NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
InsPro Technologies Corporation (the “Company”, “ITCC”,
“we”, “us” or “our”) is a technology company that provides software applications for use by
insurance administrators in the insurance industry. Our business focuses primarily on our InsPro Enterprise
TM
software
application, which was introduced in 2004.
The Company offers InsPro Enterprise on both a licensed and an application
service provider (“ASP”) basis. InsPro Enterprise is an insurance administration and marketing system that supports
group and individual business lines, and efficiently processes agent, direct market, worksite and web site generated business.
InsPro Technologies' clients include insurance carriers and third party administrators. The Company realizes revenue from the sale
of software licenses, application service provider fees, hosting fees, software maintenance fees and consulting and implementation
services.
Basis of presentation and principles of consolidation
The consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America (“US GAAP“). The consolidated financial
statements of the Company include the Company and its wholly-owned subsidiaries. All material inter-company balances and transactions
have been eliminated.
Use of estimates
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates. Significant estimates in 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 had no cash equivelents during the two years ended December
31, 2017. The Company considers all liquid debt instruments with original maturities of three months or less to be cash equivalents.
Accounts receivable
The Company has a policy of establishing an allowance for uncollectible
accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically
reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other
factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged
to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December
31, 2017 and 2016, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts
in the amount of $11,675 and $0, respectively.
Fair value of financial instruments
The carrying amounts of financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, notes payable and capital lease obligations
approximated fair value as of December 31, 2017, and December 31, 2016, because of the relatively short-term maturity of these
instruments and their market interest rates.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company follows Financial Accounting Standards
Board (“FASB”) ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and
liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to
existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for
measuring fair value, and expands disclosure about such fair value measurements.
Property and equipment
Property and equipment are carried at cost. The cost of repairs
and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed
of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income
in the year of disposition. In accordance with Statement of Financial Accounting Standards ASC 360, "Accounting for the Impairment
or Disposal of Long-Lived Assets," the Company examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Impairment of long-lived assets
The Company periodically reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company
recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company
did not record an impairment charge for the years ended December 31, 2017 and 2016.
Income taxes
The Company accounts for income taxes pursuant to the provisions
of ASC 740-10, ”
Accounting for Income Taxes
,” which requires, among other things, an asset and liability approach
to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and
liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely
than not that the net deferred asset will not be realized.
The Company follows the provisions of ASC 740 -10 related to,
Accounting
for Uncertain Income Tax Positions.
When tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the
amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax
position is recognized in the financial statements in the period during which, based on all available evidence, management believes
it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet
along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company
believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability
for uncertain tax benefits.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
The Company has adopted ASC 740-10-25
Definition of Settlement,
which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination
by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize
the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on
the basis of its technical merits and the statute of limitations remains open. The Company has not yet filed its tax returns for
the tax year ended December 31, 2017. As of December 31, 2017, the tax years ended December 31, 2016, 2015 and 2014 are still subject
to audit.
Income (loss) per common share
The Company's weighted average common shares outstanding used in
computing fully diluted net income (loss) per common share include the following:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
41,543,655
|
|
|
|
41,543,655
|
|
Conversion of series A convertible preferred stock issued and outstanding into common stock
|
|
|
25,535,000
|
|
|
|
-
|
|
Conversion of series B convertible preferred stock issued and outstanding into common stock
|
|
|
106,144,240
|
|
|
|
-
|
|
Conversion of series C convertible preferred stock issued and outstanding into common stock
|
|
|
16,672,420
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing fully diluted net income (loss) per share
|
|
|
189,895,315
|
|
|
|
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
Revenue for the year ended December
31, 2016, include a reduction in the amount of $1,299,963 for stock based fees paid to a client. See Note 6 - Stockholders’
Equity (Deficit) – Series B Preferred Stock Warrants.
The Company offers InsPro Enterprise
TM
on both a licensed and an ASP basis. An InsPro Enterprise software license entitles the purchaser a perpetual license to a copy
of the InsPro Enterprise software installed at a single client location or hosted by InsPro Technologies. Alternatively, ASP hosting
service enables a client to lease the InsPro Enterprise software, paying only for that capacity required to support their business.
ASP and hosting clients access InsPro Enterprise installed on InsPro Technologies owned servers located at InsPro Technologies’
offices or at a third party’s site.
The Company’s software maintenance fees
apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro Enterprise help
desk.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
The Company’s consulting and implementation services are generally
associated with the implementation of InsPro Enterprise for either an ASP or licensed client, and cover such activity as InsPro
Enterprise installation, configuration, modification of InsPro Enterprise functionality, client insurance plan set-up, client insurance
document design and system documentation. Professional services revenue also consists of post implementation activities for clients
pertaining to their InsPro Enterprise installation.
The Company’s revenue is generally recognized under Accounting
Standards Codification 985-605, Software Revenue Recognition. For software arrangements involving multiple elements, which are
the sale of software licenses, professional services, ASP services and maintenance services, the Company allocates revenue to each
element based on the specific objective evidence of selling price of each deliverable, which is based on prices charged when the
element is sold separately. Software revenue accounted for under ASC 985-605 is recognized when persuasive evidence of an arrangement
exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the fee is fixed or determinable
and collectability is probable. Revenue related to post-contract customer support (“PCS”), including technical support
and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term. Under ASC 985-605, if fair value
does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or
(ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case
revenue is recognized as the service is performed once the service is the only undelivered element.
The Company recognizes revenue from software license agreements
when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability
is probable. The Company considers fees relating to arrangements with payment terms extending beyond one year to not be fixed or
determinable and revenue for these arrangements is recognized as payments become due from the customer. In software arrangements
that include more than one InsPro Enterprise
TM
module, the Company allocates the total arrangement fee among the modules
based on the relative fair value of each of the modules.
License revenue allocated to software products generally is recognized
upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more
elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance
agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized
as the services are performed.
Effective August 18, 2015, the Company entered into a five year
software and services reseller agreement (the “Reseller Agreement”) with an unaffiliated third 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 December
31, 2017, and as a result the Company recognized $500,000 of Reseller Fee as revenue in the year ended December 31, 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 December 31, 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).
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
The unearned portion of the Company’s revenue, which is revenue
collected but not yet recognized as earned, has been included in the consolidated balance sheet as a liability for deferred revenue.
See Note 2 - Discontinued Operations - Revenue Recognition for Discontinued
Operations.
