NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
InsPro Technologies Corporation (the “Company”, “ITCC”,
“we”, “us” or “our”) is a technology company that provides software applications for use by
insurance administrators in the insurance industry. Our business focuses primarily on our InsPro Enterprise
TM
software
application, which was introduced in 2004.
The Company offers InsPro Enterprise on both a licensed and an Application
Service Provider (“ASP”) basis. InsPro Enterprise is an insurance administration and marketing system that supports
group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated business.
InsPro Technologies' clients include insurance carriers and third party administrators. The Company realizes revenue from the sale
of software licenses, application service provider fees, hosting fees, software maintenance fees and consulting and implementation
services.
Basis of presentation and principles of consolidation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the consolidated
financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments
are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2016 and notes thereto and other pertinent information contained in our Annual Report
on Form 10-K as filed with the Securities and Exchange Commission (the “Commission”).
The consolidated financial statements of the
Company include the Company and its wholly owned subsidiaries. All material inter-company balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates. Significant estimates in 2017 and 2016 include the allowance for doubtful accounts,
stock-based compensation, the useful lives and valuation of property and equipment, and deferred revenue.
Cash and cash equivalents
The Company considers all liquid debt instruments with original
maturities of three months or less to be cash equivalents.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Accounts receivable and allowance for uncollectable accounts
The Company has a policy of establishing an allowance for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other
factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged
to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At March
31, 2017 and December 31, 2016, the Company has established, based on a review of its outstanding balances, an allowance for doubtful
accounts in the amounts of $0.
Fair value of financial instruments
The carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and capital leases approximated fair
value as of March 31, 2017 and December 31, 2016, because of the relatively short-term maturity of these instruments and their
market interest rates.
The Company follows Financial Accounting Standards
Board (“FASB”) ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and
liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to
existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for
measuring fair value, and expands disclosure about such fair value measurements.
Property and equipment
Property and equipment are carried at cost.
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in income in the year of disposition. In accordance with Statement of Financial Accounting Standards ASC 360, “Accounting
for the Impairment or Disposal of Long-Lived Assets,” the Company examines the possibility of decreases in the value of fixed
assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Impairment of long-lived assets
The Company periodically reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company
recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the asset's estimated fair value and its book value.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Income taxes
The Company accounts for income taxes pursuant to the provisions
of FASB ASC 740-10, “Accounting for Income Taxes” (“ASC 740-10”), which requires, among other things, an
asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which
management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provisions of the ASC 740-10 related to
Accounting for Uncertain Income Tax Positions.
When tax returns are filed, it is highly certain that some positions taken
would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the
position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10,
the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be sustained upon examination, including the resolution of
appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits
in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities
upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the
Company has not recorded a liability for uncertain tax benefits.
The Company has adopted FASB ASC 740-10-25
Definition of Settlement,
which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination
by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize
the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on
the basis of its technical merits and the statute of limitations remains open. As of March 31, 2017, the tax years ended December
31, 2016, 2015 and 2014 are still subject to audit.
Income (loss) per common share
Basic earnings per share is computed by dividing income (loss) from
continuing operations by the weighted average number of shares of common stock outstanding during the period. Diluted earnings
per share is computed by dividing the adjusted net income (loss) from operations for diluted earnings per share by the weighted
average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each
period. The effects of common stock equivalents and potentially dilutive securities outstanding during 2017 and 2016 are excluded
from the calculation of diluted income (loss) per common share because they are anti-dilutive.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
The Company's common stock equivalents include the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
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
|
|
|
|
106,144,240
|
|
Options to purchase common stock issued and outstanding
|
|
|
3,400,000
|
|
|
|
4,000,000
|
|
Warrants to purchase common stock issued and outstanding
|
|
|
25,098,330
|
|
|
|
25,098,330
|
|
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
|
|
|
|
65,000,000
|
|
|
|
|
232,777,570
|
|
|
|
233,377,570
|
|
Revenue recognition and deferred revenue
The Company offers InsPro Enterprise
TM
on both a licensed
and an ASP basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy of the InsPro Enterprise
software installed at a single client location or hosted by InsPro Technologies. Alternatively, ASP hosting service enables a client
to lease the InsPro Enterprise software, paying only for that capacity required to support their business. ASP and hosting clients
access InsPro Enterprise installed on clients’ servers or on the Company’s servers located at a third party’s
site.
