The following discussion and analysis should be read in conjunction with our
unaudited consolidated financial statements and the related notes thereto. The
management's discussion and analysis contains forward-looking statements, such
as statements of our plans, objectives, expectations, and intentions. Any
statements that are not statements of historical fact are forward-looking
statements. When used, the words "believe," "plan," "intend," "anticipate,"
"target," "estimate," "expect" and the like, and/or future tense or conditional
constructions ("will," "may," "could," "should," etc.), or similar expressions,
identify certain of these forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results or events to differ materially from those expressed or implied by the
forward-looking statements. Our actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements as
a result of several factors. We do not undertake any obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of this Quarterly Report on Form 10-Q. The following discussion should
be read in conjunction with our audited financial statements and the related
notes that appear in our Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission on March 30, 2022.
Overview
Business Overview
Our primary product is the Blockchain Archive Server-a turn-key, off-the-shelf,
blockchain solution that works with virtually any hardware and software
combinations currently used in commerce, without the need to replace or
eliminate any part of the client's data security that is being utilized. The
Blockchain Archive Server encrypts, fragments, and distributes data across
thousands of secure nodes every day, which makes it virtually impossible for
hackers to compromise. Using blockchain technology, the Blockchain Archive
Server maintains a redundant, secure, and immutable backup of data. Redundant
backups and the blockchain work together to assure not only the physical
security of the database but also the integrity of the information held within.
Blockchain Archive Server protects client data from "ransomware"-malicious
software that infects your computer and displays messages demanding a fee to be
paid in order for your system to work again. Blockchain technology is a
leading-edge tool for data security, providing an added layer of security
against data loss due to all types of software specifically designed to disrupt,
damage, or gain unauthorized access to a computer system (i.e., malware).
Uniquely, the Blockchain Archive Server is a turn-key solution that can stand
alone or seamlessly integrate into an existing data infrastructure to quickly
recover from a cyber-attack. The Blockchain Archive Server is a server that
comes pre-loaded with the blockchain-powered cybersecurity software, which can
be delivered, installed, and integrated into a client's computer systems with
ease.
In December 2020, we made our second product offering-the Regional Service
Center-available on a limited test market basis. The Regional Service Center was
added to our standard product line effective January 1, 2021. A Regional Service
Center is a single unit system of 32 Blockchain Archive Servers capable of
servicing up to 2,580 individual small accounts, and is marketed to existing IT
service providers with established accounts. The Regional Service Center offers
small businesses the same state of the art technology previously available only
to large or very well-funded companies. Sollensys believes that smaller
companies, and even certain individuals, will find the Regional Service Center
affordable, paying only for the actual space they use.
We acquired Abstract Media, LLC ("Abstract Media") in December 2021. Abstract
Media was formed in October 2011 with the goal of improving user engagement
using visualization tools, and has evolved into an interactive media and
software development company to optimize effective corporate learning,
operational workflow and communication using technology in the augmented reality
or virtual reality space. Abstract Media conducts its operations from its office
location in Houston, Texas.
17
Recent Developments
Celerit Mergers
On April 7, 2022 (the "Closing Date"), (i) the Company; (ii) S-CC Merger Sub,
Inc., a wholly owned subsidiary of the Company ("S-CC Merger Sub"); (iii)
S-Solutions Merger Sub, Inc., a wholly owned subsidiary of the Company
("S-Solutions Merger Sub"); (iv) Celerit Corporation ("Celerit"); (v) Celerit
Solutions Corporation ("Celerit Solutions"); and (vi) Terry Rothwell
(collectively, (i)-(v), the "Merger Parties") executed an Amended and Restated
Merger Agreement (the "AR Merger Agreement"). On the terms and subject to the
conditions set forth in the AR Merger Agreement, and subject further to
acceptance of Articles of Merger to be filed with the Secretary of State of
Arkansas ("SOS AR"): (i) Celerit merged with and into S-CC Merger Sub (the
"Celerit Merger"), and the separate corporate existence of S-CC Merger Sub
ceased, with Celerit as the surviving corporation (the "Celerit Surviving
Corporation"). (ii) Celerit Solutions merged with and into S-Solutions Merger
Sub (the "Celerit Solutions Merger"), and the separate corporate existence of
S-Solutions Merger Sub ceased, with Celerit Solutions as the surviving
corporation (the "Celerit Solutions Surviving Corporation") (the Celerit Merger
and Celerit Solutions Merger together, the "Mergers"). The Mergers shall have
the effects set forth in the AR Merger Agreement and in the Arkansas Business
Corporation Act of 1987 (the "ABCA").
