We have not issued any unregistered securities
that were not previously disclosed on our quarterly reports on Form 10-Q or current reports on Form 8-K filed during the fiscal
year.
As a “smaller reporting company,”
we are not required to provide the information required by this Item.
The current operations of InsPro Technologies
Corporation (the “Company”, “we”, “us” or “our”) consist of the operations of our
InsPro Technologies, LLC subsidiary (“InsPro LLC”).
Financial Reporting Release No. 60, which
was released by the Commission, encourages all companies to include a discussion of critical accounting policies or methods used
in the preparation of financial statements. Our consolidated financial statements include a summary of the significant accounting
policies and methods used in the preparation of the consolidated financial statements. Management believes the following critical
accounting policies affect the significant judgments and estimates used in the preparation of the consolidated financial statements.
Use of Estimates - Management’s Discussion and Analysis
is based upon the Company’s consolidated financial statements, which have been prepared in accordance with United States
generally accepted accounting principles. The preparation of financial statements 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 warrant liability, allowance for doubtful accounts, valuation of stock-based compensation,
the useful lives and valuation of property and equipment, and deferred revenue. Actual results may differ from these estimates
under different assumptions or conditions.
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.
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 five 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
materially breaches the Reseller Agreement or the Company becomes insolvent, goes into liquidation or seeks protection under bankruptcy
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 December 31, 2016, and as a result the Company recognized
$500,000 of Reseller Fee as revenue in the year ended December 31, 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 but not yet recognized as earned, has been included in the consolidated balance sheet as a liability for deferred
revenue.
As a result of the aforementioned factors, we reported a gross
profit of $2,760,723 in 2016, as compared to a gross loss of $325,427 in 2015. The results from operations in 2016 were favorably
impacted by higher revenues combined with lower cost of revenues, which is primarily a result of the lower utilization of several
outside consulting firms that assisted with modifications to InsPro Enterprise’s functionality and implementations of InsPro
Enterprise
™
with new clients.
As a result of the aforementioned factors, we reported a loss
from continuing operations of $2,712,843 in 2016, as compared to $6,424,991 in 2015.
Gain on the sale of equipment in 2015 was the result of the
sale of certain computer equipment to an InsPro Enterprise client.
Interest expense decreased in the 2016 as compared to 2015 primarily
due to the repayment of loans with The Co-Investment Fund II, L. P. (“Co-Investment”) and from SVB. Interest expense
is attributable to interest on the Company’s loans with Co-Investment, SVB, capital leases and note payable for premium financing
on a portion of the Company’s insurance coverages.
Revenues and income from discontinued operations in 2016 decreased
as compared to 2015 due to declines in our discontinued telesales call center produced agency business. We reported a gain from
discontinued operations of $0 per share in 2016 and 2015.
On February 20, 2009, the Company entered into and completed
the sale of its agency business to eHealth Insurance Services, Inc. The Company earns renewal commissions from certain insurance
companies and a transition policy commission pursuant to a client transition agreement with eHealth Insurance Services, Inc.
As a result of these factors discussed above, we reported a
net loss of $2,667,937 or $0.06 net loss per share, in 2016 as compared to a net loss of $6,376,468, or $0.15 net loss per share
in 2015.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
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 consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America (“US GAAP“). 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,
valuation allowance on deferred tax asset, valuation of stock-based compensation, the useful lives and valuation of property and
equipment, and the valuation of deferred revenue.
Cash and cash equivalents
The Company had no cash equilavents during the two years ended
December 31, 2016. The Company considers all liquid debt instruments with original maturities of three months or less to be cash
equivalents.
Accounts receivable
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 December
31, 2016 and 2015, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts
in the amount 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, notes payable and capital lease obligations
approximated fair value as of December 31, 2016, and December 31, 2015, because of the relatively short-term maturity of these
instruments and their market interest rates.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 1 – BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Income taxes
The Company accounts for income taxes pursuant to the provisions
of ASC 740-10, ”
Accounting for Income Taxes
,” 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 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
The Company has adopted 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. The Company has not yet filed its tax returns for
the tax year ended December 31, 2016. As of December 31, 2016, the tax years ended December 31, 2015, 2014 and 2013 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 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 loss per common share because it is anti-dilutive.
The Company’s common stock equivalents include the following:
|
|
December 31,
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
Revenue for the year ended
December 31, 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 InsPro Technologies owned servers located at InsPro
Technologies’ offices or 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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. Professional services revenue also consists of post implementation activities
for clients pertaining to their InsPro Enterprise installation.
The Company’s revenue is generally recognized under Accounting
Standards Codification 985-605, Software Revenue Recognition. For software arrangements involving multiple elements, which are
the sale of software licenses, professional services, ASP services and maintenance services, the Company allocates revenue to each
element based on the specific objective evidence of selling price of each deliverable, 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.
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 five 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
materially breaches the Reseller Agreement or the Company becomes insolvent, goes into liquidation or seeks protection under bankruptcy
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 December 31, 2016, and as a result the Company recognized
$500,000 of Reseller Fee as revenue in the year ended December 31, 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 December 31,
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).
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
The unearned portion of the Company’s revenue, which is
revenue collected but not yet recognized as earned, has been included in the consolidated balance sheet as a liability for deferred
revenue.
See Note 2 - Discontinued Operations - Revenue Recognition for
Discontinued Operations.