Cost of revenues
Cost of revenues includes direct
labor and associated costs for employees and independent contractors performing InsPro Enterprise
™
design, development,
implementation and testing together with customer management, training and technical support, as well as a portion of facilities
costs. For the years ended December 31, 2017 and 2016, cost of revenues consisted of the following:
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
6,194,794
|
|
|
$
|
7,519,551
|
|
Professional fees
|
|
|
6,713,060
|
|
|
|
10,317,169
|
|
Depreciation
|
|
|
248,292
|
|
|
|
382,876
|
|
Rent, utilities, telephone and communications
|
|
|
378,301
|
|
|
|
443,348
|
|
Other cost of revenues
|
|
|
308,376
|
|
|
|
407,261
|
|
|
|
$
|
13,842,823
|
|
|
$
|
19,070,205
|
|
Selling, general and administrative
expenses
Selling, general and administrative
expenses include all selling, marketing, and other expenses not classified as cost of revenues. The following table discloses selling,
general and administrative expenses as reported in the statement of operations.
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Compensation, employee benefits and related taxes
|
|
$
|
3,986,164
|
|
|
$
|
3,337,346
|
|
Advertising and other marketing
|
|
|
35,127
|
|
|
|
140,552
|
|
Depreciation
|
|
|
100,622
|
|
|
|
118,587
|
|
Rent, utilities, telephone and communications
|
|
|
227,102
|
|
|
|
405,032
|
|
Professional fees
|
|
|
838,624
|
|
|
|
709,383
|
|
Other general and administrative
|
|
|
878,341
|
|
|
|
762,666
|
|
|
|
$
|
6,065,980
|
|
|
$
|
5,473,566
|
|
Advertising and other marketing
Advertising and other marketing costs are expensed as incurred and
are reported in selling, general and administrative expenses. See the previous table under selling, general and administrative
expenses for advertising and other marketing expenses reported in the statement of operations.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Concentrations of credit risk
The Company maintains its cash and restricted cash in bank deposit
accounts, which exceed the federally insured limits as provided through the Federal Deposit Insurance Corporation (“FDIC”).
As of December 31, 2017 and 2016, the Company had $5,254,967 and $3,195,018 of cash in United States bank deposits, of which $500,926
and $500,930 was federally insured and $4,754,926 and $2,694,088 was not federally insured, respectively.
The following table lists the percentage of the Company’s
accounts receivable balance from the Company’s InsPro Enterprise
™
clients representing 10% or more of the accounts
receivable balances as of the periods listed below.
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
52
|
%
|
|
|
30
|
%
|
Client #2
|
|
|
10
|
%
|
|
|
12
|
%
|
Client #3
|
|
|
-
|
|
|
|
13
|
%
|
The following table lists the percentage of the Company’s
revenue earned from the Company’s InsPro Enterprise clients representing 10% or more of the revenue earned in each of the
periods listed below.
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Client #1
|
|
|
38
|
%
|
|
|
30
|
%
|
Client #2
|
|
|
20
|
%
|
|
|
16
|
%
|
Client #3
|
|
|
-
|
|
|
|
14
|
%
|
Stock-based compensation
The Company accounts for stock based compensation transactions using
a fair-value-based method and recognizes compensation cost for share-based payments to employees based on their grant-date fair
value from the beginning of the fiscal period in which the recognition provisions are first applied.
Non-employee stock based compensation
The cost of stock based compensation awards issued to non-employees
for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services,
whichever is more readily determinable, based on their grant-date fair value from the beginning of the fiscal period in which the
recognition provisions are first applied.
Recent accounting pronouncements
From time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board ("FASB"), which are adopted by the Company as of the specified effective date. Unless
otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have
a material impact on the Company’s consolidated financial statements upon adoption.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
In May 2014, the FASB issued ASU No. 2014-09,
Revenue
from Contracts with Customers
(“ASU 2014-09” or “ASC 606”), which provides guidance for revenue
recognition. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services
to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods
or services. In doing so, companies will need to use more judgment and make more estimates than under ASC 606. These may include
identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction
price and allocating the transaction price to each separate performance obligation. This guidance also requires enhanced disclosures
regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers.
This guidance will be effective for the Company for the fiscal year ending December 31, 2018, and interim periods therein,
using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard
in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with
the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote
disclosures).
The aforementioned amendments are effective for public
entities for annual reporting periods beginning after December 15, 2017, and for interim periods within that reporting period.
The updated standard is effective for us in the first quarter of 2018.
The Company has completed its evaluation of the new standard
and has assessed the impacts of adoption on the consolidated financial statements and disclosures based on the evaluation of our
current customer contracts and arrangements and revenue streams, which are described below.
The Company offers InsPro Enterprise
TM
on both a
perpetual licensed and an ASP basis. The Company also offers various services to clients in connection with InsPro Enterprise.
During the implementation of the new standard, we identified five broad revenue streams: 1) professional services, 2) sale of perpetual
software licenses and sale of equipment, 3) ASP hosting revenue, 4) maintenance revenue, and 5) Reseller Fee.
Professional services consist of pre and post implementation
services pertaining to InsPro Enterprise installation, configuration and modification of InsPro Enterprise functionality, client
insurance plan set-up, client insurance document design and system documentation, training and data migration. 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. We primarily recognize professional
services revenue on a time and materials basis. Under the new standard, we elect to apply the "right to invoice" practical
expedient outlined in ASC 606-10-55-18. The invoice amount represents the number of hours of time worked by each worker multiplied
by the contractual bill rate for the type of work billed. As such, the Company will recognize revenue in the amount for which it
has the right to invoice. Therefore, revenue recognition is deemed to be consistent under both the previous and new standard.
Sale of perpetual licenses 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. The
Company also sells perpetual licenses to 3
rd
party software and sells 3
rd
party equipment to a client in
connection with the client’s use of InsPro Enterprise software on hardware owned by the client. We recognize revenue on the
sale of perpetual software licenses and sale of equipment 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. Therefore we have recognized sale
of software licenses and sale of equipment revenue when Delivery Has Occurred. Under the new standard, we will recognize sale of
software licenses and sale of equipment revenue at the point in time when control has transferred to the client, which typically
is when Delivery Has Occurred. Therefore, revenue recognition is deemed to be consistent under both the previous and new standard.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
ASP hosting enables a client to effectively lease the InsPro
Enterprise software, paying only for that capacity required to support their business during the contacted time period. Hosting
Service can also enable a client to outsource its application management of its perpetually licensed InsPro Enterprise software
to the Company. ASP hosting clients access InsPro Enterprise installed on InsPro Technologies owned servers. Maintenance enables
a client to periodic updates to their InsPro Enterprise software and access to customer support from the Company. We have recognized
ASP hosting and maintenance revenue based on contractually defined fixed fees over the contract period on a straight line basis.
Under the new standard we have determined the Company’ continuous service and support represent a series of performance obligations
that are delivered over time on a stand-ready basis. Therefore, revenue recognition is deemed to be consistent under both the previous
and new standard.
