ITEM 1A. Risk Factors

Cautionary Statements and Risk Factors

Set forth below and elsewhere in this report and in other documents we file with the SEC are important risks and uncertainties that could cause our actual results of operations, business and financial condition to differ materially from the results contemplated by the forward looking statements contained in this report .

Risks Related to Our Business

We have experienced significant and continuing losses from operations which could impede the process of raising capital.

For the years ended December 31, 2015 and 2014, we had inadequate revenues and incurred net loss attributable to Debt Resolve, Inc. of $778,427 and $809,112, respectively. Cash used in operating activities for operations was $1,063,783 and $941,607 for the years ended December 31, 2015 and 2014, respectively. Based upon projected operating expenses, we believe that our working capital as of April 14, 2016 may not be sufficient to fund our plan of operations for the next 12 months. While the execution of our new strategy and new businesses may mitigate this concern, any continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that we will prove successful.

We need to raise additional capital in order to be able to accomplish our business plan objectives. We have historically satisfied our capital needs primarily from the sale of debt and equity securities. We are continuing our efforts to secure additional funds through debt and/or equity instruments. The principal sources of capital for us are private individual accredited investors and investment banks specializing in raising capital for micro-cap companies like us. Since 2009, the principal source of funding for us has been these private accredited investors, who have invested in notes (including convertible notes) and in stock purchases. Finally, board members and management have loaned us $1,183,782 that has not been repaid or some may be converted to stock and has provided either short term or longer term capital to us. These totals do not include other short term loans principally from non-affiliated third parties that were loaned to us and repaid since 2009.

We have raised capital for our day-to-day operations since our inception in January 2003; however, no assurance can be provided that we will continue to be able to do so. There is no assurance that any funds secured will be sufficient to enable us to attain profitable operations or continue as a going concern. To the extent that we are unsuccessful, we may need to curtail our operations and implement a plan to extend payables and reduce overhead until sufficient additional capital is raised to support further operations. At any time until substantial capital is raised, there is also a significant risk of bankruptcy. There can be no assurance that any plan to raise additional funding will be successful. The financial statements contained in this filing do not include any adjustments that might result from the outcome of this uncertainty.

We may rely heavily on the financial success of Progress Advocates LLC.

Going forward, we expect a large part of our revenue to come from our new subsidiary, Progress Advocates LLC. This business operates in an entirely new market segment for us. We have no prior experience in the student loan debt sector, although our business partner does have experience in this sector. We are relying heavily on their expertise, systems and guidance to manage this new business. As a result, there is substantial risk to this endeavor until adequate revenue is established for it to be profitable.

The business plan for Progress Advocates LLC requires an investment in marketing to provide the leads required to sustain anticipated sales transactions and revenue. Each month the marketing investment must be spent at the beginning of the month to generate revenues during the rest of the month. Funds may not be available to spend at these levels, potentially reducing the anticipated sales and revenues. In addition, the full recourse loan portfolio created by the financing payment option has no historical experience to indicate what the future default rate may be. A high level of client defaults may not be adequately covered by the loan portfolio reserve account and the current provision for bad debt.

We may not be able to protect the intellectual property rights upon which our business relies, including our licensed patents, trademarks, domain name, proprietary technology and confidential information, which could result in our inability to utilize our technology platform, licensed patents or domain name, without which we may not be able to provide our services.

Our ability to compete in our traditional debt collection sector depends in part upon the strength of our proprietary rights in our technologies. We consider our intellectual property to be critical to our viability. We do not hold patents on our consumer debt-related product, but rather license technology for our Debt Resolve solution from the co-founders of our company, whose patented technology is now, and is anticipated to continue to be, incorporated into our service offerings as a key component.

Unauthorized use by others of our proprietary technology could result in an increase in competing products and a reduction in our sales. We rely on patent, trademark, trade secret and copyright laws to protect our licensed and proprietary technology and other intellectual property. We cannot be certain, however, that the steps that we have taken to protect our proprietary rights to date will provide meaningful protection from unauthorized use by others. We have initiated litigation and could pursue additional litigation in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others.

However, we may not prevail in these efforts, and we could incur substantial expenditures and divert valuable resources in the process. In addition, many foreign countries' laws may not protect us from improper use of our proprietary technologies. Consequently, we may not have adequate remedies if our proprietary rights are breached or our trade secrets are disclosed.

