ITEM 1. Business
This report contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this report. Additionally, statements concerning future matters such as the development or regulatory approval of new products, enhancements of existing products or technologies, revenue and expense levels and other statements regarding matters that are not historical are forward-looking statements.
Although forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading “Risk Factors” below, as well as those discussed elsewhere in this report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by federal securities laws, we undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made in this report, including under Item 1A, “Risk Factors,” which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Overview
Debt Resolve, Inc. is a Delaware corporation formed in April 1997. Our primary business in 2014 is providing software solutions to consumer lenders or those collecting on consumer loans using a Software-as-a-Service (SaaS) model. These solutions facilitate web-based payments or 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 as our traditional markets. 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 these prospective clients. 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.
The Debt Resolve solution utilizes our “double-blind” bidding system that works in real-time to resolve consumer obligations by taking offers from debtors and creditors and finding a resolution between the offers. Protected by five U.S. patents, our process is fully automated and does not require human intervention. The core patent, no. 6,330,551, has been upheld by the U.S. Court of Appeals for the Federal Circuit in Cybersettle, Inc. vs. National Arbitration Forum, Inc. (2007-1092). The product’s infrastructure was built to accommodate significant scaling. We also created an early stage delinquency solution which is suited to internal bank collection operations. The benefits of our Debt Resolve solutions versus traditional collection methods have been lower cost, higher average collections per account and higher portfolio recovery rates. In addition, our solutions are designed to help our clients keep satisfied customers, since our systems are much less intrusive than traditional collection techniques.
Our Debt Resolve solutions bring creditors (or parties who service their credit) and consumer debtors together to resolve defaulted consumer debt online through a series of steps. The process is initiated when one of our creditor or servicer clients electronically forwards to us a file of debtor accounts, and sets rules or parameters for handling each class of accounts. The client then invites its consumer debtor to visit a client-branded website or a generic solution, developed and hosted by us, where the consumer is presented with an opportunity to satisfy the delinquent or defaulted debt through one of our Debt Resolve solutions. Through our hosted website, the debtor is allowed to make three or four offers, or select other options to bring current or settle the obligation. If the debtor makes an offer acceptable to our creditor client, payment can then be collected, sent through the client’s payment processor and deposited directly into the client’s account. We never touch our client’s money. The entire resolution process is accomplished online.
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 14, Non-controlling interest) 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 April 2015. Each of these new business initiatives will increase as its respective revenue and profit based on the rate of marketing investment. This will allow us to manage our growth in line with available financial resources. It is anticipated that both new businesses will be accretive to our 2015 financial results.
In connection with entering into the Progress Advocates LLC joint venture with LSH, LLC, (see below), we 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.”
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 (ARM) solution for the healthcare industry. When completed, we expect 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.
Corporate and Background Information
We were incorporated as a Delaware corporation in April 1997 under our former name, Lombardia Acquisition Corp. On May 7, 2003, our certificate of incorporation was amended to change our corporate name to Debt Resolve, Inc.
Our principal executive offices are located at 1133 Westchester Ave., Suite S-223, White Plains, New York 10604, and our telephone number is (914) 949-5500. As of December 31, 2014, we had one subsidiary, Progress Advocates LLC. Our website is located at http://www.debtresolve.com. Information contained in our website is not part of this report.
Our Strengths
Through formal focus groups and one-on-one user studies conducted by us with consumer debtors who would be potential candidates to use the original Debt Resolve system, we designed the system to be user-friendly and easily navigated.
We believe our Debt Resolve Solution have a number of key features that make them unique and valuable:
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One solution utilizes a blind-bidding system for settling debt - This feature is the subject of patent protection and to date has resulted in settlements and payments that average above the floor set by our clients.
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They facilitate compliance with regulations.
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They promote best practices - the collections industry is very results-driven. To adopt new techniques or technology, participants want to know exactly what kind of benefits to expect. We recognize this and also know that Internet-based collection is a newer technology, and there is room to improve its performance. By working with our clients to build best practices, we expect to help secure sales and improve revenue to us.
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By providing a web channel, total liquidation rates are increased in our clients’ portfolios.
We believe the main advantages to consumer debtors in using our Debt Resolve Solution are:
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A greater feeling of control over the debt collection process.
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Confidentiality, security, ease-of-use and 24-hour access.
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A less threatening experience than dealing directly with debt collectors.
Our Industry
Debt Collection Industry
According to the U.S. Federal Reserve Board, consumer credit has increased from $133.7 billion in 1970 to $3,097.9 billion in December 2013, a compound annual growth rate of approximately 7.6% for the period. In parallel, the accounts receivables management (“ARM”) industry accounts for $15 billion in annual revenues according to industry analyst Kaulkin Ginsberg.
There are several major collections industry trends:
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Profit margins are stagnating or declining due to the fixed costs of telephone-based collections. In addition, periods when the economy is weak means more delinquencies to collect but a higher inability on the part of debtors to pay. Thus, costs increase to generate the same level of revenue. The ACA International’s 2012 Benchmarking & Agency Operations Survey shows that more than 50% of the operating costs are directly related to the cost of the collections agents, making the business difficult to scale using traditional staffing and collections methods.
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Small to mid-size agencies will need to offer competitive pricing and more services to compete with larger agencies, as well as focus on niche areas that require specialized expertise.
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Off-shoring has been used by both creditors and third-party collectors, but their results were less than expected due to cultural differences.
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Debt buyers may start collecting more debt themselves while agencies may start buying more debt, creating more competitiveness within the ARM industry.
The collections industry has always been driven by letters and agent calls to debtors. In the early 1990’s, dialer technology created an improvement in calling efficiency. However, it was not until the early 2000’s that any new technologies were introduced. These new technologies include analytics, Interactive Voice Response systems (IVR) and Internet-based collections. Of these, IVR systems and Internet-based collections have the ability to positively impact the cost-to-collect by reducing agent involvement, while analytics focus agent time on the accounts with the highest potential to collect.
Federal Student Loan Document Preparation Industry
In 1992, President H.W. Bush signed the first bill authorizing U.S. government backed student loans. The William D. Ford Federal Direct loan Program, in 2007, was the beginning of Department of Education involvement in the issuance of student loans directly to students. Then, in 2010, President Obama signed the Health Care and Education Reconciliation Act (HCERA), beginning government programs aimed at reducing the cost and burden of these Federal Direct Student Loan repayment for new graduates. Subsequently, in 2012 and 2014, President Obama signed Executive orders to expand these programs to all Federal Direct Student Loan borrowers who have graduated from 2007 to present. While there are three separate programs, they all fall into the categories of Income Based Repayment Plans, known as ‘Pay as you Earn’ and Student Loan Forgiveness.
Companies in this industry, 1) advise the clients on the availability and details of each program, 2) determine an initial estimate of the loan modification and subsequent cost savings available for the client, 3) with input from the clients, prepare the documentation for submission to the U. S. Department of Education (DOE), 4) with client approval, submit the documentation to DOE on the client’s behalf. Based on the data provided, DOE responds with an offer of loan modification or loan forgiveness directly to the client. For this submission, companies charge a fee.
While many companies in the industry end their services upon submission, others offer to monitor the clients account for delinquency and work with clients on annual renewal submissions to DOE. For these services, an additional small fee is usually paid.
The opportunity within this industry is enormous. As of 2014, 20 million students per year were graduating with student loan debt, both Federal and private. Since the 2010 HCERA, government subsidies for private loans has ended and the majority of student loans are Federal. The gravity of the student loan burden is reflected in this data: DOE states that as of FY 2014 Q3, there is $98 billion Federal Loans in default (unpaid for over 270 days), which represents 7 million borrowers.
Our Business Growth Strategy
Our business strategy significantly evolved during 2014 from a single goal of becoming an important participant in the ARM industry by making our Debt Resolve Solution a key collection tool at all stages of delinquency to diversifying into new industries that can leverage our core competencies and financial assets. The key elements of our business growth strategy are to:
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Develop Progress Advocates LLC into a profitable growth business that is sustainable in an industry of changing regulations and operating conditions. Included in this development are industry leading practices from technology integration to customer education and care. A key focus is to expand the marketing plan of external lead purchases with prospect self-identification through branded web properties and social media participation. Education programs will be available to explain the government programs and terminology, help consumers with debt management, and where to go for other resources. The goal is to develop a customer relationship that benefits the consumer, develops brand awareness and encourages our inclusion in the consumer’s social media world.
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Leverage our technology and knowledge of consumer debt collection to launch a new internet based product in the consumer to consumer debt resolution and collection space. This product, named Settl.it, was designed and development initiated in 2014. It is currently in beta testing and will be launched in April 2015. Settl.it will utilize our patented blind bidding system that we license and will be one of the first products available with online negotiations technology. Designed to be simple to understand, easy to use, but an effective collection tool, our goal is to make Settl.it an online leader in this industry. In addition, the product was designed to be enhanced at a future date to meet the needs of the small business marketplace.
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Enhance the Debt Resolve Solution by integrating it with other services to become a total solution for the ARM market. The initial focus will be the health industry including hospitals and medical practices. Our solution will offer a single vendor revenue management system from day one billing through late stage collections. Our partners in this solution are experienced professionals with health industry experiences including billing, call center management, and all stages of bill collections. Another focus will be a complete solution for auto financing companies. Our partner in providing this solution will be a current client and national payment processor. In both industries, the marketing strategy will center on building a customer success story and leveraging that reference account with marketing materials, industry speaking engagements, and our partner’s sales team to expand to similar industry accounts.
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Leverage our public equity financial structure by purchasing equity interests in private companies that will benefit from the experience and skills of our management and consultants as well as from holding our publicly traded equity. For Debt Resolve, each purchase will aim to be accretive to earnings and leverage our assets with little additional expense. For our partners, our involvement is aimed to accelerate their growth and profitability. In combination with our equity structure, this will allow them to monetize their years of hard work building a private company. The Progress Advocates LLC joint venture was our first such investment. Our intent is to attract others that will be synergistic to our current portfolio and offer the benefits described above.
Technology License and Proprietary Technology
At the core of our Debt Resolve Solution and Settl.it online product is a patent-protected bidding methodology co-invented by the co-founders of our company. We originally entered into a license agreement in February 2003 with the co-founders for the licensed usage of the intellectual property rights relating to U.S. Patent No. 6,330,551, issued by the U.S. Patent and Trademark Office on December 11, 2001 for “Computerized Dispute and Resolution System and Method” worldwide. This patent, which expires August 5, 2018, covers automated and online, double blind-bid systems that generate high-speed settlements by matching offers and demands in rounds. Four subsequent patents have been issued and form a five patent “cluster” underpinning our license agreement. In June 2005, we amended and restated the license agreement in its entirety. The license agreement can be found in our SEC filings.
The licensed usage is limited to the creation of software and other code enabling an automated system used solely for the settlement and collection of delinquent, defaulted and other types of credit card receivables and other consumer debt and specifically excludes the settlement and collection of insurance claims, tax and other municipal fees of all types. The licensed usage also includes the creation, distribution and sale of software products or solutions for the same aim as above and with the same exclusions. In lieu of cash royalty fees, the co-founders have agreed to accept stock options to purchase shares of our common stock.
The term of the license agreement extends until the expiration of the last-to-expire patents licensed (now 5 patents) and is not terminable by the co-founders, the licensors. The license agreement also provides that we will have the right to control the ability to enforce the patent rights licensed to us against infringers and defend against any third-party infringement actions brought with respect to the patent rights licensed to us subject, in the case of pleadings and settlements, to the reasonable consent of the co-founders. The terms of the license agreement, including the exercise price and number of stock options granted under the agreement, were negotiated in an arm’s-length transaction between the co-founders, on the one hand, and our independent directors, on the other hand.
Technology and Service Providers
We outsource our web hosting to Cervalis LLC, a Tier 1 data center providing our security in a SSAE 16 and PCI certified environment. The Cervalis hosting facility is located in Wappingers Falls, New York. We use Cervalis’ servers to operate our proprietary software developed in our corporate offices.
