DLTI DLT Resolution Inc (CE)

Notes to Unaudited Consolidated Financial Statements

June 30, 2018

Note 1 - Basis of Presentation

The accompanying unaudited interim consolidated financial statements of DLT Resolution, Inc. collectively referred to herein as (“DLT,” or the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements for the period ended December 31, 2017 and notes thereto contained in the Company’s Form 10-K filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2017 as reported in the form 10-K have been omitted.

During the six months ended June 30, 2018, the Company completed its acquisitions of A.J.D. Data Services (“A.J.D.”) and 1922861 Ontario Inc. (“Ontario”). See Note 9 – Acquisition of A.J.D. Data Services and Note 10 – Acquisition of 1922861 Ontario Inc. Both acquisitions were considered business combinations under ASC 805 “Business Combinations.” The acquisition of A.J.D. was a stock-for-stock exchange resulting in the Company owning 80% of A.J.D. As such, A.J.D. is deemed to be a subsidiary of the Company, and the results and operations of A.J.D. are consolidated with the Company from the date of acquisition forward. The acquisition of Ontario involved the Company purchasing various assets and processes from Ontario. These assets and the results of operations therefrom have been integrated into the Company’s operating subsidiary, DLT Resolution Corp., and reported by the Company from the acquisition date forward. The Company did not acquire any debt or equity ownership in Ontario. As such, Ontario is not deemed to be a subsidiary of the Company.

Note 2 - Going Concern

The Company had an accumulated deficit of $3,439,783 and a working capital deficit of $191,770 as of June 30, 2018. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Continuation of the Company’s existence depends upon its ability to obtain additional capital. 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. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 3 - Significant Accounting Policies

Use of Estimates

The preparation of financial statements, in conformity with generally accepted accounting principles in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

Income Taxes

The Company accounts for income taxes under the asset and liability method, where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

At June 30, 2018, there were no uncertain tax positions that require accrual.

Accounts Receivable

Accounts receivable balances are established for amounts owed to the Company from its customers from the sales of services and products. The Company closely monitors the collectability of outstanding accounts receivable and provide an allowance for doubtful accounts based on estimated collections of outstanding amounts. The Company had accounts receivable of $209,412 and $0 and an allowance for doubtful accounts of $0 and $0 as of June 30, 2018 and December 31, 2017, respectively.

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 document imaging, telemarketing, data entry, document management and all other back-end information technology (“IT”) functions.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation. The Company provides for depreciation using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Maintenance and repair costs are expensed as they are incurred while renewals and improvements which extend the useful life of an asset are capitalized. At the time of retirement or disposal of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the consolidated results of operations.

Intangible Assets

Intangible assets primarily consist of customer relationships, software, non-compete agreements and domain names. The Company amortizes, to cost of revenue and operating expenses, these definite‑lived intangible assets on a straight‑line basis over the life of the assets of five years.

Impairment of Long‑Lived Assets and Goodwill

The carrying value of long‑lived assets is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis.

The Company tests goodwill for impairment annually as of December 31, or whenever events or changes in circumstances indicate that goodwill may be impaired. The Company initially assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company compares the reporting unit’s carrying amount to its fair value. If the reporting unit’s carrying amount exceeds its fair value, an impairment charge is recorded based on that difference.

There was no impairment of long-lived assets or goodwill during the periods presented.

Convertible debt

The Company records beneficial conversion features related to the issuance of convertible debts that have conversion features at fixed or adjustable rates that are less than the Company’s stock prices on the respective issuance dates. The beneficial conversion features for the convertible instruments are recognized and measured by allocating a portion of the proceeds as an increase in additional paid-in capital and as a reduction to the carrying amount of the convertible instruments equal to the intrinsic value of the conversion features based on the difference between the effective conversion rates and the Company’s stock prices on the issuance dates. The beneficial conversion features are accreted by recording additional non-cash interest expense over the expected life of the convertible notes.

