Debt Resolve 10Q 2012 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ________ to ___________

Commission File No.: 1-33110

DEBT RESOLVE, INC.

(Exact name of registrant as specified in its charter)

Delaware		33-0889197
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

150 White Plains Road, Suite 108 Tarrytown, New York		10591
(Address of principal executive offices)		(Zip Code)

(914) 949-5500

(Issuer's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. o Yes o No

As of August 20, 2012, 87,887,703 shares of the issuer's Common Stock were outstanding.

DEBT RESOLVE, INC.

TABLE OF CONTENTS

		Page
	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011	3

	Condensed Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)	4

	Condensed Statements of Stockholders' Deficiency from January 1, 2012 through June 30, 2012 (unaudited)	5

	Condensed Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)	6

	Notes to Condensed Financial Statements (unaudited)	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25

Item 4T.	Controls and Procedures	25

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Mine Safety Disclosures	28

Item 5.	Other Information	28

Item 6.	Exhibits	29

	Signature	30

	CERTIFICATIONS

PART I.

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEBT RESOLVE, INC.

CONDENSED BALANCE SHEETS

	June 30,			December 31,
	2012			2011
	(unaudited)
ASSETS
Current assets:
Cash	$	1,044		$	26,832
Accounts receivable, net		33,502			26,777
Prepaid insurance		21,094			77,738
Total current assets		55,640			131,347

Fixed assets, net		1,513			2,717

Other assets:
Deposits		1,000			1,000

Total assets	$	58,153		$	135,064

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
Accounts payable and other accrued liabilities	$	3,181,744		$	2,740,191
Notes payable, current portion		484,117			502,867
Notes payable-related parties, less deferred debt discount of $1,667 and $5,000 as of June 30, 2012 and December 31, 2011, respectively		129,333			81,000
Convertible Short-term notes, net of deferred debt discount of $195,054 and $118,625 as of June 30, 2012 and December 31, 2011, respectively		951,946			345,181
Lines of credit, related parties		151,000			151,000
Total current liabilities		4,898,140			3,820,239

Long term debt:
Note payable, long term portion		131,250			150,000
Convertible long-term notes, net of deferred debt discount of $45,804 and $333,145 as of June 30, 2012 and December 31, 2011, respectively		134,196			530,049
Total long term debt		265,446			680,049
Total liabilities		5,163,586			4,500,288

Stockholders' deficiency:
Preferred stock, $0.001 par value; 10,000,000 shares authorized, none issued and outstanding		-			-
Common stock, $0.001 par value, 200,000,000 shares authorized; 87,137,703 and 85,587,703 shares issued and outstanding as of June 30, 2012 and December 31, 2011 respectively		87,138			85,588
Additional paid in capital		66,959,499			66,726,119
Accumulated deficit		(72,152,070	)		(71,176,931	)
Total stockholders' deficiency		(5,105,433	)		(4,365,224	)

Total liabilities and stockholders' deficiency	$	58,153		$	135,064

The accompanying notes are an integral part of these unaudited condensed financial statements

DEBT RESOLVE, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011

REVENUES:	$	37,280		$	32,968		$	85,890		$	68,451

Costs and expenses:
Payroll and related expenses		179,206			304,596			390,942			458,821
Selling, general and administrative expenses		165,141			177,199			311,543			505,742
Depreciation and amortization		355			3,128			1,204			6,256
Total costs and expenses		344,702			484,923			703,689			970,819

Net loss from operations		(307,422	)		(451,955	)		(617,799	)		(902,368	)

Other income (expense):
Interest expense		(68,124	)		(69,783	)		(138,165	)		(128,563	)
Amortization of debt discounts		(107,123	)		(123,373	)		(219,175	)		(230,858	)
Other expense		-			(20,000	)		-			(20,000	)

Net loss before provision for income taxes		(482,669	)		(665,111	)		(975,139	)		(1,281,789	)

Income tax (benefit)		-			-			-			-

Net loss	$	(482,669	)	$	(665,111	)	$	(975,139	)	$	(1,281,789	)

Net loss per common share -basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.02	)

Weighted average number of common shares outstanding, basic and diluted		87,137,703			80,318,655			86,602,263			79,968,737

The accompanying notes are an integral part of these unaudited condensed financial statements

DEBT RESOLVE, INC.

CONDENSED STATEMENT OF SHAREHOLDERS' DEFICIENCY

SIX MONTHS ENDED JUNE 30, 2012

(unaudited)

	Preferred stock				Common stock				Additional Paid In		Accumulated
	Shares		Amount		Shares		Amount		Capital		Deficit			Total
Balance, December 31, 2011		-		-		85,587,703		85,588		66,726,119		(71,176,931	)		(4,365,224	)
Sale of common stock		-		-		1,550,000		1,550		153,450		-			155,000
Fair value of options issued to employees for services		-		-		-		-		75,000		-			75,000
Beneficial conversion feature related to convertible notes		-		-		-		-		4,930		-			4,930
Net loss		-		-		-		-		-		(975,139	)		(975,139	)
Balance, June 30, 2012		-	$	-		87,137,703	$	87,138	$	66,959,499	$	(72,152,070	)	$	(5,105,433	)

The accompanying notes are an integral part of these unaudited condensed financial statements

DEBT RESOLVE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

	Six months ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(975,139	)	$	(1,281,789	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,204			6,255
Amortization of debt discounts		219,175			230,858
Stock based compensation		75,000			136,500
Changes in operating assets and liabilities:
Accounts receivable		(6,725	)		(1,258	)
Prepaid expenses		56,644			64,128
Accounts payable and accrued expenses		441,553			612,190
Net cash used in operating activities		(188,288	)		(233,116	)

CASH FLOWS FROM INVESTING ACTIVITIES:		-			-

CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft		-			(3,603	)
Proceeds from sale of common stock		155,000			87,500
Proceeds from issuance of short term notes					100,000
Proceeds from issuance of short term notes-related party		45,000			71,000
Repayment of short term notes		(37,500	)		(36,250	)
Proceeds from long term notes		-			25,000
Proceeds from exercise of options and warrants		-			89
Net cash provided by financing activities		162,500			243,736

Net (decrease) increase in cash and cash equivalents		(25,788	)		10,620
Cash and cash equivalents at beginning of period		26,832			26,681

Cash and cash equivalents at end of period	$	1,044		$	37,301

Supplemental Disclosures of Cash Flow Information:
Cash paid during period for interest	$	-		$	7,744
Cash paid during period for taxes	$	-		$	-

Non-cash financing and investing transactions:
Beneficial conversion feature transfer from derivative liability	$	-		$	-
Note payable issued for accrued expenses	$	-		$	105,650

The accompanying notes are an integral part of these unaudited condensed financial statements

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

NOTE 1 – BASIS AND BUSINESS PRESENTATION

Debt Resolve, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in April 21, 1997. The Company offers its service as an Application Service Provider (“ASP”) or cloud-based model, enabling clients to introduce this collection option with no modifications to their existing collections computer systems. Its products capitalize on using the Internet as a tool for communication, resolution, settlement and payment of delinquent debt.

Basis of Presentation

These unaudited condensed financial statements have been prepared in accordance with the instructions to the Form 10-Q, and therefore, do not include all the information necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2012. The unaudited condensed financial statements should be read in conjunction with the consolidated December 31, 2011 financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC").

