NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 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.
For purpose of comparability, certain prior period amounts have
been reclassified to conform to the 2017 presentation.
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, valuation of deferred tax assets, and deferred
revenue.
Cash and cash equivalents
The Company considers all liquid debt instruments with original
maturities of three months or less to be cash equivalents.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 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 September
30, 2017 and December 31, 2016, the Company has established, based on a review of its outstanding balances, an allowance for doubtful
accounts in the amount 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 September 30, 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
September 30, 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 September
30, 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 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
September 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
The Company's weighted average common shares outstanding used
in computing fully diluted net income (loss) per common share include the following:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
41,543,655
|
|
|
|
41,543,655
|
|
|
|
41,543,655
|
|
|
|
41,543,655
|
|
Conversion of series A convertible preferred stock issued and outstanding into common stock
|
|
|
25,535,000
|
|
|
|
-
|
|
|
|
25,535,000
|
|
|
|
-
|
|
Conversion of series B convertible preferred stock issued and outstanding into common stock
|
|
|
106,144,240
|
|
|
|
-
|
|
|
|
106,144,240
|
|
|
|
-
|
|
Conversion of series C convertible preferred stock issued and outstanding into common stock
|
|
|
23,747,340
|
|
|
|
-
|
|
|
|
14,699,440
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing fully diluted net income (loss) per share
|
|
|
196,970,235
|
|
|
|
41,543,655
|
|
|
|
187,922,335
|
|
|
|
41,543,655
|
|
The Company’s issued and outstanding convertible preferred
stock is convertible into common stock at a ratio of 20 common shares for each preferred share.
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 or post implementation of InsPro Enterprise for either an ASP or licensed client.
Implementation services include InsPro Enterprise installation, configuration and modification of InsPro Enterprise functionality,
client insurance plan set-up, client insurance document design and system documentation. Post implementation services include these
same services to existing clients supporting their ongoing utilization of InsPro Enterprise.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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. A Refund Event did not occur as of September 30, 2017,
and as a result the Company recognized $500,000 of Reseller Fee as revenue in the nine months ended September 30, 2017. The Company
shall refund the following amounts to the Reseller if a Refund Event occurs between the following dates; $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, 2017 the Company
has recorded the $1,500,000 unearned portion of the Reseller Fee in deferred revenue ($500,000 included in current liabilities
and $1,000,000 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
September 30, 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 September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
1,593,138
|
|
|
$
|
1,611,665
|
|
|
$
|
4,873,531
|
|
|
$
|
5,641,370
|
|
Professional fees
|
|
|
1,566,611
|
|
|
|
2,413,791
|
|
|
|
5,101,022
|
|
|
|
7,981,721
|
|
Depreciation
|
|
|
53,394
|
|
|
|
90,856
|
|
|
|
202,884
|
|
|
|
287,163
|
|
Rent, utilities, telephone and communications
|
|
|
86,250
|
|
|
|
102,784
|
|
|
|
286,452
|
|
|
|
338,117
|
|
Other cost of revenues
|
|
|
71,606
|
|
|
|
103,641
|
|
|
|
233,257
|
|
|
|
315,990
|
|
|
|
$
|
3,370,999
|
|
|
$
|
4,322,737
|
|
|
$
|
10,697,146
|
|
|
$
|
14,564,361
|
|
Selling, general and administrative expenses
Selling, general and administrative expenses include all selling,
marketing, and other expenses not classified as cost of revenues. The following table discloses selling, general and administrative
expenses as reported in the statement of operations.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
741,978
|
|
|
$
|
755,185
|
|
|
$
|
3,102,939
|
|
|
$
|
2,561,625
|
|
Advertising and other marketing
|
|
|
10,297
|
|
|
|
43,022
|
|
|
|
26,719
|
|
|
|
92,476
|
|
Depreciation
|
|
|
20,728
|
|
|
|
30,786
|
|
|
|
83,386
|
|
|
|
88,093
|
|
Rent, utilities, telephone and communications
|
|
|
37,278
|
|
|
|
100,516
|
|
|
|
188,631
|
|
|
|
304,724
|
|
Professional fees
|
|
|
201,937
|
|
|
|
163,559
|
|
|
|
554,797
|
|
|
|
568,111
|
|
Other general and administrative
|
|
|
166,108
|
|
|
|
182,277
|
|
|
|
541,261
|
|
|
|
566,398
|
|
|
|
$
|
1,178,326
|
|
|
$
|
1,275,345
|
|
|
$
|
4,497,733
|
|
|
$
|
4,181,427
|
|
Advertising and other marketing
Advertising and other marketing costs are expensed as incurred
and are reported in selling, general and administrative expenses. See the previous table under selling, general and administrative
expenses for advertising and other marketing expenses reported in the statement of operations.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 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 September 30, 2017, the Company had $3,474,057 of cash in United States bank deposits, of which $500,836 was federally insured
and $2,973,221 was not federally insured.
