The following discussion and analysis of the financial condition and results of
operations of Sollensys Corp (the "Company" or "Sollensys") should be read in
conjunction with our consolidated financial statements and the accompanying
notes thereto included elsewhere in this Annual Report on Form 10-K. References
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations to "us," "we," "our," and similar terms refer to the Company. This
Annual Report on Form 10-K includes forward-looking statements, as that term is
defined in the federal securities laws, based upon current expectations that
involve risks and uncertainties, such as plans, objectives, expectations and
intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of
factors. Words such as "anticipate," "estimate," "plan," "continuing,"
"ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and
similar expressions are used to identify forward-looking statements. We caution
you that these statements are not guarantees of future performance or events and
are subject to a number of uncertainties, risks and other influences, many of
which are beyond our control, which may influence the accuracy of the statements
and the projections upon which the statements are based. Reference is made to
"Risk Factors," which are included elsewhere in this Annual Report on Form 10-K.
Business Overview
Sollensys Corp was formerly a development stage company, incorporated in Nevada
on September 29, 2010, under the name Health Directory, Inc. Sollensys' initial
plans included organization and incorporation, target market identification,
marketing plans, and capital formation. A substantial portion of Sollensys'
efforts involved developing a business plan and establishing contacts and
visibility in the marketplace. Sollensys did not, however, generate any revenues
from these efforts.
Effective July 30, 2012, the holder of 3,000,000 shares, or approximately 79.8%
of Sollensys' then outstanding voting securities, executed a written consent in
accordance with Section 78.320 of the Nevada Revised Statutes approving an
amendment to the Articles of Incorporation to change Sollensys' name to
Sollensys, increase the number of authorized shares of Common Stock to
1,500,000,000, increase the number of authorized preferred shares of Sollensys,
par value $0.001 (the "Preferred Stock") to 25,000,000, and to split each
outstanding share of Common Stock into 131.69 shares of Common Stock.
Subsequently, beginning September 30, 2012, Sollensys went dormant.
On December 27, 2019, the Eighth Judicial District Court of Clark County, Nevada
(the "Court"), pursuant to Case number A-19-805633-B appointed Custodian
Ventures, LLC ("Custodian Ventures") as the custodian of Sollensys David Lazar,
who controls Custodian Ventures was subsequently named the only interim officer
and director of Sollensys.
On June 16, 2020, Custodian Ventures filed a motion with the Court asking the
Court to enter an order concluding and terminating the custodianship of
Sollensys. On July 20, 2020, the Court entered an order terminating
custodianship and barring non-asserted claims against Sollensys.
Effective August 5, 2020, David Lazar, the interim Chief Executive Officer,
President, Secretary, Treasurer, and sole director of Sollensys and the
beneficial owner, through his ownership of Custodian Ventures of 19,000,000
shares of Series A Preferred Stock, representing 100% of Sollensys' issued and
outstanding shares of preferred stock, entered into a Stock Purchase Agreement
by and among Eagle Lake, Sollensys, and Custodian Ventures. The Stock Purchase
Agreement is referred to herein as the "SPA." Pursuant to the terms of the SPA,
Eagle Lake agreed to purchase, and Custodian Ventures agreed to sell, 19,000,000
shares of Sollensys' Series A Preferred Stock in exchange for payment by Eagle
Lake to Custodian Ventures of $230,000 (collectively with the other transactions
in the SPA, the "Stock Purchase"). The Stock Purchase closed on August 5, 2020.
The shares of Series A Preferred Stock, par value $0.001 per share, of Sollensys
are convertible into shares of Common Stock of Sollensys at a rate of 50 shares
of Common Stock per share of Series A Preferred Stock, and has voting power on
an as-converted basis (voting with the Common Stock as one class) and thus
represents 65.4% of the voting power of all shares of stock of Sollensys.
In connection with the closing of the Stock Purchase, on August 5, 2020, Mr.
Lazar, the then-sole member of the Board of Directors (the "Board") of
Sollensys, pursuant to the power granted to the Board in Sollensys' bylaws,
increased the size of Sollensys' Board to two members. Simultaneously, Mr.
Lazar, as the sole Board member, appointed Donald Beavers as a director to fill
the newly created Board vacancy. At the same time, Mr. Lazar appointed Donald
Beavers as Chief Executive Officer and Secretary of Sollensys.
23
Also on August 5, 2020, following the above officer and director appointments
and effective on the closing of the Stock Purchase, Mr. Lazar resigned from any
and all officer and director positions with Sollensys. Mr. Lazar's resignation
is not the result of a disagreement with Sollensys on any matter relating to
Sollensys' operations, policies, or practices.
