DLT Resolution Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - CERTIFICATION - DLT Resolution Inc.	dlti_ex322.htm
EX-32.1 - CERTIFICATION - DLT Resolution Inc.	dlti_ex321.htm
EX-31.2 - CERTIFICATION - DLT Resolution Inc.	dlti_ex312.htm
EX-31.1 - CERTIFICATION - DLT Resolution Inc.	dlti_ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-148546

DLT RESOLUTION, INC

(Exact name of registrant as specified in its charter)

Nevada		20-8248213
(State of Incorporation)		(I.R.S. Employer Identification No.)

5940 S. Rainbow Blvd., Ste 400-32132, Las Vegas, NV		89118
(Address of principal executive offices)		(Zip Code)

(702) 796-6363

(Registrant’s telephone number, including area code)

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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.

Large accelerated filer	☐	Non‑accelerated filer	☐
Accelerated filer	☐	Smaller reporting company	☒
(Do not check if a smaller reporting company)		Emerging growth company	☒

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 May 26, 2021, 26,926,287 shares of the registrant’s Common Stock, $0.001 par value, were issued and 23,667,537 were outstanding.

TABLE OF CONTENTS

FORM 10-Q

QUARTER ENDED MARCH 31, 2021

		Page
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations	4

	Condensed Consolidated Statements of Comprehensive Loss	5

	Condensed Consolidated Statements of Changes in Stockholders’ Equity	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Mine Safety Disclosures	21

Item 5.	Other Information	21

Item 6.	Exhibits	22

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Item 1: Financial Statements

DLT RESOLUTION, INC.
Condensed Consolidated Balance Sheets

	March 31, 2021			December 31, 2020
	(unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	16,880		$	7,666
Accounts receivable		242,173			346,948
Prepaid expenses and other current assets		102,108			111,141
Total current assets		361,161			465,755
Property and equipment, net of accumulated depreciation		73,694			77,000
Right of use asset, net of accumulated depreciation		6,201			7,814
Intangible assets, net of accumulated amortization		1,942,411			2,016,645
Goodwill		955,468			955,854
Total assets	$	3,348,935		$	3,523,068

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Bank overdraft	$	28,285		$	30,577
Accounts payable and accrued liabilities		618,005			634,914
Accounts payable, related party		15,000			15,000
Interest payable, related party		43,409			41,565
Related party payables		20,887			20,884
Notes payables, related party		81,500			81,500
Notes payable, current portion		110,883			109,778
Lease obligation – operating lease		5,710			6,268
Total current liabilities		940,486			940,486

Notes payable, net of current portion		5,000			5,000
Other long term liability		2,243,229			1,887,711
Lease obligation – operating lease, net of current portion		-			998
Total liabilities		2,834,195			2,834,195

Stockholders' equity
Series A convertible preferred stock, $1.00 par value; 5,000,000 shares authorized; 0 and 0 issued and outstanding at March 31, 2021 and December 31, 2020		-			-
Series B convertible preferred stock, $1.00 par value; 500,000 shares authorized; 64,000 and 64,000 issued and outstanding at March 31, 2021 and December 31, 2020		64,000			64,000
Common stock, $0.001 par value; 275,000,000 shares authorized; 25,926,287 issued and 29,741,287 outstanding at March 31, 2021 and December 31, 2020		25,926			25,926
Common stock subscribed		14,000			14,000
Additional paid in capital		4,913,010			4,913,010
Other comprehensive income		484,853			816,396
Treasury stock, 3,815,000 shares at March 31, 2021 and December 31, 2020		(5,300	)		(5,300	)
Accumulated deficit		(5,319,462	)		(5,139,159	)
Total stockholders’ equity		177,027			688,873

Total liabilities and stockholders' equity	$	3,348,935		$	3,523,068

See accompanying notes to unaudited condensed consolidated financial statements.

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DLT RESOLUTION, INC.
Unaudited Condensed Consolidated Statements of Operations

	Three Months ended March 31,
	2021			2020
Revenue	$	440,083		$	428,347
Cost of revenue and operating expenses
Cost of revenue		363,546			238,686
General and administrative		88,514			196,245
Depreciation and amortization		100,104			115,268
Professional fees		65,831			40,439
Goodwill impairment loss		-			159,187
Total operating expenses		254,504			749,825

Loss from operations		(177,964	)		(321,478	)

Other expense
Foreign exchange loss		(45	)		-
Interest expense		(2,294	)		(7,424	)
Total other expense		(2,339	)		(7,424	)
Net loss before income taxes		(180,303	)		(328,902	)

Income taxes		-			-

Net loss	$	(180,303	)	$	(328,902	)

Loss from per common share, basic and diluted	$	(0.01	)	$	(0.01	)
Weighted average basic shares outstanding		25,926,287			25,427,317
Weighted average diluted shares outstanding		25,926,287			25,427,317

See accompanying notes to unaudited condensed consolidated financial statements.

