Notes
to
Condensed Consolidated Financial Statements
September
30, 2007
(Unaudited)
NOTE
1.
BASIS OF PRESENTATION AND MANAGEMENT’S LIQUIDITY PLANS:
The
accompanying unaudited condensed consolidated financial statements of Debt
Resolve Inc. and subsidiaries (the “Company” or “Debt Resolve”) have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information. In the
opinion of management, such statements include all adjustments (consisting
only
of normal recurring adjustments) necessary for the fair presentation of the
Company’s financial position, results of operations and cash flows at the dates
and for the periods indicated. Pursuant to the requirements of the Securities
and Exchange Commission (the “SEC”) applicable to quarterly reports on Form
10-QSB, the accompanying financial statements do not include all the disclosures
required by GAAP for annual financial statements. While the Company believes
that the disclosures presented are adequate to make the information not
misleading, these unaudited interim condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes included in the Company’s Annual Report on Form 10-KSB for the
year ended December 31, 2006. Operating results for the three and nine months
ended September 30, 2007 are not necessarily indicative of the results that
may
be expected for the fiscal year ending December 31, 2007, or any other interim
period.
The
accompanying 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. On November 6, 2006, the Company completed an initial public
offering (“IPO”). The Company sold 2,500,000 shares of common stock at $5.00 per
share pursuant to the IPO. After deducting underwriting discounts and expenses
and offering-related expenses, the IPO resulted in net proceeds to the Company
of $10,655,782. After the repayment of approximately $3,650,000 in interest
and
a portion of the remaining principal of the Company’s outstanding notes and
convertible notes, the Company’s net cash received was approximately $7,000,000.
Subsequent to the IPO, the Company has entered into three lines of credit with
related parties aggregating $1,075,000. The Company also completed a private
offering on September 5, 2007 that generated gross proceeds of approximately
$1,760,000 for the issuance of 880,000 shares of common stock. In addition,
during the nine months ended September 30, 2007, the Company has received
approximately $199,000 in cash proceeds from the exercise of
warrants.
Management
is actively pursuing additional debt/equity financing. In January
2007, the Company acquired the outstanding capital stock of
First Performance Corporation, an accounts receivable management agency
(see Note 3), and accordingly, is no longer in the development stage as of
the
date of the acquisition. Management believes that it will be
successful in obtaining additional financing and that it will successfully
integrate its acquisition to a level of profitability, however it has not yet
achieved profitability, and no assurance can be provided that the Company
will be able to do so. If the Company is unable to raise sufficient
additional funds or integrate its acquisition to a level of profitability,
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 its efforts will be
successful.
NOTE
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles
of Consolidation
The
accompanying 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, together with its wholly owned
subsidiary, EAR Capital, LLC. All material inter-company balances and
transactions have been eliminated in consolidation.
Reverse
Stock Split
On
August
25, 2006, the Company effected a one-for-ten reverse stock split. All share
and
per share information herein has been retroactively restated to give effect
to
this reverse stock split.
Fair
Value of Financial Instruments
The
reported amounts of the Company’s financial instruments, including accounts
payable and accrued liabilities, approximate their fair value due to their
short
maturities. The carrying amounts of debt approximate fair value because the
debt
agreements provide for interest rates that approximate market.
Restricted
Cash
The
Company typically receives cash collected on behalf of its clients. Such cash
is
held in trust for the clients, and is not available to the Company for general
corporate purposes. As such, it is segregated from Cash and Cash Equivalents.
The Company also records a corresponding liability as Collections
Payable.
Accounts
Receivable
The
Company extends credit to large and mid-size companies for collection services.
The Company has concentrations of credit risk as 77% of the balance of accounts
receivable at September 30, 2007 consists of only 3 customers. At September
30,
2007, accounts receivable from the three largest accounts amounted to
approximately $58,810 (41%), $25,787 (18%) and $25,523 (18%), 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.
Business
Combinations
In
accordance with business combination accounting, the Company allocates the
purchase price of acquired companies to the tangible and intangible assets
acquired and liabilities assumed, based on their estimated fair values. The
Company engaged a third-party appraisal firm to assist management in determining
the fair values of First Performance Corporation. Such a valuation requires
management to make significant estimates and assumptions, especially with
respect to intangible assets.
Management
makes estimates of fair values based upon assumptions believed to be reasonable.
These estimates are based on historical experience and information obtained
from
the management of the acquired companies. Critical estimates in valuing certain
of the intangible assets include but are not limited to: future expected cash
flows from customer relationships and market position, as well as assumptions
about the period of time the acquired trade names will continue to be used
in
the combined company's product portfolio; and discount rates. These estimates
are inherently uncertain and unpredictable. Assumptions may be incomplete or
inaccurate, and unanticipated events and circumstances may occur which may
affect the accuracy or validity of such assumptions, estimates or actual
results. See Note 6.
Goodwill
and Intangible Assets
The
Company accounts for goodwill and intangible assets in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”
(“SFAS 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”). Under SFAS 142, goodwill and intangibles that are deemed to have
indefinite lives are no longer amortized but, instead, are to be reviewed at
least annually for impairment. Application of the goodwill impairment test
requires judgment, including the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to reporting
units, and determining the fair value. Significant judgments required to
estimate the fair value of reporting units include estimating future cash flows,
determining appropriate discount rates and other assumptions. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or goodwill impairment for each reporting unit. Intangible assets
will
be amortized over their estimated useful lives. The Company performed an
analysis of its goodwill and intangible assets in accordance with SFAS 142
as of
June 30, 2007 and determined that an impairment charge was necessary. The
Company performed a further analysis of its intangible assets as of September
30, 2007 and determined that an additional impairment charge was necessary.
See
Note 6.