On November 30, 2020, pursuant to the Closing of the Share Exchange Agreement,
Sollensys acquired Eagle Lake, and Eagle Lake thereafter became a wholly owned
subsidiary of Sollensys, and the business of Eagle Lake became the business of
the Company going forward. At the time of the Closing, Eagle Lake had 10,011,667
shares of its common stock issued and outstanding, which is 11,667 shares in
excess of the number of shares of common stock authorized pursuant to Eagle
Lake's Articles of Incorporation. Such over-issued shares are void under Florida
law and are not entitled to any rights of a stockholder of Eagle Lake. As such,
the 10,000,000 shares of Eagle Lake common stock that the Company acquired from
the Eagle Lake Shareholders, represented 100% of the issued and outstanding
capital stock of Eagle Lake of the presence of over-issued shares.
Eagle Lake Laboratories, Inc. was incorporated in the State of Florida on May 8,
2020. Eagle Lake offers advanced technology products for cybersecurity that
ensure a clients' data integrity through collection, storage, and transmission.
The Acquisition of Abstract Media as described throughout this Report, closed on
December 6, 2021. The Results of Operations include the activity of Abstract
Media for the period December 7, 2021 through December 31, 2021, with no
comparable results in the prior year period.
Results of Operations for the Twelve Months Ended December 31, 2021 Compared to
the Nine Months Ended December 31, 2020
Revenue
For the year ended December 31, 2021 we recorded $182,321 in subscription
revenue from the execution of our blockchain archive server agreements ,
compared to $180,000 from the sale of servers for the year ended December 31,
2020. As an emerging growth company we are in the process of developing our
strategic business plan going forward, therefore, revenues may vary from period
to period.
Cost of sales
Cost of sales was $384,908 for year ended December 31, 2021 compared to cost of
sales of $30,000 for the period ended December 31, 2020. The significant
increase in cost of sales is attributable to the buildout of our infrastructure
in the December 31, 2021 period in anticipation for higher sales levels in 2022.
Operating expenses
Operating expense for the period ended December 31, 2021 were $4,253,875
compared to $3,063,903 for the period ended December 31, 2020. The significant
increase in operating expenses in 2021 compared to 2020 is due to the buildout
of the infrastructure at the Company in 2021 to support higher levels of
activity and revenue generation.
During the period ended September 30, 2020 expenses of $20,843 were paid on
behalf of the Company by David Lazar In connection with the August 5, 2020
change of control, the aggregate amount of $46,943 due to Mr. Lazar was forgiven
and recognized as a capital contribution to the Company.
Key components of the Company's operating expenses for the year ended December
31, 2021 include approximately $2,459,000 in payroll, consultants, staffing of
temporary help and benefits (which includes approximately $242,000 in non-cash
stock based compensation); approximately $962,000 in legal and professional
services, and $127,000 in rent expense.
Liquidity and Capital Resources
We had $592,534 in cash on hand as of December 31, 2021.
Net cash used in operating activities was $3,717,036 for the year ended December
31, 2021 compared to $910,926 for the year ended December 31, 2020. The material
increase in cash used in operating activities was primarily due to an increase
of approximately $1,700,000 in operating losses in 2021(net of non-cash stock
based compensation) compared to 2020 operating losses, partially offset by an
increase in customers deposit in the 2021 period of approximately $553,000 over
2020 levels.
24
Net cash used for investing activities for the year ended December 31, 2021 was
$422,453 compared to $-0- for the year ended December 31, 2020. The investing
activity in 2021 was comprised of the acquisition of Abstract Media for $8,920
and the purchase of property and equipment of $413,533.
Net cash provided by financing activities was $4,602,399 for the year ended
December 31, 2021 compared to $1,040,550 for the period ended December 31, 2020.
The material increase during 2021 is due to an increase in proceeds from the
sale of common stock of approximately $4,600,000.
During the year ended December 31, 2021, we issued 73,244 shares of our common
stock valued at $292,976 to purchase Abstract, LLC.
Since we have been incurring losses from operations we have relied on ongoing
sales of unregistered securities and the personnel guarantees of our CEO to
obtain financing to fund our operations. During the year ended December 31, 2021
we issued 73,244 shares of our common stock to help fund our acquisition of
Abstract Media. Additionally, we were able to purchase our corporate
headquarters with a cash outlay of $186,087 and through the issuance of a
$2,500,000 mortgage due to the personal guarantee of our CEO.
There can be no assurance that we will be able to continue to raise capital from
the sale of our securities, use our securities to make acquisitions, nor can
there be any assurances that our CEO will continue to provide his personal
guaranty on financing transactions to help raise capital.
Financial Impact of COVID-19
The COVID-19 pandemic has affected how we are operating our business, and the
duration and extent to which this will impact our future results of operations
and overall financial performance remains uncertain. The COVID-19 pandemic is
having widespread, rapidly evolving, and unpredictable impacts on global
society, economies, financial markets, and business practices. Federal, state
and foreign governments have implemented measures to contain the virus,
including social distancing, travel restrictions, border closures, limitations
on public gatherings, work from home, and closure of non-essential businesses.
