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 MARCH 31, 2014
¨ 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.) |
1133 Westchester Ave., Suite S-223 White Plains, New York | 10604 | |
(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 ¨ No x
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 ¨
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 | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | 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 ¨ 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. Yes ¨ No ¨
As of March 17, 2015, 98,187,082 shares of the issuer's Common Stock were outstanding.
DEBT RESOLVE, INC.
TABLE OF CONTENTS
Page | |||||
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PART I. FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | 3 | |||
Condensed Balance Sheets at March 31, 2014 (unaudited) and December 31, 2013 | 3 | ||||
Condensed Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (unaudited) | 4 | ||||
Condensed Statement of Stockholders' Deficiency from January 1, 2014 through March 31, 2014 (unaudited) | 5 | ||||
Condensed Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (unaudited) | 6 | ||||
Notes to Condensed Financial Statements (unaudited) | 7 | ||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 17 | |||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 21 | |||
Item 4T. | Controls and Procedures | 22 | |||
PART II. OTHER INFORMATION | |||||
Item 1. | Legal Proceedings | 22 | |||
Item 1A. | Risk Factors | 23 | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 23 | |||
Item 3. | Defaults Upon Senior Securities | 23 | |||
Item 4. | Mine Safety Disclosures | 24 | |||
Item 5. | Other Information | 24 | |||
Item 6. | Exhibits | 25 | |||
Signatures | 26 | ||||
CERTIFICATIONS |
2 |
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEBT RESOLVE, INC.
CONDENSED BALANCE SHEETS
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 193,609 | $ | 7,212 | ||||
Accounts receivable, net | 35,560 | 28,564 | ||||||
Prepaid expenses | 29,943 | 48,384 | ||||||
Total current assets | 259,112 | 84,160 | ||||||
Other assets: | ||||||||
Deposits | - | 1,000 | ||||||
Total assets | $ | 259,112 | $ | 85,160 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 3,193,649 | $ | 3,161,647 | ||||
Due to shareholders | 452,163 | 455,329 | ||||||
Notes payable, current portion | 452,867 | 452,867 | ||||||
Notes payable-related parties | 295,221 | 295,221 | ||||||
Convertible Short-term notes, net of deferred debt discount of $-0- and $114 as of March 31, 2014 and December 31, 2013, respectively | 232,500 | 257,386 | ||||||
Lines of credit, related parties | 151,000 | 151,000 | ||||||
Derivative liabilities | 1,517,597 | 376,940 | ||||||
Total current liabilities | 6,294,997 | 5,150,390 | ||||||
Long term debt: | ||||||||
Bank loan, long term portion | 31,250 | 50,000 | ||||||
Notes payable, related party, net of deferred debt discount of $24,454 and $-0- as of March 31, 2014 and December 31, 2013, respectively | 318,546 | 118,000 | ||||||
Convertible long-term notes, net of deferred debt discount of $40,376 and $171 as of March 31, 2014 and December 31, 2013, respectively | 1,239,124 | 1,054,329 | ||||||
Total liabilities | 7,883,917 | 6,372,719 | ||||||
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; 98,137,703 issued and outstanding as of March 31, 2014 and December 31, 2013 | 98,138 | 98,138 | ||||||
Additional paid in capital | 66,734,061 | 66,834,457 | ||||||
Accumulated deficit | (74,457,004 | ) | (73,220,154 | ) | ||||
Total stockholders' deficiency | (7,624,805 | ) | (6,287,559 | ) | ||||
Total liabilities and stockholders' deficiency | $ | 259,112 | $ | 85,160 |
The accompanying notes are an integral part of these unaudited condensed financial statements
3 |
DEBT RESOLVE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31, | ||||||||
2014 | 2013 | |||||||
Revenues: | $ | 42,256 | $ | 35,589 | ||||
Costs and expenses: | ||||||||
Payroll, payroll taxes, penalties and related expenses | 80,102 | 123,510 | ||||||
Selling, general and administrative expenses | 150,034 | 159,291 | ||||||
Depreciation and amortization | - | 303 | ||||||
Total costs and expenses | 230,136 | 283,104 | ||||||
Net loss from operations | (187,880 | ) | (247,515 | ) | ||||
Other income (expense): | ||||||||
Loss on change in fair value of derivative liabilities | (966,363 | ) | - | |||||
Gain on settlement of debt | 320 | - | ||||||
Interest expense | (79,823 | ) | (75,553 | ) | ||||
Amortization of debt discounts | (3,104 | ) | (52,006 | ) | ||||
Total other income (expense) | (1,048,970 | ) | (127,559 | ) | ||||
Net loss before provision for income taxes | (1,236,850 | ) | (375,074 | ) | ||||
Income tax (benefit) | - | - | ||||||
Net loss | $ | (1,236,850 | ) | $ | (375,074 | ) | ||
Net loss per common share -basic and diluted | $ | (0.01 | ) | $ | (0.00 | ) | ||
Weighted average number of common shares outstanding, basic and diluted | 98,137,703 | 91,771,036 |
The accompanying notes are an integral part of these unaudited condensed financial statements
4 |
DEBT RESOLVE, INC.
