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, Sollensys Corp ("Sollensys" or the "Company") made its second
product offering-the Regional Service Center-available on a limited test market
basis. The Regional Service Center was added to the Company's 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.
The Company acquired Abstract Media, LLC (Abstract Media) in December 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.
14
Recent Developments
Celerit Merger
On October 26, 2021, the Company entered into a Merger Agreement ("Merger
Agreement") by and among (i) the Company; (ii) S-CC Merger Sub, Inc., a wholly
owned subsidiary of the Company ("S-CC Merger Sub"); (iii) S-Solutions Merger
Sub, Inc., a wholly owned subsidiary of the Company ("S-Solutions Merger Sub");
(iv) Celerit Corporation ("Celerit"); (v) Celerit Solutions Corporation
("Celerit Solutions"); and (vi) Terry Rothwell (collectively, (i)-(v), the
"Merger Parties").
On the terms and subject to the conditions set forth in the Merger Agreement, as
subsequently amended, and subject further to acceptance of Articles of Merger
filed on the Closing Date with the Secretary of State of Arkansas ("SOS AR"), on
April 7, 2022 (the "Closing Date"): (i) Celerit merged with and into S-CC Merger
Sub (the "Celerit Merger"), and the separate corporate existence of S-CC Merger
Sub ceased, with Celerit as the surviving corporation (the "Celerit Surviving
Corporation"); and (ii) Celerit Solutions merged with and into S-Solutions
Merger Sub (the "Celerit Solutions Merger"), and the separate corporate
existence of S-Solutions Merger Sub ceased, with Celerit Solutions as the
surviving corporation (the "Celerit Solutions Surviving Corporation") (the
Celerit Merger and Celerit Solutions Merger together, the "Mergers"). On the
Closing Date, SS-Merger Sub and S-Solutions Merger Sub filed Articles of Merger
with the SOS AR, which are currently pending.
By virtue of, and simultaneously with, the Celerit Merger and without any
further action (other than the acceptance by the SOS AR of the applicable
Articles of Merger or as otherwise required pursuant to applicable law) on the
part of the Merger Parties, at the effective time of the Mergers (the "Effective
Time"), the Celerit Merger was completed and the Celerit Solutions Merger was
completed.
Aggregate consideration for the Mergers consisted of (i) $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, June 30, 2022, and, if not
paid at maturity, the Rothwell Note accrues simple interest at 6% per year until
paid. There is no penalty or premium for prepayment. In the event of a default,
Sollensys has agreed to pay Terry Rothwell's reasonable legal fees and costs of
collection.
Real Estate Agreement
Terry Rothwell and George Rothwell are the members of CRE Holdings, LLC ("CRE"),
the owner of two office buildings, a vacant commercial lot and a condominium.
The office buildings are leased by Celerit. The Merger Parties expect that,
shortly after the Effective Time, Sollensys, CRE, Terry Rothwell and George
Rothwell shall enter into an agreement (the "CRE Agreement") related to the
purchase by Sollensys of the two office buildings, a vacant commercial lot and a
condominium, as well as other assets owned by CRE, Terry Rothwell and George
Rothwell (the "CRE Transactions"). The purchase price for the CRE properties is
$3,295,000. The closing of the CRE Transactions shall occur on a mutually
agreeable date and time in accordance with the terms and conditions of the CRE
Agreement. If the closing does not occur on or before June 30, 2022, Sollensys
will be obligated to pay a monthly rent of $50,000 in addition to the
then-existing lease obligations. The CRE Agreement and the CRE real estate
transactions operate independently of the Merger Agreement, as amended, and the
other transactions contemplated therein.
Director Appointments
Effective as of the Closing Date, (i) the Sollensys Board of Directors was
expanded by one person, and Terry Rothwell was named as a director; (ii) Celerit
Surviving Corporation's board of directors expanded the size of Celerit
Surviving Corporation's board of directors by two persons, and named Anthony
Nolte and Donald Beavers as directors on the Celerit Surviving Corporation board
of directors, while retaining Terry Rothwell as a director; and (iii) Celerit
Solutions Surviving Corporation's board of directors expanded the size of the
Celerit Solutions Surviving Corporation Board by two persons, and named Messrs.
Nolte and Beavers as directors.
15
Executive Employment Agreements
Also as of the Closing Date, Sollensys entered into (i) an employment agreement
with Terry Rothwell pursuant to which Terry Rothwell was appointed as the Chief
Executive Officer of each of Celerit Surviving Corporation and Celerit Solutions
Surviving Corporation (the "Rothwell Employment Agreement"), and (ii) an
employment agreement with Ron Harmon pursuant to which he was appointed as the
Chief Operating Officer of each of Celerit Surviving Corporation and Celerit
Solutions Surviving Corporation (the "Harmon Employment Agreement" and, together
with the Rothwell Employment Agreement, the "Employment Agreements").
Rothwell Server Agreement
On April 7, 2022, Sollensys entered into the Rothwell Sollensys Blockchain
Archive Server Distribution Data Center Agreement (2 Units) with Terry Rothwell
and George Rothwell (the "Server Agreement"). The Rothwells together own two
units of the Sollensys Blockchain Archive Server Distributive Data Center, each
loaded with Sollensys application software (R4 Enterprise) (the "Equipment").
