The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE 1 – BASIS AND BUSINESS PRESENTATION
Debt Resolve, Inc. (the "Company") was incorporated under the laws of the State of Delaware on April 21, 1997. The Company offers its service as a Software-as-a-Service (SaaS) model, enabling clients to introduce this collection or payment software option with no modifications to their existing collections computer systems. Its products capitalize on using the Internet as a tool for communication, resolution, settlement and payment of delinquent or defaulted consumer debt and as part of a complete accounts receivable management solution for consumer creditors.
In December 2014, the Company, jointly with LSH, LLC, organized Progress Advocates LLC, a Delaware limited liability company for the purpose to provide services in the student loan document preparation industry with ownership interests of 51% and 49% for the Company and LSH, LLC, respectively.
In February 2016, the Company, jointly with Patient Online Services, LLC, organized Payment Resolution Systems LLC, a Delaware limited liability company for the purpose of assisting Medical Groups and Hospitals in the online negotiation and settlement of delinquent accounts, with ownership interests of 51% and 49% for the Company and Patient Online Services, LLC, respectively.
In May 2016, the Company, jointly with Hutton Ventures LLC, organized Student Loan Care LLC, a Delaware limited liability company for the purpose of providing document preparation services for holders of Federal Direct Student Loans, with ownership interests of 51% and 49% for the Company and Hutton Ventures LLC, respectively.
The Company operates Payment Resolution Systems within Debt Resolve, Inc., whereas Progress Advocates LLC and Student Loan Care LLC operate as independent subsidiaries.
Basis of Presentation
These unaudited condensed financial statements have been prepared in accordance with the instructions to the Form 10-Q and Article 10 of Regulation S-X, and therefore, do not include all the information necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2016. The unaudited condensed financial statements should be read in conjunction with the consolidated December 31, 2015 financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC").
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation. The non-controlling interest represents the minority owners' share of its net operating results.
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the presentation of the accompanying unaudited condensed financial statements follows:
Restatement
During the preparation of its financial statements for the quarter ended September 30, 2016, the Company identified errors in the presentation of our Accounts Receivable reported as of December 31, 2015. Based on our reassessment of relevant accounting guidelines, we have corrected the error and characterized a portion of Accounts Receivable, as a long term asset, rather than current asset. The effect of these adjustments is a reclassification of $2,508,573 of reported accounts receivable as a long term asset. There was no change to any other asset or liability accounts. There was no effect on the Statements of Stockholders’ Deficiency, Operations or Cash Flows.
The following tables show the principal financial statement line items originally reported and restatement adjustments as of December 31, 2015:
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
Accounts receivable, current
|
|
$
|
3,463,161
|
|
|
$
|
(2,508,573
|
)
|
|
$
|
954,588
|
|
|
Accounts receivable, long term
|
|
|
-
|
|
|
|
2,508,573
|
|
|
|
2,508,573
|
|
The above accounts receivable is reported, net of an allowance for doubtful accounts of $600,000.
Revenue Recognition
In recognition of the principles expressed in Accounting Standards Codification subtopic 605-10, Revenue should not be recognized until it is realized or realizable and earned, and given the element of doubt associated with collectability of an agreed settlement on past due debt, the Company postpones recognition of all contingent revenue until the client receives payment from the debtor. As is required by SAB 104, revenues are considered to have been earned when the Company has substantially accomplished the agreed-upon deliverables to be entitled to payment by the client. For most current active clients, these deliverables consist of the successful collection of past due debts using the Company's system and/or, for clients under a flat fee arrangement, the successful availability of the Company's system to its customers.
Revenues for the preparation of student loan documentation are earned when the Company has substantially accomplished the agreed-upon deliverables to be entitled to payment by the client. For most current active clients, these deliverables consist of the completed, delivered and accepted student loan package by the Department of Education and subsequent yearly re-certifications to DoE. The Company may sell its products separately or in various bundles that include multiple elements such as initial fees, monitoring, re-certification, and other services.
The Company also earns revenue from collection agencies, healthcare providers and lenders that implemented our online system. The Company's current contracts provide for revenue based on a percentage of the amount of debt collected, a fee per settlement or through a flat monthly fee. Although other revenue models have been proposed, most revenue earned to date has been determined using these methods, and such revenue is recognized when the settlement amount of debt is collected by the client or at the beginning of the month for a flat fee. While the percent of debt collected will continue to be a revenue recognition method going forward, other payment models are also being offered to clients. Dependent upon the structure of future contracts, revenue may be derived from a combination of set up fees or flat monthly or annual fees with transaction fees upon debt settlement, fees per account loaded or fees per settlement.
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
Payment Resolution Systems, the Company's 51% owned subsidiary, works as an extended business office to medical groups around the U.S. Revenue is earned in this business by the online negotiations and collection of group's accounts receivable and paid via a service fee.
Revenues for set-up fees, percentage contingent collection fees, fixed settlement fees, monthly fees, etc. are accounted for as Multiple-Element Arrangements under ASC 605-10 which incorporates Accounting Standards Codification subtopic 605-25, Multiple-Element Arrangements ("ASC 605-25"). ASC 605-25 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets.
The Company defers any revenue for which the product or service has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. At September 30, 2016 and December 31, 2015, the Company had deferred revenues of $1,131,221 and $1,260,137, respectively
Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, revenues and expenses and certain disclosures. The most significant estimates are those used in determination of the carrying value of accounts receivable, revenue recognition, derivative liabilities and stock compensation. Accordingly, actual results could differ from those estimates.