CONDENSED STATEMENT OF SHAREHOLDERS' DEFICIENCY
THREE MONTHS ENDED MARCH 31, 2014
(unaudited)
Additional | ||||||||||||||||||||||||||||
Preferred stock | Common stock | Paid In | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
Balance, December 31, 2013 | - | - | 98,137,703 | 98,138 | 66,834,457 | (73,220,154 | ) | (6,287,559 | ) | |||||||||||||||||||
Beneficial conversion feature related to convertible notes | - | - | - | - | 67,648 | - | 67,648 | |||||||||||||||||||||
Fair value of vesting options issued to employees for services | - | - | - | - | 6,250 | - | 6,250 | |||||||||||||||||||||
Net reclassification of common stock equivalents issued in excess of aggregate authorized availability | - | - | - | - | (174,294 | ) | - | (174,294 | ) | |||||||||||||||||||
Net loss | - | - | - | - | - | (1,236,850 | ) | (1,236,850 | ) | |||||||||||||||||||
Balance, March 31, 2014 | - | $ | - | 98,137,703 | $ | 98,138 | $ | 66,734,061 | $ | (74,457,004 | ) | $ | (7,624,805 | ) |
The accompanying notes are an integral part of these unaudited condensed financial statements
5 |
DEBT RESOLVE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31, | ||||||||
2014 | 2013 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,236,850 | ) | $ | (375,074 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | - | 303 | ||||||
Amortization of debt discounts | 3,103 | 52,006 | ||||||
Stock based compensation | 6,250 | 18,948 | ||||||
Loss on change in fair value of derivative liability | 966,363 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (6,996 | ) | (14,246 | ) | ||||
Prepaid expenses | 18,441 | (6,338 | ) | |||||
Security deposit | 1,000 | - | ||||||
Accounts payable, accrued liabilities and due to shareholders | 28,836 | 182,690 | ||||||
Net cash used in operating activities | (219,853 | ) | (141,711 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | - | - | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from sale of common stock | - | 150,000 | ||||||
Repayment of short term notes | (18,750 | ) | (18,750 | ) | ||||
Proceeds from long term notes | 200,000 | - | ||||||
Proceeds from long term notes, related party | 225,000 | - | ||||||
Net cash provided by financing activities | 406,250 | 131,250 | ||||||
Net increase (decrease) in cash and cash equivalents | 186,397 | (10,461 | ) | |||||
Cash at beginning of period | 7,212 | 30,850 | ||||||
Cash at end of period | $ | 193,609 | $ | 20,389 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during period for interest | $ | 1,882 | $ | 4,781 | ||||
Cash paid during period for taxes | $ | - | $ | - | ||||
Non-cash financing and investing transactions: | ||||||||
Beneficial conversion feature on convertible notes | $ | 67,648 | $ | - |
The accompanying notes are an integral part of these unaudited condensed financial statements
6 |
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 1 – BASIS AND BUSINESS PRESENTATION
Debt Resolve, Inc. (the “Company”) was incorporated under the laws of the State of Delaware on April 21, 1997. The Company offers its service as a Software-as-a-Service (SaaS) model, enabling clients to introduce this collection or payment software 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 or defaulted consumer debt and as part of a complete accounts receivable management solution for consumer creditors. In December 2014, we began operation of Progress Advocates, LLC in the student loan document preparation industry (see Note 13).
Basis of Presentation
These unaudited condensed financial statements have been prepared in accordance with the instructions to the Form 10-Q and Article 10 of Regulation S-X, 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 months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2014. The unaudited condensed financial statements should be read in conjunction with the consolidated December 31, 2013 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 period data to conform to the current period's presentation. These reclassifications had no effect on reported income or losses.
Concentrations and Credit Risk
The Company extends credit to large, mid-size and small companies for the use of its software solutions. At March 31, 2014, two clients represented receivables of $10,000 (28%) and $20,000 (56%). At December 31, 2013, three clients represented receivables of $6,044 (21%), $10,000 (35%) and $10,000 (35%). As of March 31, 2014 and December 31, 2013, no allowance for doubtful accounts has been recognized.
The Company had three clients accounting for 18.74%, 35.50% and 35.50%; (total of 89.74%) of total revenues for the three months ended March 31, 2014, respectively, and had three clients accounting for 42.19%, 42.15% and 14.05%; (total of 98.38%) of total revenues for the three months ended March 31, 2013.
7 |
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
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 on the computation for the three months ended March 31, 2014 and for the three months ended March 31, 2013 because their effect is anti-dilutive. Fully diluted shares outstanding were 120,326,036 and 105,539,370 for the three months ended March 31, 2014 and 2013, respectively.
Stock-based compensation
Total employee and non-employee stock-based compensation expense for the three months ended March 31, 2014 and 2013 amounted to $6,250 and $18,948, 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.
Derivative Liability
The Company accounts for derivatives in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At March 31, 2014 and December 31, 2013, the Company did not have any derivative instruments that were designated as hedges. See Note 8 for discussion of the Company’s derivative liabilities.
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.