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DLT RESOLUTION, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Loss

	Three Months ended March 31,
	2021			2020
Net loss	$	(180,303	)	$	(328,902	)
Other comprehensive (loss) income
(Loss) gain on valuation adjustment to other long-term liabilities		(300,000	)		230,024
Foreign currency translation adjustment		(31,543	)		(215,351	)
Total other comprehensive loss		(331,543	)		14,673

Comprehensive loss	$	(511,846	)	$	(314,229	)

See accompanying notes to unaudited condensed consolidated financial statements.

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DLT RESOLUTION, INC

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

	Series B Preferred Stock				Common Stock				Common Stock		Additional Paid-in		Treasury			Other Comprehensive			Accumulated
	Shares		Amount		Shares		Amount		Subscribed		Capital		Stock			income			Deficit			Total
Balance, December 31, 2020		64,000	$	64,000		25,926,287	$	25,926	$	14,000	$	4,913,010	$	(5,300	)	$	816,396		$	(5,139,159	)		(368,300	)
		-		-																			-
Foreign currency translation adjustment		-		-		-		-		-		-		-			(31,543	)		-			(31,543	)

Loss on adjusted value of other long-term liability		-		-		-		-		-		-		-			(300,000	)		-			(300,000	)

Net loss		-		-		-		-		-		-					-			(180,303	)		(180,303	)

Balance, March 31, 2021		64,000	$	64,000		25,926,287	$	25,926	$	14,000	$	4,913,010	$	(5,300	)	$	484,853		$	(5,319,462	)	$	177,027

Balance, December 31, 2019		64,000	$	64,000		24,395,037	$	24,395	$	-	$	4,218,265	$	(5,300	)	$	(34,430	)	$	(4,635,230	)	$	(368,300	)

Issuance of common stock for acquistion		-		-		1,500,000		1,500		-		2,398,500		-			-			-			2,400,000

Issuance of common stock for cash proceeds						31,250		31		-		24,969		-			-			-			25,000

Foreign currency translation adjustment		-		-		-		-		-		-		-			(215,351	)		-			(215,351	)

Gain on adjusted value of other long-term liability		-		-		-		-		-		-		-			230,024			-			360,024

Net loss		-		-		-		-		-		-		-			-			(328,902	)		(328,902	)

Balance March 31, 2020		64,000	$	64,000		25,926,287	$	25,926	$	-	$	6,641,734	$	(5,300	)	$	(19,757	)	$	(4,964,132	)	$	1,742,471

See accompanying notes to unaudited condensed consolidated financial statements.

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DLT RESOLUTION, INC
Unaudited Condensed Consolidated Statements of Cash Flows

	March 31,
	2021			2020
Cash flows from operating activities
Net (loss) from continuing operations	$	(180,303	)	$	(328,902	)

Adjustments to reconcile net loss to net cash used in operating activities
Goodwill impairment loss		-			159,187
Depreciation and amortization expense		100,103			115,268
Changes in operating assets and liabilities
Accounts receivable		108,231			13,958
Prepaid expenses and other current assets		10,126			-
(Repayments) proceeds from related parties, net		(21,339	)		(4,256	)

Interest payable, related party		1,844			1,844
Accounts payable and accrued liabilities		138,165			20,698
Accounts payable, related party		-			-
Lease obligation		(1,629	)		(1,580	)
Net cash provided by (used in) operating activities		355			(23,783	)

Cash flows from investing activities
Purchase of equipment		-			(1,911	)
Net cash used in investing activities		-			(1,911	)

Cash flows from financing activities
Proceeds from sale of common stock		-			25,000
(Repayments) proceeds from bank overdrafts		9,218			(11,278	)
Net cash provided by financing activities		9,218			13,722

Net change in cash		9,573			(11,972	)
Effect of exchange rate on cash		(359	)		(1,168	)
Cash and cash equivalents at beginning of year		7,666			13,140

Cash and cash equivalents at end of year		16,880		$	-

Supplemental cash flow information
Cash paid for interest	$	-		$	-
Cash paid for income taxes	$	-		$	-

Non-cash investing and financing activities

Other long term liability entered into for acquisition of Union Strategies, Inc.	$	-		$	1,370,000
Common shares issued for acquisition of Union Strategies, Inc.	$	-		$	2,400,000
Net of Union Strategies, Inc. assets acquired and liabilities assumed	$	-		$	4,000,000

See accompanying notes to unaudited condensed consolidated financial statements.