Cost of revenues
Cost of revenues includes
direct labor and associated costs for employees and independent contractors performing InsPro Enterprise
™
design,
development, implementation and testing together with customer management, training and technical support, as well as a portion
of facilities costs. For the years ended December 31, 2016 and 2015, cost of revenues consisted of the following:
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
7,519,551
|
|
|
$
|
8,034,470
|
|
Professional fees
|
|
|
10,317,169
|
|
|
|
11,973,271
|
|
Depreciation
|
|
|
382,876
|
|
|
|
490,551
|
|
Rent, utilities, telephone and communications
|
|
|
443,348
|
|
|
|
486,976
|
|
Other cost of revenues
|
|
|
407,261
|
|
|
|
717,716
|
|
|
|
$
|
19,070,205
|
|
|
$
|
21,702,984
|
|
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 Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
3,337,346
|
|
|
$
|
3,336,287
|
|
Advertising and other marketing
|
|
|
140,552
|
|
|
|
148,880
|
|
Depreciation
|
|
|
118,587
|
|
|
|
109,379
|
|
Rent, utilities, telephone and communications
|
|
|
405,032
|
|
|
|
364,569
|
|
Professional fees
|
|
|
709,383
|
|
|
|
927,623
|
|
Other general and administrative
|
|
|
762,666
|
|
|
|
1,212,826
|
|
|
|
$
|
5,473,566
|
|
|
$
|
6,099,564
|
|
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 CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
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 December 31, 2016 and 2015, the Company had $3,195,018 and $3,398,293 of cash in United States bank deposits, of which $500,930
and $500,050 was federally insured and $2,694,088 and $2,898,243 was not federally insured, respectively
The following table lists the percentage of the Company’s
accounts receivable balance from the Company’s InsPro Enterprise clients representing 10% or more of the accounts receivable
balances as of the periods listed below.
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
Client #1
|
|
30%
|
|
32%
|
Client #2
|
|
12%
|
|
17%
|
Client #3
|
|
13%
|
|
13%
|
Client #4
|
|
-
|
|
11%
|
The following table lists the percentage of the Company’s
revenue earned from the Company’s InsPro Enterprise
™
clients representing 10% or more of the revenue earned
in each of the periods listed below.
|
|
For the Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Client #1
|
|
30%
|
|
28%
|
Client #2
|
|
16%
|
|
12%
|
Client #3
|
|
14%
|
|
-
|
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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
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 the Financial Accounting Standards Board ("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. The updated standard will replace most existing revenue recognition guidance in
U.S. GAAP. 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. The updated standard is effective
for us in the first quarter of 2018 and we do not plan to early adopt. We have not yet selected a transition method and we are
currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, “Balance
Sheet Classification of Deferred Taxes”, which requires that all deferred tax liabilities and assets be classified as noncurrent
amounts on the balance sheet. ASU 2015-17 will be effective for interim and annuals periods beginning after December 15, 2016
and may be applied prospectively or retrospectively. Early adoption of the standard is permitted. The new standard is effective
for the Company at the beginning of fiscal year 2017. We are currently evaluating the impact of adopting this ASU on our consolidated
financial statements and do not expect adoption to have a material impact.
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. The new standard establishes a right-of-use model (ROU) asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting
the pattern and classification of expense recognition in the statement of operations. 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. The new standard is effective for us in the
first quarter of 2019 and we do not plan to early adopt. We are currently evaluating the impact of the adoption of ASU 2016-02
on our consolidated financial statements. Effective December 31, 2016, our only lease with a term greater than 12 months is for
our Radnor office, which will expire on March 31, 2017. We believe our current lease for our Eddystone office, which was extended
for a 1 year term that expires on January 31, 2018, would continue to be accounted for as an operating lease under the new standard.
We may enter into a new lease for office space, which may have a term greater than 12 months, in the future.
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 CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
In August 2014, the FASB issued ASU No. 2014-15, “Presentation
of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as
a Going Concern”. Under US GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing
financial statements unless and until the entity's liquidation becomes imminent. Preparation of financial statements under this
presumption is commonly referred to as the going concern basis of accounting. If and when an entity's liquidation becomes imminent,
financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, Presentation
of Financial Statements - Liquidation Basis of Accounting. Even when an entity's liquidation is not imminent, there may be conditions
or events that raise substantial doubt about the entity's ability to continue as a going concern. In those situations, financial
statements should continue to be prepared under the going concern basis of accounting, but the provisions in this ASU should be
followed to determine whether to disclose information about the relevant conditions and events. ASU No. 2014-15 was effective for
us as of December 31, 2016.
In March 2016, the FASB issued ASU 2016-09, “Improvements
to Employee Share-Based Payment Accounting (Topic 718)”, which simplifies several aspects of the accounting for employee
share-based payment transactions, including the accounting for the related income taxes, forfeitures, statutory tax withholding
requirements and classification in the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning
after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted. The
new standard is effective for the Company at the beginning of fiscal year 2017. We are currently evaluating the impact of adopting
this ASU on our consolidated financial statements and do not expect adoption to have a material impact.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash
Payments (Topic 230)”, which provides guidance for eight specific cash flow issues with the objective of reducing the existing
diversity in practice. ASU 2016-15 is effective retrospectively for annual reporting periods beginning after December 15, 2017,
including interim periods within those annual reporting periods. Early adoption is permitted. The new standard is effective for
the Company at the beginning of fiscal year 2018. We are currently evaluating the impact of adopting this ASU on our consolidated
financial statements and do not expect adoption to have a material impact.
Liquidity
During the year ended December 31, 2016, the Company’s
net loss was $2,667,937 and cash used primarily to fund financing activities resulted in a net decrease in cash of $236,676. As
of December 31, 2016, the Company had $3,161,617 of cash, a working capital deficit of $2,648,881 and the Company’s shareholder
deficit was $3,789,060. During 2016 the Company implemented cost reduction initiatives, which resulted in the reduction of expenses
in 2016 as compared to 2015. During the first quarter of 2017 the Company implemented additional cost reduction initiatives, which
management believes will reduce expenses in 2017 as compared to 2016. The Company has obtained a $2,000,000 funding commitment
from its largest stockholder Co-Investment Fund II, L.P., which is described in Note 11 – Subsequent Events.
Our liquidity needs for the next twelve months and beyond
are principally for the funding of our operations, payments on capital leases and the purchase of property and equipment. Based
on the forgoing, management believes the Company has sufficient funds to finance its operations over the next twelve months.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
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 the agency business to an unaffiliated
third party, pursuant to the terms of a client transition agreement.