Use
of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires 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 management’s judgment and available information and, consequently, actual
results could be different from these estimates.
Income
Taxes
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
Number 48, “Accounting for Uncertainty in Income Taxes, an interpretation of
FASB Statement No. 109,” (“FIN 48”). FIN 48 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition and
measurement of tax positions taken or expected to be taken in a tax return.
For
those benefits to be recognized, a tax position must be more likely than not
to
be sustained upon examination by taxing authorities. Differences between tax
positions taken or expected to be taken in a tax return and the benefit
recognized and measured pursuant to the interpretation are referred to as
“unrecognized benefits”. A liability is recognized (or amount of net operating
loss carry forward or amount of tax refundable is reduced) for an unrecognized
tax benefit because it represents an enterprise’s potential future obligation to
the taxing authority for a tax position that was not recognized as a result
of
applying the provisions of FIN 48.
In
accordance with FIN 48, interest costs related to unrecognized tax benefits
are
required to be calculated (if applicable) and would be classified as “Interest
expense, net” in the consolidated statements of operations. Penalties would be
recognized as a component of “General and administrative expenses.”
In
many
cases, the Company’s tax positions are related to tax years that remain subject
to examination by relevant tax authorities. The Company files income tax returns
in the United States (federal) and in various state and local jurisdictions.
In
most instances, the Company is no longer subject to federal, state and local
income tax examinations by tax authorities for years prior to 2003.
The
adoption of the provisions of FIN 48 did not have a material impact on the
Company’s consolidated financial position and results of operations. As of
September 30, 2007, no liability for unrecognized tax benefits was required
to
be recorded.
The
ultimate realization of deferred tax assets is dependent upon the generation
of
future taxable income during the periods in which those temporary differences
become deductible. The Company considers projected future taxable income and
tax
planning strategies in making this assessment. At present, the Company does
not
have a sufficient history of income to conclude that it is more likely than
not
that the Company will be able to realize all of its tax benefits in the near
future and therefore a valuation allowance was established for the full value
of
the deferred tax asset.
A
valuation allowance will be maintained until sufficient positive evidence exists
to support the reversal of any portion or all of the valuation allowance net
of
appropriate reserves. Should the Company continue to be profitable in future
periods with a supportable trend, the valuation allowance will be reversed
accordingly.
Revenue
Recognition
The
Company earned revenue during 2007 and 2006 from several collection agencies,
collection law firms and lenders that implemented the Company’s online system.
The Company’s current contracts provide for revenue based on a percentage of the
amount of debt collected, a flat fee per settlement from accounts submitted
on
the DebtResolve system or through 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 the client. For the early adopters
of
the Company’s product, the Company waived set-up fees and other transactional
fees that the Company anticipates charging in the future. While the percent
of
debt collected will continue to be a revenue recognition method going forward,
other payment models are also being offered to clients and may possibly become
the Company’s preferred revenue model. Dependent upon the structure of future
contracts, revenue may be derived from a combination of set up fees or monthly
licensing fees with transaction fees upon debt settlement.
In
recognition of the principles expressed in Staff Accounting Bulletin 104 (“SAB
104”), that revenue should not be recognized until it is realized or realizable
and earned, and given the element of doubt associated with the collectability
of
an agreed settlement on past due debt, at this time the Company uniformly
postpones recognition of all contingent revenue until its 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 its system and/or, for clients under a licensing arrangement, the
successful availability of its system to its customers.
In
addition, in accordance with Emerging Issues Task Force (“EITF”) Issue 00-21,
revenue is recognized and identified according to the deliverable provided.
Set-up fees, percentage contingent collection fees, fixed settlement fees,
monthly license fees, etc. are identified separately.
Recently
signed contracts and contracts under negotiation call for multiple deliverables,
and each component of revenue will be considered to have been earned when the
Company has met the associated deliverable, as is required by SAB 104 Topic
13(A). For new contracts being implemented which include a licensing fee per
account, following the guidance of SAB 104 regarding services being rendered
continuously over time, the Company will recognize revenue based on contractual
prices established in advance and will recognize income over the contractual
time periods. Where some doubt exists on the collectability of the revenues,
a
valuation reserve will be established or the income charged to losses, based
on
management’s opinion regarding the collectability of those revenues.
In
January 2007, the Company initiated operations of its debt buying subsidiary,
DRV Capital LLC. DRV Capital and its wholly-owned subsidiary, EAR Capital I,
LLC, have engaged in the acquisition of pools of past due debt at a deeply
discounted price, for the purpose of collecting on those debts. In recognition
of the principles expressed in Statement of Position 03-3 (“SOP 03-3”), where
the timing and amount of cash flows expected to be collected on these pools
is
reasonably estimable, the Company will recognize the excess of all cash flows
expected at acquisition over the initial investment in the pools of debt as
interest income on a level-yield basis over the life of the pool (accretable
yield). Because the Company is exiting this business, it will use the cost
recovery method. Revenue will be earned by this debt buying subsidiary under
the
cost recovery method when the amount of debt collected exceeds the discounted
price paid for the pool of debt.
On
January 19, 2007, the Company completed the acquisition of First Performance
Corporation, a collection agency, and its wholly-owned subsidiary First
Performance Recovery Corporation. In recognition of the principles expressed
in
SAB 104, that revenue should not be recognized until it is realized or
realizable and earned, and given the element of doubt associated with
collectability of an agreed settlement on past due debt, at this time, the
Company uniformly postpones recognition of all contingent revenue until the
cash
payment is received from the debtor. At the time it remits fees collected to
its
clients, the Company accrues the portion of those fees that the client
contractually owes. 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.