8 |
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 3 – LIQUIDITY
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 $1,236,850 for the three months ended March 31, 2014. Additionally, the Company has negative working capital (total current liabilities exceeded total current assets) of $6,035,885 as of March 31, 2014. 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 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of March 31, 2014 and December 31, 2013 are comprised of the following:
March 31, 2014 | December 31, 2013 | |||||||
Accounts payable and accrued expenses | $ | 1,065,757 | $ | 1,133,422 | ||||
Accrued interest | 1,199,730 | 1,121,942 | ||||||
Payroll and related accruals, net of advance to employees | 928,162 | 906,283 | ||||||
Total | $ | 3,193,649 | $ | 3,161,647 |
NOTE 5 – NOTES PAYABLE
As of March 31, 2014 and December 31, 2013, short term notes are as follows:
March 31, 2014 | December 31, 2013 |
| ||||||
Bank loans | $ | 106,250 | $ | 125,000 |
| |||
Investor notes payable, 12% per annum, currently in default | 377,867 | 377,867 |
| |||||
Total | 484,117 | 502,867 |
| |||||
Less current portion | 452,867 | 452,867 |
| |||||
Long term portion (only bank loan) | $ | 31,250 | $ | 50,000 |
|
9 |
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 6 – NOTES PAYABLE, RELATED PARTIES
As of March 31, 2014 and December 31, 2013, notes payable, related parties are as follows:
March 31, 2014 | December 31, 2013 | |||||||
Convertible note payable dated July 22, 2010, in default | $ | 15,000 | $ | 15,000 | ||||
Note payable dated January 14, 2011, in default | 6,000 | 6,000 | ||||||
Note payable dated April 14, 2011, in default | 25,000 | 25,000 | ||||||
Note payable dated April 15, 2011, in default | 25,000 | 25,000 | ||||||
Note payable dated May 27, 2011, in default | 10,000 | 10,000 | ||||||
Note payable dated January 18, 2012, in default | 5,000 | 5,000 | ||||||
Note payable dated January 20, 2012, in default | 5,000 | 5,000 | ||||||
Note payable dated May 21, 2012, in default | 15,000 | 15,000 | ||||||
Note payable dated May 30, 2012, in default | 20,000 | 20,000 | ||||||
Note payable dated September 17, 2013 | 5,221 | 5,221 | ||||||
Series A Convertible note, in default | 20,000 | 20,000 | ||||||
Convertible notes payable, dated July 6, 2012 | 30,000 | 30,000 | ||||||
Convertible note payable, dated July 10, 2012 | 15,000 | 15,000 | ||||||
Note payable, dated September 14, 2012 | 6,000 | 6,000 | ||||||
Convertible note payable, dated September 7, 2012 | 43,000 | 43,000 | ||||||
Convertible note payable, dated October 4, 2012 | 50,000 | 50,000 | ||||||
Convertible note payable, dated September 5, 2013 | 10,000 | 10,000 | ||||||
Convertible note payable, dated September 16, 2013 | 3,000 | 3,000 | ||||||
Note payable, dated October 24, 2013 | 30,000 | 30,000 | ||||||
Note payable, dated November 7, 2013 | 40,000 | 40,000 | ||||||
Note payable. dated December 6, 2013 | 5,000 | 5,000 | ||||||
Note payable, dated December 18, 2013 | 30,000 | 30,000 | ||||||
Note payable, dated January 9, 2014 | 25,000 | - | ||||||
Convertible note payable, dated February 28, 2014, net of unamortized debt discount of $24,454 | 175,546 | - | ||||||
Total | 613,767 | 413,221 | ||||||
Less current portion | 295,221 | 295,221 | ||||||
Long term portion | $ | 318,546 | $ | 118,000 |
On January 9, 2014, a stockholder and Board member loaned $25,000 (unsecured) to the Company due January 9, 2016 with interest at 10% per annum.
On February 28, 2014, the Company issued a $200,000 secured convertible note that matures on February 28, 2016. The note bears interest at a rate of 10% and can be convertible into shares of the Company’s common stock, at a conversion rate of $0.05 per share. Interest will also be converted into common stock at the conversion rate of $0.05 per share. In connection with the issuance of the convertible note, the Company issued an aggregate of 2,000,000 warrants to purchase the Company’s common stock at $0.15 per share over three years.
10 |
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
In accordance with ASC 470-20, the Company recognized the allocated value attributable to the warrants and the conversion feature in the amount of $25,538 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 3 years, a risk free interest rate of 0.69%, a dividend yield of 0%, and volatility of 304.56%. The debt discount attributed to the value of the warrants and conversion feature issued is amortized over the note’s maturity period (three years) as interest expense.
For the three months ended March 31, 2014, the Company amortized $1,084 of debt discount to current period operations as interest expense.
Total unpaid accrued interest on the notes payable to related parties as of March 31, 2014 and December 31, 2013 was $91,749 and $74,788, respectively. During the three months ended March 31, 2014 and 2013, the Company recorded interest expense of $16,961 and $8,753, respectively, in connection with the notes payable to related parties.