To protect the health and well-being of our employees, partners, and third-party
service providers, we have implemented work-from-home requirements, made
substantial modifications to employee travel policies, and cancelled or shifted
marketing and other corporate events to virtual-only formats for the foreseeable
future. While we continue to monitor the situation and may adjust our current
policies as more information and public health guidance become available, such
precautionary measures could negatively affect our customer success efforts,
sales and marketing efforts, delay and lengthen our sales cycles, or create
operational or other challenges, any of which could harm our business and
results of operations. In addition, the COVID-19 pandemic has disrupted the
operations of our current enterprise customers, as well as many potential
enterprise customers, and may continue to disrupt their operations, for an
indefinite period of time, including as a result of travel restrictions and/or
business shutdowns, uncertainty in the financial markets, or other harm to their
businesses and financial results, resulting in delayed purchasing decisions,
extended payment terms, and postponed or cancelled projects, all of which could
negatively impact our business and results of operations, including our revenue
and cash flows.
Beginning in March 2020, the U.S. and global economies have reacted negatively
in response to worldwide concerns due to the economic impacts of
the COVID-19 pandemic. These factors also may adversely impact enterprise and
government spending on technology as well as such customers' ability to pay for
our products and services on an ongoing basis. For example, some businesses in
industries particularly impacted by the COVID-19 pandemic, such as travel,
hospitality, retail, and oil and gas, have significantly cut or eliminated
capital expenditures. A prolonged economic downturn could adversely affect
technology spending, demand for our offerings, which could have a negative
impact on our financial condition, results of operations and cash flows. Any
resulting instability in the financial markets could also adversely affect the
value of our common stock, our ability to refinance our indebtedness, and our
access to capital.
The ultimate duration and extent of the impact from the COVID-19 pandemic
depends on future developments that cannot be accurately forecasted at this
time, such as the severity and transmission rate of the disease, the actions of
governments, businesses and individuals in response to the pandemic, the extent
and effectiveness of containment actions, the impact on economic activity and
the impact of these and other factors on our employees, partners, and
third-party service providers. These uncertainties may increase variability in
our future results of operations and adversely impact our ability to accurately
forecast changes in our business performance and financial condition in future
periods. If we are not able to respond to and manage the impact of such events
effectively or if global economic conditions do not improve, or deteriorate
further, our business, financial condition, results of operations, and cash
flows could be adversely affected.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
25
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
We believe that the following critical policies affect our more significant
judgments and estimates used in preparation of our consolidated financial
statements.
Common Control Accounting Treatment
Sollensys Corp and Eagle Lake were under the common control of the CEO before
and after the date of transfer. As a result, the Company adopted the guidance in
the Financial Accounting Standards Board's ("FASB") Accounting Standards
Codification ("ASC") 805-50-05-5 for the transfer of net assets between entities
under common control to apply a method similar to the
pooling-of-interests-method. Under the method, the financial statements of the
Company shall report results of operations for the period in which the transfer
occurs as though the transfer of the net assets had occurred at the beginning of
the period. Results of operations for the period will thus comprise both those
of the previously separate entities combined from the beginning of the period to
the date the transfer is completed and those of the combined operations from
that date to the end of the period. Similarly, the Company shall present the
statements of financial position and other financial information presented as of
the beginning of the period as though the assets and liabilities had been
transferred at that date. Financial statements and financial information
presented for prior years also shall be retrospectively adjusted to furnish
comparative information.
Going Concern
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business
for the twelve months following the date of these consolidated financial
statements.
The Company expects to generate operating cash flow 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 operations become profitable.
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.
Revenue Recognition
Revenues are accounted for in accordance with the FASB's Accounting Standards
Update 2014-09, Revenue from Contracts with Customers (Topic 606).
The Company derives revenue from two sources. The Company's 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 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".
26
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 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.
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.
27
New Accounting Pronouncements
The Company currently follows the guidance in ASC 840 "Leases," which requires
us to evaluate the lease agreements the Company enters into to determine whether
they represent operating or capital leases at the inception of the lease.
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 has 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 an emerging growth company the Company is eligible for deferring
the adoption of ASC 842 to December 15, 2021.
ASC 842 will be effective for the Company beginning on January, 1 2022. We do
not believe that the adoption of this guidance will have a material impact on
our consolidated financial statements.
Except for the adoption of ASC 842, management does not believe that any
recently issued, but not yet effective, accounting standards could have a
material effect on the accompanying financial statements. As new accounting
pronouncements are issued, we will adopt those that are applicable under the
circumstances.
Recent accounting pronouncements issued by the FASB, the American Institute of
Certified Public Accountants and the SEC did not have, or are not believed by
management to have, a material effect on the Company's financial statements.
© Edgar Online, source Glimpses
SOLLENSYS CORP. 