Software Development Costs, Customer Relationships, Non-Compete, Domain Name and Amortization

The Company capitalizes software development costs in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 985-20. Software development costs are capitalized after technological feasibility is established. Once the software products become available for general release to the public, the Company amortizes such costs over the related product’s estimated economic useful life to general and administrative expenses. Net capitalized software development costs (included in intangible assets) totaled $149,133 (acquired via issuance of $64,000 of Series B Preferred Stock and $55,000 in accounts payable) at June 30, 2018 and December 31, 2017, respectively. A non-compete agreement, domain name, goodwill, website, customer list and developed technology totaling $1,047,152, were acquired via the acquisition of 1922861 Ontario Inc as an asset purchasevia issuance of 500,000 restricted common shares. Amortization expense totaled $63,731 and $0 and $82,496 and $0 for the three and six months ended June 30, 2018 and 2017, respectively.

Net Income (Loss) Per Share

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 June 30, 2018 and December 31, 2017, the Company had 0 and 25,000 shares, respectively, of Series A Preferred Stock issued and outstanding, which were convertible into 0 and 25,000 shares, respectively, of the Company’s common stock. Also, as of June 30, 2018 and December 31, 2017, 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 December 31, 2017, there was a convertible note outstanding that could convert to a total of 490,000 common shares. As of June 30, 2018, the Company had committed 3,675,000 common shares for issuance as part of the acquisition of A.J.D. Data Services (see Note 9 – Acquisition of A.J.D. Data Services ). Also, as of June 30, 2018 there a potential earn out of an additional 1,000,000 restricted common shares of stock from the acquisition of 1922861 Ontario Inc (see Note 10 – Acquisition of 1922861 Ontario Inc) .

Principals of Consolidation

The consolidated financial statements represent the results of DLT Resolution, Inc.; its wholly owned subsidiary, DLT Resolution Corp.; its 80%-owned subsidiary, A.J.D. Data Services (see Note 9 – Acquisition of A.J.D. Data Services) ; and the assets, processes, and results therefrom of 1922861 Ontario Inc. Note 10 – Acquisition of 1922861 Ontario Inc.) All intercompany transactions and balances have been eliminated.

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 .760884 and .774954 in effect at the balance sheet dates of June 30, 2018 and December 31, 2017, respectively. Statements of operations amounts have been translated using the annual weighted average exchange rates of .790918 and .774678 for the three and six months ended June 30, 2018, and .755419 and .749442 for the three and six months ending June 30, 2017 there were no balances or transaction in CAD in 2017. 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). There were no foreign currency transaction gains or losses recognized during the periods presented.

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.

Note 4 - Related Party Transactions

No salaries were paid to directors or executives during the periods ended June 30, 2018 or 2017.

During the six months ended June 30, 2018, the Company paid out advances to a shareholder totaling $39,964 and made repayments on outstanding payables for advances received from other related parties of $17,657. The related party advances to and from the Company are unsecured and due on demand. There was $27,009 and $44,679 due to related parties as of June 30, 2018 and December 31, 2017, respectively, and $52,559 and $0 due from the shareholder as of June 30, 2018 and December 31, 2017 respectively. During the six months ended June 30, 2018, the Company also made payments for services rendered by related parties totaling $15,000, resulting in balances owed for such services of $40,000 and $55,000 at June 30, 2018 and December 31, 2017.

See Note 6 for Related Party Notes Payable.

Note 5 – Stockholders’ Equity

Series A Convertible Preferred Stock

The Company is authorized to issue up to 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.

During the six months ended June 30, 2018, the Company accepted the conversion of 25,000 shares of Series A Convertible Preferred Stock in exchange for 25,000 shares of common stock.

There were 0 and 25,000 shares of series A convertible preferred stock issued and outstanding as of June 30, 2018 and December 31, 2017, respectively. Additionally, the Company had accrued dividends payable on series A convertible preferred stock totaling $28,185 and $26,697 at June 30, 2018 and December 31, 2017, respectively.