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DLT RESOLUTION, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2021

Note 1 – Organization and Significant Accounting Policies

DLT Resolution Inc. (“DLT, the “Company”, “we” and “our”) operates in three high-tech industry segments: Blockchain Applications; Telecommunications; and Data Services which includes Image Capture, Data Collection, Data Phone Center Services, and Payment Processing. The Company offers secure data management, Information Technology (IT) and other telecommunications services in Canada and the United States. The Company operates a Health Information Exchange providing the ability to request and retrieve medical information and records while meeting all of today’s Security & Compliance demands for HIPAA, PIPEDA and PHIPA. Through our acquisition of Union Strategies, Inc. (“USI”), the Company operates a business focused on designing, installing and maintaining telephony, data, video, storage, and LAN/WAN networks. USI’s clients encompass K-12 and higher education institutions, trades industry organizations, and local government entities having memberships ranging from 100 to 10,000 people that utilize products and services that USI provides by deploying a variety of technologies to keep client networks up and running efficiently.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues to experience negative cash flow from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management’s plans in regards to this matter include raising additional equity financing and borrowing funds under a private credit facility and/or other credit sources.

Interim Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and in conformity with the instructions to Form 10-Q and Article 8 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these condensed consolidated financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in our opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with US GAAP and SEC regulations for interim financial statements. The results for the three months ended March 31, 2021 are not necessarily indicative of the results that we will have for any subsequent period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes to those statements for the year ended December 31, 2020 included in our Annual Report on Form 10-K as filed with the SEC on May 10, 2021.

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Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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.

Income taxes

Income taxes are provided for using the liability method of accounting in accordance with FASB ASC Topic 740 (formally SFAS No. 109 “Accounting for Income Taxes”). A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

At March 31, 2021, there were no uncertain tax positions that require accrual.

Revenue Recognition

The Company follows ASC 606 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue upon the transfer of promised services to customers in amounts that reflect the consideration to which the Company expects to be entitled the transfer of services. The Company considers revenue earned when all the following criteria are met: (i) the contract with the customer has been identified, (ii) the performance obligations have been identified, (iii) the transaction price has been determined, (iv) the transaction price has been allocated to the performance obligations, and (v) the performance obligations have been satisfied. The Company primarily generates revenues through the sale of products through its website and at industry tradeshows.

Net Income (Loss) Per Share

Net loss per share is calculated in accordance with FASB ASC topic 260. Basic earnings (loss) per share is computed by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is computed by dividing net income, or loss, by the weighted average number of shares of common stock outstanding for the period, assuming conversion or exercise of all potentially dilutive securities outstanding during each reporting period presented. Potentially dilutive securities are not presented or used in the computation of diluted loss per share on the statement of operations for periods when the Company incurs net losses, as their effect would be anti-dilutive.

As of March 31, 2021 and 2020, the Company had 64,000 shares of Series B Convertible Preferred Stock issued and outstanding, which were convertible into 12,800 shares of the Company’s common stock. As of March 31, 2021, the Company expects to issue an additional 1,500,000 restricted common shares of stock from recent acquisitions. See Note 2.

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Foreign Currency Translation

The functional currency of the Company’s subsidiaries in Canada is the Canadian Dollar. The subsidiaries’ assets and liabilities have been translated to U.S. dollars using exchange rates of 0.792016 and 0.784129 in effect at the balance sheet dates of March 31, 2021 and December 31, 2020, respectively. Unaudited condensed consolidated statements of operations amounts have been translated using the weighted average exchange rates of 0.790010 for the three months ended March 31, 2021 and 0.744205 for the three months ended March 31, 2020. Resulting gains or losses from translating foreign currency financial statements are recorded as other comprehensive income (loss). Foreign currency transaction gains and losses resulting from exchange rate fluctuations on transactions denominated in a currency other than the local currency are included in other income (expense). Foreign currency transaction losses recognized for the three-month periods ended March 31, 2021 and 2020 were $45 and $0, respectively.

Fair Value of Financial Instruments

Fair value of certain of the Company’s financial instruments including cash, prepaid expenses, accounts payable, accrued expenses, notes payable, and other accrued liabilities approximate cost because of their short maturities. The Company measures and reports fair value in accordance with ASC 820, “Fair Value Measurements and Disclosure” defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value investments.

Fair value, as defined in ASC 820, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset should reflect its highest and best use by market participants, principal (or most advantageous) markets, and an in-use or an in-exchange valuation premise. The fair value of a liability should reflect the risk of non-performance, which includes, among other things, the Company’s credit risk.

Valuation techniques are generally classified into three categories: the market approach; the income approach; and the cost approach. The selection and application of one or more of the techniques may require significant judgment and are primarily dependent upon the characteristics of the asset or liability, and the quality and availability of inputs. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also provides fair value hierarchy for inputs and resulting measurement as follows:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity, and that are significant to the fair values.

Fair value measurements are required to be disclosed by the Level within the fair value hierarchy in which the fair value measurements in their entirety fall. Fair value measurements using significant unobservable inputs (in Level 3 measurements) are subject to expanded disclosure requirements including a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings, and a description of where those gains or losses included in earning are reported in the statement of income.

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Note 2 – Acquisitions

Acquisition of 1922861 Ontario Inc.