Stock-based
compensation
Beginning
on January 1, 2006, the Company accounts for stock options issued under
stock-based compensation plans under the recognition and measurement principles
of SFAS No. 123 - Revised. The Company adopted the modified prospective
transition method and therefore, did not restate prior periods’ results. Total
stock-based compensation expense related to these and other stock-based grants
for the three and nine months ended September 30, 2007 amounted to $354,821
and
$2,323,069, respectively and for the three and nine months ended September
30,
2006 amounted to $2,602,134 and $2,714,946, respectively.
The
fair
value of share-based payment awards granted during the periods was estimated
using the Black-Scholes option pricing model with the following assumptions
and
weighted average fair values as follows:
|
|
Nine
months ended
September
30,
|
|
|
2007
|
2006
|
|
Risk
free interest rate range
|
4.50-4.84%
|
1.66-4.12%
|
|
Dividend
yield
|
0%
|
0%
|
|
Expected
volatility
|
81.1%-96.7%
|
96.7%
|
|
Expected
life in years
|
3-7
|
3-10
|
The
fair
value of each option granted to employees and non-employees is estimated as
of
the grant date using the Black-Scholes option 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, 2007, total unrecognized compensation cost for these and prior
grants amounted to $484,713.
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 of 4,000,934 and 1,684,437, respectively at
September 30, 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 as of September 30, 2007 do not
include the underlying shares exercisable with respect to the issuance of
232,106 warrants as of September 30, 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:
As
discussed in Note 1, 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 dated January
19,
2007. First Performance is an accounts receivable management agency with
operations in Las Vegas, Nevada and formerly in Fort Lauderdale, Florida. The
aggregate purchase price of $850,000 included $500,000 of cash and $350,000
of
the Company’s common stock, consisting of 88,563 shares at $3.95 per share.
The
assets and liabilities of First Performance have been recorded in the Company’s
consolidated balance sheet at their fair values at the date of acquisition.
As
part of the purchase of First Performance, the Company acquired identifiable
intangible assets of approximately $450,000. Of the identifiable intangibles
acquired, $60,000 was assigned to trade names and $390,000 was assigned to
customer relationships. In accordance with SFAS 142, based on certain changes
in
the operations of First Performance, including the loss of four of its major
clients, the Company performed an interim impairment analysis at June
30, 2007 and at September 30, 2007. See Note 6. The amounts of these intangibles
have been estimated based upon information available to management and are
subject to change based upon an outside appraisal being completed. The acquired
intangibles have been assigned definite lives and are subject to amortization,
as described in the table below.
The
following table details amortization periods for the identifiable, amortizable
intangibles:
|
Intangible
Asset
|
|
Amortization
Period
in
Years
|
|
Trade
names
|
|
10
years
|
|
Customer
relationships
|
|
4
years
|
The
following table details the preliminary allocation of the purchase price for
the
acquisition of First Performance:
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
Restricted
cash
|
|
$
|
157,485
|
|
|
Accounts
receivable
|
|
|
419,167
|
|
|
Prepaid
expenses and other current assets
|
|
|
103,082
|
|
|
Fixed
assets, net
|
|
|
286,229
|
|
|
Intangible
asset - trade names
|
|
|
60,000
|
|
|
Intangible
asset - customer relationships
|
|
|
390,000
|
|
|
Deposits
and other assets
|
|
|
51,999
|
|
|
Accounts
payable
|
|
|
(1,573,252
|
)
|
Net
fair values assigned to assets acquired and
liabilities assumed
|
|
|
(105,290
|
)
|
|
Direct
costs of acquisition
|
|
|
(86,915
|
)
|
|
Goodwill
|
|
|
1,042,205
|
|
|
Total
|
|
$
|
850,000
|
|
The
following represents a summary of the purchase price consideration:
|
Cash
|
|
$
|
500,000
|
|
|
Value
of common stock issued
|
|
|
350,000
|
|
|
Total
purchase price paid
|
|
$
|
850,000
|
|
|
Direct
acquisition costs
|
|
|
86,915
|
|
|
Total
purchase price consideration
|
|
$
|
936,915
|
|
First
Performance was purchased on January 19, 2007, and therefore only its operations
from January 19, 2007 through September 30, 2007 are included in the Company’s
condensed consolidated financial statements. The following table presents the
Company’s unaudited pro forma combined results of operations for each of the
three and nine months ended September 30, 2007 and 2006, respectively, as if
First Performance had been acquired at the beginning of each of the periods.
|
|
|
For
the three months ended
September
30,
|
|
For
the nine months ended
September
30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
526,818
|
|
$
|
1,554,177
|
|
$
|
2,700,051
|
|
$
|
4,845,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,331,486
|
)
|
$
|
(7,089,195
|
)
|
$
|
(10,935,483
|
)
|
$
|
(12,133,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma
basic and diluted net loss per common share
|
|
$
|
(0.41
|
)
|
$
|
(1.68
|
)
|
$
|
(1.40
|
)
|
$
|
(3.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
8,054,031
|
|
|
4,219,542
|
|
|
7,821,533
|
|
|
3,492,469
|
|
The
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 2006, nor are they necessarily indicative
of
future consolidated results.
Effective
with the acquisition of First Performance on January 19, 2007, the Company
also
sponsors the First Performance employee savings plan, for all employees of
First
Performance who have completed 1,000 hours of service. This plan does not
include a company matching contribution. The Company is currently in
the process of merging this plan and its existing 401(k) plan.
NOTE
4.
SECURITIES
PURCHASE AGREEMENT - CREDITORS INTERCHANGE:
Securities
Purchase Agreement
On
April
30, 2007, the Company, Credint Holdings, and the holders of all of the limited
liability membership interests of Credint Holdings entered into a securities
purchase agreement for the Company to acquire 100% of the outstanding limited
liability company membership interests of Creditors Interchange, an accounts
receivable management agency and wholly-owned subsidiary of Credint Holdings.