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”). We have recognized Reseller Fee 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 new 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. Therefore, revenue
recognition is deemed to be consistent under both the previous and new standard.
We adopted the new standard effective January 1, 2018 to (i)
all new contracts entered into after January 1, 2018 and (ii) all existing contracts for which all (or substantially all) of the
revenue has not been recognized under legacy revenue guidance, using the modified retrospective transition method. The adoption
of the new standard did not result in a change to the opening balance of accumulated deficit.
The disclosures in our notes to the consolidated financial
statements related to revenue recognition will be significantly expanded under the new standard, specifically around the quantitative
and qualitative information about performance obligations, changes in contract assets and liabilities, and disaggregation of revenue.
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 CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
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.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations
(Topic 805), Clarifying the Definition of a Business
("ASU 2017-01"). ASU 2017-01 clarifies the definition of
a business with the objective of addressing whether transactions involving in-substance nonfinancial assets, held directly or in
a subsidiary, should be accounted for as acquisitions or disposals of nonfinancial assets or of businesses. ASU 2017-01 will be
effective for the Company’s fiscal year beginning December 1, 2018 and subsequent interim periods. The adoption of ASU 2017-01
is not expected to have a material effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles
- Goodwill and Other (Topic 350), Simplifying the Accounting for Goodwill Impairment
("ASU 2017-04"). ASU 2017-04
removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment
will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of
goodwill. ASU 2017-04 will be effective for the Company’s fiscal year beginning December 1, 2020. Early adoption is permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is
not expected to have a material effect on the Company’s consolidated financial statements.
Liquidity
During the year ended December 31, 2017, the Company’s net
income was $1,622,420 and cash used in operations was $240,880, which included the reduction of accounts payable in the amount
of $3,975,331. As of December 31, 2017, the Company had $5,017,539 of cash, working capital of $1,189,360, which included accounts
payable of $1,484,704, and the Company’s shareholder equity was $384,493. During 2016, the Company implemented cost reduction
initiatives, which resulted in the reduction of expenses in 2016 as compared to 2015. During 2017 the Company implemented additional
cost reduction initiatives, which resulted in the reduction in cost of revenues of $5,227,382 in 2017 as compared to 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 Equity (Deficit) – Series C Preferred
Stock.
Our liquidity needs for the next twelve months and beyond are principally
for the funding of our operations, payments on capital leases and the purchase of property and equipment. Based on the forgoing,
management believes the Company has sufficient funds to finance its operations over the next twelve months.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 2 – DISCONTINUED OPERATIONS
The Company has classified its former telesales call center and
external agent produced agency business as discontinued operations. During the first quarter of 2009, the Company ceased the direct
marketing and sale of health and life insurance and related products to individuals and families in its telesales call center.
The Company also determined to discontinue selling health and life insurance and related products to individuals and families through
its non employee agents. On February 20, 2009, the Company entered into and completed the sale of the agency business to an unaffiliated
third party, pursuant to the terms of a client transition agreement.
Revenue Recognition for Discontinued Operations
Our discontinued operations generate revenue primarily from transition
policy commissions pursuant to the client transition agreement and renewal commissions paid to the Company by insurance companies
based upon the insurance policies sold to consumers by the Company’s telesales call center.
We recognize commissions and other revenue from carriers after we
receive notice that the insurance carrier has received payment of the related premium. The Company recognizes as revenue commission
payments received in connection with the client transition agreement upon the Company’s notification of such amounts.
The financial position of discontinued operations
was as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
3,806
|
|
|
$
|
8,636
|
|
Net current assets of discontinued operations
|
|
$
|
3,806
|
|
|
$
|
8,636
|
|
|
|
|
|
|
|
|
|
|
Income tax payable on discontinued operations
|
|
$
|
2,330
|
|
|
$
|
-
|
|
The results of discontinued operations do not include any allocated
or common overhead expenses. The results of operations of discontinued operations were as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Commission and other revenue from carriers
|
|
$
|
8,078
|
|
|
$
|
10,016
|
|
Transition policy commission pursuant to the Agreement
|
|
|
49,447
|
|
|
|
88,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,525
|
|
|
|
98,022
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Other general and administrative
|
|
|
32,963
|
|
|
|
27,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,963
|
|
|
|
27,867
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
|
$
|
24,562
|
|
|
$
|
70,155
|
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
Useful
Life
(Years)
|
|
December 31, 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
|
|
|
|
|
(4,547,388
|
)
|
|
|
(4,349,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
269,994
|
|
|
$
|
512,960
|
|
The following table discloses
depreciation expense as reported in the statement of operations.
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Depreciation included in cost of revenues
|
|
$
|
248,292
|
|
|
$
|
382,876
|
|
Depreciation included in selling, general and administrative
|
|
|
100,622
|
|
|
|
118,587
|
|
Total depreciation
|
|
$
|
348,914
|
|
|
$
|
501,463
|
|
NOTE 4 – NOTES PAYABLE
Notes payable as of December 31, 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. The balance on these notes payable is $45,793 at December 31, 2017.
Notes payable as of 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. The
balance on these notes payable is $39,194 at December 31, 2016.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
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 holds more than 5% of
our common stock. Donald Caldwell, who is the chairman of the board of directors of the Company (the “Board”) and former
CEO, 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.
The Company agreed, pursuant to the terms of the Purchase Agreement,
that for a period of 90 days after the effective date of the Purchase Agreement, the Company shall not, subject to certain exceptions,
offer, sell, grant any option to purchase, or otherwise dispose of any equity securities or equity equivalent securities, including
without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into
or exchangeable for, or otherwise entitles the holder thereof to receive, capital stock and other securities of the Company. 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 holds 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.
See Note 6 - Shareholders’ Equity (Deficit) – Series
C Preferred Stock.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT)
Common Stock
As of December 31, 2017 and 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 December 31,
2017 and 2016, the Company had 41,543,655 shares of its Common Stock issued and outstanding.
The Company has reserved shares of Common Stock, on an
as-if-converted basis, as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Exercise of options issued and outstanding to purchase common stock
|
|
|
825,000
|
|
|
|
4,000,000
|
|
Issuance of common shares available under the 2010 Equity Compensation Plan
|
|
|
28,171,980
|
|
|
|
24,996,980
|
|
Exercise of warrants issued and outstanding to purchase common stock
|
|
|
120,000
|
|
|
|
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
|
|
|
251,379,720
|
|
|
|
258,374,550
|
|
The above table includes common stock reserved for non exercisable
stock options and common stock reserved for the issuance of stock options in the future under the Company’s 2010 Equity Compensation
Plan.