Competition
Internet-based technology was introduced to the collections industry in 2004 and has many participants at this time. The original three were us, Apollo Enterprise Solutions, LTD. and Online Resources Corp. A large number of collection agency software providers now offer an internet payment portal included with their software.
There are many new competitors entering the online collections market at this time. We are very closely monitoring their functionality to prevent an infringement of our patented settlement engine. Several cease and desist letters were sent in 2012 and 2013 to potential infringers to stop using technology that appears to use our protected process, and we will vigorously enforce our rights to protect our technology.
The Federal Student Loan document preparation industry is comprised of numerous small companies. Due to the newness of the industry, little data is available on the economics of participation.
Government Regulation
We believe that our Internet technology business is not subject to any regulations by governmental agencies other than those routinely imposed on corporate and Internet technology businesses. We believe it is unlikely that state or foreign regulators would take the position that our solutions effectively constitute the collection of debts that is subject to licensing and other laws regulating the activities of collection agencies, as we have no client funds in our custody at any time. We simply provide a software suite that our clients use to conduct their business.
Existing laws and regulations for traditional collection agencies would include applicable state revolving credit, credit card or usury laws, state consumer plain English and disclosure laws, the Uniform Consumer Credit Code, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the U.S. Bankruptcy Code, the Health Insurance Portability and Accountability Act, the Gramm-Leach-Bliley Act, the federal Truth in Lending Act (including the Fair Credit Billing Act amendments) and the Federal Reserve Board’s implementation of Regulation Z, the federal Fair Credit Reporting Act, and state unfair and deceptive acts and practices laws. Collection laws and regulations also directly apply to an agency’s business, such as the federal Fair Debt Collection Practices Act and state law counterparts. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement of and collection on defaulted consumer debt, and any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to collect. Finally, federal and state governmental bodies are considering, and may consider in the future, other legislative proposals that would regulate the collection of consumer debt. Our failure to comply with any current or future laws or regulations applicable to us could limit our ability to collect on any consumer debt.
For our Internet technology business, any penetration of our network security or other misappropriation of consumers’ personal information could subject us to liability. Other potential misuses of personal information, such as for unauthorized marketing purposes, could also result in claims against us. These claims could result in litigation. In addition, the Federal Trade Commission and several states have investigated the use by certain Internet companies of personal information. The Company has liability insurance policies to protect itself from computer crime by its employees and external sources. The Company believes its coverages will adequately meet its potential monetary damages.
In addition, pursuant to the Gramm-Leach-Bliley Act, our financial institution clients must require us to include in their contracts with us that we have appropriate data security standards in place. The Gramm-Leach-Bliley Act stipulates that we must protect against unauthorized access to, or use of, consumer debtor information that could result in detrimental use against or substantial inconvenience to any consumer debtor. Detrimental use or substantial inconvenience is most likely to result from improper access to sensitive consumer debtor information because this type of information is most likely to be misused, as in the commission of identity theft. We believe we have adequate policies and procedures in place to protect this information; however, if we experience a data security breach that results in any penetration of our network security or other misappropriation of consumers’ personal information, or if we have an inadequate data security program in place, our financial institution clients may consider us to be in breach of our agreements with them, and we may be subject to litigation.
Also, as we move into the healthcare space, our healthcare clients must require us to include in their contracts with us that we meet the data protection provisions of the Health Insurance Portability and Accountability Act. This law is designed to ensure that patient care data is not personally identifiable in the event of a breach of our solutions. Again, this type of information is very susceptible to misuse in the commission of identity theft. We believe we have adequate policies and procedures in place to protect this information; however, if we experience a data security breach that results in any penetration of our network security or other misappropriation of consumers’ personal information, or if we have an inadequate data security program in place, our healthcare clients may also consider us to be in breach of our agreements with them, and we may be subject to litigation.
The laws and regulations applicable to the Internet and our services are evolving and unclear and could damage our business. It is possible that laws and regulations may be adopted, covering issues such as user privacy, pricing, taxation, content regulation, quality of products and services, and intellectual property ownership and infringement. This legislation could expose us to substantial liability or require us to incur significant expenses in complying with any new regulations. Increased regulation or the imposition of access fees could substantially increase the costs of communicating on the Internet, potentially decreasing the demand for our services. A number of proposals have been made at the federal, state and local level and in foreign countries that would impose additional taxes on the sale of goods and services over the Internet. Such proposals, if adopted, could adversely affect us. Moreover, the applicability to the Internet of existing laws governing issues such as personal privacy is uncertain. We may be subject to claims that our services violate such laws. Any new legislation or regulation in the United States or abroad or the application of existing laws and regulations to the Internet could adversely affect our business. Finally, in foreign countries certain restrictions on the use of the internet for certain activities are restricted or prohibited.
Our joint-venture, Progress Advocates LLC, operates within the sphere of influence of the U.S. Department of Education and could be impacted by any ensuing regulatory change. In addition, the laws under which DOE issues student loans and subsequent loan modification and forgiveness could be subject to new laws or Presidential orders.
Employees
As of April 15, 2015, we had two full-time employees and two independent contractors. Our employees and contractors are based at our corporate headquarters in White Plains, New York. None of our employees is subject to a collective bargaining agreement, and we believe that our relations with our employees and contractors are good.
ITEM 1A.
ITEM 1A. Risk Factors
Cautionary Statements and Risk Factors
Set forth below and elsewhere in this report and in other documents we file with the SEC are important risks and uncertainties that could cause our actual results of operations, business and financial condition to differ materially from the results contemplated by the forward looking statements contained in this report.
Risks Related to Our Business
We have experienced significant and continuing losses from operations which could impede the process of raising capital.
For the years ended December 31, 2014 and 2013, we had inadequate revenues and incurred net losses of $809,112 and $474,882, respectively. Cash used in operating activities for operations was $941,607 and $471,859 for the years ended December 31, 2014 and 2013, respectively. Based upon projected operating expenses, we believe that our working capital as of April 15, 2015 may not be sufficient to fund our plan of operations for the next 12 months. While the execution of our new strategy and new businesses may mitigate this concern, any continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that we will prove successful.
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 in notes (including convertible notes) and in stock purchases. Also, a bank loaned us $300,000, of which $50,000 was still outstanding as of December 31, 2014. On April 15, 2015, there remains $25,000 still outstanding. Finally, board members and management have loaned us $1,183,782 that has not been repaid or some may be 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 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. The financial statements contained in this filing do not include any adjustments that might result from the outcome of this uncertainty.
We will rely heavily on the financial success of Progress Advocates LLC.
Going forward, we expect a substantial part of our revenue to come from our new subsidiary, Progress Advocates LLC. This business operates in an entirely new market segment for us. We have no prior experience in the student loan debt sector, although our business partner does have experience in this sector. We are relying heavily on their expertise, systems and guidance to launch this new business. As a result, there is substantial risk to this endeavor until adequate revenue is established for it to be profitable.
The business plan for Progress Advocates LLC requires a large investment in marketing to provide the leads required to sustain anticipated sales transactions and revenue. Each month the marketing investment must be spent at the beginning of the month to generate revenues during the rest of the month. Funds may not be available to spend at these levels, thus reducing the anticipated sales and revenues.
We may not be able to protect the intellectual property rights upon which our business relies, including our licensed patents, trademarks, domain name, proprietary technology and confidential information, which could result in our inability to utilize our technology platform, licensed patents or domain name, without which we may not be able to provide our services.
Our ability to compete in our sector depends in part upon the strength of our proprietary rights in our technologies. We consider our intellectual property to be critical to our viability. We do not hold patents on our consumer debt-related product, but rather license technology for our Debt Resolve solution from the co-founders of our company, whose patented technology is now, and is anticipated to continue to be, incorporated into our service offerings as a key component.
Unauthorized use by others of our proprietary technology could result in an increase in competing products and a reduction in our sales. We rely on patent, trademark, trade secret and copyright laws to protect our licensed and proprietary technology and other intellectual property. We cannot be certain, however, that the steps that we have taken to protect our proprietary rights to date will provide meaningful protection from unauthorized use by others. We have initiated litigation and could pursue additional litigation in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others.
However, we may not prevail in these efforts, and we could incur substantial expenditures and divert valuable resources in the process. In addition, many foreign countries’ laws may not protect us from improper use of our proprietary technologies. Consequently, we may not have adequate remedies if our proprietary rights are breached or our trade secrets are disclosed.
Finally, protection of our intellectual property through legal means is very expensive. We may not have the funds available to enforce our rights, which would allow other parties to violate these rights. Our efforts to protect our intellectual property will consume capital that would otherwise go to sales, marketing and operations and may negatively impact our financial performance in the short term. We believe that it is critical to our long term success to allocate resources to these activities from time to time.
The intellectual property rights that we license from our co-founders are limited in industry scope, and it is possible these limits could constrain the expansion of our business.
We do not hold patents on our consumer debt-related product, but rather license technology for our Debt Resolve solution from the co-founders of our company, whose patented technology is now, and is anticipated to continue to be, incorporated into our service offerings as a key component. This license agreement limits usage of the technology to the creation of software and other code enabling an automated system used solely for the settlement and collection of credit card receivables and other consumer debt and specifically excludes the settlement and collection of insurance claims, tax and other municipal fees of all types. These limitations on usage of the licensed technology could constrain the expansion of our business by limiting the different types of debt for which some of our Debt Resolve solutions can potentially be used, and limiting the potential clients that we could service.
Potential conflicts of interest exist with respect to the intellectual property rights that we license from our co-founders, and it is possible our interests and their interests may diverge.
We do not hold patents on our consumer debt-related product, but rather license technology for our Debt Resolve Solution and our Settl.it product from the co-founders of our company, whose patented technology is now, and is anticipated to continue to be, incorporated into the Debt Resolve Solution as a key component. This license agreement presents the possibility of a conflict of interest in the event that issues arise with respect to the licensed intellectual property rights, including the prosecution or defense of intellectual property infringement actions, where our interests may diverge from those of the co-founders. The license agreement provides that we will have the right to control and defend or prosecute, as the case may require, the patent rights licensed to us subject, in the case of pleadings and settlements, to the reasonable consent of the co-founders. Our interests with respect to such pleadings and settlements may be at odds with those of the co-founders.
Under the terms of our license agreement, the co-founders of our company will be entitled to receive stock options to purchase shares of our common stock if and to the extent the licensed technology produces specific levels of revenue for us. They will not be entitled to receive any stock options for other debt collection activities such as off-line settlements or transactions not involving the Debt Resolve Solution technology. The license agreement may present the co-founders with conflicts of interest.
We are dependent upon maintaining and expanding our computer and communications systems. Failure to do so could result in interruptions and failures of our services. This could have an adverse effect on our operations which would make our services less attractive to consumers, and therefore subject us to a loss of revenue as a result of a possible loss of creditor clients.
Our ability to provide high-quality client support largely depends on the efficient and uninterrupted operation of our computer and communications systems to accommodate our creditor clients and the consumers who use our system. In the terms and conditions of our standard form of licensing agreement with our clients, we agree to make commercially reasonable efforts to maintain uninterrupted operation of our solutions 99.99% of the time, except for scheduled system maintenance. In the normal course of our business, we must record and process significant amounts of data quickly and accurately to access, maintain and expand our offerings.
The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty, operating malfunction, software virus, or service provider failure, could disrupt our operations. Any failure of our information systems, software or backup systems would interrupt our operations and could cause us to lose clients. We are exposed to the risk of network and Internet failure, both through our own systems and those of our service providers. While our utilization of redundant transmission systems can improve our network’s reliability, we cannot be certain that our network will avoid downtime. Substantially all of our computer and communications hardware systems are hosted in outsourced facilities with Cervalis in New York, and under the terms of our hosting service level agreement with Cervalis, they will provide network connectivity availability 99.9% of the time from the connection off their backbone to our hosted infrastructure.