Aggregate consideration for the Mergers consists of (i) the sum of $2,695,000,
subject to certain adjustments set forth in the AR Merger Agreement (the "Cash
Consideration"), and (ii) 4,000,000 shares of Sollensys common stock (the
"Sollensys Shares"), 3,880,000 of which were apportioned pro rata between the
Celerit stockholders, and 120,000 of which were apportioned pro rata between the
Celerit Solutions stockholders. The Cash Consideration was paid to the Terry
Rothwell via the issuance to the Terry Rothwell on the Closing Date of a
promissory note of Sollensys (the "Note"). The Note bears interest at a rate of
0.0001% through June 30, 2022, and, if not paid at maturity, the note accrues
simple interest at 6% per year until paid. There is no penalty or premium for
prepayment. Additional consideration of $10,000 was paid to Terry Rothwell.
CRE Agreement
Terry Rothwell and George Rothwell are the members of CRE Holdings, LLC ("CRE"),
which owns two office buildings, a vacant commercial lot and a condominium. The
office buildings are currently leased by Celerit. The parties expect that,
shortly after the Effective Date, Sollensys, CRE, Terry Rothwell and George
Rothwell shall enter into an agreement (the "CRE Agreement") related to the
purchase by Sollensys of the two office buildings, a vacant commercial lot and a
condominium, as well as other assets owned by CRE, Terry Rothwell and George
Rothwell (the "CRE Transactions"). The purchase price for the CRE properties is
$3,295,000. The closing of the CRE Transactions shall occur on a mutually agreed
upon date and time in accordance with the terms and conditions of the CRE
Agreement. Because the closing did not occur on or before June 30, 2022,
Sollensys must pay a monthly rent of $50,000 in addition to the then-existing
lease obligations. The CRE Agreement and the CRE Transactions operate
independently of the AR Merger Agreement and the other transactions contemplated
therein.
Director Appointment
On the Closing Date, (i) the Sollensys Board was increased by one director, and
Terry Rothwell was named to fill the newly created vacancy; (ii) the Celerit
Board was increased by two directors, and Anthony Nolte and Donald Beavers were
named to fill the newly created vacancies; and (iii) the Celerit Solutions Board
was increased by two directors, and Anthony Nolte and Donald Beavers were named
to fill the newly created vacancies.
Executive Employment Agreements
On the Closing Date, Sollensys entered into (i) an employment agreement with
Terry Rothwell pursuant to which Terry Rothwell was appointed as the Chief
Executive Officer of each of Celerit and Celerit Solutions (the "Rothwell
Employment Agreement") and (ii) an employment agreement with Ron Harmon pursuant
to which he was appointed as the Chief Operating Officer of each of Celerit and
Celerit Solutions (the "Harmon Employment Agreement" and, together with the
Rothwell Employment Agreement, the "Employment Agreements").
18
Pursuant to the Rothwell Employment Agreement, Terry Rothwell will be paid a
base salary of $135,000 and an annual bonus of $210,000. Ms. Rothwell may be
eligible for other bonuses. She will be an "at will" employee and the term of
the Rothwell Employment Agreement is one year and subject to annual renewals.
Pursuant to the Harmon Employment Agreement, Ron Harmon will be paid a base
salary of $240,000 and an annual bonus of $70,000. Mr. Harmon may be eligible
for other bonuses. He will be an "at will" employee and the term of the Harmon
Employment Agreement is one year and subject to annual renewals.
Banking and Credit Union Services Agreement
On April 7, 2022, Sollensys and Celerit entered into the Banking and Credit
Union Services Agreement (the "Banking Agreement"), pursuant to which Sollensys
assigned to Celerit exclusive rights and responsibility for sales, support and
service of all Sollensys products and services offered to banks and financial
institutions and assign to Celerit, or any agreements related thereto and
execute all future similar agreements as Celerit.