Revenue Recognition for Discontinued Operations
Our discontinued operations generate revenue primarily from
transition policy commissions pursuant to the client transition agreement and renewal commissions paid to the Company by insurance
companies based upon the insurance policies sold to consumers by the Company’s telesales call center.
We recognize commissions and other revenue from carriers after
we receive notice that the insurance carrier has received payment of the related premium. The Company recognizes as revenue commission
payments received in connection with the client transition agreement upon the Company’s notification of such amounts.
The financial position of discontinued
operations was as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
8,636
|
|
|
$
|
15,212
|
|
Net current assets of discontinued operations
|
|
$
|
8,636
|
|
|
$
|
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 Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
Commission and other revenue from carriers
|
|
$
|
10,016
|
|
|
$
|
18,499
|
|
Transition policy commission pursuant to the Agreement
|
|
|
88,006
|
|
|
|
165,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,022
|
|
|
|
183,543
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Other general and administrative
|
|
|
27,867
|
|
|
|
27,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,867
|
|
|
|
27,746
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
70,155
|
|
|
$
|
155,797
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following:
|
|
Useful
Life
(Years)
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Computer equipment and software
|
|
3
|
|
$
|
4,419,412
|
|
|
$
|
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
|
|
|
|
|
|
|
4,862,621
|
|
|
|
4,596,136
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
(4,349,661
|
)
|
|
|
(3,848,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
512,960
|
|
|
$
|
747,937
|
|
The following table discloses
depreciation expense as reported in the statement of operations.
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Depreciation included in cost of revenues
|
|
$
|
382,876
|
|
|
$
|
490,551
|
|
Depreciation included in selling, general and administrative
|
|
|
118,587
|
|
|
|
109,379
|
|
Total depreciation
|
|
$
|
501,463
|
|
|
$
|
599,930
|
|
NOTE 4 – NOTES PAYABLE
Notes payable at December 31, 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 CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 5 – EQUITY TRANSACTIONS AND LOANS FROM RELATED
PARTIES
September 2015 Private Placement
On September 18, 2015, the Company completed a private placement
(the “Private Placement”) with certain accredited investors (collectively the “Investors”), including The
Co-Investment Fund II, L.P., which hold more than 5% of our common stock (“Co-Investment”) and 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 a warrant to purchase 6,964,750 shares of our Common Stock to Co-Investment, 166,666 shares of
Series B Preferred Stock and a warrant to purchase 1,666,660 shares of our Common Stock to Edmond Walters, 150,000 shares of Series
B Preferred Stock and a warrant to purchase 1,500,000 shares of our Common Stock to Azeez Enterprises, and 150,000 shares of Series
B Preferred Stock and a warrant to purchase 1,500,000 shares of our Common Stock to an unrelated third party.
The Company agreed, pursuant to the terms of the Purchase Agreement,
that for a period of 90 days after the effective date (the “Initial Standstill”) of the Purchase Agreement, the Company
shall not, subject to certain exceptions, offer, sell, grant any option to purchase, or otherwise dispose of any equity securities
or equity equivalent securities, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument
that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, capital stock and
other securities of the Company. In addition, pursuant to the Purchase Agreement, the Company was permitted to sell up to an additional
1,000,000 Units to Independence Blue Cross within 90 days following the Closing on substantially the same terms and conditions
described above and as set forth in the Purchase Agreement.
The Purchase Agreement also provides for a customary participation
right for the Investors, subject to certain exceptions and limitations, which grants the Investors the right to participate in
any future capital raising financings of the Company occurring from the effective date of the Purchase Agreement until 24 months
after the effective date of the Purchase Agreement. The Investors may participate in such financings at a level based on the Investors’
ownership percentage of the Company on a fully-diluted basis prior to such financing.
Secured Convertible Promissory Note to Co-Investment Fund
II, LP.
On January 30, 2015, the Company and InsPro LLC issued a Secured
Convertible Promissory Note (“Note”) to Co-Investment, pursuant to a Secured Convertible Promissory Note Purchase Agreement
(the “Note Purchase Agreement”). In connection with the Note Purchase Agreement, the Company, InsPro LLC (collectively
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 Company and InsPro LLC, which is secured by all assets of the Company and InsPro LLC other than copyright applications,
copyright registration, patents, patent applications, trademarks, services markets and other intellectual property (“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 will be paid on or before June 30, 2016. 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 5 – EQUITY TRANSACTIONS AND LOANS FROM RELATED
PARTIES (continued)
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 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 Loan Agreement 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.
Pursuant to the terms of the Purchase Agreement, the Company
and Co-Investment agreed that, effective at the closing of the Private Placement on September 18, 2015, (i) the Note and Second
Note (collectively, “Notes”) were amended such that the entire principal amount of the Notes plus accrued interest
as of the closing was converted into 696,475 Units that consisted of 696,475 shares of Series B Preferred Stock and a warrant to
purchase 6,964,750 shares of our Common Stock , (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.
Loan Payable to Related Party
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
Loan from Mr. Walters 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 Edmond Walters agreed that, effective at the closing on September 18, 2015, (i) the Walters Loan was converted by the issuance
of the 166,666 Units that consisted of 166,666 shares of Series B Preferred Stock and a warrant to purchase 1,666,660 shares of
our Common Stock to Edmond Walters under the Purchase Agreement, (ii) all amounts owed to Edmond 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 Edmond 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 CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 5 – EQUITY TRANSACTIONS AND LOANS FROM RELATED
PARTIES (continued)
IBC Private Placement
On October 6, 2015, the Company entered into and completed a
private placement (the “IBC Private Placement”) with Independence Blue Cross, LLC, a Pennsylvania limited liability
company, which hold more than 5% of our common stock ( “IBC”), for an aggregate of 333,333 shares of its Series B Preferred
Stock and a warrant (the “IBC Warrant”) to purchase 3,333,330 shares of the Company’s Common Stock, pursuant
to the terms of a securities purchase agreement (the “IBC Purchase Agreement”).