Finally, protection of our intellectual property through legal means is very expensive. We may not have the funds available to enforce our rights, which would allow other parties to violate these rights. Our efforts to protect our intellectual property will consume capital that would otherwise go to sales, marketing and operations and may negatively impact our financial performance in the short term. We believe that it is critical to our long term success to allocate resources to these activities from time to time.

Potential conflicts of interest exist with respect to the intellectual property rights that we license from our co-founders, and it is possible our interests and their interests may diverge.

We do not hold patents on our consumer debt-related product, but rather license technology for our Debt Resolve Solution and our Settl.it product from the co-founders of our company, whose patented technology is now, and is anticipated to continue to be, incorporated into the Debt Resolve Solution as a key component. This license agreement presents the possibility of a conflict of interest in the event that issues arise with respect to the licensed intellectual property rights, including the prosecution or defense of intellectual property infringement actions, where our interests may diverge from those of the co-founders. The license agreement provides that we will have the right to control and defend or prosecute, as the case may require, the patent rights licensed to us subject, in the case of pleadings and settlements, to the reasonable consent of the co-founders. Our interests with respect to such pleadings and settlements may be at odds with those of the co-founders.

Under the terms of our license agreement, the co-founders of our company will be entitled to receive stock options to purchase shares of our common stock if and to the extent the licensed technology produces specific levels of revenue for us. They will not be entitled to receive any stock options for other debt collection activities such as off-line settlements or transactions not involving the Debt Resolve Solution technology. The license agreement may present the co-founders with conflicts of interest.

Our auditors have issued a Going Concern Statement.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, we incurred a net loss attributable to Debt Resolve, Inc. of $778,427 and $809,112 for the years ended December 31, 2015 and 2014, respectively. Additionally, we have negative working capital (total current liabilities exceeded total current assets) of $10,313,663 as of December 31, 2015. These factors among others raise substantial doubt about our ability to continue as a going concern.

We 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 we can successfully accomplish these steps and/or business plans, and it is uncertain that we will achieve a profitable level of operations and be able to obtain additional financing.

Our continued existence is dependent upon management's ability to develop profitable operations and resolve its liquidity problems. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

We have issued preferred stock convertible to common stock that may have the effect of diluting then current stockholder interests and impairing their voting rights, and provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue a series of preferred stock with dividend, liquidation, conversion, voting or other rights which could dilute the interests of, or impair the voting power of, our common stockholders.

On May 2, 2014, our board of directors designated 5,000,000 shares of preferred stock as Series A Convertible Stock ("Series A") with a $0.001 par value. The Series A preferred stock ranks senior to common stock and all other preferred stock, and equal or junior to any preferred stock that may be issued in regard to liquidation; is not entitled to dividends and is convertible, at the holders' option, at 10 shares of common stock for each share of Series A preferred stock. On July 2, 2015, we issued 47,500 shares of Series A preferred stock for services rendered. In 2014, we issued an aggregate of 414,500 warrants to purchase Series A preferred stock for services rendered and a debt obligation, with exercise prices ranging from $0.50 to $1.50 per share, expiring three years from the date of issuance. In 2015, we issued an aggregate of 705,000 warrants to purchase Series A preferred stock for services rendered , with exercise prices ranging from $0.50 to $1.50 per share, expiring three years from the date of issuance.

In connection with entering into the Progress Advocates LLC joint venture with LSH, LLC, we issued to LSH, LLC two five-year warrants to purchase an aggregate of 1,500,000 shares of Series A convertible preferred stock at an exercise price of $0.50 per share. The first warrant for 1,000,000 shares preferred stock vests and becomes exercisable 25% upon issuance and the balance upon the achievement by Progress Advocates of specific increasing revenue goals. As of December 30, 2015, these revenue goals have been achieved and these warrants have vested. The second warrant for 500,000 shares of preferred stock vests and becomes exercisable when Progress Advocates achieves at least $1,000,000 in cumulative "operating income." A third five year warrant to purchase 500,000 shares of Series A preferred stock was issued in October 2015 based upon Progress Advocates achievement of six months of positive operating income.

The issuance of a series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control. For example, it would be possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of our company. In addition, advanced notice is required prior to stockholder proposals.

Delaware law also could make it more difficult for a third party to acquire us. Specifically, Section 203 of the Delaware General Corporation Law may have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by our stockholders.

Risks Related to Our Industry

The ability of our solution's clients to recover and enforce defaulted consumer debt may be limited under federal, state, local and foreign laws, which would negatively impact our revenues.