Concentrations and Credit Risk
The Company extends credit to large, mid-size and small companies for the use of its software solutions along with customers in the student loan industry. At September 30, 2016 and December 31, 2015, the Company did not have an accounts receivable concentration and no sales concentrations for the three and nine months ended September 30, 2016 and 2015.
Net Loss per Common Share, basic and diluted
The Company computes earnings (loss) per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share ("ASC 260-10"). Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the "treasury stock" and/or "if converted" methods as applicable.
The computation of basic and diluted income (loss) per share as of September 30, 2016 excludes potentially dilutive securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during the period.
Potentially dilutive securities as of September 30, 2016 and 2015 are as follows:
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
Convertible notes payable
|
|
|
63,978,077
|
|
|
|
42,555,000
|
|
|
Preferred stock
|
|
|
-
|
|
|
|
6,425,000
|
|
|
Options to purchase common stock
|
|
|
18,742,434
|
|
|
|
15,342,434
|
|
|
Warrants to purchase common stock
|
|
|
104,575,000
|
|
|
|
73,738,000
|
|
|
Warrants to purchase Series A preferred stock
|
|
|
25,645,000
|
|
|
|
19,885,000
|
|
|
Totals
|
|
|
212,940,511
|
|
|
|
157,945,434
|
|
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
Reclassification
Certain reclassifications have been made to prior period's data to conform to the current period's presentation. These reclassifications had no effect on reported income or losses.
Stock-based compensation
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Stock-based compensation expense is recorded by the Company in the same expense classifications in the statements of operations, as if such amounts were paid in cash. As of September 30, 2016, there were outstanding stock options to purchase 18,742,434 shares of common stock, 13,592,434 shares of which were vested.
Defined Contribution (401k) Plan
The Company maintains a defined contribution (401k) plan for our employees. The plan provides for a company match in the amount of 100% of the first 3% of pre-tax salary contributed and 50% of the next 3% of pre-tax salary contributed. Due to the severe cash limitations that the Company has experienced, the match was suspended from mid-2008 to the present and will only be re-instated when business conditions warrant.
Derivative Liability
The Company accounts for derivatives in accordance with ASC 815, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value, regardless of hedging relationship designation. Accounting for changes in fair value of the derivative instruments depends on whether the derivatives qualify as hedge relationships and the types of relationships designated are based on the exposures hedged. At September 30, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges. See Note 10 for discussion of the Company's derivative liabilities.
Recent accounting pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 3 – LIQUIDITY
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying unaudited condensed consolidated financial statements, the Company incurred a net loss of $1,587,953 for the nine months ended September 30, 2016. Additionally, the Company has negative working capital (total current liabilities exceeded total current assets) of $11,267,418 as of September 30, 2016. These factors among others raise substantial doubt about the Company's ability to continue as a going concern.
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
The Company has undertaken further steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond to address its lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof. However, there can be no assurance that the Company can successfully accomplish these steps and or business plans, and it is uncertain that the Company will achieve a profitable level of operations and be able to obtain additional financing.
The Company's continued existence is dependent upon management's ability to develop profitable operations and resolve its liquidity problems. There can be no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all. In the event that the Company is unable to continue as a going concern, it may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
NOTE 4 – ACCOUNTS RECEIVABLE AND DUE TO FACTOR
Accounts receivable are receivables generated from sales to customers and progress billings on performance type contracts. Amounts included in accounts receivable are deemed to be collectible within the Company's operating cycle. Management provides an allowance for doubtful accounts based on the Company's historical losses, specific customer circumstances, and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables when all attempts to collect have been exhausted and the prospects for recovery are remote. As of September 30, 2016 and December 31, 2015, the Company's accounts receivable was $4,444,177 and $3,463,161, net of allowance for doubtful accounts of $1,086,473 and $600,000, respectively.
The Company's majority owned subsidiaries, Progress Advocates LLC and Student Loan Care, LLC entered into a factoring agreements which had certain provisions that factor advances were based on either a non-recourse and recourse basis. During the first quarter of 2016, the Company agreed to modify the terms of the outstanding factoring agreement whereby the outstanding advances which were originally based upon a non-recourse basis will be reclassified to a full recourse advances. Accordingly, the Company reclassified the outstanding advances of $1,128,701 to a full recourse liability to the factor, increased the carrying value of accounts receivable by $1,128,701, net of an allowance for doubtful accounts of $212,388.
The recourse agreements provide for the Company to receive an advance of between 30% - 96% of any accounts receivable that it factors with 62% - 0% held in reserve. The average amount received from these recourse agreements was 50.9% and the average amount reserved was 42.1%. The factoring agreements also provide for discount fees of 4% - 8% of the face value of any accounts receivable factored, plus additional charges for other transaction fees. The agreements may be terminated by either party at any time and will continue unless either party formally cancels.
The Company's majority owned subsidiary, Student Loan Care LLC, entered into a similar recourse factoring agreement during the second quarter of 2016. This agreement provides for the Company to receive an advance of between 45% - 90% of any accounts receivable that it factors with 45% - 5% held in reserve. The average amount received was 64% and the average amount reserved was 30%. The factoring agreement also provides for discount fees of 3% - 6% of the face value of any accounts receivable factored, plus additional charges for other transaction fees. The agreement may be terminated by either party at any time and will continue unless either party formally cancels. As of September 30, 2016 and December 31, 2015, the Company's outstanding obligation under the factoring agreements were $3,666,931 and $2,442,935, respectively.