The Company’s software maintenance fees apply to both licensed
and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise help desk.
The Company’s consulting and implementation services are generally
associated with the implementation of InsPro
Enterprise for either an ASP or licensed client, and cover such
activity as InsPro Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance plan
set-up, client insurance document design and system documentation.
The Company’s revenue is generally recognized under FASB ASC
985-605 (“ASC 985-605”). For software arrangements involving multiple elements, which are license fees, professional
services, ASP services and maintenance services, the Company allocates revenue to each element based on the relative fair value
or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices
charged when the element is sold separately. Software revenue accounted for under ASC 985-605 is recognized when persuasive evidence
of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the
fee is fixed or determinable and collectability is probable. Revenue related to post-contract customer support (“PCS”),
including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term. Under
ASC 985-605, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery
of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service,
in which case revenue is recognized as the service is performed once the service is the only undelivered element.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company recognizes revenue from software license
agreements when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable,
and collectability is probable. The Company considers fees relating to arrangements with payment terms extending beyond one year
to not be fixed or determinable and revenue for these arrangements is recognized as payments become due from the customer. In software
arrangements that include more than one InsPro Enterprise
TM
module, the Company allocates the total arrangement fee
among the modules based on the relative fair value of each of the modules.
License revenue allocated to software products
generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement
includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated
to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements
is recognized as the services are performed.
Effective August 18, 2015, the Company entered into a 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 March 31, 2017
the Company has recorded the $2,000,000 unearned portion of the Reseller Fee in deferred revenue ($500,000 included in current
liabilities and $1,500,000 included in long term liabilities).
The unearned portion of the Company’s revenue, which is revenue
collected or billed but not yet recognized as earned, has been included in the consolidated balance sheet as a liability for deferred
revenue.
See Note 2 - Discontinued Operations - Revenue Recognition for Discontinued
Operations.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Cost of revenues
Cost of revenues includes direct
labor and associated costs for employees and independent contractors performing InsPro Enterprise
TM
design, development,
implementation and testing together with customer management, training and technical support, as well as a portion of facilities
costs and depreciation. The following table discloses cost of revenue as reported in the statement of operations.
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
1,920,423
|
|
|
$
|
2,232,355
|
|
Professional fees
|
|
|
1,914,984
|
|
|
|
3,012,354
|
|
Depreciation
|
|
|
88,149
|
|
|
|
100,214
|
|
Rent, utilities, telephone and communications
|
|
|
106,488
|
|
|
|
137,670
|
|
Other cost of revenues
|
|
|
78,925
|
|
|
|
96,976
|
|
|
|
$
|
4,108,969
|
|
|
$
|
5,579,569
|
|
Selling, general and administrative expenses
Selling, general and administrative expenses include all selling,
marketing, and other expenses not classified as cost of revenues. The following table discloses selling, general and administrative
expenses as reported in the statement of operations.
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
1,132,958
|
|
|
$
|
1,008,087
|
|
Advertising and other marketing
|
|
|
8,735
|
|
|
|
41,720
|
|
Depreciation
|
|
|
34,789
|
|
|
|
25,421
|
|
Rent, utilities, telephone and communications
|
|
|
99,513
|
|
|
|
100,932
|
|
Professional fees
|
|
|
138,300
|
|
|
|
260,802
|
|
Other general and administrative
|
|
|
182,202
|
|
|
|
193,174
|
|
|
|
$
|
1,596,497
|
|
|
$
|
1,630,136
|
|
Advertising and other marketing
Advertising and other marketing costs are expensed as incurred and
are reported in selling, general and administrative expenses. See the previous table under selling, general and administrative
expenses for advertising and other marketing expenses reported in the statement of operations.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
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 March 31, 2017, the Company had $2,070,717 of cash in United States bank deposits, of which $500,976 was federally insured and
$1,569,741 was not federally insured.
