DLT Resolution Inc. - Quarter Report: 2021 September (Form 10-Q)

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 September 30, 2021

OR

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

Commission file number 333-148546

(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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐     No ☒

As of November 15, 2021, 26,926,287 shares of the registrant’s Common Stock, $0.001 par value, were issued and 22,667,537 were outstanding.

TABLE OF CONTENTS

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2021

Item 1: Financial Statements.

See accompanying notes to unaudited condensed consolidated financial statements.

DLT RESOLUTION, INC

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

See accompanying notes to unaudited condensed consolidated financial statements.

DLT RESOLUTION, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 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 and nine months ended September 30, 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.

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 September 30, 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 September 30, 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 September 30, 2021, the Company expects to issue an additional 500,000 restricted common shares of stock from a recent acquisition. See Note 2.

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 0.789079 and 0.784129 in effect at the balance sheet dates of September 30, 2021 and December 31, 2020, respectively. Unaudited condensed consolidated statements of operations amounts have been translated using the annual weighted average exchange rates of 0.793692 for the nine months ended September 30, 2021 and 0.750785 for the nine months ended September 30, 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 nine-month periods ended September 30, 2021 and 2020 were ($281) and ($3), 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.

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 with mark to market pricing of DLT closing stock price as of December 31, 2020 and September 30, 2021. 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 $1,049,463 and $647,711 as of September 30, 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:

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. Under the purchase agreement, the Company issued 1,500,000 shares of Common Stock and committed to issue an additional 1,000,000 shares of Common Stock at certain milestones, which was determined to have a fair value with mark to market pricing of DLT closing stock price as of December 31, 2020 and May 20, 2021, being the date that the Company issued the 1,000,000 shares. The obligation to issue the 1,000,000 shares of Company Common Stock is shown as an “other long-term liabilities” on the face of the balance sheet and was valued at $0 and $1,240,000 as of September 30, 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:

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.

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 $160,594 recorded in the unaudited condensed consolidated financial statements for the nine months ended September 30, 2020.

We amortize identifiable intangible assets on a straight-line basis over their estimated useful lives. As of September 30, 2021 and December 31, 2020, identifiable intangibles were as follows:

Expected future amortization expense related to identifiable intangibles based on our carrying amount as of September 30, 2021 for the following five years is as follows (in thousands):

Note 4 – Notes 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 September 30, 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 September 30, 2021, other long-term liabilities consisted of $1,049,763 for shares issuable for the Acquisition of 1922861 Ontario Inc. 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. On May 20, 2021, the Company issued 1,000,000 shares of its Common Stock to extinguish the liability in connection with the USI acquisition. The remaining liability is 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.

On January 13, 2020, the Company issued 1,500,000 shares of restricted Common Stock pursuant to the Purchase Agreement to acquire USI. On May 20, 2021, the Company issued 1,000,000 shares of its Common Stock to extinguish the liability in connection with the USI acquisition. See Note 2.

Common stock subscribed

The Company sold a subscription to purchase 14,000 shares of its Common Stock for $14,000 on April 24, 2020. To date, the shares have not been issued to the purchaser.

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 September 30, 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 September 30, 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 September 30, 2021 and 2020.

As of September 30, 2021 and December 31, 2020, the Company had outstanding amounts payable to a related party payables of $20,886 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 September 30, 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 September 30, 2021 and December 31, 2020, $81,500 of principal and $47,067 and $41,565, of accrued interest was due, respectively.

Note 8 – Concentrations

During the three-month and nine-month periods ended September 30, 2021 and 2020, no single customer accounted for more than 10% of our total revenue for the respective periods. As of September 30, 2021, one customer had an outstanding accounts receivable balance that was 21% of our total accounts receivable at that time. As of December 31, 2020, one customer had an outstanding accounts receivable balance that was 15% 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 nine-month periods ended September 30, 2021 and 2020. USI paid approximately $3,732 against the Lease obligation in the nine months ended September 30, 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:

Future lease payments included in the measurement of lease liabilities on the unaudited balance sheet as of September 30, 2021, for the following five fiscal years and thereafter were as follows:

Payroll taxes

A subsidiary of the Company incurs employer payroll taxes and withholds payroll taxes from employee compensation and is required to remit the funds to Canadian government authorities on a timely basis. The subsidiary has not remitted the payroll taxes and carries the obligation as a current liability. The subsidiary intends to remit the funds as soon as it has the financial ability. The government authorities may assess penalties and interest on the subsidiary. No provision on the balance sheet is carried for the possible assessment. Management estimates that the amount of a potential assessment would not be material to the financial statements as of September 30, 2021 and the nine months then ended.

Canadian sales taxes

The Company charges and collects Canadian federal and provincial sales taxes known as harmonized sales tax or HST and is required to remit the funds to Canadian government authorities on a timely basis. The subsidiary has not remitted the HST taxes and carries the obligation as a current liability. The subsidiary intends to remit the funds as soon as it has the financial ability. The government authorities may assess penalties and interest on the subsidiary. No provision on the balance sheet is carried for the possible assessment. Management estimates that the amount of a potential assessment would not be material to the financial statements as of September 30, 2021 and the nine months then ended.