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of September 30, 2016 and December 31, 2015 are comprised of the following:
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Accounts payable
|
|
$
|
742,521
|
|
|
$
|
740,881
|
|
|
Accrued interest
|
|
|
2,293,185
|
|
|
|
1,912,436
|
|
|
Payroll and related accruals, net of advance to employees
|
|
|
1,043,718
|
|
|
|
827,263
|
|
|
Total
|
|
$
|
4,079,424
|
|
|
$
|
3,480,580
|
|
On April 19, 2016, the Company entered into a settlement agreement with the former Chief Executive officer whereby the Company issued a convertible note for $75,000 and 2,225,000 warrants to purchase the Company's common stock at $0.10 per share for three years as part settlement of the outstanding salary due of $153,750. The remaining balance is to be paid monthly installments of $2,500 to the extent of available cash flows as determined by the Board of Directors. (See Note 7)
NOTE 6 – NOTES PAYABLE
As of September 30, 2016 and December 31, 2015, short term notes are as follows:
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Note payable, dated June 1, 2015
|
|
|
41,667
|
|
|
|
45,765
|
|
|
Note payable, dated July 2, 2015
|
|
|
12,500
|
|
|
|
12,500
|
|
|
Note payable, dated August 28, 2015
|
|
|
32,967
|
|
|
|
50,000
|
|
|
Note payable, dated December 17, 2015
|
|
|
50,000
|
|
|
|
50,000
|
|
|
Note payable, dated January 13, 2016
|
|
|
50,000
|
|
|
|
-
|
|
|
Note payable, dated February 16, 2016
|
|
|
25,000
|
|
|
|
-
|
|
|
Note payable, dated July 14, 2016
|
|
|
47,000
|
|
|
|
-
|
|
|
Equitable promissory note, dated March 1, 2016
|
|
|
62,468
|
|
|
|
-
|
|
|
Investor notes payable, 12% per annum
|
|
|
377,867
|
|
|
|
377,867
|
|
|
Total
|
|
|
699,469
|
|
|
|
536,132
|
|
|
Less current portion
|
|
|
699,469
|
|
|
|
536,132
|
|
|
Long term portion
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
On January 13, 2016, the Company issued an unsecured note payable for $50,000 due January 1, 2017 with interest at 12% per annum, paid monthly beginning May 2016 and principal payments beginning November 2016. The outstanding balance as of September 30, 2016 is $50,000.
On February 16, 2016, the Company issued an unsecured note payable for $25,000 due February 1, 2017 with interest at 12% per annum, paid monthly beginning June 2016 and principal payments beginning December 2016. The outstanding balance as of September 30, 2016 is $25,000.
On March 1, 2016. The Company issued a promissory note payable for $89,240, with interest at 6% per annum, with monthly payments beginning April 15, 2016 in the amount no less than of 5% of the principal balance remaining due until the amount due plus all accrued interest is paid in full. The outstanding balance as of September 30, 2016 is $62,468.
On July 14, 2016. The Company issued a promissory note payable for $47,000, with interest at 12% per annum, with monthly interest payments beginning November 14, 2016 and principal repayments beginning May 14, 2017. The outstanding balance as of September 30, 2016 is $47,000.
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE 7 – NOTES PAYABLE, RELATED PARTIES
As of September 30, 2016 and December 31, 2015, notes payable, related parties are as follows:
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Convertible note payable dated July 22, 2010, in default
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
|
Note payable dated January 14, 2011, in default
|
|
|
6,000
|
|
|
|
6,000
|
|
|
Note payable dated April 14, 2011, in default
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Note payable dated April 15, 2011, in default
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Note payable dated January 18, 2012, in default
|
|
|
5,000
|
|
|
|
5,000
|
|
|
Note payable dated January 20, 2012, in default
|
|
|
5,000
|
|
|
|
5,000
|
|
|
Note payable dated May 21, 2012, in default
|
|
|
15,000
|
|
|
|
15,000
|
|
|
Note payable dated May 30, 2012, in default
|
|
|
20,000
|
|
|
|
20,000
|
|
|
Series A Convertible note, in default
|
|
|
20,000
|
|
|
|
20,000
|
|
|
Convertible notes payable, dated July 6, 2012, in default
|
|
|
30,000
|
|
|
|
30,000
|
|
|
Convertible note payable, dated July 10, 2012, in default
|
|
|
15,000
|
|
|
|
15,000
|
|
|
Note payable, dated September 14, 2012, in default
|
|
|
6,000
|
|
|
|
6,000
|
|
|
Convertible note payable, dated September 7, 2012, in default
|
|
|
43,000
|
|
|
|
43,000
|
|
|
Convertible note payable, dated October 4, 2012, in default
|
|
|
50,000
|
|
|
|
50,000
|
|
|
Convertible note payable, dated September 5, 2013, in default
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Convertible note payable, dated September 16, 2013, in default
|
|
|
3,000
|
|
|
|
3,000
|
|
|
Note payable dated September 17, 2013, in default
|
|
|
5,221
|
|
|
|
5,221
|
|
|
Note payable, dated October 24, 2013
|
|
|
30,000
|
|
|
|
30,000
|
|
|
Note payable, dated November 7, 2013
|
|
|
40,000
|
|
|
|
40,000
|
|
|
Note payable. dated December 6, 2013
|
|
|
5,000
|
|
|
|
5,000
|
|
|
Note payable, dated December 18, 2013
|
|
|
30,000
|
|
|
|
30,000
|
|
|
Note payable, dated January 9, 2014, in default
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Convertible note payable, dated February 28, 2014, net of unamortized debt discount of $-0- and $2,064, respectively, in default
|
|
|
200,000
|
|
|
|
197,936
|
|
|
Convertible note payable, dated April 24, 2014, net of unamortized debt discount of $-0- and $775, respectively
|
|
|
25,000
|
|
|
|
24,225
|
|
|
Convertible note payable, dated November 7, 2014, net of unamortized debt discount of $211 and $1,733, respectively
|
|
|
24,789
|
|
|
|
23,267
|
|
|
Convertible notes payable, dated December 4, 2014, net of unamortized debt discount of $294 and $1,532, respectively
|
|
|
49,706
|
|
|
|
48,468
|
|
|
Note payable, dated January 25, 2015
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Convertible note payable, dated March 3, 2015, net of unamortized debt discount of $972 and $2,701, respectively
|
|
|
49,028
|
|