On April 12, 2018, the Company entered into and closed the transactions contemplated by the definitive asset purchase agreement and plan of re-organization by and among the Company, 1922861 Ontario Inc. a corporation organized under the laws of Ontario (“1922861 Ontario Inc.”), the stockholders of 1922861 Ontario Inc. and other parties signatory thereto to acquire all the operating assets of 1922861 Ontario Inc. for 500,000 restricted common shares of DLT Resolution valued at $212,520, and a payment of CAD $19,200 to 1922861 Ontario’s supplier. On September 21, 2018 the 1922861 Ontario Inc. acquisition reached the first milestone and received another 500,000 restricted commons shares of DLT Resolution valued at $205,295. The acquisition is considered a business combination for accounting purposes under ASC 805, and resulted in the integration of 1922861 Ontario Inc.’s operating assets and processes into the Company’s Canadian subsidiary DLT Resolution Corp.

In addition to the consideration on closing, an additional 500,000 restricted shares of Company Common Stock may potentially be issued upon the acquired base generating CAD $500,000 in cumulated gross sales with a 10% pre-tax profit. The Company has allotted 24 months to achieve this milestone. There is full acceleration to allow for full vesting as quickly as the cumulative sales milestones are reached.

The Company applied the acquisition method to the business combination and valued each of the assets acquired (cash, accounts receivable, equipment, customer relationships, software, domain names and non-compete agreements) and liabilities assumed (accounts payable and related party payable) at fair value as of the acquisition date. The carrying values of cash, accounts receivable, accounts payable and related party payable were deemed to be fair value as of the acquisition date. The Company determined the fair value of the equipment to be historical net book value. The preliminary allocation of the purchase price was based on estimates of the fair value of the assets and liabilities assumed based on provisional amounts. However, the allocation of excess purchase and the amounts allocated to intangible assets are now as per valuation of assets and liabilities performed by independent valuer. Under the purchase agreement, the Company issued 1,000,000 shares of Common Stock valued at $417,815 and committed to issue an additional 500,000 shares of Common Stock at certain milestones, which was determined to have a fair value of $685,000 with mark to market pricing of DLT stock price as of December 31, 2020 and March 31, 2021 using its closing price as of both dates. The obligation to issue the 500,000 shares of Company Common Stock is shown as an “other long-term liabilities” on the face of the balance sheet and was valued at $703,229 and $647,711 as of March 31, 2021 and December 31, 2020, respectively. The following table shows the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

ASSETS ACQUIRED
Accounts receivable	$	18,663
Customer list		103,255
Developed technology		321,679
Domain and trade name		3,971
Non-compete		37,330
Goodwill		169,896
TOTAL ASSETS ACQUIRED	$	654,794

LIABILITIES ASSUMED
Accounts payable		22,197
HST payable		2,147
TOTAL LIABILITIES ASSUMED		24,344

NET ASSETS ACQUIRED	$	630,450

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Acquisition of Union Strategies Inc.

On January 30, 2020, the Company entered into transactions contemplated by the definitive share for share exchange agreement and plan of re-organization (the “Purchase Agreement”) by and among the Company, Union Strategies. Inc. (“USI”), the stockholders of USI and other parties signatory thereto to acquire all the issued and outstanding capital stock of USI for 1,500,000 shares of the Company’s restricted Common Stock (the “Closing Shares”). The acquisition resulted in USI becoming a wholly-owned subsidiary of the Company.

In the event that USI’s gross revenue for 2020 exceeds CAD $3,100,000 and it generates a minimum $75,000 in EBITDA (the “Performance Targets”), the Company agreed to issue an additional 1,000,000 shares of restricted Company Common Stock (“the Contingent Shares”) as additional purchase price consideration, which the Company estimates is probable that the Performance Targets will be achieved. Based on the $1.60 closing share price of the Company’s Common Stock on January 30, 2020, the Closing Shares are valued at $2,400,000 and the Contingent Shares are valued at $1,600,000, for a total purchase price consideration of $4,000,000.

The Company applied the acquisition method to the business combination and valued each of the assets acquired and liabilities assumed at fair value as of the acquisition date. The carrying values of accounts receivable, property and equipment, right to use asset, accounts payable, HST payable, accrued liabilities and lease obligation were deemed to be fair value as of the acquisition date. The preliminary allocation of the purchase price is based on estimates of the fair value of the assets and liabilities assumed based on provisional amounts. However, the estimates of the fair value of the assets acquired and liabilities assumed are subject to revision based on the results of their valuation performed by an independent valuer. The obligation to issue the Contingent Shares is subject mark to market pricing of DLT stock price and is included in “other long-term liabilities” on the face of the balance sheet and valued at $1,540,000 and $1,240,000 based on the closing share price of DLT Common Stock on March 31, 2021 and December 31, 2020, respectively.