The following table lists the percentage of the Company’s
accounts receivable balance from the Company’s clients representing 10% or more of the accounts receivable balances as of
the periods listed below.
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
63
|
%
|
|
|
30
|
%
|
Client #2
|
|
|
0
|
%
|
|
|
12
|
%
|
Client #3
|
|
|
0
|
%
|
|
|
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 Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
33
|
%
|
|
|
24
|
%
|
Client #2
|
|
|
22
|
%
|
|
|
12
|
%
|
Stock-based compensation
The Company accounts for stock based compensation transactions
using a fair-value-based method and recognizes compensation cost for share-based payments to employees based on their grant-date
fair value from the beginning of the fiscal period in which the recognition provisions are first applied.
Non-employee stock based compensation
The cost of stock based compensation awards issued to non-employees
for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services,
whichever is more readily determinable, based on their grant-date fair value from the beginning of the fiscal period in which the
recognition provisions are first applied.
Registration rights agreements
At September 30, 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 September 30, 2017. See Note 6 - Stockholders Deficit – Registration and Participation
Rights.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 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. The Company plans to utilize the cumulative effect transition method and will adopt this standard
effective January 1, 2018.
Because the Company has historically established the relative
fair value of license fees, professional services, ASP services and maintenance services based on vendor-specific objective evidence
(“VSOE”) for its customers and as a result historically has not been required to defer a material amount of revenue
due to insufficient VSOE, the Company does not anticipate the updated standard’s requirement to establish or estimate a standalone
selling price, rather than defer revenues in the absence of VSOE, to have a significant impact on the Company’s financial
statements.
While we are continuing to assess all potential impacts of the
new standard, we currently believe with respect to the Company’s professional services revenue, the Company generally recognizes
implementation and post implementation services over time on a time and materials basis as the services are performed. These services
include InsPro Enterprise installation, configuration and modification of InsPro Enterprise functionality, client insurance plan
set-up, client insurance document design and system documentation. Once these services are performed for a client they cannot be
returned by the client to the Company and the Company cannot provide the same services to any other client without substantial
rework needed to satisfy another client’s needs. Once the services are performed on a time and materials basis the amounts
are owed by the Client to the Company and are non-refundable. Under the updated standard, the implementation and post implementation
services represent a series of performance obligations that are delivered over time on a stand-alone basis. In some instances the
Company performs implementation and post implementation services at an agreed upon fixed price with an agreed upon payment schedule.
When the agreed upon payment schedule is based upon the achievement of deliverables and when such payments are not refundable to
the client the Company recognizes such billed amounts as receivables and as revenue when such deliverables have been delivered
to a client. When the agreed upon payment schedule is not based on specific deliverables the Company recognizes the fixed price
as a receivable from the client and as revenue at the point in time when such service has been completed and delivered to a client.
As a result, the Company believes that its current professional services revenue recognition meets the criteria for revenue recognition
under the updated standard.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
With respect to the Company’s ASP hosting and maintenance
revenue, the Company provides value to its customers through continuous service and support over the duration of its contacts or
arrangements with our customers. The Company currently recognizes ASP hosting and maintenance revenue ratably over the contract
or arrangement period. Under the updated standard, the continuous service and support represent a series of performance obligations
that are delivered over time on a stand-ready basis. As a result, the Company believes that its current ASP hosting and maintenance
revenue recognition meets the criteria for revenue recognition under the updated standard.