NOTE 7 – CONVERTIBLE NOTES
Convertible notes of non-related party investors are comprised of the following:
March 31, 2014 | December 31, 2013 | |||||||
Series A Convertible Notes | $ | 817,000 | $ | 817,000 | ||||
Series B Convertible Notes | 225,000 | 225,000 | ||||||
Series C Convertible Notes | 245,000 | 245,000 | ||||||
Series D Convertible Notes, net of unamortized debt discount of $-0- and $285 respectively | 25,000 | 24,715 | ||||||
Bridge 2014 Convertible Notes, net of unamortized debt discount of $40,376 | 159,624 | - | ||||||
Total | 1,471,624 | 1,311,715 | ||||||
Less: Current portion | (232,500 | ) | (257,386 | ) | ||||
Long term portion | $ | 1,239,124 | $ | 1,054,329 |
In 2014, the Company issued an aggregate of $200,000 in secured convertible notes that mature two years from the date of issuance (from January 2016 through March 2016). The notes bear interest at a rate of 10% and can be convertible into shares of the Company’s common stock, at a conversion rate of $0.05 per share. Interest will also be converted into common stock at the conversion rate of $0.05 per share. In connection with the issuance of the convertible notes, the Company issued an aggregate of 2,000,000 warrants to purchase the Company’s common stock at $0.15 per share over three years.
In accordance with ASC 470-20, the Company recognized the allocated value attributable to the warrants and the conversion feature in the amount of $42,110 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 3 years, an average risk free interest rate from 0.69% to 0.91%, a dividend yield of 0%, and volatility of 288.70% to 305.40%. The debt discount attributed to the value of the warrants and conversion feature issued is amortized over the note’s maturity period (three years) as interest expense.
For the three months ended March 31, 2014, the Company amortized $1,734 of debt discount to current period operations as interest expense.
11 |
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
Certain convertible note holders, representing an aggregate of $1,079,500 of these notes, entered into an agreements in December 2014 through February 2015 whereby their obligations were extended for a period of 18 months from the date of execution of the agreement. The terms of the agreement included a payment of accrued interest of $500 for every $25,000 of outstanding principal. All other terms (including any amendments or earlier extensions) of the notes remain the same. The remaining convertible notes are in default.
NOTE 8 — DERIVATIVE LIABILITIES
Excessive committed shares
On March 31, 2014, in connection with the previously issued stock options and warrants, the Company had the possibility of exceeding their common shares authorized when considering the number of possible shares that may be issuable to satisfy settlement provisions of these agreements after consideration of all existing instruments that could be settled in shares. This resulted in a derivative liability as a result of the Company having a potential to settle the obligation to issue these excess shares. The accounting treatment of derivative financial instruments required that the Company reclassify the derivative from equity to a liability at their fair values as of the date possible issuable shares exceeded the authorized level and at fair value as of each subsequent balance sheet date.
The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price of the underlying common stock of the Company.
At March 31, 2014, the fair value of the derivative liabilities of $1,517,597 was determined using the Black Scholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 305.59%; risk free rate: 0.90%; and expected life: 2.90 to 3.99 years.
As of March 31, 2014 and December 31, 2013, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of March 31, 2014, in the amount of $1,517,597 has a level 3 classification.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of March 31, 2014:
Excess Share Derivative | ||||
Balance, December 31, 2013 | $ | 376,940 | ||
Total (gains) losses | ||||
Transfers in of Level 3 upon exceeding in authorized shares | 174,294 | |||
Mark-to-market at March 31, 2014: | 966,363 | |||
Balance, March 31, 2014 | $ | 1,517,597 | ||
Net loss for the period included in earnings relating to the liabilities held at March 31, 2014 | $ | (966,363 | ) |
12 |
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. The Company’s stock price increased by 138% from December 31, 2013 to March 31, 2014. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments.
NOTE 9 — STOCKHOLDERS' EQUITY
Preferred Stock
At March 31, 2014 and December 31, 2013, the Company has authorized 10,000,000 shares of preferred stock, par value $0.001, of which none are issued and outstanding.
Common stock
At March 31, 2014 and December 31, 2013, the Company has authorized 200,000,000 shares of common stock, par value $0.001, of which 98,137,703 are issued and outstanding.
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 March 31, 2014:
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 | 28,771,600 | 3.88 | $ | 0.10 | 28,771,600 | $ | 0.10 | ||||||||||||||
0.15 | 8,283,334 | 1.89 | 0.15 | 8,283,334 | 0.15 | |||||||||||||||||
0.25 | 45,456,750 | 1.85 | 0.25 | 45,456,750 | 0.25 | |||||||||||||||||
0.30 | 250,000 | 1.86 | 0.30 | 250,000 | 0.30 | |||||||||||||||||
0.40 | 12,974,590 | 0.57 | 0.40 | 12,974,590 | 0.40 | |||||||||||||||||
Total | 95,736,274 | 2.29 | $ | 0.22 | 95,736,274 | $ | 0.22 |
13 |
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
Transactions involving the Company's warrant issuance are summarized as follows:
Number of Shares | Weighted Average Price Per Share | |||||||
Outstanding at December 31, 2012 | 68,210,274 | $ | 0.29 | |||||
Issued | 24,100,000 | 0.10 | ||||||
Exercised | - | |||||||
Expired | (574,000 | ) | (1.40 | ) | ||||
Outstanding at December 31, 2013 | 91,736,274 | 0.22 | ||||||
Issued | 4,000,000 | 0.15 | ||||||
Exercised | - | - | ||||||
Expired | - | - | ||||||
Outstanding at March 31, 2014 | 95,736,274 | $ | 0.22 |
In conjunction with the issuance of convertible notes, during the three months ended March 31, 2014, the Company issued an aggregate of warrants to purchase 4,000,000 shares of common stock with an exercise price of $0.15 per share expiring three years from the date of issuance. Please see Notes 6 and 7.