The following table lists the percentage of the Company’s
accounts receivable balance from the Company’s clients representing 10% or more of the accounts receivable balances as of
the periods listed below.
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
28
|
%
|
|
|
30
|
%
|
Client #2
|
|
|
26
|
%
|
|
|
12
|
%
|
Client #3
|
|
|
15
|
%
|
|
|
13
|
%
|
The following table lists the percentage of the Company’s
revenue earned from the Company’s clients representing 10% or more of the revenue earned in each of the periods listed below.
|
|
For the 3 Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
31
|
%
|
|
|
29
|
%
|
Client #2
|
|
|
20
|
%
|
|
|
23
|
%
|
Stock-based compensation
The Company accounts for stock based compensation transactions using
a fair-value-based method and recognizes compensation cost for share-based payments to employees based on their grant-date fair
value from the beginning of the fiscal period in which the recognition provisions are first applied.
Non-employee stock based compensation
The cost of stock based compensation awards issued to non-employees
for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services,
whichever is more readily determinable, based on their grant-date fair value from the beginning of the fiscal period in which the
recognition provisions are first applied.
Registration rights agreements
At March 31, 2017, the Company does not believe
that it will incur a penalty in connection with the Company’s registration rights agreements. Accordingly, no liability in
respect thereof was recorded as of March 31, 2017. See Note 6 - Stockholders Deficit – Registration and Participation Rights.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued by FASB,
which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact
of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated
financial statements upon adoption.
In May 2014, the FASB issued Accounting Standards Update (“ASU”)
ASU No. 2014-09
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”), that outlines a
comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. In July 2015, the FASB approved a one-year deferral of the effective date
of ASU 2014-09 to the beginning of 2018 for public companies, with an option that would permit companies to adopt the standard
as early as the original effective date of 2017. 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”), which 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 expired 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
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.
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 was effective for the Company at the beginning of fiscal year 2017 and there was no material impact of adopting this
ASU on our consolidated financial statements.
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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Liquidity
During the three months ended March 31, 2017, the Company’s
net loss was $646,302 and cash used in operations was $1,044,732. As of March 31, 2017, the Company had $1,985,940 of cash, a working
capital deficit of $3,145,962 and the Company’s shareholder deficit was $4,350,272. During 2016 the Company implemented cost
reduction initiatives, which resulted in the reduction of expenses in 2016 as compared to 2015. During the three months ended March
31, 2017, the Company implemented additional cost reduction initiatives, which resulted in the reduction of cost of revenues of
$1,470,600 and selling, general and administrative expenses of $33,639 as compared to the same period in 2016. On April 20, 2017,
the Company obtained $2,000,000 of cash from its largest stockholder, The Co-Investment Fund II, L.P. (“Co-Investment”),
which is described in Note 10 – Subsequent Events.
Our liquidity needs for the next 12 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 for a period of the next
twelve months from the date of this filing.
NOTE 2 – DISCONTINUED OPERATIONS
The Company has classified its former telesales call center and
external agent produced agency business as discontinued operations. During the first quarter of 2009, the Company ceased the direct
marketing and sale of health and life insurance and related products to individuals and families in its telesales call center.
The Company also determined to discontinue selling health and life insurance and related products to individuals and families through
its non-employee agents. On February 20, 2009, the Company entered into and completed the sale of its agency business to an unaffiliated
third party, pursuant to the terms of a client transition agreement.