Series A Convertible Preferred Stock
As of December 31, 2017 and 2016, the Company’s board of directors
has designated 3,437,500 shares of Series A Convertible Preferred Stock with a par value of $0.001 per share (“Series A Preferred
Stock”). As of December 31, 2017 and 2016, the Company had 1,276,750 shares of its Series A Preferred Stock issued and outstanding.
As of December 31, 2017 and 2016, the Company has reserved 25,000 and 380,000 shares of Series A Preferred Stock for the exercise
of warrants issued and outstanding to purchase its Series A Preferred Stock, respectively.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
The Series A Preferred Stock is entitled to vote as a single class
with the holders of the Company’s common stock, with each share of Series A Preferred Stock having the right to 20 votes.
Upon the liquidation, sale or merger of the Company, each share of Series A Preferred Stock is entitled to receive an amount equal
to the greater of (A) a liquidation preference equal to two and a half (2.5) times the Series A Preferred Stock original issue
price or $12,767,500, subject to certain customary adjustments, or (B) the amount such share of Series A Preferred Stock would
receive if it participated
pari passu
with the holders of common stock on an as-converted basis. The liquidation preference
is calculated by taking the product of the issued and outstanding shares of Series A Preferred stock times $10.00. Each share of
Series A Preferred Stock becomes convertible into 20 shares of common stock, subject to adjustment and at the option of the holder
of the Series A Preferred Stock. For so long as any shares of Series A Preferred Stock are outstanding, the vote or consent of
the holders of at least two-thirds of the Series A Preferred Stock is required to approve (Y) any amendment to the Company’s
certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special rights of the Series
A Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares of capital stock
that rank senior to the Series A Preferred Stock. In addition to the voting rights described above, for so long as 1,000,000 shares
of Series A Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the shares of Series
A Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the Company or other
fundamental transaction, unless such transaction, when consummated, will provide the holders of Series A Preferred Stock with an
amount per share equal to two and a half (2.5) times the Series A Preferred Stock original issue price or $12,767,500 in aggregate
for all issued and outstanding Series A Preferred Stock.
Series A Preferred Stock is junior to Series B Convertible Preferred
Stock par value $0.001 per share (“Series B Preferred Stock”) and 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.
Series B Convertible Preferred Stock
As of December 31, 2017 and 2016, the Company’s board of directors
has designated 11,000,000 shares of Series B Preferred Stock. As of December 31, 2017 and 2016, the Company had 5,307,212 of its
Series B Preferred Stock issued and outstanding. As of December 31, 2017 and 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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
The Series B Preferred Stock is entitled to vote as a single class
with the holders of the Company’s common and preferred stock, with each share of Series B Preferred Stock having the right
to 20 votes. Upon the liquidation, sale or merger of the Company, each share of Preferred Stock is entitled to receive an amount
equal to the greater of (A) a liquidation preference equal to the Series B Preferred Stock original issue price or $15,921,636
as of December 31, 2017 and 2016, subject to certain customary adjustments, or (B) the amount such share of Series B Preferred
Stock would receive if it participated
pari passu
with the holders of common and preferred stock on an as-converted basis.
The liquidation preference is calculated by taking the product of the issued and outstanding shares of Series B Preferred stock
times $3.00. Each share of Series B Preferred Stock becomes convertible into 20 shares of common stock, subject to adjustment and
at the option of the holder of the Series B Preferred Stock. For so long as any shares of Series B Preferred Stock are outstanding,
the vote or consent of the holders of at least two-thirds of the Series B Preferred Stock is required to approve (Y) any amendment
to the Company’s certificate of incorporation or bylaws that would adversely alter the voting powers, preferences or special
rights of the Series B Preferred Stock or (Z) any amendment to the Company’s certificate of incorporation to create any shares
of capital stock that rank senior to the Series B Preferred Stock. In addition to the voting rights described above, for so long
as 1,000,000 shares of Series B Preferred Stock are outstanding, the vote or consent of the holders of at least two-thirds of the
shares of Series B Preferred Stock is required to effect or validate any merger, sale of substantially all of the assets of the
Company or other fundamental transaction, unless such transaction, when consummated, will provide the holders of Series B Preferred
Stock with an amount per share equal to the Series B Preferred Stock original issue price in aggregate or $15,921,636 in aggregate,
for all issued and outstanding Series B Preferred Stock.
Series B Preferred Stock is senior to Series A Preferred Stock,
and junior to 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.
2016
On February 2, 2016 the Company filed a registration statement for
a rights offering on Form S-1/A, which the Commission declared effective on February 5, 2016, to distribute to shareholders excluding
residents of Arizona and California at no charge, one non-transferable subscription right for each 16,615 shares of our Common
Stock, 831 shares of our Series A Preferred Stock and 830 shares of our Series B Preferred Stock owned as of January 31, 2016,
the record date, either as a holder of record or, in the case of shares held of record by brokers, dealers, custodian banks, or
other nominees on shareholders’ behalf, as a beneficial owner of such shares. If the rights offering was fully subscribed
the gross proceeds from the rights offering would have been approximately $2.5 million. This rights offering was designed
to give all of the holders of the Company’s capital stock the opportunity to participate in an equity investment in the Company
on the same economic terms as the Private Placement.
The basic subscription right entitled the holder to purchase one
unit (“Subscription Unit”) at a subscription price of $240. A Subscription Unit consisted of 80 shares of Series B
Preferred Stock and a warrant to purchase 800 shares of Common Stock that expires on November 20, 2017 at an exercise price of
$0.15 per share. In the event that a holder of a Subscription Unit purchased all of the basic Subscription Units available to the
holder then pursuant to their basic subscription right, the holder had the option to choose to subscribe for a portion of any Subscription
Units that were not purchased by all other holders of Subscription Units through the exercise of their basic subscription rights.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
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 of 17 Subscription Units. The Company received $4,080 in gross proceeds as a result of the exercise of Subscription
Units. As a result of the exercise of 17 Subscription Units the Company issued effective on March 14, 2016 in aggregate 1,360 shares
of Series B Preferred Stock and of warrants to purchase in aggregate 13,600 shares of Common Stock that expires on November 20,
2017 at an exercise price of $0.15 per share (the “2016 Warrants”). Effective with the expiration of the subscription
rights all unexercised subscription rights expired.
The Company allocated $451 of the $4,080 proceeds received as a
result of the rights offering, which represent the fair value of the 2016 Warrants, to additional paid in capital using a Black-Scholes
option pricing model with the following assumptions: expected volatility of 259%, a risk-free interest rate of 0.51%, an expected
term of 1.7 years and 0% dividend yield. The remaining $3,629 of the proceeds received was allocated to the Series B Preferred
Stock.