The following table shows the estimated fair values of USI’s assets acquired and liabilities assumed at the January 30, 2020 date of acquisition:

ASSETS ACQUIRED
Accounts receivable, net	$	163,138
Property and equipment, net		91,506
Right to use asset, net		14,001
Customer list		2,073,780
Developed technology		2,073,740
TOTAL ASSETS ACQUIRED	$	4,416,126

LIABILITIES ASSUMED
Accounts payable, HST payable and accrued liabilities		402,582
Lease obligation		13,544
TOTAL LIABILITIES ASSUMED		416,126

NET ASSETS ACQUIRED	$	4,000,000

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Pro Forma

The following table presents the unaudited pro forma results of the Company for the years ended December 31, 2019 and 2018 as if the acquisitions of USI and the combined 1922861 Ontario Inc. and DLT Resolution Corp. occurred on January 1, 2018. The pro forma results include estimates and assumptions which management believes are necessary. However, pro forma results do not include an anticipated cost savings or their effects of the planned integration of USI and 1922861 Ontario Inc. and are not necessarily indicative of the result that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future. The unaudited pro forma revenue and net loss for USI was approximately $2,730,000 and $175,000, respectively, for 2019. The unaudited pro forma revenue and net income for USI was approximately $2,700,000 and $88,000, respectively, for 2018. The unaudited pro forma revenue and net loss for the combined 1922861 Ontario Inc. and DLT Resolution Corp. was approximately $953,000 and $374,000, respectively, for the year ended December 31, 2018. The pro forma information includes adjustments for the amortization of intangible assets.

	Year ended December 31,
	2019			2018
	(unaudited)			(unaudited)

Revenue	$	3,193,000		$	3,653,000
Net loss		(1,730,000	)		(802,000	)

USI and 1922861 Ontario Inc. did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and net losses.

Note 3 – Goodwill and Intangible Assets

Due to a sustained decline in the market capitalization of our common stock during the first quarter of 2020, we performed an interim goodwill impairment test. Management considered that, along with other possible factors affecting the assessment of the Company’s reporting unit for the purposes of performing a goodwill impairment assessment, including management assumptions about expected future revenue forecasts and discount rates, changes in the overall economy, trends in the stock price, estimated control premium, other operating conditions, and the effect of changes in estimates and assumptions that could materially affect the determination of fair value and goodwill. As a result of the significant decline in the current market capitalization despite any of the other positive factors contemplated and relatively little change in our ongoing business operations, the outcome of this goodwill impairment test resulted in a charge for the impairment of goodwill of $159,187 recorded in the unaudited condensed consolidated financial statements for the three months ended March 31, 2020.

We amortize identifiable intangible assets on a straight-line basis over their estimated useful lives. As of March 31, 2021 and December 31, 2020, identifiable intangibles were as follows:

	March 31, 2021			December 31, 2020

Developed technology	$	460,954		$	456,363
Customer relationships		1,018,533			1,008,390
Website		119,000			119,000
Domain and trade name		139,395			138,007
Non-compete		853,002			844,507
Accumulated amortization		(648,473	)		(549,622	)
Total intangible assets, net	$	1,942,411		$	2,016,645

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Expected future amortization expense related to identifiable intangibles based on our carrying amount as of March 31, 2021 for the following five years is as follows (in thousands):

For the Twelve Months ended March 31,
2022	$	339,767
2023		332,906
2024		332,906
2025		316,778
2026		116,259
Thereafter		503,795
	$	1,942,411

Note 4 – Note Payable

On August 1, 2017, the Company issued a non-interest bearing $5,000 note payable due on July 1, 2019 to a third party in exchange for Company Common Stock held by the third party. As of March 31, 2021, the note is unpaid.

Note 5 – Other Long-term Liabilities

Other long-term liabilities consist of the Company’s obligations to issue shares of its Common Stock pursuant to recent acquisitions. See Note 2. As of March 31, 2021, total other long-term liabilities $2,243,229 consisted of $703,229 for shares issuable for the Acquisition of 1922861 Ontario Inc. and $1,540,000 for the shares issuable for the acquisition of USI. As of December 31, 2020, total other long-term liabilities consisted of $647,711 for shares issuable for the Acquisition of 1922861 Ontario Inc. and $1,240,000 for the shares issuable for the acquisition of USI. The liabilities are subject to mark to market accounting based on the market price of DLT shares of Common Stock and will be extinguished once the shares are issued.

Note 6 – Stockholders’ Equity

Common Stock

On January 13, 2020, the Company issued 31,250 shares of restricted Company Common Stock to a third party individual in a stock subscription agreement for $25,000 in cash.

The Company issued 1,500,000 shares of restricted Common Stock pursuant to the Purchase Agreement to acquire USI. See Note 2.

Series A Convertible Preferred Stock

The Company is authorized to issue 5,000,000 shares of Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock can be converted to common shares at the option of the holder at a rate of $0.10 per share. There were no shares of series A convertible preferred stock issued and outstanding as of March 31, 2021 and December 31, 2020.