Prior to this agreement, an agreement with Creditors Interchange for the use
by
Creditors Interchange of the Company’s DebtResolve system, and a management
services agreement pursuant to which Creditors Interchange provides management
consulting services to First Performance were in place.
The
total
consideration for the acquisition was to consist of (a) 840,337 shares of the
Company’s common stock, and (b) $60,000,000 in cash less the sum, as of the date
the acquisition is consummated, of all principal, accrued interest, prepayment
penalties and other charges in respect of Creditors Interchange’s outstanding
indebtedness. The closing date in the original agreement was June 30, 2007,
and
was extended to August 31, 2007. On August 31, 2007 the total consideration
was
reduced to $54 million with a further extension of the closing date to September
14, 2007. On September 24, 2007, the Company terminated the securities purchase
agreement based on certain terms in the Purchase Agreement.
In
connection with the financing of the transaction, as well as to provide
additional working capital and to fund operations, the Company signed an
engagement letter with investment banks to explore financing alternatives.
Subsequent to June 30, 2007, the Company secured financing commitments for
up to
$40 million in debt, consisting of $25 million of senior secured debt and $15
million of mezzanine debt. The Company also procured financing commitments
for
the balance of the cash portion of the reduced total consideration as equity
financing and had completed a financing package for the transaction. However,
the Company terminated the securities purchase agreement due to a material
adverse change in the financial condition of Creditors Interchange, and the
financing commitments lapsed at termination of the transaction.
Employment
Agreements
In
connection with the Purchase Agreement, the Company entered into employment
agreements with Bruce Gray and John Farinacci. Pursuant to his employment
agreement, Mr. Gray was to serve as Executive Vice President of the Company
and
President and Chief Executive Officer of Creditors Interchange. Mr. Gray was
also to be nominated to join the Board of Directors of the Company. Mr. Gray
was
to receive a base salary of $400,000 and options to purchase up to 400,000
shares of the Company’s common stock. Mr. Gray was also eligible for an annual
bonus based on certain performance criteria.
Pursuant
to his employment agreement with the Company, Mr. Farinacci was to serve as
President of First Performance Corporation, and Executive Vice
President-Operations of Creditors Interchange. Mr. Farinacci was also to serve
as a Senior Vice President of the Company. Mr. Farinacci was to receive a base
salary of $300,000 and options to purchase up to 400,000 shares of the Company’s
Common Stock. Mr. Farinacci was also eligible for an annual bonus based on
certain performance criteria.
While
the
employment agreements with Messrs. Gray and Farinacci were executed on April
30,
2007, both employment agreements would only be declared effective as of the
closing of the transactions contemplated by the Purchase Agreement and will
automatically terminate should the transaction not occur. The agreements
terminated on September 24, 2007, in conjunction with the termination of the
Purchase Agreement.
NOTE
5.
FIXED
ASSETS:
Fixed
assets consist of the following:
|
|
|
September
30,
|
|
|
|
|
Useful
life
|
|
2007
|
|
|
Computer
equipment
|
|
|
3-5
years
|
|
$
|
493,731
|
|
|
Computer
software
|
|
|
3
years
|
|
|
67,641
|
|
|
Telecommunications
equipment
|
|
|
5
years
|
|
|
3,165
|
|
|
Office
equipment
|
|
|
3
years
|
|
|
6,361
|
|
|
Furniture
and fixtures
|
|
|
5
years
|
|
|
137,865
|
|
|
Leasehold
improvements
|
|
|
Lease
term
|
|
|
21,081
|
|
|
Less:
accumulated depreciation
|
|
|
|
|
|
729,844
(412,545
|
)
|
|
|
|
|
|
|
$
|
317,299
|
|
Depreciation
expense totaled $38,961 and $12,020 for the three months ended September 30,
2007 and 2006, respectively. Depreciation expense totaled $115,832 and $39,487
for the nine months ended September 30, 2007 and 2006,
respectively.
On
August
31, 2007, certain First Performance assets were abandoned due to the closure
of
the Florida office on July 31, 2007. Accordingly, the Company included a charge
to general and administrative expenses in the amount of $68,329 related to
the
disposal of these assets.
NOTE
6.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
The
Company recorded $1,042,205 of goodwill in connection with its acquisition
of
First Performance (See Note 3). It also recorded $450,000 in intangible assets
related to First Performance’s trade names and customer relationships (See Note
6). The amounts of goodwill that the Company recorded in
connection with this acquisition was determined by
comparing the aggregate amount of the purchase price plus related
transaction costs to the fair value of the net tangible
and identifiable intangible assets acquired.
In
accordance with SFAS 142, based on certain changes in the operations of First
Performance, including the loss of four of its major clients, the
Company performed an interim impairment analysis at June 30, 2007 and
September 30, 2007. As a result of this analysis, the Company determined that
the entire amount of goodwill with respect to First Performance was deemed
to be impaired. In addition, the other intangible assets subject to amortization
were also found to be impaired, and were revalued at $270,000, as of June 30,
2007. Accordingly, the Company recorded a goodwill and
intangibles impairment charge in the amount of $1,179,080 as of June 30, 2007.
The Company recorded an additional $27,255 charge at September 30, 2007,
revaluing the intangible assets to $225,000.
Making
estimates about the carrying value of goodwill requires management to exercise
significant judgment. It is reasonably possible that the estimate of the
effect on the financial statements of a condition, situation, or set
of circumstances that existed at the date of the financial statements,
which management considered in formulating its estimate could change in the
near
term due to one or more future confirming events.
Accordingly, the actual results regarding estimates of the
carrying value of these intangibles could differ materially from the Company's
estimates.