Our disaster recovery plan may not be adequate and our business interruption insurance may not adequately compensate us for losses that could occur as a result of a network-related business interruption. The occurrence of a natural disaster or unanticipated problems at our facilities or those of our service providers could cause interruptions or delays in use of our solutions and loss of data. Additionally, we rely on third parties to facilitate network transmissions and telecommunications.
We cannot assure you that these transmissions and telecommunications will remain either reliable or secure. Any transmission or telecommunications problems, including computer viruses and other cyberattacks and simultaneous failure of our information systems and their backup systems, particularly if those problems persist or recur frequently, could result in lost business from creditor clients and consumers. Network failures of any sort could seriously affect our client relations, potentially causing clients to cancel or not renew contracts with us.
Our auditors have issued a Going Concern Statement.
The accompanying 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 consolidated financial statements, the Company incurred a net loss of $809,112 and $474,882 for the years ended December 31, 2014 and 2013 respectively. Additionally, the Company has negative working capital (total current liabilities exceeded total current assets) of $5,197,474 as of December 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. The accompanying consolidated 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.
Stanley E. Freimuth possesses specialized knowledge about our business strategy, and we would be adversely impacted if he was to become unavailable to us.
We believe that our ability to execute our business strategy will depend to a significant extent upon the efforts and abilities of Stanley E. Freimuth, our Chief Executive Officer. His corporate leadership experiences and successes leading small companies to profitability would be difficult to replace. If he were to become unavailable to us, our operations would be adversely affected. We have no insurance to compensate us for the loss of his services.
We have issued “blank check” preferred stock without stockholder approval with the effect of diluting then current stockholder interests and impairing their voting rights, and provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.
Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of “blank check” preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interest of, or impair the voting power of, our common stockholders.
On May 2, 2014, our 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 with 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, we 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, we 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 years from the date of issuance.
In connection with entering into the Progress Advocates LLC joint venture with LSH, LLC, we 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.”
The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company. In addition, advanced notice is required prior to stockholder proposals.
Delaware law also could make it more difficult for a third party to acquire us. Specifically, Section 203 of the Delaware General Corporation Law may have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by our stockholders.
Risks Related to Our Industry
The ability of our solution’s clients to recover and enforce defaulted consumer debt may be limited under federal, state, local and foreign laws, which would negatively impact our revenues.
Federal, state, local and foreign laws may limit our creditor clients’ ability to recover and enforce defaulted consumer debt. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement and collection of consumer debt. The Consumer Financial Protection Bureau is actively looking at the debt collection industry for new regulation. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to settle defaulted consumer debt accounts on behalf of our clients and could result in decreased revenues to us. We cannot predict if or how any future legislation would impact our business or our clients. In addition, we cannot predict how foreign laws will impact our ability to expand our business internationally or the cost of such expansion. Our failure to comply with any current or future applicable laws or regulations could limit our ability to settle defaulted consumer debt claims on behalf of our clients, which could adversely affect our revenues.
Changes in Federal laws and regulations may limit Progress Advocates LLC’s ability to offer document preparation services for the modification and consolidation of U.S. student loans. We cannot predict if the current government programs allowing these modifications will continue to be offered by the U.S. Department of Education in similar form or substance to the current offering upon which Progress Advocates offers its services.
For all of our businesses, government regulation and legal uncertainties regarding consumer credit and debt collection practices may require us to incur significant expenses in complying with any new regulations.
A number of our existing and potential creditor clients, such as banks and credit card issuers, operate in highly regulated industries. We are impacted by consumer credit and debt collection practices laws, both in the United States and abroad. The relationship of a consumer and a creditor is extensively regulated by federal, state, local and foreign consumer credit and protection laws and regulations. Governing laws include consumer plain English and disclosure laws, the Uniform Consumer Credit Code, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the U.S. Bankruptcy Code, the Health Insurance Portability and Accountability Act, the Gramm-Leach-Bliley Act, the Federal Truth in Lending Act (including the Fair Credit Billing Act amendments), the Fair Debt Collection Practices Act and state law counterparts, the Federal Reserve Board’s implementation of Regulation Z, the federal Fair Credit Reporting Act, and state unfair and deceptive acts and practices laws. Failure of these parties to comply with applicable federal, state, local and foreign laws and regulations could have a negative impact on us. For example, applicable laws and regulations may limit our ability to collect amounts owing with respect to defaulted consumer debt accounts, regardless of any act or omission on our part. We cannot assure you that any indemnities received from the financial institutions which originated the consumer debt account will be adequate to protect us from liability to consumers. Any new laws or rulings that may be adopted, and existing consumer credit and protection laws, may adversely affect our ability to collect and settle defaulted consumer debt accounts. In addition, any failure on our part to comply with such requirements could adversely affect our ability to settle defaulted consumer debt accounts and result in liability. In addition, state or foreign regulators may take the position that our solutions effectively constitute the collection of debts that is subject to licensing and other laws regulating the activities of collection agencies. If so, we may need to obtain licenses from such states, or such foreign countries where we may engage in our solutions business. Until licensed, we will not be able to lawfully deal with consumers in such states or foreign countries. Obtaining such licenses would be expensive.
We face potential liability that arises from our handling and storage of personal consumer information concerning disputed claims and other privacy concerns.
Any penetration of our network security or other misappropriation of consumers’ personal information could subject us to liability in both our Settl.it and Debt Resolve Solution businesses. Other potential misuses of personal information, such as for unauthorized marketing purposes, could also result in claims against us. These claims could result in litigation. In addition, the Federal Trade Commission and several states have investigated the use by certain Internet companies of personal information. We could incur unanticipated expenses, especially in connection with our settlement database, if and when new regulations regarding the use of personal information are enacted.
In addition, pursuant to the Gramm-Leach-Bliley Act, our financial institution clients are required to include in their contracts with us that we have appropriate data security standards in place. The Gramm-Leach-Bliley Act stipulates that we must protect against unauthorized access to, or use of, consumer debtor information that could be detrimentally used against or result in substantial inconvenience to any consumer debtor. Detrimental use or substantial inconvenience is most likely to result from improper access to sensitive consumer debtor information because this type of information is most likely to be misused, as in the commission of identity theft. We believe we have adequate policies and procedures in place to protect this information; however, if we experience a data security breach that results in any penetration of our network security or other misappropriation of consumers’ personal information, or if we have an inadequate data security program in place, our financial institution clients may consider us to be in breach of our agreements with them.
Also, as we move into the healthcare space, our healthcare clients must require us to include in their contracts with us that we meet the data protection provisions of the Health Insurance Portability and Accountability Act. This law is designed to ensure that patient care data is not personally identifiable in the event of a breach of our solutions. Again, this type of information is very susceptible to misuse in the commission of identity theft. We believe we have adequate policies and procedures in place to protect this information; however, if we experience a data security breach that results in any penetration of our network security or other misappropriation of consumers’ personal information, or if we have an inadequate data security program in place, our healthcare clients may also consider us to be in breach of our agreements with them, and we may be subject to litigation.
Government regulation and legal uncertainties regarding the Internet may require us to incur significant expenses in complying with any new regulations.
The laws and regulations applicable to the Internet and our services are evolving and unclear and could damage our business. Due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted, covering issues such as user privacy, pricing, taxation, content regulation, quality of products and services, and intellectual property ownership and infringement. This legislation could expose us to substantial liability or require us to incur significant expenses in complying with any new regulations. Increased regulation or the imposition of access fees could substantially increase the costs of communicating on the Internet, potentially decreasing the demand for our services. A number of proposals have been made at the federal, state and local level and in foreign countries that would impose additional taxes on the sale of goods and services over the Internet. Such proposals, if adopted, could adversely affect us. Moreover, the applicability to the Internet of existing laws governing issues such as personal privacy is uncertain. We may be subject to claims that our services violate such laws. Any new legislation or regulation in the United States or abroad or the application of existing laws and regulations to the Internet could adversely affect our business.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses, which as a smaller public company may be disproportionately high.
Changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for small capitalization companies like us. These new and changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards will likely result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
A poor performance by the economy may adversely impact our business.
When economic conditions deteriorated, more borrowers became delinquent on their consumer debt. However, while volumes of debt to settle have risen, borrowers have less ability in a downturn to make payment arrangements to pay their delinquent or defaulted debt. As a result, our revenues may decline, or it may be more costly to generate the same revenue levels, resulting in reduced earnings. A poor economy may also slow borrowing or may curb lenders willingness to provide credit, which results in lower business levels.
Risks Related to our Common Stock
Our stock is thinly traded.
The daily volume in our stock varies widely and is often limited. At this time, it is not possible to liquidate a significant position in a relatively short time period. In addition, because we are not traded on a national exchange, there are additional restrictions on the purchase or sale of our common stock. It has become increasingly difficult to find a brokerage firm willing to accept over-the-counter stock certificates due to new Financial Industry Regulatory Authority regulations.
Issuance of preferred stock results in significant dilution.
The issuance of preferred stock with its 10 to 1 conversion ratio into common stock will significantly dilute our common shareholders. We have significant amounts, 2,490,500 shares, of preferred stock still eligible to be issued in the future.
Our stock price may exhibit a high degree of volatility.
Because our stock is traded with relatively low volume, the price can move significantly on small trading volumes. The release of positive news would be expected to move our stock price up, but we have large illiquid blocks discussed above that sell into any upward momentum. These blocks exert a downward influence or may place a temporary or long-term cap on our stock price appreciation. Over time, we would expect these blocks to be broadly sold into the market, increasing our shareholder base and trading volume and mitigating the effect of these blocks over time. While we currently do not provide sales or earnings guidance as some larger companies do, we may do so in the future, and our stock price reaction may be volatile depending on our revenue and earnings performance relative to the guidance.
All of our assets are subject to liens as security for delinquent federal payroll taxes and indebtedness under our series D convertible notes.
All of our assets now owned or hereafter acquired, and all proceeds therefrom, including accounts receivable and technology, are subject to liens in favor of the Internal Revenue Service for delinquent payroll taxes from 2011-2013 (see Note 12 to our Notes to Financial Statements), and certain investors who purchased our series D convertible notes (see Note 8 to our Notes to Financial Statements). While we are not currently in default under either of these obligations, our failure to comply with the terms of these obligations (which, for example, require monthly payments to the IRS) could entitle the IRS to declare all obligations to be immediately due and payable. If we were unable to service the obligations, the lien holders could foreclose on the assets that serve as collateral. As a result, following an event of default under these obligations and enforcement against the collateral, the lien holders will be entitled to be repaid in full from the proceeds of all the pledged assets owned by us now or hereafter acquired securing the obligations owed to them before any payment is made to the holders of our common stock from the proceeds of that collateral. Additionally, the holders of the liens will receive all proceeds from any realization on the collateral or from the collateral or proceeds thereof in any insolvency proceeding, until the obligations secured by the liens are paid in full.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
Not applicable
ITEM 2.
ITEM 2. Properties
We currently occupy office space at 1133 Westchester Avenue, Suite S-223, White Plains, NY 10604, under a short term lease with an unaffiliated third party at a monthly rate of $3,500.
ITEM 3.
ITEM 3. Legal Proceedings
Lawsuits from vendors
Dreier LLP, a law firm, filed a complaint in the Supreme Court of New York, County of New York, seeking damages of $311,023 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. A settlement was reached on September 30, 2014 requiring the Company to pay $22,500 of installment payments. The first installment of $10,000 was paid on October 10, 2014. The last five installments of $2,500 were paid on November 10, 2014, December 11, 2014, January 12, 2015, February 11, and March 10, 2015, respectively. The full amount, less settlement payment made, in dispute was included in the Company’s accounts payable at December 31, 2014.
From time to time, we are 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 our financial position or results of operations.
ITEM 4.
ITEM 4. Mine Safety Disclosures
Not applicable
PART II.
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our shares of common stock are quoted on the OTC Pink marketplace under the symbol DRSV.
The following table sets forth the high and low closing prices for our common stock for the periods indicated as reported on the OTC Pink marketplace from January 1, 2013 to present:
As of April 15, 2015, there were approximately 2,000 record holders of our common stock. We believe that a significant number of beneficial owners of our common stock hold shares in “nominee” or “street” name.