Series C Preferred Stock
As of December 31, 2017 and 2016, the Board has designated 4,000,000
and 0 shares of Series C Preferred Stock, respectively. As of December 31, 2017 and 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.
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.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
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. 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 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.
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 of 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 $90,011 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
2016
On March 31, 2016, the Company granted two executives of the Company
options to purchase a total of 1,000,000 shares of the Company’s Common Stock, which vest as follows: 250,000 shares of Common
Stock on March 31 of each year from 2017 to 2020. Such options have a five year term and an exercise price of $0.10 per share,
which exceeded the $0.04 closing price of one share of the Company’s Common Stock as quoted on the OTCBB on March 31, 2016.
The fair value of the options granted was estimated on the date of the grant to be $40,000 using the Black-Scholes option-pricing
model based on the following assumptions: expected volatility: 724%, risk-free interest rate: 0.38%, expected life in years: 5
based on the contract life of the option grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining
to these options in salaries, commission and related taxes of $7,500 in the year ended December 31, 2016.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
On May 20, 2016, the Company granted to an executive of the Company
options to purchase a total of 500,000 shares of the Company’s Common Stock, which vest as follows: 125,000 shares of Common
Stock on May 20 of each year from 2017 to 2020. Such options have a five year term and an exercise price of $0.10 per share, which
exceeded the $0.04 closing price of one share of the Company’s Common Stock as quoted on the OTCBB on May 20, 2016. The fair
value of the options granted was estimated on the date of the grant to be $16,000 using the Black-Scholes option-pricing model
based on the following assumptions: expected volatility: 710%, risk-free interest rate: 0.32%, expected life in years: 5 based
on the contract life of the option grant, and assumed dividend yield: 0%. The Company recorded compensation expense pertaining
to these options in salaries, commission and related taxes of $2,664 in the year ended December 31, 2016.
During the year ended December 31, 2016, 475,000 options, which
were previously granted to directors and a former employee of the Company, expired in accordance with the terms of such stock options.
The Company recorded compensation expense pertaining to employee
stock options and warrants in the amount of $222,142 for the year ended December 31, 2016, which included $74,762 of expense pertaining
to stock options and $147,380 of expense pertaining to the amendment of warrants to purchase Series A Preferred Stock. See Note
6 – Stockholders Equity (Deficit) – Series A Preferred Stock Warrants.
2017
During the year ended December 31, 2017, options for 3,175,000,
which were previously granted to former executives of the Company, expired in accordance with the terms of such stock options.
The Company recorded compensation expense pertaining to employee
stock options and warrants to purchase Series A Preferred Stock in the amount of $144,948 for the year ended December 31, 2017,
which included $126,344 of expense pertaining to stock options and $18,604 of expense pertaining to the amendment of warrants to
purchase Series A Preferred Stock. See Note 6 – Stockholders’ Equity (Deficit) – Series A Preferred Stock Warrants
– 2017.
The value of equity compensation expense not yet expensed pertaining
to unvested equity compensation was $12,350 as of December 31, 2017, which will be recognized over a weighted average 2.8 years
in the future.
As of December 31, 2017, there were 30,000,000 shares of our Common
Stock authorized to be issued under the 2010 Equity Compensation Plan, of which 28,171,980 shares of our common stock remain available
for future stock option grants.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
A summary of the Company’s outstanding stock options as of
and for the years ended December 31, 2017 and 2016 are as follows:
|
|
Number
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Of Shares
|
|
|
Average
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Fair Value
|
|
|
Contractual Life
|
|
|
Value (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
2,975,000
|
|
|
$
|
0.90
|
|
|
$
|
0.54
|
|
|
|
2.5
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,500,000
|
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(475,000
|
)
|
|
|
3.58
|
|
|
|
2.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
4,000,000
|
|
|
|
0.10
|
|
|
|
0.06
|
|
|
|
3.4
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(3,175,000
|
)
|
|
|
0.10
|
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
825,000
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
3.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
383,333
|
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
|
2.9
|
|
|
$
|
-
|
|
|
(1)
|
The aggregate intrinsic value is based on the $0.048 closing price as of December 31, 2017 for the Company’s Common Stock.
|
Common Stock Warrants
2016
On March 14, 2016, the 2016 Warrants were issued in connection with
the rights offering in 2016. See Note 6 – Stockholders Equity (Deficit) – Series B Convertible Preferred Stock. The
Company determined the 2016 Warrants qualify for a scope exception under ASC 815 as they were determined to be indexed to the Company’s
stock.
2017
During the year ended December 31, 2017, warrants to purchase 24,978,330
common shares expired in accordance with the terms of such warrants.
Outstanding common stock warrants as of December 31, 2017, have
a weighted average remaining contractual life of 0.2 years.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
A summary of the status of the Company's outstanding common stock
warrants as of and for the years ended December 31, 2017 and 2016 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Common
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
25,084,730
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Issued
|
|
|
13,600
|
|
|
|
0.15
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
25,098,330
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(24,978,330
|
)
|
|
|
0.15
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
120,000
|
|
|
$
|
0.15
|
|
Series A Preferred Stock warrants
2016
On March 31, 2016, the Company amended and restated a warrant to
purchase a total of 150,000 shares of the Company’s Series A Preferred Stock originally granted to Mr. Robert J. Oakes on
August 18, 2010, and also amended and restated a warrant to purchase a total of 150,000 shares of the Company’s Series A
Preferred Stock originally granted to Mr. Anthony R. Verdi on September 14, 2011 (collectively the “Original Warrants”).
Immediately prior to March 31, 2016, the Original Warrants had an expiration date of September 14, 2016 and the Original Warrants
were amended and restated to have an expiration date of September 14, 2017 (as amended, the “Amended and Restated Warrants”).
The Amended and Restated Warrants are fully exercisable and have an exercise price of $4.00 per share. The fair value of the amendment
to the Amended and Restated Warrants was estimated on the date of the amendment to be the difference between the value of the Amended
and Restated Warrants immediately before and after the change in the expiration date. The fair value of the Amended and Restated
Warrants was estimated on the date of the amendment before the change in the expiration date to be $2,224 using the Black-Scholes
option-pricing model based on the following assumptions: expected volatility: 111%, risk-free interest rate: 0.38%, expected life
in years: 0.5 based on the contract life of the warrant grant, and assumed dividend yield: 0%. The fair value of the Amended and
Restated Warrants was estimated on the date of the amendment after the change in the expiration date to be $149,605 using the Black-Scholes
option-pricing model based on the following assumptions: expected volatility: 263%, risk-free interest rate: 0.38%, expected life
in years: 1.5 based on the contract life of the warrant grant, and assumed dividend yield: 0%. The Company recorded compensation
expense pertaining to the Amended and Restated Warrant in salaries, commission and related taxes of $147,380 in the year ended
December 31, 2016.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
2017
On August 16, 2017, the Company granted to David J. Medlock 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 year ended December 31, 2017.
