DLT Resolution Inc 10-Q for FY2021 Q3
DLT Resolution Inc. (DLTI)
About this 10-Q
DLT Resolution Inc filed this 10-Q on November 15, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $342.56K
- down 42.8% from $599.16K a year earlier
- Net loss
- $175.3K
- compared with a net loss of $11.94K a year earlier
- Diluted EPS
- -$0.02
- compared with $0.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
OR
Commission file number
(Exact name of registrant as specified in its charter) |
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(State of Incorporation) |
| (I.R.S. Employer Identification No.) |
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(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 ☐
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 ☐
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
As of November 15, 2021, 26,926,287 shares of the registrant’s Common Stock, $0.001 par value, were issued and
TABLE OF CONTENTS
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2021
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PART I FINANCIAL INFORMATION |
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| Condensed Consolidated Statements of Changes in Stockholders’ Deficit |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 1: Financial Statements.
DLT RESOLUTION, INC |
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Condensed Consolidated Balance Sheets |
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| September 30, 2021 |
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| December 31, 2020 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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Accounts receivable, net of allowance for doubtful accounts of $44,730 at September 30, 2021 and $148,779 at December 31, 2020 |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net of accumulated depreciation |
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Operating lease – right of use asset |
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Intangible assets, net of accumulated amortization |
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Goodwill |
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Total assets |
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LIABILITIES AND STOCKHOLDERS’DEFICIT | ||||||||
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Current liabilities |
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Bank overdraft |
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Accounts payable and accrued liabilities |
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Accounts payable, related party |
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Interest payable, related party |
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Related party payables |
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Note payable, related party |
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Notes payable, current portion |
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Lease obligation – operating lease |
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Total current liabilities |
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Notes payable, net of current portion |
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Other long term liability |
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Lease obligation – operating lease, net of current portion |
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Total liabilities |
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Stockholders’ equity |
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Series A convertible preferred stock, $ |
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Series B convertible preferred stock, $ |
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Common stock, $ |
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Common stock subscribed |
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Additional paid-in capital |
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Other comprehensive income |
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Treasury stock, |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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See accompanying notes to unaudited condensed consolidated financial statements. | ||||||||
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| Table of Contents |
DLT RESOLUTION, INC. | ||||||||||||||||
Condensed Consolidated Statements of Operations | ||||||||||||||||
(Unaudited) | ||||||||||||||||
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| Three months ended September 30, |
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| Nine months ended September 30, |
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Revenue |
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Cost of revenue and operating expenses |
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Cost of revenue |
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General and administrative |
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Depreciation and amortization |
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Professional fees |
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Goodwill impairment loss |
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Total operating expenses |
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Loss from operations |
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Other expense |
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Foreign exchange loss |
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Interest expense |
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Total other expense |
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Net loss |
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Basic loss per common share – net loss |
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Diluted loss per common share – net loss |
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Weighted average basic shares outstanding |
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Weighted average diluted shares outstanding |
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See accompanying notes to unaudited condensed consolidated financial statements. | ||||||||||||||||
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| Table of Contents |
DLT RESOLUTION, INC. | ||||||||||||||||
Consolidated Statements of Comprehensive Loss | ||||||||||||||||
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| Three months ended September 30, |
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| Nine months ended September 30, |
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| 2020 |
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Net loss |
| $ | ( | ) |
| $ | ( | ) |
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Other comprehensive loss |
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Gain on adjusted value of other long-term liability |
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Foreign currency translation adjustment |
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Total other comprehensive loss |
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Comprehensive loss |
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| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
| Table of Contents |
DLT RESOLUTION, INC
Unaudited Consolidated Statements of Changes in Stockholders’ Equity
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| Series B Preferred Stock |
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| Common Stock |
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| Common Stock |
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| Additional Paid-in |
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| Treasury |
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| Other Comprehensive |
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| Shares |
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| Amount |
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| Subscribed |
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| Capital |
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| Stock |
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| income |
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| Deficit |
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| Total |
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Balance, December 31, 2020 |
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Issuance of common stock for acquisition |
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Foreign currency translation adjustment |
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Loss on adjusted value of other long-term liability |
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Net loss |
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Balance, September 30, 2021 |
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Balance, December 31, 2019 |
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Issuance of common stock for acquisition |
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Issuance of common stock for cash proceeds |
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Sale of common stock subscription |
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Foreign currency translation adjustment |
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Gain on adjusted value of other long-term liability |
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Net loss |
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Balance September 30, 2020 |
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See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
| Table of Contents |
DLT RESOLUTION, INC | ||||||||
Condensed Consolidated Statements of Cash Flows | ||||||||
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| Nine Months Ended September 30, 2021 |
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| Nine Months Ended September 30, 2020 |
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Cash flows from operating activities |
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Net loss |
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Adjustments to reconcile net loss to net cash used in operating activities |
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Depreciation and amortization expense |
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Goodwill impairment loss |
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Changes in operating assets and liabilities |
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Accounts receivable |
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Lease obligation |
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| ( | ) |
Interest payable, related party |
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Accounts payable and accrued liabilities |
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Repayments to related parties |
|
| ( | ) |
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| ( | ) |
Prepaid expenses and other current assets |
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| ( | ) | |
Net cash used in operating activities |
|
| ( | ) |
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| ( | ) |
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Net cash used in investing activities |
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Purchase of equipment |
|
| ( | ) |
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| ( | ) |
Net cash used in investing activities |
|
| ( | ) |
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| ( | ) |
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Cash flows from financing activities |
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Proceeds from notes payable |
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Proceeds from (repayment of) bank overdrafts |
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| ( | ) | |
Proceeds from sale of common stock |
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Proceeds from sale of common stock subscription |
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Net cash provided by financing activities |
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Net change in cash |
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| ( | ) | |
Effect of exchange rate on cash |
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Cash at beginning of period |
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Cash at end of period |
| $ |
|
| $ |
| ||
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Supplemental cash flow information |
|
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Cash paid for interest |
| $ |
|
| $ |
| ||
Cash paid for income taxes |
| $ |
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| $ |
| ||
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Non-cash investing and financing activities |
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Other long term liability entered into for acquisition of Union Strategies, Inc. |
| $ |
|
| $ |
| ||
Common shares issued for acquisition of Union Strategies, Inc. |
| $ |
|
| $ |
| ||
Net of Union Strategies, Inc. assets acquired and liabilities assumed |
| $ |
|
| $ |
| ||
|
|
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See accompanying notes to unaudited condensed consolidated financial statements. | ||||||||
| 7 |
| Table of Contents |
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.
