NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 1 – BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
InsPro Technologies Corporation (the “Company”,
“ITCC”, “we”, “us” or “our”) is a technology company that provides software applications
for use by insurance administrators in the insurance industry. Our business focuses primarily on our InsPro Enterprise
TM
software application, which was introduced in 2004.
The Company offers InsPro Enterprise on both a licensed and
an Application Service Provider (“ASP”) basis. InsPro Enterprise is an insurance administration and marketing system
that supports group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated
business. InsPro Technologies' clients include insurance carriers and third party administrators. The Company realizes revenue
from the sale of software licenses, application service provider fees, hosting fees, software maintenance fees and consulting and
implementation services.
Basis of presentation and principles of consolidation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the consolidated
financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments
are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2015 and notes thereto and other pertinent information contained in our Annual Report
on Form 10-K as filed with the Securities and Exchange Commission (the “Commission”).
The consolidated financial statements of
the Company include the Company and its wholly owned subsidiaries. All material inter-company balances and transactions have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates. Significant estimates in 2016 and 2015 include the allowance for doubtful accounts,
stock-based compensation, the useful lives and valuation of property and equipment, and deferred revenue.
Cash and cash equivalents
The Company considers all liquid debt instruments with original
maturities of three months or less to be cash equivalents.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Accounts receivable and allowance for uncollectable accounts
The Company has a policy of establishing an allowance for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other
factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged
to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At September
30, 2016 and December 31, 2015, the Company has established, based on a review of its outstanding balances, an allowance for doubtful
accounts in the amounts of $0 and $140,946, respectively.
Fair value of financial instruments
The carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair
value as of September 30, 2016 and December 31, 2015, because of the relatively short-term maturity of these instruments and their
market interest rates.
The Company follows Financial Accounting
Standards Board (“FASB”) ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for
assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be
applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework
for measuring fair value, and expands disclosure about such fair value measurements.
Property and equipment
Property and equipment are carried at cost.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in income in the year of disposition. In accordance with Statement of Financial Accounting Standards ASC 360, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” the Company examines the possibility of decreases in the value of fixed
assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Impairment of long-lived assets
The Company periodically reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company
recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the asset's estimated fair value and its book value.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Income taxes
The Company accounts for income taxes pursuant to the provisions
of FASB ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”), which requires, among other things, an
asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which
management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provisions of the ASC 740-10 related
to
Accounting for Uncertain Income Tax Positions.
When tax returns are filed, it is highly certain that some positions taken
would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the
position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10,
the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained upon examination, including the resolution of
appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits
in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities
upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the
Company has not recorded a liability for uncertain tax benefits.
The Company has adopted FASB ASC 740-10-25
Definition of
Settlement,
which provides guidance on how an entity should determine whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the
completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively
settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than
not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of September
30, 2016, the tax years ended December 31, 2015, 2014, 2013 and 2012 are still subject to audit.
Income (loss) per common share
Basic earnings per share is computed by dividing income (loss)
from continuing operations by the weighted average number of shares of common stock outstanding during the period. Diluted earnings
per share is computed by dividing the adjusted net income (loss) from operations for diluted earnings per share by the weighted
average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each
period. The effects of common stock equivalents and potentially dilutive securities outstanding during 2016 and 2015 are excluded
from the calculation of diluted income (loss) per common share because it is anti-dilutive.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
The Company's common stock equivalents include the following:
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock issued and outstanding
|
|
|
25,535,000
|
|
|
|
25,535,000
|
|
Series B convertible preferred stock issued and outstanding
|
|
|
106,144,240
|
|
|
|
106,117,040
|
|
Options to purchase common stock issued and outstanding
|
|
|
4,000,000
|
|
|
|
2,975,000
|
|
Warrants to purchase common stock issued and outstanding
|
|
|
25,098,330
|
|
|
|
25,084,730
|
|
Warrants to purchase series A convertible preferred stock, issued and outstanding
|
|
|
7,600,000
|
|
|
|
7,600,000
|
|
Warrants to purchase series B convertible preferred stock, issued and outstanding
|
|
|
65,000,000
|
|
|
|
25,000,000
|
|
|
|
|
233,377,570
|
|
|
|
192,311,770
|
|
Revenue recognition and deferred revenue
Revenues for nine months ended September 30, 2016, include a
reduction in the amount of $1,299,963 for stock based fees paid to a client. See Note 6 - Stockholders’ Deficit – Series
B Preferred Stock Warrants.
The Company offers InsPro Enterprise
TM
on both a
licensed and an ASP basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy of the InsPro
Enterprise software installed at a single client location or hosted by InsPro Technologies. Alternatively, ASP hosting service
enables a client to lease the InsPro Enterprise software, paying only for that capacity required to support their business. ASP
and hosting clients access InsPro Enterprise installed on clients’ servers or on the Company’s servers located at a
third party’s site.
The Company’s software maintenance fees apply to both
licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise help desk.
The Company’s consulting and implementation services
are generally associated with the implementation of InsPro Enterprise for either an ASP or licensed client, and cover such activity
as InsPro Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance plan set-up,
client insurance document design and system documentation.
The Company’s revenue is generally recognized under FASB
ASC 985-605 (“ASC 985-605”). For software arrangements involving multiple elements, which are license fees, professional
services, ASP services and maintenance services, the Company allocates revenue to each element based on the relative fair value
or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices
charged when the element is sold separately. Software revenue accounted for under ASC 985-605 is recognized when persuasive evidence
of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the
fee is fixed or determinable and collectability is probable. Revenue related to post-contract customer support (“PCS”),
including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term. Under
ASC 985-605, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery
of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service,
in which case revenue is recognized as the service is performed once the service is the only undelivered element.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company recognizes revenue from software
license agreements when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or
determinable, and collectability is probable. The Company considers fees relating to arrangements with payment terms extending
beyond one year to not be fixed or determinable and revenue for these arrangements is recognized as payments become due from the
customer. In software arrangements that include more than one InsPro Enterprise
TM
module, the Company allocates the
total arrangement fee among the modules based on the relative fair value of each of the modules.