Total stock-based compensation expense for warrants issued for the three months ended March 31, 2014 and 2013 amounted to $-0- and $8,948, respectively.
Options
The following table summarizes options outstanding and related prices for the shares of the Company's common stock issued to shareholders at March 31, 2014:
Exercise Price | Number Outstanding | Option Outstanding Options Average Remaining Contractual Life (years) | Weighted Average Exercise price | Number Exercisable | Options Exercisable Weighted Average Exercise price | |||||||||||||||||
$ | 0.015 | 3,000,000 | 6.92 | $ | 0.015 | - | $ | 0.015 | ||||||||||||||
0.02 | 250,000 | 6.96 | 0.02 | 250,000 | 0.02 | |||||||||||||||||
0.06 | 3,000,000 | 4.17 | 0.06 | 3,000,000 | 0.06 | |||||||||||||||||
0.09 | 250,000 | 4.68 | 0.09 | 250,000 | 0.09 | |||||||||||||||||
0.095 | 500,000 | 4.80 | 0.095 | 500,000 | 0.095 | |||||||||||||||||
0.10 | 650,000 | 3.95 | 0.10 | 650,000 | 0.10 | |||||||||||||||||
0.13 | 500,000 | 3.09 | 0.13 | 500,000 | 0.13 | |||||||||||||||||
0.17 | 4,500,000 | 3.02 | 0.17 | 4,500,000 | 0.17 | |||||||||||||||||
0.19 | 1,000,000 | 2.36 | 0.19 | 1,000,000 | 0.19 | |||||||||||||||||
0.22 | 175,000 | 3.01 | 0.22 | 175,000 | 0.22 | |||||||||||||||||
0.70 | 75,000 | 1.44 | 0.70 | 75,000 | 0.70 | |||||||||||||||||
0.80 | 350,000 | 0.82 | 0.80 | 350,000 | 0.80 | |||||||||||||||||
1.00 | 350,000 | 1.29 | 1.00 | 350,000 | 1.00 | |||||||||||||||||
1.25 | 523,000 | 0.86 | 1.25 | 523,000 | 1.25 | |||||||||||||||||
1.40 | 350,000 | 1.20 | 1.40 | 350,000 | 1.40 | |||||||||||||||||
1.50 | 200,000 | 0.07 | 1.50 | 200,000 | 1.50 | |||||||||||||||||
1.63 | 20,000 | 1.21 | 1.63 | 20,000 | 1.63 | |||||||||||||||||
1.84 | 35,000 | 1.18 | 1.84 | 35,000 | 1.84 | |||||||||||||||||
4.75 | 203,000 | 0.07 | 4.75 | 203,000 | 4.75 | |||||||||||||||||
5.00 | 1,517,434 | 2.61 | 5.00 | 1,517,434 | 5.00 | |||||||||||||||||
Total | 17,448,434 | 3.72 | $ | 0.70 | 14,448,434 | $ | 0.84 |
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DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
Transactions involving the Company's option issuance are summarized as follows:
Number of Shares | Weighted Average Price Per Share | |||||||
Outstanding at December 31, 2012 | 19,285,934 | $ | 0.76 | |||||
Issued | - | - | ||||||
Exercised | - | - | ||||||
Expired | (5,087,500 | ) | 0.47 | |||||
Outstanding at December 31, 2013 | 14,198,434 | 0.86 | ||||||
Issued | 3,250,000 | 0.015 | ||||||
Exercised | -- | -- | ||||||
Expired | ||||||||
Outstanding at March 31, 2014 | 17,448,434 | $ | 0.70 |
During the three months ended March 31, 2014, the Board granted stock options to purchase 3,000,000 shares of common stock of the Company at exercise price of $0.015 with exercise period of seven years to an officer employee, vesting 1/3 each year for three years.
During the three months ended March 31, 2014, the Board granted stock options to purchase 250,000 shares of common stock of the Company at exercise price of $0.02 with exercise period of seven years to a consultant, fully vested at the date of issuance.