With respect to the Company’s sale of software licenses
and sale of equipment, the Company’s current revenue recognition occurs when persuasive evidence of an arrangement exists,
the software is delivered in accordance with all terms and conditions of the customer contracts (“Delivery Has Occurred”),
the fee is fixed or determinable and collectability is probable. Historically the criteria Delivery Has Occurred has been the last
criteria satisfied in terms of determining revenue recognition for sale of software licenses and sale of equipment. Historically
the Company has recognized sale of software licenses and sale of equipment revenue when Delivery Has Occurred. Under the updated
standard the Company will be required to recognize sale of software licenses and sale of equipment revenue when control of the
software license or the equipment is transferred to the customer, which we believe has been when Delivery Has Occurred. As a result,
the Company believes that its current sale of software licenses and sale of equipment revenue recognition meets the criteria for
revenue recognition under the updated standard.
Due to the complexity of certain of our client contracts, the
actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific
terms and, therefore, may vary in some instances.
With respect to the Company’s Reseller Fee revenue the
Company currently recognized revenue whenever a portion of the Reseller Fee is no longer subject to refund as a result of a Refund
Event and at which time no portion of the Reseller Fee is subject to refund the portion of the Reseller Fee not already recognized
as revenue is recognized ratably over the duration of the Reseller Agreement. Under the updated standard, the Company believes
the contractual specific refund amounts and time frames pertaining to a Refund Event represent separate performance obligations
over the duration of the Reseller Agreement, which the Reseller Agreement has contractually specified the prices for each separate
performance deliverable. As a result, the Company believes that its current Reseller Fee revenue recognition meets the criteria
for revenue recognition under the updated standard.
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. We believe our current lease for our Eddystone office, which was extended for a 1 year
term that expires on January 31, 2019, 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
September 30, 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) (“ASU 2016-13”).” 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 2016-13
on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 “Classification
of Certain Cash Receipts and Cash Payments (Topic 230)” (“ASU 2016-15”), 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 nine months ended September 30, 2017, the Company’s
net income was $403,799 and cash used in operations was $1,898,368, which included the reduction of accounts payable in the amount
of $3,492,776. As of September 30, 2017, the Company had $3,424,735 of cash, working capital deficit of $77,792 and the Company’s
shareholder deficit was $849,045. During 2016 the Company implemented cost reduction initiatives, which resulted in the reduction
of expenses in 2016 as compared to 2015. During the nine months ended September 30, 2017, the Company implemented additional cost
reduction initiatives, which resulted in the reduction of cost of revenues of $3,867,215 as compared to the same period in 2016.
During the second quarter of 2017 the Company obtained $2,300,000 of cash from existing stockholders, which is described in Note
5 – Transactions with Related Parties. During the third quarter of 2017 the Company obtained $208,350 of cash from existing
stockholders as a result of a rights offering, which is described in Note 6 – Stockholders Deficit – Series C Preferred
Stock.
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 foregoing,
management believes the Company has sufficient funds to finance its operations for twelve months from the date of this report was
issued.
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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 2 – DISCONTINUED OPERATIONS (continued)
The financial position of discontinued
operations was as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
3,152
|
|
|
$
|
8,636
|
|
Net current assets of discontinued operations
|
|
$
|
3,152
|
|
|
$
|
8,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payable on discontinued operations
|
|
$
|
656
|
|
|
$
|
-
|
|
The results of discontinued operations do not include any allocated
or common overhead expenses. The results of operations of discontinued operations before income taxes were as follows:
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission and other revenue from carriers
|
|
$
|
1,741
|
|
|
$
|
2,068
|
|
|
$
|
6,148
|
|
|
$
|
7,627
|
|
Transition policy commission pursuant to the Agreement
|
|
|
11,259
|
|
|
|
21,169
|
|
|
|
39,252
|
|
|
|
67,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,000
|
|
|
|
23,237
|
|
|
|
45,400
|
|
|
|
75,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other general and administrative
|
|
|
10,844
|
|
|
|
8,390
|
|
|
|
26,478
|
|
|
|
21,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,844
|
|
|
|
8,390
|
|
|
|
26,478
|
|
|
|
21,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
|
$
|
2,156
|
|
|
$
|
14,847
|
|
|
$
|
18,922
|
|
|
$
|
53,341
|
|
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the
following:
|
|
Useful
Life
(Years)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Computer equipment and software
|
|
3
|
|
$
|
4,590,221
|
|
|
$
|
4,419,412
|
|
Office equipment
|
|
4.6
|
|
|
145,228
|
|
|
|
158,732
|
|
Office furniture and fixtures
|
|
6.7
|
|
|
-
|
|
|
|
189,857
|
|
Leasehold improvements
|
|
5.4
|
|
|
81,933
|
|
|
|
94,620
|
|
|
|
|
|
|
4,817,382
|
|
|
|
4,862,621
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
(4,484,744
|
)
|
|
|
(4,349,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
332,638
|
|
|
$
|
512,960
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 3 - PROPERTY AND EQUIPMENT (continued)
The following table discloses depreciation
expense as reported in the statement of operations.