|
|
47,299
|
|
|
Convertible note payable, dated May 12, 2015, net of unamortized debt discount of $337 and $750, respectively
|
|
|
19,663
|
|
|
|
19,250
|
|
|
Note payable, dated June 18, 2015
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Note payable, dated July 13, 2015
|
|
|
12,500
|
|
|
|
12,500
|
|
|
Note payable, dated August 5, 2015, in default
|
|
|
25,000
|
|
|
|
25,000
|
|
|
Note payable, dated August 19, 2015, in default
|
|
|
50,000
|
|
|
|
50,000
|
|
|
Convertible note payable, dated May 15, 2016, net of unamortized debt discount of $60,822
|
|
|
14,178
|
|
|
|
-
|
|
|
Note payable, dated June 9, 2016
|
|
|
15,000
|
|
|
|
-
|
|
|
Note payable, dated June 22, 2016
|
|
|
30,000
|
|
|
|
-
|
|
|
Note payable, dated June 30, 2016
|
|
|
25,000
|
|
|
|
-
|
|
|
Note payable, dated September 28, 2016
|
|
|
125,000
|
|
|
|
|
|
|
Total
|
|
|
1,143,085
|
|
|
|
926,166
|
|
|
Less current portion
|
|
|
(783,907
|
)
|
|
|
(789,616
|
)
|
|
Long term portion
|
|
$
|
359,178
|
|
|
$
|
136,550
|
|
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
On May 15, 2016, the Company issued a $75,000 secured convertible note that matures on May 15, 2018 in settlement of accrued compensation. The note bears interest at a rate of 10% and can be convertible into shares of the Company's common stock, at a conversion rate of $0.02 per share. Interest will also be converted into common stock at the conversion rate of $0.02 per share. In connection with the issuance of the convertible note, the Company issued an aggregate of 2,225,000 warrants to purchase the Company's common stock at $0.10 per share over three years.
The Company has identified the embedded derivatives related to the convertible note dated May 15, 2016 (See Note 10). These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent reporting date.
At inception of the May 15, 2016 note, the Company determined the aggregate fair value of $73,697 of embedded derivatives. The fair value of the embedded derivatives was determined using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 336.12%, (3) weighted average risk-free interest rate of 0.55%, (4) expected life from 2 years, and (5) estimated fair value of the Company's common stock of $0.02 per share. The determined fair value of the debt derivatives of $73,697 was charged as a debt discount of the note. In addition, the Company recognized the value attributable to the warrants, up to the remaining net proceeds of $1,303 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 3 years, a risk free interest rate of 0.91%, a dividend yield of 0%, and volatility of 336.12%. The debt discount attributed to the value of the warrants and conversion feature issued is amortized over the note's maturity period (two years) as interest expense.
On June 9, 2016, a stockholder loaned $15,000 (unsecured) to the Company due June 9, 2017 with interest at 12% per annum, paid monthly beginning October 2016 and principal payments beginning April 2017.
On June 22, 2016, a stockholder and board member loaned $30,000 (unsecured) to the Company due June 22, 2017 with interest at 12% per annum, paid monthly beginning October 2016 and principal payments beginning April 2017.
On June 30, 2016, a stockholder and board member loaned $25,000 (unsecured) to the Company due June 30, 2017 with interest at 12% per annum, paid monthly beginning October 2016 and principal payments beginning April 2017.
On September 28, 2016, a stockholder and board member loaned $200,000 (unsecured) to the Company due September 28, 2018 (of which $75,000 has been repaid) with interest at the lowest permissible interest rate, due at maturity.
For the three and nine months ended September 30, 2016, the Company amortized $11,098 and $21,919 of debt discount to operations as interest expense. For the three and nine months ended September 30, 2015, the Company amortized $5,484 and $15,484 of debt discount to operations as interest expense.
Total unpaid accrued interest on the notes payable to related parties as of September 30, 2016 and December 31, 2015 was $310,957 and $233,856, respectively. During the nine months ended September 30, 2016 and 2015, the Company recorded interest expense of $77,101 and $79,088, respectively, in connection with the notes payable to related parties.
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE 8 – LINE OF CREDIT- RELATED PARTY
On January 25, 2015, the Company issued an unsecured promissory note to certain members of the Company's board of directors who provided the Company a line of credit up to $400,000 for working capital over a term of four years with an annualized interest rate of 5.25%. The promissory note is due 30 days upon written demand however, the Company is obligated to make monthly payments of principal and interest necessary to meet the minimal monthly principal and interest payments required by the bank on loans the lenders obtained to provide the financing. As of September 30, 2016 and December 31, 2015, the outstanding balance on this loan was $333,336 and 397,893, respectively.
On September 24, 2009, the Company entered into an unsecured short term loan with a stockholder for $150,000 to be used to discharge the bridge loans of another investor. Borrowings under the loan bear interest at 12% per annum, with interest accrued and payable on maturity. The Note was due on November 24, 2009 and is still outstanding. In conjunction with this line of credit, the Company also issued a warrant to purchase 150,000 shares of common stock at an exercise price of $0.15 per share with an expiration date of September 24, 2014. On April 6, 2010, a partial repayment of $25,000 of principal was paid. Also, as a result of the delinquent repayment of the note, a penalty of $69,000 was incurred on April 15, 2010. On August 17, 2010, a partial payment of $50,000 of principal was made on the line of credit. Unpaid accrued interest on this loan as of September 30, 2016 and December 31, 2015 was $132,842 and $119,239, respectively.