During the year ended December 31, 2017, warrants to purchase 380,000
shares of the Company’s Series A Preferred Stock, which were previously granted to Mr. Oakes, Mr. Verdi and a former executive
of the Company, expired in accordance with the terms of such warrants.
Outstanding warrants to purchase the Company’s Series A Preferred
Stock as of December 31, 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 as of and for the years ended December 31, 2017 and 2016 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
380,000
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
380,000
|
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
25,000
|
|
|
|
4.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(380,000
|
)
|
|
|
4.00
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
25,000
|
|
|
$
|
4.00
|
|
Series B Preferred Stock Warrants
2016
On April 4, 2016, the Company entered into an agreement with an
existing client, which among other things, included a provision that the Company issue a warrant to the client to purchase 2,000,000
shares of the Company’s Series B Preferred Stock, which is immediately exercisable (the “2016 Series B Warrants”).
The 2016 Series B Warrants have a three year term, a cashless exercise provision and an exercise price of $3.00 per share. On May
4, 2016 the Company issued the 2016 Series B Warrant to the client. The fair value of the 2016 Series B Warrants was estimated
on April 4, 2016, which was the date of the agreement with the client, to be $1,299,963 using the Black-
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
Scholes option-pricing model based on the following assumptions:
expected volatility: 503%, risk-free interest rate: 0.38%, expected life in years: 3 based on the contract life of the 2016 Series
B Warrants, and assumed dividend yield: 0%. The Company determined the 2016 Series B Warrants qualify for a scope exception under
ASC 815 as they were determined to be indexed to the Company’s stock. The Company recorded the fair value of the 2016 Series
B Warrant as an increase to additional paid in capital and a reduction to revenue during the year ended December 31, 2016, in the
amount of $1,299,963.
Outstanding Series B Warrants as of December 31, 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 as of and for the years ended December 31, 2017 and 2016 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
Preferred
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
1,250,000
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,000,000
|
|
|
|
3.00
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
3,250,000
|
|
|
$
|
3.00
|
|
Registration and Participation Rights
In connection with the Company’s acquisition of Atiam Technologies
L. P., the Company and certain owners of Atiam Technologies L.P. entered into a registration rights agreement.
In connection with the Company’s 2008 private placement, the
Company and the participating investors also entered into a Registration Rights Agreement (the “2008 Registration Rights
Agreement”). Under the terms of the 2008 Registration Rights Agreement, the Company agreed to prepare and file with the SEC,
a registration statement on Form S-1 covering the resale of the shares and the warrant shares, which was filed with the SEC on
February 1, 2008 and declared effective by the SEC on April 22, 2008. Subject to limited exceptions, the Company also agreed to
use its reasonable best efforts to keep the registration statement effective under the Securities Act until the date that all of
the registrable securities covered by the registration statement have been sold or may be sold without volume restrictions pursuant
to Rule 144(b)(i)) promulgated under the Securities Act. The 2008 Registration Rights Agreement also provides for payment of partial
damages to the investors under certain circumstances relating to failure to file or obtain or maintain effectiveness of the registration
statement, subject to adjustment.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 6 – SHAREHOLDERS’ EQUITY (DEFICIT) (continued)
In connection with the Company’s 2009 private placement, the
Company and the participating investor also entered into a Registration Rights Agreement (the “2009 Registration Rights Agreement”).
Under the terms of the 2009 Registration Rights Agreement, the Company agreed to prepare and file with the SEC, within 30 days
following the receipt of a demand notice of a holder of registrable securities, a registration statement on Form S-1 covering the
resale of the shares and the warrant shares. Subject to limited exceptions, the Company also agreed to use its reasonable best
efforts to cause the registration statement to be declared effective under the Securities Act, and to use its reasonable best efforts
to keep the registration statement effective under the Securities Act until the date that all of the registrable securities covered
by the registration statement have been sold or may be sold without volume restrictions pursuant to Rule 144(b)(i) promulgated
under the Securities Act. In addition, if the Company proposes to register any of its securities under the Securities Act in connection
with the offering of such securities for cash, the Company shall, at such time, promptly give each holder of registrable securities
notice of such intent, and such holders shall have the option to register their registrable securities on such additional registration
statement. The 2009 Registration Rights Agreement also provides for payment of partial damages to the investor under certain circumstances
relating to failure to file or obtain or maintain effectiveness of the Registration Statement, subject to adjustment.
In connection with the Company’s 2010 private placement, the
Company and the participating investors also entered into a Registration Rights Agreement (the “2010 Registration Rights
Agreement”), which provided the investors with demand and “piggyback” registration rights on substantially the
same terms as the 2009 Registration Rights Agreement.
In connection with Co-Investment’s note conversion, the Company
and Co-Investment also entered into a Registration Rights Agreement, in substantially the same form as the 2010 Registration Rights
Agreement.
In connection with the private placements that occurred during 2012,
2013, 2015 and 2017, the Company and the participating investors also entered into registration rights agreements, in substantially
the same form as the 2010 Registration Rights Agreement.
As of December 31, 2017, the Company has not received a demand notice
in connection with any registration rights agreement. As of December 31, 2017, the Company does not believe that it is probable
that the Company will incur a penalty in connection with the Company’s registration rights agreements. Accordingly no liability
was recorded as of December 31, 2017.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 7 – CAPITAL LEASE OBLIGATIONS
InsPro LLC has entered into several capital lease obligations to
purchase equipment used for operations. InsPro LLC has the option to purchase the equipment at the end of the lease agreements
for one dollar. The underlying assets and related depreciation were included in the appropriate fixed asset category, and related
depreciation account.
Property and equipment includes the following amounts for leases
that have been capitalized:
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Useful Life (Years)
|
|
|
|
|
|
|
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
|
|
|
|
|
(1,454,084
|
)
|
|
|
(1,260,944
|
)
|
|
|
|
|
$
|
217,658
|
|
|
$
|
330,293
|
|
Future minimum payments required under capital leases as of December
31, 2017 are as follows:
2018
|
|
$
|
158,949
|
|
2019
|
|
|
63,145
|
|
2020
|
|
|
17,562
|
|
|
|
|
|
|
Total future payments
|
|
|
239,656
|
|
Less amount representing interest
|
|
|
20,940
|
|
|
|
|
|
|
Present value of future minimum payments
|
|
|
218,716
|
|
Less current portion
|
|
|
143,855
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
74,861
|
|
NOTE 8 – DEFINED CONTRIBUTION 401(k) PLAN
The Company implemented a 401(k) plan on January 1, 2007. Eligible
employees contribute to the 401(k) plan. Employees become eligible after attaining age 19 and after 3 months of employment with
the Company. The employee may become a participant of the 401(k) plan on the first day of the month following the completion of
the eligibility requirements. Effective January 1, 2007 the Company implemented an elective contribution to the plan of 25% of
the employee’s contribution up to 4% of the employee’s compensation (the “Contribution”). The Contributions
are subject to a vesting schedule and become fully vested after one year of service, retirement, death or disability, whichever
occurs first. The Company made contributions of $67,181 and $79,080 for the years ended December 31, 2017 and 2016, respectively.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
On October 9, 2017 the Company and Mr. David M. 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 Company’s 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.