NOTE
7.
INTANGIBLE
ASSETS:
Intangible
assets consist exclusively of amounts related to the acquisition of First
Performance.
The
components of intangible assets as of September 30, 2007 are set forth in the
following table:
|
|
|
Useful
life
|
|
Original
amount
|
|
Amortization
|
|
Impairment
|
|
September
30,
2007
|
|
|
Trade
names
|
|
|
10
years
|
|
$
|
60,000
|
|
|
(3,152
|
)
|
|
(41,848
|
)
|
$
|
15,000
|
|
|
Customer
relationships
|
|
|
4
years
|
|
$
|
390,000
|
|
|
(57,718
|
)
|
|
(122,282
|
)
|
$
|
210,000
|
|
|
|
|
|
|
|
$
|
450,000
|
|
|
(60,870
|
)
|
|
(164,130
|
)
|
$
|
225,000
|
|
The
amortization of intangibles will result in the following additional expense
by
year:
|
Years
Ended December 31:
|
|
Intangible
Amortization
|
|
|
2007
|
|
$
|
16,152
|
|
|
2008
|
|
|
64,607
|
|
|
2009
|
|
|
64,607
|
|
|
2010
|
|
|
64,607
|
|
|
2011
|
|
|
6,857
|
|
|
Thereafter
|
|
|
8,170
|
|
|
Total
|
|
$
|
225,000
|
|
Amortization
expense totaled $17,745 and $60,870 for the three and nine months ended
September 30, 2007, respectively.
The
weighted average amortization period for amortizable intangibles is 3.7 years
and has no residual value.
NOTE
8.
LINES
OF
CREDIT:
First
Performance had a line of credit on the date of the Company’s acquisition. The
outstanding balance as of January 19, 2007 of $150,000 was repaid during the
nine months ended September 30, 2007, and the line of credit was
terminated.
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-Chairman of the
Company and a member of its Board of Directors. As of September 30, 2007, the
outstanding balance on this line of credit was $500,000. The Company
incurred interest expense related to this line of credit of $15,333 and $17,967
during the three and nine months ended September 30, 2007, respectively.
Subsequent to September 30, 2007, the Company borrowed an additional $76,000
from this line.
On
August
10, 2007, the Company entered into a line of credit agreement with James D.
Burchetta, Debt Resolve’s CEO and Co-Chairman, for up to $100,000 to be used
primarily to fund the working capital needs of First Performance. Borrowings
under the line of credit will 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. As of September 30, 2007, the Company has borrowed $75,000 under this
line of credit. The Company incurred interest expense related to this line
of
credit of $1,362 during the three and nine months ended September 30, 2007.
Subsequent to September 30, 2007, the Company borrowed an additional $40,000
from this line.
NOTE
9.
PURCHASED
ACCOUNTS RECEIVABLE:
On
December 22, 2006, the Company and its wholly-owned subsidiaries, EAR Capital
I,
LLC, as borrower, and DRV Capital, LLC, as servicer, entered into a $20.0
million secured debt financing facility pursuant to a Master Loan and Servicing
Agreement, dated as of December 21, 2006, with Sheridan Asset Management, LLC
(“Sheridan”), as lender, to finance the purchase of distressed consumer debt
portfolios from time to time. The facility generally provides for a 90.0%
advance rate with respect to each qualified debt portfolio purchased. Interest
accrues at 12% per annum and is payable monthly. Notes issued under the facility
are collateralized by the distressed consumer debt portfolios that are purchased
with the proceeds of the loans. Each note has a maturity date not to exceed
a
maximum of 24 months after the borrowing date. Once the notes are repaid and
the
Company has been repaid its investment (generally 10% of the purchase price),
the Company and Sheridan share the residual collections from the debt
portfolios, net of servicing fees, as per the terms specified in each
acquisition agreement. The sharing in residual cash flows continues for the
entire economic life of the debt portfolios financed using this facility and
will extend beyond the expiration date of the facility. New advances for
portfolio purchases under the facility are not available beyond the December
21,
2007 expiration date. The Company is required to give Sheridan the opportunity
to fund all of its purchases of distressed consumer debt with advances through
December 21, 2008. As of September 30, 2007, the Company had acquired $607,994
in discounted value of acquired receivables, with a remaining balance of
$108,868. During the nine months ended September 30, 2007, the Company performed
a revaluation of the remaining receivables and recorded a decline in value
of
$23,096. The Company borrowed a total of $547,195 to finance these receivables
and had outstanding remaining portfolio loans payable in the amount of $54,678.
Management of the Company made a strategic decision in October, 2007 to suspend
the purchase of debt portfolios on the open market.
The
following tables represent the activity with respect to purchased receivables
and financings for those receivables for the nine months ended September 30,
2007.
|
Purchased
Accounts Receivable
|
|
|
|
|
Beginning
balance - January 1, 2007
|
|
$
|
—
|
|
|
Purchases
|
|
|
607,994
|
|
|
Liquidations
|
|
|
(123,753
|
)
|
|
Sale
of pools
|
|
|
(352,277
|
)
|
|
Write
downs
|
|
|
(23,096
|
)
|
|
Ending
balance - September 30, 2007
|
|
$
|
108,868
|
|
|
Portfolio
Loans Payable:
|
|
|
|
|
Beginning
balance - January 1, 2007
|
|
$
|
—
|
|
|
Borrowings
|
|
|
547,195
|
|
|
Repayments
|
|
|
(492,517
|
)
|
|
Ending
balance - September 30, 2007
|
|
$
|
54,678
|
|
NOTE
10.
