debtresolve_10q-093008.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x |
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
quarterly period ended SEPTEMBER 30, 2008
o |
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the
Transition Period from ________ to ___________
Commission
File No.: 0-29525
DEBT RESOLVE,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
33-0889197
|
(State or other
jurisdiction of
incorporation or
organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
707 Westchester Avenue, Suite
213
White Plains, New
York
|
|
10604
|
(Address of
principal executive offices)
|
|
(Zip
Code)
|
(914)
949-5500
(Issuer’s
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated
filer o
|
Accelerated filer
o |
Non-accelerated
filer o
|
Smaller reporting
company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12
b-2 of the Exchange Act). Yes o No x
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. o
Yes o No
As of
November 14, 2008, 9,786,864 shares of the issuer’s Common Stock were issued and
9,336,864 were outstanding.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
TABLE
OF CONTENTS
|
Page
|
PART
I. Financial Information
|
|
|
|
Item
1. Condensed Consolidated Financial
Statements
|
|
|
|
Condensed
Consolidated Balance Sheets at September 30, 2008 (unaudited) and December
31, 2007
|
3
|
|
|
Condensed
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 2008 and 2007 (unaudited)
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2008 and 2007 (unaudited)
|
5
|
|
|
Condensed
Consolidated Statements of Stockholders’ Deficiency
(unaudited)
|
6
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
20
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
27
|
|
|
Item
4. Controls and Procedures
|
27
|
|
|
PART II. Other
Information |
|
|
|
Item
1. Legal Proceedings
|
28
|
|
|
Item
1A. Risk Factors
|
28
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
28
|
|
|
Item
3. Defaults Upon Senior Securities
|
28
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
28
|
|
|
Item
5. Other Information
|
28
|
|
|
Item
6. Exhibits
|
29
|
|
|
Signatures
|
30
|
|
|
Certifications
|
31
|
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
ASSETS
|
|
|
|
September
30, 2008
|
|
|
|
|
|
(Unaudited)
|
|
|
December 31, 2007
|
Current
assets:
|
|
|
|
|
|
Cash
|
|
$ |
2,527 |
|
|
$ |
-- |
|
Restricted
cash
|
|
|
18 |
|
|
|
67,818 |
|
Accounts
receivable
|
|
|
17,890 |
|
|
|
84,013 |
|
Other
receivable
|
|
|
-- |
|
|
|
200,000 |
|
Prepaid expenses and other
current assets
|
|
|
159,026 |
|
|
|
108,189 |
|
Total current
assets
|
|
|
179,461 |
|
|
|
460,020 |
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
|
114,144 |
|
|
|
283,095 |
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Deposits
and other assets
|
|
|
94,855 |
|
|
|
108,780 |
|
Intangible
assets, net
|
|
|
-- |
|
|
|
208,848 |
|
Total other
assets
|
|
|
94,855 |
|
|
|
317,628 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
388,461 |
|
|
$ |
1,060,743 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ DEFICIENCY
|
|
Current
liabilities:
|
|
$ |
2,753,256 |
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$ |
1,444,764 |
|
Accrued professional
fees
|
|
|
1,297,408 |
|
|
|
1,003,550 |
|
Accrued
closing costs - FPC
|
|
|
1,350,931 |
|
|
|
-- |
|
Collections
payable
|
|
|
-- |
|
|
|
42,606 |
|
Convertible
debenture (net of deferred debt discount
of $300,000 and $0,
respectively)
|
|
|
-- |
|
|
|
-- |
|
Short
term notes (net of deferred debt discount
of $0 and $29,400,
respectively)
|
|
|
380,000 |
|
|
|
70,600 |
|
Lines
of credit – related parties
|
|
|
1,198,623 |
|
|
|
1,011,000 |
|
Total
current liabilities
|
|
|
6,980,218 |
|
|
|
3,572,520 |
|
|
|
|
|
|
|
|
|
|
Notes
payable (net of deferred debt discount
of $97,422 and $70,975,
respectively)
|
|
|
725,578 |
|
|
|
254,025 |
|
Total liabilities
|
|
|
7,705,796 |
|
|
|
3,826,545 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficiency:
|
|
|
|
|
|
|
|
|
Preferred
stock, 10,000,000 shares authorized, $0.001 par value,
none
issued and outstanding
|
|
|
--
|
|
|
|
-- |
|
Common
stock, 100,000,000 shares authorized, $0.001 par
value,
9,236,864
and 8,474,363 shares issued and outstanding,
respectively
|
|
|
9,687 |
|
|
|
8,474 |
|
Additional paid-in
capital
|
|
|
46,353,083 |
|
|
|
42,501,655 |
|
Treasury
stock, 450,000 shares issued
|
|
|
(450 |
) |
|
|
-- |
|
Accumulated
deficit
|
|
|
(53,679,655 |
) |
|
|
(45,275,931 |
) |
Total stockholders’
deficiency
|
|
|
(7,317,335 |
) |
|
|
(2,765,802 |
) |
Total
liabilities and stockholders’ deficiency
|
|
$ |
388,461 |
|
|
$ |
1,060,743 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
17,143 |
|
|
$ |
13,810 |
|
|
$ |
148,140 |
|
|
$ |
46,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
expenses
|
|
|
1,013,136 |
|
|
|
2,499,761 |
|
|
|
4,903,627 |
|
|
|
7,049,885 |
|
Depreciation and amortization
expense
|
|
|
14,343 |
|
|
|
14,380 |
|
|
|
43,313 |
|
|
|
42,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
1,027,479 |
|
|
|
2,514,141 |
|
|
|
4,946,940 |
|
|
|
7,092,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(1,010,336 |
) |
|
|
(2,500,331 |
) |
|
|
(4,798,800 |
) |
|
|
(7,045,505 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
-- |
|
|
|
27 |
|
|
|
190 |
|
|
|
41,637 |
|
Interest
expense
|
|
|
(36,906 |
) |
|
|
(3,064 |
) |
|
|
(104,509 |
) |
|
|
(3,135 |
) |
Interest
expense – related parties
|
|
|
(43,594 |
) |
|
|
(16,644 |
) |
|
|
(99,692 |
) |
|
|
(24,278 |
) |
Amortization
of deferred debt discount
|
|
|
(114,208 |
) |
|
|
-- |
|
|
|
(661,663 |
) |
|
|
-- |
|
Other
income
|
|
|
(2,829 |
) |
|
|
-- |
|
|
|
(3,166 |
) |
|
|
10,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other (expense) income
|
|
|
(197,537 |
) |
|
|
(19,681 |
) |
|
|
(868,840 |
) |
|
|
24,304 |
|
Loss
from continuing operations
|
|
|
(1,207,873 |
) |
|
|
(2,520,012 |
) |
|
|
(5,667,639 |
) |
|
|
(7,021,201 |
) |
Loss
from discontinued operations
|
|
|
(85,466 |
) |
|
|
(811,474 |
) |
|
|
(2,736,085 |
) |
|
|
(3,728,158 |
) |
Net
loss
|
|
$ |
(1,293,339 |
) |
|
$ |
(3,331,486 |
) |
|
$ |
(8,403,724 |
) |
|
$ |
(10,749,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
and diluted (See Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.13 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.64 |
) |
|
$ |
(0.90 |
) |
Discontinued
operations
|
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.48 |
) |
Total
|
|
$ |
(0.14 |
) |
|
$ |
(0.41 |
) |
|
$ |
(0.94 |
) |
|
$ |
(1.38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares
outstanding (See
Note 2)
|
|
|
9,175,673 |
|
|
|
8,054,031 |
|
|
|
8,905,496 |
|
|
|
7,812,125 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine
months ended September 30,
|
|
|
|
|
|
|
|
|
Cash flows from
continuing operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(5,667,639 |
) |
|
$ |
(7,021,201 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Non cash stock based
compensation
|
|
|
2,503,056 |
|
|
|
2,323,069 |
|
Issuance
of common stock for funding and services
|
|
|
845,500 |
|
|
|
-- |
|
Stock
placed in escrow (treasury)
|
|
|
(450 |
) |
|
|
-- |
|
Amortization
of deferred debt discount
|
|
|
206,663 |
|
|
|
-- |
|
Depreciation
and amortization
|
|
|
43,313 |
|
|
|
42,558 |
|
Changes
in operating assets & liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
5,240 |
|
|
|
(1,356 |
) |
Prepaid
expenses and other current assets
|
|
|
(51,876 |
) |
|
|
(96,849 |
) |
Deferred
acquisition costs
|
|
|
-- |
|
|
|
-- |
|
Deposits
and other assets
|
|
|
-- |
|
|
|
-- |
|
Accounts
payable and accrued expenses
|
|
|
1,177,847 |
|
|
|
697,794 |
|
Accrued
professional fees
|
|
|
208,786 |
|
|
|
-- |
|
Net cash (used in) continuing
operating activities
|
|
|
(729,560 |
) |
|
|
(4,055,985 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from
continuing investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of fixed assets
|
|
|
-- |
|
|
|
(34,626 |
) |
Net
cash used in continuing investing activities
|
|
|
-- |
|
|
|
(34,626 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from
continuing financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from other receivable
|
|
|
200,000 |
|
|
|
-- |
|
Proceeds
from long term loans
|
|
|
498,000 |
|
|
|
-- |
|
Proceeds
from convertible debenture
|
|
|
300,000 |
|
|
|
-- |
|
Proceeds
from issuance of short term notes
|
|
|
575,000 |
|
|
|
-- |
|
Proceeds
from line of credit
|
|
|
304,623 |
|
|
|
510,258 |
|
Repayment
of short term notes
|
|
|
(295,000 |
) |
|
|
-- |
|
Repayment
of line of credit
|
|
|
(16,000 |
) |
|
|
-- |
|
Proceeds
from issuance of common stock
|
|
|
-- |
|
|
|
1,759,980 |
|
Proceeds
from exercise of warrants
|
|
|
375 |
|
|
|
198,219 |
|
Net cash provided by continuing
financing activities
|
|
|
1,566,998 |
|
|
|
2,468,457 |
|
|
|
|
|
|
|
|
|
|
Cash flows of
discontinued operations
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(733,855 |
) |
|
|
(2,553,190 |
) |
Net
cash used in investing activities
|
|
|
(56 |
) |
|
|
(719,717 |
) |
Net
cash provided by financing activities
|
|
|
(101,000 |
) |
|
|
(29,253 |
) |
Net
cash used in discontinued operations
|
|
|
(834,911 |
) |
|
|
(3,302,160 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
2,527 |
|
|
|
(4,924,314 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
-- |
|
|
|
4,925,571 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
2,527 |
|
|
$ |
1,257 |
|
|
|
|
|
|
|
|
|
|
Supplemental
investing and financing activities:
|
|
|
|
|
|
|
|
|
Current
assets acquired
|
|
|
-- |
|
|
$ |
679,734 |
|
Fixed
assets acquired
|
|
|
-- |
|
|
|
286,229 |
|
Deposits
acquired
|
|
|
-- |
|
|
|
51,999 |
|
Intangible
assets acquired
|
|
|
-- |
|
|
|
450,000 |
|
Goodwill
recognized on purchase business combination
|
|
|
-- |
|
|
|
1,042,205 |
|
Accrued
liabilities assumed in the acquisition
|
|
|
-- |
|
|
|
(1,573,252 |
) |
Direct
acquisition costs
|
|
|
-- |
|
|
|
(71,579 |
) |
Non-cash
consideration to seller
|
|
|
-- |
|
|
|
(350,000 |
) |
Cash
paid to acquire business
|
|
$ |
-- |
|
|
$ |
500,000 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
DEBT
RESOLVE, INC. and SUBSIDIARIES
|
Consolidated
Statements of Stockholders’ Equity (Deficiency)
|
For
the Nine Months Ended September 30, 2008 and the Year Ended December 31,
2007
|
(Unaudited)
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
During
the
|
|
|
|
|
|
|
|
Number
of
|
|
|
|
Number
of
|
|
|
|
|
Paid
in
|
|
|
Treasury
|
|
Development
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
|
Stock
|
|
Stage
|
|
|
Total
|
|
Balance
at December 31, 2007
|
|
|
|
|
|
8,474,363
|
|
$
|
8,474
|
|
$
|
42,501,655
|
|
$ |
0
|
|
$
|
(45,275,931
|
)
|
|
$
|
(2,765,802
|
)
|
Capital
contributed from the exercise of options and warrants