Pursuant to the IBC Purchase Agreement, the Company agreed to
sell to IBC 333,333 Units in the IBC Private Placement at a per Unit purchase price equal to $3.00. Each Unit sold in the IBC Private
Placement consisted of one share of Series B Preferred Stock and an IBC Warrant to purchase ten shares of Common Stock at an initial
exercise price of $0.15 per share, subject to adjustment. The gross proceeds from the closing of the IBC Private Placement were
$999,999 and the Company intends to use the net proceeds of the Private Placement for working capital purposes.
The Company also agreed, pursuant to the terms of the IBC Purchase
Agreement, that for a period of 90 days after the effective date of the Purchase Agreement, the Company shall not, subject to certain
exceptions, offer, sell, grant any option to purchase, or otherwise dispose of any equity securities or equity equivalent securities,
including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible
into or exchangeable for, or otherwise entitles the holder thereof to receive, capital stock and other securities of the Company.
The IBC Purchase Agreement also provides for a customary participation
right for the Investor, subject to certain exceptions and limitations, which grants the Investor the right to participate in any
future capital raising financings of the Company occurring from the effective date of the Purchase Agreement until 24 months after
the effective date of the Purchase Agreement. IBC may participate in such financings at a level based on the Investor’s ownership
percentage of the Company on a fully-diluted basis prior to such financing.
NOTE 6 – SHAREHOLDERS’ DEFICIT
Common Stock
As of December 31, 2016 and 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 December 31,
2016 and 2015, the Company had 41,543,655 shares of its Common Stock issued and outstanding.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
The Company has reserved shares of Common Stock, on an as-if-converted
basis, as follows:
|
|
December 31, 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
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 December 31, 2016 and 2015, the Company’s board
of directors has designated 3,437,500 shares of Series A Convertible Preferred Stock with a par value of $0.001 per share (“Series
A Preferred Stock”). As of December 31, 2016 and 2015, the Company had 1,276,750 shares of its Series A Preferred Stock issued
and outstanding. As of December 31, 2016 and 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, 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 becomes convertible into 20 shares of common stock, subject to adjustment and at the option of the holder
of the Series A Preferred Stock. 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
Series B Convertible Preferred Stock
As of December 31, 2016 and 2015, the Company’s board
of directors has designated 11,000,000 shares of Series B Convertible Preferred Stock with a par value of $0.001 per share (“Series
B Preferred Stock”). As of December 31, 2016 and 2015, the Company had 5,307,212 and 5,305,852 of its Series B Preferred
Stock issued and outstanding, respectively. As of December 31, 2016 and 2015, the Company has reserved 1,250,000 and 1,170.000
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 and preferred stock, with each share of Series B Preferred Stock having the
right to 20 votes. Upon the liquidation, sale or merger of the Company, each share of 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 as of December 31, 2016 and 2015, 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 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 becomes 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 in aggregate for all
issued and outstanding Series B Preferred Stock.
2015
On September 18, 2015, pursuant to the Purchase Agreement, the
Company sold to the investors 1,163,141 Units in the Private Placement at a per Unit purchase price equal to $3.00. Each Unit sold
in the Private Placement consisted of one share of Series B Preferred Stock and a warrant to purchase ten shares of Common Stock
at an initial exercise price of $0.15 per share, subject to adjustment. See Note 5 – Equity Transactions and Loans from Related
Parties – September 2015 Private Placement.
The Company allocated $364,928 of the $3,489,423 proceeds received
as a result of the Private Placement, which represent the fair value of the Warrant Shares, to additional paid in capital using
a Black-Scholes option pricing model with the following assumptions: expected volatility of 422%, a risk-free interest rate of
0.10%, an expected term of 2.1 years and 0% dividend yield. The remaining $3,124,495 of the proceeds received was allocated to
the Series B Preferred Stock less $13,013 of legal expenses incurred as a result of the September 2015 Private Placement.
On October 6, 2015, pursuant to the IBC Purchase Agreement,
the Company sold to IBC 333,333 Units in the IBC Private Placement at a per Unit purchase price equal to $3.00. Each Unit sold
in the IBC Private Placement consisted of one share of Series B Preferred Stock and a warrant to purchase ten shares of Common
Stock at an initial exercise price of $0.15 per share, subject to adjustment. See Note 5 – Equity Transactions and Loans
from Related Parties – IBC Private Placement.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
The Company allocated $132,382 of the $999,999 proceeds received
as a result of the Private Placement, which represent the fair value of the IBC Warrant shares, to additional paid in capital using
a Black-Scholes option pricing model with the following assumptions: expected volatility of 397%, a risk-free interest rate of
0.70%, an expected term of 2.1 years and 0% dividend yield. The remaining $867,617 of the proceeds received was allocated to the
Series B Preferred Stock.
2016
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
2015
During 2015, options to purchase 4,450,000 shares of the Company’s
Common Stock, which were previously granted to directors and current and former employees of the Company, expired in accordance
with the terms of such options.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
On March 27, 2015, the Company granted to an executive of the
Company an option to purchase a total of 200,000 shares of the Company’s Common Stock, which vests as follows: 66,666 shares
of Common Stock on March 27, 2016 and 66,667 shares of Common Stock on March 27 of each of 2017 and 2018. This option has a five
year term and an exercise price of $0.10 per share, which exceeded the $0.067 closing price of one share of the Company’s
Common Stock as quoted on the OTCBB on March 27, 2015. The fair value of the option granted was estimated on the date of the grant
to be $14,000 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility: 792%, risk-free
interest rate: 0.12%, 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 this option in salaries, commission and related taxes of $3,565 in the
year ended December 31, 2015.
On November 13, 2015, the Company granted to an executive of
the Company an option to purchase a total of 500,000 shares of the Company’s Common Stock, which vests as follows: 125,000
shares of Common Stock on March 13 of each year from 2016 through 2018. This option has a five year term and an exercise price
of $0.10 per share, which exceeded the $0.032 closing price of one share of the Company’s Common Stock as quoted on the OTCBB
on November 13, 2015. The fair value of the option 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: 778%, risk-free interest rate: 0.3%, 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 this option in salaries, commission and related taxes of $1,600 in the year ended December 31, 2015.
