Following the Closing, the Seller shall continue to pay the rent payable pursuant to the Lease for the months of November 2022 and December 2022. Buyer shall thereafter be responsible for rent payments in the Lease commencing on January 1, 2023.

 

(b) The Company shall pay, and shall be responsible for, all outstanding liabilities of Abstract Media related to any and all contracts of Abstract Media as of the Closing Date.

 

(c) Following the Closing and for a period of 24 months thereafter (the “Earn-Out Period”), Buyer shall pay to the Company an amount equal to 5% of the gross proceeds received by the Company with respect to contracts and agreements in place with Abstract Media as of the Closing Date. Such payments shall be made within 7 days of each calendar month during the Earn-Out Period.

 

Under the terms of the Membership Interest Purchase Agreement, the Company determined that the goodwill and the unamortized value of intangible assets as of September 30, 2022 had been fully impaired. As a result the Company recorded an impairment charge of $344,787 on its Consolidated Statement of Operations for the three months ended September 30, 2022

 

Results of Operations for the Three and Nine Months Ended September 30, 2022 Compared to the Three and Nine Months Ended September 30, 2021

 

The comparison of operating results includes the operations of Abstract Media in the three and nine months ended September 30, 2022 compared to zero operating results for Abstract Media in the same three and nine month periods in 2021. See “—Overview—Recent Developments” regarding the unwinding of all of the Celerit transactions. During the nine months ended September 30, 2022, Celerit generated $7,245,182 in revenue and a pre-tax profit of $2,651,278. Additionally, as a result of the Celerit unwinding we lost $14,649,778 upon rescission resulting in a net loss of $11,998,500 from discontinued operations for the nine months ended September 30, 2022. The results from discontinued operations are excluded from management’s discussion of operation below, and from the Liquidity analysis.

 

22

 

 

Revenue

 

For the three months ended September 30, 2022, we recorded $102,353 in revenue at Sollensys from the execution of our blockchain archive server agreements and due to addition of Abstract Media revenue, compared to $35,714 in revenue for the three months ended September 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 nine months ended September 30, 2022, we recorded $890,576 in revenue compared to $145,357 for the same period ended September 30, 2021. We are in the process of developing our strategic business plan going forward and, therefore, revenue may vary from period to period.

 

Cost of sales

 

Cost of sales was $190,048 for the three months ended September 30, 2022, compared to cost of sales of $104,608 for the three months ended September 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 Abstract Media’s revenue and cost of sales.

 

Cost of sales was $999,093 for the nine months ended September 30, 2022, compared to cost of sales of $167,352 for the nine months ended September 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 Abstract Media’s revenue and cost of sales.

 

Operating expenses

 

Operating expenses for the three months ended September 30, 2022 were $1,222,896 compared to $1,058,574 for the three months ended September 30, 2021. The increase in operating expenses in the three months ended September 30, 2022, compared to the same period in 2021 is indicative of an impairment charge to goodwill and intangible assets of $344,787, offset by the Company’s efforts to reduce operating expenses going forward. There can be no assurance that the Company can continue reducing expenses in the future.

 

Operating expenses for the nine months ended September 30, 2022 were $4,111,884 compared to $2,505,120 for the nine months ended September 30, 2021. The significant increase in operating expenses in the nine months ended September 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, the addition of Abstract Media’s operating expenses, and due to an impairment charge to goodwill and intangible assets of $344,787. However, prospectively the Company is attempting to reduce its level of operating expenses because its anticipated revenue ramp-up has not occurred. There can be no assurance that the company can reduce expenses and that the levels of revenue will increase in the future.

 

Key components of the Company’s operating expenses for the nine months ended September 30, 2022 include approximately $1,118,000 in legal and professional fees, approximately $1,475,000 in payroll and benefits, approximately $135,000 in rent expense, approximately $503,000 in stock-based compensation for services, approximately $143,000 in amortization of intangible assets and depreciation, and approximately $54,000 in marketing expense.