|
|
|
|
|
|
4,167
|
|
|
4
|
|
|
38
|
|
|
|
|
|
|
|
|
|
42
|
|
Capital
contributed from the grant of stock options to employees
|
|
|
|
|
|
|
|
|
|
|
|
1,459,719
|
|
|
|
|
|
|
|
|
|
1,459,719
|
|
Capital
contributed from the accrual of issuance of restricted stock to an
employee
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
40,000
|
|
Capital
contributed from the grant of stock options to pay for consulting
services
|
|
|
|
|
|
|
|
|
|
|
|
82,650
|
|
|
|
|
|
|
|
|
|
82,650
|
|
Capital
contributed from deferred debt discount
|
|
|
|
|
|
|
|
|
|
|
|
115,600
|
|
|
|
|
|
|
|
|
|
115,600
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-2,872,237
|
|
|
|
-2,872,237
|
|
Balance
at March 31, 2008
|
|
|
|
|
|
8,478,530
|
|
$
|
8,478
|
|
$
|
44,199,662
|
|
$ |
0
|
|
$
|
(48,148,168
|
)
|
|
$
|
(3,940,028
|
)
|
Capital
contributed from the exercise of options and warrants
|
|
|
|
|
|
33,334
|
|
|
33
|
|
|
300
|
|
|
|
|
|
|
|
|
|
333
|
|
Capital
contributed from the grant of stock options to employees
|
|
|
|
|
|
|
|
|
|
|
|
495,261
|
|
|
|
|
|
|
|
|
|
495,261
|
|
Capital
contributed from the issuance of restricted stock to an employee
(reversing accrual)
|
|
|
|
|
|
50,000
|
|
|
50
|
|
|
-50
|
|
|
|
|
|
|
|
|
|
0
|
|
Capital
contributed from the grant of stock options to pay for consulting
services
|
|
|
|
|
|
|
|
|
|
|
|
58,150
|
|
|
|
|
|
|
|
|
|
58,150
|
|
Sales
of common stock for cash
|
|
|
|
|
|
400,000
|
|
|
400
|
|
|
679,600
|
|
|
|
|
|
|
|
|
|
680,000
|
|
Capital
contributed from deferred debt discount
|
|
|
|
|
|
|
|
|
|
|
|
88,110
|
|
|
|
|
|
|
|
|
|
88,110
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-4,238,148
|
|
|
|
-4,238,148
|
|
Balance
at June 30, 2008
|
|
|
|
|
|
8,961,864
|
|
$
|
8,962
|
|
$
|
45,521,033
|
|
$ |
0
|
|
$
|
(52,386,316
|
)
|
|
$
|
(6,856,322
|
)
|
Capital
contributed from the grant of stock options to employees
|
|
|
|
|
|
|
|
|
|
|
|
357,925
|
|
|
|
|
|
|
|
|
|
357,925
|
|
Capital
contributed from the grant of stock options to pay for consulting
services
|
|
|
|
|
|
|
|
|
|
|
|
9,400
|
|
|
|
|
|
|
|
|
|
9,400
|
|
Issuance
of common stock for funding and services
|
|
|
|
|
|
725,000
|
|
|
725
|
|
|
164,725
|
|
|
|
|
|
|
|
|
|
615,000
|
|
Capital
contributed from deferred debt discount
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
300,000
|
|
Stock
issued for escrow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-450
|
|
|
|
|
|
|
-450
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-1,293,339
|
|
|
|
-1,293,339
|
|
Balance
at September 30, 2008
|
|
|
|
|
|
9,686,864
|
|
$
|
9,687
|
|
$
|
46,353,083
|
|
$ |
0
|
|
$
|
(53,679,655
|
)
|
|
$
|
(7,317,335
|
)
|
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
NOTE
1. BASIS OF
PRESENTATION AND MANAGEMENT’S LIQUIDITY PLANS:
The
accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern and the realization of assets and the satisfaction of liabilities
in the normal course of business. The carrying amounts of assets and
liabilities presented in the financial statements do not purport to represent
realizable or settlement values. The Company has suffered significant
recurring operating losses, has a working capital deficiency and needs to raise
additional capital in order to be able to accomplish its business plan
objectives. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. These condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The
Company has historically raised funds through the sale of debt and equity
instruments. As of September 30, 2008, the Company has entered into
four lines of credit with related parties with current outstanding balances of
$1,198,623. Also as of September 30, 2008, the Company also issued
notes to unaffiliated investors for a total of $1,253,000 and obtained bank
loans of $250,000. Subsequent to September 30, 2008, the Company has
received approximately $100,000 in net cash proceeds from a loan and completed a
small private placement for net cash proceeds of $25,000. Also, an
officer has loaned the Company approximately $184,180 as a result of paying
certain bills on behalf of the Company. Management has informed these
note holders that some or all of these loans would be re-paid at the next
significant funding of $5 million or more that the Company
receives.
On March
31, 2008, the Company entered into a private placement agreement with Harmonie
International LLC (“Harmonie”) for the sale of 2,966,102 shares of Company
common stock for cash proceeds of $7,000,000. Harmonie is also to receive
a warrant to purchase up to 3,707,627 of common stock of the Company at an
exercise price of $2.36 per share. The warrant has a ten-year
exercise period. On May 16, 2008, Harmonie requested an extension
until May 30, 2008 by which to complete the funding. Thereafter,
Harmonie requested an additional extension until June 20,
2008. Although the Company declined to give Harmonie any additional
formal extensions, the agreement has not been formally
terminated. Harmonie continues to confirm their commitment to fund
but has failed to do so, nor has it offered any proof of funds nor provided a
firm funding date. As of November 14, 2008, the Company has received
no funding from Harmonie and believes that it is very unlikely to receive such
funding. The Company expects to begin legal action
shortly.
Management
is actively pursuing additional debt and equity financing. Management
believes that it will be successful in obtaining additional financing; however
no assurance can be provided that the Company will be able to do so.
If the Company is unable to raise sufficient additional funds, it will have to
develop and implement a plan to extend payables and reduce overhead until
sufficient additional capital is raised to support further
operations. However, there can be no assurance that such efforts will
be successful. In the event that the Company is not able to raise
sufficient funding, the Company may have to seek bankruptcy
protection.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
NOTE
2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements include the
accounts of First Performance Corporation, a wholly-owned subsidiary,
together with its wholly-owned subsidiary, First Performance Recovery
Corporation, and DRV Capital LLC, a wholly-owned subsidiary (“DRV Capital”),
together with its wholly-owned subsidiary, EAR Capital, LLC
(“EAR”). The results of all subsidiaries, including DRV Capital, EAR,
First Performance and First Performance Recovery are shown as discontinued
operations in the financial statements. All material inter-company
balances and transactions have been eliminated in consolidation.
Reclassifications
Certain
accounts in the prior period financial statements have been reclassified for
comparison purposes to conform to the presentation of the current period
financial statements. These reclassifications had no effect on the
previously reported loss.
Accounts
Payable and Accrued Liabilities
Included
in accounts payable and accrued liabilities as of September 30, 2008 are accrued
professional fees of $1,297,408 and accrued closing costs for First Performance
of $1,350,931. The
Company owed 12 vendors a total of $1,871,873 at September 30, 2008, each of
whom was individually owed in excess of 10% of total Company
assets.
Stock-based
compensation
The
Company accounts for stock options issued under stock-based compensation plans
under the recognition and measurement principles of SFAS No. 123(R) (“Share
Based Payment”). The fair value of each option and warrant granted to
employees and non-employees is estimated as of the grant date using the
Black-Scholes pricing model. The estimated fair value of the options
granted is recognized as an expense over the requisite service period of the
award, which is generally the option vesting period. As of September
30, 2008, total unrecognized compensation cost amounted to $50,116, all of which
is expected to be recognized in 2008 and 2009. Total stock-based
compensation expense for the three months ended September 30, 2008 and 2007
amounted to $367,326 and $354,821, respectively, and for the nine months ended
September 30, 2008 and 2007 amounted to $2,048,106 and $2,323,069,
respectively.
The fair
value of share-based payment awards, including options and warrants, granted
during the periods was estimated using the Black-Scholes pricing model with the
following assumptions (including a volatility factor derived from an index of
comparable public entities) and weighted average fair values as
follows:
|
Nine
months ended
September
30,
|
|
2008
|
2007
|
Risk
free interest rate range
|
2.10-3.50%
|
4.52-4.84%
|
Dividend
yield
|
0%
|
0%
|
Expected
volatility
|
81.1%
|
81.1%-96.7%
|
Expected
life in years
|
3-7
|
3-7
|
The
Company accounts for the expected life of share options in accordance with the
“simplified” method provisions of Securities and Exchange Commission Staff
Accounting Bulletin (“SAB”) No. 110 (December 2007), which enables the use of
the simplified method for “plain vanilla” share options as defined in SAB No.
107.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
Net loss
per share of common stock
Basic net
loss per share excludes dilution for potentially dilutive securities and is
computed by dividing net loss attributable to common stockholders by the
weighted average number of common shares outstanding during the
period. Diluted net loss per share reflects the potential dilution
that could occur if securities or other instruments to issue common stock were
exercised or converted into common stock. Potentially dilutive
securities realizable from the exercise of options and warrants aggregating
8,112,451 and 5,453,265, respectively at September 30, 2008 and 2007, are
excluded from the computation of diluted net loss per share as their inclusion
would be anti-dilutive.
The
Company’s issued and outstanding common shares do not include the underlying
shares exercisable with respect to the issuance of 177,938 and 232,106 warrants,
respectively, as of September 30, 2008 and 2007, exercisable at $0.01 per share
related to a financing completed in June 2006. In accordance with
SFAS No. 128 “Earnings Per Share”, the Company has given effect to the issuance
of these warrants in computing basic net loss per share.
NOTE
3. ACQUISITION OF FIRST PERFORMANCE CORPORATION:
On
January 19, 2007, the Company acquired all of the outstanding capital stock of
First Performance Corporation, a Nevada corporation (“First Performance”), and
its wholly-owned subsidiary, First Performance Recovery Corporation, pursuant to
a Stock Purchase Agreement. First Performance was an accounts
receivable management agency, formerly with operations in Las Vegas, Nevada and
Fort Lauderdale, Florida.