The Company recorded compensation expense pertaining to employee
stock options and warrants in salaries, commission and related taxes of $500,739 for the year ended December 31, 2015, which included
$125,667 of expense pertaining to stock options, $133,381 of expense pertaining to warrants to purchase Series A Preferred Stock,
$51,200 of expense pertaining to warrants to purchase Series B Preferred Stock, and $190,491 of expense pertaining to an amended
and restated warrant to purchase Series A Preferred Stock. See Note 6 – Stockholders Deficit – Series A Preferred Stock
warrants and Series B Preferred Stock warrants.
2016
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 $7,500 in the year ended December 31, 2016.
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 $2,664 in the year ended December 31, 2016.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
During the year ended December 31, 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.
The Company recorded compensation expense pertaining to employee
stock options and warrants in the amount of $222,142 for the year ended December 31, 2016, which included $74,762 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 was $138,694 as of December 31, 2016, which will be recognized over a weighted average 2.6 years
in the future.
As of December 31, 2016, there were 30,000,000 shares of our
Common Stock authorized to be issued under the 2010 Equity Compensation Plan, of which 24,996,980 shares of our common stock remain
available for future stock option grants.
A summary of the Company’s outstanding stock options as
of and for the years ended December 31, 2016 and 2015 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, 2014
|
|
|
6,725,000
|
|
|
$
|
0.46
|
|
|
$
|
0.30
|
|
|
|
1.66
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
700,000
|
|
|
|
0.10
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(4,450,000
|
)
|
|
|
0.10
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
2,975,000
|
|
|
|
0.90
|
|
|
|
0.54
|
|
|
|
2.53
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,500,000
|
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(475,000
|
)
|
|
|
3.58
|
|
|
|
2.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
4,000,000
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
1,516,666
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
3.44
|
|
|
$
|
-
|
|
|
(1)
|
The aggregate intrinsic value is based on the $0.0375 closing price as of December 31, 2016 for the Company’s Common
Stock.
|
Common Stock Warrants
2015
During 2015, warrants to purchase 35,353,790 shares of the Company’s
Common Stock expired in accordance with the terms of such warrants.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
The 2015 Warrants provide that the holders thereof shall have
the right at any time prior to the earlier of (i) ten business days’ after the Company has properly provided written notice
to all such holders of a Call Event (as defined below) and (ii) November 20, 2017, to acquire up to a total of 11,631,410 shares
of Common Stock of the Company upon the payment of $0.15 per Share (the “Exercise Price”). See Note 5 – Equity
Transactions and Loans from Related Parties – September 2015 Private Placement.
The IBC Warrant provides that the holders thereof shall have
the right at any time prior to the earlier of (i) ten business days’ after the Company has properly provided written notice
to all such holders of a Call Event and (ii) November 20, 2017, to acquire up to a total of 3,333,330 shares of Common Stock of
the Company (each an “IBC Warrant Share”) upon the payment of $0.15 per Warrant Share (the “Exercise Price”).
The Company also has the right upon a Call Event to call the outstanding IBC Warrant, in which case such IBC Warrant will expire
if not exercised within ten business days thereafter. See Note 5 – Equity Transactions and Loans from Related Parties –
IBC Private Placement.
The Company also has the right, at any point after which the
volume weighted average trading price per share of the Common Stock for a minimum of 20 consecutive trading days is equal to at
least eight times the Exercise Price per share, provided that certain other conditions have been satisfied (a “Call Event”),
to call the outstanding 2015 Warrants and IBC Warrant, in which case such 2015 Warrants and IBC Warrant will expire if not exercised
within ten business days thereafter.
The Company determined the 2015 Warrants and the IBC Warrant
qualify for a scope exception under ASC 815 as they were determined to be indexed to the Company’s stock.
2016
On March 14, 2016, the 2016 Warrants were issued in connection
with the rights offering. See Note 6 – Stockholders Deficit – Series B Convertible 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.
A summary of the status of the Company's outstanding common
stock warrants as of and for the years ended December 31, 2016 and 2015 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2014
|
|
|
45,473,780
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
Issued
|
|
|
14,964,740
|
|
|
|
0.15
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(35,353,790
|
)
|
|
|
0.15
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
25,084,730
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Issued
|
|
|
13,600
|
|
|
|
0.15
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
25,098,330
|
|
|
$
|
0.15
|
|
Outstanding common stock warrants at December 31, 2016, have
a weighted average remaining contractual life of 0.9 years.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
Series A Preferred Stock warrants
2015
On March 27, 2015, the Company granted to two executives of
the Company warrants to purchase a total of 160,000 shares of the Company’s Series A Preferred Stock, which in total vests
as follows: 40,000 shares of Series A Preferred Stock on March 27 of each year from 2016 through 2019. These warrants each have
a five year term and an exercise price of $4.00 per share. The fair value of these warrants granted were estimated on the date
of the grant to be $224,000 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility:
768%, risk-free interest rate: 0.12%, expected life in years: 5 based on the contract life of the warrant grant, and assumed dividend
yield: 0%. During the year ended December 31, 2015, one of the two executives resigned and warrants to purchase a total of 80,000
shares of the Company’s Series A Preferred Stock expired in accordance with the terms of such warrants. The Company recorded
compensation expense pertaining to these warrants in salaries, commission and related taxes of $133,381 in the year ended December
31, 2015.
2016
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 year ended
December 31, 2016.