Pursuant to the terms and conditions of the Server Agreement, Sollensys may use
the Equipment in exchange for level monthly payments of $100,000 ($50,000 per
server) from the servers' revenue to the Rothwells, payable until both Rothwells
are deceased.
Results of Operations for the Three Months Ended March 31, 2022 Compared to the
Three Months Ended March 31, 2021
The comparison of operating results include the operations of Abstract Media in
the three months ended March 31, 2022 compared to zero operating results for
Abstract Media in same three month period in 2021.
Revenue
For the three months ended March 31, 2022, we recorded $444,096 in revenue from
the execution of our blockchain archive server agreements and due to addition of
Abstract Media revenue, compared to $71,429 from the sale of servers for the
three months ended March 31, 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 $396,656 for the three months ended March 31, 2022, compared
to cost of sales of $32,344 for the three months ended March 31, 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 March 31, 2022 were $1,360,544
compared to $563,567 for the three months ended March 31, 2021. The significant
increase in operating expenses in the three months ended March 31, 2022,
compared to the same period in 2021 is due to the buildout of the infrastructure
at the Company in 2021 to support higher levels of activity and revenue
generation in 2022, and due to the addition of Abstract Media's operating
expenses.
Key components of the Company's operating expenses for the three months ended
March 31, 2022 include approximately (i) $709,000 in payroll, consultants,
temporary staff and benefits (ii) approximately $427,000 in legal and
professional services; and approximately (iii) $54,000 in rent expense.
16
Liquidity and Capital Resources
We had $18,782 in cash on hand as of March 31, 2022.
Net cash used in operating activities was $1,267,156 for the three months ended
March 31, 2022, compared to $218,974 for the three months ended March 31, 2021.
The material increase in cash used in operating activities during the three
months ended March 31, 2022 was primarily due to an increase of approximately
$742,000 in operating losses in the three months ended 2022 (net of non-cash
stock-based compensation, depreciation and amortization) and an increase in
accounts receivable balances of approximately $185,000 over prior year levels
Net cash used in investing activities during the three months ended March 31,
2022 was $16,077 compared to $-0- for the three months ended March 31, 2021. The
investing activity in 2022 related to the purchase of office equipment.
Net cash provided by financing activities was $709,481 for the three months
ended March 31, 2022, compared to $111,501 for the three months ended March 31,
2021. The material increase during the 2022 period was due to an increase in
proceeds from the sale of common stock of approximately $400,000, and loan
proceeds of approximately $220,000.
During the three months ended March 31, 2022, we issued shares of our common
stock and raised $510,001.
Since we have been incurring losses from operations, we have relied on ongoing
sales of unregistered securities and the personnel guarantees of Mr. Beavers,
our Chief Executive Officer, to obtain financing to fund our operations.
There can be no assurance that we will be able to continue to raise capital from
the sale of our securities, or use our securities to make acquisitions.
Additionally, there can be any assurances that Mr. Beavers will continue to
provide his personal guaranty on financing transactions to help raise capital.
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.
17
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
We believe that the following critical policies affect our more significant
judgments and estimates used in preparation of our consolidated financial
statements.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which
establishes a new lease accounting model for lessees. The updated guidance
requires an entity to recognize assets and liabilities arising from financing
and operating leases, along with additional qualitative and quantitative
disclosures. The amended guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018, with early
adoption permitted. In March 2019, the FASB issued ASU 2019-01, Codification
Improvements, which clarifies certain aspects of the new lease standard. The
FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases in July
2018. Also in 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted
Improvements, which provides an optional transition method whereby the new lease
standard is applied at the adoption date and recognized as an adjustment to
retained earnings. The amendments have the same effective date and transition
requirements as the new lease standard On November 15, 2019, the FASB issued ASU
2019-10, which amends the effective dates for three major accounting standards.
The ASU defers the effective dates for the credit losses, derivatives, and lease
standards for certain companies. Since the Company is classified as a small
reporting company, emerging growth company, and has a calendar-year end the
Company was eligible for deferring the adoption of ASC 842 to January 1, 2022.
In the first quarter of fiscal 2022, we adopted ASU 2016-02 using the
"Comparatives Under 840 Option" approach to transition. Under this method,
financial information related to periods prior to adoption will be as originally
reported under the previous standard - ASC 840, Leases. The effects of adopting
the new standard (ASC 842, Leases) in fiscal 2022 were recognized as a
cumulative-effect adjustment to retained earnings as of the beginning of the
fiscal first quarter. We elected the package of practical expedients permitted
under the transition guidance within the new standard, which among other things,
allows us to carry forward the historical lease classification as operating or
capital leases. We also elected to combine lease and non-lease components and to
exclude short-term leases from our consolidated balance sheets.
The most significant impact of adoption was the recognition of operating lease
assets and operating lease liabilities of $496 thousand and $541 thousand,
respectively. The cumulative impact of these changes increased accumulated
deficit by $46 thousand. We expect the impact of adoption to be immaterial to
our consolidated statements of earnings and consolidated statements of cash
flows on an ongoing basis. As part of our adoption, we also modified our control
procedures and processes, none of which materially affected our internal control
over financial reporting. See Note 9, Leases, for additional information
regarding our accounting policy for leases and additional disclosures.
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