The
operations of First Performance from January 19, 2007 through September 30, 2007
are included in the Company’s unaudited condensed consolidated financial
statements as discontinued operations. The following table presents
the Company’s unaudited pro forma combined results of operations for the three
and nine months ended September 30, 2007, as if First Performance had been
acquired at the beginning of the period.
|
|
For the three months ended
September 30,
|
|
|
For the nine months ended
September 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
526,818 |
|
|
$ |
2,700,051 |
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(3,331,486 |
) |
|
$ |
(10,935,483 |
) |
|
|
|
|
|
|
|
|
|
Pro-forma
basic and diluted net loss per common share
|
|
$ |
(0.41 |
) |
|
$ |
(1.40 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic and
diluted
|
|
|
8,054,031 |
|
|
|
7,821,533 |
|
The
unaudited pro forma combined results are not necessarily indicative of the
results that actually would have occurred if the First Performance acquisition
had been completed as of the beginning of 2007, nor are they necessarily
indicative of future consolidated results.
First
Performance was closed on June 30, 2008. As a result, the operations
of First Performance have been classified as discontinued operations in the
accompanying unaudited condensed consolidated financial
statements. (See Note 6).
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
NOTE
4. NOTES
PAYABLE:
On
November 30, 2007, an unaffiliated investor loaned the Company $100,000 on a
90-day short term note. The note carries 12% interest per annum, with
interest payable monthly in cash. The principal balance outstanding
will be due at any time upon 30 days written notice, subject to mandatory
prepayment (without penalty) of principal and interest, in whole or in part,
from the net cash proceeds of any public or private, equity or debt financing
made by Debt
Resolve. The note matured on February 28, 2008 and was extended to
November 30, 2008 for aggregate extension fees of $45,000. In
conjunction with the note the Company also issued a warrant to purchase 100,000
shares of common stock at an exercise price of $1.25 per share with an
expiration date of November 30, 2012. The note was recorded net of a
debt discount of $44,100, based on the relative fair value of the warrant under
the Black-Scholes pricing model. The debt discount was amortized over
the initial term of the note. During the three and nine months ended
September 30, 2008, the Company recorded amortization of the debt discount
related to this note of $0 and $29,400, respectively. This note is
guaranteed by Mssrs. Mooney and Burchetta, two Directors of the
Company.
On
December 21, 2007, an unaffiliated investor loaned the Company $125,000 on an
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. The note is secured by the assets of the
Company. 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. The note
was recorded net of a deferred debt discount of $19,375, based on the relative
fair value of the warrant under the Black-Scholes pricing model. Such
discount is being amortized over the term of the note. During the
three and nine months ended September 30, 2008, the Company recorded
amortization of the debt discount related to this note of $12,917 and $19,375,
respectively. This note is guaranteed by Mr. Burchetta.
On
December 30, 2007, an unaffiliated investor loaned the Company $200,000 on an
18-month note with a maturity date of June 30, 2009. The note carries
interest at a rate of 12% per annum, with interest accruing and payable at
maturity. The note is secured by the assets of the
Company. 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. The note was recorded
net of a deferred debt discount of $51,600, based on the relative fair value of
the warrant under the Black-Scholes pricing model. Such discount is
being amortized over the term of the note. During the three and nine
months ended September 30, 2008, the Company recorded amortization of the debt
discount related to this note of $8,600 and $25,800,
respectively. This note is guaranteed by Mr. Burchetta.
On
January 25, 2008, an unaffiliated investor loaned the Company $100,000 on an
18-month note with a maturity date of July 25, 2009. The note carries
interest at a rate of 12% interest per annum, with interest accruing and payable
at maturity. The note is secured by the assets of the
Company. In conjunction with the note, the Company also issued a
warrant to purchase 50,000 shares of common stock at an exercise price of $1.00
and an expiration date of January 24, 2013. The note was recorded net
of a deferred debt discount of $20,300, based on the relative fair value of the
warrant under the Black-Scholes pricing model. Such discount is being
amortized over the term of the note. During the three and nine months
ended September 30, 2008, the Company recorded amortization of the debt discount
related to this note of $3,383 and $9,022, respectively.
Between
January 15, 2008 and February 8, 2008, an unaffiliated investor loaned the
Company $75,000 on a short term basis. The interest rate is 12% per
annum, and the loan is repayable on demand. As of September 30, 2008,
the remaining outstanding balance on the loan is $30,000.
On
February 26, 2008, an unaffiliated investor loaned the Company an additional
$100,000 on an 18-month note with a maturity date of August 26,
2009. The note carries interest at a rate of 12% interest per annum,
with interest accruing and payable at maturity. Terms of the loan
included a $20,000 service fee on repayment or a $45,000 service fee if
repayment occurs more than 31 days after origination. The outstanding
principal and interest may be repaid, in whole or in part, at any time without
prepayment penalty. Accordingly, since the loan remains unpaid, the
Company has accrued the service fee of $45,000 as of September 30,
2008. The note is secured by the assets of the Company. In
conjunction with the note, the Company also issued a warrant to purchase 175,000
shares of common stock at an exercise price of $1.25 and an expiration date of
February 26, 2013. The note was recorded net of a deferred debt
discount of $57,400, based on the relative fair value of the warrant under the
Black-Scholes pricing model. Such discount is being amortized over
the term of the note. During the three and nine months ended
September 30, 2008, the Company recorded amortization of the debt discount
related to this note of $9,567 and $22,322, respectively.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
On March
7, 2008, the Company borrowed $100,000 from a bank at a variable rate equal to
the bank’s prime rate (currently 6%) for 30 days. On March 14, 2008,
the original loan was repaid, and the Company borrowed $150,000 at the prime
rate and due on April 7, 2008. On May 15, 2008, the loan was repaid
and the Company borrowed $250,000 at the prime rate and due on July 1,
2008. The note was subsequently extended to January 1,
2009. The loan is secured by the assets of the Company and is
personally guaranteed by Mr. Montgomery and Mr. Mooney, an officer/director and
a director, respectively.
On March
27, 2008, an unaffiliated investor loaned the Company $100,000 on an 18-month
note with a maturity date of September 27, 2009. The note carries
interest at a rate of 12% interest per annum, with interest accruing and payable
at maturity. The outstanding principal and interest may be repaid, in
whole or in part, at any time without prepayment penalty. The note is
secured by the assets of the Company. In conjunction with the note,
the Company also issued a warrant to purchase 50,000 shares of common stock at
an exercise price of $1.95 and an expiration date of March 27,
2013. The note was recorded net of a deferred debt discount of
$37,900, based on the relative fair value of the warrant under the Black-Scholes
pricing model. Such discount is being amortized over the term of the
note. During the three and nine months ended September 30, 2008, the
Company recorded amortization of the debt discount related to this note of
$6,317 and $12,633, respectively.
On April
10, 2008, an unaffiliated investor loaned the Company an additional $198,000
through an amendment to an earlier note with a maturity date of June 21,
2009. The amended note for a total of $323,000 retained the
requirement for the Company to repay the note after raising $500,000 subsequent
to the note. In September, 2008, the Company had raised more than
$500,000, and the note has not been repaid. As a result, this note is
in default. The note carries interest at a rate of 12% interest per
annum, with interest accruing and payable at maturity. Terms of the
loan included an $18,000 service fee. The outstanding principal and
interest may be repaid, in whole or in part, at any time without prepayment
penalty. The note is secured by the assets of the Company and is
guaranteed by Mr. Burchetta. 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. The
note was recorded net of a deferred debt discount of $88,110, based on the
relative fair value of the warrant under the Black-Scholes pricing
model. Such discount is being amortized over the term of the
note. During the three and nine months ended September 30, 2008, the
Company recorded amortization of the debt discount related to this note of
$73,425 and $88,110, respectively.
NOTE
5. CONVERTIBLE
DEBENTURE:
On July
30, 2008, an unaffiliated investor loaned the Company $300,000 on a 6-month note
with a maturity date of January 31, 2009. The note carries interest
at a rate of 15% interest per annum, with interest for the six month period of
$22,500 payable in advance at closing. The note is secured by 450,000
shares held in escrow pending repayment by the maturity date. On
September 30, 2008, the original note was exchanged for a convertible debenture
with a maturity date of March 30, 2009. The debenture is convertible
at a 50% discount to the 20 previous days’ volume weighted closing price on the
date of conversion. In addition, the Exchange Agreement required that
150,000 shares be issued to Able in consideration of the exchange of the note
for the convertible debenture. The debenture was recorded net of a
deferred debt discount of $50,000 and net of a beneficial conversion feature of
$250,000, based on the relative fair value of the shares and the conversion
feature under the Black-Scholes pricing model. Such discount is being
amortized over the term of the note. During the three and nine months
ended September 30, 2008, the Company recorded no amortization of the debt
discount or beneficial conversion feature related to this
debenture.
NOTE
6. LINES OF CREDIT –
RELATED PARTIES:
On May
31, 2007, the Company entered into a line of credit agreement with Arisean
Capital, Ltd. (“Arisean”), pursuant to which the Company may borrow from time to
time up to $500,000 from Arisean to be used by the Company to fund its working
capital needs. Borrowings under the line of credit are secured by the
assets of the Company and bear interest at a rate of 12% per annum, with
interest payable monthly in cash. The principal balance outstanding
will be due at any time upon 30 days written notice, subject to mandatory
prepayment (without penalty) of principal and interest, in whole or in part,
from the net cash proceeds of any public or private, equity or debt financing
completed by the Company. Arisean’s obligation to lend such funds to
the Company is subject to a number of conditions, including review by Arisean of
the proposed use of such funds by the Company. Arisean is controlled
by Charles S. Brofman, the Co-Founder of the Company and a member of its Board
of Directors. As of September 30, 2008, the outstanding balance on
this line of credit was $576,000. On February 8, 2008, in
consideration of the line of credit not being repaid with the later loan
proceeds secured subsequent to the date of the agreement, the Company granted
options to purchase 350,000 shares of the common stock of the Company at $1.25
per share to Mr. Brofman. The term of the options is three years and
vest immediately. The grant was valued at $227,500 under the
Black-Scholes pricing model and was expensed immediately as amortization of the
deferred debt discount.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
On August 10, 2007, the Company entered
into a line of credit agreement with James D. Burchetta, Debt Resolve’s Chairman
and Founder, for up to $100,000 to be used to fund the working capital needs of
Debt Resolve and First Performance. Borrowings under the line of
credit are secured by the assets of the Company and bear interest at a rate of
12% per annum, with interest payable monthly in cash. The principal
balance outstanding will be due at any time upon 30 days written notice, subject
to mandatory prepayment (without penalty) of principal and interest, in whole or
in part, from the net cash proceeds of any public or private, equity or debt
financing made by Debt Resolve. As of September 30, 2008, the
outstanding balance on this line of credit was $119,000.
On
October 17, 2007, the Company entered into a line of credit agreement with
William M. Mooney, a Director of Debt Resolve, for up to $275,000 to be used
primarily to fund the working capital needs of First
Performance. Borrowings under the line of credit bear interest at 12%
per annum, with interest payable monthly in cash. The principal
balance outstanding will be due at any time upon 30 days written notice, subject
to mandatory prepayment (without penalty) of principal and interest, in whole or
in part, from the net cash proceeds of any public or private, equity or debt
financing made by Debt Resolve. In conjunction with this line of
credit, the Company also issued a warrant to purchase 137,500 shares of common
stock at an exercise price of $2.00 per share with an expiration date of October
17, 2012. The liability for borrowings under the line of credit was
recorded net of a deferred debt discount of $117,700, based on the relative fair
value of the warrant under the Black-Scholes pricing model. The debt
discount was fully amortized during the year ended December 31,
2007. As of September 30, 2008, the Company had $345,421 in
outstanding borrowings under this line of credit. Borrowings under
this line of credit are guaranteed by Mr. Burchetta and Mr.