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the presentation of the accompanying unaudited condensed financial statements follows:

Estimates

The preparation of the unaudited condensed financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Reclassification

Certain reclassifications have been made to prior periods' data to conform to the current period's presentation. These reclassifications had no effect on reported income or losses.

Credit Risk

The Company extends credit to large, mid-size and small companies for collection services. At June 30, 2012, two clients represented receivables of $15,000 (45%) and $15,000 (45%). At December 31, 2011, three clients represented receivables of $5,000 (19%), $10,000 (37%) and $11,777 (44%). As of June 30, 2012 and December 31, 2011, no allowance for doubtful accounts has been recognized.

The Company had two clients accounting for 40.24% and 40.24%; (total of 80.48%) of total revenues for the three months ended June 30, 2012, respectively, and had three clients accounting for 34.93%,34.93% and 11.69%; (total of 81.55%) of total revenues for the six months ended June 30, 2012.

The Company had two clients accounting for 45.50% and 47.68%; (total of 93.18%) of total revenues for the three months ended June 30, 2011, respectively, and had two clients accounting for 43.82% and 49.05%; (total of 92.87%) of total revenues for the six months ended June 30, 2011.

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

Income Taxes

The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes ("ASC 740-10") which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes primarily relate to debt costs.

Net Loss per Share

The Company follows Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) specifying the computation, presentation and disclosure requirements of earnings per share information. Basic loss per share has been calculated based upon the weighted average number of common shares outstanding. Stock options and warrants have been excluded as common stock equivalents in the diluted loss per share because their effect is anti-dilutive on the computation. Average fully diluted shares outstanding were 99,526,037 and 98,990,597 for the three and six months ended June 30, 2012, respectively. Average fully diluted shares outstanding were 91,857,071 and 92,994,203 for the three and six month periods ended June 30, 2011, respectively.

Stock-based compensation

Total stock-based compensation expense for the three and six months ended June 30, 2012 amounted to $30,000 and $75,000, respectively and for the three and six months ended June 30, 2011 amounted to $136,500 and $136,500, respectively.

Defined Contribution (401k) Plan

The Company maintains a defined contribution (401k) plan for our employees. The plan provides for a company match in the amount of 100% of the first 3% of pre-tax salary contributed and 50% of the next 3% of pre-tax salary contributed. Due to the severe cash limitations that the Company has experienced, the match was suspended from mid-2008 to the present and will only be re-instated when business conditions warrant.

Reliance on Key Personnel and Consultants

The Company has only 4 full-time employees. Additionally, there are 2 consultants performing various specialized services. The Company is heavily dependent on the continued active participation of the President, the Chief Operating Officer and key consultants. The loss of the President, Chief Operating Officer or key consultants could significantly and negatively impact the business until adequate replacements can be identified and put in place.

Recent accounting pronouncements

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s financial position, results of operations or cash flows.

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

NOTE 3 – GOING CONCERN MATTERS

The accompanying unaudited condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed financial statements, the Company incurred a net loss of $975,139 for the six months ended June 30, 2012. Additionally, the Company has negative working capital (total current liabilities exceeded total current assets) of $4,842,500 as of June 30, 2012. These factors among others raise substantial doubt about the Company’s ability to continue as a going concern.

The Company has undertaken further steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond to address its lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof. However, there can be no assurance that the Company can successfully accomplish these steps and or business plans, and it is uncertain that the Company will achieve a profitable level of operations and be able to obtain additional financing.

The Company’s continued existence is dependent upon management’s ability to develop profitable operations and resolve its liquidity problems. There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all. In the event that the Company is unable to continue as a going concern, it may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.

The accompanying unaudited condensed financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment at June 30, 2012 and December 31, 2011 are comprised of the following:

	June 30, 2012			December 31, 2011
Computer equipment	$	110,548		$	110,548
Software		42,170			42,170
Telecommunication equipment		3,165			3,165
Office equipment		3,067			3,067
Furniture and fixtures		106,436			106,436
Total		265,386			265,386
Less accumulated depreciation		(263,873	)		(262,669	)
Total	$	1,513		$	2,717

The Company uses the straight line method of depreciation over 3 to 5 years.

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities as of June 30, 2012 and December 31, 2011 are comprised of the following:

	June 30, 2012		December 31, 2011
Accounts payable and accrued expenses	$	1,601,160	$	1,468,691
Accrued interest		697,634		567,469
Payroll and related accruals, net of advance to employees		882,950		704,031
Total	$	3,181,744	$	2,740,191

NOTE 6 – NOTES PAYABLE

As of June 30, 2012 and December 31, 2011, short term notes are as follows:

	June 30, 2012		December 31, 2011
Bank loans	$	237,500	$	275,000
Investor notes payable, 12% per annum, currently in default		377,867		377,867
Total		615,367		652,867
Less current portion		484,117		502,867
Long term portion (only bank loan)	$	131,250	$	150,000

Investor notes payable

On December 21, 2007, an unaffiliated investor loaned the Company $125,000 on an unsecured 18-month note with a maturity date of June 21, 2009. The note has a provision requiring repayment once the Company has raised an aggregate of $500,000 following issuance of this note. As a result, this note is currently in default as it has not been repaid and the Company reached the $500,000 threshold in September, 2008. The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity. In conjunction with the note, the Company granted to the investor a warrant to purchase 37,500 shares of common stock at an exercise price of $1.07 and an expiration date of December 21, 2012. This note is guaranteed by Mr. Burchetta, a Company director.

On December 30, 2007, an unaffiliated investor loaned the Company $200,000 on an unsecured 18-month note with a maturity date of June 30, 2009. The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity. In conjunction with this note, the Company also issued a warrant to purchase 100,000 shares of common stock at an exercise price of $1.00 and an expiration date of December 30, 2012. This note is guaranteed by Mr. Burchetta, a Company director. As of June 30, 2012 and December 31, 2011, this note is in default.

On April 10, 2008, an unaffiliated investor loaned the Company an additional $198,000 on an amendment of the prior unsecured note with a maturity date of June 21, 2009 (see above) for the entire balance of the first note plus the amendment ($323,000 total). The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity. In conjunction with the note, the Company also issued a warrant to purchase 99,000 shares of common stock at an exercise price of $2.45 and an expiration date of April 10, 2013. This warrant has a "cashless" exercise feature. This note is guaranteed by Mr. Burchetta, a Director of the Company. The note was amended and maintains the provision requiring repayment of the note upon raising gross proceeds of $500,000 subsequent the issuance of the note. At September 30, 2008, the Company had raised in excess of $500,000 subsequent to this amended note, and as a result, this note is in default.

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

As of June 30, 2012 and December 31, 2011, the principal balance of the note was $177,867, and is still in default.

Bank loans

On October 7, 2011, a bank loan was issued in the amount of $237,500 at a 6.25% interest rate, with monthly payments of $6,250 maturing on December 1, 2014, and guaranteed by Mr. Mooney. During the six months ended June 30, 2012, the Company repaid $37,500 towards the outstanding note. The outstanding balance on the bank loan as of June 30, 2012 and December 31, 2011 is $187,500 and $225,000, respectively.

On April 15, 2011, the Company borrowed an additional unsecured loan of $50,000 at a rate of 6.25% due on July 1, 2011. The loan was guaranteed by Mr. Mooney. The loan was subsequently extended to September 1, 2011. The Company repaid this loan by paying $25,000 on July 26, 2011 and September 9, 2011. On December 20, 2011, the Company again borrowed an additional unsecured loan of $50,000 at a rate of 6.25% due on April 1, 2012. This loan is again guaranteed by Mr. Mooney. The loan has been extended to July 1, 2012.