STOCKHOLDERS’
DEFICIENCY
On
September 5, 2007, the Company completed a private placement for gross proceeds
of $1,760,000 for the sale of 880,000 shares of common stock. In
conjunction with this transaction, the Company issued an aggregate of 440,000
warrants to purchase common stock to the investors and 88,000 warrants to
purchase common stock to the placement agent. Each warrant is exercisable at
$2.00 per share for a term of five years. The common stock and warrants sold
have "piggy - back' registration rights on the Company's next registration
statement if the required private placement holding period has not previously
elapsed.
NOTE
11.
STOCK
OPTIONS:
As
of
September 30, 2007, the Company had one 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, 2007 is presented below:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
|
2007
|
|
Price
|
|
Term
|
|
Value
|
|
|
Outstanding
at January 1, 2007
|
|
|
261,000
|
|
$
|
5.00
|
|
|
3.9
Years
|
|
$
|
--
|
|
|
Granted
|
|
|
632,000
|
|
$
|
4.61
|
|
|
5.7
Years
|
|
$
|
--
|
|
|
Exercised
|
|
|
--
|
|
$
|
--
|
|
|
--
|
|
$
|
--
|
|
|
Forfeited
or expired
|
|
|
(5,500
|
)
|
$
|
5.00
|
|
|
--
|
|
$
|
--
|
|
|
Outstanding
at September 30, 2007
|
|
|
887,500
|
|
$
|
4.74
|
|
|
5.2
Years
|
|
$
|
--
|
|
|
Exercisable
at September 30, 2007
|
|
|
617,250
|
|
$
|
4.80
|
|
|
5.1
Years
|
|
$
|
--
|
|
As
of
September 30, 2007, the Company had 270,250 unvested options within the 2005
Plan.
On
February 1, 2007, the Company issued options to purchase 30,000 shares of its
common stock
exercisable
at $4.04 per share to
a
new
employee
.
The
stock
options
have an exercise period of five years and vest 30% at issuance, 30% in nine
months and 40% on the anniversary of issuance. The grant was valued at
$91,200
,
will be
expensed over the vesting period and resulted in an expense during the nine
months ended September 30, 2007 of $81,067.
On
February 28, 2007, the Company issued options to purchase 20,000 shares of
its
common stock
exercisable
at $4.10 per share to
a
new
board member
.
The
stock
options
have an exercise period of five years, vest 50% at issuance and 50% on the
anniversary of issuance, were valued at $61,600
,
will be
expensed over the vesting period and resulted in an expense during the nine
months ended September 30, 2007 of $48,767.
On
April
23, 2007, the Company issued options to purchase 75,000 shares of its common
stock exercisable at $3.70 per share to a new employee. The stock options have
an exercise period of seven years and vest 25% at issuance, 25% at nine months,
25% at eighteen months and 25% at thirty months after the grant date. The grant
was valued at $210,750, will be expensed over the one year employment contract
term and resulted in expense during the nine months ended September 30, 2007
of
$140,500.
On
April
27, 2007, the Company issued options to purchase 75,000 shares of its common
stock exercisable at $4.75 per share to a new employee. The stock options have
an exercise period of seven years and vest 33% on the first, second and third
anniversary of the grant date. The grant was valued at $270,750, will be
expensed over the one year employment contract term and resulted in expense
during the nine months ended September 30, 2007 of $112,813.
On
April
27, 2007, the Company issued options to purchase 278,000 shares of its common
stock exercisable at $4.75 per share to four current employees. The stock
options have an exercise period of seven years. Of the grant, 276,500 shares
vest immediately and 1,500 vest on the first anniversary of the grant date.
The
grant was valued at $1,003,580, were expensed immediately except for the grant
vesting over the first year and resulted in expense during the nine months
ended
September 30, 2007 of $1,001,775.
On
April
27, 2007, the Company issued options to purchase 154,000 shares of its common
stock exercisable at $5.00 per share to six current employees as an extension
of
expiring three year non-plan options. The stock options have an exercise period
of four years, providing the grantees with the equivalent of a seven year grant,
as all new options granted now have a seven year term. Of the grant, options
to
purchase 77,000 shares vest immediately and options to purchase the remaining
77,000 shares vest on the first anniversary of the grant date. The grant was
valued at $446,600, the expense associated with the first 77,000 shares were
expensed immediately and the remainder are being expensed over the one year
vesting period and resulted in a charge during the nine months ended September
30, 2007 of $256,933.
A
summary
of stock option activity outside the 2005 Plan during the nine months ended
September 30, 2007 is presented below:
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
|
2007
|
|
Price
|
|
Term
|
|
Value
|
|
|
Outstanding
at January 1, 2007
|
|
|
3,147,434
|
|
$
|
4.96
|
|
|
6.4
Years
|
|
$
|
--
|
|
|
Granted
|
|
|
50,000
|
|
$
|
4.75
|
|
|
6.6
Years
|
|
$
|
--
|
|
|
Exercised
|
|
|
--
|
|
$
|
--
|
|
|
--
|
|
$
|
--
|
|
|
Forfeited
or Expired
|
|
|
(84,000
|
)
|
$
|
5.60
|
|
|
--
|
|
$
|
--
|
|
|
Outstanding
at September 30, 2007
|
|
|
3,113,434
|
|
$
|
4.97
|
|
|
6.4
Years
|
|
$
|
32,625
|
|
|
Exercisable
at September 30, 2007
|
|
|
3,113,434
|
|
$
|
4.97
|
|
|
6.4
Years
|
|
$
|
32,625
|
|
On
April
27, 2007, the Company issued options to purchase 50,000 shares of its common
stock exercisable at $4.75 per share to a current employee. The stock options
vest immediately and have an exercise period of seven years. The grant was
valued at $180,500 and was expensed immediately.