Brofman. On February 8, 2008, in consideration of the line of credit
not being repaid with the later loan proceeds secured subsequent to the date of
the agreement, the Company granted Mr. Mooney 350,000 options to purchase common
stock at $1.25 per share. This option has a term of three years and
vests immediately. The grant was valued at $227,500 under the
Black-Scholes pricing model and was expensed immediately as amortization of the
deferred debt discount.
Between
February 21, 2008 and July 1, 2008, an officer of the Company, Kenneth H.
Montgomery, loaned the Company $158,202. Borrowings under the line of
credit bear interest at 12% per annum, with interest payable monthly in
cash. The principal balance outstanding will be due at any time upon
30 days written notice, subject to mandatory prepayment (without penalty) of
principal and interest, in whole or in part, from the net cash proceeds of any
public or private, equity or debt financing made by Debt Resolve. In
conjunction with this line of credit, the Company also issued options to
purchase 350,000 shares of common stock at an exercise price of $1.00 per share
with an expiration date of July 15, 2015. The grant was valued at
$262,500 under the Black-Scholes pricing model and was expensed
immediately. In addition, Mr. Montgomery has paid $184,180 of bills
on behalf of the Company as of November 1, 2008.
NOTE
7. DRV CAPITAL LLC
AND FIRST PERFORMANCE CORP.– DISCONTINUED OPERATIONS:
On June
5, 2006, the Company formed a wholly-owned subsidiary, DRV Capital LLC (“DRV
Capital”), to potentially purchase portfolios of defaulted consumer debt and
attempt to collect on that debt. In December 2006, the Company formed
a wholly-owned subsidiary of DRV Capital, EAR Capital I, LLC, for the limited
purpose of purchasing and holding pools of debt funded in part by borrowings
from Sheridan Asset Management, LLC (“Sheridan”). As of October 15,
2007, the Company ceased operations of DRV Capital and EAR, and all remaining
portfolios were sold. As a result, the operations of DRV Capital have
been classified as discontinued operations in the accompanying unaudited
condensed consolidated financial statements.
In
accordance with SFAS 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS 144”), the Company has reported these subsidiaries’
results for the three and nine months ended September 30, 2007 as discontinued
operations because the operations and cash flows have been eliminated from the
Company’s continuing operations.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
Components
of discontinued operations are as follows:
|
|
Three months
ended
September 30,
2007
|
|
|
Nine months
ended
September 30,
2007
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
591 |
|
|
$ |
3,818 |
|
Payroll and related
expenses |
|
|
67,749 |
|
|
|
182,772 |
|
General and
administrative expenses |
|
|
29,335 |
|
|
|
154,795 |
|
Total
expenses |
|
|
97,084 |
|
|
|
337,566 |
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
|
(96,493 |
) |
|
|
(333,748 |
) |
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(8,551 |
) |
|
|
(38,460 |
) |
|
|
|
|
|
|
|
|
|
Loss from
discontinued operations |
|
$ |
(105,045 |
) |
|
$ |
(372,209 |
) |
On
January 19, 2007, the Company acquired all of the outstanding capital stock of
First Performance Corporation, a Nevada corporation (“First Performance”), and
its wholly-owned subsidiary, First Performance Recovery Corporation, pursuant to
a Stock Purchase Agreement. First Performance was an accounts
receivable management agency, formerly with operations in Las Vegas, Nevada and
Fort Lauderdale, Florida. First Performance was closed on June 30,
2008. As a result, the operations of First Performance have been
classified as discontinued operations in the accompanying condensed consolidated
financial statements.
In
accordance with SFAS 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS 144”), the Company has reported these subsidiaries’
results for the three and nine months ended September 30, 2008 and 2007 as
discontinued operations because the operations and cash flows have been
eliminated from the Company’s continuing operations.
Components
of discontinued operations are as follows:
|
|
Three months
ended
|
|
|
|
September 30,
2008
|
|
|
September 30,
2007
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
(3,026 |
) |
|
$ |
512,417 |
|
|
|
|
|
|
|
|
|
|
Payroll and related
expenses |
|
|
38,166 |
|
|
|
745,488 |
|
General and
administrative expenses |
|
|
47,517 |
|
|
|
373,068 |
|
Impairment of
goodwill and intangibles |
|
|
-- |
|
|
|
27,255 |
|
Disposal of fixed
asset |
|
|
-- |
|
|
|
68,329 |
|
Accrual for closing
costs for lease |
|
|
-- |
|
|
|
-- |
|
Depreciation and
amortization |
|
|
-- |
|
|
|
42,327 |
|
Total
expenses |
|
|
85,683 |
|
|
|
1,256,467 |
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
|
(88,709 |
) |
|
|
(744,050 |
) |
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(105 |
) |
|
|
(1,281 |
) |
Other
income |
|
|
3,348 |
|
|
|
38,902 |
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued operations |
|
$ |
(85,466 |
) |
|
$ |
(706,429 |
) |
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
|
|
Nine months
ended
|
|
|
|
September 30,
2008
|
|
|
September 30,
2007
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
300,742 |
|
|
$ |
2,489,128 |
|
|
|
|
|
|
|
|
|
|
Payroll and related
expenses |
|
|
603,924 |
|
|
|
2,638,868 |
|
General and
administrative expenses |
|
|
732,446 |
|
|
|
1,795,023 |
|
Impairment of
goodwill and intangibles |
|
|
176,545 |
|
|
|
1,206,335 |
|
Disposal of fixed
asset |
|
|
87,402 |
|
|
|
68,329 |
|
Accrual for closing
costs for lease |
|
|
1,364,458 |
|
|
|
-- |
|
Depreciation and
amortization |
|
|
70,539 |
|
|
|
134,146 |
|
Total
expenses |
|
|
3,035,314 |
|
|
|
5,842,701 |
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
|
(2,734,572 |
) |
|
|
(3,353,573 |
) |
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(9,200 |
) |
|
|
(1,724 |
) |
Other income
(expense) |
|
|
7,687 |
|
|
|
(652 |
) |
|
|
|
|
|
|
|
|
|
Loss from
discontinued operations |
|
$ |
(2,736,085 |
) |
|
$ |
(3,355,949 |
) |
NOTE
8. STOCK
OPTIONS:
As of
September 30, 2008, the Company has one qualified stock-based employee
compensation plan. The 2005 Incentive Compensation Plan (the “2005 Plan”)
was approved by the stockholders on June 14, 2005 and provides for the issuance
of options and restricted stock grants to officers, directors, key employees and
consultants of the Company to purchase up to 900,000 shares of common
stock.
A summary
of option activity within the 2005 Plan during the nine months ended September
30, 2008 is presented below:
|
|
2008
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
January 1, 2008 |
|
|
820,000 |
|
|
$ |
4.79 |
|
|
4.2
Years
|
|
|
$ |
-- |
|
Granted |
|
|
203,000 |
|
|
$ |
1.32 |
|
|
6.4
Years
|
|
|
$ |
-- |
|
Exercised |
|
|
-- |
|
|
$ |
-- |
|
|
|
--
|
|
|
$ |
-- |
|
Forfeited or
expired |
|
|
(138,000 |
) |
|
$ |
4.65 |
|
|
|
--
|
|
|
$ |
-- |
|
Outstanding at
September 30, 2008 |
|
|
885,000 |
|
|
$ |
3.01 |
|
|
4.7 Years
|
|
|
$ |
-- |
|
Exercisable at
September 30, 2008 |
|
|
727,500 |
|
|
$ |
3.23 |
|
|
4.6
Years
|
|
|
$ |
-- |
|
As of
September 30, 2008, the Company had 157,500 unvested options within the 2005
Plan.
On
February 8, 2008, the Company issued options to purchase 150,000 shares of its
common stock exercisable at $1.25 per share to a current
employee. The stock options have an exercise period of seven years
and vest 33% at issuance, 33% at the employee’s first anniversary and 34% on the
second anniversary of employment. The grant was valued at $138,000
under the Black-Scholes pricing model, is being expensed over the vesting period
and resulted in an expense during the nine months ended September 30, 2008 of
$116,533.
On
February 8, 2008, the Company issued options to purchase 20,000 shares of its
common stock exercisable at $1.25 per share to a current
employee. The stock options have an exercise period of seven years
and vested immediately. The grant was valued at $18,400 under the
Black-Scholes pricing model and was expensed immediately.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
On
February 8, 2008, the Company issued options to purchase 3,000 shares of its
common stock exercisable at $1.25 per share to a current
employee. The stock options have an exercise period of seven
years. The grant vests on the first anniversary of employment of the
employee, which occurred during the nine months ended September 30,
2008. The grant was valued at $2,760 under the Black-Scholes pricing
model and was expensed during the nine months ended September 30,
2008.
On
February 8, 2008, the Board re-priced the exercise price of outstanding options
of all current employees from their prior grant prices ranging from $4.10 to
$5.00 to $1.50 per share. In connection with this re-pricing, the
Company recorded additional stock based compensation expense of $266,421 during
the nine months ended September 30, 2008.
On June
3, 2008, the Company issued options to purchase 10,000 shares of its common
stock exercisable at $1.84 per share to a current employee. The stock
options have an exercise period of seven years and vested
immediately. The grant was valued at $13,800 under the Black-Scholes
pricing model and was expensed immediately.
On June
16, 2008, the Company issued options to purchase 20,000 shares of its common
stock exercisable at $1.63 per share to a current employee. The stock
options have an exercise period of seven years and vest 50% on the six month
anniversary of the grant and 50% on the one-year anniversary of the
grant. The grant was valued at $24,400 under the Black-Scholes
pricing model and is being expensed over the vesting period, which resulted in
an expense during the nine months ended September 30, 2008 of
$10,675.
A summary
of non-qualified stock option activity outside the 2005 Plan during the nine
months ended September 30, 2008 is presented below:
|
|
2008
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
January 1, 2008 |
|
|
3,033,434 |
|
|
$ |
4.79 |
|
|
6.3
Years
|
|
|
$ |
-- |
|
Granted |
|
|
2,311,500 |
|
|
$ |
1.16 |
|
|
5.2 Years
|
|
|
$ |
-- |
|
Exercised |
|
|
-- |
|
|
$ |
-- |
|
|
|
--
|
|
|
$ |
-- |
|
Forfeited or
expired |
|
|
(155,000 |
) |
|
$ |
4.66 |
|
|
|
--
|
|
|
$ |
-- |
|
Outstanding at
September 30, 2008 |
|
|
5,189,934 |
|
|
$ |
2.89 |
|
|
5.6 Years
|
|
|
$ |
-- |
|
Exercisable at
September 30, 2008 |
|
|
5,189,934 |
|
|
$ |
2.89 |
|
|
5.6 Years
|
|
|
$ |
-- |
|
As of
September 30, 2008, the Company had no unvested stock options outside the 2005
Plan.
On
February 8, 2008, the Company issued options to purchase 461,500 shares of its
common stock exercisable at $1.25 per share to an officer, directors and a
former director of the Company. The stock options have an exercise
periods ranging from five to seven years. The grants vested
immediately. The grants were valued at $412,315 under the
Black-Scholes pricing model and were expensed immediately.