As of September 30, 2016 and December 31, 2015, the outstanding balance on this loan was $151,000. Since the loan matured on November 24, 2009, it is currently in default. During the nine months ended September 30, 2016 and 2015, the Company recorded $13,602 and $13,553, respectively, as interest expense.
NOTE 9 – CONVERTIBLE NOTES
Convertible notes of non-related party investors are comprised of the following:
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
Series A Convertible Notes
|
|
$
|
817,000
|
|
|
$
|
817,000
|
|
|
Series B Convertible Notes
|
|
|
225,000
|
|
|
|
225,000
|
|
|
Series C Convertible Notes
|
|
|
245,000
|
|
|
|
245,000
|
|
|
Series D Convertible Notes
|
|
|
21,000
|
|
|
|
21,000
|
|
|
Bridge 2014 Convertible Notes, net of unamortized debt discount of $1,093 and $23,410, respectively
|
|
|
748,907
|
|
|
|
726,590
|
|
|
Bridge 2015 Convertible Notes, net of unamortized debt discount of $39,137 and $73,244, respectively
|
|
|
285,863
|
|
|
|
251,756
|
|
|
Bridge 2016 Convertible Notes, net of unamortized debt discount of $10,945
|
|
|
61,055
|
|
|
|
-
|
|
|
Bridge 2 (2016) Convertible Notes, net of unamortized debt discount of $172,767
|
|
|
52,233
|
|
|
|
-
|
|
|
Convertible promissory notes, net of unamortized debt discount of $47,466
|
|
|
72,534
|
|
|
|
-
|
|
|
Total
|
|
|
2,528,592
|
|
|
|
2,286,346
|
|
|
Less: Current portion
|
|
|
(1,672,231
|
)
|
|
|
(2,034,590
|
)
|
|
Long term portion
|
|
$
|
856,361
|
|
|
$
|
251,756
|
|
In 2016, the Company issued an aggregate of $72,000 in secured convertible notes that mature two years from the date of issuance (from January 2018 through February 2018). The notes bear interest at a rate of 10% and can be convertible into shares of the Company's common stock, at a conversion rate of $0.05 per share. Interest will also be converted into common stock at the conversion rate of $0.05 per share. In connection with the issuance of the convertible notes, the Company issued an aggregate of 250,000 warrants to purchase the Company's common stock at $0.15 per share over three years.
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
On July 14, 2016, the Company issued a $25,000 a unsecured convertible note that mature two years from the date of issuance. The note bears interest at a rate of 10% and can be convertible into shares of the Company's common stock, at a conversion rate of $0.02 per share. Interest will also be converted into common stock at the conversion rate of $0.02 per share. In connection with the issuance of the convertible notes, the Company issued an aggregate of 750,000 warrants to purchase the Company's common stock at $0.10 per share over three years.
In 2016, the Company issued an aggregate of $120,000 in unsecured convertible notes that mature one year from the date of issuance (from February 2017 through September 2017) for services rendered. The notes bear interest at a rate of 10% and can be convertible into shares of the Company's common stock, at a rate of $0.02 per share (as amended). Interest will also be converted into common stock at the conversion rate of $0.02 per share. In addition, until amended on August 17, 2016, if the Company issues any of its common stock or any security convertible into its common stock at an exercise or conversion price lower than the stated conversion price, then the stated conversion price is reduced to the lower conversion price.
After February 1, 2016, the Company issued an aggregate of $200,000 in secured convertible notes that mature two years from the date of issuance (from January 2018 through June 2018). The notes bear interest at a rate of 10% and can be convertible into shares of the Company's common stock, at a conversion rate of $0.02 per share. Interest will also be converted into common stock at the conversion rate of $0.02 per share. In connection with the issuance of the convertible notes, the Company issued an aggregate of 6,000,000 warrants to purchase the Company's common stock at $0.10 per share over three years.
Until February 1, 2016 and in accordance with ASC 470-20, the Company recognized the value attributable to the warrants and the conversion feature in the amount of $7,124 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 3 years, an average risk free interest rate of 1.25%, a dividend yield of 0%, and volatility of 356.55%. The debt discount attributed to the value of the warrants and conversion feature issued is amortized over the note's maturity period (two years) as interest expense.
After February 1, 2016 to August 17, 2016, the Company has identified the embedded derivatives related to the notes issued after January 31, 2016. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent reporting date.
At inception of the post January 2016 notes through August 17, 2016, the Company determined the aggregate fair value of $358,222 of embedded derivatives. The fair value of the embedded derivatives was determined using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility from 323.14% to 348.27%, (3) weighted average risk-free interest rate from of 0.40% to 0.76%, (4) expected life from 1 to 2 years, and (5) estimated fair value of the Company's common stock of $0.01 to $0.02 per share. The determined fair value of the debt derivatives of $358,222 was charged as a debt discount of the note. In addition, the Company recognized the value attributable to the warrants, up to the remaining net proceeds of $8,854 to additional paid in capital and a discount against the notes. The Company valued the warrants in accordance with ASC 470-20 using the Black-Scholes pricing model and the following assumptions: contractual terms of 3 years, a risk free interest rate of 0.87% to 0.92%, a dividend yield of 0%, and volatility of 330.45% to 348.10%. The debt discount attributed to the value of the warrants and conversion feature issued is amortized over the note's maturity period (two years) as interest expense.