NOTE 7 – NOTES PAYABLE, RELATED PARTIES

As of June 30, 2012 and December 31, 2011, notes payable, related parties are as follows:

	June 30, 2012		December 31, 2011
Note payable dated January 14, 2011	$	6,000	$	6,000
Note payable dated April 14, 2011		25,000		25,000
Note payable dated April 15, 2011		25,000		25,000
Note payable dated May 27, 2011		10,000		10,000
Note payable dated January 18, 2012		5,000		-
Note payable dated January 20, 2012		5,000		-
Note payable dated May 21, 2012		15,000		-
Note payable dated May 30, 2012		20,000		-
Series A Convertible note, net of unamortized debt discount of $1,667 and $5,000, respectively		18,333		15,000
Total		129,333		81,000
Less current portion		129,333		81,000
Long term portion	$	-	$	-

On January 14, 2011, the President David M. Rainey loaned $6,000 (unsecured) to the Company with a due date of June 30, 2011. The loan has been extended to December 31, 2011. The Company is currently in default. The loan carries interest at the rate of 12% per annum. The lender received a warrant to purchase 60,000 shares of the common stock of the Company at an exercise price of $0.25 per share. The warrant has a five year exercise period. The note was recorded net of a deferred debt discount of $2,220, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount is being amortized over the term of the note. During the six months ended June 30, 2012 and 2011, the Company amortized the debt discount and charged $0 and $2.220, respectively.

On April 14, 2011, the Chief Executive Officer James G. Brakke loaned $25,000 (unsecured) to the Company with a due date of July 31, 2011. The loan has been extended to December 31, 2011. The Company is currently in default. The loan carries interest at the rate of 12% per annum. The lender received a warrant to purchase 250,000 shares of the common stock of the Company at an exercise price of $0.25 per share. The warrant has a five year exercise period.

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

On April 15, 2011, a director William M. Mooney, Jr. loaned $25,000 (unsecured) to the Company with a due date of July 31, 2011. The note has been extended to December 31, 2011. The Company is currently in default. The loan carries interest at the rate of 12% per annum. The lender received a warrant to purchase 250,000 shares of the common stock of the Company at an exercise price of $0.25 per share. The warrant has a five year exercise period.

On May 27, 2011, a director William M. Mooney, Jr. loaned an additional $15,000 (unsecured) (of which $5,000 has been repaid in 2011) to the Company with a due date of September 30, 2011. The note has been extended to December 31, 2011. The Company is currently in default. The loan carries interest at the rate of 12% per annum. The lender received a warrant to purchase 150,000 shares of the common stock of the Company at an exercise price of $0.25 per share. The warrant has a five year exercise period.

On January 18, 2012, the Chief Executive Officer James G Brakke loaned $5,000 (unsecured) to the Company with a demand due date. The loan carries interest at the rate of 12% per annum. The lender received a warrant to purchase 50,000 shares of the common stock of the Company at an exercise price of $0.25 per share. The warrant has a five year exercise period. The note was recorded net of a deferred debt discount of $2,495, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount is being amortized over the term of the note. During the six months ended June 30, 2012, the Company amortized the debt discount and charged $2,495 to interest expense- amortization of debt discount.

On January 20, 2012, a director William M. Mooney, Jr. loaned $5,000 (unsecured) to the Company with a demand due date. The loan carries interest at the rate of 12% per annum. The lender received a warrant to purchase 50,000 shares of the common stock of the Company at an exercise price of $0.25 per share. The warrant has a five year exercise period. The note was recorded net of a deferred debt discount of $2,435, based on the relative fair value of the warrant under the Black-Scholes pricing model. Such discount is being amortized over the term of the note. During the six months ended June 30, 2012, the Company amortized the debt discount and charged $2,435 to interest expense- amortization of debt discount.

On May 21, 2012, a director William M. Mooney, Jr. loaned $18,000 (unsecured), net with repayments of $3,000, to the Company due March 31, 2012 with interest at 12% per annum.

On May 30, 2012, the Chief Executive Officer James G Brakke loaned $20,000 (unsecured) to the Company due March 31, 2013 with interest at 12% per annum.

As described in Note 9 below, From June 2009 to March 2010, investors loaned the Company an aggregate of $1,237,459 on three year Series A Convertible Notes with an interest rate of 14%, of which $20,000 was a related party note by the Chief Executive Officer James G. Brakke prior to joining the Company. See Note 9 for full description. During the six months ended June 30, 2012 and 2011, the Company amortized the debt discount and charged $3,333 and $3,333, respectively, to interest expense - amortization of debt discount.

Total unpaid accrued interest on the notes payable to related parties as of June 30, 2012 and December 31, 2011 was $10,211 and $5,722, respectively. During the six months ended June 30, 2012 and 2011, the Company recorded interest expense of $4,489 and $1,780, respectively, in connection with the notes payable to related parties.

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

NOTE 8 – LINE OF CREDIT- RELATED PARTY

On September 24, 2009, the Company entered into an unsecured short term loan with William M. Mooney, a Director of Debt Resolve, for $150,000 to be used to discharge the bridge loans of another investor. Borrowings under the loan bear interest at 12% per annum, with interest accrued and payable on maturity. The Note was due on November 24, 2009 and is still outstanding. In conjunction with this line of credit, the Company also issued a warrant to purchase 150,000 shares of common stock at an exercise price of $0.15 per share with an expiration date of September 24, 2014. On April 6, 2010, a partial repayment of $25,000 of principal was paid. Also, as a result of the delinquent repayment of the note, a penalty of $69,000 was incurred on April 15, 2010. On August 17, 2010, a partial payment of $50,000 of principal was made on the line of credit. Unpaid accrued interest on this loan as of June 30, 2012 and December 31, 2011 was $55,745 and $46,710, respectively. As of June 30, 2012 and December 31, 2011, the outstanding balance on this loan was $151,000. The loan matured on November 24, 2009 and is currently in default. During the six months ended June 30, 2012 and 2011, the Company recorded $9,035 and $8,986, respectively, as interest expense.

NOTE 9 – CONVERTIBLE NOTES

Convertible notes are comprised of the following:

	June 30, 2012			December 31, 2011
Series A Convertible Notes, net of unamortized debt discount of $110,583 and $246,750, respectively	$	706,417		$	570,250
Series B Convertible Notes, net of unamortized debt discount of $51,841 and $88,884, respectively		173,159			136,116
Series C convertible Notes, net of unamortized debt discount of $73,013 and $109,003, respectively		186,987			150,997
Series D Convertible Notes, net of unamortized debt discount of $5,421 and $7,133, respectively		19,579			17,867
Total		1,086,142			875,230
Less: Current portion		(951,946	)		(345,181	)
Long term portion	$	134,196		$	530,049

From June 2009 to March 2010, unaffiliated investors loaned the Company an aggregate of $1,217,459 (excluding $20,000 related party, see Note 7) on three-year Series A Convertible Notes with an interest rate of 14%. The interest accrues and is payable at maturity, which range in dates from August 2012 to March 2013. The conversion price is set at $0.15 per share. The Notes carry a first lien security interest in all of the assets of the Company. In addition, the investors received 12,174,590 warrants to purchase the common stock of the Company at an exercise price of $1.00. On January 21, 2010, the exercise price was reduced to $0.40 due to certain provisions of the warrants. The exercise period of the warrants is five years. The notes were recorded net of a deferred debt discount of $1,143,268, based on the relative fair value of the warrants under the Black-Scholes pricing model. Such discount is being amortized over the term of the notes. During the six months ended June 30, 2012 and 2011, the Company recorded amortization of the debt discount related to these notes of $136,167 and $139,500, respectively.