License revenue allocated to software products
generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated
to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements
is recognized as the services are performed.
Effective August 18, 2015, the Company entered into a 5 year
software and services reseller agreement (the “Reseller Agreement”) with an unaffiliated 3
rd
party (the
“Reseller”) whereby the Company granted the Reseller the exclusive right to market InsPro Enterprise to prospective
clients for their administration of long term care insurance products for an initial fee of $2,500,000 (the “Reseller Fee”).
Pursuant to the Reseller Agreement, the Reseller Fee is fully or partially refundable to the Reseller in the event that the Company
material breaches the Reseller Agreement or the Company becomes insolvent, goes into liquidation, seeks protection under bankruptcy,
or materially breaches the Reseller Agreement during the term of the Reseller Agreement (each a “Refund Event”). The
Reseller Fee was fully refundable if a Refund Event occurred before August 31, 2016. A Refund Event did not occur as of September
30, 2016, and as a result the Company recognized $500,000 of Reseller Fee as revenue in the three and nine months ended September
30, 2016. The Company shall refund the following amounts to the Reseller if a Refund Event occurs between the following dates;
$2,000,000 between September 1, 2016 and August 31, 2017, $1,500,000 between September 1, 2017 and August 31, 2018, and $1,000,000
between September 1, 2018 and August 31, 2019. As of September 30, 2016 the Company has recorded the $2,000,000 Reseller Fee in
deferred revenue ($500,000 included in short term liabilities and $1,500,000 included in long term liabilities).
The unearned portion of the Company’s revenue, which is
revenue collected or billed but not yet recognized as earned, has been included in the consolidated balance sheet as a liability
for deferred revenue.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Cost of revenues
Cost of revenues includes
direct labor and associated costs for employees and independent contractors performing InsPro Enterprise
TM
design, development,
implementation and testing together with customer management, training and technical support, as well as a portion of facilities
costs and depreciation. The following table discloses cost of revenue as reported in the statement of operations.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
1,611,665
|
|
|
$
|
1,962,026
|
|
|
$
|
5,641,370
|
|
|
$
|
5,972,150
|
|
Professional fees
|
|
|
2,413,791
|
|
|
|
3,066,414
|
|
|
|
7,981,721
|
|
|
|
9,014,589
|
|
Depreciation
|
|
|
90,856
|
|
|
|
97,660
|
|
|
|
287,163
|
|
|
|
388,021
|
|
Rent, utilities, telephone and communications
|
|
|
102,784
|
|
|
|
126,378
|
|
|
|
338,117
|
|
|
|
359,334
|
|
Other cost of revenues
|
|
|
103,641
|
|
|
|
71,546
|
|
|
|
315,990
|
|
|
|
605,300
|
|
|
|
$
|
4,322,737
|
|
|
$
|
5,324,024
|
|
|
$
|
14,564,361
|
|
|
$
|
16,339,394
|
|
Selling, general and administrative expenses
Selling, general and administrative expenses include all selling,
marketing, and other expenses not classified as cost of revenues. The following table discloses selling, general and administrative
expenses as reported in the statement of operations.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
755,185
|
|
|
$
|
851,593
|
|
|
$
|
2,561,625
|
|
|
$
|
2,551,107
|
|
Advertising and other marketing
|
|
|
43,022
|
|
|
|
22,986
|
|
|
|
92,476
|
|
|
|
114,635
|
|
Depreciation
|
|
|
30,786
|
|
|
|
21,967
|
|
|
|
88,093
|
|
|
|
86,514
|
|
Rent, utilities, telephone and communications
|
|
|
100,516
|
|
|
|
92,955
|
|
|
|
304,724
|
|
|
|
270,890
|
|
Professional fees
|
|
|
163,559
|
|
|
|
190,333
|
|
|
|
568,111
|
|
|
|
687,730
|
|
Other general and administrative
|
|
|
182,277
|
|
|
|
266,560
|
|
|
|
566,398
|
|
|
|
771,010
|
|
|
|
$
|
1,275,345
|
|
|
$
|
1,446,394
|
|
|
$
|
4,181,427
|
|
|
$
|
4,481,886
|
|
Advertising and other marketing
Advertising and other marketing costs are expensed as incurred
and are reported in selling, general and administrative expenses. See the previous table under selling, general and administrative
expenses for advertising and other marketing expenses reported in the statement of operations.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Concentrations of credit risk
The Company maintains its cash and restricted cash in bank deposit
accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”).
At September 30, 2016, the Company had $2,791,900 of cash in United States bank deposits, of which $500,946 was federally insured
and $2,290,954 was not federally insured.
The following table lists the percentage of the Company’s
accounts receivable balance from the Company’s clients representing 10% or more of the accounts receivable balances as of
the periods listed below.
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
33
|
%
|
|
|
32
|
%
|
Client #2
|
|
|
15
|
%
|
|
|
17
|
%
|
Client #3
|
|
|
14
|
%
|
|
|
13
|
%
|
Client #4
|
|
|
-
|
|
|
|
11
|
%
|
The following table lists the percentage of the Company’s
revenue earned from the Company’s clients representing 10% or more of the revenue earned in each of the periods listed below.
|
|
For the 9 Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
25
|
%
|
|
|
24
|
%
|
Client #2
|
|
|
16
|
%
|
|
|
12
|
%
|
Client #3
|
|
|
15
|
%
|
|
|
-
|
|
Stock-based compensation
The Company accounts for stock based compensation transactions
using a fair-value-based method and recognizes compensation cost for share-based payments to employees based on their grant-date
fair value from the beginning of the fiscal period in which the recognition provisions are first applied.