Series B Convertible Preferred Stock

The Company is authorized to issue 500,000 shares of Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock can be converted to common shares at the option of the holder at a rate of $0.20 per share. There were 64,000 shares of series B convertible preferred stock issued and outstanding as of March 31, 2021 and December 31, 2020.

Note 7 - Related Party Transactions

No compensation was incurred for the services of the Company’s directors or executives during the periods ended March 31, 2021 and 2020.

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As of March 31, 2021 and December 31, 2020, the Company had outstanding amounts payable to related party payables of $20,887 and $20,884. The obligations are unsecured, non-interest bearing, due on demand and payable in Canadian dollars, with the change in the liability from December 31, 2020 to March 31, 2021 attributable to the change in the exchange rate for U.S. and Canadian dollars.

The Company has a note payable to a related party as settlement for consulting services. The note carries interest of 9% compounded annually and is due on demand. As of March 31, 2021 and December 31, 2020, $81,500 of principal and $43,409 and $41,565 of accrued interest was due, respectively.

Note 8 – Concentrations

During the three-month periods ended March 31, 2021 and 2020, no single customer accounted for more than 10% of our total revenue for the respective periods. As of March 31, 2021 and December 31, 2020, two customers had outstanding accounts receivable balance that exceeded 10% of our total accounts receivable at that time.

Note 9 – Commitments and Contingencies

Leases Commitment

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. USI has an operating lease for its Edmonton, Canada facility that started in March 2019 and terminates in February 2022. There was no sublease rental income for the three-month periods ended March 31, 2021 and 2020. USI paid approximately $2,222 against the Lease obligation in the three months ended March 31, 2021.

USI’s lease agreement does not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments.

ROU lease asset and lease liability for the operating lease is recorded in the balance sheet as follows:

	As of
	March 31, 2021
Operating lease - right of use asset	$	6,201

Lease obligations — operating leases, current portion	$	5,710
Lease obligations — operating leases, net of current portion		-
Total lease liability	$	5,710

Weighted average remaining lease term (in years)		0.6
Weighted average discount rate		7.75	%

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Future lease payments included in the measurement of lease liabilities on the unaudited balance sheet as of March 31, 2021, for the following five fiscal years and thereafter were as follows:

	For the year ending
	December 31,

2021	$	5,703

2022		1,267
Total future minimum lease payments		6,970
Present value adjustment		1,260
Total	$	5,710

Other Commitments

As permitted under Canadian Corporations Business Act, USI agrees to indemnify officers and directors for certain events or occurrences while the officer or director is, or was, serving at USI’s request in this capacity. The term of the indemnification period is indefinite. There is no limit on the amount of future payments USI could be required to make under these indemnification agreements; however, USI maintains insurance policy coverage that may enable USI to recover a portion of any amounts paid. As a result of USI’s insurance policy coverage, management believes the estimated fair value of these indemnifications is minimal. Accordingly, USI did not record any indemnification liabilities as of March 31, 2021 and December 31, 2020.

Note 10 – Subsequent Events

On May 20, 2021, we issued 1,000,000 shares of our Common Stock to the sellers of USI as completion of our purchase price paid.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation. Shareholders’ Equity General

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about DLT Resolutions’ industry, management’s beliefs, and certain assumptions made by management. Forward-looking statements include our expectations regarding product, services, and maintenance revenue, annual savings associated with the organizational changes effected in prior years, and short- and long-term cash needs. In some cases, words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates,” variations of these words, and similar expressions are intended to identify forward-looking statements. In addition, statements about the potential effects of the COVID-19 pandemic on the Company’s businesses, results of operations and financial condition may constitute forward-looking statements. The statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any forward-looking statements. Risks and uncertainties of our business include those set forth in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on May 10, 2021, under “Item 1A. Risk Factors” as well as additional risks described in this Form 10-Q. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Overview

Recent Developments

On January 30, 2020, the Company acquired all the issued and outstanding capital stock of USI for 2,500,000 shares of the Company’s restricted Common Stock (See Note 2). The acquisition, valued at $4,000,000 resulted in USI becoming a wholly owned subsidiary of the Company. USI, located in Woodbridge, Ontario, Canada, is focused on designing, installing and maintaining telephony, data, video, storage, and LAN/WAN networks. USI has clients encompassing K-12 and higher education institutions, trades industry organizations, and local government entities having memberships ranging from 100 to 10,000 people that utilize products and services that USI provides by deploying a variety of technologies to keep client networks up and running efficiently.

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Results of Operations

Revenues

Revenues for the three months ended March 31, 2021 and 2021 were $440,083 and $428,347, respectively. The increase resulted primarily from the inclusion of a full quarter’s USI revenue in 2021 compared to the quarter ended March 31, 2020, which includes USI revenue starting on the January 30, 2020 acquisition date.