During year ended December 31, 2010, unaffiliated investors loaned the Company an aggregate of $275,000 on three-year Series B Convertible Notes with an interest rate of 14%. During the year ended December 31, 2010, $50,000 was repaid in cash, leaving a balance of $225,000 on these notes at December 31, 2011 and 2010. The interest accrues and is payable at maturity. The conversion price is set at $0.15 per share. The Notes carry a first lien security interest in all of the assets of the Company with the Series A notes above. In addition, at conversion, the investors will receive 900,000 warrants to purchase the common stock of the Company at an exercise price of $0.40 per share. The warrants are callable when the Company's stock trades above $0.75 per share for 10 consecutive trading days.

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

The notes were recorded net of a deferred debt discount of $264,324, based on the relative fair value of the warrants under the Black-Scholes pricing model. Such discount is being amortized over the term of the notes. During the six months ended June 30, 2012 and 2011, the Company recorded amortization of the debt discount related to these notes of $37,043 and $37,043, respectively.

During the year ended December 31, 2010, unaffiliated investors loaned the Company an aggregate of $260,000 on three-year Series C Convertible Notes with an interest rate of 14%. The interest accrues and is payable at maturity. The conversion price was set at $0.15 per share. The notes carry a first lien security interest with the Series A and B notes above in all of the assets of the Company. In addition, the investors received 2,641,670 warrants to purchase the common stock of the Company at an exercise price of $0.40 per share. The series C notes have a “ratchet” provision resetting the conversion price to $0.10 and the warrant exercise price to $0.25 on the first closing of a subsequent offering with those terms. This “ratchet” was triggered on August 12, 2010 with the completion of the minimum closing of $1,500,000 on a $3,000,000 private placement. Additionally, as a result of the delay in filing a registration statement on the private placement”, the Series C Warrants have become “cashless”, along with the warrants from the private placement. There is no further effect from this “ratchet” event. The notes were recorded net of a deferred debt discount of $215,940, based on the relative fair value of the warrants under the Black-Scholes pricing model. Such discount is being amortized over the term of the notes. During the six months ended June 30, 2012 and 2011, the Company recorded amortization of the debt discount related to these notes of $35,990 and $35,990, respectively.

During the year ended December 31, 2011, the Company issued an aggregate of $25,000 of Series D Convertible Notes with an interest rate of 14% due three years from the date of issuance. The interest accrues and is payable at maturity. The conversion price is set at $0.12 per share. The investors have a second lien position behind the Series A, B and C notes. In addition, the investors received 250,000 warrants to purchase the common stock of the Company at an exercise price of $0.30 per share over five years. The notes were recorded net of deferred debt discount of $10,271 based on the relative fair value of the warrants under the Black-Scholes pricing model. Such discount is being amortized over the term of the notes. During the six months ended June 30, 2012 and 2011, the Company recorded amortization of the debt discount relating to these notes of $1,712 and $1,427, respectively.

Aggregate Maturity of Long-Term convertible notes, if not converted, as of June 30, 2012 are as follows:

Year	Amount
2012		509,500
2013		812,500
2014		25,000
Total		1,347,000
Less Related party (Note 7)		20,000
Less Debt Discount		240,858
	$	1,086,142

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

NOTE 10 – WARRANTS AND OPTIONS

Warrants

The following table summarizes warrants outstanding and related prices for the shares of the Company's common stock issued to shareholders at June 30, 2012:

Exercise Price		Number Outstanding		Warrants Outstanding Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise price		Number Exercisable		Warrants Exercisable Weighted Average Exercise Price
$	0.10		1,771,600		3.13	$	0.10		1,771,600	$	0.10
	0.15		4,183,334		2.65		0.15		4,183,334		0.15
	0.25		42,081,750		3.27		0.25		42,081,750		0.25
	0.30		250,000		3.61		0.30		250,000		0.30
	0.40		12,974,590		2.57		0.40		12,974,590		0.40
	1.00		678,000		0.24		1.00		678,000		1.00
	1.07		37,500		0.48		1.07		37,500		1.07
	1.25		350,000		0.58		1.25		350,000		1.25
	1.95		50,000		0.74		1.95		50,000		1.95
	2.00		137,500		0.30		2.00		137,500		2.00
	2.45		99,000		0.77		2.45		99,000		2.45
Total			62,613,274		3.02	$	0.29		62,613,274	$	0.29

Transactions involving the Company's warrant issuance are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Outstanding at December 31, 2010		49,407,195		$	0.33
Issued		10,610,000			0.25
Exercised		(87,254	)		(0.09	)
Expired		(516,667	)		(2.68	)
Outstanding at December 31, 2011		59,413,274			0.30
Issued		3,200,000			0.25
Exercised		-			-
Expired		-			-
Outstanding at June 30, 2012		62,613,274		$	0.29

In conjunction with the sale of the Company's common stock during 2012, the Company issued warrants to purchase 3,100,000 shares of common stock with an exercise price of $0.25 per share expiring five years from the date of issuance.

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

In conjunction with issuance of short term notes to related parties during 2012, the Company issued an aggregate of warrants to purchase an aggregate of 100,000 shares of common stock with an exercise price of $0.25 per share expiring five years from the date of issuance. The fair value of the warrants was determined using the Black-Scholes option pricing method with the following assumptions: Dividend yield: 0%; Volatility: 280.93% to 282.20%; and Risk free rate: 0.82% to 0.91% and was amortized and charged to interest expense-amortization of debt discount over the term of the related notes (see Note 7).

Non-Employee Options

The following table summarizes non-employee options outstanding and related prices for the shares of the Company's common stock issued to shareholders at June 30, 2012:

Exercise Price		Number Outstanding		Option Outstanding Options Average Remaining Contractual Life (years)		Weighted Average Exercise price		Number Exercisable		Options Exercisable Weighted Average Exercise Price
$	0.10		4,250,000		4.59	$	0.10		650,000	$	0.10
	0.13		500,000		5.01		0.13		500,000		0.13
	0.70		75,000		2.94		0.70		75,000		0.70
	1.84		25,000		2.92		1.84		25,000		1.84
Total			4,850,000		4.60	$	0.12		1,250,000	$	0.18

Transactions involving the Company's non-employee option issuance are summarized as follows:

	Number of Shares		Weighted Average Price Per Share
Outstanding at December 31, 2010		4,603,000	$	0.13
Issued		250,000		0.10
Exercised		--		--
Canceled or expired		--
Outstanding at December 31, 2011		4,850,000	$	0.12
Issued		-		-
Exercised		-		-
Expired		-		-
Outstanding at June 30, 2012		4,850,000	$	0.12

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

Employee Options

The following table summarizes employee options outstanding and related prices for the shares of the Company's common stock issued to shareholders at June 30, 2012:

Exercise Price		Number Outstanding		Option Outstanding Options Average Remaining Contractual Life (years)		Weighted Average Exercise price		Number Exercisable		Options Exercisable Weighted Average Exercise price
$	0.06		3,500,000		5.92	$	0.06		2,500,000	$	0.06
	0.09		250,000		6.43		0.09		250,000		0.09
	0.095		500,000		6.55		0.095		500,000		0.095
	0.15		250,000		1.38		0.15		250,000		0.15
	0.17		4,500,000		4.77		0.17		4,500,000		0.17
	0.19		1,000,000		4.11		0.19		1,000,000		0.19
	0.20		250,000		0.81		0.20		250,000		0.20
	0.22		175,000		4.75		0.22		175,000		0.22
	0.80		350,000		2.57		0.80		350,000		0.80
	1.00		350,000		3.04		1.00		350,000		1.00
	1.25		634,500		2.26		1.25		634,500		1.25
	1.40		350,000		3.20		1.40		350,000		1.40
	1.50		243,500		1.49		1.50		243,500		1.50
	1.63		20,000		2.96		1.63		20.000		1.63
	1.84		10,000		2.92		1.84		10,000		1.84
	4.75		203,000		1.82		4.75		203,000		4.75
	5.00		1,829,934		3.78		5.00		1,829,934		5.00
	10.00		20,000		1.24		10.00		20,000		10.00
Total			14,435,934		4.49	$	0.97		13,435,934	$	0.97

Transactions involving the Company's employee option issuance are summarized as follows:

	Number of Shares			Weighted Average Price Per Share
Outstanding at December 31, 2010		12,026,934		$	1.50
Issued		3,750,000			0.06
Exercised		--			--
Canceled or expired		(1,821,000	)		2.44
Outstanding at December 31, 2011		13,955,934			0.99
Issued		500,000			0.095
Exercised		--			--
Expired		(20,000	)		1.50
Outstanding at June 30, 2012		14,435,934		$	0.97

DEBT RESOLVE, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

JUNE 30, 2012

During the six months ended June 30, 2012, the Board granted stock options to purchase 500,000 shares of common stock of the Company at exercise price of $0.095 with exercise period of seven years to an existing employee, fully vested. The grant was valued using the Black-Scholes model and had a value of $45,000 and was charged to operations for the six months ended June 30, 2012. The fair value of the options was determined using the Black-Scholes option pricing method with the following assumptions: Dividend yield: 0%; Volatility: 282.58%; and Risk Free rate: 1.31%

Total stock-based compensation expense for employee options for the six months ended June 30, 2012 and 2011 amounted to $75,000 and $136,500, respectively.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

Litigation

On July 17, 2008, Dreier LLP, a law firm, filed a complaint in the Supreme Court of New York, County of New York, seeking damages of $311,023.32 plus interest for legal services allegedly rendered to us. The complaint was answered on August 14, 2008 raising various affirmative defenses. On December 16, 2008, Dreier LLP filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York. The case has been on hold since the bankruptcy filing. On March 18, 2009, the Company filed a counterclaim in the bankruptcy court for legal malpractice and the defenses raised in the previously filed answer. The full amount in dispute is included in the Company’s accounts payable. The bankruptcy case has stayed this litigation and is still pending at this time. However, the Company believes that based on bankruptcy law this action will be discharged along with the bankruptcy case following distribution of the assets of the estate with no liability to us.

From time to time, the Company is involved in various litigation matters in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations.

NOTE 12 – RELATED PARTY TRANSACTIONS

During the six months ended June 30, 2012 and 2011, certain Company directors personally guarantee the Company's notes payable and its' bank loan (Notes 6). Also, certain directors and officers made short-term loans as discussed in Note 7. Total interest expense in connection with notes payable to related parties and related party line of credits amounted $15,967 and $13,145 for the six months ended June 30, 2012 and 2011, respectively (Note 7 and Note 8).

NOTE 13 – SUBSEQUENT EVENTS

On August 1, 2012, the Company issued 500,000 shares of its common stock for net proceeds of $50,000.

In July 2012, the Company issued an aggregate of $45,000 related party notes due one year from the date of issuance with interest at 12% per annum.

Mathew L Johnson & Associates, P.C. v. Debt Resolve, Inc. (District Court, Clark County, of the State of Nevada Case No.A-12-665900-C):

Mathew L. Johnson & Associates, P. C ("MLJ"), the plaintiff, filed a complaint on or about July 27, 2012 related to a claim for breach of contract in the amount of $10,000. On or about August 23, 2010, MLJ preformed certain legal services on behalf of the Company. The Company entered into an agreement with MLJ, which provided for, among other things, a payment for services. This matter is in the early stages of discovery. We intend to vigorously defend against the claims asserted against us.

Item 2. Management's Discussion and Analysis or Plan of Operation

Overview

Since completing initial product development in early 2004, our primary business has been providing software solutions to consumer lenders or those collecting on those consumer loans based on our proprietary DR Settle™ solution, our Internet-based bidding system that facilitates the settlement and collection of defaulted consumer debt via the Internet. In 2010, we launched two other solutions, DR Prevent™ for early stage collections and DR Collect™, a solution specifically tailored to agencies and law firms. We have marketed our services primarily to consumer banks, collection agencies, collection law firms and the buyers of defaulted debt in the United States, Europe and Asia. We intend to market our services to other segments served by the collections industry worldwide. For example, we believe that our system will be especially valuable for the collection of low balance debt, such as that held by utility companies and online service providers, where the cost of traditionally labor intensive collection efforts may exceed the value collected. We also intend to pursue past-due Internet-related debt, such as that held by sellers of sales and services online or payday lenders. We believe that consumers who incurred their debt over the Internet will be quite likely to respond favorably to an Internet-based collection solution. In addition, creditors of Internet-related debt usually have access to debtors’ e-mail addresses, facilitating the contact of debtors directly by e-mail. Also, there are significant opportunities for us in healthcare with hospitals and large provider groups. We believe that expanding to more recently past-due portfolios of such debt will result in higher settlement volumes, improving our clients’ profitability by increasing their collections while reducing their cost of collections. We do not anticipate any material incremental costs associated with developing our capabilities and marketing to these creditors, as our existing Debt Resolve solutions can already handle most types of debt, and we make contact with these creditors in our normal course of business. However, we are continually upgrading our solutions to address specific client needs or to open new markets for our web solutions with our existing staff.

We have prepared for our entry into the European marketplace by reviewing our mode of business and modifying our contracts to comply with appropriate European privacy, debtor protection and other applicable regulations. We expect that initially, our expense associated with servicing our United Kingdom and other potential European clients will be minimal, consisting primarily of travel expense to meet with those clients and additional legal fees, as our European contracts, although already written to conform to European regulations, may require customization. We have begun investigation of companies who may provide local, outsourced European customer service support for us on an as needed basis, the expense of which will be variable with the level of business activity. We may incur additional costs, which we cannot anticipate at this time, if we expand into Canada and other countries. However, none of these additional costs that we are aware of at this time are material to our current cost structure or would impact our financial results in a material way.

Our marketing and client support goals are currently focused entirely on increasing revenue in the short term. Once we begin to approach breakeven on a cash basis, we expect our operating expenses to grow in line with revenues for an initial period as we employ additional technicians, sales people and client support representatives, although the rate of increase will level out. We expect that salaries and other compensation expenses will continue to be our largest category of expense, while travel, legal, audit and other sales and marketing expenses will grow as we expand our sales, marketing and support capabilities. In addition, we expect to incur moderate capital expenditures to upgrade our data center and provide for geographic redundancy. No additional costs of these types will be incurred until our revenues increase to the point that facilitates additional costs. Our current strategy focuses entirely on increasing revenue substantially within our current resources. Our current lean staffing does somewhat limit the number of new clients that we can implement each month and will eventually affect the number of clients that we can effectively support with our current cost structure.