Dividends
We have not paid to date, nor do we expect to pay in the future, a dividend on our common stock. The payment of dividends on our common stock is within the discretion of our board of directors, subject to our certificate of incorporation. We intend to retain any earnings for use in our operations and the expansion of our business. Payment of dividends in the future will depend on our future earnings, future capital needs and our operating and financial condition, among other factors.
Recent Sales of Unregistered Securities
None
Purchases of Equity Securities
We did not repurchase any shares of our common stock in the fourth quarter of the year ended December 31, 2013.
ITEM 6.
ITEM 6. Selected Financial Data
Not applicable
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included in this report. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
Our primary business in 2014 was 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 or 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 as our traditional markets. 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 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.
For the years ending December 31, 2014 and 2013, we had significantly inadequate revenues and incurred a net loss from operations of $809,112 and $474,882, respectively. Cash used in operating activities was $941,607 for the year ended December 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 December 31, 2014 was not sufficient to fund our plan of operations for the next twelve months.
However, in 2014 and 2015, we have raised 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. 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 positive cash flow is generated from operations, there is also a 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 14, Non-Controlling Interest), was launched to provide 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 in 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. Anticipated launch of this application is April 2015. Each of these businesses will increase its respective revenue and profit based on the rate of marketing investment. This will allow us to manage our growth in line with available financial resources. It is anticipated that both new businesses 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 Years Ended December 31, 2014 and December 31, 2013
Revenues
Revenues totaled $155,976 and $144,300 for the years ended December 31, 2014 and 2013, respectively. We earned revenue during the years ended December 31, 2014 and 2013 as a percent of debt collected, on a fee per settlement and on a flat monthly fee basis. In addition, in December 2014, we began earning revenue as fees for providing student loan services.
Costs and Expenses
Payroll and related expenses. Payroll and related expenses amounted to $603,828 for the year ended December 31, 2014, as compared to $372,651 for the year ended December 31, 2013, an increase of $231,177. The increase mainly resulted from the stock based compensation expense in 2014 for $193,214 compared to $10,000 in 2013, and increase in personnel. Salaries were $359,100 and $285,763 in the year ended December 31, 2014 and 2013, respectively. Employee benefits were $57,763 and $86,888 in the year ended December 31, 2014 and 2013, respectively.
General and administrative expenses. General and administrative expenses amounted to $721,717 for the year ended December 31, 2014, as compared to $347,659 for the year ended December 31, 2013, an increase of $374,058. Service fees were $387,442 and $75,867 for the year ended December 31, 2014 and 2013, respectively, the increase being primarily attributable to higher stock-based and cash paid consulting fees. Occupancy expense was $29,500 and $17,178 for the years ended December 31, 2014 and 2013, respectively. Telecommunications expense was $55,002 and $49,479 for the year ended December 31, 2014 and 2013, respectively. Accounting expenses decreased to $52,156 for the year ended December 31, 2014 from $78,127 for the year ended December 31, 2013. We had less accounting services and billings received in 2014, whereas in 2013 more accounting services and billings were received in the 2012 year. Travel, marketing, insurance and legal expense were $15,654, $48,617, $66,127 and $53,721 in the year ended December 31, 2014 compared with $4,445, $21,914, $94,652 and $4,503 in the year ended December 31, 2013. Other miscellaneous general and administrative expenses were $725 and $1,494 for the year ended December 31, 2014 and 2013, respectively.
Depreciation and amortization expense. For the year ended December 31, 2014 and 2013, we recorded depreciation expense of $-0- and $908, respectively. Depreciation expense for the year ended December 31, 2014 is $-0- due to the full depreciation of our assets.
Gain on change in fair value of derivative liabilities. For the year ended December 31, 2014 and 2013, 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 year ended December 31, 2014 and 2013, we recorded a gain on change in fair value of these derivative liabilities of $743,924 and $421,050, respectively.
Gain on settlement of debt. For the year ended December 31, 2014 and 2013, we settled outstanding accounts payable for less than the recorded liability. As such, we reported a gain of $320 and $53,829 for the year ended December 31, 2014 and 2013, respectively.
Interest (expense). We recorded interest expense of $379,829 for the year ended December 31, 2014 compared to interest expense of $298,640 for the year ended December 31, 2013. Interest expense increased due to the issuance of new notes in the later part of 2013 and 2014.
Amortization of deferred debt discount. Amortization expense of $46,331 and $74,203 was incurred for the year ended December 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 on older notes.
Liquidity and Capital Resources
As of December 31, 2014, we had a working capital deficiency (total current liabilities exceeded total current assets) in the amount of $5,197,474 and cash and cash equivalents totaling $55,605. We reported a net loss of $809,112 for the year ended December 31, 2014. Net cash used in operating activities was $941,607 for the year ended December 31, 2014. Cash flow provided by financing activities was $990,000 for the year ended December 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 may not be sufficient to fund our plan of operations for the next year.
On January 25, 2015, Debt resolve, Inc. entered into an agreement whereby four of the company’s directors (Gary Martin, Raymond Conta, James Brakke, and Stanley Freimuth) will make available to the company a $400,000 credit line for working capital needs for a period of up to four years. The interest rate on funds utilized by the company is 5.25% (reflecting the lender’s cost of borrowing such funds). Borrowings under the agreement are unsecured and non-convertible, and are due and payable at any time upon 30 days written notice to Debt Resolve.
We have raised capital for our day-to-day operations since our inception through year end 2014; 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. 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 insolvency. 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. Our Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
As of April 15, 2015, we have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Impact of Inflation
We believe that inflation has not had a material impact on our results of operations for the years ended December 31, 2014 and 2013. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.
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:
Accounts Receivable
In the course of doing business, we extend credit to large, mid-size and small companies for collection services. At December 31, 2014, one client represented receivables of $10,000 (35%). At December 31, 2013, three clients represented receivables of $6,044 (21%), $10,000 (35%) and $10,000 (35%). We do not generally require collateral or other security to support customer receivables. Accounts receivable are carried at their estimated collectible amounts. Accounts receivable are periodically evaluated for collectability and the allowance for doubtful accounts is adjusted accordingly. Management determines collectability based on their experience and knowledge of the customers. As of December 31, 2014 and 2013, no allowance for doubtful accounts has been booked.
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 December 31, 2014 and 2013, we did not have any derivative instruments that were designated as hedges.
At December 31, 2014 and 2013, we had the possibility of exceeding their common shares authorized when considering the number of possible shares that may be issuable to satisfy settlement provisions for all existing instruments that could be settled in shares.
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.
The Company accounts for equity awards to non-employees at fair value on the date of grant. Equity awards to non-employees are subject to periodic revaluation until the completion of any requisite performance requirements in accordance with ASC 505-50.
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.
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
As of December 31, 2014 or 2013, the Company did not have any items that would be classified as level 1 or 2 disclosures. The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in note 9. 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 in Note 9 to the financial statements are that of volatility and market price of the underlying common stock of the Company.
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. 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. Refer to page in Our Consolidated Financial Statements for details regarding recent accounting pronouncements.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Our audited financial statements for the year ended December 31, 2014 are included as a separate section of this report beginning on page.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
DEBT RESOLVE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Debt Resolve, Inc.
We have audited the accompanying consolidated balance sheets of Debt Resolve, Inc. (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, shareholders’ deficiency and cash flows for each of the two years in the period ended December 31, 2014. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3, the Company has suffered recurring losses from operations and has significant negative working capital as of December 31, 2014, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter are described in Note 3. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Fiondella, Milone & LaSaracina LLP
Glastonbury, Connecticut
April 15, 2015
DEBT RESOLVE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2014 AND 2013
The accompanying notes are an integral part of these consolidated financial statements
DEBT RESOLVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements
DEBT RESOLVE, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
TWO YEARS ENDED DECEMBER 31, 2014
The accompanying notes are an integral part of these consolidated financial statements
DEBT RESOLVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
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, the Company, jointly with LSH, LLC, organized Progress Advocates LLC, a Delaware limited liability company for the purpose to provide services in the student loan document preparation industry with ownership interests of 51% and 49% for the Company and LSH, LLC, respectively. In connection with the organization, the Company issued warrants to LSH, LLC to acquire an aggregate of 1,500,000 shares of the Company’s Series A Preferred Stock (Note 10) at $0.50 per share expiring December 7, 2019. Of the issued warrants, 250,000 warrants vested immediately with the remaining 1,250,000 warrants vesting on performance criteria, as defined.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the presentation of the accompanying consolidated financial statements follows:
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation. The non-controlling interest represents the minority owners’ share of its net operating results.
Estimates
The preparation of the consolidated 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.
Revenue Recognition
To date, the Company has earned revenue from collection agencies, collection law firms and lenders that implemented our online system. The Company's 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. 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. 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. The Company is currently marketing its system to three primary markets. The first and second are financial institutions and collection agencies or law firms, its traditional markets. The Company is also expanding into healthcare, particularly hospitals, which is its third market.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
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, the Company postpones 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 the Company has 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 the Company's system and/or, for clients under a flat fee arrangement, the successful availability of the Company's system to its customers.
Revenues for set-up fees, percentage contingent collection fees, fixed settlement fees, monthly fees, etc. are accounted for as Multiple-Element Arrangements under ASC 605-10 which incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements (“ASC 605-25”). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.
Revenues for the preparation of student loan documentation are earned when the Company has substantially accomplished the agreed-upon deliverables to be entitled to payment by the client. For most current active clients, these deliverables consist of the completed, delivered and accepted student loan package. The Company may sell its products separately or in various bundles that include multiple elements such as upfront fees, monitoring and other services.
The Company defers any revenue for which the product or service has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. At December 31, 2014 and 2013, the Company had deferred revenues of $25,343 and $-0-, respectively.
Concentrations of Credit Risk
The Company’s consolidated financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Generally, the Company’s cash and cash equivalents in interest-bearing accounts does not exceed FDIC insurance limits. The financial stability of these institutions is periodically reviewed by senior management.
Accounts Receivable and Sales Concentration
The Company extends credit to large, mid-size and small companies for collection services. At December 31, 2014, one client represented receivables of $10,000 (35%) At December 31, 2013, three clients represented receivables of $6,044 (21%), $10,000 (35%) and $10,000 (35%). The Company does not generally require collateral or other security to support customer receivables. Accounts receivable are carried at their estimated collectible amounts. Accounts receivable are periodically evaluated for collectability and the allowance for doubtful accounts is adjusted accordingly. Management determines collectability based on their experience and knowledge of the customers. As of December 31, 2014 and 2013, no allowance for doubtful accounts has been recorded.
The Company had three clients accounting for 17%, 38% and 20% of total revenue for the year ended December 31, 2014 and two clients accounting for 42% and 42% of total revenue for the year ended December 31, 2013.
Cash and Cash Equivalents
For purposes of the consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
Fair Values
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
The carrying value of the Company’s cash, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.
As of December 31, 2014 or 2013, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed in Note 9. 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 in Note 9 are that of volatility and market price of the underlying common stock of the Company.
Property and Equipment
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years. Property and equipment is fully depreciated as of December 31, 2014 and 2013.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
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. Fully diluted shares outstanding were 131,119,754 and 109,704,119 for the years ended December 31, 2014 and 2013, respectively.
Segment Information
Accounting Standards Codification subtopic Segment Reporting 280-10 (“ASC 280-10”) establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein materially represents all of the financial information related to the Company’s only material principal operating segment.
Long-Lived Assets
The Company follows Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse.
The Company adopted the provisions of Accounting Standards Codification (“ASC”) Topic 740-10, which prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Company complies with the provisions of FASB ASC 740-10 in accounting for its uncertain tax positions. ASC 740-10 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Management has determined that the Company has no significant uncertain tax positions requiring recognition under ASC 740-10 requiring recognition in the Company’s consolidated financial statements as of December 31, 2014 and 2013. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the statements of operations.