On June
3, 2008, the Company issued options to purchase 25,000 shares of its common
stock exercisable at $1.84 per share to a Consultant who provides legal services
to the Company. The stock options have an exercise period of seven
years. The grant vested immediately. The grant was valued
at $34,500 under the Black-Scholes pricing model and was expensed
immediately.
On June
12, 2008, the Company issued options to purchase 350,000 shares of its common
stock exercisable at $1.40 per share to an employee of the
Company. The stock options have an exercise period of seven
years. The grant vested immediately. The grant was valued
at $364,000 under the Black-Scholes pricing model and was expensed
immediately.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
On
September 9, 2008, the Company issued options to purchase 75,000 shares of its
common stock exercisable at $0.70 per share to a Consultant who provides legal
services to the Company. The stock options have an exercise period of
seven years. The grant vested immediately. The grant was
valued at $39,000 under the Black-Scholes pricing model and was expensed
immediately.
The
Company recorded stock based compensation expense representing the amortized
amount of the fair value of options granted in prior periods in the amount of
$197,201 during the nine months ended September 30, 2008.
Stock
based compensation for the three and nine months ended September 30, 2008 and
2007 was recorded in the consolidated statements of operations as
follows:
|
|
Three months ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Payroll and related
expenses |
|
$ |
357,926 |
|
|
$ |
337,721 |
|
General and
administrative expenses |
|
$ |
9,400 |
|
|
$ |
17,100 |
|
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Payroll and related
expenses |
|
$ |
1,897,906 |
|
|
$ |
2,068,939 |
|
General and
administrative expenses |
|
$ |
150,200 |
|
|
$ |
238,694 |
|
NOTE
9. WARRANTS:
A summary
of warrant activity as of January 1, 2008 and changes during the nine months
ended September 30, 2008 is presented below:
|
|
2008
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
January 1, 2008 |
|
|
2,042,770 |
|
|
$ |
1.60 |
|
|
3.0 Years
|
|
|
|
-- |
|
Granted |
|
|
449,000 |
|
|
$ |
1.56 |
|
|
4.4 Years
|
|
|
|
-- |
|
Exercised |
|
|
(37,501 |
) |
|
$ |
0.01 |
|
|
|
--
|
|
|
|
-- |
|
Forfeited or
expired |
|
|
(238,814 |
) |
|
$ |
3.28 |
|
|
|
--
|
|
|
|
-- |
|
Outstanding at
September 30, 2008 |
|
|
2,215,455 |
|
|
$ |
1.44 |
|
|
3.0 Years
|
|
|
$ |
69,396 |
|
Exercisable at
September 30, 2008 |
|
|
1,990,455 |
|
|
$ |
1.60 |
|
|
3.4 Years
|
|
|
$ |
69,396 |
|
As of
September 30, 2008, there were 225,000 unvested warrants to purchase shares of
common stock.
On
February 8, 2008, two warrants to purchase the common stock of the Company of
71,250 and 3,750 shares, respectively, were granted to two individuals who
referred the candidate who became CEO of the Company in February
2008. The warrants have an exercise price of $1.25 per share and a
term of five years. The warrants were valued at $60,000 under the
Black-Scholes pricing model and were expensed immediately.
During
the nine months ended September 30, 2008, warrants to purchase 37,501 shares of
common stock were exercised for proceeds of $375.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
NOTE
10. ISSUANCE OF
COMMON STOCK
In
connection with the Company’s sale of a $300,000 convertible debenture on July
30, 2008, the Company issued 450,000 common shares as treasury stock and granted
a security interest in the shares to the debenture holder. The
Company excludes the treasury shares from the number of outstanding shares used
to determine its net loss per share.
On
September 18, two share issuances occurred. The first issuance was
225,000 shares to a vendor to provide certain services. The second
issuance was 50,000 shares to an investor for forbearance on a
note.
NOTE
11. COMMITMENTS AND
CONTINGENCIES:
Litigation
Our First
Performance subsidiary settled an employment claim with a former employee for
approximately $25,000. Due to the closure of First Performance and
the cessation of revenue generating activities, settlement was never paid as
First Performance had no funds with which to effect settlement. The
claimant is attempting to enjoin Debt Resolve to get it to pay the claim, plus
damages related to the non-payment of the original settlement. With
damages and attorney’s fees, the claimant is attempting to compel satisfaction
for the adjusted amount of $110,000. This potential action would
occur in Florida.
The
Company has received complaints from several vendors relating to unpaid
bills. The total amount of bills subject to this litigation is
approximately $430,000. Judgment to enforce payment of these
obligations prior to the Company being able to generate adequate funding to
continue operations as well as pay these obligations would have a material
adverse effect on the Company’s ability to continue as a going
concern.
The
Company sent a demand letter to Compass Bank requesting $7 million as a result
of the failure of Harmonie International to complete funding of its stock
purchase. Compass had sent the Company a letter verifying that funds
were in transit. Compass filed a complaint in the United States
District Court for the Southern District of Texas seeking a declaratory judgment
that Compass is not liable for Harmonie’s failure to fund. In its
complaint, Compass admits fraud by a former employee in this
matter. The Company has engaged Texas counsel to defend this matter
and counterclaim for additional damages based on the decline in the Company’s
stock price as a result of Harmonie’s failure to fund based on Compass providing
proof of funds in transit.
From time
to time, the Company may be involved in various litigation in the ordinary
course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company’s financial position or results of operations.
Operating
leases
On August
1, 2005, the Company entered into a five year lease for its corporate
headquarters which includes annual escalations in rent. In accordance
with SFAS No. 13, “Accounting for Leases,” (“SFAS 13”) the Company accounts for
rent expense using the straight line method of accounting, accruing the
difference between actual rent due and the straight line amount. At
September 30, 2008, accrued rent payable totaled $12,602.
The
Company also leased an office in Las Vegas, Nevada under a non-cancelable
operating lease that expires July 31, 2014 and calls for annual escalations in
rent. First Performance follows the requirements of SFAS 13 as does
Debt Resolve. At September 30, 2008, there was no accrued rent
payable related to this lease as a credit totaling $29,941 was taken at the
close of the business in June. Following the closure of First
Performance, the Company is working with the landlord to terminate this
lease. At June 30, First Performance took a charge for the remaining
balance due on the lease of $1,394,930 due to closing the business, reduced by
the credit for the accrued rent payable to a balance of $1,364,989.
Rent
expense for the three months ended September 30, 2008 and 2007 was $31,916 and
$140,177, respectively, and rent expense for the nine months ended September 30,
2008 and 2007 was $1,600,886 and $413,652, respectively.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
As of
September 30, 2008, future minimum rental payments under the above corporate
headquarters non-cancelable operating lease are as follows:
For
the Years Ending
December 31,
|
|
Amount
|
|
2008
|
|
$ |
32,541 |
|
2009
|
|
|
130,164 |
|
2010
|
|
|
75,929 |
|
|
|
$ |
238,634 |
|
Employment Agreement
On February 16, 2008, the Company
entered into an employment agreement with Mr. Kenneth H. Montgomery to serve as
its Chief Executive Officer. The agreement has a one-year,
automatically renewable term unless the Company provides 90 days written notice
of its intention not to renew prior to the anniversary date. Mr.
Montgomery’s salary is $225,000 annually, with a bonus of up to 75% of salary
based on performance of objectives set by the Chairman and the Board of
Directors. Mr. Montgomery also received 50,000 shares of restricted
stock and 350,000 options to purchase the common stock of the Company at an
exercise price of $0.80, the closing price on his date of approval by the
Board. The grant of options has a seven-year term and vest 50%
immediately and 50% on the six-month anniversary of his
employment. The option grant was valued at $210,000 under the
Black-Scholes pricing model, and the initial vesting was expensed immediately
and the remainder of the grant is being expensed over the vesting
period. The restricted shares were valued at $0.80 per share, the
closing price on the date of the grant. There are no restrictions on
this grant of stock, except that the stock is not registered and is therefore
subject to SEC rules regarding unregistered stock. During the nine
months ended September 30, 2008, the Company recorded an expense relating to the
option grant in the amount of $210,000. As of
September 30, 2008, the Company owes $93,750 in salary under the
agreement.
NOTE
12. RECENT
ACCOUNTING PRONOUNCEMENTS:
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”) including an amendment of FASB
Statement No. 115. SFAS 159 permits companies to choose to measure certain
financial instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings. The Company adopted SFAS
159 beginning in the first quarter of 2008, without material effect on the
Company’s consolidated financial position or results of operations.
In
February 2008, the FASB issued Staff Position No. 157-2, Effective Date of FASB
Statement No. 157 (“FSP 157-2”) that defers the effective date of applying the
provisions of SFAS 157 to the fair value measurement of non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (or at least annually),
until fiscal years beginning after November 15, 2008.
The
Company is currently evaluating the effect that the adoption of FSP 157-2 will
have on its consolidated results of operations and financial condition, but does
not expect it to have a material impact.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of
SFAS 160 to have a significant impact on its results of operations or financial
position.
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133.” This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. Based on current conditions, the Company does not expect
the adoption of SFAS 161 to have a significant impact on its results of
operations or financial position.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement will not have
an impact on the Company’s financial statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises excluded from the
scope of Statement 60 or to some insurance contracts that seem similar to
financial guarantee insurance contracts issued by insurance enterprises (such as
mortgage guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance contracts that
are derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on the Company’s financial statements.
NOTE
13. RELATED PARTY
TRANSACTIONS:
During
the nine months ended September 30, 2008, an entity owned by a former Director
performed consulting services for the Company in the amount of
$25,984. Such amount is reflected in Accounts Payable and Accrued
Liabilities as of September 30, 2008.
Certain
Company directors and an officer personally guarantee the Company’s notes
payable and its’ bank loan (Note 4).
NOTE
14. AMERICAN STOCK
EXCHANGE DEFICIENCY LETTER:
On
January 7, 2008, the Company received a deficiency letter from the American
Stock Exchange stating that it was not in compliance with specific provisions of
the American Stock Exchange continued listing standards. Also on January 7,
2008, the Company provided a plan of remediation to the Exchange, and the plan
was accepted. The Company was given 90 days to regain compliance with
listing standards by April 7, 2008. As a result of the closing of the
documentation by which Harmonie International LLC committed to invest $7 million
in the common stock of the Company, the Exchange provided an extension of the
time to regain compliance. On June 10, 2008, and having not been
funded by Harmonie International LLC, the Exchange informed the Company that it
was going to proceed with the delisting. In accordance with Exchange
rules, the Company requested a hearing to contest the intention to de-list the
Company from the Exchange. The hearing was held on August 27,
2008. On October 3, 2008, de-listing of the Company occurred, and the
Company now trades on the Over-the-counter Bulletin Board.
NOTE
15. CHARGES RELATED
TO THE CLOSURE OF FIRST PERFORMANCE:
At June
30, 2008, due to the closure of First Performance, the following charges were
incurred and are reflected in the results of discontinued
operations:
Write-off of Fixed
Assets |
|
$ |
87,402 |
|
Write-off of
Intangibles |
|
|
176,545 |
|
Accrual of final
lease costs |
|
|
1,364,458 |
|
|
|
|
|
|
Total
charges |
|
$ |
1,628,405 |
|
DEBT
RESOLVE, INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2008
(Unaudited)
NOTE
16. SUBSEQUENT
EVENTS:
On
October 10, 2008, an unaffiliated investor purchased 100,000 shares of stock for
cash proceeds of $25,000. The investor was granted a warrant to
purchase 125,000 shares of the Company’s common stock at an exercise price of
$0.25 per share. The warrant has a five year exercise
period.