| 8 |
| Table of Contents |
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
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
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.
| 9 |
| Table of Contents |
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
In addition to the consideration on closing, an additional
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
ASSETS ACQUIRED |
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Accounts receivable |
| $ |
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Customer list |
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Developed technology |
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Domain and trade name |
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Non-compete |
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Goodwill |
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TOTAL ASSETS ACQUIRED |
| $ |
| |
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LIABILITIES ASSUMED |
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Accounts payable |
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HST payable |
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TOTAL LIABILITIES ASSUMED |
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NET ASSETS ACQUIRED |
| $ |
| |
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
In the event that
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
| 10 |
| Table of Contents |
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 |
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Accounts receivable, net |
| $ |
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Property and equipment, net |
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Right to use asset, net |
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Customer list |
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Developed technology |
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TOTAL ASSETS ACQUIRED |
| $ |
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LIABILITIES ASSUMED |
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Accounts payable, HST payable and accrued liabilities |
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Lease obligation |
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TOTAL LIABILITIES ASSUMED |
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NET ASSETS ACQUIRED |
| $ |
| |
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 $
|
| Year ended December 31, |
| |||||
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| 2019 |
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| 2018 |
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| (unaudited) |
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| (unaudited) |
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Revenue |
| $ |
|
| $ |
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Net loss |
|
| ( | ) |
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| ( | ) |
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 $
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:
|
| September 30, 2021 |
|
| December 31, 2020 |
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Developed technology |
| $ |
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| $ |
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Customer relationships |
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Website |
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Domain and trade name |
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Non-compete |
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Accumulated amortization |
|
| ( | ) |
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| ( | ) |
Total intangible assets, net |
| $ |
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| $ |
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| 11 |
| Table of Contents |
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):
For the Twelve Months ended September 30, |
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2021 |
| $ |
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2022 |
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2023 |
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2024 |
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2025 |
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Thereafter |
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| $ |
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Note 4 – Notes Payable
On August 1, 2017, the Company issued a non-interest bearing $
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 $
Note 6 – Stockholders’ Equity
Common Stock
On January 13, 2020, the Company issued
On January 13, 2020, the Company issued
Common stock subscribed
The Company sold a subscription to purchase
Series A Convertible Preferred Stock
The Company is authorized to issue
Series B Convertible Preferred Stock
The Company is authorized to issue
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 $
The Company has a note payable to a related party as settlement for consulting services. The note carries interest of
Note 8 – Concentrations
During the three-month and nine-month periods ended September 30, 2021 and 2020, no single customer accounted for more than
| 12 |
| Table of Contents |
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 $
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 |
| |
|
| September 30, 2021 |
| |
Operating lease - right of use asset |
| $ |
| |
|
|
|
|
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Lease obligations — operating leases, current portion |
| $ |
| |
Lease obligations — operating leases, net of current portion |
|
|
| |
Total lease liability |
| $ |
| |
|
|
|
|
|
Weighted average remaining lease term (in years) |
|
|
| |
Weighted average discount rate |
|
| % | |
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:
|
| For the year ending |
| |
|
| December 31, |
| |
|
|
|
| |
2021 |
| $ |
| |
|
|
|
|
|
2022 |
|
|
| |
Total future minimum lease payments |
|
|
| |
Present value adjustment |
|
|
| |
Total |
| $ |
| |
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.
| 13 |
| Table of Contents |
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.
| 14 |
| Table of Contents |
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.
| 15 |
| Table of Contents |
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.
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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.
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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. |
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· | 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. |
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· | 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. |
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· | 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 September 30, 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 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.
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Item 6. Exhibits.
The following exhibits are attached hereto:
Exhibit No. |
| Description of Exhibit |
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| 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. |
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By: | /s/ John Wilkes | /s/ John Wilkes |
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| John Wilkes | John Wilkes |
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| President and Chief Executive Officer | Chief Financial Officer, Secretary and Treasurer |
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| (Principal Executive Officer) | (Principal Financial Officer) |
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| November 15, 2021 | November 15, 2021 |
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