The fair value of the options were determined using the Black-Scholes option pricing method with the following assumptions: Dividend yield: 0%; Volatility: 304.56% to 305.19%; and Risk Free rate: 2.13% to 2.14%
Total stock-based compensation expense for options for the three months ended March 31, 2014 and 2013 amounted to $6,250 and $10,000, respectively.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Payroll taxes
Due to a lack of capital, the Company has been unable to pay all of the compensation owed to its employees. In addition, in 2011, 2012 and the third quarter of 2013, the Company did not pay certain federal and state payroll tax obligations due for employees' compensation, and they have become delinquent. The amounts of accrued employees' compensation included $203,428 unpaid payroll taxes. As a result, the Company has included in accrued expenses an amount of approximately $258,000 that represents an estimate of federal and state interest and penalties that could be expected upon settlement of payment of these payroll taxes with the respective taxing authorities. The Company is currently in discussions with the IRS about the federal portion of the liability about a workout plan. Upon agreement with the IRS, the Company will then initiate a discussion with the states involved.
NOTE 12 – RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2014 and 2013, certain Company directors personally guarantee the Company's notes payable and its' bank loan (Notes 5). Also, certain directors and officers made short-term or longer term loans as discussed in Note 6. Total interest expense in connection with notes payable to related parties and related party line of credits amounted $21,429 and $13,221 for the three months ended March 31, 2014 and 2013, respectively (Note 6).
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DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2014
NOTE 13 – SUBSEQUENT EVENTS
Equity:
Common stock:
On July 21, 2014, the Company issued 49,379 shares of its common stock in settlement of $4,000 note payable and related accrued interest of $1,925.
Preferred stock:
On May 2, 2014, the Company’s board of directors designated 5,000,000 shares of its preferred stock as Series A Convertible Stock (“Series A”) with a $0.001 par value. The Series A preferred stock which has rank senior to common and all other preferred stock of the corporation and equal or junior to any preferred stock that may be issued in regard to liquidation; not entitled to dividends and is convertible, at the holders’ option, at 10 shares of common stock for each share of Series A preferred stock.
On July 10, 2014, the Company issued an aggregate of 595,000 shares of its Series A preferred stock for services rendered, including 500,000 shares issued to a Board member.
In 2014, the Company issued an aggregate of 414,500 warrants to purchase Series A preferred stock for services rendered and a debt obligation, with exercise prices ranging from $0.50 to $1.50 per share, expiring three to five years from the date of issuance.
In connection with entering into the Progress Advocates LLC joint venture with LSH, LLC, (see below), the Company issued to LSH, LLC two five-year warrants to purchase an aggregate of 1,500,000 shares of series A convertible preferred stock of Debt Resolve at an exercise price of $0.50 per preferred share. The first warrant for 1,000,000 shares of Debt Resolve preferred stock vests and becomes exercisable 25% upon issuance and the balance upon the achievement by Progress Advocates of specific increasing revenue goals. The second warrant for 500,000 shares of Debt Resolve preferred stock vests and becomes exercisable when Progress Advocates achieves at least $1,000,000 in cumulative “operating income.”
Debt:
In December 2014 through March 2015, the Company executed maturity date extension agreements with unaffiliated holders of Convertible Notes extending the original maturity date 18 months to June through September 2016 for $1,079,500 of outstanding principle.
In 2014, the Company issued an aggregate of $650,000 convertible notes due two years from the date of issuance with interest, due at maturity, of 10% per annum. The notes are convertible into common stock at $0.05 per share, at the holders’ election 6 months after issuance. In connection with the issuance, the Company issued warrants to purchase 6,500,000 shares of common stock with an exercise price of $0.15 per share expiring three years from the date of issuance. Board members were issued $75,000 in notes and 750,000 common stock warrants.
Financial Options Group, LLC
In October 2014, the Company formed an LLC initially called Financial Options Group, LLC, subsequently changed to Progress Advocates LLC with LSH, LLC to focus on the student loan market with ownership of 51% owned by the Company and 49% owned by LSH, LLC.
In connection with entering into the Progress Advocates LLC joint venture with LSH, LLC, (see above), the Company issued to LSH, LLC two five-year warrants to purchase an aggregate of 1,500,000 shares of series A convertible preferred stock of the Company with vesting of the majority of these shares conditional upon meeting performance objectives.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our primary business is providing software solutions to consumer lenders or those collecting on those consumer loans using a Software-as-a-Service (SaaS) model. These solutions facilitate web-based payments for the resolution of delinquent or defaulted consumer debt. 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. Other opportunities exist for marketing our software to hospitals and large physician groups. In addition, client results show that our solution is attractive 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 will pursue these markets as well. 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.
As past experience has shown, 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 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.
For the three months ended March 31, 2014 and 2013, we had significantly inadequate revenues and incurred a net loss of $1,236,850 and $375,074, respectively, from operations. The increase in the net loss from operations in the period ending March 31, 2014, is primarily attributable to the 'Loss on change in fair value of derivative liabilities' in that period of $966,363, without which the net loss from operations was reduced 33.6% year over year. Cash used in operating activities was $219,853 for the three months ended March 31, 2014. Cash used in operating activities was $471,859 for the year ended December 31, 2013. Based upon projected operating expenses, we believed that our working capital as of March 31, 2014 might not have been sufficient to fund our plan of operations for the next twelve months.