The Employment Agreement also provides for a monthly allowance equal
to $5,000 per month, starting in October 2017 through October 31, 2018, to assist in offsetting Mr. Anderson’s commuting
expense to and from his home in North Carolina and for his temporary living expenses in Pennsylvania. The Employment Agreement
also provides for a reimbursement of his out of pocket relocation expenses incurred through October 31, 2018, up to $25,000.
The Employment Agreement also provides for Mr. Anderson to receive
a cash bonus payment as defined in the Employment Agreement (“Bonus Payment”) upon a change of control and the completion
of a purchase or acquisition of the Company during the term of the Employment Agreement. The Bonus Payment ranges from $200,000
to $5,150,000 depending on the net proceeds received from the purchase or sale of the Company.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
The Employment Agreement also provides for a grant of restricted
stock to Mr. Anderson (“Restricted Stock Grant”) in the event that the Company sells newly issued stock or the stockholders
of the Company sell their stock that represents 10% or more of the fully-diluted outstanding stock of the Company during the term
of the Employment Agreement (a “Qualifying Event”). The Restricted Stock Grant will be of the same class of the Company’s
stock as issued or sold in the Qualified Event. The number of shares in the Restricted Stock Grant will be determined based on
3% of the excess of the enterprise value of the Company as defined in the Employment Agreement over $30,000,000. The Restricted
Stock Grant will vest annually in three substantially equal installments starting on the first anniversary of the Restricted Stock
Grant. The Restricted Stock Grant shall become fully vested upon a change of control, or Mr. Anderson’s termination without
cause, or his resignation for good reason as defined in the Employment Agreement.
On March 31, 2008, Anthony R. Verdi, our Chief
Financial Officer, was also appointed to the position of Chief Operating Officer, effective April 8, 2008. Mr. Verdi was appointed
to the board on June 20, 2008 and was appointed our Principal Executive Officer on May 18, 2011 through January 26, 2015.
Mr. Verdi’s amended and restated employment
agreement automatically renewed for a one year term on March 31, 2015, and, if not terminated, will automatically renew for one
year periods. His annual base salary was $225,000 per year from March 31, 2008 through May 30, 2011 and was then increased by the
board of directors to $250,000 effective June 1, 2011, again increased to $300,000 effective November 1, 2015 and again increased
to $325,000 effective October 1, 2017. He is entitled to receive such bonus compensation as a majority of our board of directors
may determine from time to time.
If we terminate Mr. Verdi’s employment for
cause or Mr. Verdi terminates his employment agreement without good reason, Mr. Verdi will be entitled to receive (i) all accrued
and unpaid salary and vacation pay through the date of termination and (ii) continued participation for one month in our benefit
plans. Otherwise if we terminate Mr. Verdi’s employment or Mr. Verdi terminates his employment agreement for good reason
including his permanent disability he will be entitled to receive 18 months’ base salary at the then current rate, payable
in accordance with our usual practices, continued participation for 18 months in our benefit plans and payment, within a commercially
reasonable time and on a prorated basis, of any bonus or other payments earned in connection with our bonus plan existing at the
time of termination. In addition, if Mr. Verdi’s employment is terminated in accordance with the foregoing sentence within
two months prior to, or 24 months following, a change in control (as described in the employment agreement), Mr. Verdi will be
entitled to receive 18 months’ base salary at the then current rate upon the date of termination, regardless of our usual
practices, and all stock options held by Mr. Verdi at the date of termination will immediately become 100% vested and all restrictions
on such options will lapse.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
If Mr. Verdi’s employment is terminated
due to a permanent disability we may credit any such amounts against any proceeds paid to Mr. Verdi with respect to any disability
policy maintained and paid for by us for Mr. Verdi’s benefit. If Mr. Verdi dies during the term of his employment agreement,
the employment agreement will automatically terminate and Mr. Verdi’s estate or beneficiaries will be entitled to receive
(i) three months’ base salary at the then current rate, payable in a lump sum and (ii) continued participation for one year
in our benefit plans.
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 December 31, 2017, the Company
recorded a severance accrual connection with Mr. Oakes termination in the amount of $327,529, 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.
As of December 31, 2017, the Company recorded
a severance accrual connection with an executive’s termination effective December 31, 2017, in the amount of $103,882, which
is recorded in selling, general and administrative expenses and accrued liabilities. Pursuant to this executive’s employment
agreement, the executive is subject to non-competition and non-solicitation covenants during the term of his employment agreement
and for a period of six months following his termination.
As of December 31, 2017, the Company has employment
agreements with Mr. Medlock and another executive that will automatically renew for a one year term in 2018. These employment agreements
provide that these executives will be compensated at an aggregate annual base salary of $429,000. These agreements may be terminated
by the Company for “cause” (as such term is defined in the agreements) and without “cause” upon 30 days’
notice. These agreements may be terminated by the Company without “cause”, in which case the terminated employee will
be entitled to their base salary for a period of six months. In the event of termination without cause or for good reason, these
executives would receive their then current base annual salary for a period of six months, plus unpaid accrued employee benefits,
which is primarily accrued vacation, less all applicable taxes. In the event of the voluntary termination of any of these executives’,
death or disability, they or their estate would receive unpaid accrued employee benefits, less all applicable taxes. These agreements
also contain non-competition and non-solicitation provisions for the duration of the agreements plus a period of six months after
termination of employment.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
Operating Leases
On July 7, 2006, the Company entered into a lease agreement with
Radnor Properties-SDC, L.P. (the “Landlord”) for the lease of 7,414 square feet of office space located in Radnor Financial
Center, Building B, 150 Radnor-Chester Road, Radnor, Pennsylvania. The term of the lease commenced on November 1, 2006, which was
the date the Company, with the Landlord’s prior consent, assumed possession of the premises and the date the Landlord tendered
possession of the premises to the Company following the substantial completion of the improvements required to be made by the Landlord
under the lease agreement, and will expire on the last day of the 125
th
month following the commencement of the lease
term, which is March 31, 2017. The annual rent increases every 12 months, starting at approximately $161,592 plus a proportionate
share of the Landlord’s building expenses after the second month and ending at approximately $258,378 plus a proportionate
share of the Landlord’s building expenses. Under the terms of the lease agreement, rent is waived for the first five months
of the lease term with respect to 5,238 square feet and for the first twelve months for the remaining 2,176 square feet. The lease
expired on March 31, 2017, in accordance with the terms of the lease.