 

Liquidity and Capital Resources

 

We had $5,288 in cash and cash equivalents on hand as of September 30, 2022.

 

As described throughout this Report, the Company entered into a rescission agreement with Celerit on August 21, 2022. The analysis below of the Company’s liquidity excludes any discussion of the impact on cash flows from discontinued operations.

 

Net cash used in operating activities for continuing operations was $2,953,008 for the nine months ended September 30, 2022, compared to $1,641,486 in cash used for continuing operations for the nine months ended September 30, 2021. The material increase in cash used in operating activities during the nine months ended September 30, 2022 was primarily due to the decrease in profitability from continuing operations of approximately $1,458,000 during the nine months ended September 30, 2022.

 

Net cash used in investing activities from continuing operations during the nine months ended September 30, 2022 was $18,469 compared to $408,691 cash used in investing activities from continuing operations for the nine months ended September 30, 2021. The decrease in cash used in investing activities during the nine months ended September 30, 2022 was primarily due to the decrease in capital expenditures during 2022, compared to cash used for building improvements of $167,246 on Company’s corporate headquarters, and cash used of $241,445 for the purchase of furniture and equipment in the 2021 period.

 

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Net cash provided by financing activities from continuing operations was $2,603,481 for the nine months ended September 30, 2022, compared to $2,066,959 for the nine months ended September 30, 2021. The increase in cash provided during the 2022 period was primarily due to an in increase in notes payable and related party loans of approximately $2,149,000, plus proceeds from the sale of common stock of approximately $510,000 in the 2022 period compared to $2,040,979 in the comparable 2021 period.

 

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 no assurances that Mr. Beavers will continue to provide his personal guaranty on financing transactions to help raise capital.

 

Plans to Address Liquidity Shortages

 

In order to address liquidity shortages, the Company has undertaken two initiatives (i) the sale and leaseback of its corporate headquarters at a significant profit, and the divestiture of Abstract Media which has generated negative cash flow during 2022. See Note 12: Subsequent Events

 

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.

 

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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 the preparation of our consolidated financial statements.

 

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 10, Leases, for additional information regarding our accounting policy for leases and additional disclosures.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

We are a smaller reporting company and are not required to provide this information.

 

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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 September 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 (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2022 to ensure that information required to be disclosed by us in reports filed or submitted under 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, does 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 September 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 September 30, 2022, the Company issued 253,336 common shares to consultants and service providers at an average price of $1.13.

 

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 September 30, 2022.

 

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Item 6. Exhibits

 

Exhibit No.   Document
10.1   Rescission, Termination and Release Agreement, dated as of August 22, 2022, by and among the registrant, SCARE Holdings, LLC, Celerit Corporation, Celerit Solutions Corporation, Terry Rothwell and Ron Harmon (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on August 26, 2022).
10.2   Promissory Note issued August 22, 2022, by Sollensys Corp to Celerit Corporation. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on August 26, 2022).
10.3   Securities Purchase Agreement, dated as of October 13, 2022, by and between the registrant and AJB Capital Investments, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant on October 19, 2022).
10.4   Promissory Note issued on October 13, 2022 by the registrant to AJB Capital Investments, LLC (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant on October 19, 2022).
10.5   Common Stock Purchase Warrant dated October 13, 2022 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the registrant on October 19, 2022).
10.6   Security Agreement, dated as of October 13, 2022, by and between the registrant and AJB Capital Investments, LLC (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the registrant on October 19, 2022).
31.1*   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2*   Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1**   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
101.INS*   Inline XBRL Instance Document
101.SCH*   Inline XBRL Taxonomy Extension Schema Document
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

 
* Filed herewith.
** Furnished herewith.

 

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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: November 21, 2022 By: /s/ Donald Beavers
    Chief Executive Officer
    (principal executive officer, principal financial officer and principal accounting officer)

 

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