The accompanying notes are an integral part of the unaudited consolidated financial statements.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
On November 30, 2020, Sollensys entered into a share exchange agreement (the “Share Exchange Agreement”) with (i) Eagle Lake Laboratories, Inc., a Florida corporation (“Eagle Lake”), (ii) each of the shareholders of Eagle Lake (the “Eagle Lake Shareholders”), and (iii) Donald Beavers as the representative of the Eagle Lake Shareholders.
Among other conditions to the closing of the transactions contemplated by the Share Exchange Agreement (the “Closing”), pursuant to the terms of the Share Exchange Agreement, the parties agreed that the Company would acquire 100% of Eagle Lake’s issued and outstanding capital stock, in exchange for the issuance to the Eagle Lake Shareholders of a number of shares of the Company’s common stock, par value $0.001 per share, to be determined at the Closing of the Share Exchange Agreement.
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 December 29, 2020, the Company’s Board approved the change in the Company’s fiscal year-end from March 31 to December 31.
Common Control Accounting Treatment
Sollensys Corp and Eagle Lake were under the common control of the CEO before and after the date of transfer. As a result, the Company adopted the guidance in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 805-50-05-5 for the transfer of net assets between entities under common control to apply a method similar to the pooling-of-interests-method. Under the method, the financial statements of the Company shall report results of operations for the period in which the transfer occurs as though the transfer of the net assets had occurred at the beginning of the period. Results of operations for the period will thus comprise both those of the previously separate entities combined from the beginning of the period to the date the transfer is completed and those of the combined operations from that date to the end of the period. Similarly, the Company shall present the statements of financial position and other financial information presented as of the beginning of the period as though the assets and liabilities had been transferred at that date. Financial statements and financial information presented for prior years also shall be retrospectively adjusted to furnish comparative information.
Reverse Stock Split
On October 14, 2020, the Company filed with the Secretary of State of Nevada a Certificate of Amendment to its Articles of Incorporation (the “Amendment”) to effect a 1-for-120 reverse stock split (the “Reverse Split”) of the Company’s issued and outstanding common stock. Pursuant to the Amendment, effective as of October 30, 2020, every 120 shares of the issued and outstanding common stock will be converted into one share of common stock, without any change in the par value per share.
The Reverse Split became effective on November 2, 2020. Following the effectiveness of the Reverse Split, on November 2, 2020, the number of authorized shares of common stock was reduced from 12,000,000,000 shares to 300,000,000. Additionally, following the Reverse Split, Eagle Lake’s 11,400,000,000 common shares were adjusted to 95,000,000 shares and they continued to maintain 95.8% of the total of 99,193,962 common shares outstanding.
No fractional shares of common stock were issued in connection with the Reverse Split. If, as a result of the Reverse Split, a shareholder would otherwise hold a fractional share, the shareholder received, instead of the issuance of such fractional share, one whole share of common stock. As a result, 143,585 additional shares were issued due to the rounding up fractional shares.
SOLLENSYS CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the FASB’s ASC, which is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Eagle Lake. All intercompany accounts and transactions are eliminated in consolidation.
Going Concern
The accompanying unaudited 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 unaudited consolidated financial statements. The Company has incurred significant operating losses since its inception. As of September 30, 2021, the Company had a working capital deficit of $402,600 and an accumulated deficit of $5,996,285.
The Company expect to generate operating cash flow that will be sufficient to fund presently anticipated operations although there can be no assurance. This raises substantial doubt about the Company’s ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing to supplement expected cash flow. Historically, the Company has raised capital through private placements, as an interim measure to finance working capital needs and may continue to raise additional capital through the sale of common stock or other securities and obtaining some short-term loans. The Company will be required to continue to do so until its operations become profitable.
The Company may attempt to raise capital in the near future through the sale of equity or debt financing; however, there can be assurances the Company will be successful in doing so. There can be no assurance that such additional financing will be available to the Company on acceptable terms or at all.
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 financial statements and the reported amount of expenses during the reporting period. The most significant estimates relate to income taxes 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 unaudited 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.
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 GAAP have been omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These unaudited 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. Interim results are not necessarily indicative of results for a full year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto on December 31, 2020, as presented in the Company’s Annual Report on Form 10-KT filed on March 31, 2021, with the SEC.
SOLLENSYS CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Revenues are accounted for in accordance with the FASB’s Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606).