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation included in cost of revenues
|
|
$
|
53,394
|
|
|
$
|
90,856
|
|
|
$
|
202,884
|
|
|
$
|
287,163
|
|
Depreciation included in selling, general and administrative
|
|
|
20,728
|
|
|
|
30,786
|
|
|
|
83,386
|
|
|
|
88,093
|
|
Total depreciation
|
|
$
|
74,122
|
|
|
$
|
121,642
|
|
|
$
|
286,270
|
|
|
$
|
375,256
|
|
NOTE 4 – NOTES PAYABLE
Notes payable at September 30, 2017, consist of two notes payable
for insurance premium financing on one of the Company’s insurance policies. The first note commenced on May 3, 2017, 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, 2017 and ending on April 3, 2018. The second note commenced on September 28, 2017, has an annual interest rate of 8.99%
and consists of 10 monthly payments of principal and interest of $4,920 per month commencing on September 28, 2017 and ending on
July 28, 2018.
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.
NOTE 5 – TRANSACTIONS WITH RELATED PARTIES
Private Placements to Existing Stockholders
On April 20, 2017, the Company completed a
private placement (the “Private Placement”) with The Co-Investment Fund II, L.P. (“Co-Investment”),
which hold more than 5% of our common stock. Donald Caldwell, who is the chairman of the board of directors (the
“Board”) and former CEO 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, par value $0.001 per share (“Series C 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 5 – TRANSACTIONS WITH RELATED PARTIES (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 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.
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,
and John Scarpa, who holds more than 5% of our Series B Preferred Stock. Michael Azeez is a member of the Board and is the managing
partner of Azeez Enterprises, L.P. The Company issued and both Azeez Enterprises, L.P. and Mr. Scarpa purchased 75,000 shares each,
of our Series C Convertible Preferred Stock at a per share price of $2.00 for an aggregate total investment of $300,000 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”).
See Note 6 - Shareholders’ Deficit – Series C Preferred
Stock.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Common Stock
As of September 30, 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 September 30, 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
September 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
The Company has reserved shares of Common Stock, on an as-if-converted
basis, as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Exercise of options issued and outstanding to purchase common stock
|
|
|
1,200,000
|
|
|
|
4,000,000
|
|
Issuance of common shares available under the 2010 Equity Compensation Plan
|
|
|
27,796,980
|
|
|
|
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
|
|
|
500,000
|
|
|
|
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
|
|
Conversion of series C convertible preferred stock issued and outstanding into common stock
|
|
|
25,083,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total common stock reserved for issuance
|
|
|
276,358,050
|
|
|
|
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 September 30, 2017 and December 31, 2016,
the
Board has designated
3,437,500 shares of Series A Convertible Preferred Stock par value $0.001 per share (“Series
A Preferred Stock”). As of September 30, 2017 and December 31, 2016, the Company had 1,276,750 shares of its Series A Preferred
Stock issued and outstanding. As of September 30, 2017 and December 31, 2016, the Company has reserved 25,000 and 380,000 shares
of Series A Preferred Stock, respectively, 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 in aggregate, 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
September 30, 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 September 30, 2017 and December 31, 2016,
the
Board has designated
11,000,000 shares of Series B Preferred Stock. As of September 30, 2017 and December 31, 2016, the
Company had 5,307,212 of its Series B Preferred Stock issued and outstanding. As of September 30, 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 September 30, 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 in aggregate, 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
September 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
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
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 chairman of
the Board and former CEO, 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 $1 to the Series
B Preferred Stock and $3,628 to additional paid in capital.
Series C Preferred Stock
As of September 30, 2017 and December 31, 2016,
the
Board has designated
4,000,000 and 0 shares of Series C Preferred Stock, respectively. As of September 30, 2017 and December
31, 2016, the Company had 1,254,175 and 0 of its Series C Preferred Stock issued and outstanding.