The financial position of discontinued operations
was as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
7,216
|
|
|
$
|
8,636
|
|
Other current assets
|
|
|
-
|
|
|
|
-
|
|
Net current assets of discontinued operations
|
|
$
|
7,216
|
|
|
$
|
8,636
|
|
The results of discontinued operations do not include any allocated
or common overhead expenses. The results of operations of discontinued operations were as follows:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Commission and other revenue from carriers
|
|
$
|
2,378
|
|
|
$
|
3,067
|
|
eHealth Agreement
|
|
|
15,934
|
|
|
|
16,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,312
|
|
|
|
19,215
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Other general and administrative
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
12,312
|
|
|
$
|
13,215
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
Useful
Life
(Years)
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Computer equipment and software
|
|
|
3
|
|
|
$
|
4,509,487
|
|
|
$
|
4,419,412
|
|
Office equipment
|
|
|
4.6
|
|
|
|
145,228
|
|
|
|
158,732
|
|
Office furniture and fixtures
|
|
|
6.7
|
|
|
|
-
|
|
|
|
189,857
|
|
Leasehold improvements
|
|
|
7.1
|
|
|
|
81,933
|
|
|
|
94,620
|
|
|
|
|
|
|
|
|
4,736,648
|
|
|
|
4,862,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
(4,321,412
|
)
|
|
|
(4,349,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
415,236
|
|
|
$
|
512,960
|
|
The following table discloses depreciation expense
as reported in the statement of operations.
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Depreciation included in cost of revenues
|
|
$
|
88,149
|
|
|
$
|
100,214
|
|
Depreciation included in selling, general and administrative
|
|
|
34,789
|
|
|
|
25,421
|
|
Total depreciation
|
|
$
|
122,938
|
|
|
$
|
125,635
|
|
NOTE 4 – NOTES PAYABLE
Notes payable at March 31, 2017, consist of a note payable for insurance
premium financing on one of the Company’s insurance policies. The 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, 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 5 – TRANSACTIONS WITH RELATED PARTIES
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”). See Note 10 – Subsequent
Events. 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. Series C Preferred Stock is senior to
Series A Preferred Stock (as defined below) and the Series C Preferred Stock (as defined below) as it pertains to liquidation preferances.
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.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Common Stock
As of March 31, 2017 and December 31, 2016, 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 March 31,
2017 and December 31, 2016, the Company had 41,543,655 shares of its Common Stock issued and outstanding.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
The Company has reserved shares of Common Stock, on an as-if-converted
basis, as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Exercise of options issued and outstanding to purchase common stock
|
|
|
3,400,000
|
|
|
|
4,000,000
|
|
Issuance of common shares available under the 2010 Equity Compensation Plan
|
|
|
25,596,980
|
|
|
|
24,996,980
|
|
Exercise of warrants issued and outstanding to purchase common stock
|
|
|
25,098,330
|
|
|
|
25,098,330
|
|
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
|
|
|
|
106,144,240
|
|
Exercise of warrants to purchase series B convertible preferred stock issued and outstanding and converted into common stock
|
|
|
65,000,000
|
|
|
|
65,000,000
|
|
|
|
|
|
|
|
|
|
|
Total common stock reserved for issuance
|
|
|
258,374,550
|
|
|
|
258,374,550
|
|
The above table includes Common Stock reserved for non exercisable,
unvested stock options and Common Stock reserved for the issuance of stock options in the future under the Company’s 2010
Equity Compensation Plan.
Series A Preferred Stock
As of March 31, 2017 and December 31, 2016,
the Company’s board of directors has designated 3,437,500 shares of Series A Convertible
Preferred Stock par value $0.001 per share (“Series A Preferred Stock”). As of March 31, 2017 and December 31,
2016, the Company had 1,276,750 shares of its Series A Preferred Stock issued and outstanding. As of March 31, 2017 and
December 31, 2016, the Company has reserved 380,000 shares of Series A Preferred Stock for the exercise of warrants issued
and outstanding to purchase its Series A Preferred Stock.