Cost of Revenue

Cost of revenue for the three months ended March 31, 2021 and 2020 were $363,546 and $196,245, respectively. The increase resulted primarily from the inclusion of a full quarter’s USI cost of revenue in 2021 compared to the quarter ended March 31, 2020, which includes USI cost of revenue starting on the January 30, 2020 acquisition date.

General and Administrative

General and administrative expense, excluding professional fees, was $88,514 and $196,245 for the three months ended March 31, 2021 and 2020, respectively. The decrease resulted primarily from the receipt of nearly $46,000 in Canadian government COVID-19 related payroll subsidies in the three months ended March 31, 2021 that reduced our USI payroll costs for the quarter.

Professional Fees

Professional fees were $65,883 and $40,439 for the three months ended March 31, 2021 and 2020, respectively. The increase resulted primarily from the inclusion of a full quarter’s USI professional fees in 2021 compared to the quarter ended March 31, 2020, which includes USI professional fees starting on the January 30, 2020 acquisition date.

Depreciation and Amortization

Depreciation and amortization expense was $100,104 and $115,268 for the three months ended March 31, 2021 and 2020, respectively. The decrease resulted primarily from the lower level of amortization expense related to intangible assets acquired in the USI acquisition. Our amortization expense in the quarter ended March 31, 2020 was based on an estimated purchase price allocation that we revised in the quarter ended September 30, 2020 following a purchase price allocation analysis performed by a third party that resulted in less amortization expense each quarter thereafter..

Goodwill Impairment Loss

Our goodwill impairment loss was $0 and $159,187 for the three months ended March 31, 2021 and 2020, respectively. Due to a sustained decline in the market capitalization of our Common Stock during the first quarter of 2020, we performed an interim goodwill impairment test. Management considered that, along with other possible factors affecting the assessment of the Company’s reporting unit for the purposes of performing a goodwill impairment assessment, including management assumptions about expected future revenue forecasts and discount rates, changes in the overall economy, trends in the stock price, estimated control premium, other operating conditions, and the effect of changes in estimates and assumptions that could materially affect the determination of fair value and goodwill. As a result of the significant decline in the current market capitalization despite any of the other positive factors contemplated and relatively little change in our ongoing business operations, the outcome of this goodwill impairment test resulted in a charge for the impairment of goodwill of $159,187 in the three months ended March 31, 2020.

Other Expense

The Company had net other expense of $2,339 and $7,424 for the three months ended March 31, 2021 and 2020, respectively. The decrease is due to a reduction in the outstanding balance of our interest-bearing obligations.

Net Loss

The Company had a net loss of $180,303 and $328,902 for the three months ended March 31, 2021 and 2020, respectively. The decrease in net loss in the current year primarily resulted from the aforementioned non-recurring goodwill impairment loss incurred in the period ended March 31, 2020.

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Liquidity and Capital Resources

As of March 31, 2021, we had total current assets of $361,161 and current liabilities of $923,679 creating a working capital deficit of $562,518. As of December 31, 2020, we had working capital deficit of $474,731 with the increase of the deficit attributed to the reduction in our accounts receivable in the quarter ended March 31, 2021 with the proceeds from collections of accounts receivable used to fund our operations.

Net provided by operating activities was $355 during the three months ended March 31, 2021 compared to $19,527 for the same period in 2020.

Net cash used in investing activities was $1,911 during the three months ended March 31, 2021 compared to $0 for the same period in 2020.

During the three months ended March 31, 2021 and 2020, the Company generated $9,218 and $13,722 in cash from financing activities, respectively.

Going Concern

Off-Balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Management of DLT Resolution Inc. is responsible for maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

In addition, the disclosure controls and procedures must ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial and other required disclosures.

At the end of the period covered by this report, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was carried out under the supervision and with the participation of our Principal Executive Officer, Principal Financial and Accounting Officer. Based on his evaluation of our disclosure controls and procedures, he concluded that during the period covered by this report, such disclosure controls and procedures were not effective to detect the inappropriate application of US GAAP standards. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our disclosure controls and that may be considered to be “material weaknesses.”

The Company will continue to create and refine a structure in which critical accounting policies and estimates are identified, and together with other complex areas, are subject to multiple reviews by accounting personnel. In addition, the Company will enhance and test our year-end financial close process. Additionally, the Company’s management will increase its review of our disclosure controls and procedures. Finally, we plan to designate individuals responsible for identifying reportable developments. We believe these actions will remediate the material weakness by focusing additional attention and resources in our internal accounting functions. However, the material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

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Changes in Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and (iv) provide reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because changes in conditions may occur or the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In assessing the effectiveness of our internal control over financial reporting as of December 31, 2020, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on its assessment, management concluded that our internal control over financial reporting as of December 31, 2020 was not effective in the specific areas described in the “Disclosure Controls and Procedures” section above and as specifically described in the paragraphs below.