The Series C 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 C Preferred Stock having
the right to 20 votes.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
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 a half (2.5) times the Series C Preferred Stock original issue price, or $6,270,875 in aggregate, 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
and to Series B Preferred Stock as it pertains to liquidation preferances.
Each share of Series C Preferred Stock is 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, or $6,270,875,
in aggregate for all issued and outstanding Series C Preferred Stock.
In connection with the Private Placement, the Board 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. T
he
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.
2017
The Company recorded the $2,300,000 of proceeds received as
a result of the Private Placement and Second Private Placement (collectively the “2017 Private Placements”) less $12,154
of legal expenses incurred in connection with the 2017 Private Placements to Series C Preferred Stock in the amount of $1,150 and
additional paid in capital in the amount of $2,286,696. See Note 5 – Transactions With Related Parties.
On July 17, 2017 the Company filed a registration statement
for a rights offering (the “Rights Offering”) on form S-1/A, which the Commission declared effective on July 17, 2017,
to distribute to shareholders excluding residents of California at no charge, one non-transferable subscription right for each
9,651 shares of our Common Stock, 483 shares of our Series A Preferred Stock, 483 shares of our Series B Preferred Stock and 483
shares of our Series C Preferred Stock owned as of July 17, 2017, 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. The 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 2017 Private Placements.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
The basic subscription right entitled the holder to purchase
one unit (“Subscription Unit”) at a subscription price of $50. A Subscription Unit consisted of 25 shares of Series
C Preferred Stock. In the event that a holder of a subscription right purchases all of the basic Subscription Units available to
the holder then pursuant to their basic subscription right, the holder will have 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. The subscription rights expired on August 29, 2017.
Effective with the expiration of the Rights Offering, which
occurred on August 29, 2017, holders of subscription rights exercised in aggregate 167 basic subscription rights and 4,000 over
subscription rights for a total 4,167 Subscription Units. As a result of the exercise of 4,167 Subscription Units the Company received
$208,350 in gross proceeds and issued effective on August 29, 2017, in aggregate 104,175 shares of Series C Preferred Stock. Effective
with the expiration of the Rights Offering all unexercised subscription rights expired. The Company incurred $90,009 of legal and
other expenses as a result of the Rights Offering. As a result of the Rights Offering the Company recorded $104 to Series C Preferred
Stock, which is the par value of the 104,175 shares issued, and $118,237 to additional paid in capital.
Stock Options
During the nine months ended September 30, 2017, options for
2,800,000 common shares, which were previously granted to former executives of the Company, expired in accordance with the terms
of such stock options.
As of September 30, 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 27,796,980 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 $111,427 and $18,604, respectively, for a total of $130,031 for the nine months ended
September 30, 2017.
The value of equity compensation expense not yet expensed pertaining
to unvested equity compensation for options to purchase common stock was $27,266 as of September 30, 2017, which will be recognized
over a weighted average 2.4 years in the future.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
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
|
|
|
|
3.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended Calculation of weighted average years remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(2,800,000
|
)
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at Calculation of weighted average years remaining
|
|
|
1,200,000
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
3.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at Calculation of weighted average years
remaining
|
|
|
383,333
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
3.1
|
|
|
$
|
-
|
|
(1) The aggregate intrinsic value is based on the $0.032 closing
price as of September 30, 2017, for the Company’s Common Stock.
Common Stock Warrants
Outstanding warrants at September 30, 2017, have an average
weighted average remaining contractual life of 0.1 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 September 30, 2017
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at September 30, 2017
|
|
|
25,098,330
|
|
$
|
|
0.15
|
|
Series A Preferred Stock Warrants
During the nine months ended September 30, 2017, warrants to
purchase 380,000 shares of the the Company’s Series A Preferred Stock, which were previously granted to a current and a former
executive of the Company, expired in accordance with the terms of such warrants.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)
On August 16, 2017, the Company granted to an executive of the
Company a warrant to purchase 25,000 shares of the Company’s Series A Preferred Stock. This warrant is immediately exercisable,
has 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 $18,604 using the Black-Scholes option-pricing model based on the following assumptions: expected volatility:
261%, risk-free interest rate: 1.03%, 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 this warrant in salaries, commission and related taxes of $18,604
in the nine months ended September 30, 2017.