The Company paid the Landlord a security deposit of $110,000 under
the lease (the “Security Deposit”) during the third quarter of 2006, which is accounted for as a deposit in other assets.
The Company will not earn interest on the Security Deposit. The Security Deposit will decrease and the Landlord will return to
the Company $10,000 on the third anniversary of the commencement date of the lease and on each anniversary thereafter until the
required Security Deposit has been reduced to $20,000. The Security Deposit will be returned to the Company 30 days after the end
of the lease provided the Company has complied with all provisions of the lease. The balance of the Security Deposit is $0 and
$30,000 as of December 31, 2017 and 2016, respectively.
On September 14, 2007, InsPro LLC entered into a lease agreement
with BPG Officer VI Baldwin Tower L.P. (“BPG”) for approximately 5,524 square feet of office space at Baldwin Towers
in Eddystone, Pennsylvania. On March 26, 2008, and again on December 2, 2008, the Company and BPG agreed to amend the lease to
increase the leased office space by 1,301 and 6,810 square feet, respectively (as amended the “BPG Lease”). The original
term of the lease commenced on October 1, 2007 and expired on January 31, 2013. The annual rent increases every 12 months,
starting at approximately $102,194 plus a proportionate share of landlord’s building expenses and ending at approximately
$286,335 plus a proportionate share of landlord’s building expenses.
On March 15, 2012, InsPro LLC and BPG agreed to amend the BPG Lease
to extend its term to January 31, 2017, and after BPG completes certain building improvements InsPro Technologies will move from
its current location to another floor of the same building and lease 17,567 square feet of furnished office space from BPG. Effective
April 1, 2015, InsPro LLC and BPG agreed to amend the BPG Lease to lease 6,810 square feet of furnished office space from BPG on
another floor of the same building. The Company’s monthly rent shall be $24,887 per month commencing with InsPro Technologies’
occupancy of the new office space, which occurred in June 2012 through January 31, 2013. InsPro Technologies’ monthly rent
increased to $25,619 per month February 1, 2013 through January 31, 2014, increased to $26,351 per month February 1, 2014 through
January 31, 2015, increased to $27,082 per month February 1, 2015 through March 31, 2015, increased to $37,082 through January
31, 2016, will increase to $37,814 per month February 1, 2016 through March 31, 2016, and will decrease to $27,814 per month from
April 1, 2016 through January 31, 2017. On June 9, 2016, InsPro LLC and BPG entered into a sixth amendment to the Lease Agreement
whereby InsPro LLC and BPG agreed to amend the Lease Agreement to extend the term through January 31, 2018 for 17,567 of rentable
square feet at a monthly cost of $28,546 for the period February 1, 2017 through January 31, 2018. On June 7, 2017, InsPro LLC
and BPG entered into a seventh amendment to the Lease Agreement whereby InsPro LLC and BPG 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.
The Company leases certain real and personal property under non-cancelable
operating leases. Rent expense was $403,831 and $613,250 for the years ended December 31, 2017 and 2016, respectively.
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 9 – COMMITMENTS AND CONTINGENCIES (continued)
Future minimum payments required under operating leases and service
agreements at December 31, 2017 are as follows:
2018
|
|
$
|
679,864
|
|
2019
|
|
|
338,278
|
|
2020
|
|
|
38,926
|
|
thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
1,057,068
|
|
NOTE 10 - INCOME TAXES
The Company has net operating loss carry forwards for federal income
tax purposes of approximately $48,900,000 at December 31, 2017, the unused portion of which expires in years 2026 through 2037.
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 percent 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.
Components of income taxes for the years ending
December 31 were as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
28,000
|
|
|
$
|
-
|
|
State
|
|
|
142,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
170,000
|
|
|
$
|
-
|
|
The table below summarizes the differences
between the Company’s effective tax rate and the statutory federal rate as follows for the periods ended December 31, 2017
and 2016:
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
U.S. statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes
|
|
|
6.5
|
|
|
|
3.0
|
|
Amortization/impairment of acquisition related assets
|
|
|
(0.3
|
)
|
|
|
0.2
|
|
Stock based compensation
|
|
|
3.6
|
|
|
|
(3.2
|
)
|
Stock based fees paid to client
|
|
|
0.0
|
|
|
|
(18.5
|
)
|
Other permanent differences
|
|
|
1.7
|
|
|
|
(0.6
|
)
|
Valuation allowance
|
|
|
(36.8
|
)
|
|
|
(15.9
|
)
|
|
|
|
9.70
|
%
|
|
|
0.00
|
%
|
INSPRO TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
NOTE 10 - INCOME TAXES (continued)
Deferred tax assets and liabilities are provided
for significant income and expense items recognized in different years for tax and financial reporting purposes. The components
of the net deferred tax assets for the years ended December 31, 2017 and 2016 were as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
14,201,084
|
|
|
$
|
19,227,610
|
|
Depreciation
|
|
|
67,099
|
|
|
|
88,909
|
|
Compensation expense
|
|
|
123,093
|
|
|
|
64,230
|
|
Accrued expense
|
|
|
41,681
|
|
|
|
-
|
|
Deferred revenue
|
|
|
449,500
|
|
|
|
686,297
|
|
All Miscellaneous Other
|
|
|
3,386
|
|
|
|
2,874
|
|
Total deferred tax asset
|
|
|
14,885,843
|
|
|
|
20,069,920
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
-
|
|
|
|
-
|
|
Net deferred tax asset
|
|
|
14,885,843
|
|
|
|
20,069,920
|
|
Less: valuation allowance
|
|
|
(14,885,843
|
)
|
|
|
(20,069,920
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 $5,184,077 from the prior year.
On December 22, 2017 the Tax Cuts and Jobs Act (H.R. 1) was signed
into law. This act includes, among other items, a permanent reduction to the U.S. corporate income tax rate from 35% to 21% effective
January 1, 2018. The new bill reduced the blended tax rate for the Company from 38% to 29%. The change in the blended tax rate
reduced the 2017 net operating loss carry forward deferred tax assets by approximately $4,407,232.
NOTE 11 – SUBSEQUENT EVENTS
Expiration of Warrants
On March 14, 2018, warrants to purchase 120,000 common shares expired
in accordance with the terms of such warrants.