Outstanding warrants to purchase the Company’s Series
A Preferred Stock at December 31, 2016, have a remaining contractual life of 0.7 years.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
A summary of the status of the Company's outstanding Series
A Preferred Stock warrants as of and for the years ended December 31, 2016 and 2015 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2014
|
|
|
300,000
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
Granted
|
|
|
160,000
|
|
|
|
4.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(80,000
|
)
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
380,000
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
380,000
|
|
|
$
|
4.00
|
|
Series B Preferred Stock Warrants
2015
On November 13, 2015, the Company granted to two executives
of the Company warrants to purchase a total of 80,000 shares of the Company’s Series B Preferred Stock, which were immediately
exercisable. These warrants each have a five year term and an exercise price of $3.00 per share. The fair value of these warrants
granted were estimated on the date of the grant to be $51,200 using the Black-Scholes option-pricing model based on the following
assumptions: expected volatility: 778%, risk-free interest rate: 0.3%, expected life in years: 5 based on the contract life of
the warrant grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining to these warrants in salaries,
commission and related taxes of $51,200 in the year ended December 31, 2015.
2016
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 Series B Warrants at December 31, 2016, have a remaining
contractual life of 2.5 years.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
A summary of the status of the Company's outstanding Series
B Warrants as of and for the period ended December 31, 2016, are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2014
|
|
|
1,170,000
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
Granted
|
|
|
80,000
|
|
|
|
3.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
1,250,000
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,000,000
|
|
|
|
3.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
Registration and Participation Rights
In connection with the Company’s acquisition of Atiam
Technologies L. P., the Company and certain owners of Atiam Technologies L.P. entered into a registration rights agreement.
In connection with the Company’s 2008 private placement,
the Company and the participating investors also entered into a Registration Rights Agreement (the “2008 Registration Rights
Agreement”). Under the terms of the 2008 Registration Rights Agreement, the Company agreed to prepare and file with the SEC,
a registration statement on Form S-1 covering the resale of the shares and the warrant shares, which was filed with the SEC on
February 1, 2008 and declared effective by the SEC on April 22, 2008. Subject to limited exceptions, the Company also agreed to
use its reasonable best efforts to keep the registration statement effective under the Securities Act until the date that all of
the registrable securities covered by the registration statement have been sold or may be sold without volume restrictions pursuant
to Rule 144(b)(i)) promulgated under the Securities Act. The 2008 Registration Rights Agreement also provides for payment of partial
damages to the investors under certain circumstances relating to failure to file or obtain or maintain effectiveness of the registration
statement, subject to adjustment.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 6 – SHAREHOLDERS’ DEFICIT (continued)
In connection with the Company’s 2009 private placement,
the Company and the participating investor also entered into a Registration Rights Agreement (the “2009 Registration Rights
Agreement”). Under the terms of the 2009 Registration Rights Agreement, the Company agreed to prepare and file with the SEC,
within 30 days following the receipt of a demand notice of a holder of registrable securities, a registration statement on
Form S-1 covering the resale of the shares and the warrant shares. Subject to limited exceptions, the Company also agreed to use
its reasonable best efforts to cause the registration statement to be declared effective under the Securities Act, and to use its
reasonable best efforts to keep the registration statement effective under the Securities Act until the date that all of the registrable
securities covered by the registration statement have been sold or may be sold without volume restrictions pursuant to Rule 144(b)(i)
promulgated under the Securities Act. In addition, if the Company proposes to register any of its securities under the Securities
Act in connection with the offering of such securities for cash, the Company shall, at such time, promptly give each holder of
registrable securities notice of such intent, and such holders shall have the option to register their registrable securities on
such additional registration statement. The 2009 Registration Rights Agreement also provides for payment of partial damages to
the investor under certain circumstances relating to failure to file or obtain or maintain effectiveness of the Registration Statement,
subject to adjustment.
In connection with the Company’s 2010 private placement,
the Company and the participating investors also entered into a Registration Rights Agreement (the “2010 Registration Rights
Agreement”), which provided the investors with demand and “piggyback” registration rights on substantially the
same terms as the 2009 Registration Rights Agreement.
In connection with Co-Investment’s note conversion, the
Company and Co-Investment also entered into a Registration Rights Agreement (the “December 2010 Registration Rights Agreement”),
in substantially the same form as the 2010 Registration Rights Agreement.
In connection with the 2012 private placement, the 2013 Private
Placement, the Private Placement and the IBC Private Placement, the Company and the participating investors also entered into registration
rights agreements, in substantially the same form as the 2010 Registration Rights Agreement.
As of December 31, 2016, the Company has not received a demand
notice in connection with any registration rights agreement. At December 31, 2016, the Company does not believe that it is probable
that the Company will incur a penalty in connection with the Company’s registration rights agreements. Accordingly no liability
was recorded as of December 31, 2016.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 7 – CAPITAL LEASE OBLIGATIONS
InsPro LLC has entered into several capital lease obligations
to purchase equipment used for operations. InsPro LLC has the option to purchase the equipment at the end of the lease agreements
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 December 31, 2016 and 2015:
|
|
|
|
December 31, 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
|
|
|
|
|
(1,260,944
|
)
|
|
|
(990,007
|
)
|
|
|
|
|
$
|
330,293
|
|
|
$
|
369,095
|
|
Future minimum payments required under capital leases at December
31, 2016 are as follows:
2017
|
|
$
|
203,110
|
|
2018
|
|
|
130,693
|
|
2019
|
|
|
30,307
|
|
|
|
|
|
|
Total future payments
|
|
|
364,110
|
|
Less amount representing interest
|
|
|
22,946
|
|
|
|
|
|
|
Present value of future minimum payments
|
|
|
341,164
|
|
Less current portion
|
|
|
188,025
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
153,139
|
|
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 3 months of employment with
the Company. The 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 “Contribution”). 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 $79,080 and $82,462 for the years ended December 31, 2016 and 2015, respectively.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Employment and Separation Agreements
On March 31, 2008, Anthony R. Verdi, our Chief
Financial Officer, was also appointed to the position of Chief Operating Officer, effective April 8, 2008. Mr. Verdi was appointed
to the board on June 20, 2008, and was appointed our Principal Executive Officer on May 18, 2011 through January 26, 2015.