The amount of revenue recognized reflects the consideration which the Company expects to be entitled to receive in exchange for the products and/or services. To achieve this principle, the Company applies the following five steps:
1. Identify the contract with the customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to performance obligations in the contract, and
5. Recognize revenue when or as the Company satisfies a performance obligation.
The Company recognizes revenue when the control of the products 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. Additionally, the Company recognizes revenue when a service is completed thereby completing a performance obligation.
Customer Deposits
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 ASC 606 are considered to be liabilities on the Company’s balance sheet. As of September 30, 2021, the current balance of deposits was $236,439 and the long-term balance was $201,428, compared to $17,143 and $72,857, for the year ended December 31, 2020, respectively.
Cash and cash equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. On September 30, 2021 and December 31, 2020, the Company’s cash equivalents totaled $146,406 and $129,624, respectively.
Stock-based Compensation
The Company accounts for stock-based compensation using the fair value method following the guidance outlined in Section 718-10 of the FASB ASC for disclosure about stock-based compensation. This section requires a public entity to measure the cost of employee and non-employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which service is provided. No compensation cost is recognized for equity instruments for which service is not provided or rendered.
Related party transactions
The Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. In accordance with ASC 850, the Company’s financial statements include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business, as well as transactions that are eliminated in the preparation of financial statements.
SOLLENSYS CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Net Loss per Share
Net loss per common share is computed by dividing net loss by the weighted average common shares outstanding during the period as defined by ASC Topic 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 year. 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, 2021, there were no common stock equivalents.
NOTE 3 – ACCRUED EXPENSES
As of September 30, 2021, and December 31, 2020, the balances of accrued expenses were $307,921 and $46,134 respectively. The accrued expenses as of September 30, 2021, were comprised of $58,987 in credit card payables, $127,287 in liabilities associated with maintaining the Company’s servers, $64,147 in liabilities related to the Company’s purchase of a new building, and $57,500 in miscellaneous liabilities.
NOTE 4 – LONG TERM ASSETS
As of September 30, 2021 and December 31, 2020 long term assets amounted to $2,901,110 and $-0-, respectively. At September 30, 2021 long term assets were comprised of the following:
|
Land, building and building improvements
|
|
$
|
2,653,552
|
|
|
Furniture and equipment-net
|
|
|
233,854
|
|
|
Security deposits
|
|
|
13,694
|
|
|
Total
|
|
$
|
2,901,110
|
|
On September 8, 2021, the Company acquired a building in Palm Bay, Florida with approximately 36,810 square feet of office space for $2,430,762 excluding closing costs. Since the building has not yet been occupied, no depreciation has been recorded for the period ended September 30, 2021. The Company purchased the building by entering into a $2,500,000 mortgage. After closing costs and adjustments, the Company received $46,651 in cash at closing.
The terms of the mortgage call for monthly interest only payments of approximately $10,000 each through December 2021 at an interest rate of 4.75%. Effective January 8, 2022, monthly mortgage payments of principal and interest of $16,250 each, at an interest rate of 4.75% per annum, with a maturity date of December 8, 2024 and a balloon payment due of approximately $2,270,000. The mortgage is secured by the underlying real estate all equipment and fixtures owned or subsequently acquired, and 500,000 shares of the Company’s common pledged by the Company’s CEO, as well his personal guarantee for the full amount of the mortgage.
The 42 month principal payment schedule on the 42 month loan is as follows:
|
2021
|
|
$
|
-0-
|
|
|
2022
|
|
|
77,931
|
|
|
2023
|
|
|
81,716
|
|
|
2024
|
|
|
2,340,353
|
|
|
Total
|
|
$
|
2,500,000
|
|
As of September 30, 2021, the balance of the short-term mortgage payable was $58,101 and the long-term portion was $2,441,899.
NOTE 5 – STOCKHOLDERS’ EQUITY
Series A Preferred Stock
On March 21, 2020, the Company filed a Certificate of Designation to authorize 25,000,000 shares of Series A preferred stock, par value $0.001 per share. Among other rights, the holders of Series A preferred stock have the right to convert each share of Series A preferred stock into 50 shares of common stock. On April 1, 2020, the Company issued 19,000,000 shares of Series A preferred stock to the Company’s then-Chief Executive Officer, David Lazar. The fair value of the issuance was estimated at $1,900,000 and recorded as stock-based compensation.
Common Stock
The Company has authorized 300,000,000 shares of common stock, $0.001 par value per share. As of September 30, 2021 and December 31, 2020, respectively, there were 100,002,492 and 99,327,547 shares of common stock issued and outstanding.
During the nine months ended September 30, 2021, the Company raised $2,040,979 from sale of 591,580 shares to investors.