Certain convertible note holders, representing an aggregate of $819,500 of these notes, entered into agreements in in May and June 2016 whereby their obligations were extended from May 2018 through September 2018. The terms of the agreement included extension of previously issued warrants in connection with the debt by two years and reducing the exercise price from $0.10-$0.15 per share to $0.65-$0.10 per share to certain note holders. All other terms (including any amendments or earlier extensions) of the notes remain the same.
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
The determined change in fair value of the extended and repriced warrants was determined using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 322.74% to 348.75%, (3) weighted average risk-free interest rate of 0.43% to 0.62%, (4) expected life from 0.65 to 1.04 years, and (5) estimated fair value of the Company's common stock of $0.014 to 0.032 per share. The determined fair value of the change in warrants of $37,447 and change in conversion rates of $34,145 was charged to current period interest.
For the three and nine months ended September 30, 2016, the Company amortized $58,447 and $130,635 of debt discount to current period operations as interest expense. For the three and nine months ended September 30, 2015, the Company amortized $18,603 and $50,581 of debt discount to current period operations as interest expense.
NOTE 10 – DERIVATIVE LIABILITIES
As described in Note 9, the Company has identified the embedded derivatives related to the notes issued after January 31, 2016 through August 17, 2016. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the Notes and to fair value as of each subsequent reporting date.
The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price of the underlying common stock of the Company.
On August 17, 2016, the Company modified the previously issued notes eliminating the embedded derivative. The Company determined the aggregate fair value of $327,905 of embedded derivatives at the date of modification. The fair value of the embedded derivatives was determined using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 346.44%, (3) weighted average risk-free interest rate from of 0.46% to 0.74%, (4) expected life from 0.46 to 1.91 years, and (5) estimated fair value of the Company's common stock of $0.0175 per share. The Company reclassified the determined fair value of the derivative of $327,905 from liability to equity on August 17, 2016.
At September 30, 2016, the Company did not have any level 3 assets or liabilities.
As of September 30, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges.
The following table provides a summary of changes in fair value of the Company's Level 3 financial liabilities as of September 30, 2016:
|
|
|
Derivative
Liability
|
|
|
Balance, December 31, 2015
|
|
$
|
-
|
|
|
Total (gains) losses
|
|
|
|
|
|
Transfers in of Level 3 upon issuance of convertible notes payable
|
|
|
358,222
|
|
|
Transfers out of Level 3 upon debt modification
|
|
|
(327,905
|
)
|
|
Mark-to-market at September 30, 2016:
|
|
|
(30,317
|
)
|
|
Balance, September 30, 2016
|
|
$
|
-0-
|
|
|
Net Gain for the period included in earnings relating to the liabilities held at September 30, 2016
|
|
$
|
30,317
|
|
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
NOTE 11 – STOCKHOLDERS' EQUITY
Preferred Stock
At September 30, 2016 and December 31, 2015, the Company has authorized 10,000,000 shares of Series A convertible preferred stock, par value $0.001, of which none are issued and outstanding as of September 30, 2016 and December 31, 2015. The Series A convertible preferred stock which has rank senior to common and all other preferred stock of the corporation and equal or junior to any preferred stock that may be issued in regard to liquidation; not entitled to dividends and is convertible, at the holders' option, at 10 shares of common stock for each share of Series A preferred stock.
Common stock
At September 30, 2016 and December 31, 2015, the Company has authorized 500,000,000 shares of common stock, par value $0.001, of which 115,277,206 and 104,612,082 are issued and outstanding as of September 30, 2016 and December 31, 2015, respectively.
During the nine months ended September 30, 2016, the Company issued an aggregate of 665,124 shares of its common stock for services valued at $11,973.
During the nine months ended September 30, 2016, the Company issued 5,000,000 shares of common stock as officer compensation valued at $100,000.
During the nine months ended September 30, 2016, the Company issued 5,000,000 shares of common stock as compensation to the non-controlling interest parties of Student Loan Care LLC valued at $100,000
NOTE 12 – WARRANTS AND OPTIONS
Common stock warrants
The following table summarizes warrants outstanding and related prices for the shares of the Company's common stock issued to shareholders at September 30, 2016:
|
Exercise Price
|
|
Number
Outstanding
|
|
|
Warrants Outstanding
Weighted Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise price
|
|
|
Number
Exercisable
|
|
|
Warrants
Exercisable
Weighted
Average
Exercise Price
|
|
|
$0.01 to 0.10
|
|
|
84,150,000
|
|
|
|
3.87
|
|
|
$
|
0.08
|
|
|
|
54,150,000
|
|
|
$
|
0.10
|
|
|
0.11 to 0.20
|
|
|
10,225,000
|
|
|
|
1.33
|
|
|
|
0.15
|
|
|
|
10,225,000
|
|
|
|
0.15
|
|
|
0.21 to 0.30
|
|
|
10,200,000
|
|
|
|
0.49
|
|
|
|
0.25
|
|
|
|
10,200,000
|
|
|
|
0.25
|
|
|
Total
|
|
|
104,575,000
|
|
|
|
3.29
|
|
|
$
|
0.11
|
|
|
|
74,575,000
|
|
|
$
|
0.13
|
|
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
Transactions involving the Company's warrant issuance are summarized as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average Price
Per Share
|
|
|
Outstanding at December 31, 2015
|
|
|
72,385,000
|
|
|
|
0.15
|
|
|
Issued
|
|
|
39,300,000
|
|
|
|
0.06
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(7,110,000
|
)
|
|
|
(0.25
|
)
|
|
Outstanding at September 30, 2016
|
|
|
104,575,000
|
|
|
$
|
0.11
|
|
In conjunction with the issuance of convertible notes, during the nine months ended September 30, 2016, the Company issued warrants to purchase 250,000 and 8,975,000 shares of common stock with an exercise price of $0.15 and $0.10 per share expiring three years from the date of issuance, respectively. Please see Note 9.