Outstanding warrants to purchase the Company’s Series
A Preferred Stock at September 30, 2017, have a remaining contractual life of 4.9 years.
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 September 30, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
25,000
|
|
|
|
4.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(380,000
|
)
|
|
|
4.00
|
|
Outstanding and exercisable at September 30, 2017
|
|
|
25,000
|
|
|
$
|
4.00
|
|
Series B Preferred Stock Warrants
Outstanding preferred stock warrants to purchase the Company’s
Series B Preferred Stock at September 30, 2017 have a remaining contractual life of 1.6 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 September 30, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at September 30, 2017
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
Registration and Participation Rights
As of September 30, 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
September 30, 2017
NOTE 7 – CAPITAL LEASE OBLIGATIONS
The Company’s subsidiary, InsPro Technologies, LLC (“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:
|
|
Useful Life (Years)
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software
|
|
3
|
|
$
|
1,656,731
|
|
|
$
|
1,576,226
|
|
Leasehold improvements
|
|
3
|
|
|
15,011
|
|
|
|
15,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,671,742
|
|
|
|
1,591,237
|
|
Less accumulated depreciation
|
|
|
|
|
(1,414,291
|
)
|
|
|
(1,260,944
|
)
|
|
|
|
|
$
|
257,451
|
|
|
$
|
330,293
|
|
Future minimum payments required under capital leases at September
30, 2017, are as follows:
Three months ending December 31, 2017
|
|
$
|
44,319
|
|
2018
|
|
|
158,950
|
|
2019
|
|
|
63,145
|
|
2020
|
|
|
16,990
|
|
|
|
|
|
|
Total future payments
|
|
|
283,404
|
|
Less amount representing interest
|
|
|
26,309
|
|
|
|
|
|
|
Present value of future minimum payments
|
|
|
257,095
|
|
Less current portion
|
|
|
153,204
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
103,891
|
|
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 $51,912 and $61,701 for the nine months ended September 30, 2017 and 2016, respectively.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 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 North 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 annual rent increased 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 was waived for the first five months
of the lease term with respect to 5,238 square feet and for the first twelve months for the remaining 2,176 square feet. The 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. On June 7, 2017, InsPro LLC and Baldwin Tower Office
Building, LLC (“Landlord”), which is the new owner and landlord for the Company’s Eddystone office building,
entered into a seventh amendment to the Lease Agreement whereby InsPro LLC and Landlord agreed to amend the Lease Agreement to
extend the term through January 31, 2019 for 17,567 of rentable square feet at a monthly cost of $30,010 for the period February
1, 2018 through January 31, 2019.
Future minimum payments required under operating leases and
service agreements at September 30, 2017, are as follows:
Three months ending December 31, 2017
|
|
$
|
152,539
|
|
2018
|
|
|
596,704
|
|
2019
|
|
|
255,118
|
|
2020
|
|
|
15,932
|
|
thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
1,020,293
|
|
The Company leases certain real and personal property under
non-cancelable operating leases. Rent expense was $87,279 and $140,393 for the three months ended September 30, 2017 and 2016,
respectively. Rent expense was $317,588 and $470,960 for the nine months ended September 30, 2017 and 2016, respectively.
Mr. Robert Oakes resigned as an executive employee effective
June 30, 2017. Pursuant to Mr. Oakes’ employment agreement, Mr. Oakes will be entitled to receive; (i) continuation of his
$300,000 per year base salary for a period of 12 months in accordance with the Company's normal payroll practices, less any applicable
income tax withholding required under federal or state law, and subject to Section 409A of the Internal Revenue Code of 1986, as
amended, and applicable guidance issued there under, and (ii) continuation for a period of 18 months after the date of termination
of the benefits under benefit plans extended from time to time by the Company to its senior executives. As of September 30, 2017,
the Company recorded a severance accrual connection with Mr. Oakes termination in the amount of $330,929, which is recorded in
selling, general and administrative expenses and accrued liabilities. Pursuant to Mr. Oakes’ employment agreement, he is
subject to non-competition and non-solicitation covenants during the term of his employment agreement and for a period of one year
following his termination.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 10 - INCOME TAXES
The Company has net operating loss carry forwards for federal
income tax purposes of approximately $49,632,000 at September 30, 2017, 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.