As
of
September 30, 2007, the Company had no unvested stock options outside the 2005
Plan.
During
the nine months ended September 30, 2007 and 2006, the Company recorded an
expense of $15,436 and $157,277 respectively, representing the amortized amount
of the fair value of stock options issued to non-employees prior to January
1,
2006.
The
Company recorded stock based compensation expense representing the amortized
amount of the fair value of options granted in 2006 in the amount of $84,279
and
$352,061 during the three and nine months ended September 30, 2007,
respectively.
NOTE
12.
WARRANTS:
A
summary
of warrant activity as of January 1, 2007 and changes during the nine months
ended September 30, 2007 is presented below:
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
|
2007
|
|
Price
|
|
Term
|
|
Value
|
|
|
Outstanding
at January 1, 2007
|
|
|
2,091,158
|
|
$
|
1.44
|
|
|
3.1
Years
|
|
|
--
|
|
|
Granted
|
|
|
628,000
|
|
$
|
2.29
|
|
|
4.7
Years
|
|
|
--
|
|
|
Exercised
|
|
|
(984,721
|
)
|
$
|
0.20
|
|
|
--
|
|
|
--
|
|
|
Forfeited
or Expired
|
|
|
(50,000
|
)
|
$
|
3.85
|
|
|
--
|
|
|
--
|
|
|
Outstanding
at September 30, 2007
|
|
|
1,684,437
|
|
$
|
1.62
|
|
|
2.8
Years
|
|
$
|
1,510,205
|
|
|
Exercisable
at September 30, 2007
|
|
|
1,459,437
|
|
$
|
1.86
|
|
|
3.2
Years
|
|
$
|
1,510,205
|
|
As
of
September 30, 2007, there were 225,000 unvested warrants to purchase shares
of
common stock.
On
March
1, 2007 the Company issued a warrant to purchase 100,000 shares of its common
stock exercisable at $3.85 per share to a consultant. The warrant has an
exercise period of three years, which vests 25% at issuance and 25% at three,
nine and nine months from issuance. The warrant was valued at $240,000. On
June
30, 2007, warrants for 50,000 shares of common stock were cancelled due to
termination of the consultant’s services. Expense during the nine months ended
September 30, 2007 was $134,571.
During
the nine months ended September 30, 2007, the Company received $199,099 in
cash
proceeds from the exercise of 984,721 warrants to purchase common
stock.
NOTE
13.
LITIGATION:
On
January
8, 2007, the Company filed a patent infringement lawsuit against Apollo
Enterprise Solutions, LLC (“Apollo”) in federal court in New Jersey. The
suit alleges that Apollo’s online debt collection system infringes one or
more claims of the patents-in-suit, U.S. Patent Nos. 6,330,551 and
6,954,741. The Company claims that it has exclusive rights under these and
certain other patents with respect to the settlement of consumer
debt.
A change
of venue moved the suit to the Southern District of New York.
In
response to the Company’s complaint, Apollo (i) filed a motion to dismiss for an
alleged lack of personal jurisdiction and, (ii) on January 29, 2007, filed
a
mirror lawsuit against the Company in federal court in the Central District
of
California which seeks a declaratory judgment of non-infringement and invalidity
with respect to these patents. The Company filed a motion to dismiss, transfer
or stay the California case in preference to the first-filed New Jersey case.
That motion
has
been
granted by the court, and the California case has been stayed in preference
to
the New Jersey case
.
In the New Jersey case, the Court issued an order requiring the parties to
submit a series of briefs showing why the case should not be transferred from
New Jersey to the District of Delaware, the Southern District of New York or
the
Central District of California. The New Jersey Court subsequently denied
Apollo’s motion to transfer the case to California and granted the Company’s
request in the alternative that the case be heard in New York if the Court
decided it should not stay in New Jersey. The case was transferred to federal
court in the Southern District of New York where it remains pending at a
preliminary stage. The mirror action that Apollo filed against the Company
in
California has been dismissed without prejudice by the parties. Subsequent
to
September 30, 2007, the Company entered into a settlement agreement with
Apollo. See Note 17.
NOTE
14.
OPERATING
LEASES:
On
August
1, 2005, the Company entered into a five year lease for its corporate
headquarters which includes annual escalations in rent. Since that date, in
accordance with SFAS No. 13, “Accounting for Leases,” 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, 2007, accrued rent payable totaled $15,385.
The
Company also leased an office in Fort Lauderdale, Florida under a non-cancelable
operating lease that expires January 31, 2009 and called for monthly payments
of
$22,481. Until August 31, 2007, the monthly payment has been reduced by a $5,000
abatement to $17,481 per month. In July 2007, the Company negotiated an early
cancellation of the Florida lease whereby the rent obligation terminated on
August 31, 2007.
The
Company
continues to lease an office in Las Vegas, Nevada under a non-cancelable
operating lease that expires July 31, 2014 and calls for monthly payments of
$21,644.
Rent
expense for the three months ended September 30, 2007 and 2006 was $140,177
and
$30,862, respectively. Rent expense for the nine months ended September 30,
2007
and 2006 was $413,652 and $92,505, respectively.
Future
minimum rental payments under the above non-cancelable operating leases (as
renegotiated) are as follows:
|
For
the Year Ending
December
31,
|
|
Amount
|
|
|
2007
|
|
$
|
96,246
|
|
|
2008
|
|
|
387,029
|
|
|
2009
|
|
|
389,892
|
|
|
2010
|
|
|
335,657
|
|
|
2011
|
|
|
259,728
|
|
|
Thereafter
|
|
|
670,964
|
|
|
|
|
$
|
2,139,516
|
|
NOTE
15.