Server Agreement
The Rothwell Sollensys Blockchain Archive Server Distribution Data Center
Agreement (2 Units) was entered into April 7, 2022, by and among Terry Rothwell,
George Benjamin Rothwell and Sollensys (the "Server Agreement"). The Rothwells
collectively own two units of Sollensys Blockchain Archive Server Distributive
Data Center, each loaded with Sollensys Application Software (R4 Enterprise)
(the "Equipment"). Pursuant to the terms and conditions of the Server Agreement,
Sollensys may use the Equipment in exchange for level monthly payments of
$100,000 ($50,000 per server) from the servers' revenue to Terry Rothwell and
George Benjamin Rothwell, a married couple, as a joint and survivor annuity,
payable until both Rothwells are deceased.
Termination of Celerit Third Party Vendor Agreement
On December 1, 2017, prior to the closing of the Celerit Merger, Celerit entered
into a Third Party Vendor Agreement, as subsequently amended (the "Agreement"),
with a third party. Pursuant to the terms of the Agreement, on May 27, 2022, the
third party paid to the Company a lump sum of $3,019,852 to terminate the
Agreement. The Company will continue to provide services to the third party,
however, as a subcontractor to another third party. The subcontractor
arrangement may be terminated at any time upon 30 days' prior written notice.
Results of Operations for the Three and Six Months Ended June 30, 2022 Compared
to the Three and Six Months Ended June 30, 2021
The comparison of operating results includes the operations of Abstract Media,
Celerit in the three and six months ended June 30, 2022 compared to zero
operating results for Abstract Media and Celerit in same three and six month
periods in 2021.
Revenue
For the three months ended June 30, 2022, we recorded $6,292,177 in revenue from
Celerit by providing bank resource management, technology hosting, and network
services, at Sollensys from the execution of our blockchain archive server
agreements and due to addition of Abstract Media revenue, compared to $38,214 in
revenue for the three months ended June 30, 2021. We are in the process of
developing our strategic business plan going forward and, therefore, revenue may
vary from period to period.
For the six months ended June 30, 2022, we recorded $6,736,273 in revenue
compared to $109,643 for the same period ended June 30, 2021. We are in the
process of developing our strategic business plan going forward and, therefore,
revenue may vary from period to period.
19
Cost of sales
Cost of sales was $2,233,418 for the three months ended June 30, 2022, compared
to cost of sales of $30,400 for the three months ended June 30, 2021. The
significant increase in cost of sales is attributable to higher sales, the
buildout of our infrastructure in the prior period in anticipation of higher
sales levels in 2022, and the addition of Celerit's and Abstract Media's revenue
and cost of sales.
Cost of sales was $2,630,074 for the six months ended June 30, 2022, compared to
cost of sales of $62,744 for the six months ended June 30, 2021. The significant
increase in cost of sales is attributable to higher sales, the buildout of our
infrastructure in the prior period in anticipation of higher sales levels in
2022, and the addition of Celerit's and Abstract Media's revenue and cost of
sales.
Operating expenses
Operating expenses for the three months ended June 30, 2022 were $2,786,398
compared to $882,989 for the three months ended June 30, 2021. The significant
increase in operating expenses in the three months ended June 30, 2022, compared
to the same period in 2021 is due to the buildout of the infrastructure at the
Company in 2021 to support higher levels of activity and revenue generation in
2022, and due to the addition of Celerit's and Abstract Media's operating
expenses.
Operating expenses for the six months ended June 30, 2022 were $4,146,943
compared to $1,446,546 for the six months ended June 30, 2021. The significant
increase in operating expenses in the six months ended June 30, 2022, compared
to the same period in 2021 is due to the buildout of the infrastructure at the
Company in 2021 to support higher levels of activity and revenue generation in
2022, and due to the addition of Celerit's and Abstract Media's operating
expenses.