Non-employee stock based compensation
The cost of stock based compensation awards issued to non-employees
for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services,
whichever is more readily determinable, based on their grant-date fair value from the beginning of the fiscal period in which the
recognition provisions are first applied.
Registration rights agreements
At September 30, 2016, the Company does not
believe that it will incur a penalty in connection with the Company’s registration rights agreements. Accordingly, no liability
in respect thereof was recorded as of September 30, 2016. See Note 6 - Stockholders Deficit – Registration and Participation
Rights.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued
by FASB, which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that
the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated
financial statements upon adoption.
In May 2014, the FASB issued Accounting Standards Update (“ASU”)
ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"), that outlines a
comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. In July 2015, the FASB approved a one-year deferral of the effective date
of ASU 2014-09 to the beginning of 2018 for public companies, with an option that would permit companies to adopt the standard
as early as the original effective date of 2017. ASU 2014-09 may be adopted either retrospectively or on a modified retrospective
basis whereby it would be applied to new contracts and existing contracts with remaining performance obligations as of the effective
date, with a cumulative catch-up adjustment recorded to beginning retained earnings at the effective date for those contracts.
We are currently evaluating the impacts of the adoption of ASU 2014-09 on our consolidated financial position, results from operations
and related disclosures, along with the implementation approach to be used.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842)
("ASU 2016-02"), that requires all leases with a term greater than 12 months to be recognized on
the balance sheet, while lease expenses would continue to be recognized in the statement of operations in a manner similar to current
accounting guidance. ASU 2016-02 is effective for the Company at the beginning of fiscal year 2019 and early adoption is permitted.
Entities must adopt ASU 2016-02 on a modified retrospective basis whereby it would be applied at the beginning of the earliest
comparative year. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments – Credit Losses (Topic 326).” For most financial assets, such as trade and other receivables, loans and
other instruments, this standard changes the current incurred loss model to a forward-looking expected credit loss model, which
generally will result in the earlier recognition of allowances for losses. The new standard is effective for the Company at the
beginning of fiscal year 2019. Entities are required to apply the provisions of the standard through a cumulative-effect adjustment
to retained earnings as of the effective date. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated
financial statements.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 2 – DISCONTINUED OPERATIONS
The Company has classified its former telesales call center
and external agent produced agency business as discontinued operations. During the first quarter of 2009, the Company ceased the
direct marketing and sale of health and life insurance and related products to individuals and families in its telesales call center.
The Company also determined to discontinue selling health and life insurance and related products to individuals and families through
its non-employee agents. On February 20, 2009, the Company entered into and completed the sale of its agency business to an unaffiliated
third party, pursuant to the terms of a client transition agreement.
The financial position of discontinued
operations was as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
6,288
|
|
|
$
|
15,212
|
|
Net current assets of discontinued operations
|
|
$
|
6,288
|
|
|
$
|
15,212
|
|
The results of discontinued operations do not include any allocated
or common overhead expenses. The results of operations of discontinued operations were as follows:
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission and other revenue from carriers
|
|
$
|
2,068
|
|
|
$
|
3,633
|
|
|
$
|
7,627
|
|
|
$
|
12,320
|
|
Transition policy commission pursuant to the Agreement
|
|
|
21,169
|
|
|
|
39,680
|
|
|
|
67,581
|
|
|
|
126,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,237
|
|
|
|
43,313
|
|
|
|
75,208
|
|
|
|
138,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other general and administrative
|
|
|
8,390
|
|
|
|
6,267
|
|
|
|
21,867
|
|
|
|
21,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,390
|
|
|
|
6,267
|
|
|
|
21,867
|
|
|
|
21,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
14,847
|
|
|
$
|
37,046
|
|
|
$
|
53,341
|
|
|
$
|
116,782
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following:
|
|
Useful
Life
(Years)
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Computer equipment and software
|
|
3
|
|
$
|
4,415,764
|
|
|
$
|
4,152,927
|
|
Office equipment
|
|
4.6
|
|
|
158,732
|
|
|
|
158,732
|
|
Office furniture and fixtures
|
|
6.7
|
|
|
189,857
|
|
|
|
189,857
|
|
Leasehold improvements
|
|
5.4
|
|
|
94,620
|
|
|
|
94,620
|
|
|
|
|
|
|
4,858,973
|
|
|
|
4,596,136
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
(4,223,455
|
)
|
|
|
(3,848,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
635,518
|
|
|
$
|
747,937
|
|
The following table discloses depreciation
expense as reported in the statement of operations.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation included in cost of revenues
|
|
$
|
90,856
|
|
|
$
|
97,660
|
|
|
$
|
287,163
|
|
|
$
|
388,021
|
|
Depreciation included in selling, general and administrative
|
|
|
30,786
|
|
|
|
21,967
|
|
|
|
88,093
|
|
|
|
86,514
|
|
Total depreciation
|
|
$
|
121,642
|
|
|
$
|
119,627
|
|
|
$
|
375,256
|
|
|
$
|
474,535
|
|
NOTE 4 – NOTES PAYABLE
Notes payable at September 30, 2016, consist of two notes payable
for insurance premium financing on two of the Company’s insurance policies. The first note commenced on April 28, 2016, has
an annual interest rate of 8.75% and consists of 11 monthly payments of principal and interest of $7,456 per month commencing on
May 28, 2016 and ending on March 28, 2017. The second note commenced on May 3, 2016, has an annual interest rate of 7.99% and consists
of 11 monthly payments of principal and interest of $4,358 per month commencing on June 3, 2016 and ending on April 3, 2017.