During the nine months ended September 30, 2016, the Company issued 75,000 common stock warrants in connection with services provided. The warrants are exercisable for three years from the date of issuance at an exercise price of $0.15 per common share. The warrants were valued using the Black Sholes option pricing method with the following assumptions: dividend yield $-0-, volatility of 338.33%, risk free rate of 1.11% and expected life of 3.00 years. The determined estimated fair value of $1,860 was charged to operations during the nine months ended September 30 2016.
During the nine months ended September 30, 2016, the Company extended the life of previously issued warrants to purchase 6,250,000 shares of common stock by two years and reduced the exercise price from $0.15 per share to $0.10 per share in connection with the note extensions. Please see Note 9.
In connection with entering into the Student Loan Care LLC joint venture with Hutton Ventures, LLC, the Company issued to Hutton Ventures LLC three five-year warrants to purchase an aggregate of 30,000,000 shares of common stock of the Company at an exercise price of $0.05 per share. The first warrant for 5,000,000 shares of Debt Resolve common stock vests and becomes exercisable upon the achievement by Student Loan Care of specific increasing revenue goals. The second warrant for 20,000,000 shares of Debt Resolve common stock vests and becomes exercisable when Student Loan Care achieves specific cumulative "operating income" goals. The third warrant for 5,000,000 shares of Debt Resolve common stock vests and becomes exercisable upon the achievement by Student Loan Care and affiliates of revenue for the year ending December 31, 2018 equal to or greater than 75% of Debt Resolve's total revenue for the year ending December 31, 2018.
Preferred stock warrants
The following table summarizes warrants outstanding and related prices for the shares of the Company's Series A convertible preferred stock issued at September 30, 2016:
|
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Warrants Outstanding
Weighted Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise price
|
|
|
Number
Exercisable
|
|
|
Warrants
Exercisable
Weighted
Average
Exercise Price
|
|
|
$0.50
|
|
|
|
2,120,000
|
|
|
|
3.30
|
|
|
$
|
0.50
|
|
|
|
1,120,000
|
|
|
$
|
0.50
|
|
|
1.00
|
|
|
|
71,000
|
|
|
|
0.97
|
|
|
|
1.00
|
|
|
|
71,000
|
|
|
|
1.00
|
|
|
1.50
|
|
|
|
373,500
|
|
|
|
1.14
|
|
|
|
1.50
|
|
|
|
373,500
|
|
|
|
1.50
|
|
|
Total
|
|
|
|
2,564,500
|
|
|
|
2.92
|
|
|
$
|
0.65
|
|
|
|
1,564,500
|
|
|
$
|
0.76
|
|
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
Transactions involving the Company's warrant issuance are summarized as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average Price
Per Share
|
|
|
Outstanding at December 31, 2015
|
|
|
2,524,500
|
|
|
|
0.65
|
|
|
Issued
|
|
|
40,000
|
|
|
|
1.50
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
2,564,500
|
|
|
$
|
0.65
|
|
During the nine months ended September 30, 2016, the Company issued 40,000 Series A convertible preferred stock warrants in connection with services provided. The warrants are exercisable for three years from the date of issuance at an exercise prices of $1.50 per preferred share. The warrants were valued using the Black Sholes option pricing method with the following assumptions: dividend yield $-0-, volatility of underlying common stock of 343.24%, risk free rate of 0.88% and expected life of 3.00 years. The determined estimated fair value of $6,346 was charged to operations during the nine months ended September 30, 2016.
Options
The following table summarizes options outstanding and related prices for the shares of the Company's common stock issued at September 30, 2016:
|
Exercise Price
|
|
|
Number
Outstanding
|
|
|
Option Outstanding Options Average Remaining Contractual Life (years)
|
|
|
Weighted Average
Exercise price
|
|
|
Number
Exercisable
|
|
|
Options Exercisable Weighted Average
Exercise price
|
|
|
$0.015
|
|
|
|
7,000,000
|
|
|
|
4.65
|
|
|
$
|
0.015
|
|
|
|
2,000,000
|
|
|
$
|
0.015
|
|
|
0.02
|
|
|
|
400,000
|
|
|
|
6.25
|
|
|
|
0.02
|
|
|
|
250,000
|
|
|
|
0.02
|
|
|
0.025
|
|
|
|
250,000
|
|
|
|
5.90
|
|
|
|
0.025
|
|
|
|
250,000
|
|
|
|
0.025
|
|
|
0.06
|
|
|
|
3,000,000
|
|
|
|
1.67
|
|
|
|
0.06
|
|
|
|
3,000,000
|
|
|
|
0.06
|
|
|
0.09
|
|
|
|
250,000
|
|
|
|
2.18
|
|
|
|
0.09
|
|
|
|
250,000
|
|
|
|
0.09
|
|
|
0.095
|
|
|
|
500,000
|
|
|
|
2.30
|
|
|
|
0.095
|
|
|
|
500,000
|
|
|
|
0.095
|
|
|
0.10
|
|
|
|
650,000
|
|
|
|
1.44
|
|
|
|
0.10
|
|
|
|
650,000
|
|
|
|
0.10
|
|
|
0.13
|
|
|
|
500,000
|
|
|
|
0.59
|
|
|
|
0.13
|
|
|
|
500,000
|
|
|
|
0.13
|
|
|
0.17
|
|
|
|
4,500,000
|
|
|
|
0.52
|
|
|
|
0.17
|
|
|
|
4,500,000
|
|
|
|
0.17
|
|
|
0.22
|
|
|
|
175,000
|
|
|
|
0.50
|
|
|
|
0.22
|
|
|
|
175,000
|
|
|
|
0.22
|
|
|
5.00
|
|
|
|
1,517,434
|
|
|
|
0.05
|
|
|
|
5.00
|
|
|
|
1,517,434
|
|
|
|
5.00
|
|
|
Total
|
|
|
|
18,742,434
|
|
|
|
2.65
|
|
|
$
|
0.50
|
|
|
|
13,592,434
|
|
|
$
|
0.65
|
|
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
Transactions involving the Company's option issuance are summarized as follows:
|
|
|
Number of
Shares
|
|
|
Weighted
Average Price
Per Share
|
|
|
Outstanding at December 31, 2015
|
|
|
15,592,434
|
|
|
|
0.67
|
|
|
Issued
|
|
|
4,150,000
|
|
|
|
0.02
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
Expired
|
|
|
(1,000,000
|
)
|
|
|
0.19
|
|
|
Outstanding at September 30, 2016
|
|
|
18,742,434
|
|
|
$
|
0.50
|
|
In February 2016, the Board granted stock options to purchase 2,000,000 shares of common stock of the Company at exercise price of $0.015 with exercise period of seven years to an officer, vesting 1/3 each anniversary for three years. The grant was valued using the Black-Scholes option pricing model and had a value of $40,000 and will be charged to operations through the vesting period.