EMPLOYMENT
AGREEMENTS:
On
April
23, 2007, Anthony P. Canale was appointed to the position of General Counsel
of
the Company. Mr. Canale’s employment agreement provides for a base salary of
$175,000 with certain bonus provisions. Mr. Canale was also awarded 75,000
options vesting 25% on the date of hire, 25% in six months, 25% in eighteen
months and 25% in 30 months. The employment agreement has a one year renewable
term. Subsequent to September 30, 2007, Mr. Canale resigned from the
Company.
On
May 1,
2007, the Company appointed David M. Rainey to the position of Chief Financial
Officer and Treasurer. Mr. Rainey’s employment agreement provides for a base
salary of $200,000 with certain bonus provisions. Mr. Rainey was also awarded
75,000 options which vest 1/3 each on the first, second and third anniversaries
of his employment. The employment agreement has a one year renewable term.
Katherine A. Dering, the former Chief Financial Officer, remained with the
Company as Senior Vice President - Finance, under an amended employment
agreement until September 1, 2007.
NOTE
16.
SEGMENT
DATA:
The
Company is a technology-driven accounts receivable management company with
operations in three segments: internet debt resolution software and services
(“Internet Services”), defaulted consumer debt buying (“Debt Buying”), and a
consumer debt collections agency (“Collection Agency”).
Debt
Resolve, operating the Company’s core business, offers online debt resolution
services to creditors and collection agencies. DRV Capital is a debt buyer
that
uses the Company’s patent-based online collection software to boost its
collections on the debt which it owns. First Performance operates collection
operations in two states and collects on defaulted consumer debt on behalf
of
its clients, who are debt buyers and creditors.
The
following tables summarize financial information about the Company’s business
segments for the three and nine months ended September 30, 2007:
Three
months ended September 30, 2007
|
|
|
Internet
Services
|
|
Debt
Buying
|
|
Collection
Agency
|
|
Corporate
|
|
Consolidated
|
|
|
Revenues
|
|
$
|
13,810
|
|
$
|
591
|
|
$
|
512,417
|
|
$
|
--
|
|
$
|
526,818
|
|
|
Loss
from operations
|
|
$
|
(2,284,792
|
)
|
$
|
(96,493
|
)
|
$
|
(744,050
|
)
|
$
|
(215,539
|
)
|
$
|
(3,340,874
|
)
|
|
Depreciation
and amortization
|
|
$
|
14,380
|
|
$
|
--
|
|
$
|
42,327
|
|
$
|
--
|
|
$
|
56,707
|
|
|
Goodwill
& intangibles impairment charge
|
|
$
|
--
|
|
$
|
--
|
|
$
|
(27,255
|
)
|
$
|
--
|
|
$
|
(27,255
|
)
|
|
Interest
income
|
|
$
|
(19,681
|
)
|
$
|
(8,551
|
)
|
$
|
(1,281
|
)
|
$
|
--
|
|
$
|
(29,513
|
)
|
|
Capital
expenditures
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
Total
assets
|
|
$
|
484,355
|
|
$
|
116,046
|
|
$
|
738,027
|
|
$
|
--
|
|
$
|
1,338,428
|
|
Nine
months ended September 30, 2007
|
|
|
Internet
Services
|
|
Debt
Buying
|
|
Collection
Agency
|
|
Corporate
|
|
Consolidated
|
|
|
Revenues
|
|
$
|
46,938
|
|
$
|
3,818
|
|
$
|
2,489,128
|
|
$
|
--
|
|
$
|
2,539,884
|
|
|
Loss
from operations
|
|
$
|
(6,394,966
|
)
|
$
|
(333,748
|
)
|
$
|
(3,318,474
|
)
|
$
|
(702,170
|
)
|
$
|
(10,749,358
|
)
|
|
Depreciation
and amortization
|
|
$
|
42,558
|
|
$
|
--
|
|
$
|
134,146
|
|
$
|
--
|
|
$
|
176,704
|
|
|
Goodwill
& intangibles impairment charge
|
|
$
|
--
|
|
$
|
--
|
|
$
|
(1,206,335
|
)
|
$
|
--
|
|
$
|
(1,206,335
|
)
|
|
Interest
income
|
|
$
|
14,224
|
|
$
|
(38,460
|
)
|
$
|
(1,724
|
)
|
$
|
--
|
|
$
|
(25,960
|
)
|
|
Capital
expenditures
|
|
$
|
40,320
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
40,320
|
|
|
Total
assets
|
|
$
|
484,355
|
|
$
|
116,046
|
|
$
|
738,027
|
|
$
|
--
|
|
$
|
1,338,428
|
|
NOTE
17.
SUBSEQUENT
EVENTS:
Subsequent
to September 30, 2007, the Company issued 16,667 shares in connection with
the
exercise of warrants for cash proceeds of $167.
|
b.
|
Line
of Credit - Related Party
|
On
October 17, 2007, Debt Resolve entered into a line of credit 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 will 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 from Mr. Mooney, 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 addition, the Company issued to Mr. Mooney warrants to purchase
137,500 shares of common stock at an exercise price of $2.00 per share. The
warrant award is subject to certain regulatory approvals. Subsequent to October
17, 2007, the Company has borrowed $275,000 under this line of credit. Drawings
under this line of credit are guaranteed personally by James Burchetta and
Charles Brofman, the Company’s Co-Chairmen.
On
October 26, 2007, the Company settled the patent litigation against Apollo.
Pursuant
to the settlement, the Company’s infringement claims against Apollo’s present
system were dismissed with prejudice, subject to the understanding that the
Company is free to file a patent infringement action against Apollo in the
future under the patents in the event Apollo’s product is configured differently
than as represented by Apollo and in a manner that infringes the patents. In
the
event of such litigation, Apollo retains its rights to assert any defense
available to it.