Key components of the Company's operating expenses for six months ended June 30,
2022 include approximately $1,066,000 in legal and professional fees,
approximately $1,907,000 in payroll and benefits, approximately $144,000 in rent
expense, approximately $192,000 in stock based compensation for services,
approximately $338,000 in amortization of intangible assets and depreciation,
and approximately $49,000 in marketing expense.
Liquidity and Capital Resources
We had $2,441,556 in cash and cash equivalents on hand as of June 30, 2022.
Net cash provided by operating activities was $492,163 for the six months ended
June 30, 2022, compared to $(644,996) in cash used for the six months ended June
30, 2021. The material improvement in cash provided by operating activities
during the six months ended June 30, 2022 was primarily due to the improvement
in profitability during the six months ended June 30, 2022
Net cash provided by investing activities during the six months ended June 30,
2022 was $190,898 compared to $-0- for the six months ended June 30, 2021. The
investing activity in 2022 primarily related to the acquisition of Celerit,
compared to the purchase of the Company's corporate headquarters in the 2021
period, which was financed with debt.
Net cash provided by financing activities was $1,165,961 for the six months
ended June 30, 2022, compared to $862,557 for the six months ended June 30,
2021. The increase during the 2022 period was primarily due to related party
loan proceeds, net of repayments, and proceeds from the sale of common stock of
approximately $510,000 in the 2022 period, compared to approximately $863,000
from the sale of common stock in 2021.
Since we have been incurring losses from operations, we have relied on ongoing
sales of unregistered securities and the personal guarantees of Mr. Beavers, our
Chief Executive Officer, a member of our Board of Directors and a significant
stockholder, to obtain financing to fund our operations.
There can be no assurance that we will be able to continue to raise capital from
the sale of our securities, or use our securities to make acquisitions.
Additionally, there can be any assurances that Mr. Beavers will continue to
provide his personal guaranty on financing transactions to help raise capital.
20
Plans to Address Liquidity Shortages
In order to address liquidity shortages the Company has undertaken two
initiatives:
Potential Sale or Lease of the Company's Building
The Company's management believes that its corporate headquarters building in
Palm Bay, Florida has significantly appreciated in value and has excess capacity
that will not be utilized in the immediate future. In order to capitalize on the
perceived building appreciation, the Company is considering several courses of
action but has not yet formalized a plan. These alternatives include rental of
the building, outright sale of the building, or a sale-leaseback arrangement.
There can be no assurance as to the timing of the formulation of a plan, or that
any of these alternatives will materialize, and if they do materialize, will be
on favorable terms to the Company that will result in an improvement in the
Company's liquidity.
Potential Divestiture of the Celerit Assets
Based upon Celerit's post-acquisition performance and due to divergent views
with the executive management team, the Company is considering its options with
respect to the Celerit assets. Management has initiated discussions with the
Celerit sellers about "unwinding" the Celerit transaction, however, multiple
issues are being considered on both sides and no meaningful plan or agreement on
potential deal points has been reached. There can be no assurances on timing, or
that any transaction will be consummated with the Celerit sellers or other
potential third parties; and if a transaction is consummated that it will be
favorable terms or that it will positively impact the Company's liquidity.
Financial Impact of COVID-19
The COVID-19 pandemic has affected how we are operating our business, and the
duration and extent to which this will impact our future results of operations
and overall financial performance remains uncertain. The COVID-19 pandemic is
having widespread, rapidly evolving, and unpredictable impacts on global
society, economies, financial markets, and business practices. Federal, state
and foreign governments have implemented measures to contain the virus,
including social distancing, travel restrictions, border closures, limitations
on public gatherings, work from home, and closure of non-essential businesses.
To protect the health and well-being of our employees, partners, and third-party
service providers, we have implemented work-from-home requirements, made
substantial modifications to employee travel policies, and cancelled or shifted
marketing and other corporate events to virtual-only formats for the foreseeable
future. While we continue to monitor the situation and may adjust our current
policies as more information and public health guidance become available, such
precautionary measures could negatively affect our customer success efforts,
sales and marketing efforts, delay and lengthen our sales cycles, or create
operational or other challenges, any of which could harm our business and
results of operations. In addition, the COVID-19 pandemic has disrupted the
operations of our current enterprise customers, as well as many potential
enterprise customers, and may continue to disrupt their operations, for an
indefinite period of time, including as a result of travel restrictions and/or
business shutdowns, uncertainty in the financial markets, or other harm to their
businesses and financial results, resulting in delayed purchasing decisions,
extended payment terms, and postponed or cancelled projects, all of which could
negatively impact our business and results of operations, including our revenue
and cash flows.