In 2011, we adopted a business strategy of partnering with well known collection industry providers, including shop floor collection software providers, payment processors and other industry service vendors. We believe that partnering with these established industry providers will accelerate our sales effort, as these partners market our solutions to their existing client bases. We are integrating our solutions with their technology, and our partners are beginning their marketing efforts at this time.

Effective utilization of our system will require a change in thinking on the part of the collection industry, but we believe the effort will result in new collection benchmarks. We intend to provide detailed advice and hands-on assistance to clients to help them make the transition to our system and to document the performance of our solutions in each market to provide strong return-on-investment data to these prospective clients. Our recent clients tell us that they are happy with the results that they are getting. However, there is still an extensive sales process to get prospective clients comfortable with using web-based collection technology. As a result, our sales cycle tends to be longer in some cases than what is required from a technical perspective. We can have new clients up and running typically in 30 days or less, but the sales cycle may extend this period to 60-90 days with some prospective clients.

Our current contracts provide that we will earn revenue based on a percentage of the amount of debt collected from accounts submitted on our Debt Resolve solutions, flat fees per settlement achieved, flat fees per account placed, or a flat monthly fee. Although other revenue models have been proposed, most revenue earned to date has been determined using these methods, and such revenue is recognized when the settlement amount of debt is collected by our client or at the beginning of each month. For the early adopters of our system, we waived set-up fees and other transactional fees that we anticipate charging on a going-forward basis. While the percent of debt collected will continue to be a revenue recognition method going forward, other payment models are also being offered to clients and may possibly become our preferred revenue model. Most contracts currently in process include provisions for set up fees and base revenue on a flat monthly or annual fee, in the aggregate or per account, with some contracts having a small transaction fee on debt settlement as well. In addition, with respect to our early delinquency stage DR Prevent module, we expect that a fee per account on our system, and/or the hybrid revenue model which will include both fees per account and transaction fees at settlement, may become the preferred revenue methods. In October 2010, we launched a new application, DR Collect, which targets collection agencies and collection law firms on a flat monthly fee basis. Finally, we launched iSettleNow.com in late 2011 that charges new clients a setup fee and a percent of payments made through the solution. As we expand our knowledge of the industry, we have become aware that different revenue models may be more appropriate for the individual circumstances of our potential clients, and our expanded choice of revenue models reflects that knowledge.

For the six months ending June 30, 2012 and 2011, we had significantly inadequate revenues and incurred a net loss of $975,139 and $1,281,789, respectively, from operations. Cash used in operating activities was $188,288 for the six months ended June 30, 2012. Cash used in operating activities was $632,355 for the year ended December 31, 2011. Based upon projected operating expenses, we believe that our working capital as of the date of this report may not be sufficient to fund our plan of operations for the next twelve months. The aforementioned factors raise substantial doubt about our ability to continue as a going concern.

We need to raise additional capital in order to be able to accomplish our business plan objectives. We have historically satisfied our capital needs primarily from the sale of debt and equity securities. We are continuing our efforts to secure additional funds through debt and/or equity instruments. The principal sources of capital for us are private individual accredited investors and investment banks specializing in raising capital for micro-cap companies like us. Since 2009, the principal source of funding for us has been these private accredited investors, who have invested $1,747,000 in notes (including convertible notes) and $792,500 in stock purchases or a total of $2,539,500.

In addition, we closed a private placement with an investment bank in 2010 for gross proceeds of $1,600,000 in stock purchases. Also, a bank loaned us $300,000 of which $237,500 is still outstanding as of June 30, 2012. Finally, board members and management have loaned us $230,000 that has not been repaid or converted to stock and has provided either short term or longer term capital to us. These totals do not include other short term loans principally from non-affiliated third parties that were loaned to us and repaid since 2009.

We expect revenue to increase in 2012 based on current contracts and our sales pipeline from calendar 2011. During 2011, we used approximately $650,000 in cash plus we increased our accounts payable and accrued expenses for operations (excluding accrued interest) by another $350,000, for a total cash need of $1 million in 2011, with revenue of only $138,000. We expect similar expenses in 2012 and also have maturing notes of $500,000. Many of our partnerships that are currently driving revenue growth are only beginning to become active, and revenue for 2012 may substantially exceed the 200% increase based on current partnership agreements in place.

In addition to increasing revenue, we previously focused on improving our balance sheet to facilitate further investment. Our balance sheet enhancement efforts have resulted in significant dilution to our existing shareholders as certain liabilities were converted to stock. In addition, some of these conversions resulted in concentrated large illiquid blocks of our shares which may overhang our trading for extensive periods of time. This restructuring was substantially completed in October 2010. Our efforts removed approximately $8 million of current liabilities from the balance sheet at June 30, 2009 that was filed on our Form 10-Q on August 19, 2009. The liabilities converted or settled were certain ones that existed on that balance sheet date. The conversion to equity of some of these liabilities resulted in the issuance of approximately 23.6 million shares. Approximately $377,000 of notes from that period remain outstanding that are subject to later conversion at a conversion rate of $0.10 per share.

Since most of the restructuring has been substantially completed, there would not be significant additional shares issued or dilution for this reason, except for the $377,000 of notes discussed above that have the potential for the issuance of 3,770,000 shares plus additional shares for accrued interest. Also, there will not be further large blocks of liabilities removed going forward as there was during the period July 1, 2009 to October 31, 2010. While the improvements have enhanced our balance sheet and therefore made securing additional funding more practical, the remaining liabilities will have to be paid down over time and will consume a portion of free cash flow post-profitability. Also, even though the balance sheet has improved significantly since June 30, 2009, there is no assurance that we will be successful in raising additional capital to continue operations until we reach profitability.

Results of Operations for the Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

Revenues

Revenues totaled $37,280 and $32,968 for the three months ended June 30, 2012 and 2011, respectively. We earned revenue during the three months ended June 30, 2012 and 2011 as a percent of debt collected, on a fee per settlement and on a flat monthly fee basis.

Costs and Expenses

Payroll and related expenses. Payroll and related expenses amounted to $179,206 for the three months ended June 30, 2012, as compared to $304,596 for the three months ended June 30, 2012, a decrease of $125,390. The decrease mainly resulted from the stock based compensation issued in 2011 for $136,500 as compared to $30,000 in the current period. Salaries were $122,500 and $140,000 in the three months ended June 30, 2012 and 2011, respectively. Employee benefits were $24,090 and $23,303 in the three months ended June 30, 2012 and 2011, respectively.

General and administrative expenses. General and administrative expenses amounted to $165,141 for the three months ended June 30, 2012, as compared to $177,199 for the three months ended June 30, 2011, a decrease of $12,058. Service fees were $53,744 and $45,493 for the three months ended June 30, 2012 and 2011, respectively. Occupancy expense was $8,447 and $3,000 for the three months ended June 30, 2012 and 2011, respectively. Telecommunications expense was $13,261 and $14,385for the three months ended June 30, 2012 and 2011, respectively. Accounting expenses increased to $60,547 for the three months ended June 30, 2012 from $20,000 for the three months ended June 30, 2011. We had more accounting services and billings received in the second quarter of 2012, whereas in 2011 less accounting services and billings were received. Travel, marketing, insurance and legal expense were $238, $3,671, $25,239 and $-0- in the three months ended June 30, 2012 compared with $230, $9,846, $28,941 and $52,899 in the three months ended June 30, 2011. The decrease in legal fees was primarily due to most legal matters being handled internally by the President, chief financial Officer and Acting General Counsel subsequent to the first quarter of 2011. Other miscellaneous general and administrative expenses were $625 and $2,403 for the three months ended June 30, 2012 and 2011, respectively.