During 2013 and 2014, we have been successful in raising capital for our day-to-day operations from accredited investors, though no assurance can be provided that we will continue to be able to do so. There is also 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. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Importantly however, during the course of 2014, a new strategy was developed to diversify revenue sources through the use of our core competencies in e-commerce based debt collection and internet based product development. In December 2014, Progress Advocates, LLC, a Debt Resolve joint venture (see Note 13, Financial Options Group) was launched to provide document preparation for U.S. Department of Education based loan modification services to holders of student loans. Its early success is supportive of current forecasts for both revenue and profitability, significant to our business viability. A second initiative to support our new strategy was also started during 2014. This initiative has resulted in the development of a new on-line consumer to consumer debt negotiation service, named Settl.it, which will charge a fee per transaction. This product is in beta test with launch scheduled for the end of March 2015. Each of these new business initiatives will increase its respective revenue and profit based on the rate of marketing investment. This will allow Debt Resolve to manage its growth in line with available financial resources. It is anticipated that both new business will be accretive to our 2015 financial results.
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Each of these new business initiatives will increase its respective revenue and profit based on the rate of marketing investment. This will allow Debt Resolve to manage its growth in line with available financial resources. It is anticipated that both new business will be accretive to our 2015 financial results.
Utilizing the financial resources provided by these new initiatives, a plan has been developed for 2015 to re-purpose the traditional Debt Resolve Solution into a more fully featured Accounts Receivable Management solution for the healthcare industry. When completed, hospitals and medical groups will look to Debt Resolve for the low cost collection and management of patient pay receivables, the fastest growing debt in their industry, from billing to charge offs.
Results of Operations for the Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013
Revenues
Revenues totaled $42,256 and $35,589 for the three months ended March 31, 2014 and 2013, respectively. We earned revenue during the three months ended March 31, 2014 and 2013 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 $80,102 for the three months ended March 31, 2014, as compared to $123,510 for the three months ended March 31, 2013, a decrease of $43,408. The decrease mainly resulted from the reduction in salaries paid in 2014. Salaries were $67,589 and $98,816 in the three months ended March 31, 2014 and 2013, respectively. Employee benefits were $12,513 and $24,694 in the three months ended March 31, 2014 and 2013, respectively.
General and administrative expenses. General and administrative expenses amounted to $150,034 for the three months ended March 31, 2014, as compared to $159,291 for the three months ended March 31, 2013, a decrease of $9,257. Service fees were $101,222 and $8,340 for the three months ended March 31, 2014 and 2013, respectively. The primary reason for the increase in service fees were consulting services provided by our CEO who converted to payroll in the 2014 year. Occupancy expense was $7,063 and $4,676 for the three months ended March 31, 2014 and 2013, respectively. Telecommunications expense was $12,804 and $13,230 for the three months ended March 31, 2014 and 2013, respectively. Accounting expenses decreased to $5,000 for the three months ended March 31, 2014 from $84,596 for the three months ended March 31, 2013. In 2014, we did not incur outside auditor fees as compared to our annual cost in 2013. Travel, marketing, insurance and legal expense were $5,365, $295, $17,969 and $-0- in the three months ended March 31, 2014 compared with $2,280, $8,183, $32,675 and $1,225 in the three months ended March 31, 2013. Other miscellaneous general and administrative expenses were $184 and $4,086 for the three months ended March 31, 2014 and 2013, respectively.
Depreciation and amortization expense. For the three months ended March 31, 2014 and 2013, we recorded depreciation expense of $-0- and $303, respectively.
Loss on change in fair value of derivative liabilities. During the three months March 31, 2014, we had the possibility of exceeding common shares authorized when considering the number of possible shares that may be issuable to satisfy settlement provisions of these agreements after consideration of all existing instruments that could be settled in shares. The accounting treatment of derivative financial instruments requires us to reclassify the derivative from equity to a liability at their fair values as of the date possible issuable shares exceeded the authorized level and at fair value as of each subsequent balance sheet date. For the three months ended March 31, 2014 and 2013, we recorded a loss on change in fair value of these derivative liabilities of $966,363 and $-0-, respectively.
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Gain on settlement of debt. During the three months March 31, 2014, we settled outstanding accounts payable for less than the recorded liability. As such, we reported a gain of $320 and $-0- for the three months ended March 31, 2014 and 2013, respectively.
Interest (expense). We recorded interest expense of $79,823 for the three months ended March 31, 2014 compared to interest expense of $75,553 for the three months ended March 31, 2013. Interest expense increased due to the issuance of new notes in 2014.
Amortization of deferred debt discount. Amortization expense of $3,104 and $52,006 was incurred for the three months ended March 31, 2014 and 2013, respectively, for the amortization of the value of the deferred debt discount associated with certain of our notes payable. Amortization expense decreased due to expiry of the remaining amortizable discounts.
Liquidity and Capital Resources
As of March 31, 2014, we had a working capital deficiency (total current liabilities exceeded total current assets) in the amount of $6,035,885 and cash and cash equivalents totaling $193,609. We reported a net loss of $1,236,850 for the three months ended March 31, 2014. Net cash used in operating activities was $219,853 for the three months ended March 31, 2014. Cash flow provided by financing activities was $406,250 for the three months ended March 31, 2014. As of December 31, 2013, we had a working capital deficiency (total current liabilities exceeded total current assets) in the amount of $5,066,230 and cash and cash equivalents totaling $7,212.