Notes payable at December 31, 2015, consist of two notes payable
for insurance premium financing on two of the Company’s insurance policies. The first note commenced on April 28, 2015, has
an annual interest rate of 7.50% and consists of 11 monthly payments of principal and interest of $7,566 per month commencing on
May 28, 2015 and ending on March 28, 2016. The second note commenced on May 3, 2015, has an annual interest rate of 7.99% and consists
of 11 monthly payments of principal and interest of $4,396 per month commencing on June 3, 2015 and ending on April 3, 2016.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 5 – TRANSACTIONS AND LOANS FROM RELATED PARTIES
On January 30, 2015, the Company and InsPro Technologies issued
a Secured Convertible Promissory Note (“Note”) to The Co-Investment Fund II L. P. (“Co-Investment”), pursuant
to a Secured Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”). In connection with the
Note Purchase Agreement, the Company and InsPro Technologies, LLC (“InsPro LLC, and together with the Company, the “Borrowers”)
and Co-Investment entered into a Security Agreement (the “Security Agreement”, and together with the Note and the Note
Purchase Agreement, the “Financing Agreements”). Pursuant to the terms and subject to the conditions set forth in the
Financing Agreements, Co-Investment provided a loan in the amount of $1,000,000 (“Loan”) to the Borrowers, which was
secured by all assets of the Borrowers other than copyright applications, copyright registration, patents, patent applications,
trademarks, services markets and other intellectual property (collectively, the “Collateral”). Pursuant to the Note,
interest in the amount of 8% per annum, calculated on a 365 or 366 day year, as the case may be, and the principal amount of $1,000,000
and accrued interest were paid on September 18, 2015. Co-Investment has the right to convert principal and accrued interest into
the equity securities of the Company in the event that the Company issues and sells equity securities to investors on or before
the repayment in full of the Note in an equity financing resulting in gross proceeds to the Company of at least $1,000,000.
Pursuant to the Security Agreement, the Borrowers shall not,
without Co-Investment’s prior consent, sell, lease or otherwise dispose of any equipment or fixtures constituting Collateral.
In addition, the Borrowers will furnish Co-Investment with such information and documents regarding the Collateral and their financial
condition, business, assets and liabilities as is reasonably requested by Co-Investment.
In connection with the Financing Agreements, Co-Investment entered
into a Subordination Agreement (“Subordination Agreement”) with Silicon Valley Bank (“SVB”), the terms
of such agreement were approved by the Company, InsPro LLC and Atiam Technologies L.P. Pursuant to the Subordination Agreement,
Co-Investment agreed, among other things, that all obligations under the Company’s loan agreement with SVB and any other
obligations to SVB would be senior to the outstanding indebtedness under the Financing Agreements.
On March 27, 2015, the Borrowers issued a second Secured Convertible
Promissory Note (the “Second Note”) in the amount of $1,000,000 to Co-Investment pursuant to a second Secured Convertible
Promissory Note Purchase Agreement (the “Second Note Purchase Agreement”). The terms of the Second Note are essentially
identical to the terms of the Note and the terms of the Second Note Purchase Agreement are essentially identical to the terms of
the Note Purchase Agreement.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 5 – TRANSACTIONS AND LOANS FROM RELATED PARTIES
(continued)
On September 18, 2015, the Company completed a private placement
(the “Private Placement”) with certain accredited investors (collectively the “Investors”), including Co-Investment,
which hold more than 5% of our common stock; Donald Caldwell who is the CEO and chairman of the board of directors of the Company
and managing partner of Co-Investment; Edmond Walters, who is a director of the Company, and Azeez Enterprises, LP, which is affiliated
with Michael Azeez, who is a director of the Company, for an aggregate of 1,163,141 shares of our Series B Convertible Preferred
Stock and warrants to purchase 11,631,410 shares of our common stock (the “2015 Warrants”). The Company sold to the
investors 1,163,141 units (“Units”) at a per Unit price of $3.00, for an aggregate total investment of $3,489,423,
and each unit consisted of one share of Series B Convertible Preferred Stock and a warrant to purchase 10 shares of our common
stock at an initial exercise price of $0.15 per share (“Warrant Shares”), subject to adjustment pursuant to the terms
of a securities purchase agreement (the “Purchase Agreement”). The Company intends to use the net proceeds of the Private
Placement for working capital purposes. See Note 6 - Shareholders’ Deficit – Series B Preferred Stock and Common Stock
Warrants. In the Private Placement the Company issued; 696,475 shares of Series B Preferred Stock and 6,964,750 Warrant shares
to Co-Investment, 166,666 shares of Series B Preferred Stock and 1,666,660 Warrant Shares to Edmond Walters, 150,000 shares of
Series B Preferred Stock and 1,500,000 Warrant Shares to Azeez Enterprises, and 150,000 shares of Series A Preferred Stock and
1,500,000 Warrant Shares to an unrelated third party.
Pursuant to the terms of the Purchase Agreement, the Company
and Co-Investment agreed that, effective at the closing on September 18, 2015, (i) the Note and Second Note (collectively, “Notes”)
were amended such that the entire principal amount of such Notes plus accrued interest as of the closing was converted into Units,
(ii) the Notes were converted in accordance with the terms thereof by the issuance of the Units to Co-Investment under the Purchase
Agreement, (iii) all amounts owed to Co-Investment by the Company under borrowings by the Company, whether evidenced orally or
in writing, including without limitation, the Notes and any unpaid principal balance, any interest owed and any penalties or additional
fees owed to Co-Investment (collectively, “Existing Indebtedness”), was fully paid and satisfied by the Company, and
the Existing Indebtedness was cancelled, and (iv) the Notes and any other agreements entered into in connection with the Notes
were amended to give effect to the foregoing.