The table below summarizes the differences
between the Company’s effective tax rate and the statutory federal rate as follows for the periods ended September 30, 2017
and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Computed "expected" expense (benefit)
|
|
$
|
117,124
|
|
|
$
|
(639,375
|
)
|
State tax expense (benefit), net of federal effect
|
|
|
12,529
|
|
|
|
(54,804
|
)
|
Amortization/impairment of acquisition related assets
|
|
|
(3,061
|
)
|
|
|
(3,752
|
)
|
Stock based compensation
|
|
|
40,310
|
|
|
|
77,080
|
|
Stock based fees paid to client
|
|
|
-
|
|
|
|
493,986
|
|
Other permanent differences
|
|
|
24,827
|
|
|
|
12,898
|
|
Increase (decrease) in valuation allowance
|
|
|
(177,249
|
)
|
|
|
113,967
|
|
|
|
$
|
14,500
|
|
|
$
|
-
|
|
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 were as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
18,860,162
|
|
|
$
|
19,227,610
|
|
Depreciation
|
|
|
84,138
|
|
|
|
88,909
|
|
Compensation expense
|
|
|
296,671
|
|
|
|
64,230
|
|
Deferred revenue
|
|
|
651,700
|
|
|
|
686,297
|
|
All Miscellaneous Other
|
|
|
-
|
|
|
|
2,874
|
|
Total deferred tax asset
|
|
|
19,892,671
|
|
|
|
20,069,920
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
Net deferred tax asset
|
|
|
19,892,671
|
|
|
|
20,069,920
|
|
Less: valuation allowance
|
|
|
(19,892,671
|
)
|
|
|
(20,069,920
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2017
NOTE 10 - INCOME TAXES (continued)
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 decreased by $177,249 from the prior year.
NOTE 11 – SUBSEQUENT EVENTS
On October 9, 2017, the Company entered into an agreement with
David M. Anderson to become the Chief Executive Officer of the Company. Donald Caldwell, who has been the Chief Executive Officer
of the Company and an employee since January 26, 2015, stepped down from his role as Chief Executive Officer and no longer is an
employee, effective as of October 9, 2017. Mr. Caldwell will remain chairman of the Board.
On October 9, 2017 the Company and Mr. Anderson entered into
a written employment agreement (the “Employment Agreement”) for an initial one-year term, which term shall be automatically
extended for successive one-year terms unless either the Company or Mr. Anderson provides notice of non-renewal prior to the expiration
of the then current term. Pursuant to the Employment Agreement, Mr. Anderson will receive a base salary of $380,000 per year. Mr.
Anderson is eligible to receive an annual bonus for each calendar year, commencing with the 2018 calendar year, based on individual
and corporate performance goals established by the Board. The target annual bonus is 100% of Mr. Anderson’s base salary,
but for any calendar year may range from 0% to 100% of his base salary based on the Board’s determination of the level of
achievement of the applicable performance goals. Mr. Anderson is eligible to participate in the Company’s employee benefit
plans as in effect from time to time on the same basis as generally made available to other senior executives of the Company. Mr.
Anderson is also eligible to receive a bonus in connection with a change in control of the Company, which bonus amount depends
upon the net proceeds available for distribution to the Company’s stockholders.
In addition, the Employment Agreement also provides for certain
payments and benefits in the event of a termination of his employment under specific circumstances. If, during the term of the
Employment Agreement, his employment is terminated by the Company other than for “cause” or death, or by Mr. Anderson
for “good reason” (each as defined in the Employment Agreement), he would be entitled to (1) continuation of his base
salary at the rate in effect immediately prior to the termination date for 12 months following the termination date, (2) a lump
sum payment equal to a pro-rata portion of his annual bonus as calculated based on the number of days worked in the year in which
termination occurs, which bonus will be paid at the same time as bonuses are paid to other employees of the Company, and (3) if
Mr. Anderson is eligible for and timely elects to receive continued health coverage under the Company’s health plan under
COBRA, reimbursement of the cost of continuing coverage of the applicable benefit plans under COBRA until the earlier of (A) the
date on which Mr. Anderson first becomes covered by any other equally advantageous health plan and (B) 12 months following the
termination date. Mr. Anderson’s receipt of the termination payments and benefits is contingent upon execution of a general
release of any and all claims arising out of or related to his employment with the Company and the termination of his employment.
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.