The Series A Preferred Stock is entitled to vote as a single class
with the holders of the Company’s Common Stock and preferred stock, with each share of Series A Preferred Stock having the
right to 20 votes.
Upon the liquidation, sale or merger of the Company, each share
of Series A Preferred Stock is entitled to receive an amount equal to the greater of (A) a liquidation preference equal to two
and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500, subject to certain customary adjustments,
or (B) the amount such share of Series A Preferred Stock would receive if it participated
pari passu
with the holders of
Common Stock on an as-converted basis. The liquidation preference is calculated by taking the product of the issued and outstanding
shares of Series A Preferred Stock times $10.00. Series A Preferred Stock is junior to Series B Convertible Preferred Stock par
value $0.001 per share (“Series B Preferred Stock”) and the Series C Preferred Stock as it pertains to liquidation
preferances.
Each share of Series A Preferred Stock is convertible into 20 shares
of Common Stock, subject to adjustment and at the option of the holder of the Series A Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
For so long as any shares of Series A Preferred Stock are outstanding,
the vote or consent of the holders of at least two-thirds of the Series A Preferred Stock is required to approve 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 any amendment to the Company’s certificate of incorporation to create any shares
of capital stock that rank senior to the Series A Preferred Stock. In addition to the voting rights described above, for so long
as 1,000,000 shares of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the
shares of Series A Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the
Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series A Preferred
Stock with an amount per share equal to two and a half (2.5) times the Series A Preferred Stock original issue price, or $12,767,500,
in aggregate for all issued and outstanding Series A Preferred Stock.
Series B Preferred Stock
As of March 31, 2017 and December 31, 2016, the Company’s board of directors has designated 11,000,000 shares of Series B Preferred Stock. As of March 31, 2017 and December 31, 2016, the Company had 5,307,212 of
its Series B Preferred Stock issued and outstanding. As of March 31, 2017 and December 31, 2016, the Company has reserved 3,250,000
shares of Series B Preferred Stock for the exercise of warrants issued and outstanding to purchase its Series B Preferred Stock.
The Series B Preferred Stock is entitled to vote as a single class
with the holders of the Company’s Common Stock and preferred stock, with each share of Series B Preferred Stock having the
right to 20 votes.
As of March 31, 2017 and December 31, 2016, upon the liquidation,
sale or merger of the Company, each share of Series B Preferred Stock is entitled to receive an amount equal to the greater of
(A) a liquidation preference equal to the Series B Preferred Stock original issue price, or $15,921,636, subject to certain customary
adjustments, or (B) the amount such share of Series B Preferred Stock would receive if it participated
pari passu
with the
holders of Common Stock and preferred stock on an as-converted basis. The liquidation preference is calculated by taking the product
of the issued and outstanding shares of Series B Preferred Stock times $3.00. Series B Preferred Stock is senior to Series A Preferred
Stock, and junior to the Series C Preferred Stock, as it pertains to liquidation preferances.
Each share of Series B Preferred Stock is convertible into 20 shares
of Common Stock, subject to adjustment and at the option of the holder of the Series B Preferred Stock.
For so long as any shares of Series B Preferred Stock are outstanding,
the vote or consent of the holders of at least two-thirds of the Series B Preferred Stock is required to approve (Y) any amendment
to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special
rights of the Series B Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares
of capital stock that rank senior to the Series B Preferred Stock. In addition to the voting rights described above, for so long
as 1,000,000 shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the
shares of Series B Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the
Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series B Preferred
Stock with an amount per share equal the Series B Preferred Stock original issue price, or $15,921,636, in aggregate for all issued
and outstanding Series B Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
On February 2, 2016 the Company filed a registration statement
for a rights offering on Form S-1/A, which the Commission declared effective on February 5, 2016, to distribute to shareholders
excluding residents of Arizona and California at no charge, one non-transferable subscription right for each 16,615 shares of our
Common Stock, 831 shares of our Series A Preferred Stock and 830 shares of our Series B Preferred Stock owned as of January 31,
2016 (the “Record Date”), either as a holder of record or, in the case of shares held of record by brokers, dealers,
custodian banks, or other nominees on shareholders’ behalf, as a beneficial owner of such shares. If the rights offering
was fully subscribed the gross proceeds from the rights offering would have been approximately $2.5 million. This rights offering
was designed to give all of the holders of the Company’s capital stock the opportunity to participate in an equity investment
in the Company on the same economic terms as the private placement completed by the Company for an aggregate of 1,163,141 shares
of Series B Preferred Stock and warrants to purchase 11,631,410 shares of Common Stock with certain accredited investors, including
Co-Investment and Donald Caldwell, who is the CEO and chairman of the board of directors of the Company, 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.