Additionally, during the nine months ended September 30, 2021, the Company issued an aggregate of 56,365 shares of common stock, valued at $300,360, pursuant to the Sollensys Corp 2021 Equity Incentive Plan to numerous consultants.
SOLLENSYS CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On September 30, 2021, and December 31, 2020, there were 10,000,000 shares of Series A preferred stock authorized, with -0- shares issued and outstanding at both periods, respectively.
NOTE 6 – SUBSEQUENT EVENTS
In accordance with ASC 855-10, management has performed an evaluation of subsequent events from September 30, 2021 through the date the financial statements were available to be issued and noted no subsequent events requiring disclosure except as follows:
Sale of Restricted Common Stock
The Company sold an aggregate of 50,000 shares of common stock to investors and raised $200,000 in proceeds.
Proceeds of Unsecured Demand Loan
Additionally, the Company received $300,000 in proceeds in the form of an unsecured 2% demand loan from an investor.
Abstract Media Acquisition
On October 15, 2021, the Company entered into that certain 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”).
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 equal to $605,000 minus the Debt Repayment Amount (as hereinafter defined), divided by the VWAP (as defined in the Agreement) as of the closing date, plus (ii) $15,000, plus (iii) $15,000 to be paid solely to John Swain as additional consideration for Mr. Swain’s membership interests (the “Acquisition”). The “Debt Repayment Amount” means the debt owned by the Company to Mr. Swain pursuant to a promissory note dated as of August 15, 2017, which debt the parties agree is approximately $80,000, but which shall be finally calculated on the closing date.
The Agreement includes customary representations, warranties and closing conditions.
The Acquisition closed on October 15, 2021. As a result of the Acquisition, Abstract Media became a wholly owned subsidiary of the Company.
Formation of S-CC Merger Sub, Inc. and S-Solutions Merger Sub, Inc.
On October 20, 2021, the Company formed S-CC Merger Sub, Inc., an Arkansas corporation and a wholly owned subsidiary of the Company. Also on October 20, 2021, the Company formed S-Solutions Merger Sub, Inc., an Arkansas corporation and a wholly owned subsidiary of the Company.
Celerit Merger Agreement
On October 26, 2021, the Company entered into that certain Merger Agreement (“Merger Agreement”) by and among (i) the Company; (ii) S-CC Merger Sub, Inc., an Arkansas corporation and a wholly owned subsidiary of the Company (“S-CC Merger Sub”); (iii) S-Solutions Merger Sub, Inc., an Arkansas corporation and a wholly owned subsidiary of the Company (“S-Solutions Merger Sub”); (iv) Celerit Corporation, an Arkansas corporation (“Celerit”); (v) Celerit Solutions Corporation, an Arkansas corporation (“Celerit Solutions”); and (vi) Terry Rothwell (“Shareholder”).
Pursuant to the terms of the Merger Agreement, on the closing date, (i) Celerit will merge with and into S-CC Merger Sub, with Celerit surviving, (ii) Celerit Solutions will merge with and into S-Solutions Merger Sub, with Celerit Solutions surviving, and (iii) the Shareholder will receive from the Company certain cash consideration and other consideration as set forth in the Merger Agreement (the “Merger”), on the terms and subject to the conditions set forth therein, including but not limited to payment by the Company of (a) the sum of $4,440,000 in cash, and (b) 3,000,000 shares of the Company’s common stock.
Celerit, together with its affiliate Celerit Solutions, are an IT services business with a world class customer success department serving the financial sector since 1985. The Merger is being effected to further the Company’s mission to create a safe and immutable environment, in conjunction with Celerit and Celerit Solutions, for the future of banking.
Pursuant to the terms of the Merger Agreement, the Company expects to enter into a Purchase Agreement (“Purchase Agreement”) by and among (i) the Company; (ii) CRE Holdings LLC, an Arkansas limited liability company (“CRE”); and (iii) Terry Rothwell and George Rothwell, the sole members of CRE (together, the “Rothwells”). The Company expects that the Purchase Agreement will stipulate the terms of the acquisition of four real property parcels owned by CRE, as well as one real property parcel owned by the Rothwells, for a total purchase price of $5,560,000 (the “Real Estate Acquisition”). Included within the combined five real property parcels are Celerit’s and Celerit Solutions’ administrative offices, data center, as well as three vacant land parcels.
The Merger Agreement includes customary representations, warranties and closing conditions.
Neither the Merger nor the Real Estate Acquisition have closed yet, however pursuant to the terms of the Merger Agreement, they are expected to close substantially simultaneously.