Stock-based compensation
The Company measures 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 fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. 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. Stock-based compensation expense is recorded by the Company in the same expense classifications in the consolidated statements of operations, as if such amounts were paid in cash. Total stock-based compensation expense for the years ended December 31, 2014 and 2013 amounted to $333,665 and $18,948, respectively.
Reclassification
Certain reclassifications have been made to prior period’s data to conform to the current period's presentation. These reclassifications had no effect on reported income or losses.
Defined Contribution (401k) Plan
The Company maintains a defined contribution (401k) plan for its 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 December 31, 2014 and 2013, the Company did not have any derivative instruments that were designated as hedges.
At December 31, 2014 and 2013, 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 for all existing instruments that could be settled in shares.
Recent accounting pronouncements
There were various other 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 consolidated financial position, results of operations or cash flows.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
NOTE 3 - GOING CONCERN MATTERS
The accompanying 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 consolidated financial statements, the Company incurred a net loss of $851,485 and $474,882 for the years ended December 31, 2014 and 2013 respectively. Additionally, the Company has negative working capital (total current liabilities exceeded total current assets) of $5,197,474 as of December 31, 2014 and is in default on certain debt obligations (see Note 6). 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. The accompanying consolidated 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 December 31, 2014 and 2013 are comprised of the following:
During the year ended December 31, 2014, the Company settled an accounts payable of $320 for $-0- resulting in a gain on settlement of debt of $320.
During the year ended December 31, 2013, the Company settled an accounts payable of $63,829 for $10,000 resulting in a gain on settlement of debt of $53,829.
NOTE 5 - NOTES PAYABLE
As of December 31, 2014 and 2013, short term notes are as follows:
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
Bank loans
On October 7, 2011, a bank loan (unsecured) was issued in the amount of $237,500 at a 6.25% interest rate, with monthly payments of $6,250 matured on December 1, 2014, and guaranteed by a director. During the years ended December 31, 2014 and 2013, the Company repaid $75,000, and $75,000, respectively. The outstanding balance on the bank loan as of December 31, 2014 and 2013 is $50,000 and $125,000, respectively.
Investor notes payable
Investor Note 1
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, which has passed. This note is guaranteed by a stockholder.
On April 10, 2008, this investor loaned the Company an additional $198,000 on an amendment of the prior unsecured note with a maturity date of June 21, 2009 for payment of the entire balance of the first note plus the amendment ($323,000 total). In February 2010, the Company converted $65,133 principal and $74,867 accrued interest on the note to common stock. In August 2010, the Company repaid $80,000 principal through partial sale of the note. As a result, the remaining balance of the amended note is $177,867. 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. The Company also issued 50,000 shares of common stock valued at $122,130 in order to induce the investor to forbear on the note. This note is guaranteed by a stockholder 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.
Investor Note 2
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, which has passed. This note is guaranteed by a stockholder. As of December 31, 2014 and 2013, this note is in default.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
NOTE 6 - NOTES PAYABLE, RELATED PARTIES
As of December 31, 2014 and 2013, notes payable, related parties are as follows:
As described in Note 8 below, On July 22, 2010, investors loaned the Company an aggregate of $260,000 on three-year Series C Convertible Notes with an interest rate of 14%, of which $15,000 was a related party. See Note 8 for full details.
On January 14, 2011, a stockholder loaned $6,000 (unsecured) to the Company with a due date of June 30, 2011. The loan had 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. Such discount was amortized over the original term of the note.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
On April 14, 2011, a stockholder and Board member loaned $25,000 (unsecured) to the Company with a due date of July 31, 2011. The loan had 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. The Company had recorded a deferred debt discount of $8,850 that was amortized over the original term of the debt.
On April 15, 2011, a stockholder and Board member loaned $25,000 (unsecured) to the Company with a due date of July 31, 2011. The note had 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. The Company had recorded a deferred debt discount of $8,850 that was amortized over the original term of the debt.
On May 27, 2011, a stockholder and Board member loaned an additional $15,000 (unsecured) (of which $5,000 has been repaid in 2011 and remainder of $10,000 repaid in 2014) to the Company with a due date of September 30, 2011. The note had been extended to December 31, 2011. 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. The Company had recorded a deferred debt discount of $5,610 that was amortized over the original term of the debt.
On January 18, 2012, a stockholder and Board member 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. Such discount was charged to operations at issuance.
On January 20, 2012, a stockholder and Board member 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. Such discount was charged to operations at issuance date.
On May 21, 2012, a stockholder and Board member loaned $18,000 (unsecured) (of which $3,000 has been repaid in 2012) to the Company. The loan was due May 21, 2014 with interest at 12% per annum, and is currently in default.
On May 30, 2012, a stockholder and Board member loaned $20,000 (unsecured) to the Company due March 31, 2013 with interest at 12% per annum, and is currently in default.
As described in Note 8 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. See Note 8 for full description.
On July 6, 2012, a stockholder and Board member loaned $10,000 (unsecured) to the Company due July 6, 2014 with interest at 12% per annum and convertible into the Company's common stock at $0.10 per share at the holder's option. The Company determined there was no beneficial conversion feature at the time of issuance. The Company did not make payment on the maturity date, therefore the note is currently in default.
On July 6, 2012, a stockholder and Board member loaned $20,000 (unsecured) to the Company due July 6, 2014 with interest at 12% per annum and convertible into the Company's common stock at $0.10 per share at the holder's option. The Company determined there was no beneficial conversion feature at the time of issuance. The Company did not make payment on the maturity date, therefore the note is currently in default.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
On July 10, 2012, a stockholder and Board member loaned $15,000 (unsecured) to the Company due July 10, 2014 with interest at 12% per annum and convertible into the Company's common stock at $0.10 per share at the holder's option. The Company determined there was no beneficial conversion feature at the time of issuance. The Company did not make payment on the maturity date, therefore the note is currently in default.
On September 14, 2012, a stockholder and Board member loaned $6,000 (unsecured) to the Company due September 14, 2014 with interest at 12% per annum. The Company did not make payment on the maturity date, therefore the note is currently in default.
On September 7, 2012, a stockholder and Board member loaned $43,000 (unsecured) to the Company due September 7, 2014 with interest at 12% per annum and convertible into the Company's common stock at $0.10 per share at the holder's option. The Company determined there was no beneficial conversion feature at the time of issuance. The Company did not make payment on the maturity date, therefore the note is currently in default.
On October 4, 2012, a stockholder and Board member loaned $50,000 (unsecured) to the Company due October 4, 2014 with interest at 12% per annum and convertible into the Company's common stock at $0.10 per share at the holder's option. The Company determined there was no beneficial conversion feature at the time of issuance. The Company did not make payment on the maturity date, therefore the note is currently in default.
On September 5, 2013, a stockholder and Board member loaned $10,000 (unsecured) to the Company due September 5, 2015 with interest at 10% per annum and convertible into the Company's common stock at $0.10 per share at the holder's option. The Company determined there was no beneficial conversion feature at the time of issuance.
On September 16, 2013, a stockholder and Board member loaned $3,000 (unsecured) to the Company due September 16, 2015 with interest at 12% per annum and convertible into the Company's common stock at $0.10 per share at the holder's option. The Company determined there was no beneficial conversion feature at the time of issuance.
On September 17, 2013, a stockholder and Board member loaned $5,221 (unsecured) to the Company due September 17, 2014 with interest at 12% per annum. The company did not make payment on the maturity date, therefore the note is currently in default.
On October 24, 2013, a stockholder and Board member loaned $30,000 (unsecured) to the Company due October 24, 2016 with interest at 10% per annum.
On November 7, 2013, a stockholder and board member loaned $40,000 (unsecured) to the Company due November 7, 2017 with interest at 10% per annum.
On December 6, 2013, a stockholder and Board member loaned $5,000 (unsecured) to the Company due December 6, 2016 with interest at 12% per annum.
On December 18, 2013, a stockholder and Board member loaned $30,000 (unsecured) to the Company due December 18, 2018 with interest at 10% per annum.
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.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
On April 24, 2014, the Company issued a $25,000 secured convertible note that matures on April 24, 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 250,000 warrants to purchase the Company’s common stock at $0.15 per share over three years.
On November 7, 2014, the Company issued a $25,000 secured convertible note that matures on November 7, 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 250,000 warrants to purchase the Company’s common stock at $0.15 per share over three years.
On December 4, 2014, the Company issued two $25,000 secured convertible notes that mature on December 4, 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 note, the Company issued an aggregate of 500,000 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 value attributable to the warrants and the conversion feature in the aggregate amount of $37,830 to additional paid in capital and a discount against the 2014 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 from 0.69% to 0.97%, a dividend yield of 0%, and volatility of 289.98% to 306.76%. The debt discount attributed to the value of the warrants and conversion feature issued is amortized over the note’s maturity period as interest expense.
For the year ended December 31, 2014, the Company amortized $12,819 of debt discount to current period operations as interest expense.
Total unpaid accrued interest on the notes payable to related parties as of December 31, 2014 and 2013 was $143,526 and $74,788, respectively. During the year ended December 31, 2014 and 2013, the Company recorded interest expense of $69,738 and $37,474, respectively, in connection with the notes payable to related parties.
Aggregate maturities of long-term debt as of December 31:
NOTE 7 - LINE OF CREDIT- RELATED PARTY
On September 24, 2009, the Company entered into an unsecured short term loan with a stockholder 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 December 31, 2014 and 2013 was $101,119 and $82,999, respectively.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
As of December 31, 2014 and 2013, the outstanding balance on this loan was $151,000. Since the loan matured on November 24, 2009, it is currently in default. During the year ended December 31, 2014 and 2013, the Company recorded $18,120 and $18,120, respectively, as interest expense.
NOTE 8 - CONVERTIBLE NOTES
Convertible notes of non-related party investors are comprised of the following:
Series A Convertible Notes
From June 2009 to March 2010, unaffiliated investors loaned the Company an aggregate of $1,217,459 (excluding $20,000 related party, see Note 6) 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 was amortized over the term of the notes. During the year ended December 31, 2014 and 2013, the Company recorded amortization of the debt discount related to these notes of $-0- and $18,958, respectively.
Certain convertible note holders, representing an aggregate of $734,500 of these notes entered, into an agreement 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 note holders representing an aggregate balance of $82,500 are in default.
Series B Convertible Notes
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 CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
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 was amortized over the term of the notes. During the years ended December 31, 2013 and 2012, the Company recorded amortization of the debt discount related to these notes of $-0- and $14,798, respectively.
Certain convertible note holders, representing an aggregate of $175,000 of these notes entered, into an agreement in December 2014 through March 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 note holders representing an aggregate balance of $50,000 are in default.
Series C Convertible Notes
During the year ended December 31, 2010, unaffiliated investors loaned the Company an aggregate of $260,000 (excluding $15,000 related party, see Note 6) 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 aforementioned private placement”, the Series C Warrants have become “cashless”, along with the warrants from the aforementioned 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 was amortized over the term of the notes. For the years ended December 31, 2014 and 2013, the Company recorded amortization of the debt discount related to these notes of $-0- and $37,023, respectively.
Certain convertible note holders, representing an aggregate of $155,000 of these notes entered, into an agreement 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 note holders representing an aggregate balance of $90,000 are in default.
Series D Convertible Notes
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 year ended December 31, 2014 and 2013, the Company recorded amortization of the debt discount relating to these notes of $285 and $3,424, respectively.
On July 21, 2014, the Company issued 49,379 shares of its common stock in settlement of $4,000 Series D Convertible Note payable and related accrued interest of $1,925.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
Certain convertible note holders, representing an aggregate of $15,000 of these notes entered, into an agreement 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 note holders representing an aggregate balance of $6,000 are in default. Additionally, one note holder has filed liens against the Company on his behalf and two of his affiliates to secure payment of the obligations.