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
remaining 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.
Series C Preferred Stock
See Note 10 – Subsequent Events.
Stock Options
During the three months ended March 31, 2017, options for 600,000
common shares, which were previously granted to a former executive of the Company, expired in accordance with the terms of such
stock options.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
As of March 31, 2017, there were 30,000,000 shares of our Common
Stock authorized to be issued under the Company’s 2010 Equity Compensation Plan, of which 25,596,980 shares of our Common
Stock remain available for future stock option grants.
The Company recorded compensation expense pertaining to employee
stock options and warrants in the amount of $85,090 for the three months ended March 31, 2017.
The value of equity compensation expense not yet expensed pertaining
to unvested equity compensation for both options to purchase common stock and Series A Preferred Stock was $53,603 as of March
31, 2017, which will be recognized over a weighted average 2.8 years in the future.
A summary of the Company's outstanding stock options 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, 2016
|
|
|
4,000,000
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
|
3.44
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(600,000
|
)
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
3,400,000
|
|
|
$
|
0.10
|
|
|
$
|
0.07
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2017
|
|
|
1,516,666
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
3.34
|
|
|
$
|
-
|
|
(1) The aggregate intrinsic value is based on the $0.0625 closing
price as of March 31, 2017, for the Company’s Common Stock.
Common Stock Warrants
Outstanding warrants at March 31, 2017, have an average weighted
average remaining contractual life of 0.6 years. A summary of the status of the Company's outstanding common
stock warrants are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
25,098,330
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
For the period ended March 31, 2017
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at March 31, 2017
|
|
|
25,098,330
|
|
|
$
|
0.15
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
Series A Preferred Stock Warrants
Outstanding warrants to purchase the Company’s Series
A Preferred Stock at March 31, 2017, have a remaining contractual life of 0.5 year. A summary of the status of the Company's outstanding
Series A Preferred Stock warrants are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
380,000
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
For the period ended March 31, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at March 31, 2017
|
|
|
380,000
|
|
|
$
|
4.00
|
|
Series B Preferred Stock Warrants
Outstanding preferred stock warrants to purchase the Company’s
Series B Preferred Stock at March 31, 2017 have a remaining contractual life of 2.1 years. A summary of the status of the Company's
outstanding Series B Preferred Stock warrants are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
For the period ended March 31, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at March 31, 2017
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
Registration and Participation Rights
As of March 31, 2017, the Company has not received a demand
notice in connection with any of the Company’s various registration rights agreements.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2017
NOTE 7 – CAPITAL LEASE OBLIGATIONS
The Company’s subsidiary, InsPro LLC, has entered into
several capital lease obligations to purchase equipment used for operations. The Company has the option to purchase the equipment
at the end of each lease agreement for one dollar. The underlying assets and related depreciation were included in the appropriate
fixed asset category, and related depreciation account.