As of December 31, 2020, the Principal Executive Officer/Principal Financial Officer identified the following specific material weaknesses in the Company’s internal controls over its financial reporting processes:

·	Policies and Procedures for the Financial Close and Reporting Process — Currently there are no policies or procedures that clearly define the roles in the financial close and reporting process. The various roles and responsibilities related to this process should be defined, documented, updated and communicated. Failure to have such policies and procedures in place amounts to a material weakness to the Company’s internal controls over its financial reporting processes.

·	Representative with Financial Expertise — For the year ending December 31, 2020, the Company did not have a representative with the requisite knowledge and expertise to review the financial statements and disclosures at a sufficient level to monitor the financial statements and disclosures of the Company. Failure to have a representative with such knowledge and expertise amounts to a material weakness to the Company’s internal controls over its financial reporting processes.

·	Adequacy of Accounting Systems at Meeting Company Needs — The accounting system in place at the time of the assessment lacks the ability to provide high quality financial statements from within the system, and there were no procedures in place or built into the system to ensure that all relevant information is secure, identified, captured, processed, and reported within the accounting system. Failure to have an adequate accounting system with procedures to ensure the information is secure and accurately recorded and reported amounts to a material weakness to the Company’s internal controls over its financial reporting processes.

·	Segregation of Duties — Management has identified a significant general lack of definition and segregation of duties throughout the financial reporting processes. Due to the pervasive nature of this issue, the lack of adequate definition and segregation of duties amounts to a material weakness to the Company’s internal controls over its financial reporting processes.

In light of the foregoing, once we have the adequate funds, management plans to develop the following additional procedures to help address these material weaknesses:

The Company will create and refine a structure in which critical accounting policies and estimates are identified, and together with other complex areas, are subject to multiple reviews by accounting personnel. In addition, we plan to enhance and test our month-end and year-end financial close process. Additionally, our audit committee will increase its review of our disclosure controls and procedures. We also intend to develop and implement policies and procedures for the financial close and reporting process, such as identifying the roles, responsibilities, methodologies, and review/approval process. We believe these actions will remediate the material weaknesses by focusing additional attention and resources in our internal accounting functions. However, the material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2021 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

On March 29, 2019, DLT Resolution Corp. and DLT Resolution Inc. was served with a Statement of Claimants 300-306 Town Centre Boulevard Limited Partnership/Court File No. CV-19-00617228-000 (Toronto) for unpaid rent and lost revenue related to the premises. In this action, the Plaintiff has claimed damages against the Defendants DLT Resolution Corp. and DLT Resolution Inc. in the amount of $567,385 for an alleged breach of lease. The Plaintiff has claimed damages against the Defendant DLT Resolution Inc. in the amount of $567,385 for allegedly wrongfully inducing a breach of lease and tortious interference with contractual relations. The Plaintiff has further claimed damages against the Defendant DLT Resolution Inc. in the amount of $567,385 for allegedly oppressive conduct under the Ontario Business Corporations Act. The Plaintiff has further claimed compensation for its legal costs and for pre-judgment interest. The Company filed a statement of Defense citing, amongst other things, that it has never entered into any agreement with the landlord, nor guaranteed any such liability. The Defendants DLT Resolution Corp. and DLT Resolution Inc. intend to contest the claim vigorously. There is no intention to make a settlement offer nor have instructions been received to make a settlement offer at this juncture. Since the statement of defense was delivered on May 16, 2019, the Company had no further communication from counsel for the Plaintiff nor have any steps been taken to move the litigation forward. Although there can be no assurance of the Company’s ability to dismiss the claim, management feels the claim is without merit and is confident it will receive a ruling in its favor.

Item 1. Risk Factors.

Not required under Regulation S-K for smaller reporting companies

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

On May 20, 2021, the Company issued 1,000,000 shares of its restricted Common Stock to the former shareholders of USI as additional compensation for acquiring all of USI’s issued and outstanding common shares (see Note 2).

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None

Item 5. Other Information.

None.

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Item 6. Exhibits.

The following exhibits are attached hereto:

Exhibit No.		Description of Exhibit

31.1	*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	*	Certification of Principal Accounting Officer pursuant to Rule 13a-15(e) and 15d-15(e), promulgated under the Securities and Exchange Act of 1934, as amended, filed herewith.
32.1	**	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Securities Exchange Act, as amended, and 18 U.S.C. Section 1350.
32.2	**	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101		Interactive data files pursuant to Rule 405 of Regulation S-T

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DLT Resolution, Inc.

By:	/s/ John Wilkes	/s/ John Wilkes
	John Wilkes	John Wilkes
	President and Chief Executive Officer	Chief Financial Officer, Secretary and Treasurer
	(Principal Executive Officer)	(Principal Financial Officer)

	May 26, 2021	May 26, 2021

DLT Resolution Inc. - FORM 10-Q - May 26, 2021

Attached files

DLT Resolution Inc. Reports