In 2014, the Company issued an aggregate of $1,050,000 (excluding $300,000 related party, see Note 6) in secured convertible notes that mature two years from the date of issuance (from January 2016 through December 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 7,500,000 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 value attributable to the warrants and the conversion feature in the amount of $113,146 to additional paid in capital and a discount against the 2014 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 1.10%, a dividend yield of 0%, and volatility of 287.80% to 319.28%. The debt discount attributed to the value of the warrants and conversion feature issued is amortized over the note’s maturity period (two years) as interest expense.
For the year ended December 31, 2014, the Company amortized $33,227 of debt discount to current period operations as interest expense.
In addition to the above non-related party convertible notes, there was $486,000 of related party long-term convertible notes outstanding as of December 31, 2014. Please see Note 6 - Notes Payable, Related Parties for a discussion of those convertible notes.
Aggregate maturities of long-term debt as of December 31:
NOTE 9 - DERIVATIVE LIABILITIES
Excessive committed shares
Beginning on April 11, 2013 through December 31, 2014, in connection with the previously issued convertible debt, 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.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
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.
During the year ended December 31, 2013, the fair value of the net derivative liabilities reclassified from equity of $797,990 was determined using the Black Scholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 179.66% to 303.52%; risk free rate: 0.74% to 1.85%; and expected life: 4.41 to 5.00 years.
During the year ended December 31, 2014, the fair value of the net derivative liabilities reclassified from equity of $703,566 was determined using the Black Scholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 289.46% to 305.91%; risk free rate: 0.14% to 2.14%; and expected life: 2.00 to 5.00 years.
At December 31, 2013, the fair value of the derivative liabilities of $376,940 was determined using the Black Scholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 251.07%; risk free rate: 1.75%; and expected life: 4.41 years.
At December 31, 2014, the fair value of the derivative liabilities of $336,582 was determined using the Black Scholes Option Pricing model with the following assumptions: dividend yield: 0%; volatility: 308.55%; risk free rate: 0.67% to 1.10%; and expected life: 2.08 to 3.29 years.
As of December 31, 2014 and 2013, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of December 31, 2014 and 2013, in the amount of $336,582 and $376,940 has a level 3 classification, respectively.
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of two years ended December 31, 2014:
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
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 decreased by 67% from December 31, 2013 to December 31, 2014. As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases, therefore decreasing the liability on the Company’s consolidated 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. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.
NOTE 10 - STOCKHOLDERS' EQUITY
Preferred Stock
At December 31, 2014 and 2013, the Company has authorized 10,000,000 shares of preferred stock, par value $0.001, of which 595,000 and -0- are issued and outstanding as of December 31, 2014 and 2013, respectively.
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 Convertible Stock as payment for services rendered valued at $178,500. The Series A Convertible Stock was valued based on the underlying fair value of the Company’s common stock.
Common stock
At December 31, 2014 and 2013, the Company has authorized 200,000,000 shares of common stock, par value $0.001, of which 98,187,082 and 98,137,703 are issued and outstanding as of December 31, 2014 and December 31, 2013, respectively.
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.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
NOTE 11 - WARRANTS AND OPTIONS
Common stock warrants
The following table summarizes warrants outstanding and related prices for the shares of the Company's common stock issued to shareholders at December 31, 2014:
Transactions involving the Company's warrant issuance are summarized as follows:
In conjunction with the sale of common stock, during the year ended December 31, 2013, the Company issued an aggregate of warrants to purchase 24,000,000 shares of common stock with an exercise price of $0.10 per share expiring five years from the date of issuance and are cashless at exercise, if elected.
During the year ended December 31, 2013, the Company issued a consultant a warrant to purchase 100,000 shares of its common stock at $0.15 per share for five years. The warrant was valued using the Black-Scholes model and had a value of $8,948 and was charged to operations. The fair value of the options was determined using the Black-Scholes option pricing method with the following assumptions: Dividend yield: 0%; Volatility: 254.08%; and Risk Free rate: 0.76%.
In conjunction with the issuance of convertible notes, during the year ended December 31, 2014, the Company issued an aggregate of warrants to purchase 10,500,000 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 8.
Total stock-based compensation expense for common stock warrants issued for the year ended December 31, 2014 and 2013 amounted to $-0- and $8,948, respectively.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
Preferred stock warrants
The following table summarizes warrants outstanding and related prices for the shares of the Company's preferred stock issued at December 31, 2014:
Transactions involving the Company's warrant issuance are summarized as follows:
In 2014, the Company issued an aggregate 414,500 preferred stock warrants in connection with services provided. The warrants are exercisable for three to five years from the date of issuance at an exercise prices from $0.50 to $1.50 per preferred share. The warrants were valued using the Black Sholes option pricing method with the following assumptions: dividend yield $-0-, volatility of 287.80% to 319.28%, risk free rate of 0.77% to 1.67% and expected life of 3.00 to 5.00 years. The determined estimated fair value of $107,732 was charged to operations during the year ended December 31, 2014.
In connection with entering into the Progress Advocates LLC joint venture with LSH, LLC, 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.” The vested warrants were valued using the Black Sholes option pricing method with the following assumptions: dividend yield $-0-, volatility of 290.46%, risk free rate of 1.44% and expected life of 5.00 years. The determined estimated fair value of $29,933 was recorded as compensation in majority owned subsidiary during the year ended December 31, 2014.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
Options
The following table summarizes options outstanding and related prices for the shares of the Company's common stock issued at December 31, 2014:
Transactions involving the Company's option issuance are summarized as follows:
In 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.
In 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.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
The fair value of the options issued to employees and consultants 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 years ended December 31, 2014 and 2013 amounted to $17,500 and $10,000, respectively.
NOTE 12 - 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 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. A settlement was reached on September 30, 2014 requiring the Company to pay $22,500 of installment payments. Installment payments totaling $15,000 were made during 2014. The remaining installment payments, totaling $7,500, were made in 2015. The full amount of the original dispute, less the $15,000 of installment payments made during 2014, is included in the Company’s accounts payable at December 31, 2014.
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 consolidated financial position or results of operations.
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 first quarter of 2013, the Company did not pay certain federal and state payroll tax obligations due for employees' compensation, and they have become delinquent. As a result, the Company has included in accrued expenses an amount of approximately $250,000 at December 31, 2014 that represents an estimate that could be expected upon settlement 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.
Employment agreement
On March 1, 2014, the Company appointed Stanley E. Freimuth as Chief Executive Officer of the Company with an initial term of three years and monthly compensation of $17,500. In addition, Mr. Freimuth received 5,000,000 shares of the Company’s common stock for which was exchanged for 500,000 shares of series A convertible preferred stock issued per board resolution, options to purchase 3,000,000 shares of the common stock exercisable at $0.015 per share for 7 years, vesting over three years on anniversary, and a $25,000 sign on bonus.
Operating leases
The Company currently occupies office space at 1133 Westchester Avenue, Suite S-223, White Plains, NY 10604, under a short term lease with an unaffiliated third party. The monthly rent is $3,500 and can be terminated with a sixty day notice. The lease expires June 30, 2015 and has lease commitments of $21,000 for 2015.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
NOTE 13 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2014 and 2013, certain Company directors personally guarantee the Company's notes payable and its' bank loan (Note 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 $87,858 and $55,594 for the year ended December 31, 2014 and 2013, respectively (Note 6 and Note 7). During the year ended December 31, 2013, a director purchased $400,000 of stock, receiving 8,000,000 shares and 24,000,000 warrants for the investment.
NOTE 14- NON CONTROLLING INTEREST
In December 2014, the Company organized Progress Advocates, LLC, a Delaware limited liability company for the purpose to provide services in the student loan document preparation industry. At the time of formation, Progress Advocates, LLC did not have any significant assets or liabilities. In connection with entering into the Progress Advocates LLC joint venture with LSH, LLC (minority owner), 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 (Note 11).
A reconciliation of the non-controlling loss attributable to the Company:
Net loss attributable to non-controlling interest for the year ended December 31, 2014:
The following table summarizes the changes in non-controlling interest from December 31, 2013 to December 31, 2014:
NOTE 15 - INCOME TAXES
The Company follows Accounting Standards Codification subtopic 740, Income Taxes (“ASC 740”) which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under such method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
The difference between income tax expense computed by applying the federal statutory corporate tax rate and actual income tax expense is as follows:
The significant components of the deferred tax assets (liabilities) at December 31, 2014 and 2013, are summarized as follows:
As of December 31, 2014 and 2013, the Company had U.S. federal and state net operating loss carryforwards of approximately $32.68 million and $30.59 million, respectively, which expire at various dates from 2023 through 2034. These net operating loss carryforwards may be used to offset future taxable income and thereby reduce the Company’s U.S. federal income taxes. Section 382 of the Internal Revenue Code of 1986 (the “Code”) imposes an annual limit on the ability of a corporation that undergoes a greater than 50% ownership change to use its net operating loss carry forwards to reduce its tax liability. The Company may be subject to a limitation as a result of the Company’s initial public offering in 2006 and other transactions related to its stock ownership. These potential limitations could affect the utilization of the carryforwards prior to their expiration.
The Company has provided a full valuation allowance against its net deferred tax assets, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits of these assets will not be realized.
The Company complies with the provisions of FASB ASC 740-10 in accounting for its uncertain tax positions. ASC 740-10 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely that not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Management has determined that the Company has no significant uncertain tax positions requiring recognition under ASC 740-10.
DEBT RESOLVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 and 2013
The Company is subject to income tax in the U.S., and certain state jurisdictions. The Company has not been audited by the U.S. Internal Revenue Service, or any states in connection with income taxes. The periods from December 31, 2012 to December 31, 2014 remain open to examination by the U.S. Internal Revenue Service, and state tax authorities. The periods from December 31, 2004 to December 31, 2011 are subject to examination up to the net operating loss.
The Company recognizes interest and penalties related to unrecognized tax benefits, if incurred, as a component of income tax expense.
NOTE 16 - SUBSEQUENT EVENTS
Preferred stock:
In 2015, the Company issued an aggregate of 50,000 warrants to purchase Series A preferred stock for services rendered with exercise prices ranging from $0.50 to $1.50 per share, expiring three years from the date of issuance.
Debt:
In 2015, the Company issued an aggregate of $275,000 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 4,125,000 shares of common stock with an exercise price of $0.15 per share expiring three years from the date of issuance.
On January 25, 2015, the Company issued an unsecured promissory note to certain members of the Company’s board of directors providing a line of credit up to $400,000 for working capital needs up to four years with an annualized interest rate of 5.25%. The promissory note is due 30 days upon written demand however, the Company is obligated to make monthly payments of principal and interest necessary to meet the minimal monthly principal and interest payments required by the bank on loans the lenders obtained to provide the financing.
ITEM 9A.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (Principal Financial Officer) as appropriate, to allow timely decisions regarding required disclosure. During the fourth quarter ended December 31, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the Exchange Act. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were ineffective as of December 31, 2014.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
With the participation of our Principal Executive Officer and Principal Financial Officer, currently the same person, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as defined under Rule 13a-15, as of December 31, 2014 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based on our evaluation and the material weaknesses described below, management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2014, based on the COSO framework criteria. Management has identified the major control deficiencies as the lack of segregation of duties and limited accounting knowledge of Company debt and equity transactions. Our management believes that these material weaknesses are due to the small size of our accounting staff. The small size of our accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the high cost of such remediation relative the benefit expected to be derived thereby.
To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework. These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above together constitute a material weakness.
In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the year ended December 31, 2014 included in this Annual Report on Form 10-K were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our financial statements for the year ended December 31, 2014 are fairly stated, in all material respects, in accordance with U.S. GAAP.
This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not required to attestation by our registered public accounting firm under section 404(a) of the Sarbanes-Oxley Act.
Limitations on Effectiveness of Controls and Procedures
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Controls
During the fourth quarter ended December 31, 2014, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
ITEM 9B.
ITEM 9B. Other Information
None
PART III.
ITEM 10.