Federal, state, local and foreign laws may limit our creditor clients' ability to recover and enforce defaulted consumer debt. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement and collection of consumer debt. The Consumer Financial Protection Bureau is actively looking at the debt collection industry for new regulation. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to settle defaulted consumer debt accounts on behalf of our clients and could result in decreased revenues to us. We cannot predict if or how any future legislation would impact our business or our clients. In addition, we cannot predict how foreign laws will impact our ability to expand our business internationally or the cost of such expansion. Our failure to comply with any current or future applicable laws or regulations could limit our ability to settle defaulted consumer debt claims on behalf of our clients, which could adversely affect our revenues.

Changes in Federal laws and regulations may limit Progress Advocates LLC's ability to offer document preparation services for the modification and consolidation of U.S. student loans. We cannot predict if the current government programs allowing these modifications will continue to be offered by the U.S. Department of Education in similar form or substance to the current offering upon which Progress Advocates offers its services.

Government regulation and legal uncertainties regarding the Internet may require us to incur significant expenses in complying with any new regulations.

The laws and regulations applicable to the Internet and our services are evolving and unclear and could damage our business. Due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted, covering issues such as user privacy, pricing, taxation, content regulation, quality of products and services, and intellectual property ownership and infringement. This legislation could expose us to substantial liability or require us to incur significant expenses in complying with any new regulations. Increased regulation or the imposition of access fees could substantially increase the costs of communicating on the Internet, potentially decreasing the demand for our services. A number of proposals have been made at the federal, state and local level and in foreign countries that would impose additional taxes on the sale of goods and services over the Internet. Such proposals, if adopted, could adversely affect us. Moreover, the applicability to the Internet of existing laws governing issues such as personal privacy is uncertain. We may be subject to claims that our services violate such laws. Any new legislation or regulation in the United States or abroad or the application of existing laws and regulations to the Internet could adversely affect our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses, which as a smaller public company may be disproportionately high.

Changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for small capitalization companies like us. These new and changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards will likely result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

A poor performance by the economy may adversely impact our business.

When economic conditions deteriorated, more borrowers became delinquent on their consumer debt. However, while volumes of debt to settle have risen, borrowers have less ability in a downturn to make payment arrangements to pay their delinquent or defaulted debt. As a result, our revenues may decline, or it may be more costly to generate the same revenue levels, resulting in reduced earnings. A poor economy may also slow borrowing or may curb lenders willingness to provide credit, which results in lower business levels.

Risks Related to our Common Stock

Our stock is thinly traded.

The daily volume in our stock varies widely and is often limited. At this time, it is not possible to liquidate a significant position in a relatively short time period. In addition, because we are not traded on a national exchange, there are additional restrictions on the purchase or sale of our common stock. It has become increasingly difficult to find a brokerage firm willing to accept over-the-counter stock certificates due to new Financial Industry Regulatory Authority regulations.

Our stock price may exhibit a high degree of volatility.

Because our stock is traded with relatively low volume, the price can move significantly on small trading volumes. The release of positive news would be expected to move our stock price up, but we have large illiquid blocks discussed above that sell into any upward momentum. These blocks exert a downward influence or may place a temporary or long-term cap on our stock price appreciation. Over time, we would expect these blocks to be broadly sold into the market, increasing our shareholder base and trading volume and mitigating the effect of these blocks over time. While we currently do not provide sales or earnings guidance as some larger companies do, we may do so in the future, and our stock price reaction may be volatile depending on our revenue and earnings performance relative to the guidance.

All of our assets are subject to liens as security for delinquent federal payroll taxes and indebtedness under our series D convertible notes.

All of our assets now owned or hereafter acquired, and all proceeds therefrom, including accounts receivable and technology, are subject to liens in favor of the Internal Revenue Service for delinquent payroll taxes from 2011-2013 (see Note 13 to our Notes to Financial Statements), and certain investors who purchased our series D convertible notes (see Note 9 to our Notes to Financial Statements). While we are not currently in default under either of these obligations, our failure to comply with the terms of these obligations (which, for example, require monthly payments to the IRS) could entitle the IRS to declare all obligations to be immediately due and payable. If we were unable to service the obligations, the lien holders could foreclose on the assets that serve as collateral. As a result, following an event of default under these obligations and enforcement against the collateral, the lien holders will be entitled to be repaid in full from the proceeds of all the pledged assets owned by us now or hereafter acquired securing the obligations owed to them before any payment is made to the holders of our common stock from the proceeds of that collateral. Additionally, the holders of the liens will receive all proceeds from any realization on the collateral or from the collateral or proceeds thereof in any insolvency proceeding, until the obligations secured by the liens are paid in full.