On March 17, 2015, the Company received a loan from Edmond Walters,
a current director of the Company, in the amount of $500,000 (the “Walters Loan”). The Walters Loan was a pre-payment
by Mr. Walters in connection with any future issuance of equity securities of the Company, and is convertible into equity securities
of the Company in connection with any such future issuance of equity securities as agreed to by the Company and Mr. Walters. The
Walters Loan is refundable to Mr. Walters on demand, without interest, if the Company does not consummate an equity financing within
a time period to be determined by the Company and Mr. Walters.
Pursuant to the terms of the Purchase Agreement, the Company
and Mr. Walters agreed that, effective at the closing on September 18, 2015, (i) the Walters Loan was converted by the issuance
of the Units to Mr. Walters under the Purchase Agreement, (ii) all amounts owed to Mr. Walters by the Company under borrowings
by the Company, whether evidenced orally or in writing, including without limitation, the Walters Loan and any unpaid principal
balance, any interest owed and any penalties or additional fees owed to Mr. Walters (collectively, “Walters Existing Indebtedness”),
was fully paid and satisfied by the Company, and the Walters Existing Indebtedness was cancelled, and (iii) the Walters Loan and
any agreements entered into in connection with the Loan were amended to give effect to the foregoing.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 6 – STOCKHOLDERS’ DEFICIT
Common Stock
As of September 30, 2016 and December 31, 2015, the Company
was authorized to issue 500,000,000 shares of common stock with a par value of $0.001 per share (“Common Stock”). As
of September 30, 2016 and December 31, 2015, the Company had 41,543,655 shares of its Common Stock issued and outstanding. The
Company has reserved shares of Common Stock, on an as-if-converted basis, as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Exercise of options issued and outstanding to purchase common stock
|
|
|
4,000,000
|
|
|
|
2,975,000
|
|
Issuance of common shares available under the 2010 Equity Compensation Plan
|
|
|
24,996,980
|
|
|
|
26,021,980
|
|
Exercise of warrants issued and outstanding to purchase common stock
|
|
|
25,098,330
|
|
|
|
25,084,730
|
|
Conversion of series A convertible preferred stock issued and outstanding into common stock
|
|
|
25,535,000
|
|
|
|
25,535,000
|
|
Exercise of warrants to purchase series A convertible preferred stock issued and outstanding and converted into common stock
|
|
|
7,600,000
|
|
|
|
7,600,000
|
|
Conversion of series B convertible preferred stock issued and outstanding into common stock
|
|
|
106,144,240
|
|
|
|
106,117,040
|
|
Exercise of warrants to purchase series B convertible preferred stock issued and outstanding and converted into common stock
|
|
|
65,000,000
|
|
|
|
25,000,000
|
|
|
|
|
|
|
|
|
|
|
Total common stock reserved for issuance
|
|
|
258,374,550
|
|
|
|
218,333,750
|
|
The above table includes Common Stock reserved for non exercisable,
unvested stock options and Common Stock reserved for the issuance of stock options in the future under the Company’s 2010
Equity Compensation Plan.
Series A Convertible Preferred Stock
As of September 30, 2016 and December 31, 2015, the Company
was authorized to issue 3,437,500 shares of Series A Convertible Preferred Stock par value $0.001 per share (“Series A Preferred
Stock”). As of September 30, 2016 and December 31, 2015, the Company had 1,276,750 shares of its Series A Preferred Stock
issued and outstanding. As of September 30, 2016 and December 31, 2015, the Company has reserved 380,000 shares of Series A Preferred
Stock for the exercise of warrants issued and outstanding to purchase its Series A Preferred Stock.
The Series A Preferred Stock is entitled to vote as a single
class with the holders of the Company’s Common Stock and preferred stock, with each share of Series A Preferred Stock having
the right to 20 votes.
Upon the liquidation, sale or merger of the Company, each share
of Series A Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to two
and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500, subject to certain customary adjustments,
or (B) the amount such share of Series A Preferred Stock would receive if it participated
pari passu
with the holders of
Common Stock on an as-converted basis. The liquidation preference is calculated by taking the product of the issued and outstanding
shares of Series A Preferred Stock times $10.00. Each share of Series A Preferred Stock is convertible into 20 shares of Common
Stock, subject to adjustment and at the option of the holder of the Series A Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
For so long as any shares of Series A Preferred Stock are outstanding,
the vote or consent of the holders of at least two-thirds of the Series A Preferred Stock is required to approve (Y) any amendment
to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special
rights of the Series A Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares
of capital stock that rank senior to the Series A Preferred Stock. In addition to the voting rights described above, for so long
as 1,000,000 shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the
shares of Series A Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the
Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series A Preferred
Stock with an amount per share equal to two and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500,
in aggregate for all issued and outstanding Series A Preferred Stock.
Series B Convertible Preferred Stock
As of September 30, 2016 and December 31, 2015, the Company
was authorized to issue 11,000,000 shares of Series B Convertible Preferred Stock par value $0.001 per share (“Series B Preferred
Stock”). As of September 30, 2016 and December 31, 2015, the Company had 5,307,212 and 5,305,852 of its Series B Preferred
Stock issued and outstanding, respectively. As of September 30, 2016 and December 31, 2015, the Company has reserved 3,250,000
and 1,250,000 shares of Series B Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series B Preferred
Stock, respectively.
The Series B Preferred Stock is entitled to vote as a single
class with the holders of the Company’s Common Stock and preferred stock, with each share of Series B Preferred Stock having
the right to 20 votes.