Mr. Verdi’s amended and restated employment
agreement automatically renewed for a one year term on March 31, 2015, and, if not terminated, will automatically renew for one
year periods. His annual base salary was $225,000 per year from March 31, 2008 through May 30, 2011 and was then increased by the
board of directors to $250,000 effective June 1, 2011 and again increased to $300,000 effective November 1, 2015. He is entitled
to receive such bonus compensation as a majority of our board of directors may determine from time to time.
If we terminate Mr. Verdi’s employment
for cause or Mr. Verdi terminates his employment agreement without good reason, Mr. Verdi will be entitled to receive (i) all accrued
and unpaid salary and vacation pay through the date of termination and (ii) continued participation for one month in our benefit
plans. Otherwise if we terminate Mr. Verdi’s employment or Mr. Verdi terminates his employment agreement for good reason
including his permanent disability he will be entitled to receive 18 months’ base salary at the then current rate, payable
in accordance with our usual practices, continued participation for 18 months in our benefit plans and payment, within a commercially
reasonable time and on a prorated basis, of any bonus or other payments earned in connection with our bonus plan existing at the
time of termination. In addition, if Mr. Verdi’s employment is terminated in accordance with the foregoing sentence within
two months prior to, or 24 months following, a change in control (as described in the employment agreement), Mr. Verdi will be
entitled to receive 18 months’ base salary at the then current rate upon the date of termination, regardless of our usual
practices, and all stock options held by Mr. Verdi at the date of termination will immediately become 100% vested and all restrictions
on such options will lapse.
If Mr. Verdi’s employment is terminated
due to a permanent disability we may credit any such amounts against any proceeds paid to Mr. Verdi with respect to any disability
policy maintained and paid for by us for Mr. Verdi’s benefit. If Mr. Verdi dies during the term of his employment agreement,
the employment agreement will automatically terminate and Mr. Verdi’s estate or beneficiaries will be entitled to receive
(i) three months’ base salary at the then current rate, payable in a lump sum and (ii) continued participation for one year
in our benefit plans.
Pursuant to an amended and restated written employment agreement
with InsPro LLC, Mr. Robert J. Oakes serves as Vice Chairman of the board of directors. Pursuant to his employment agreement, his
annual base salary was $250,000 per year through September 30, 2011. On April 7, 2011, Mr. Oakes received an increase in his base
compensation pursuant to his employment agreement to $300,000 retroactive to July 1, 2010, upon InsPro LLC achievement of one calendar
quarter of positive operating cash flow, which occurred during the calendar quarter ended March 31, 2011. Mr. Oakes was entitled
to bonus compensation equal to 100% of the InsPro LLC’s net income up to a maximum of $100,000 in 2010 and $100,000 in 2011.
Mr. Oakes is entitled to such fringe benefits as are available to other executives of the Company. Mr. Oakes employment agreement
was automatically extended for an additional one year term on March 25, 2016 and will be annually automatically extended thereafter
unless either party provides written notification to the other party of non-renewal no later than 60 days prior to the termination
date of the agreement.
In the event of Mr. Oakes’s termination
without cause or for good reason, he or his estate would receive his then current base annual salary, plus unpaid accrued employee
benefits, which is primarily accrued vacation, plus the continuation of his employee benefits for a period of 12 months, less all
applicable taxes. In the event of his voluntary termination, death or disability, he or his estate would receive unpaid accrued
employee benefits, plus the continuation of his employee benefits for a period of one month, less all applicable taxes.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
As of December 31, 2016, the Company has employment
agreements with the Chief Revenue Officer, which commenced in 2016 for a one year term that will automatically renew for a one
year term in 2017, and four vice presidents of the Company, which automatically renewed each for a one year term in 2016. These
employment agreements provide that these executives will be compensated at an aggregate annual base salary of $1,011,000 with bonus
compensation at the discretion of the Company’s board of directors. These agreements may be terminated by the Company for
“cause” (as such term is defined in the agreements) and without “cause” upon 30 days notice. These agreements
may be terminated by the Company without “cause”, in which case the terminated employee will be entitled to their base
salary for a period of six months. In the event of termination without cause or for good reason, these executives would receive
their then current base annual salary for a period of six months, plus unpaid accrued employee benefits, which is primarily accrued
vacation, less all applicable taxes. In the event of the voluntary termination of any of these executives’, death or disability,
they or their estate would receive unpaid accrued employee benefits, less all applicable taxes. These agreements also contain non-competition
and non-solicitation provisions for the duration of the agreements plus a period of six months after termination of employment.
Operating Leases
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, which is March 31, 2017. The annual rent increases every 12 months, starting at approximately $161,592
plus a proportionate share of the Landlord’s building expenses after the second month and ending at approximately $258,378
plus a proportionate share of the Landlord’s building expenses. Under the terms of the lease agreement, rent is 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 the amount of $7,564 as of December 31, 2016, which is included
in accrued liabilities on the consolidated balance sheet.
The Company paid the Landlord a security deposit of $110,000
under the lease (the “Security Deposit”) during the third quarter of 2006, which is accounted for as a deposit in other
assets. The Company will not earn interest on the Security Deposit. The Security Deposit will decrease and the Landlord will return
to the Company $10,000 on the third anniversary of the commencement date of the lease and on each anniversary thereafter until
the required Security Deposit has been reduced to $20,000. The Security Deposit will be returned to the Company 30 days after the
end of the lease provided the Company has complied with all provisions of the lease. The balance of the Security Deposit is $30,000
as of December 31, 2016.
On September 14, 2007, InsPro LLC entered into a lease agreement
with BPG Officer VI Baldwin Tower L.P. (“BPG”) for approximately 5,524 square feet of office space at Baldwin Towers
in Eddystone, Pennsylvania. On March 26, 2008, and again on December 2, 2008, the Company and BPG agreed to amend the lease to
increase the leased office space by 1,301 and 6,810 square feet, respectively (as amended the “BPG Lease”). The original
term of the lease commenced on October 1, 2007 and expired on January 31, 2013. The annual rent increases every 12 months,
starting at approximately $102,194 plus a proportionate share of landlord’s building expenses and ending at approximately
$286,335 plus a proportionate share of landlord’s building expenses.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
On March 15, 2012, InsPro LLC and BPG agreed to amend the BPG
Lease to extend its term to January 31, 2017, and after BPG completes certain building improvements InsPro Technologies will move
from its current location to another floor of the same building and lease 17,567 square feet of furnished office space from BPG.