Series B Convertible Preferred Stock

The Company is authorized to issue up to 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 June 30, 2018 and December 31, 2017.

Common Stock

The authorized common stock of the Company consists of 275,000,000 shares and carries a par value of $0.001. During the year ended December 31, 2014, the Company bought back 380,000 post-split shares of common stock into treasury from a former officer for $100. The shares are being carried as treasury shares as reflected on the balance sheet.

During the year ended December 31, 2017, the Company issued a $5,000 note payable and $200 related party payable for a total of 3,777,000 outstanding common shares which are carried as treasury stock. There were 3,815,000 common shares held as treasury stock as of June 30, 2018 and December 31, 2017, respectively.

During the six months ended June 30, 2018, the Company issued 618,855 common shares for cash proceeds of $153,500; 525,000 common shares valued at $120,243 for the acquisition of A.J.D. Data Services; 500,000 common shares valued at $275,000 for the acquisition of 1922861 Ontario Inc; 25,000 common shares for the conversion of 25,000 shares of Series A Convertible Preferred Stock and 63,888 common shares for rounding differences from the effect of a reverse stock split effected during the year ended December 31, 2017.

There were 23,305,614 and 21,572,871 common shares issued and 19,490,614 and 17,757,871 outstanding at June 30, 2018 and December 31, 2017, respectively.

Note 6 – Notes Payable

Related Party

During the year ended December 31, 2015, the Company entered into a note payable with a related party as a settlement for payment of consulting services provided valued at $350,000. The note carries interest of 9% compounded annually and was due on November 19, 2016. During the year ended December 31, 2016, the Company issued 50,000 shares of series A convertible preferred stock as repayment of $31,500 of accrued interest and $18,500 of outstanding principal. Additionally, on January 31, 2017, the Company issued 1,250,000 shares of common stock as repayment of $250,000 of principal. There was $81,500 and $81,500 of principal and $23,183 and $19,545 of accrued interest due as of June 30, 2018 and December 31, 2017.

Non – Related Party

On August 1, 2017, the Company entered into a note payable with an unrelated party to purchase common stock held by the unrelated party. The note is due on July 1, 2019 and bears no interest. There was $5,000 and $5,000 due as of June 30, 2018 and December 31, 2017.

Note 7 – Convertible Notes Payable

On May 22, 2017, the Company entered into a convertible note payable with an unrelated party for $4,900 which was paid to a vendor on the Company’s behalf. The note carried interest at 10% per annum, was due on demand and was convertible at the option of the holder into common stock of the Company at a rate equal to the lesser of a 50% discount from the last trade price of the stock or $0.01 per share. There was $0 and $4,900 of principal and $0 and $3,048 of accrued interest due as of June 30, 2018 and December 31, 2017, respectively, which is included in “accounts payable and accrued liabilities” on the balance sheet. See Note 8 – Derivative Liability for explanation of related derivative liability derived from variable conversion rate. This note was repaid in full in May 2018 (Note 8).

Note 8 – Derivative Liability

As of June 30, 2018 and December 31, 2017, Company had a derivative liability balance of $0 and $20,328 on the balance sheets and recorded gains of $2,703 and $441 from derivative liability fair value adjustments during the three months ended June 30, 2018 and 2017 and a loss of $2,427 and gain of $441 from derivative liability fair value adjustments for the six months ended June 30, 2018. The derivative liability activity comes from convertible notes payable as follows:

As discussed in Note 7 – Convertible Notes Payable , on May 22, 2017 the Company issued a $4,900 Convertible Promissory Note to an unrelated party that is due on demand. The note bears interest at a rate of 10% per annum and can be convertible into the Company’s common shares 90 days after issuance, at the holder’s option, at the conversion rate equal to the lesser of a 50% discount from the last trade prior to conversion or $0.01. The Company analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. In accordance with ASC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

The Company carries its derivative liability on the balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair-values the embedded derivative using the Black-Scholes option pricing model. The fair value of the derivative at the issuance date of this note was $5,348 which was recorded as a derivative liability on the balance sheet. The Company recorded a debt discount of $4,900 which was equal to the face value of the convertible note, and immediately expensed $448. Although the note was due on demand, upon issuance the Company estimated a six-month repayment period, over which they amortized the debt discount in full. As such, the Company recorded $4,900 in amortization expense during the year ended December 31, 2017.