As of September 30, 2016 and December 31, 2015, upon the liquidation,
sale or merger of the Company, each share of Series B Preferred Stock is entitled to receive an amount equal to the greater of
(A) a liquidation preference equal to the Series B Preferred Stock original issue price, or $15,921,636 and $15,917,556, respectively,
subject to certain customary adjustments, or (B) the amount such share of Series B Preferred Stock would receive if it participated
pari passu
with the holders of Common Stock and preferred stock on an as-converted basis. The liquidation preference is
calculated by taking the product of the issued and outstanding shares of Series B Preferred Stock times $3.00. Each share of Series
B Preferred Stock is convertible into 20 shares of Common Stock, subject to adjustment and at the option of the holder of the Series
B Preferred Stock.
For so long as any shares of Series B Preferred Stock are outstanding,
the vote or consent of the holders of at least two-thirds of the Series B Preferred Stock is required to approve (Y) any amendment
to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special
rights of the Series B Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares
of capital stock that rank senior to the Series B Preferred Stock. In addition to the voting rights described above, for so long
as 1,000,000 shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the
shares of Series B Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the
Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series B Preferred
Stock with an amount per share equal the Series B Preferred Stock original issue price, or $15,921,636, in aggregate for all issued
and outstanding Series B Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
On February 2, 2016 the Company filed a registration statement
for a rights offering on Form S-1/A, which the Commission declared effective on February 5, 2016, to distribute to shareholders
excluding residents of Arizona and California at no charge, one non-transferable subscription right for each 16,615 shares of our
Common Stock, 831 shares of our Series A Preferred Stock and 830 shares of our Series B Preferred Stock owned as of January 31,
2016 (the “Record Date”), either as a holder of record or, in the case of shares held of record by brokers, dealers,
custodian banks, or other nominees on shareholders’ behalf, as a beneficial owner of such shares. If the rights offering
was fully subscribed the gross proceeds from the rights offering would have been approximately $2.5 million. This rights offering
was designed to give all of the holders of the Company’s capital stock the opportunity to participate in an equity investment
in the Company on the same economic terms as the Private Placement.
The basic subscription right entitled the holder to purchase
one unit (“Subscription Unit”) at a subscription price of $240. A Subscription Unit consisted of 80 shares of Series
B Preferred Stock and a warrant to purchase 800 shares of Common Stock that expires on November 20, 2017 at an exercise price of
$0.15 per share. In the event that a holder of a Subscription Unit purchased all of the basic Subscription Units available to the
holder then pursuant to their basic subscription right, the holder had the option to choose to subscribe for a portion of any Subscription
Units that were not purchased by all other holders of Subscription Units through the exercise of their basic subscription rights.
Effective with the expiration of the subscription rights, which
occurred on March 14, 2016, holders of subscription rights exercised in aggregate 17 basic subscription rights and 0 over subscription
rights for a total 17 Subscription Units. The Company received $4,080 in gross proceeds as a result of the exercise of Subscription
Units. As a result of the exercise of 17 Subscription Units the Company issued effective on March 14, 2016 in aggregate 1,360 shares
of Series B Preferred Stock and of warrants to purchase in aggregate 13,600 shares of Common Stock that expires on November 20,
2017 at an exercise price of $0.15 per share (the “2016 Warrants”). Effective with the expiration of the subscription
rights all unexercised subscription rights expired.
The Company allocated $451 of the $4,080 proceeds received as
a result of the rights offering, which represent the fair value of the 2016 Warrants, to additional paid in capital using a Black-Scholes
option pricing model with the following assumptions: expected volatility of 259%, a risk-free interest rate of 0.51%, an expected
term of 1.7 years and 0% dividend yield. The remaining $3,629 of the proceeds received was allocated to the Series B Preferred
Stock.
Stock Options
On March 31, 2016, the Company granted two executives of the
Company options to purchase a total of 1,000,000 shares of the Company’s Common Stock, which vest as follows: 250,000 shares
of Common Stock on March 31 of each year from 2017 to 2020. Such options have a five year term and an exercise price of $0.10 per
share, which exceeded the $0.04 closing price of one share of the Company’s Common Stock as quoted on the OTCBB on March
31, 2016. The fair value of the options granted was estimated on the date of the grant to be $40,000 using the Black-Scholes option-pricing
model based on the following assumptions: expected volatility: 724%, risk-free interest rate: 0.38%, expected life in years: 5
based on the contract life of the option grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining
to these options in salaries, commission and related taxes of $2,500 in the nine months ended September 30, 2016.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
On May 20, 2016, the Company granted to an executive of the
Company options to purchase a total of 500,000 shares of the Company’s Common Stock, which vest as follows: 125,000 shares
of Common Stock on May 20 of each year from 2017 to 2020. Such options have a five year term and an exercise price of $0.10 per
share, which exceeded the $0.04 closing price of one share of the Company’s Common Stock as quoted on the OTCBB on May 20,
2016. The fair value of the options granted was estimated on the date of the grant to be $16,000 using the Black-Scholes option-pricing
model based on the following assumptions: expected volatility: 710%, risk-free interest rate: 0.32%, expected life in years: 5
based on the contract life of the option grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining
to these options in salaries, commission and related taxes of $666 in the nine months ended September 30, 2016.
During the nine months ended September 30, 2016, 475,000 options,
which were previously granted to directors and a former employee of the Company, expired in accordance with the terms of such stock
options.
As of September 30, 2016, there were 30,000,000 shares of our
Common Stock authorized to be issued under the Company’s 2010 Equity Compensation Plan, of which 24,996,980 shares of our
Common Stock remain available for future stock option grants.
The Company recorded compensation expense pertaining to employee
stock options and warrants in the amount of $202,843 for the nine months ended September 30, 2016, which included $55,463 of expense
pertaining to stock options and $147,380 of expense pertaining to the amendment of warrants to purchase Series A Preferred Stock.
See Note 6 – Stockholders Deficit – Series A Preferred Stock Warrants.