On
October 14, 2008, at a meeting of the Company’s Board, the Board acting as
Compensation Committee granted 1,200,000 restricted shares and 1,200,000 options
to purchase the Company’s common stock at an exercise price of $0.17 per share
and an exercise period of seven years to the four members of the Board and an
officer of the Company.
On
November 14, 2008, an unaffiliated investor loaned the Company $100,000 on a
short term convertible debenture with a maturity date of December 31,
2008. The note carries interest of $7,000 payable in advance at
closing. A default rate of 22% applies to the outstanding balance
after the maturity date. The debenture is convertible into any
subsequent financing at the terms of the financing, at the investor’s
option. The investor was granted 1,000,000 warrants to purchase the
common stock of the Company at an exercise price of $0.12 per
share. The warrant has a five year exercise period.
Item
2. Management’s Discussion and Analysis or Plan of
Operation
Overview
Prior to
January 19, 2007, we were a development stage company. On January 19,
2007, we acquired all of the outstanding capital stock of First Performance
Corporation, a Nevada corporation (“First Performance”), and its wholly owned
subsidiary, First Performance Recovery Corporation, pursuant to a Stock Purchase
Agreement dated January 19, 2007. Accordingly, we are no longer
considered a development stage entity as of the date of the
acquisition.
Since
completing initial product development in early 2004, our primary business has
been providing a software solution to consumer lenders or those collecting on
those loans based on our proprietary DebtResolve system, our Internet-based
bidding system that facilitates the settlement and collection of defaulted
consumer debt via the Internet. We have marketed our service
primarily to consumer personal credit and credit card issuers, collection
agencies, collection law firms and the buyers of defaulted debt in the United
States and Europe. We intend to market our service to other segments
served by the collections industry worldwide. For example, we believe
that our system will be especially valuable for the collection of low balance
debt, such as that held by utility companies and online service providers, where
the cost of traditionally labor intensive collection efforts may exceed the
value collected. We also intend to pursue past-due Internet-related
debt, such as that held by sellers of sales and services online. We
believe that consumers who incurred their debt over the Internet will be likely
to respond favorably to an Internet-based collection solution. In
addition, creditors of Internet-related debt usually have access to debtors’
e-mail addresses, facilitating the contact of debtors directly by
e-mail. We believe that healthcare, with its low balances due on
co-pays and deductibles, will be an ideal market for our system. We
believe that expanding to more recently past-due portfolios of any such debt
will result in higher settlement volumes, improving our clients’ profitability
by increasing their collections while reducing their cost of
collections. We do not anticipate any material incremental costs
associated with developing our capabilities and marketing to these creditors, as
our existing DebtResolve system can already handle these types of debt, and we
make contact with these creditors in our normal course of business.
We have
prepared for our entry into the European marketplace by reviewing our mode of
business and modifying our contracts to comply with appropriate European
privacy, debtor protection and other applicable regulations. We
expect that initially, our expense associated with servicing our United Kingdom
and other potential European clients will be minimal, consisting primarily of
travel expense to meet with those clients and additional legal fees, as our
European contracts, although already written to conform to European regulations,
may require customization. We have begun investigation of, and
negotiations with, companies who may provide local, outsourced European customer
service support for us on an as needed basis, the expense of which will be
variable with the level of business activity. In the United Kingdom
and the Benelux countries, we have engaged agents to represent us for sales and
customer service for a flat monthly fee or a percentage of amounts
recovered. Last year, we announced the signing of our first European
customer, a U.K.-based large collection agency. However, we no longer
have this client as a customer. We may incur additional costs, which
we cannot anticipate at this time, if we expand into Canada and other
countries.
Our
revenues to date have been insufficient to fund our operations. We
have financed our activities to date through our management’s contributions of
cash, the forgiveness of royalty and consulting fees, the proceeds from sales of
our common stock in private placement financings, the proceeds of our
convertible promissory notes in three private financings, short-term borrowings
from previous investors or related parties, the proceeds from the sale of our
common stock in our initial public offering, proceeds from notes with investors
introduced to us by The Resolution Group, loans from a local bank and loans and
convertible notes from other unaffiliated investors. In connection
with our marketing and client support goals, we expect our operating expenses to
grow as we employ additional technicians, sales people and client support
representatives. We expect that salaries and other compensation
expenses will continue to be our largest category of expense, while travel,
legal and other sales and marketing expenses will grow as we expand our sales,
marketing and support capabilities. 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.
Our
current contracts provide that we will earn revenue based on a percentage of the
amount of debt collected from accounts submitted on our DebtResolve system, from
flat fees per settlement achieved, from flat fees per placement on our system or
a flat monthly license fee. Although other revenue models have been
proposed, most revenue earned to date has been determined using these methods,
and such revenue is recognized when the settlement amount of debt is collected
by our client or in accordance with our client contracts. For the
early adopters of our system, we waived set-up fees and other transactional fees
that we anticipate charging on a going-forward basis. While the
percent of debt collected will continue to be a revenue recognition method going
forward, other payment models are also being offered to clients and may possibly
become our preferred revenue model. Most contracts currently in
process include provisions for set up fees and base revenue on a monthly
licensing fee, in the aggregate or per account, with some contracts having a
small transaction fee on debt settlement as well. In addition, with
respect to our DR Prevent ™ module, which settles consumer debt at earlier
stages, we expect that a licensing fee per account on our system, and/or the
hybrid revenue model which will include both fees per account and transaction
fees at settlement, may become the preferred revenue methods. As we
expand our knowledge of the industry, we have become aware that different
revenue models may be more appropriate for the individual circumstances of our
potential clients, and our expanded choice of revenue models reflects that
knowledge.
In
January 2007, we also entered into the business of purchasing and collecting
debt. Through our subsidiary, DRV Capital LLC, and its single-purpose
subsidiary, EAR Capital I, LLC, we bought two portfolios of charged-off debt at
a significant discount to their face value and, through subcontracted, licensed
debt collectors, attempted to collect on that debt by utilizing both our
DebtResolve system and also traditional collection methods. On
October 15, 2007, we notified our debt buying business partners that we would no
longer be buying portfolios of debt on the open market, since many of our
current and future partners are debt buyers. We sold our remaining
portfolios and repaid all outstanding loans. As a result, the
activity for DRV Capital has been included in the accompanying unaudited
condensed consolidated financial statements as discontinued
operations. In the future, we may use our DRV Capital entity to
participate with one or more of our debt buying customers in purchasing a
percentage of their portfolio, for the purpose of getting a larger percentage of
the portfolio to collect and to enhance the introduction our DebtResolve system
to new debt buying clients. We have no plans at the present time to
engage in this activity.
In
January 2007, we purchased the outstanding common stock of First
Performance. First Performance was a collection agency that
represents both regional and national credit grantors from such diverse
industries as retail, bankcard, oil cards, mortgage and auto. Due to
the loss of four major clients at First Performance during 2007, we performed
two interim impairment analyses in accordance with SFAS 142. As a
result of these analyses, we recorded impairment charges aggregating $1,206,335
during year ended December 31, 2007. We also bought First Performance
to use it as a laboratory to design and develop further enhancements of our
DebtResolve system in an active operating environment. This effort
has been successful, and a number of new enhancements are now in our
pipeline. As a result, we no longer needed First Performance for this
purpose and decided to close it effective June 30, 2008 to concentrate fully on
our core business and to reduce cash expenses from funding the First Performance
losses. As a result, the activity for First Performance and First
Performance Recovery has been included in the accompanying condensed
consolidated financial statements as discontinued operations.
We have
historically raised funds through the sale of debt and equity
instruments. As of September 30, 2008, we have entered into four lines of
credit with related parties with current outstanding balances of
$1,198,623. Also as of September 30, 2008, we also issued notes to
unaffiliated investors for a total of $1,253,000 and obtained bank loans of
$250,000. In addition, subsequent to September 30, 2008, we have
received approximately $125,000 in cash proceeds from a private placement of
common stock and a loan. Management has informed the note holders
that some or all of these loans would be re-paid at the next significant funding
that the Company receives.
On March
31, 2008, we entered into a private placement agreement with Harmonie
International LLC (“Harmonie”) for the sale of 2,966,102 shares of common stock
for cash proceeds of $7,000,000. Harmonie is also to receive a warrant to
purchase up to 3,707,627 of our common stock at an exercise price of $2.36 per
share. The warrant has a ten year exercise period. On May
16, 2008, Harmonie requested an extension until May 30, 2008 by which to
complete the funding. Thereafter, Harmonie requested an additional
extension until June 20, 2008. Although the Company declined to give
Harmonie any additional formal extensions, the agreement has not been
terminated. Harmonie continues to confirm their commitment to fund
but has failed to do so, nor has it offered any proof of funds nor provided a
firm funding date. As of November 14, 2008, the Company has received
no funding from Harmonie and believes that it is very unlikely to receive such
funding. The Company intends to pursue legal action in the near
future.
We are
actively pursuing additional debt/equity financing. We believe that
we will be successful in obtaining additional financing, however
no assurance can be provided that we will be able to do so. If we are
unable to raise sufficient additional funds, we will have to develop and
implement a plan to extend payables and reduce overhead until sufficient
additional capital is raised to support further operations. However,
there can be no assurance that our efforts at raising additional financing will
be successful. In the event that our fundraising efforts do not
succeed, the Company may have to seek bankruptcy protection.
Results
of Operations for the Three Months Ended September 30, 2008 Compared to the
Three Months Ended September 30, 2007
Revenues
Revenues
totaled $17,143 and $13,810 for the three months ended September 30, 2008 and
2007, respectively. We earned revenue during the three months ended
September 30, 2008 from contingency fee income, based on a percent of debt
collected or fees per settlement at a lender and two banks that implemented our
online system. We earned revenue during the three months ended
September 30, 2007 from contingency fee income, based on a percentage of the
amount of debt collected or fees per settlement from accounts placed on our
online system.
Costs
and Expenses
General and administrative
expenses. General and
administrative expenses amounted to $1,013,136 for the three months ended
September 30, 2008, as compared to $1,539,950 for the three months ended
September 30, 2007, a decrease of $466,814 or 30%. This decrease was
due to decreases in almost every expense category due to headcount reductions
and cost containment. Non-cash stock based compensation expense for
employees was $357,926 and $337,721 for the three months ended September 30,
2008 and 2007, respectively. Salary expenses were $206,136 for the
three months ended September 30, 2008, a decrease of $294,495 over salary
expenses of $500,632 for the three months ended September 30, 2007 due to
downsizing later in 2007 and 2008. Payroll tax expense of $7,062 for
the three months ended September 30, 2008 represented a decrease of $21,368 over
payroll tax expense of $28,429 for the three months ended September 30, 2007 due
to accrual of payrolls instead of payment in 2008 due to lack of
funding. The expenses for the three months ended September 30, 2008
for benefits, severance and miscellaneous were $11,912, $0 and $0, respectively
versus expenses of $49,662, $(102) and $1,325, respectively, for the three
months ended September 30, 2007. Allocations of salaries and benefits
to subsidiaries was $0 and ($240,836) for the three months ended September 30,
2008 and 2007, respectively. Allocations ceased effective July 1,
2008 with the closure of First Performance. DRV Capital was closed in
the 4th quarter
of 2007. These allocations are eliminated in consolidation, but the
amounts for DRV Capital and First Performance are in discontinued operations
rather than payroll and related expense.