Beginning in March 2020, the U.S. and global economies have reacted negatively
in response to worldwide concerns due to the economic impacts of
the COVID-19 pandemic. These factors also may adversely impact enterprise and
government spending on technology as well as such customers' ability to pay for
our products and services on an ongoing basis. For example, some businesses in
industries particularly impacted by the COVID-19 pandemic, such as travel,
hospitality, retail, and oil and gas, have significantly cut or eliminated
capital expenditures. A prolonged economic downturn could adversely affect
technology spending, demand for our offerings, which could have a negative
impact on our financial condition, results of operations and cash flows. Any
resulting instability in the financial markets could also adversely affect the
value of our common stock, our ability to refinance our indebtedness, and our
access to capital.
The ultimate duration and extent of the impact from the COVID-19 pandemic
depends on future developments that cannot be accurately forecasted at this
time, such as the severity and transmission rate of the disease, the actions of
governments, businesses and individuals in response to the pandemic, the extent
and effectiveness of containment actions, the impact on economic activity and
the impact of these and other factors on our employees, partners, and
third-party service providers. These uncertainties may increase variability in
our future results of operations and adversely impact our ability to accurately
forecast changes in our business performance and financial condition in future
periods. If we are not able to respond to and manage the impact of such events
effectively or if global economic conditions do not improve, or deteriorate
further, our business, financial condition, results of operations, and cash
flows could be adversely affected.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
We believe that the following critical policies affect our more significant
judgments and estimates used in preparation of our consolidated financial
statements.
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New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842), which
establishes a new lease accounting model for lessees. The updated guidance
requires an entity to recognize assets and liabilities arising from financing
and operating leases, along with additional qualitative and quantitative
disclosures. The amended guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2018, with early
adoption permitted. In March 2019, the FASB issued ASU 2019-01, Codification
Improvements, which clarifies certain aspects of the new lease standard. The
FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases in July
2018. Also in 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted
Improvements, which provides an optional transition method whereby the new lease
standard is applied at the adoption date and recognized as an adjustment to
retained earnings. The amendments have the same effective date and transition
requirements as the new lease standard On November 15, 2019, the FASB issued ASU
2019-10, which amends the effective dates for three major accounting standards.
The ASU defers the effective dates for the credit losses, derivatives, and lease
standards for certain companies. Since the Company is classified as a small
reporting company, emerging growth company, and has a calendar-year end the
Company was eligible for deferring the adoption of ASC 842 to January 1, 2022.
In the first quarter of fiscal 2022, we adopted ASU 2016-02 using the
"Comparatives Under 840 Option" approach to transition. Under this method,
financial information related to periods prior to adoption will be as originally
reported under the previous standard - ASC 840, Leases. The effects of adopting
the new standard (ASC 842, Leases) in fiscal 2022 were recognized as a
cumulative-effect adjustment to retained earnings as of the beginning of the
fiscal first quarter. We elected the package of practical expedients permitted
under the transition guidance within the new standard, which among other things,
allows us to carry forward the historical lease classification as operating or
capital leases. We also elected to combine lease and non-lease components and to
exclude short-term leases from our consolidated balance sheets.
The most significant impact of adoption was the recognition of operating lease
assets and operating lease liabilities of $496 thousand and $541 thousand,
respectively. The cumulative impact of these changes increased accumulated
deficit by $46 thousand. We expect the impact of adoption to be immaterial to
our consolidated statements of earnings and consolidated statements of cash
flows on an ongoing basis. As part of our adoption, we also modified our control
procedures and processes, none of which materially affected our internal control
over financial reporting. See Note 9, Leases, for additional information
regarding our accounting policy for leases and additional disclosures.
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