Property and equipment includes the following amounts for leases
that have been capitalized:
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Useful Life (Years)
|
|
|
|
|
|
|
Computer equipment and software
|
|
3
|
|
$
|
1,576,226
|
|
|
$
|
1,576,226
|
|
Leasehold improvements
|
|
3
|
|
|
15,011
|
|
|
|
15,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,591,237
|
|
|
|
1,591,237
|
|
Less accumulated depreciation
|
|
|
|
|
(1,334,741
|
)
|
|
|
(1,260,944
|
)
|
|
|
|
|
$
|
256,496
|
|
|
$
|
330,293
|
|
Future minimum payments required under capital leases at March
31, 2017, are as follows:
2017
|
|
$
|
122,149
|
|
2018
|
|
|
130,693
|
|
2019
|
|
|
30,307
|
|
|
|
|
|
|
Total future payments
|
|
|
283,149
|
|
Less amount representing interest
|
|
|
18,232
|
|
|
|
|
|
|
Present value of future minimum payments
|
|
|
264,917
|
|
Less current portion
|
|
|
145,371
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
119,546
|
|
NOTE 8 – DEFINED CONTRIBUTION 401(k) PLAN
The Company implemented a 401(k) plan on January 1, 2007. Eligible
employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 6 months of employment with
the Company. An employee may become a participant of the 401(k) plan on the first day of the month following the completion of
the eligibility requirements. Effective January 1, 2007 the Company implemented an elective contribution to the plan of 25% of
the employee’s contribution up to 4% of the employee’s compensation. The contributions are subject to a vesting schedule
and become fully vested after one year of service, retirement, death or disability, whichever occurs first. The Company made contributions
of $21,215 and $23,688 for the three months ended March 31, 2017 and 2016, respectively.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2017
NOTE 9 – COMMITTMENTS AND CONTINGENCIES
On July 7, 2006, the Company entered into a lease agreement
with Radnor Properties-SDC, L.P. (the “Landlord”) for the lease of 7,414 square feet of office space located in Radnor
Financial Center, Building B, 150 Radnor-Chester Road, Radnor, Pennsylvania. The term of the lease commenced on November 1, 2006,
which was the date the Company, with the Landlord’s prior consent, assumed possession of the premises and the date the Landlord
tendered possession of the premises to the Company following the substantial completion of the improvements required to be made
by the Landlord under the lease agreement, and will expire on the last day of the 125
th
month following the commencement
of the lease term. The lease expired on March 31, 2017, in accordance with the terms of the lease.
On September 14, 2007, InsPro LLC entered into a lease agreement
(the “Lease Agreement”) with BPG Officer VI Baldwin Tower L.P. (“BPG”). On April 28, 2015, InsPro LLC and
BPG entered into a fifth amendment to the Lease Agreement whereby InsPro LLC and BPG agreed to amend the Lease Agreement to increase
the leased office space by 6,801 rentable square feet effective April 1, 2015, through March 31, 2016, at an incremental monthly
rent of $10,000. On June 9, 2016, InsPro LLC and BPG entered into a sixth amendment to the Lease Agreement whereby InsPro LLC and
BPG agreed to amend the Lease Agreement to extend the term through January 31, 2018 for 17,567 of rentable square feet at a monthly
cost of $28,546 for the period February 1, 2017 through January 31, 2018.
Future minimum payments required under operating leases and
service agreements at March 31, 2017, are as follows:
2017
|
|
$
|
517,618
|
|
2018
|
|
|
266,591
|
|
2019
|
|
|
225,108
|
|
2020
|
|
|
15,932
|
|
thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
1,025,249
|
|
The Company leases certain real and personal property under
non-cancelable operating leases. Rent expense was $118,484 and $187,657 for the three months ended March 31, 2017 and 2016, respectively.
NOTE 10 – SUBSEQUENT EVENTS
Private Placement
On April 20, 2017, the Company completed a private placement
(the “Private Placement”) with Co-Investment, which hold more than 5% of our common stock. Donald Caldwell, who is
the CEO and chairman of the board of directors of the Company, is the CEO for Cross Atlantic Capital Partners, Inc., which is the
managing partner of Co-Investment. The Company issued and Co-Investment purchased 1,000,000 shares of our Series C Convertible
Preferred Stock at a per share price of $2.00 for an aggregate total investment of $2,000,000 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 5 – Transactions With Related Parties for a description of the Series C Preferred
Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2017
NOTE 10 – SUBSEQUENT EVENTS (continued)
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
500,000 shares of Series C Preferred Stock Units to other existing stockholders 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 Co-Investment, subject to certain exceptions and limitations, which grants Co-Investment 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. Co-Investment may participate in such financings at a level based on Co-Investment’s
ownership percentage of the Company on a fully-diluted basis prior to such financing.