The
expense for stock based compensation for stock options granted to consultants
for the three months ended September 30, 2008 was $144,400, as compared with
stock based compensation in the amount of $17,100 for the three months ended
September 30, 2007 due to the stock grants to new investors in three months
ended September 30, 2008. Also, for the three months ended September
30, 2008 consulting fees totaled $55,107, as compared with $270,764 in
consulting fees for the three months ended September 30, 2007, a decrease of
$215,657, primarily related to the elimination of consultants to control
costs. Legal fees decreased by $226,876 to $68,771 for the three
months ended September 30, 2008 from $295,647 for the three months ended
September 30, 2007. The expenses for occupancy, telecommunications,
travel and office supplies and maintenance for the three months ended September
30, 2008 were $31,916, $21,251, $2,556 and $7,785, respectively, as compared
with expenses of $30,882, $43,417, $36,807 and $3,774 for occupancy,
telecommunications, travel and office supplies and maintenance, respectively,
for the three months ended September 30, 2007, all due to cost control efforts
in the second half of 2007 and the nine months ended September 30,
2008. Marketing expenses decreased by $33,920 to $22,135 for the
three months ended September 30, 2008 from $56,054 for the three months ended
September 30, 2007, primarily due to the elimination of marketing consultants
after June 30, 2007. Other general operating costs for the three
months ended September 30, 2008, including insurance and accounting expenses,
amounted to $76,180, as compared with $140,717 for the three months ended
September 30, 2007. As with payroll expenses, allocations of general
and administrative expense to subsidiaries was $0 and ($32,042) for the three
months ended September 30, 2008 and 2007, respectively, with allocations ceasing
on July 1, 2008 due to the closure of First Performance. DRV Capital
had already been closed in the 4th quarter
of 2007. These allocations are eliminated in consolidation, but the
amounts for DRV Capital and First Performance are in discontinued operations
rather than general and administrative expense.
Terminated acquisition
costs. During the three months ended September 30, 2007, we
terminated the Creditors Interchange transaction. As a result, all
costs associated with the proposed acquisition were charged to terminated
acquisition costs in the amount of $959,811 on September 30, 2007.
Depreciation and amortization
expense. For the three months ended September 30, 2008 and
2007, we recorded depreciation expense of $14,343 and $14,380,
respectively.
Interest income
(expense). We recorded interest income, interest expense and
interest expense – related parties of $0, ($36,906) and ($43,594) for the three
months ended September 30, 2008, respectively, compared to interest income,
interest expense and interest expense – related parties of $27, ($3,064) and
($16,644), respectively, for the three months ended September 30,
2007. Interest expense for the three months ended September 30, 2008
includes interest accrued on our lines of credit, convertible debentures,
investor notes and bank loans.
Amortization of deferred debt
discount. Amortization expense of $114,208 was incurred for
the three months ended September 30, 2008 for the amortization of the value of
the deferred debt discount associated with our lines of credit and short term
notes.
Results
of Operations for the Nine Months Ended September 30, 2008 Compared to the Nine
Months Ended September 30, 2007
Revenues
Revenues
totaled $148,140 and $46,938 for the nine months ended September 30, 2008 and
2007, respectively. We earned revenue during the nine months ended
September 30, 2008 from contingency fee income, based on a percentage of the
amount of debt collected, fees per settlement, fees per placement or monthly
license fees at collection agencies, a lender and two banks that implemented our
online system. We earned revenue during the nine months ended
September 30, 2007 from contingency fee income, based on a percentage of the
amount of debt collected, start up fees or fees per settlement from accounts
placed on our online system.
Costs
and Expenses
General and administrative
expenses. General and administrative expenses amounted to
$4,903,627 for the nine months ended September 30, 2008, as compared to
$6,090,073 for the nine months ended September 30, 2007, a decrease of
$1,126,446 or 19%. This decrease was due to across-the-board expense
reductions due to headcount reductions and cost control. Non-cash
stock based compensation expense was $1,897,906 and $2,068,939 for the nine
months ended September 30, 2008 and 2007, respectively. Salary
expenses were $815,020 for the nine months ended September 30, 2008, a decrease
of $695,089 or 46% over salary expenses of $1,510,109 for the nine months ended
September 30, 2007 due to downsizing later in 2007 and 2008. Payroll
tax expense of $44,341 for the nine months ended September 30, 2008 represented
a decrease of $78,518 over payroll tax expense of $122,859 for the nine months
ended September 30, 2007 due to accrual of payrolls instead of payment in 2008
due to lack of funding and headcount reductions from 2007. The
expenses for the nine months ended September 30, 2008 for benefits, severance
and miscellaneous were $83,982, $2,083 and $82,893, respectively versus expenses
of $158,449, $39,148 and $12,750, respectively, for the nine months ended
September 30, 2007. Allocations of salaries and benefits to
subsidiaries was ($109,612) and ($503,227) for the nine months ended September
30, 2008 and 2007, respectively, with lower allocations in 2008 due to lower
corporate headcount, the June 2008 closure of First Performance and the October
2007 closure of DRV Capital. These allocations are eliminated in
consolidation, but the amounts for DRV Capital and First Performance are in
discontinued operations rather than payroll and related expense.
The
expense for stock based compensation for stock options granted to consultants
for the nine months ended September 30, 2008 was $965,200, as compared with
stock based compensation in the amount of $254,130 for the nine months ended
September 30, 2007 due to the stock grants to TRG and other investors in nine
months ended September 30, 2008. Also, for the nine months ended
September 30, 2008 consulting fees totaled $277,915, as compared with $714,857
in consulting fees for the nine months ended September 30, 2007, a decrease of
$436,942, primarily related to the elimination of consultants to control
costs. Legal fees decreased by $434,810 to $215,339 for the nine
months ended September 30, 2008 from $650,149 for the nine months ended
September 30, 2007 due to strong cost control and the Apollo litigation in
2007. The expenses for occupancy, telecommunications, travel and
office supplies and maintenance for the nine months ended September 30, 2008
were $96,724, $60,833, $58,095 and $10,043, respectively, as compared with
expenses of $92,527, $167,451, $202,073 and $33,511 for occupancy,
telecommunications, travel and office supplies and maintenance, respectively,
for the nine months ended September 30, 2007, all due to cost control efforts in
the second half of 2007 and the nine months ended September 30,
2008. Marketing expenses decreased by $208,411 to $65,680 for the
nine months ended September 30, 2008 from $274,090 for the nine months ended
September 30, 2007, primarily due to the elimination of marketing consultants
after June 30, 2007. Other general operating costs for the nine
months ended September 30, 2008, including insurance and accounting expenses,
amounted to $454,154, as compared with $447,189 for the nine months ended
September 30, 2007. As with payroll expense, allocation of general
and administrative expense to subsidiaries was ($116,969) and ($154,931) for the
nine months ended September 30, 2008 and 2007, respectively. These
allocations are eliminated in consolidation, but the amounts for DRV Capital and
First Performance are in discontinued operations rather than general and
administrative expense.
Terminated acquisition
costs. During the three months ended September 30, 2007, we
terminated the Creditors Interchange transaction. As a result, all
costs associated with the proposed acquisition were charged to terminated
acquisition costs in the amount of $959,811 on September 30, 2007.
Depreciation and amortization
expense. For the nine months ended September 30, 2008 and
2007, we recorded depreciation expense of $43,313 and $42,557,
respectively.
Interest income
(expense). We recorded interest income, interest expense and
interest expense – related parties of $190, ($104,509) and ($99,692) for the
nine months ended September 30, 2008, respectively, compared to interest income,
interest expense and interest expense – related parties of $41,637, ($3,135) and
($24,278), respectively, for the nine months ended September 30,
2007. Interest expense for the nine months ended September 30, 2008
includes interest accrued on our lines of credit, convertible debentures,
investor notes and bank loans.
Amortization of deferred debt
discount. Amortization expense of $661,663 was incurred for
the nine months ended September 30, 2008 for the amortization of the value of
the deferred debt discount associated with our lines of credit and short term
notes.
Liquidity
and Capital Resources
During
the nine months ended September 30, 2008, the largest items affecting operating
cash were the adjustments for non-cash stock based compensation and the
amortization of deferred debt discount, as well as the accrual of payables not
able to be paid due to insufficient cash on hand during the
period. For the nine months ended September 30, 2007, both non-cash
stock based compensation and the accrual of unpaid payables were also
significant adjustments to operating cash, as well as the expenses incurred
during the Creditors Interchange transaction under “Terminated acquisition
costs”.
Significantly
more financing activity occurred during the nine months ended September 30, 2008
because there was cash still on hand from the IPO during the nine months ended
September 30, 2007.
During
the nine months ended September 30, 2007, significant cash resources were used
for the purchase and operation of First Performance and the start-up and
operation of DRV Capital. Cash used for operating activities in
discontinued operations for the nine months ended September 30, 2008 related to
the operations of First Performance.
We have
historically raised funds through the sale of debt and equity
instruments. As of September 30, 2008, we have entered into four
lines of credit with related parties with current outstanding balances of
$1,198,623. Also as of September 30, 2008, we also issued notes to
unaffiliated investors for a total of $1,253,000 and obtained bank loans of
$250,000. In addition, subsequent to September 30, 2008, we have
received approximately $125,000 in cash proceeds from a loan and a small private
placement. Also, an officer has paid bills on behalf of us in the
amount of $184,180, as of September 30, 2008. Management has informed
these note holders that some or all of these loans would be re-paid at the next
significant funding that the Company receives.
On March
31, 2008, we entered into a private placement agreement with Harmonie
International LLC (“Harmonie”) for the sale of 2,966,102 shares of common stock
for cash proceeds of $7,000,000. Harmonie is also to receive a warrant to
purchase up to 3,707,627 of our common stock at an exercise price of $2.36 per
share. The warrant has a ten year exercise
period. On May 16, 2008, Harmonie requested an extension until
May 30, 2008 by which to complete the funding. Thereafter, Harmonie
requested an additional extension until June 20, 2008. Although the
Company declined to give Harmonie any additional formal extensions, the
agreement has not been terminated. Harmonie continues to confirm
their commitment to fund but has failed to do so, nor has it offered any proof
of funds nor provided a firm funding date. As of November 14, 2008,
we have received no funding from Harmonie and believes that it is very unlikely
to receive such funding. We intend to pursue legal remedies
shortly.
We are
actively pursuing additional debt/equity financing. We believe that
we will be successful in obtaining additional financing, however
no assurance can be provided that we will be able to do so. If we are
unable to raise sufficient additional funds, we will have to develop and
implement a plan to extend payables and reduce overhead until sufficient
additional capital is raised to support further operations. However,
there can be no assurance that our efforts will be successful. If we
are not able to raise adequate funding, we may have to seek bankruptcy
protection.
Critical
Accounting Policies and Estimates
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. These estimates and
assumptions are based on our management’s judgment and available information
and, consequently, actual results could be different from these
estimates.