In April 2016, the Board granted stock options to purchase 150,000 shares of common stock of the Company at exercise price of $0.02 with exercise period of seven years to an officer, vesting 1/3 each six month anniversary for eighteen months. The grant was valued using the Black-Scholes option pricing model and had a value of $1,650 and will be charged to operations through the vesting period.
In May 2016, the Board granted stock options to purchase 2,000,000 shares of common stock of the Company at exercise price of $0.015 with exercise period of seven years to an officer, vesting 1/3 each anniversary for three years. The grant was valued using the Black-Scholes option pricing model and had a value of $40,000 and will be charged to operations through the vesting period.
The Black-Scholes option pricing model used the following assumptions: Dividend yield: 0%; Volatility: 329.59% to 348.27%; and Risk Free rate: 1.55% to 1.72%, term: contractual terms.
Total stock-based compensation expense for options for the nine months ended September 30, 2016 and 2015 amounted to $24,021 and $11,250, respectively.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Payroll taxes
Due to a lack of capital, the Company has been unable to pay all of the compensation owed to its employees. In addition, in 2011, 2012 and the first quarter of 2013, the Company did not pay certain federal and state payroll tax obligations due for employees' compensation, and they have become delinquent. As a result, the Company has included in accrued expenses an amount of approximately $100,000 at September 30, 2016 that represents an estimate that could be expected upon settlement of these payroll taxes with the respective taxing authorities. In April, 2015, an agreement was reached with the IRS that details an agreed upon amount owed and a 17 month payment plan for same. In addition, the Company has contacted the state involved and anticipates settlement discussions in the near future.
Compensation settlement:
On April 19, 2016, the Company entered into a settlement agreement with the former Chief Executive officer whereby the Company issued a convertible note for $75,000 and 2,225,000 warrants to purchase the Company's common stock at $0.10 per share for three years as part settlement of the outstanding salary due of $153,750. The remaining balance is to be paid monthly installments of $2,500 to the extent of available cash flows as determined by the Board of Directors.
DEBT RESOLVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
Litigation:
On April 11, 2016, a Decision was entered in the matter of a noteholder's claim (as described in Part 1, Item 3 (under "Defaults upon Senior Securities") against Debt Resolve Inc., granting the noteholder's motion for summary judgment in part, and denying it in part, and denying Debt Resolve's cross motion for summary judgment. A stipulation with respect to damages was entered by the Court on August 29, 2016 providing that the total outstanding principal and interest due the noteholder as of July 31, 2016 is $322,152. The noteholder is seeking an award of his attorneys' fees from the Court. No decision has been rendered by the Court with respect to noteholder's attorneys' fee claim.
NOTE 14 – RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2016 and 2015, certain Company directors personally guarantee the Company's notes payable and its' bank loan (Note 8). Also, certain directors and officers made short-term or longer term loans as discussed in Note 7 and 8. Total interest expense in connection with notes payable to related parties and related party lines of credit amounted $90,703 and $92,641 for the nine months ended September 30, 2016 and 2015, respectively.
Progress Advocates
The Company reimburses the 49% owner (non-controlling interest party) for payroll, marketing and general expenses incurred by Progress Advocates. For the nine months ended September 30, 2016 and 2015, the Company reimbursed approximately $289,000 and $1,614,000 in incurred costs, respectively. There was no reimbursement made for the quarter ending September 30, 2016.
NOTE 15 – SUBSEQUENT EVENTS
Line of Credit – Related Parties (reference Note 8).
In a letter dated July 28, 2016, the Lenders presented a demand for immediate repayment of the outstanding balance or a securitization of same by the Company. This letter was a result of the suspension of all marketing and sales activities by the Company’s majority owned subsidiary, Progress Advocates LLC, for whom the funds drawn from the Line of Credit were expended. In an agreement dated October 18, 2016, the Company agreed to securitize the Lender’s Line of Credit through a Pledge of the Company’s 51 Class A units of the limited liability membership interests in Progress Advocates LLC.