Depreciation and amortization expense. For the three months ended June 30, 2012 and 2011, we recorded depreciation expense of $355 and $3,128, respectively. Depreciation expense for the three months ended June 30, 2012 is lower due to the full depreciation of some assets after June 30, 2011.

Interest (expense). We recorded interest expense of $68,124 for the three months ended June 30, 2012 compared to interest expense of $69,783 for the three months ended June 30, 2011. Interest expense decreased due to the payoff of some notes in 2011.

Amortization of deferred debt discount. Amortization expense of $107,123 and $123,373 was incurred for the three months ended June 30, 2012 and 2011, respectively, for the amortization of the value of the deferred debt discount associated with certain of our notes payable. Amortization expense increased due to the issuance of new notes during 2011 and 2012.

Results of Operations for the Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Revenues

Revenues totaled $85,890 and $68,451for the six months ended June 30, 2012 and 2011, respectively. We earned revenue during the six months ended June 30, 2012 and 2011 as a percent of debt collected, on a fee per settlement and on a flat monthly fee basis.

Costs and Expenses

Payroll and related expenses. Payroll and related expenses amounted to $390,942 for the six months ended June 30, 2012, as compared to $458,821 for the six months ended June 30, 2011, a decrease of $67,879. The increase mainly resulted from the stock based compensation issued in 2012 for $75,000 as compared to $136,500 for the same period last year. Salaries were $265,850 and $272,500 in the six months ended June 30, 2012 and 2011, respectively. Employee benefits were $47,476 and $45,025 in the six months ended June 30, 2012 and 2011, respectively.

General and administrative expenses. General and administrative expenses amounted to $311,543 for the six months ended June 30, 2012, as compared to $505,742 for the six months ended June 30, 2011, a decrease of $194,199. Service fees were $98,968 and $110,380 for the six months ended June 30, 2012 and 2011, respectively. Occupancy expense was $15,523 and $6,000 for the six months ended June 30, 2012 and 2011, respectively. Telecommunications expense was $27,509 and $28,725 for the six months ended June 30, 2012 and 2011, respectively. Accounting expenses decreased to $98,968 for the six months ended June 30, 2012 from $116,575 for the six months ended June 30, 2011. We had less accounting services and billings received in the first half of 2012, whereas in 2011 more accounting services and billings were received in the second quarter of 2012. Travel, marketing, insurance and legal expense were $5,063, $11,169, $50,775 and $-0- in the six months ended June 30, 2012 compared with $5,031, $29,418, $57,863 and $139,202 in the six months ended June 30, 2011. The decrease in legal fees was primarily due to most legal matters being handled internally by the President, chief financial Officer and Acting General Counsel subsequent to the first quarter of 2011. Other miscellaneous general and administrative expenses were $4,199 and $12,549 for the six months ended June 30, 2012 and 2011, respectively.

Depreciation and amortization expense. For the six months ended June 30, 2012 and 2011, we recorded depreciation expense of $1,204 and $6,256, respectively. Depreciation expense for the six months ended June 30, 2012 is lower due to the full depreciation of some assets after June 30, 2011.

Interest (expense). We recorded interest expense of $138,165 for the six months ended June 30, 2012 compared to interest expense of $128,563 for the six months ended June 30, 2011. Interest expense increased by $9,602 or 7.5% due to additional borrowing as compared to last year.

Amortization of deferred debt discount. Amortization expense of $219,175 and $230,858 was incurred for the six months ended June 30, 2012 and 2011, respectively, for the amortization of the value of the deferred debt discount associated with certain of our notes payable. Amortization expense decreased by $11,683 or 5.1% due to maturing notes payable issued in prior years.

Liquidity and Capital Resources

As of June 30, 2012, we had a working capital deficiency (total current liabilities exceeded total current assets) in the amount of $4,842,500 and cash and cash equivalents totaling $1,044. We reported a net loss of $975,139 for the six months ended June 30, 2012. Net cash used in operating activities was $188,288 for the six months ended June 30, 2012. Cash flow provided by financing activities was $162,500 for the six months ended June 30, 2012. As of December 31, 2011, we had a working capital deficiency (total current liabilities exceeded total current assets) in the amount of $3,688,892 and cash and cash equivalents totaling $26,832. Our working capital as of the date of this report is negative and is not sufficient to fund our plan of operations for the next year. The aforementioned factors raise substantial doubt about our ability to continue as a going concern.

We have historically satisfied our capital needs primarily from the sale of debt and equity securities. We are continuing our efforts to secure additional funds through debt and/or equity instruments. The principal sources of capital for us are private individual accredited investors and investment banks specializing in raising capital for micro-cap companies like us. Since 2009, the principal source of funding for us has been these private accredited investors, who have invested $1,747,000 in notes (including convertible notes) and $792,500 in stock purchases or a total of $2,539,500. In addition, we closed a private placement with an investment bank in 2010 for gross proceeds of $1,600,000 in stock purchases. Also, a bank loaned us $300,000 of which $237,500 is still outstanding as of June 30, 2012. Finally, board members and management have loaned us $255,000 that has not been repaid or converted to stock and has provided either short term or longer term capital to us. These totals do not include other short term loans principally from non-affiliated third parties that were loaned to us and repaid since 2009.

We have successfully raised capital for our day-to-day operations since our inception in January 2003; however, no assurance can be provided that we will continue to be able to do so. There is no assurance that any funds secured will be sufficient to enable us to attain profitable operations or continue as a going concern. To the extent that we are unsuccessful, we may need to curtail our operations and implement a plan to extend payables and reduce overhead until sufficient additional capital is raised to support further operations. At any time until substantial capital is raised, there is also a significant risk of bankruptcy. There can be no assurance that any plan to raise additional funding will be successful. It is quite challenging in the current environment to raise money given the initial delays in generating meaningful revenue. We constantly speak with banks or investors, but the yield is low. Unless our revenue grows quickly, it may not be possible to demonstrate the progress investors require to secure additional funding. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

On January 18, 2012, our Chief Executive Officer James G Brakke loaned $5,000 (unsecured) to the Company with a demand due date. The loan carries interest at the rate of 12% per annum. The lender received a warrant to purchase 50,000 shares of the common stock of the Company at an exercise price of $0.25 per share. The warrant has a five year exercise period.

In the first quarter of 2012, private investors purchased 1,550,000 shares of common stock for proceeds of $155,000. In addition, the investors received 3,100,000 warrants to purchase our common stock at an exercise price of $0.25. The warrants have a five year exercise period and are 50% “cashless” and 50% cash exercise.

On May 21, 2012, a director William M. Mooney, Jr. loaned $18,000 (unsecured), net with repayments of $3,000, to the Company with a demand due date. The loan is non interest bearing.

On May 30, 2012, the Chief Executive Officer James G Brakke loaned $20,000 (unsecured) to the Company with a demand due date. The loan is non interest bearing.

Critical Accounting Policies and Estimates

Use of estimates

The preparation of condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. These estimates and assumptions are based on our management's judgment and available information and, consequently, actual results could be different from these estimates.