The value of equity compensation expense not yet expensed pertaining
to unvested equity compensation for both options to purchase common stock and Series A Preferred Stock was $157,992 as of September
30, 2016, which will be recognized over a weighted average 2.6 years in the future.
A summary of the Company's outstanding stock options as of and
for the nine months ended September 30, 2016 are as follows:
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Of Shares
|
|
|
Average
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Fair Value
|
|
|
Contractual Life
|
|
|
Value (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
2,975,000
|
|
|
$
|
0.90
|
|
|
$
|
0.54
|
|
|
|
2.53
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,500,000
|
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(475,000
|
)
|
|
|
3.58
|
|
|
|
2.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
4,000,000
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at September 30, 2016
|
|
|
1,391,666
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
3.69
|
|
|
$
|
-
|
|
(1) The aggregate intrinsic value is based on the $0.08 closing
price as of September 30, 2016 for the Company’s Common Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
Common Stock Warrants
On March 14, 2016, the 2016 Warrants were issued in connection
with the rights offering. See Note 6 – Stockholders Deficit – Series B Preferred Stock. The Company determined the
2016 Warrants qualify for a scope exception under ASC 815 as they were determined to be indexed to the Company’s stock.
Outstanding warrants at September 30, 2016 have an average weighted
average remaining contractual life of 1.1 years. A summary of the status of the Company's outstanding common stock warrants as
of and for the nine months ended September 30, 2016 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
25,084,730
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
For the period ended September 30, 2016
|
|
|
|
|
|
|
|
|
Granted
|
|
|
13,600
|
|
|
|
0.15
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at September 30, 2016
|
|
|
25,098,330
|
|
|
$
|
0.15
|
|
Series A Preferred Stock Warrants
On March 31, 2016, the Company amended and restated a warrant
to purchase a total of 150,000 shares of the Company’s Series A Preferred Stock originally granted to Mr. Robert J. Oakes
on August 18, 2010, and also amended and restated a warrant to purchase a total of 150,000 shares of the Company’s Series
A Preferred Stock originally granted to Mr. Anthony R. Verdi on September 14, 2011 (collectively the “Original Warrants”).
Immediately prior to March 31, 2016, the Original Warrants had an expiration date of September 14, 2016 and the Original Warrants
were amended and restated to have an expiration date of September 14, 2017 (as amended, the “Amended and Restated Warrants”).
The Amended and Restated Warrants are fully exercisable and have an exercise price of $4.00 per share. The fair value of the amendment
to the Amended and Restated Warrants was estimated on the date of the amendment to be the difference between the value of the Amended
and Restated Warrants immediately before and after the change in the expiration date. The fair value of the Amended and Restated
Warrants was estimated on the date of the amendment before the change in the expiration date to be $2,224 using the Black-Scholes
option-pricing model based on the following assumptions: expected volatility: 111%, risk-free interest rate: 0.38%, expected life
in years: 0.5 based on the contract life of the warrant grant, and assumed dividend yield: 0%. The fair value of the Amended and
Restated Warrants was estimated on the date of the amendment after the change in the expiration date to be $149,605 using the Black-Scholes
option-pricing model based on the following assumptions: expected volatility: 263%, risk-free interest rate: 0.38%, expected life
in years: 1.5 based on the contract life of the warrant grant, and assumed dividend yield: 0%. The Company recorded compensation
expense pertaining to the Amended and Restated Warrant in salaries, commission and related taxes of $147,380 in the nine months
ended September 30, 2016.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
Outstanding warrants to purchase the Company’s Series
A Preferred Stock at September 30, 2016 have a remaining contractual life of 1 year. A summary of the status of the Company's outstanding
Series A Preferred Stock warrants as of and for the nine months ended September 30, 2016 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
380,000
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
For the period ended September 30, 2016
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at September 30, 2016
|
|
|
380,000
|
|
|
$
|
4.00
|
|
Series B Preferred Stock Warrants
On April 4, 2016, the Company entered into an agreement with
an existing client, which among other things, included a provision that the Company issue a warrant to the client to purchase 2,000,000
shares of the Company’s Series B Preferred Stock, which is immediately exercisable (the “2016 Series B Warrants”).
The 2016 Series B Warrants have a three year term, a cashless exercise provision and an exercise price of $3.00 per share. On May
4, 2016 the Company issued the 2016 Series B Warrant to the client. The fair value of the 2016 Series B Warrants was estimated
on April 4, 2016, which was the date of the agreement with the client, to be $1,299,963 using the Black-Scholes option-pricing
model based on the following assumptions: expected volatility: 503%, risk-free interest rate: 0.38%, expected life in years: 3
based on the contract life of the 2016 Series B Warrants, and assumed dividend yield: 0%. The Company determined the 2016 Series
B Warrants qualify for a scope exception under ASC 815 as they were determined to be indexed to the Company’s stock. The
Company recorded the fair value of the 2016 Series B Warrant as an increase to additional paid in capital and a reduction to revenue
in the nine months ended September 30, 2016, in the amount of $1,299,963.
Outstanding preferred stock warrants to purchase the Company’s
Series B Preferred Stock at September 30, 2016 have a remaining contractual life of 2.6 years. A summary of the status of the Company's
outstanding Series B Preferred Stock warrants as of and for the nine months ended September 30, 2016 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
1,250,000
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
For the period ended September 30, 2016
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,000,000
|
|
|
|
3.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at September 30, 2016
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
Registration and Participation Rights
As of September 30, 2016, the Company has not received a demand
notice in connection with any of the Company’s various registration rights agreements.
NOTE 7 – CAPITAL LEASE OBLIGATIONS
The Company’s subsidiary, InsPro LLC, has entered into
several capital lease obligations to purchase equipment used for operations. The Company has the option to purchase the equipment
at the end of each lease agreement for one dollar. The underlying assets and related depreciation were included in the appropriate
fixed asset category, and related depreciation account.