ITEM 10. Directors, Executive Officers and Corporate Governance
The following table shows the positions held by our board of directors and executive officers, as well as a key employee, and their ages, as of April 15, 2015:
The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors and executive officers are as follows:
Stanley E. Freimuth has been our Chief Executive Officer, Acting Chief Financial Officer and Director since March 2014. Mr. Freimuth has a long and successful track record of growing and transforming both B2B and B2C companies. Mr. Freimuth was Chairman, President and CEO of Presstek, Inc., a publically traded digital printing equipment manufacturer, bringing the company back to financial stability and negotiating its sale to a private equity buyer. Before Presstek, Mr. Freimuth was Chairman and Executive Director of Tracer Imaging, a specialty B2B and B2C lenticular and 3D printing company where he helped launch an innovative consumer-facing product. Until 2007, Mr. Freimuth was the senior U.S. executive at Fujifilm USA, Inc., which he led to record revenues through a period of major technological transition in most of its core businesses. Mr. Freimuth’s background in executive management qualifies him to be a director.
William M. Mooney, Jr. has been a member of our board of directors since April 2003 and our Chairman since April 1, 2014. Mr. Mooney is currently CEO of The Westchester County Association. Mr. Mooney has been involved in the banking sector in an executive capacity for more than 30 years. Prior to joining Independence Community Bank, he served for four years as an Executive Vice President and member of the management committee of Union State Bank, responsible for retail banking, branch banking and all marketing activity. Mr. Mooney also spent 23 years at Chemical Bank and, following its merger with Chase Manhattan Bank, he was a Senior Vice President with responsibilities including oversight of all retail business. He also held the position of Chairman for the Westchester County Association, past Chairman of the United Way Westchester and Chairman of St. Thomas Aquinas College. He has served on the board of trustees for New York Medical College, St. Agnes Hospital, the Board of Dominican Sisters and the Hispanic Chamber of Commerce. Mr. Mooney received a B.A. degree in business administration from Manhattan College. He also attended the Harvard Management Program and the Darden Graduate School at the University of Virginia. Mr. Mooney's background in banking and finance qualifies him to be a director.
James G. Brakke has been a member of our board of directors since October 2009. Mr. Brakke was our Chairman and Chief Executive Officer from April 2010 through June 2012 and remained as Chairman through March 31, 2014. Mr. Brakke is a Vice Chairman of the Ronald Reagan Presidential Foundation Advisory Council, Director at First Foundation Bank, First Foundation Advisors, Mission Hospital Foundation and Maury Microwave Corp. and Chairman of Life Vessel & Advanced Wellness. Mr. Brakke was Founder and President until 2009 of Brakke-Schafnitz Insurance Brokers, a multi-line commercial brokerage and consulting firm he co-founded in 1971 managing in excess of $250 million of insurance premiums with both domestic and international insurers. He is a former member of the board of advisors for Pepperdine University's Graziadio School of Business, Orange County Sheriffs and the Orange County YMCA and has served as director on the boards of Denticare, Pacific National Bank, Commercial Capital Bank, The Busch Firm, National Health Care Services and E-Funds. Mr. Brakke is a graduate of Colorado State University with a B.S. degree in Business and Finance. Mr. Brakke's background in insurance and corporate governance qualifies him to be a director.
Gary T. Martin has been a member of our board of directors since June 2012. Mr. Martin has been the Chief Executive Officer of Encore Supply Strategies since 2010. Encore provides consulting services to customers of Procter & Gamble who license Procter & Gamble’s proprietary supply chain intellectual property. Mr. Martin is also President of Adventure Leisure Properties Ltd., a Florida-based company operating a recreational investment property in New Zealand since 2002. Mr. Martin is also President of a small startup company, LYNX Technology Limited, located in Ontario, Canada, which has been developing proprietary exploratory mining equipment since 2010. Previously, Mr. Martin was an executive with Procter & Gamble for 33 years. Mr. Martin was President of Procter & Gamble’s worldwide family care business from 1999 until his retirement in 2001. Previously, from 1991 to 1999, he was Senior Vice President of the company’s supply system with responsibility for worldwide purchasing, engineering, manufacturing and customer service/distribution. In this capacity, Mr. Martin was responsible for managing the company’s capital spending, the production of all its products and 65,000 employees. Additionally, for a time, he was also the Chief Information Officer of the company. Mr. Martin’s executive experience qualifies him to be a director.
Raymond A. Conta has been a member of our board of directors since 2014. Mr. Conta is an entrepreneur in Westchester County, NY. He owns Advanced Billing Services, Inc., a business that he started in 1999. He also owns other affiliated businesses. Mr. Conta serves on the board of The Children’s Hospital Research Foundation located in Westchester County. Mr. Conta has a B.A. degree from Hamilton College in 1992 and a J.D. from Pace University in 1995. Mr. Conta’s experience in the debt buying and debt collection industries qualifies him to be a director.
All directors hold office until the next annual meeting of stockholders (when scheduled) and the election and qualification of their successors. Officers are elected annually by our board of directors and serve at the discretion of the board, subject to their contracts.
Key Employee
René A. Samson has been our Vice President of Technology since July 2009. Mr. Samson has worked as a software developer for more than 10 years. He has experience working on projects for multinationals as well as startup companies. Mr. Samson joined Debt Resolve as a senior software developer in 2005, and was an integral part of the team that developed the original Debt Resolve solutions. As Vice President of Technology, Mr. Samson is now responsible for the entire IT department of Debt Resolve.
Additional Information about our Board and its Committees
We continue to monitor the rules and regulations of the SEC regarding “independent” directors. William M. Mooney, Jr., James G. Brakke, Gary T. Martin, and Raymond A. Conta are “independent” as defined by New York Stock Exchange rules.
During 2014, all of our directors attended at least 75% of all meetings during the periods for which they served on our board, and all of the meetings held by committees of the board on which they serve. The board of directors has formed an audit committee, compensation committee and a nominations and governance committee, all of which operate under written charters. The charters for the audit committee, the compensation committee, and the nominations and governance committee were included as exhibits to our registration statement filed with the SEC on September 30, 2005.
Committees of the Board
Audit Committee. In September 2004, we established an audit committee of the board of directors which, as of December 31, 2014, consisted of only William M. Mooney, Jr., an independent director. The audit committee’s duties, which are specified in our Audit Committee Charter, include, but are not limited to:
·
reviewing and discussing with management and the independent accountants our annual and quarterly financial statements,
·
directly appointing, compensating, retaining, and overseeing the work of the independent auditor,
·
approving, in advance, the provision by the independent auditor of all audit and permissible non-audit services,
·
establishing procedures for the receipt, retention, and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing matters and the confidential, anonymous submissions by our employees of concerns regarding questionable accounting or auditing matters,
·
the right to engage and obtain assistance from outside legal and other advisors as the audit committee deems necessary to carry out its duties,
·
the right to receive appropriate funding, as needed, from the company to compensate the independent auditor and any outside advisors engaged by the committee and to pay the ordinary administrative expenses of the audit committee that are necessary or appropriate to carrying out its duties, and
·
reviewing and approving of all related party transactions unless the task is assigned to a comparable committee or group of independent directors.
Compensation Committee. In May 2004, we established a compensation committee of the board of directors which, as of December 31, 2014, consisted of only Mr. Mooney, an independent director. The compensation committee reviews and approves our salary and benefits policies, including compensation of executive officers. The compensation committee also administers our incentive compensation plan, and recommends and approves grants of stock options and restricted stock grants under that plan.
Nominations and Governance Committee. In June 2005, we established a nominations and governance committee of the board of directors which, as of December 31, 2014, consisted of only Mr. Mooney, an independent director. This committee meets at least once annually. The purpose of the nominations and governance committee is to select, or recommend for our entire board’s selection, the individuals to stand for election as directors at the annual meeting of stockholders and to oversee the selection and composition of committees of our board. The nominations and governance committee’s duties, which are specified in our Nominations and Governance Committee Charter, include, but are not limited to:
·
establishing criteria for the selection of new directors,
·
considering stockholder proposals of director nominations,
·
committee selection and composition,
·
considering the adequacy of our corporate governance,
·
overseeing and approving management continuity planning process, and
·
reporting regularly to the board with respect to the committee’s duties.
Financial Experts on Audit Committee
The audit committee will at all times be composed exclusively of “independent directors” who are “financially literate.” “Financially literate” is defined as being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.
The committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication. The board of directors believes that Mr. Mooney satisfies the definition of financial sophistication and also qualifies as an “audit committee financial expert,” as defined under rules and regulations of the SEC.
Indebtedness of Directors and Executive Officers
None of our directors or executive officers or their respective associates or affiliates is indebted to us.
Family Relationships
There are no family relationships among our directors and executive officers.
Legal Proceedings
As of April 15, 2015, there was no material proceeding to which any of our directors, executive officers, affiliates or stockholders is a party adverse to us.
Code of Ethics
In May 2003, we adopted a Code of Ethics and Business Conduct that applies to all of our executive officers, directors and employees. The Code of Ethics and Business Conduct codifies the business and ethical principles that govern all aspects of our business. Our Code of Ethics and Business Conduct is posted on our website at http://www.debtresolve.com and we will provide a copy without charge to any stockholder who makes a written request for a copy.
Committee Interlocks and Insider Participation
Mr. Freimuth, our CEO, is the only board member employed by our Company. No director is a director of another public corporation.
Section 16(a) Beneficial Ownership Reporting Compliance
Rules adopted by the SEC under Section 16(a) of the Exchange Act, require our officers and directors, and persons who own more than 10% of the issued and outstanding shares of our equity securities, to file reports of their ownership, and changes in ownership, of such securities with the SEC on Forms 3, 4 or 5, as appropriate. Such persons are required by the regulations of the SEC to furnish us with copies of all forms they file pursuant to Section 16(a).
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to us during our most recent fiscal year, and any written representations provided to us, we believe that all of the officers, directors, and owners of more than 10% of the outstanding shares of our common stock did comply with Section 16(a) of the Exchange Act for the year ended December 31, 2014.
ITEM 11.
ITEM 11. Executive Compensation
Summary Compensation Table
The following table sets forth, for the most recent fiscal year, all cash compensation paid, distributed or accrued, including salary and bonus amounts, for services rendered to us by our Chief Executive Officer and one other executive officer in such year who received or are entitled to receive remuneration in excess of $100,000 during the stated period and any individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer as at December 31, 2014:
_________________
(1)
Mr. Freimuth joined our company as a consultant and interim CEO in November 2013. On March 1, 2014, he became an employee and CEO. In 2014, Mr. Freimuth was issued 500,000 shares of series A convertible preferred stock at a fair value of $150,000 and options to purchase 3,000,000 shares of the Company’s common stock at $0.015 per share for seven years, vesting 1/3 each year, for three years.
(2)
Mr. Cassella joined our company and became our Chief Operating Officer in June 2011. In July 2012, Mr. Cassella became the Chief Executive Officer and Acting Chief Financial Officer. Mr. Cassella resigned from the Company effective September 30, 2013.
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes equity awards outstanding at December 31, 2014 for each of the executive officers named in the Summary Compensation Table above:
_________________
(1)
Mr. Freimuth holds stock options to purchase 3,000,000 shares of our common stock, one third of which vested on March 1, 2014 and one third of which vested on March 1, 2015, one third of which will vest on March 1, 2016, all of which expire on March 1, 2021.
(2)
Mr. Cassella holds stock options to purchase 1,500,000 shares of our common stock, all of which are vested and expire on June 1, 2018.
(3)
Mr. Samson holds stock options to purchase 20,000 shares of our common stock, all of which are vested and expire on June 16, 2015. Mr. Samson also holds options to purchase 500,000 shares of our common stock, all of which are vested and expire on January 17, 2019.
Employment Agreements
On June 1, 2011, Michael J. Cassella joined our company as Chief Operating Officer. Mr. Cassella had a one year contract that renewed automatically unless 90 days’ notice of intention not to renew was given by the Company. A six month period allowed us to terminate the contract for any or no reason but expired on December 1, 2011. Mr. Cassella’s base salary was $150,000. Mr. Cassella also received a grant of 2,000,000 options to purchase our common stock, one fourth of which vested immediately and one fourth of which vested on each of the first, second and third anniversaries of the start of employment with the Company. Mr. Cassella resigned effective September 30, 2013, and forfeited 500,000 unvested options.