Accounts
Receivable
The
Company extends credit to large and mid-size companies for collection
services. The Company has concentrations of credit risk as 100% of
the balance of accounts receivable at September 30, 2008 consists of only two
customers. At September 30, 2008, accounts receivable from continuing
activities from the two accounts amounted to approximately $11,880 (85%) and
$2,086 (15%), respectively. 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 collectibility and the allowance for doubtful accounts is adjusted
accordingly. Management determines collectibility based on their
experience and knowledge of the customers.
Stock-based
compensation
The
Company accounts for stock options and warrants issued under stock-based
compensation plans under the recognition and measurement principles of SFAS No.
123(R) (“Share Based Payment”). Total stock-based compensation
expense for the three months ended September 30, 2008 and 2007 amounted to
$367,326 and $354,821, respectively. Total stock-based compensation
expense for the nine months ended September 30, 2008 and 2007 amounted to
$2,048,106 and $2,323,069, respectively.
The fair
value of each option and warrant granted to employees and non-employees is
estimated as of the grant date using the Black-Scholes pricing
model. The estimated fair value of the options granted is recognized
as an expense over the requisite service period of the award, which is generally
the option vesting period. As of September 30, 2008, total
unrecognized compensation cost amounted to $50,116, all of which is expected to
be recognized in 2008 and 2009.
The
Company accounts for the expected life of share options in accordance with the
“simplified” method provisions of Securities and Exchange Commission Staff
Accounting Bulletin (“SAB”) No. 110 (December 2007), which enables the use of
the simplified method for “plain vanilla” share options as defined in SAB No.
107.
Charges
related to closure of First Performance
At June
30, 2008, due to the closure of First Performance, the following charges were
incurred and are reflected in the results of discontinued
operations:
Write-off of Fixed
Assets |
|
$ |
87,402 |
|
Write-off of
Intangibles |
|
|
176,545 |
|
Accrual of final
lease costs |
|
|
1,364,458 |
|
|
|
|
|
|
Total
charges |
|
$ |
1,628,405 |
|
Recent
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”) including an amendment of FASB
Statement No. 115. SFAS 159 permits companies to choose to measure certain
financial instruments and certain other items at fair value. The standard
requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings. The Company adopted SFAS
159 beginning in the first quarter of 2008, without material effect on the
Company’s consolidated financial position or results of operations.
In
February 2008, the FASB issued Staff Position No. 157-2, Effective Date of FASB
Statement No. 157 (“FSP 157-2”) that defers the effective date of applying the
provisions of SFAS 157 to the fair value measurement of non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (or at least annually),
until fiscal years beginning after November 15, 2008. The Company is
currently evaluating the effect that the adoption of FSP 157-2 will have on its
consolidated results of operations and financial condition, but does not expect
it to have a material impact.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
non-controlling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. Based on current conditions, the Company does not expect
the adoption of SFAS 161 to have a significant impact on its results of
operations or financial position.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement will not have
an impact on the Company’s financial statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises excluded from the
scope of Statement 60 or to some insurance contracts that seem similar to
financial guarantee insurance contracts issued by insurance enterprises (such as
mortgage guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance contracts that
are derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on the Company’s financial statements.
Statement
Relating to Forward-Looking Statements
This
report contains forward-looking statements that are based on our beliefs as well
as assumptions and information currently available to us. When used
in this report, the words “believe,” “expect,” “anticipate,” “estimate,”
“potential” and similar expressions are intended to identify forward-looking
statements. These statements are subject to risks,
uncertainties and assumptions, including, without limitation, the risks and
uncertainties concerning our recent research and development activities; the
risks and uncertainties concerning acceptance of our services and products, if
and when fully developed, by our potential customers; our present financial
condition and the risks and uncertainties concerning the availability of
additional capital as and when required; the risks and uncertainties concerning
the Limited License Agreement with Messrs. Brofman and Burchetta; the risks and
uncertainties concerning our dependence on our key executives; the risks and
uncertainties concerning technological changes and the competition for our
services and products; the risks and uncertainties concerning general economic
conditions; and the risks and uncertainties described in our Annual Report on
Form 10-KSB for the year ended December 31, 2007, filed on April 16, 2008, in
the section labeled “Risk Factors.” Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, or
projected. We caution you not to place undue reliance on any
forward-looking statements, all of which speak only as of the date of this
report.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
None
Item
4. Controls and Procedures
Disclosure Controls and
Procedures
We
evaluated the design and operation of our disclosure controls and procedures to
determine whether they are effective in ensuring that we disclose required
information in a timely manner and in accordance with the Securities Exchange
Act of 1934 (the “Exchange Act”) and the rules and regulations promulgated by
the SEC. Management, including our President and Chief Financial Officer and our
Chief Executive Officer, supervised and participated in such evaluation.
Management concluded, based on such review, that our disclosure controls and
procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), were not
effective as of the end of the period covered by this Quarterly Report on Form
10-Q. The ineffectiveness of these disclosure controls is due to the matters
described below in “Internal Control over Financial Reporting.”
Limitations on the
Effectiveness of Controls
We
believe that a control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control system are met,
and no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected. Our
disclosure controls and procedures are designed to provide a reasonable
assurance of achieving their objectives and our President and Chief Financial
Officer and Chief Executive Officer have concluded that such controls and
procedures are not effective at the "reasonable assurance" level. The
ineffectiveness of these disclosure controls is due to the matters described
below in “Internal Control over Financial Reporting.”
Internal Control over
Financial Reporting
The
Company’s independent registered public accounting firm has reported to our
audit committee certain matters involving internal controls that this firm
considered to be reportable conditions and a material weakness, under standards
established by the American Institute of Certified Public Accountants. The
reportable conditions and material weakness relate to a limited segregation of
duties at the Company. Segregation of duties within our company is
limited due to the small number of employees that are assigned to positions that
involve the processing of financial information. Specifically,
certain key financial accounting and reporting personnel had an expansive scope
of duties that allowed for the creation, review, approval and processing of
financial data without independent review and authorization for preparation of
consolidation schedules and resulting financial statements and related
disclosures. We did not maintain a sufficient depth of personnel with
an appropriate level of accounting knowledge, experience and training in the
selection and application of GAAP commensurate with financial reporting
requirements. Accordingly, we place undue reliance on the finance
team at corporate headquarters, specifically our President and Chief Financial
Officer. Accordingly, management has determined that this control deficiency
constitutes a material weakness. This material weakness could result
in material misstatements of significant accounts and disclosures that would
result in a material misstatement to our interim or annual consolidated
financial statements that would not be prevented or detected. In
addition, due to limited staffing, the Company is not always able to detect
minor errors or omissions in reporting.
Going
forward, management anticipates that additional staff will be necessary to
mitigate these weaknesses, as well as to implement other planned
improvements. Additional staff will enable us to document and apply
transactional and periodic controls procedures, permit a better review and
approval process and improve quality of financial reporting. However, the
potential addition of new staff is contingent on obtaining additional financing,
and there is no assurance that the Company will be able to do so.
Management
believes that its financial statements for the three and nine months ended
September 30, 2008 and 2007, fairly present, in all material respects, its
financial condition and results of operations. During the three and
nine months ended September 30, 2008, there were no changes to our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
CEO
and CFO Certifications
Appearing
as Exhibits 31.1 and 31.2 to this report are “Certifications” of the CEO and
CFO. The certifications are required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (the “Section 302 Certifications”).
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
Our First
Performance subsidiary settled an employment claim with a former employee for
approximately $25,000. Due to the closure of First Performance and
the cessation of revenue generating activities, settlement was never paid as
First Performance had no funds with which to effect settlement. The
claimant is attempting to enjoin Debt Resolve to get it to pay the claim, plus
damages related to the non-payment of the original settlement. With
damages and attorney’s fees, the claimant is attempting to compel satisfaction
for the adjusted amount of $110,000. This potential action would
occur in Florida.
The
Company has received complaints from several vendors relating to unpaid
bills. The total amount of bills subject to this litigation is
approximately $430,000. Judgment to enforce payment of these
obligations prior to the Company being able to generate adequate funding to
continue operations as well as pay these obligations would have a material
adverse effect on the Company’s ability to continue as a going
concern.
The
Company sent a demand letter to Compass Bank requesting $7 million as a result
of the failure of Harmonie International to complete funding of its stock
purchase. Compass had sent the Company a letter verifying that funds
were in transit. Compass filed a complaint in the United States
District Court for the Southern District of Texas seeking a declaratory judgment
that Compass is not liable for Harmonie’s failure to fund. In its
complaint, Compass admits fraud by a former employee in this
matter. The Company has engaged Texas counsel to defend this matter
and counterclaim for additional damages based on the decline in the Company’s
stock price as a result of Harmonie’s failure to fund based on Compass providing
proof of funds in transit.
From time
to time, the Company may be involved in various litigation in the ordinary
course of business. In the opinion of management, the ultimate disposition
of these matters will not have a material adverse effect on the Company’s
financial position or results of operations.
Item
1A. Risk Factors
Not
applicable
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
On
October 10, 2008, the Company completed a small private placement for net cash
proceeds of $25,000 for 100,000 shares of common stock and 125,000 warrants at
an exercise price of $0.25 per share and a five year exercise
period. Neither the shares nor warrants were registered
securities. The proceeds were used for general working capital
purposes.
Item
3. Defaults upon Senior Securities
An
unaffiliated investor loaned the Company a toal of $323,000 in December, 2007
and April, 2008. The loan has a provision requiring repayment upon the
Company raising an aggregate of $500,000 subsequent to the loan. The
Company reached this limit in September, 2008, causing a default with regard to
the loan. As of November 14, 2008, the loan has not bee repaid, and
the Company is in discussions with the lender to cure the default. As
a result of the default on this note, the cross-default provisions were
triggered on eight other notes of the Company.
Item
4. Submission of Matters to a Vote of Security Holders
None
Item
5. Other Information
None
Item
6. Exhibits and Filings on Form 8-K
31.1 Certification
of Chief Executive Officer required by Rule 13(a)-14(a).
31.2 Certification
of Chief Financial Officer required by Rule 13(a)-14(a).
32.1 Certifications
required by Rule 13(a)-14(b) and 18 U.S.C. Section 1350.
Filing
on Form 8-K dated January 7, 2008.
Filing
on Form 8-K dated January 14, 2008.
Filing
on Form 8-K dated January 29, 2008.
Filing on
Form 8-K dated January 30, 2008.
Filing on
Form 8-K dated April 4, 2008.
Filing on
Form 8-K dated May 16, 2008.
Filing on
Form 8-K dated May 30, 2008.
Filing on
Form 8-K dated June 10, 2008.
Filing on
Form 8-K dated June 23, 2008.
Filing on
Form 8-K dated August 8, 2008.
Filing on
Form 8-K/A dated August 20, 2008
Filing on
Form 8-K/A dated August 20, 3008
Filing on
Form 8-K/A dated October 1, 2008
Filing on
Form 8-K dated November 11, 2008
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated:
November 19, 2008 |
DEBT RESOLVE,
INC. |
|
|
|
|
|
|
By:
|
/s/
Kenneth h.
Montgomery |
|
|
|
Kenneth
H. Montgomery |
|
|
|
Chief
Executive Officer
(principal
executive officer)
|
|
|
|
|
|
|
By:
|
/s/
David M. Rainey |
|
|
|
David
M. Rainey |
|
|
|
President
and Chief Financial Officer
(principal
financial and accounting officer)
|
|
30