In connection with the Private Placement, the board
of directors of the Company approved a Certificate of Designation of Series C Convertible Preferred Stock of the Company
(the “Certificate of Designation”) setting forth the rights, preferences and limitations of the Series C
Preferred Stock. The Company’s board of directors has designated 4,000,000 shares of Series C Preferred Stock. On April
19, 2017, the Company filed the Certificate of Designation with the Secretary of State of the State of Delaware.
The Certificate of Designation provides, among other things,
that upon the liquidation, sale or merger of the Company, the holders of shares of Series C Preferred Stock are 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 C Preferred Stock
original issue price, subject to certain customary adjustments, or (B) the amount such Series C Preferred Share would receive if
it participated
pari passu
with the holders of shares of Common Stock on an as-converted basis.
Each Series C Preferred Share is convertible into 20 shares
of Common Stock.
For so long as any Series C Preferred Shares are outstanding,
the vote or consent of the holders of at least two-thirds of the Series C Preferred Shares 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 Series C Preferred Shares are outstanding, the vote or consent of the holders of at least two-thirds of the Series
C Preferred Shares 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 plus any declared but unpaid
dividends.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2017
NOTE 10 – SUBSEQUENT EVENTS (continued)
On May 11, 2017, the Company completed a private placement
(the “Second Private Placement”) with Azeez Enterprises, L.P., which hold more than 5% of our Series C Preferred Stock.
Michael Azeez is a member of the board of directors of the Company and is the managing partner of Azeez Enterprises, L.P. The Company
issued and Azeez Enterprises, L.P. purchased 75,000 shares of our Series C Convertible Preferred Stock at a per share price of
$2.00 for an aggregate total investment of $150,000 pursuant to the terms of a securities purchase agreement at essentially the
same terms as those contained in the Purchase Agreement (the “Second Purchase Agreement”). Also as part of the Second
Private Placement and Second Purchase Agreement with John Scarpa, which hold more than 5% of our Series B Preferred Stock. The
Company issued and John Scarpa purchased 75,000 shares of our Series C Convertible Preferred Stock at a per share price of $2.00
for an aggregate total investment of $150,000 pursuant to the terms of the Second Purchase Agreement. The Company intends to use
the net proceeds of the Second Private Placement for working capital purposes.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Certain of the statements contained in this Quarterly Report
on Form 10-Q, including in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
and elsewhere in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on management’s
current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations
contained in the forward-looking statements. The forward-looking statements herein include, among others, statements addressing
management’s views with respect to future financial and operating results and costs associated with the Company’s operations
and other similar statements. Various factors, including competitive pressures, regulatory changes, customer defaults or insolvencies,
adverse resolution of any contract or other disputes with customers, or the loss of one or more key client relationships, could
cause actual outcomes and results to differ materially from those described in forward-looking statements.
The words “may,” “will,” “expect,”
“intend,” “anticipate,” “estimate,” “believe,” “continue” and similar
expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement
is not forward-looking. While we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly
Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us
and projections of the future about which we cannot be certain. Many factors, including general business and economic conditions
affect our ability to achieve our objectives. As a result of these factors, we cannot assure you that the forward-looking statements
in this Quarterly Report on Form 10-Q will prove to be accurate. In addition, if our forward-looking statements prove to be inaccurate,
the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard
these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any
specified time frame, if at all. We may not update these forward-looking statements, even though our situation may change in the
future.
We qualify all the forward-looking statements contained in this
Quarterly Report on Form 10-Q by the foregoing cautionary statements.