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 September 30, 2021 and December 31, 2020.

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, 2019, as filed with the SEC on April 30, 2020, 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

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.

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 was organized on October 24, 2011 under the Ontario Business Corporations Act of 1990 and is located in Woodbridge, Ontario, Canada. USI 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.

Results of Operations

Revenues

Revenues for the three months ended September 30, 2021 and 2020 were $342,562 and $599,160, respectively. The decrease resulted primarily from having two of our operating companies having fewer customers and less revenue per customer in the quarter ended September 30, 2021.

Revenues for the nine months ended September 30, 2021 and 2020 were $1,197,976 and $1,576,960, respectively. The decrease resulted primarily from having two of our operating companies having fewer customers and less revenue per customer in the nine months ended September 30, 2021.

Cost of Revenue

Cost of revenue for the three months ended September 30, 2021 and 2020 were $276,898 and $317,665, respectively. The dollar decrease resulted primarily from the reduction in revenue and costs corresponding to that reduced revenue. Cost of revenue as a percentage of revenue increased in the current three-month period as compared to the prior year three-month period primarily due to the lack of reduction in fixed costs associated with producing revenue and those fixed costs accounting for a greater percentage of revenue in the current three-month period.

Cost of revenue for the nine months ended September 30, 2021 and 2020 were $1,010,489 and $820,179, respectively. The increase resulted primarily from USI’s cost of revenue being included for only eight of the nine months ended September 30, 2020 as a result of our acquiring USI on January 30, 2020. Cost of revenue as a percentage of revenue increased in the current nine-month period as compared to the prior year nine-month period primarily due to the lack of reduction in fixed costs associated with producing revenue and those fixed costs accounting for a greater percentage of revenue in the current nine-month period.

General and Administrative

General and administrative expense, excluding professional fees, was $128,039 and $245,005 for the three months ended September 30, 2021 and 2020, respectively. The decrease resulted primarily from the increased benefit of Canadian government provided payroll subsidies in the three months ended September 30, 2021.

General and administrative expense, excluding professional fees, was $358,862 and $613,893 for the nine months ended September 30, 2021 and 2020, respectively. The decrease resulted primarily from the benefit of Canadian government provided payroll subsidies in the nine months ended September 30, 2021 that were not available in the nine months ended September 30, 2020, which was partially offset by USI’s general and administrative expense being included for only eight of the nine months ended September 30, 2020 as a result of our acquiring USI on January 30, 2020.

Professional Fees

Professional fees were $46,154 and $29,060 for the three months ended September 30, 2021 and 2020, respectively. Professional fees increased primarily due to the increased use of outside professionals.

Professional fees were $91,942 and $93,481 for the nine months ended September 30, 2021 and 2020, respectively.

Depreciation and Amortization

Depreciation and amortization expense was $63,228 and $1,288 for the three months ended September 30, 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 September 30, 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 that quarter and each quarter thereafter.

Depreciation and amortization expense was $269,064 and $268,321 for the nine months ended September 30, 2021 and 2020, respectively.

Goodwill Impairment Loss

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 $160,594 in the nine months ended September 30, 2020.

Other Expense

The Company had net other expense of $3,442 and $11,902for the three months ended September 30, 2021 and September 30, 2020. The decrease is due to a reduction in the outstanding balance of our interest-bearing obligations.

The Company had net other expense of $8,627 and $30,808 for the nine months ended September 30, 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 $175,299 and $11,935 for the three months ended September 30, 2021 and 2020. The increase in net loss in the current year primarily resulted from the decreases in revenue and gross profit in the three months ended September 30, 2021.

The Company had a net loss of $541,008 and $410,316 for the nine months ended September 30, 2021 and 2020. The increase in net loss in the current year primarily resulted from the decreases in revenue and gross profit in the nine months ended September 30, 2021, which was partially offset by the inclusion of the goodwill impairment loss in the nine months ended September 30, 2020.

Liquidity and Capital Resources

As of September 30, 2021, we had total current assets of $266,552 and current liabilities of $1,013,309 creating a working capital deficit of $746,757. As of December 31, 2020, we had $7,666 of cash, total current assets of $465,755 and current liabilities of $940,486 creating a working capital deficit of $474,731.

Net cash used in operating activities was $13,977 during the nine months ended September 30, 2021 compared to $121,863 for the same period in 2020.

Net cash used in investing activities was $1,493 during the nine months ended September 30, 2021 compared to $766 for the same period in 2020.

During the nine months ended September 30, 2021, the Company generated $16,293 cash from financing activities. During the nine months ended September 30, 2020, the Company generated $119,720 of cash from financing activities that was primarily from the proceeds of Canadian government loans and sales of our common stock.

Going Concern

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.

Off-Balance Sheet Arrangements

We have no 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 stockholders.

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.

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:

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:

There have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2021 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

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 1A. 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.

Item 6. Exhibits.

The following exhibits are attached hereto:

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.