The convertible note was repaid in full on May 22, 2018, on which date the Company determined the derivative’s fair value to be $22,775, which was written off to additional paid-in capital and resulted in a $2,427 net loss from change in fair value for the six months ended June 30, 2018. The fair value of the embedded derivatives for the notes was determined using a Black Scholes valuation model based on the following assumptions: (1) expected volatility of 338%, (2) risk-free interest rate of 2.13%, and (3) expected life of 0.50 of a year.

Note 9 – Acquisition of A.J.D. Data Services

On January 21, 2018, the Company entered into and closed the transactions contemplated by the definitive stock purchase agreement and plan of re-organization by and among the Company, A.J.D. Data Services Ltd., a limited liability company organized under the laws of Ontario (“A.J.D.”), the stockholders of A.J.D. and other parties signatory thereto to acquire 80 shares, representing 80% of the issued and outstanding capital stock of A.J.D. for 525,000 restricted common shares of the Company valued at $120,243. A.J.D. is focused on document imaging, telemarketing, data entry, document management and all other back-end functions. The acquisition is intended to be part of a tax-free share-for-share exchange which will see DLT Resolution issuing restricted common shares on closing and an additional 3,675,000 restricted common shares upon meeting the following milestones:

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. The allocation of the excess purchase price is not final and the amounts allocated to intangible assets are subject to change pending the completion of final valuations of certain assets and liabilities. Under the purchase agreement, the Company issued 525,000 shares of common stock valued at $120,243 and committed to issue an additional 3,675,000 shares of common stock at certain milestones which was determined to have a fair value of $841,702 in exchange for a 80% interest. The estimated fair value of the common stock to be issued of $841,702 is shown as an “other long term liability” on the face of the balance sheet. The following table shows the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

The intangible assets acquired will be amortized over 5 years.

The non-controlling interest was valued using an enterprise value approach whereby the total value of all net assets of A.J.D. were valued with the non-controlling interest representing the minority interest percentage of the net assets as of the date of acquisition. The non-controlling interest was determined to have a fair value of $239,807 as of the date of acquisition.

From the period of acquisition on January 21, 2018 to June 30, 2018, A.J.D. generated total revenues of $285,429.

Note 10 – Acquisition of 1922861 Ontario Inc.

Acquisition of Operating Assets

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 $275,000, and a payment of CAD $19,200 to 1922861 Ontario’s supplier. 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 1,000,000 restricted common shares may potentially be issued upon meeting the following milestones:

The Company has allotted 24 months to achieve these milestones. There is full acceleration to allow for full vesting as quickly as the cumulative sales milestones are reached. Share issuances will be issued under reliance of appropriate exemptions from registration with the Securities & Exchange Commission and will contain substantial resale restrictions.

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. The allocation of the excess purchase price is not final and the amounts allocated to intangible assets are subject to change pending the completion of final valuations of certain assets and liabilities. Under the purchase agreement, the Company issued 500,000 shares of common stock valued at $275,000 and committed to issue an additional 1,000,000 shares of common stock at certain milestones which was determined to have a fair value of $430,639 in exchange for all assets. The estimated fair value of the common stock to be issued of $430,639 is shown as an “other long term liability” and “other payable – short term” which is included in accounts payable on the face of the balance sheet. The following table shows the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

Note 11 – Concentrations of Revenue

During the six months ended June 30, 2018, six customers accounted for 45% of the Company’s total revenue.