On November 1, 2013, Stanley E. Freimuth as a principal and consultant for Claremont Ventures, was appointed as interim Chief Executive Officer. Details of this appointment can be found in the Company’s 8K filing, dated November 15, 2013. On March 1, 2014, Mr. Freimuth was subsequently, hired as the Company’s permanent CEO. Details of this agreement can be found in the Company’s 8K filing, dated March 6, 2014.
The employment agreements also contained covenants (a) restricting the employee from engaging in any activities competitive with our business during the term of the employment agreement, (b) prohibiting the employee from disclosure of our confidential information and (c) confirming that all intellectual property developed by the employee and relating to our business constitutes our sole property. In addition, the agreement provides for a non-compete during the term of the employee’s severance.
Director Compensation
Non-employee Director Compensation. Non-employee directors currently receive no cash compensation for serving on our board of directors other than reimbursement of all reasonable expenses for attendance at board and board committee meetings. Under our 2005 Incentive Compensation Plan, non-employee directors are entitled to receive stock options to purchase shares of common stock or restricted stock grants. The Board received no grants for 2014 service on the Board.
Employee Director Compensation. Directors who are employees of ours receive no compensation for services provided in that capacity, but are reimbursed for out-of-pocket expenses in connection with attendance at meetings of our board and its committees.
The table below summarizes the compensation we paid to non-employee directors for the fiscal year ended December 31, 2014.
Director Compensation
_________________
(1)
Mr. Contra joined our board in 2014. On March 13, 2013, Mr. Contra was issued 250,000 options to purchase the Company’s common stock at $0.02 per share for seven years, vesting immediately.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The table below sets forth the beneficial ownership of our common stock, as of February 15, 2015, by:
·
all of our directors and executive officers, individually,
·
all of our directors and executive officers, as a group, and
·
all persons who beneficially owned more than 5% of our outstanding common stock.
The beneficial ownership of each person was calculated based on 98,187,082 outstanding shares of common stock as of April 15, 2015. The SEC has defined “beneficial ownership” to mean more than ownership in the usual sense. For example, a person has beneficial ownership of a share not only if he owns it in the usual sense, but also if he has the power to vote, sell or otherwise dispose of the share. Beneficial ownership also includes the number of shares that a person has the right to acquire within 60 days of April 15, 2015 pursuant to the exercise of options or warrants or the conversion of notes, debentures or other indebtedness, but excludes stock appreciation rights. Two or more persons might count as beneficial owners of the same share. Unless otherwise noted, the address of the following persons listed below is c/o Debt Resolve, Inc., 1133 Westchester Avenue, Suite S-223 White Plains, New York 10604.
Unless otherwise indicated, we believe that all persons named in the table below have sole voting and investment power with respect to all shares of common stock beneficially owned by them.
________________
(1)
Includes stock options to purchase 1,872,500 shares of common stock. Also includes warrants to purchase 1,537,500 shares of common stock. On an outstanding voting basis, Mr. Mooney owns 3,274,855 common shares which represents 3.3% of the total shares.
(2)
Includes stock options to purchase 1,700,000 shares of common stock. Also includes warrants to purchase 1,525,000 shares of common stock. On an outstanding voting basis, Mr. Brakke owns 289,500 common shares which represents .3% of the total shares.
(3)
Includes 41,700,500 warrants to purchase shares of common stock. On an outstanding voting basis, Mr. Martin owns 20,728,000 common shares which represents 21.1% of the total shares.
(4)
Includes stock options to purchase 2,000,000 shares of common stock. Also includes warrants to purchase 500,000 shares of common stock. On an outstanding voting basis, Mr. Freimuth owns 6,126,685 common shares which represents 6.2% of the total shares.
(5)
Includes stock options to purchase 4,750,000 shares of common stock. Also includes warrants to purchase 2,000,000 shares of common stock. On an outstanding voting basis, Mr. Conta owns no common shares.
(6)
On a common stock issued and outstanding voting basis, all directors and executive officers as a group own 30.9% of the total shares.
Change in Control
There are no arrangements currently in effect which may result in our “change in control,” as that term is defined by the provisions of Item 403(c) of Regulation S-K.
Equity Compensation Plan Information
The issuance of stock incentive awards for an aggregate of 900,000 shares of common stock is authorized under our 2005 Incentive Compensation Plan. As of December 31, 2014, 324,000 stock options were available for issuance under our 2005 Incentive Compensation Plan, and there were outstanding stock options to purchase 576,000 shares of our common stock.
The following table provides information as of December 31, 2014 with respect to the shares of common stock that may be issued under our existing equity compensation plan:
Equity Compensation Plan Information
Defined Contribution 401(k) Plan
We maintain a defined contribution 401(k) 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. However, due to the severe cash limitations that we have experienced, the match was suspended in 2009 and will only be re-instated when business conditions warrant.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
On September 5, 2013, a stockholder and Board member loaned $10,000 (unsecured) to the Company due September 5, 2015 with interest at 10% per annum and convertible into the Company's common stock at $0.10 per share at the holder's option. The Company determined there was no beneficial conversion feature at the time of issuance.
On September 16, 2013, a stockholder and Board member loaned $3,000 (unsecured) to the Company due September 16, 2015 with interest at 12% per annum and convertible into the Company's common stock at $0.10 per share at the holder's option. The Company determined there was no beneficial conversion feature at the time of issuance.
On October 24, 2013, a stockholder and Board member loaned $30,000 (unsecured) to the Company due October 24, 2016 with interest at 10% per annum.
On November 7, 2013, a stockholder and board member loaned $40,000 (unsecured) to the Company due November 7, 2017 with interest at 10% per annum.
On December 6, 2013, a stockholder and Board member loaned $5,000 (unsecured) to the Company due December 6, 2016 with interest at 12% per annum.
On December 18, 2013, a stockholder and Board member loaned $30,000 (unsecured) to the Company due December 18, 2018 with interest at 10% per annum.
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.
On April 24, 2014, the Company issued a $25,000 secured convertible note that matures on April 24, 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 250,000 warrants to purchase the Company’s common stock at $0.15 per share over three years.
On November 7, 2014, the Company issued a $25,000 secured convertible note that matures on November 7, 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 250,000 warrants to purchase the Company’s common stock at $0.15 per share over three years.
On December 4, 2014, the Company issued two $25,000 secured convertible notes that mature on December 4, 2016. The notes 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 500,000 warrants to purchase the Company’s common stock at $0.15 per share over three years.
Total unpaid accrued interest on the notes payable to related parties as of December 31, 2014 and 2013 was $143,526 and $74,788, respectively. During the year ended December 31, 2014 and 2013, the Company recorded interest expense of $69,738 and $37,474, respectively, in connection with the notes payable to related parties.
On January 25, 2015, Debt resolve, Inc. entered into an agreement whereby four of the company’s directors (Gary Martin, Raymond Conta, James Brakke, and Stanley Freimuth) will make available to the company a $400,000 credit line for working capital needs for a period of up to four years. The interest rate on funds utilized by the company is 5.25% (reflecting the lender’s cost of borrowing such funds). Borrowings under the agreement are unsecured and non-convertible, and are due and payable at any time upon 30 days written notice to Debt Resolve.
Director Independence
William M. Mooney, Jr., James G. Brakke, Ramond A. Conta and Gary T. Martin are “independent” directors, as such term is defined in Rule 10A-3(b)(1) under the Exchange Act, and Mr. Mooney serves on each of our Audit, Compensation and Nominations and Governance Committees. See Item 10, “Directors, Executive Officers and Corporate Governance” for more information on the independence of our directors.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
Audit Fees
Audit fees are those fees billed for professional services rendered for the audit of the annual financial statements and review of the financial statements included in Form 10-Q. The aggregate amount of the audit fees billed by Fiondella, Milone & LaSaracina LLP in 2014 was $58,050 and in 2013 was $52,767.
Audit-related Fees
No audit-related fees were billed by Fiondella, Milone & LaSaracina in 2014 or 2013.
Tax Fees
Tax fees are those fees billed for professional services rendered for tax compliance, including preparation of corporate federal and state income tax returns and related compliance. The aggregate amount of tax fees billed by Fiondella, Milone & LaSaracina LLP in 2014 was $27,500 and in 2013 was $23,275.
All Other Fees
None
Audit Committee
The only member of our audit committee is Mr. Mooney. Our board of directors and audit committee approved the services rendered and fees charged by our independent auditors. The audit committee has reviewed and discussed our audited financial statements for the years ended December 31, 2014 and 2013 with our management. In addition, the audit committee has discussed Fiondella, Milone & LaSaracina LLP for 2014 and 2013, our independent registered public accountants, as required under PCAOB standards.
Based on the audit committee’s review of the matters noted above and its discussions with our independent auditors and our management, the audit committee recommended to the board of directors that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Policy for Pre-Approval of Audit and Non-Audit Services
The audit committee’s policy is to pre-approve all audit services and all non-audit services that our independent auditor is permitted to perform for us under applicable federal securities regulations. As permitted by the applicable regulations, the audit committee’s policy utilizes a combination of specific pre-approval on a case-by-case basis of individual engagements of the independent auditor and general pre-approval of certain categories of engagements up to predetermined dollar thresholds that are reviewed annually by the audit committee. Specific pre-approval is mandatory for the annual financial statement audit engagement, among others.
The pre-approval policy was implemented effective as of September 2004. All engagements of the independent auditor to perform any audit services and non-audit services since that date have been pre-approved by the audit committee in accordance with the pre-approval policy. The policy has not been waived in any instance. All engagements of the independent auditor to perform any audit services and non-audit services prior to the date the pre-approval policy was implemented were approved by the audit committee in accordance its normal functions.
ITEM 15.
ITEM 15. Exhibits and Financial Statement Schedules
(a) Exhibits
_________________
(1)
Incorporated herein by reference to Current Report on Form 8-K, filed March 11, 2003.
(2)
Incorporated herein by reference to Current Report on Form 8-K, filed August 31, 2006.
(3)
Incorporated herein by reference to Information Statement on Schedule 14C, filed June 24, 2010.
(4)
Incorporated herein by reference to Current Report on Form 8-K, filed September 5, 2007.
(5)
Incorporated herein by reference to Annual Report on Form 10-K for the year ended December 31, 2011, filed on April 16, 2012.
(6)
Incorporated herein by reference to Current Report on Form 8-K, filed March 6, 2013.
(7)
Incorporated herein by reference to Current Report on Form 8-K, filed on March 27, 2014.
(8)
Incorporated herein by reference to Registration Statement on Form SB (File no. 000-29525) of Lombardia Acquisition Corp., filed February 15, 2000.
(9)
Incorporated herein by reference to Registration Statement on Form SB-2 (File No. 333-128749), filed September 30, 2005.
(10)
Incorporated herein by reference to Current Report on Form 8-K/A, filed January 9, 2012.
(11)
Incorporated herein by reference to Current Report on Form 8-K, filed December 19, 2014.
(12)
Incorporated herein by reference to Current report on Form 8-K, filed January 25, 2015.
_________________
** 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
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
DEBT RESOLVE, INC.
Dated: April 15, 2015
By:
/s/ Stanley E. Freimuth
Stanley E. Freimuth
Chief Executive Officer and Acting Chief Financial Officer
(principal executive officer and principal financial
and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Stanley E. Freimuth
Chief Executive Officer and Acting Chief Financial Officer
April 15, 2015
Stanley E. Freimuth
(principal executive officer and principal financial and accounting officer) and Director
/s/ James G. Brakke
Director
April 15, 2015
James G. Brakke
/s/ William M. Mooney, Jr.
Chairman of the Board
April 15, 2015
William M. Mooney, Jr.
/s/ Gary T. Martin
Director
April 15, 2015
Gary T. Martin
/s/ Raymond A. Conta
Director
April 15, 2015
Raymond A. Conta