Stock-based compensation

We account for stock options issued under the recognition and measurement principles of Accounting Standards Codification subtopic 718-10, Compensation ("ASC 718-10"). Under the provisions of ASC 718-10, we are required to measure the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the award is measured on the grant date and for non-employees, the award is generally re-measured on interim financial reporting dates until the service period is complete, in accordance with ASC 718-10. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Total stock-based compensation expense for the six months ended June 30, 2012 and 2011 amounted to $75,000 and $136,500, respectively.

Recent Accounting Pronouncements

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.

Statement Relating to Forward-Looking Statements

This report contains forward-looking statements that are based on our beliefs as well as assumptions and information currently available to us. When used in this report, the words "believe," "expect," "anticipate," "estimate," "potential" and similar expressions are intended to identify forward-looking statements. These statements are subject to risks, uncertainties and assumptions, including, without limitation, the risks and uncertainties concerning our recent research and development activities; the risks and uncertainties concerning acceptance of our services and products, if and when fully developed, by our potential customers; our present financial condition and the risks and uncertainties concerning the availability of additional capital as and when required; the risks and uncertainties concerning the Limited License Agreement with Messrs. Brofman and Burchetta; the risks and uncertainties concerning our dependence on our key executives; the risks and uncertainties concerning technological changes and the competition for our services and products; the risks and uncertainties concerning general economic conditions; and the risks and uncertainties described in our Annual Report on Form 10-K for the year ended December 31, 2011, filed on April 16, 2012, in the section labeled "Risk Factors." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you not to place undue reliance on any forward-looking statements, all of which speak only as of the date of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4T. Controls and Procedures

Disclosure Controls and Procedures

We evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that we disclose required information in a timely manner and in accordance with the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations promulgated by the SEC. The executive who serves as our President and Chief Financial Officer has participated in such evaluation. Management concluded, based on such review, that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q. The ineffectiveness of these disclosure controls is due to the matters described below in "Internal Control over Financial Reporting."

Limitations on the Effectiveness of Controls

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives and our President and Chief Financial Officer has concluded that such controls and procedures are not effective at the "reasonable assurance" level. The ineffectiveness of these disclosure controls is due to the matters described below in "Internal Control over Financial Reporting."

Internal Control over Financial Reporting

The Company's independent registered public accounting firm has reported to our audit committee certain matters involving internal controls that this firm considered to be reportable conditions and a material weakness, under standards established by Public Company Accounting Oversight Board. The reportable conditions and material weakness relate to a limited segregation of duties at the Company. Segregation of duties within our company is limited due to the small number of employees that are assigned to positions that involve the processing of financial information.

Specifically, certain key financial accounting and reporting personnel had an expansive scope of duties that allowed for the creation, review, approval and processing of financial data without independent review and authorization for preparation of consolidation schedules and resulting financial statements and related disclosures. We did not maintain a sufficient depth of personnel with an appropriate level of accounting knowledge, experience and training in the selection and application of Generally Accepted Accounting Principles commensurate with financial reporting requirements. Accordingly, we place undue reliance on the finance team at corporate headquarters, specifically the executive who is our President and Chief Financial Officer and outside accounting professionals. Accordingly, management has determined that this control deficiency constitutes a material weakness. This material weakness could result in material misstatements of significant accounts and disclosures that would result in a material misstatement to our interim or annual consolidated financial statements that would not be prevented or detected. In addition, due to limited staffing, the Company is not always able to detect minor errors or omissions in reporting.

Going forward, management anticipates that additional staff will be necessary to mitigate these weaknesses, as well as to implement other planned improvements. Additional staff will enable us to document and apply transactional and periodic controls procedures, permit a better review and approval process and improve quality of financial reporting. However, the potential addition of new staff is contingent on obtaining additional financing, and there is no assurance that the Company will be able to do so.

Management believes that its unaudited condensed financial statements for the three months ended June 30, 2012 and 2011 fairly presented, in all material respects, its financial condition and results of operations. During the three months ended June 30, 2012, there were no changes to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Lawsuits from vendors

Item 1A. Risk Factors

As a "small reporting company" as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

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

None

Item 3. Defaults upon Senior Securities

On December 21, 2007, an unaffiliated investor loaned us $125,000 on an unsecured 18-month note with a maturity date of June 21, 2009. The note has a provision requiring repayment once we raised an aggregate of $500,000 following issuance of this note. As a result, this note is currently in default as it has not been repaid and we reached the $500,000 threshold in September, 2008. The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity. In conjunction with the note, we granted to the investor a warrant to purchase 37,500 shares of common stock at an exercise price of $1.07 and an expiration date of December 21, 2012. This note is guaranteed by Mr. Burchetta, a Company director. On April 10, 2008, we borrowed an additional $198,000 from this investor. Please see discussion below.

On December 30, 2007, an unaffiliated investor loaned us $200,000 on an 18-month note with a maturity date of June 30, 2009. The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity. In conjunction with this note, the Company also issued a warrant to purchase 100,000 shares of common stock at an exercise price of $1.00 and an expiration date of December 30, 2012. This note is guaranteed by Mr. Burchetta, a Company director. As of June 30, 2012, this note has matured and is still outstanding and is in default at this time. The Company is in discussions with the lender.

On April 10, 2008, an unaffiliated investor loaned us an additional $198,000 on an amendment of the prior unsecured note with a maturity date of June 21, 2009 for the entire balance of the first note plus the amendment ($323,000 total). The note carries interest at a rate of 12% per annum, with interest accruing and payable at maturity. The outstanding principal and interest may be repaid, in whole or in part, at any time without prepayment penalty. In conjunction with the note, we also issued a warrant to purchase 99,000 shares of common stock at an exercise price of $2.45 and an expiration date of April 10, 2013. This warrant has a "cashless" exercise feature. This note is guaranteed by Mr. Burchetta, a Director of the Company. The amended note maintains the provision requiring repayment of the note upon raising gross proceeds of $500,000 subsequent the issuance of the note. At September 30, 2008, we had raised in excess of $500,000 subsequent to this amended note, and as a result, this note is in default. We also issued 50,000 shares of common stock valued at $122,130 in order to induce the investor to forbear on the note, which is included in expenses. On February 12, 2010, we converted $74,867 of accrued interest through January 2010 and $65,133 of principal on the note to stock. On August 27, 2010, we repaid $80,000 in principal on the note, leaving a remaining balance of $177,867 plus accrued interest due on the note as of June 30, 2012. As of June 30, 2012, this note has matured and is still outstanding and is in default at this time.

Item 4. Mining Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits and Filings on Form 8-K (incorporated by reference)

31.1		Certification of Chief Executive Officer required by Rule 13(a)-14(a).

32.1		Certifications required by Rule 13(a)-14(b) and 18 U.S.C. Section 1350.

101.INS **		XBRL Instance Document

101.SCH **		XBRL Taxonomy Extension Schema Document

101.CAL **		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF **		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB **		XBRL Taxonomy Extension Label Linkbase Document

101.PRE **		XBRL Taxonomy Extension Presentation Linkbase Document

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DEBT RESOLVE, INC.

Dated: August 20, 2012	By:	/s/ Michael J. Cassella
		Michael J. Cassella
		Co-Chairman/ Chief Executive Officer/Principal Accounting Officer
		(Principal executive officer/Principal accounting officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Debt Resolve (DRSV) 10-Q2012 Q2 Quarterly report

Content analysis