SOLLENSYS CORP. - Quarter Report: 2022 September (Form 10-Q)

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)

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:

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.

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SOLLENSYS CORP.

Consolidated Balance Sheets

(unaudited)

Note: Amounts may not foot due to rounding. 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

SOLLENSYS CORP.

Consolidated Statements of Operations

(unaudited)

Note: Amounts may not foot due to rounding.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

SOLLENSYS CORP.

Statements of Changes in Stockholders’ Equity (Deficit)

(unaudited)

Note: Amounts may not foot due to rounding.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

SOLLENSYS CORP.

Consolidated Statements of Cash Flows

(unaudited)

Note: Amounts may not foot due to rounding.

The accompanying notes are an integral part of the unaudited consolidated financial statements.

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.

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.

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.

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:

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.

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:

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.

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 $437,691496,000 and $483,005541,000, 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:

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

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

Net assets acquired and liabilities assumed

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.

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

Net assets acquired and liabilities assumed

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.

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:

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:

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

The loss from discontinued operations is follows:

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.

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:

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:

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

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.

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.

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 5five year period at a monthly base rent of $25,667 with an annual 3% escalator clause.

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.

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:

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