Effective April 1, 2015, InsPro LLC and BPG agreed to amend the BPG Lease to lease 6,810 square feet of furnished office space
from BPG on another floor of the same building. The Company’s monthly rent shall be $24,887 per month commencing with InsPro
Technologies’ occupancy of the new office space, which occurred in June 2012 through January 31, 2013. InsPro Technologies’
monthly rent increased to $25,619 per month February 1, 2013 through January 31, 2014, increased to $26,351 per month February
1, 2014 through January 31, 2015, increased to $27,082 per month February 1, 2015 through March 31, 2015, increased to $37,082
through January 31, 2016, will increase to $37,814 per month February 1, 2016 through March 31, 2016, and will decrease to $27,814
per month from April 1, 2016 through January 31, 2017. 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.
The Company leases certain real and personal property under
non-cancelable operating leases. Rent expense was $613,250 and $664,995 for the years ended December 31, 2016 and 2015, respectively.
Future minimum payments required under operating leases and
service agreements at December 31, 2016 are as follows:
2017
|
|
$
|
638,946
|
|
2018
|
|
|
257,591
|
|
2019
|
|
|
225,108
|
|
thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
1,121,645
|
|
NOTE 10 - INCOME TAXES
The Company has net operating loss carry forwards for federal
income tax purposes of approximately $50,600,000 at December 31, 2016, the unused portion of which expires in years 2026 through
2036. The Company accounts for income taxes under Accounting Standards Codification 740, Income Taxes “ASC 740”. ASC
740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial
statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and
tax credit carry forwards. ASC 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. Internal Revenue Code Section 382 “IRC 382” places a limitation on the amount of
taxable income that can be offset by carry forwards after a change in control (generally greater than a 50% change in ownership).
The issuance of the Company’s Series A Preferred Stock on January 15, 2009 resulted in a change of control as defined under
IRC 382.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
NOTE 10 - INCOME TAXES (continued)
The table below summarizes the differences
between the Company’s effective tax rate and the statutory federal rate as follows for the periods ended December 31, 2016
and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Computed "expected" expense (benefit)
|
|
$
|
(933,778
|
)
|
|
$
|
(2,231,764
|
)
|
State tax expense (benefit), net of federal effect
|
|
|
(80,038
|
)
|
|
|
(191,294
|
)
|
Amortization/impairment of acquisition related assets
|
|
|
(5,002
|
)
|
|
|
(5,002
|
)
|
Stock based compensation
|
|
|
84,414
|
|
|
|
190,281
|
|
Stock based fees paid to client
|
|
|
493,986
|
|
|
|
-
|
|
Other permanent differences
|
|
|
14,917
|
|
|
|
5,995
|
|
Increase in valuation allowance
|
|
|
425,501
|
|
|
|
2,231,784
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets and liabilities are
provided for significant income and expense items recognized in different years for tax and financial reporting purposes. The components
of the net deferred tax assets for the years ended December 31, 2016 and 2015 were as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
19,227,610
|
|
|
$
|
18,868,252
|
|
Depreciation
|
|
|
88,909
|
|
|
|
52,177
|
|
Compensation expense
|
|
|
64,230
|
|
|
|
61,683
|
|
Deferred revenue
|
|
|
686,297
|
|
|
|
648,288
|
|
All Miscellaneous Other
|
|
|
2,874
|
|
|
|
14,019
|
|
Total deferred tax asset
|
|
|
20,069,920
|
|
|
|
19,644,419
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
Net deferred tax asset
|
|
|
20,069,920
|
|
|
|
19,644,419
|
|
Less: valuation allowance
|
|
|
(20,069,920
|
)
|
|
|
(19,644,419
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has fully reserved the deferred tax asset in excess
of the deferred tax liabilities due to the limitation on taxable income that can be offset by net operating loss carry forwards
in future periods under IRC section 382 as a result of changes in control and substantial uncertainty of the realization of any
tax assets in future periods. The valuation allowance was increased by $425,501 from the prior year.
NOTE 11 – SUBSEQUENT EVENTS
Co-Investment $2,000,000 funding Commitment
On March 29, 2017, Co-Investment provided the Company with
a funding commitment letter (the “Commitment Letter”) whereby Co-Investment committed to purchase 1,000,000 shares
of the Company’s new series C preferred stock, par value $0.001 per share, (“Series C Preferred Stock”) at a
per share purchase price of $2.00 per share for an aggregate purchase price of $2,000,000 (the “Commitment”). The Company
anticipates Co-Investment will fulfill the Commitment in April as soon as practical. The Company intends to use the net proceeds
of the Commitment for working capital purposes.
The Series C Preferred Stock will be entitled to vote as
a single class with the holders of the Company’s common stock, with each share of Series C Preferred Stock having the right
to 20 votes. Upon the liquidation, sale or merger of the Company, each share of Series C Preferred Stock is entitled to receive
an amount equal to the greater of (A) a liquidation preference equal to two and half (2.5) times the Series C Preferred Stock
original issue price, subject to certain customary adjustments, or (B) the amount such share of Series C 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 C Preferred stock times $5.00. Each share of
Series C Preferred Stock becomes convertible into 20 shares of common stock, subject to adjustment and at the option of the holder
of the Series C Preferred Stock. For so long as any shares of Series C Preferred Stock are outstanding, the vote or consent of
the holders of at least two-thirds of the Series C 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
C 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 C Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares
of Series C Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series
C 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 C Preferred Stock with
an amount per share equal to two and a half (2.5) times the Series C Preferred Stock original issue price in aggregate for all
issued and outstanding Series C Preferred Stock.