Property and equipment includes the following amounts for leases
that have been capitalized as of September 30, 2016 and December 31, 2015:
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Useful Life (Years)
|
|
|
|
|
|
|
Computer equipment and software
|
|
3
|
|
$
|
1,576,226
|
|
|
$
|
1,344,091
|
|
Phone System
|
|
3
|
|
|
15,011
|
|
|
|
15,011
|
|
|
|
|
|
|
1,591,237
|
|
|
|
1,359,102
|
|
Less accumulated depreciation
|
|
|
|
|
(1,185,594
|
)
|
|
|
(990,007
|
)
|
|
|
|
|
$
|
405,643
|
|
|
$
|
369,095
|
|
Future minimum payments required under capital leases at September
30, 2016 are as follows:
2016
|
|
$
|
80,961
|
|
2017
|
|
|
203,110
|
|
2018
|
|
|
130,693
|
|
2019
|
|
|
30,307
|
|
|
|
|
|
|
Total future payments
|
|
|
445,071
|
|
Less amount representing interest
|
|
|
28,598
|
|
|
|
|
|
|
Present value of future minimum payments
|
|
|
416,473
|
|
Less current portion
|
|
|
230,215
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
186,258
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2016
NOTE 8 – DEFINED CONTRIBUTION 401(k) PLAN
The Company implemented a 401(k) plan on January 1, 2007. Eligible
employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 6 months of employment with
the Company. An employee may become a participant of the 401(k) plan on the first day of the month following the completion of
the eligibility requirements. Effective January 1, 2007 the Company implemented an elective contribution to the plan of 25% of
the employee’s contribution up to 4% of the employee’s compensation. The contributions are subject to a vesting schedule
and become fully vested after one year of service, retirement, death or disability, whichever occurs first. The Company made contributions
of $61,701 and $61,925 for the nine months ended September 30, 2016 and 2015, respectively.
NOTE 9 – COMMITTMENTS AND CONTINGENCIES
On July 7, 2006, the Company entered into a lease agreement
with Radnor Properties-SDC, L.P. (the “Landlord”) for the lease of 7,414 square feet of office space located in Radnor
Financial Center, Building B, 150 Radnor-Chester Road, Radnor, Pennsylvania. The term of the lease commenced on November 1, 2006,
which was the date the Company, with the Landlord’s prior consent, assumed possession of the premises and the date the Landlord
tendered possession of the premises to the Company following the substantial completion of the improvements required to be made
by the Landlord under the lease agreement, and will expire on the last day of the 125
th
month following the commencement
of the lease term. The lease will expire on March 31, 2017, in accordance with the terms of the lease. The annual rent increases
every 12 months, starting at approximately $161,592 plus a proportionate share of Landlord’s building expenses after
the second month and ending at approximately $258,378 plus a proportionate share of Landlord’s building expenses. Under the
terms of the lease agreement, rent was waived for the first five months of the lease term with respect to 5,238 square feet and
for the first twelve months for the remaining 2,176 square feet. The Company recorded a liability for deferred rent in accrued
liabilities in the amount of $15,128 as of September 30, 2016.
On September 14, 2007, InsPro LLC entered into a lease agreement
(the “Lease Agreement”) with BPG Officer VI Baldwin Tower L.P. (“BPG”). On April 28, 2015, InsPro LLC and
BPG entered into a fifth amendment to the Lease Agreement whereby InsPro LLC and BPG agreed to amend the Lease Agreement to increase
the leased office space by 6,801 rentable square feet effective April 1, 2015, through March 31, 2016, at an incremental monthly
rent of $10,000. On June 9, 2016, InsPro LLC and BPG entered into a sixth amendment to the Lease Agreement whereby InsPro LLC and
BPG agreed to amend the Lease Agreement to extend the term through January 31, 2018 for 17,567 of rentable square feet at a monthly
cost of $28,546 for the period February 1, 2017 through January 31, 2018.
Future minimum payments required under operating leases and
service agreements at September 30, 2016 are as follows:
2016
|
|
$
|
205,490
|
|
2017
|
|
|
522,274
|
|
2018
|
|
|
29,398
|
|
2019
|
|
|
-
|
|
thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
757,162
|
|
The Company leases certain real and personal property under
non-cancelable operating leases. Rent expense was $140,393 and $172,496 for the three months ended September 30, 2016 and 2015,
respectively. Rent expense was $470,960 and $488,977 for the nine months ended September 30, 2016 and 2015, respectively.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Certain of the statements contained in this Quarterly Report
on Form 10-Q, including in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
and elsewhere in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management’s
current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations
contained in the forward-looking statements. The forward-looking statements herein include, among others, statements addressing
management’s views with respect to future financial and operating results and costs associated with the Company’s operations
and other similar statements. Various factors, including competitive pressures, regulatory changes, customer defaults or insolvencies,
adverse resolution of any contract or other disputes with customers, or the loss of one or more key client relationships, could
cause actual outcomes and results to differ materially from those described in forward-looking statements.
The words “may,” “will,” “expect,”
“intend,” “anticipate,” “estimate,” “believe,” “continue” and similar
expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement
is not forward-looking. While we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly
Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us
and projections of the future about which we cannot be certain. Many factors, including general business and economic conditions
affect our ability to achieve our objectives. As a result of these factors, we cannot assure you that the forward-looking statements
in this Quarterly Report on Form 10-Q will prove to be accurate. In addition, if our forward-looking statements prove to be inaccurate,
the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard
these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any
specified time frame, if at all. We may not update these forward-looking statements, even though our situation may change in the
future.
We qualify all the forward-looking statements contained in this
Quarterly Report on Form 10-Q by the foregoing cautionary statements.