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 successfully raised capital for our day-to-day operations since our inception; 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 or we reach cash flow breakeven, 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 our delay in generating meaningful revenue. 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.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results are as follows:
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Accounts Receivable
We extend credit to large, mid-size and small companies for the use of our software solutions. At March 31, 2014, two clients represented receivables of $10,000 (28%) and $20,000 (56%). At December 31, 2013, three clients represented receivables of $6,044 (21%), $10,000 (35%) and $10,000 (35%). As of March 31, 2014 and December 31, 2013, no allowance for doubtful accounts has been recognized.
We had three clients accounting for 18.74%, 35.50% and 35.50%; (total of 89.74%) of total revenues for the three months ended March 31, 2014, respectively, and had three clients accounting for 42.19%, 42.15% and 14.05%; (total of 98.38%) of total revenues for the three months ended March 31, 2013.
Stock-based compensation
We follow Accounting Standards Codification subtopic 718-10, Stock-based Compensation ("ASC 718-10"). The standards require the measurement of compensation cost at the grant date, based upon the estimated fair value of the award, and requires amortization of the related expense over the employee’s requisite service period.
Fair Values
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
We follow Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value. None of these statements had an impact on the Company’s financial position, results of operations or cash flows.
Derivative Liability
We account for derivatives in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At March 31, 2014 and December 31, 2013, we did not have any derivative instruments that were designated as hedges.
Revenue Recognition
To date, we have earned revenue from collection agencies, collection law firms and lenders that implemented our online system. Our current contracts provide for revenue based on a percentage of the amount of debt collected, a fee per settlement or through 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 the client or at the beginning of the month for a flat fee. For the early adopters of our product, we have waived set-up fees and other transactional fees that we anticipate charging in the future. 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.
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Dependent upon the structure of future contracts, revenue may be derived from a combination of set up fees or flat monthly or annual fees with transaction fees upon debt settlement, fees per account loaded or fees per settlement. We are currently marketing our system to three primary markets. The first and second are financial institutions and collection agencies or law firms, our traditional markets. We are also expanding into healthcare, particularly hospitals, which is our third market.
In recognition of the principles expressed in Accounting Standards Codification subtopic 605-10, Revenue Recognition ("ASC 605-10") that revenue should not be recognized until it is realized or realizable and earned, and given the element of doubt associated with collectability of an agreed settlement on past due debt, we postpone recognition of all contingent revenue until the client receives payment from the debtor. As is required by SAB 104, revenues are considered to have been earned when we have substantially accomplished the agreed-upon deliverables to be entitled to payment by the client. For most current active clients, these deliverables consist of the successful collection of past due debts using our system and/or, for clients under a flat fee arrangement, the successful availability of our system to its customers.
In addition, in accordance with ASC 605-10, revenue is recognized and identified according to the deliverable provided. Set-up fees, percentage contingent collection fees, fixed settlement fees, monthly fees, etc. are identified separately.
Recently-Issued 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, 2013, filed on March 10, 2015, 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.
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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. Our Chief Executive 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 Chief Executive 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
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 Chief Executive 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, we are 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 we will be able to do so.
Management believes that its unaudited condensed financial statements for the three months ended March 31, 2014 and 2013 fairly presented, in all material respects, its financial condition and results of operations. During the three months ended March 31, 2014, 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
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.
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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
Investor Note 1:
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, a shareholder and former Company director. On April 10, 2008, we borrowed an additional $198,000 from this investor. Please see discussion below.
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 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 was 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 through partial sale of the note, leaving a remaining balance of $177,867 plus accrued interest due on the note as of September 30, 2013. As of September 30, 2013, this note has matured and is still outstanding and is in default at this time.
Investor Note 2:
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 a shareholder and former Company director. As of March 31, 2013, this note has matured and is still outstanding and is in default at this time.
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Convertible Notes:
From June 2009 to March 2010, unaffiliated investors loaned the Company an aggregate of $1,237,459 (including $20,000 related party) on three-year Series A Convertible Notes with an interest rate of 14% with an aggregate of $837,000 (including $20,000 related party) remaining at March 31, 2014. 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 2014 and 2015, the Company extended for 18 months $734,500 of the outstanding debt.
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 March 31, 2014. 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 2014 and 2015, the Company extended for 18 months $175,000 of the outstanding debt.
During the year ended December 31, 2010, unaffiliated investors loaned the Company an aggregate of $260,000 ($15,000 related party) 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 2014 and 2015, the Company extended for 18 months $155,000 of the outstanding debt.
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 2014 and 2015, the Company extended for 18 months $15,000 of the outstanding debt.
Item 4. Mining Safety Disclosures
Not applicable
Item 5. Other Information
None
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Item 6. Exhibits
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
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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: March 31, 2015 | By: | /s/ Stanley E. Freimuth | |
Stanley E. Freimuth | |||
Director/Chief Executive Officer/Principal Accounting Officer | |||
(Principal executive officer/Principal accounting officer) |
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