SOLLENSYS CORP. - Quarter Report: 2022 June (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 June 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 August 16, 2022, the registrant had 105,197,822 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 Stockholder’s 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.

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.

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.

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 Messrs. 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.

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”).

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.

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 June 30, 2022, the results of its operations for the three months and six months ended June 30, 2022 and 2021 and its cash flows for the six months ended June 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 six months ended June 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 its wholly-owned subsidiaries, Eagle Lake, Abstract Media, Celerit, and Celerit Solutions. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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. The Company has incurred significant operating losses since its inception. As of June 30, 2022, the Company had a working capital deficit of $(3,047,366) and an accumulated deficit of $(8,141,111).

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.

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.

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

We determine the fair value of contingent consideration based on a probability-weighted discounted cash flow analysis. The fair value remeasurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in the fair value hierarchy. In each period, we reassess our current estimates of performance relative to the stated targets and adjusts the liability to fair value. Any such adjustments are included as a component of Other Income (Expense) in the Consolidated Statements of Operations and Comprehensive Loss.

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:

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 June 30, 2022, the current balance of deferred revenue was $383,445 and the long-term balance was $188,571 compared to $437,731 and $205,714 respectively at December 31, 2021.

Celerit Revenue

At its newly acquired Celerit subsidiaries, revenue is primarily comprised of service agreements, where the Company enters into a contract with a banking institution to provide professional services. The contract may be fixed or variable, and the variable rate is based on the number of hours worked under the contract. The Company’s fixed rate contracts typically include a base range of hours, where the Company or the customer incurs charges if the hours worked are less than or exceed the agreed upon range, respectively.

The Company believes that each service agreement entered into constitutes a single performance obligation for the purposes of revenue recognition under ASC 606. The Company recognizes revenue as services are provided based on the number of hours worked and the consideration that the Company expects to receive in a contract with a customer, which is based on the rate established in the contract agreement. The Company believes this method best depicts the pattern of the satisfaction of its performance obligation.

The timing of revenue recognition from contracts with customers results in contract assets. Generally, billing occurs subsequent to revenue recognition, resulting in the recording of a contract asset. The amount recorded for contract assets is recorded as unbilled revenue which is included in other receivables on the consolidated balance sheets.

Significant judgments:

Practical expedients and accounting policy elections:

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 six months ended June 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 June 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.

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 accumulated deficit as of the beginning of the fiscal first quarter. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical lease classification as operating or capital leases. We also elected to combine lease and non-lease components and to exclude short-term leases from our consolidated balance sheets.

The most significant impact of adoption was the recognition of right of use operating lease assets and right of use operating lease liabilities of $496,000 and $541,000, respectively. The cumulative impact of these changes increased 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 June 30, 2022 and December 31, 2021, the balance of accounts receivable were $1,391,190 and $1,717, respectively. Management determined that an allowance for doubtful accounts was not necessary for either period.

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4 – NOTES PAYABLE AND RELATED PARTY LOANS

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

At June 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 consideration paid, identifiable assets acquired and liabilities assumed:

Consideration paid

Net assets acquired and liabilities assumed

The Company has 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 represents Abstract Media’s ability to generate profitable operations going forward. Management estimated the provisional fair values of the intangible assets and goodwill at December 31, 2021. The Company’s accounting for the acquisition of Abstract Media is incomplete. Management is performing a valuation study to calculate the fair value of the acquired intangible assets, which it plans to complete within the one-year measurement period.

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

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

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company has allocated the fair value of the total consideration paid to goodwill of $10,945,515 and $2,736,378 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 at June 30, 2022. The Company’s accounting for the acquisition of Celerit is incomplete. Management is performing a valuation study to calculate the fair value of the acquired intangible assets, which it plans to complete within the one-year measurement period.

The unaudited financial information in the table below summarizes the combined results of operations of the Company, Celerit and Celerit Solutions for the three and six month periods ended June 30, 2022 and June 30, 2021, on a pro forma basis, as though the companies had been combined as of January 1, 2021. The pro forma earnings for these period, were adjusted to include annual intangible amortization expense of $456,603 and 912,126, in each three and six month period respectively. The unaudited pro forma financial information does not purport to be indicative of the Company's combined results of operations which would actually have been obtained had the acquisition taken place on January 1, 2021, nor should it be taken as indicative of future consolidated results of operations.

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. Since the closing did not occur on or before June 30, 2022, Sollensys became obligated to pay monthly rent of $50,000 in addition to the then-existing lease obligations beginning July 1, 2022. The CRE Agreement and the CRE real estate transactions operate independently of the Merger Agreement, as amended, and the other transactions contemplated therein.

NOTE 6 – INTANGIBLE ASSETS

As of June 30, 2022, the balance of intangible assets was $2,699,618. During the six months ended June 30, 2022 and 2021, the Company recorded $261,398 and $-0- in amortization expense, respectively. As discussed in Note 5, the intangible assets have been valued based on provisional estimates of fair value and are subject to change as the Company completes its valuation assessment by the completion of the one year measurement period. Remaining amortization at June 30, 2022 for the following fiscal years is estimated to be: 2022 - $489,430; 2023 - $978,859; 2024 - $973,298; and 2025 -$228,031.

NOTE 7 – RELATED PARTY TRANSACTIONS

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

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 8 – STOCK-BASED COMPENSATION

During 2022 and 2021, the Company issued 129,701, 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 $562,824 and are amortized and vest ratably over the one year service period that the consultants provided service over. In some cases these shares vest immediately. During the six months ended June 30, 2022, the Company expensed $191,889. The remaining unamortized stock-based compensation amount of $129,126 amortized to expense through April 2023. Of the 129,701 shares issued, 91,701 shares are currently vested and the remaining 38,000 shares vest through April 2023.

NOTE 9 – 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 such as our leases at our Celerit subsidiaries, 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 June 30, 2022 were as follows:

SOLLENSYS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10 – STOCKHOLDERS’ EQUITY

Preferred Stock

On June 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 June 30, 2022 and December 31, 2021, respectively, there were 104,947,822 and 100,715,736 shares of common stock issued and outstanding.

During the six months ended June 30, 2022, the Company:

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

NOTE 11 – SUBSEQUENT EVENTS

On July 1, 2022, the Company issued 50,000 restricted common shares to a service provider. These shares were valued at $1.52 per share. On July 8, 2022 the Company issued 200,000 restricted common shares to an investor relations firm. These shares were valued at $1.04 per share.

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. Since the closing did not occur on or before June 30, 2022, effective July 1, 2022 Sollensys became obligated to pay monthly rent of $50,000 in addition to the then-existing lease obligations.

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.

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.

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”).

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.

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.

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.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and principal financial officer, as of June 30, 2022, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our Chief Executive Officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2022 to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that our disclosure controls are effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and principal financial officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.

Item 1A. Risk Factors.

As a smaller reporting company, we are not required to include this disclosure in this Quarterly Report on Form 10-Q. 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended June 30, 2022, the Company issued an aggregate of 4,000,000 shares to investors pursuant to the terms of the Celerit Agreement and issued 73,336 shares to service providers valued at $252,776.

The above sales were made pursuant to an exemption from registration as set forth in Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.